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CBOE Holdings, Inc. Revenue Tops Expectations Even as Trading Volume Remains Muted

By Joe Tenebruso - Jul 31, 2015 at 4:05PM

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The options exchange operator maintained a lid on expenses and benefitted from higher average revenue per contract traded.

Source: CBOE Holdings.

CBOE Holdings ( CBOE -0.17% ) on Friday reported financial results for its second quarter. The operator of the largest U.S. options exchange delivered revenue and earnings that exceeded Wall Street's expectations, and shares inched up slightly on the news in morning trading.

Second-quarter operating revenue rose 3% year over year to $148.7 million, surpassing consensus estimates of $142.8 million, as transaction fees increased 4%. This occurred even as trading volume dropped 9% -- to 275.9 million contracts -- compared with the year-ago quarter.

Helping to offset the lower volume was a 14% increase in the average revenue per contract (RPC) to $0.368. The increase in RPC was driven by a favorable shift in the mix of products traded, higher fees, and lower volume discounts. In regard to the product mix, the highest RPC product categories, index options and futures contracts, accounted for a greater percentage of trading volume at 37.2% compared with 33.9% in the second quarter of 2014.

The leverage gained from this higher revenue base helped drive a 90-basis-point year-over-year improvement in operating margin to 49.3%. Total operating expenses increased only 2% to $75.3 million, mostly due to higher costs for professional fees, outside services, and royalty fees. Core operating expenses -- which exclude volume-based expenses, depreciation and amortization, accelerated stock-based compensation expense, and unusual or one-time expenses -- were $46.7 million, down 4% compared with the year-ago period, primarily due to lower compensation and benefits costs. The decline in compensation costs as well as the increase in professional fees and outside services is primarily attributed to the company's outsourcing of certain regulatory services to FINRA, which occurred in December 2014.

Volume-based expenses, which include royalty fees and order-routing fees, increased 10% to $17.4 million, driven primarily by a shift in the mix of licensed products traded, which resulted in an increase in the average royalty rate per licensed contract. 

All told, net income to common stockholders increase 5% to $44.6 million, and earnings per share, boosted by share buybacks, rose 8% to $0.54. Analysts expected only $0.50 in EPS.

"CBOE delivered solid earnings in the second quarter despite a continuation of an industry wide low-volume trading environment, reflecting our disciplined approach to cost management," said CFO Alan Dean in a press release. "As the trading environment improved toward the end of the quarter and volume accelerated, CBOE was well positioned to benefit, most notably in our highest-margin, proprietary products."

Capital return program
During the quarter, CBOE repurchased 819,556 shares of stock at an average price of $57.61 per share, for a total purchase price of $47.2 million. As of June 30, 2015, the company had approximately $111 million of availability remaining under its existing share repurchase authorizations.

In addtion, as announced on July 29, 2015, CBOE Holdings' Board of Directors increased the company's quarterly dividend by 10% to $0.23 per share, effective with the third-quarter dividend.

"We are pleased that our ability to consistently deliver strong cash flow allows us to continue to return excess cash to our shareholders, which includes growing dividends," said Dean. "As we have done every year since 2010, earlier this week our Board increased CBOE's quarterly cash dividend by 10 percent, taking our dividend to $0.23 from $0.21."

Looking ahead
CBOE continues to release new products and services, and management expects new weekly options on the popular CBOE Volatility Index (VIX Index) to launch on October 8, 2015.

Management also reaffirmed its full-year 2015 guidance, including core expenses in the range of $190 million to $194 million capital expenditures in the range of $37 million to $40 million.

"We continued to uniquely 'create, collaborate, and connect' with the marketplace to efficiently and cost effectively expand our business," said CEO Edward Tilly. "We are confident that the significant progress made in and since the second quarter will enable us to continue to deliver sustainable long-term value to our customers and our shareholders."

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