CHICAGO, Oct. 28, 2016 /PRNewswire/ -- CBOE Holdings, Inc. (NASDAQ: CBOE) today reported net income allocated to common stockholders of $40.3 million, or $0.50 per diluted share, for the third quarter of 2016, compared with $67.2 million, or $0.81 per diluted share, in the third quarter of 2015. Last year's third quarter financial results represent an all-time high for the company, while this year's results include $8.6 million of acquisition-related expenses. Adjusted net income allocated to common stockholders was $47.2 million, or $0.58 per share, compared with $63.0 million, or $0.76 per share, for the third quarter of 2015. Operating revenue for the quarter was $156.2 million, down 16 percent compared with $187.0 million in the third quarter of 2015.
Financial results presented on an adjusted basis for the third quarter of 2016 exclude certain items that management believes are not indicative of the company's core operating performance, which are detailed in the reconciliation of non-GAAP results.
"CBOE made significant progress throughout the third quarter to advance our growth initiatives, including the announcement of our planned acquisition of Bats Global Markets. We are excited about CBOE's and Bats' future as a combined company and look forward to working together to efficiently maximize synergies and revenue opportunities. We believe this combination will enhance our financial strength, accelerate our strategic growth initiatives and provide new areas of growth to deliver greater value for CBOE shareholders," said Edward T. Tilly, CBOE Holdings' Chief Executive Officer.
"Although trading volume was down this quarter compared to last year's record third-quarter volume, CBOE posted solid financial results, while continuing our efforts to efficiently manage our resources and expenses," said Alan J. Dean, CBOE Holdings' Executive Vice President and Chief Financial Officer. "Our focus on creating long-term value for our shareholders remains unchanged. The recently announced planned acquisition of Bats is an example of how we are allocating resources in a way that we believe will generate the best returns for our shareholders."
(1)A full reconciliation of our non-GAAP results to our GAAP results for the 2016 and 2015 reporting periods is included in the attached tables. See "Non-GAAP Information" in the accompanying financial tables.
Key Statistics and Financial Highlights
The table below highlights CBOE Holdings' operating results on a GAAP basis and an adjusted basis for the three- and nine-month periods ended September 30, 2016 and 2015. Financial results presented on an adjusted basis provide supplemental information to facilitate period-over-period comparisons by adjusting for certain items that management believes are not indicative of the company's core operating performance.
Operating Revenue
The company reported operating revenue of $156.2 million in the third quarter of 2016, a decrease of $30.8 million, or 16 percent, from $187.0 million in the third quarter of 2015, resulting from a decrease of $32.9 million in transaction fees, offset somewhat by an increase of $1.1 million in market data fees.
Transaction fees were down 23 percent in the quarter as a result of a 12 percent decrease in total trading volume and a 12 percent decrease in average revenue per contract (RPC) versus the third quarter of 2015. Total trading volume in the third quarter was 296.3 million contracts, or 4.63 million contracts per day, compared with volume of 335.7 million contracts, or 5.25 million contracts per day, in last year's third quarter. Trading volume in the company's higher-margin index options and futures contracts fell 19 percent in the quarter, while multiply-listed options declined 6 percent versus the third quarter of 2015. The RPC in the third quarter of 2016 was $0.378 compared with $0.431 in the third quarter of 2015.
The RPC variance primarily reflects a shift in the mix of products traded, with a lower proportion of volume coming from index options and futures contracts, which generate the highest RPC. These product categories accounted for 40.7 percent of trading volume in the third quarter of 2016, compared with 44.6 percent in the third quarter of 2015. In addition, the RPC for equity options and exchange-traded products declined, reflecting higher volume-related incentives versus last year's third quarter.
The average RPC represents total transaction fee revenue divided by total reported trading volume for Chicago Board Options Exchange® (CBOE®), C2 Options ExchangeSM (C2SM) and CBOE Futures ExchangeSM (CFE®).
Operating Expenses
Total operating expenses were $90.6 million for the third quarter of 2016, up $4.6 million or 5 percent, compared with $85.9 million for the same period in 2015, driven by higher professional fees and outside services, partially offset by lower depreciation and amortization and royalty fees. The increase in professional fees and outside services largely reflects fees incurred relating to the company's planned acquisition of Bats Global Markets, Inc. (Bats). Total adjusted operating expenses, which exclude accelerated stock-based compensation, acquisition-related expenses and other unusual items were $81.4 million, down $4.5 million or 5 percent, compared with $85.9 million for the third quarter of 2015.
