Cboe Global Markets (NYSEMKT:CBOE) enjoyed positive performance in its volatility-based options and futures instruments in the second quarter of 2019. But just as this all-important product group exhibited signs of resilience after a weak first quarter, revenue from U.S. and European equities trading, coupled with slighter foreign exchange trading results, offset overall momentum. Nonetheless, the exchange holding company may be poised for a solid couple of quarters as evidence of rising market volatility is emerging. As we recap performance from the last three months below, note that all comparative numbers refer to the prior-year quarter.

Cboe Global Markets: The raw numbers

Metric Q2 2019 Q2 2018 Change
Revenue $283.2 million $283.5 million 0%
Net income $87.6 million $82.4 million 6.3%
Diluted earnings per share $0.78 $0.73 6.8%

Data source: Cboe Global Markets.

What happened with Cboe Global Markets this quarter?

  • Cboe's largest segment, options, generated a top-line increase of 3% to $140.8 million. Average daily volume (ADV) improved by 2%, while revenue per contract (RPC) dipped by 1%. The segment retained its 37.7% share of the options market.
  • Futures revenue rose 4% to $32.6 million. Management attributed the advance to higher net transaction fees as RPC climbed by 7%.
  • The U.S. equities segment saw its top line diminish by 5% to $74.1 million, as the business' share of the U.S. market declined by 320 basis points to 15.7%.
  • European equities revenue decreased by 4% to $22.4 million, due to a decline in net transaction fees, which was partially offset by higher net non-transaction fees.
  • Global FX (foreign exchange) revenue fell 10% to $13.1 million. Average daily notational volume (ADNV) slumped by 15% to $32.5 billion. However, the segment increased its market share by 30 basis points to 15.2%.
  • Adjusted operating margin, which excludes the amortization of intangible assets acquired through the purchase of Bats Global Markets in 2017, as well as current-year acquisition expenses tied to this transaction, rose 100 basis points to 63.6%. Lower compensation expense was the primary driver of the improvement.
  • Cboe paid cash to repay $300 million in long-term debt, reducing its total debt-to-EBITDA ratio from 1.5 in the preceding sequential quarter to a current reading of 1.2.
  • The company raised its quarterly dividend by 16% to $0.36, which yields 1.2% on an annualized basis at current share price.
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What management had to say

During Cboe's earnings conference call, management discussed its belief that rising trade tensions with China and prospects for a global economic slowdown are causing investors to reassess risk in the markets. Of course, volatile markets produce generally favorable conditions (i.e., higher volume) for Cboe's proprietary futures and options instruments linked to the Cboe Volatility Index (VIX).

Management also highlighted recent growth in instruments favored by retail investors -- in particular, the Mini-SPX options contract, which is linked to Cboe's "XSP" Mini-S&P 500 Index. Below, CEO Edward Tilly describes both the advantages and recent success of this instrument:

Our Mini-SPX Options contract, which is 1/10 the size of SPX [S&P 500 index], and the same size as SPY [ an exchange-traded fund based on the S&P 500 index], continues to demonstrate the value of our SPX product suite. Q2 2019 ADV is up 119% from Q1 2019 and up 314% from Q2 2018. Demand continues to build from investors looking for the increased risk management granularity provided by a smaller notional [smaller-priced] contract. Both jurisdictional approval [i.e., approval for trade in non-U.S. markets] and the growth in XSP are a direct result of customers' feedback as we continue to focus on the needs of our customers with the goal of providing solutions for all of their risk management needs.

Looking forward

Rather than provide earnings guidance for revenue and net earnings, Cboe presents just a few outlook items for investors to digest each quarter. The most important of these is management's projection for total operating expense during the year. This quarter, Cboe lowered its full-year expense expectation from a range of between $415 million and $423 million to $405 million to $413 million. Both ranges exclude the amortization of intangible assets, most of which were acquired in the Bats transaction as noted above. 

On a more qualitative basis, company executives didn't seem especially concerned about market-share declines this quarter. Looking past the second quarter, CEO Tilly noted that changes to prioritize the execution of retail limit orders, and to otherwise increase order flow in U.S. equities, is paying off: Cboe's U.S. equities market share crossed 17% in July, after its ebb to 15.7% at the end of June.

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