CBOE Earnings Shine on Higher Volumes - Analyst Blog

CBOE Holdings Inc. CBOE reported first-quarter 2014 operating earnings of 58 cents per share, which modestly outpaced the Zacks Consensus Estimate of 55 cents per share and the year-ago figure of 50 cents. Accordingly, operating net income grew 14% year over year to $50 million.

Including extraordinary items, reported net income escalated to $48.5 million or 56 cents a share from $41.8 million or 48 cents per share in the year-ago quarter.

Total operating revenue jumped 11% year over year to $157.9 million and outbeat the Zacks Consensus Estimate of $156 million. Higher revenues were driven by transaction fees of $112.8 million (up 13.8% year over year), exchange services and other fees of $9.5 million (up 4.4%), market data fees of $7.2 million (up 30.9%) and regulatory fees of $9.9 million (up 2.1%). These were partially offset by a decline in access fees of $15.2 million (down 3.2%) and other revenue of $3.3 million (down 5.6%).

Average daily volume escalated 29% year over year to 5.62 million, whereas total trading volume spiked 31% to $342.8 million, driven by improvement across asset class. However, average revenue per contract plunged 13% to 32.9 cents due to higher volume-based incentives for some of the multiply-listed options along with a shift in the product-mix.

Total operating expenses rose 4% year over year to $75.9 million. Adjusting for volume-based expenses, depreciation and amortization, accelerated stock-based compensation expense and unusual or one-time expenses, core operating expenses increased 5% to $73.3 million in the quarter. The increase primarily resulted from higher employee costs, data processing, depreciation and amortization, royalty fees and trading volume incentives.

Subsequently, core operating income jumped 16.5% year over year to $84.6 million. Core operating margin improved to 53.6% from 50.9% in the year-ago period. However, effective tax rate rose to 39.9% from 38.3% in the year-ago quarter.

Financial Update

As of Mar 31, 2014, CBOE Holdings had cash and cash equivalents of $199.1 million, down from $221.3 million at 2013-end. Total assets stood at $412.8 million at the end of Mar 2014, down from $441.6 million at 2013-end.

Meanwhile, long-term liabilities were $51.7 million, up from $49.6 million at 2013-end, although total shareholder equity rose to $286.7 million from $284.5 million at 2013-end. Consequently, operating cash flow decreased 7.3% year over year to $88.3 million at the end of Mar 2014.

Share Repurchase Update

CBOE Holdings repurchased 0.7 million shares for $37.1 million during the reported quarter. Moreover, shares worth $179.2 million have been purchased since the inception of the share buyback program in 2011.

On Dec 10, 2013, the board of CBOE Holdings sanctioned the repurchase of additional $100 million worth of common stock. Including shares remaining from the previous authorization, the company had about $120.8 million shares available for buybacks at the end of Mar 2014.

Guidance

Concurrently, CBOE Holdings reiterated its outlook for 2014. Core operating expense is projected to rise by 3–5% over 2013 to $191–196 million, primarily due to higher expenses from regulatory services. Depreciation and amortization expense should be within $38–40 million.

Continuing stock-based compensation expense, included in core expenses, is expected to be about $13 million in 2014. Meanwhile, effective tax rate is likely to be within 38.5–39.5%. Capital expenditure is projected in the band of $47–50 million, higher than $31.7 million in 2013.

Dividend Update

On Apr 29, 2014, the board of CBOE Holdings announced a regular quarterly dividend of 18 cents per share, which is payable on Jun 20, 2014, to shareholders of record on May 30.

On Mar 21, 2014, CBOE Holdings paid a regular quarterly dividend of 18 cents per share to shareholders of record as on Feb 28.

On Jan 17, 2014, the company paid a special dividend of 50 cents per share to shareholders of record on Jan 3.

Others

CBOE Holdings carries a Zacks Rank #3 (Hold) at present. However, some better-ranked financial stocks include Euronet Worldwide Inc. EEFT, General Finance Corp. GFN and State Auto Financial Corp. STFC, all of which sport a Zacks Rank #1 (Strong Buy).