The company's core operating expenses, which include total operating expenses less volume-based expenses, depreciation and amortization, accelerated stock-based compensation expense and unusual or one-time expenses, were $51.6 million for the third quarter of 2016, up $0.5 million or 1 percent, compared with last year's third quarter. The slight increase in core operating expenses primarily reflects increases of $1.2 million in travel and promotional expenses and $0.4 million in facilities cost, partially offset by a decrease of $1.5 million in compensation and benefits.
Volume-based expenses, which include royalty fees and order routing fees, were $19.9 million in the third quarter of 2016, a decrease of $2.5 million or 11 percent, compared with the same period last year. This decrease primarily reflects lower royalty fees of $2.4 million, resulting from lower trading volume in licensed index and futures products, which were down 19 percent versus last year's record-setting, third-quarter volume.
Operating Margin
The company's operating margin was 42.0 percent for the third quarter of 2016, compared with 54.1 percent in last year's third quarter. The adjusted operating margin was 47.9 percent for the quarter compared with 54.1 percent for the third quarter of 2015.
Effective Tax Rate
The company reported an effective tax rate of 39.9 percent for the third quarter of 2016 compared with 33.4 percent in last year's third quarter. The third quarter of 2016 included expense arising from the recognition of uncertain tax positions and 2015's third quarter included the benefit of the release of uncertain tax positions relating to prior years.
Operational Highlights and Recent Developments
- On September 26, the company announced that it entered into a definitive agreement to acquire Bats in a cash and stock transaction valued at approximately $32.50 per Bats share, or a total of approximately $3.2 billion, consisting of 31% cash and 69% CBOE Holdings stock, based on CBOE Holdings' closing stock price of $70.30 per share on September 23, 2016.
- On September 26, CBOE launched options on the FTSE Emerging Index (Ticker: FTEM), a market-capitalization weighted index representing the performance of large and mid-cap companies from advanced and secondary emerging markets.
- On August 25, CBOE Vest Financial, an investment manager focused on target outcome investment strategies, launched the CBOE Vest S&P 500 Buffer Protect Strategy Fund (Ticker: BUIGX), the first mutual fund designed to provide investors with index-based buffer protection.
- On August 15, CBOE listed for trading S&P 500® Index Monday-expiring WeeklysSM options. CBOE now offers SPX options with Monday, Wednesday and Friday weekly expirations.
- On August 15, CBOE launched the CBOE-SMA Large Cap Index, the first of a series of sentiment-based strategy benchmark indexes that measure short-term market momentum based on Social Market Analytics' social media metrics.
- On July 29, CBOE announced plans to broaden its data distribution to investors who want to track and trade options on the widely followed MSCI Emerging Markets (Ticker: MXEF) and MSCI EAFE (Ticker: MXEA) Indexes. Real-time values for the underlying MSCI Emerging Markets and MSCI EAFE Indexes are expected to be available to broker-dealers through CBOE's Market Data Express service later this year.
- On July 6, CBOE announced that it has created a series of 13 "Enhanced Growth Indexes," the second in a family of options-based strategy performance benchmarks designed to target the outcomes of specific investment strategies. The CBOE S&P 500 Enhanced Growth Indexes measure the performance of a hypothetical portfolio of SPX FLexible EXchange® (FLEX®) options designed to provide targeted annual returns. CBOE began disseminating daily values for the new benchmarks on June 24, 2016.
- On July 1, the company opened its first international business development office in London, enabling CBOE to increase its presence in the region and allow its business development team to more directly engage with European-based clients and potential new customers, as well as the exchange's strategic partners.
2016 Fiscal Year Financial Guidance
The company updated its financial guidance for the 2016 fiscal year as follows:
- Core operating expenses for the 2016 fiscal year are expected to be slightly below the company's guidance range of $211.0 million to $215.0 million.(2)
- Depreciation and amortization expense is expected to be slightly below the range of $46.0 million to $48.0 million.
- Capital expenditures are expected to be slightly below the range of $47.0 million to $49.0 million.
The company reaffirmed its financial guidance for the 2016 fiscal year as follows:
- Continuing stock-based compensation expense included in core expenses is expected to be approximately $13.5 million for the full year.
- The company expects to recognize accelerated stock-based compensation expense, on a quarterly basis, totaling approximately $1.0 million for the full year. This expense is reported in compensation and benefits and included in the company's non-GAAP reconciliation as an adjusted financial measure.
- The effective tax rate for full-year 2016 is expected to be in the range of 38.5 percent to 39.5 percent. Significant changes in trading volume, expenses, state and local tax rates and other items, including ongoing state and federal tax audits and unusual items, could materially impact this expectation.
(2)Specific quantifications of the amounts that would be required to reconcile the company's core operating