Cboe Global Markets, Inc. (Cboe: CBOE) Booming

Cboe Global Markets, Inc. (Cboe: CBOE) Booming

Cboe Global Markets, Inc. (Cboe: CBOE) today reported financial results for the 2018 fourth quarter and full year.

Consolidated results for the year ended December 31, 2017 include Bats Global Markets, Inc. (Bats) for the period March 1 through December 31, 2017.  Cboe completed its acquisition of Bats on February 28, 2017.

“Our record results were fueled by growth across all of our business segments and, most notably, in our suite of proprietary products,” said Edward T. Tilly, Cboe Global Markets Chairman, President and Chief Executive Officer.  “Additionally, we continued to make steady progress towards achieving our synergy targets while remaining focused on executing our strategic initiatives and defining markets to serve investors globally, as demonstrated by our announced rollout of Cboe Select Sector Index Options on 11 industry sectors that comprise the S&P 500 index.  We are well-positioned to continue to deliver value to our customers and shareholders.  A tremendous team effort made 2018’s record results possible and we are very excited about all that we can accomplish in 2019, including the final phase of our multi-year technology migration, which we plan to complete in October,” Mr. Tilly added.

“Our record financial results for the fourth quarter and the year underscore the operating leverage inherent in our business model when top-line growth is coupled with consistent expense discipline. Our net revenue grew by 26 percent and 22 percent for the fourth quarter and the year, respectively, accompanied by an adjusted operating margin of 66.6 percent for the fourth quarter and 64.9 percent for the year, reflecting growth of six percentage points and nearly four percentage points, respectively,” said Brian Schell, Cboe Global Markets Executive Vice President, Chief Financial Officer and Treasurer.  “Additionally, our strong operating results allowed us to strengthen our balance sheet while still returning $271.2 million to shareholders through dividends and share repurchases in 2018,” Mr. Schell added.

*All comparisons are fourth quarter or the year 2018 compared to the same period in 2017.
(1)A full reconciliation of our non-GAAP results to our GAAP results is included in the attached tables. See “Non-GAAP Information” in the accompanying financial tables.

Consolidated Fourth Quarter Results -Table 1
Table 1 below presents summary selected unaudited condensed consolidated financial information for the company as reported and on an adjusted basis for the three months ended December 31, 2018 and 2017.

Table 1
Consolidated Fourth Quarter Results 4Q18 4Q17
($ in millions except per share data) 4Q18 4Q17 Change Adjusted1 Adjusted1 Change
Total Revenues Less Cost of Revenues $ 334.4 $ 265.6 26 % $ 334.4 $ 265.6 26 %
Total Operating Expenses $ 158.0 $ 156.9 1 % $ 111.8 $ 105.0 6 %
Operating Income $ 176.4 $ 108.7 62 % $ 222.6 $ 160.6 39 %
Operating Margin %   52.8 % 40.9 % 1190 bps 66.6 % 60.5 % 610 bps
Net Income Allocated to Common Stockholders $ 137.3 $ 254.6 (46) % $ 171.6 $ 97.7 76 %
Diluted EPS $ 1.23 $ 2.26 (46) % $ 1.54 $ 0.87 77 %
EBITDA $ 233.4 $ 167.9 39 % $ 240.2 $ 176.8 36 %
EBITDA Margin %   69.8 % 63.2 % 660 bps 71.8 % 66.6 % 520 bps
  • Total revenues less cost of revenues (referred to as “net revenue”) were $334.4 million, up 26 percent from $265.6 million in the prior-year period, reflecting growth in each business segment.
  • Total operating expenses were $158.0 million versus $156.9 million in the fourth quarter of 2017. Adjusted operating expenses¹ were $111.8 million versus $105.0 million in the fourth quarter of 2017, primarily reflecting an increase in compensation and benefits as a result of increased financial performance.
  • Operating income grew by 62 percent to $176.4 million and adjusted operating income¹ grew by 39 percent to $222.6 million.
  • The operating margin for the fourth quarter was 52.8 percent. The adjusted operating margin¹ increased to 66.6 percent from 60.5 percent in the fourth quarter of 2017, reflecting increased operating leverage from a higher revenue base.
  • Income tax expense of $37.3 million for the fourth quarter was $190.3 million higher than last year primarily due to the tax benefits recognized from the enactment of corporate tax reform in 2017.
  • Diluted EPS for the fourth quarter of 2018 was $1.23. Adjusted diluted EPS1 was $1.54, up 77 percent compared to 2017’s fourth quarter.

Business Segment Information:

Table 2
Total Revenues Less Cost of Revenues by
Business Segment
(in millions) 4Q18 4Q17 Change
Options $ 174.5 $ 130.0 34 %
U.S. Equities 81.5 69.0 18 %
Futures 40.4 35.6 13 %
European Equities 24.3 18.8 29 %
Global FX 13.7 12.0 14 %
Corporate 0.0 0.2 (100) %
Total $ 334.4 $ 265.6 26 %
(1)A full reconciliation of our non-GAAP results to our GAAP results is included in the attached tables. See “Non-GAAP Information” in the accompanying financial tables.

Discussion of Results by Business Segment:

Options:

  • Options net revenue of $174.5 million was up $44.5 million or 34 percent from the fourth quarter of 2017, primarily due to growth in net transaction fees driven by higher trading volume and revenue per contract (RPC) in both index options and multiply-listed options, with SPX options setting a new quarterly trading record.
  • Net transaction fees¹ increased $46.1 million or 44 percent, as total options average daily volume (ADV) grew 23 percent and the RPC increased 17 percent for the fourth quarter. The RPC increase reflects RPC growth in multiply-listed options and index options of 48 percent and 10 percent, respectively.
  • Cboe’s Options business had market share of 38.4 percent for the fourth quarter of 2018 compared to 40.5 percent in the fourth quarter of 2017.

U.S. Equities:

  • U.S. Equities net revenue of $81.5 million was up $12.5 million or 18 percent, primarily due to higher net transaction fees, driven by a 33 percent increase in ADV and a 24 percent increase in net capture.
  • Cboe’s U.S. Equities business had market share of 17.8 percent for the fourth quarter of 2018 compared to 18.5 percent in the fourth quarter of 2017.

Futures:

  • Futures net revenue of $40.4 million increased $4.8 million or 13 percent, primarily due to higher net transaction fees.
  • Net transaction fees¹ increased $4.0 million or 12 percent, due to an 18 percent increase in VIX futures ADV, offset somewhat by a 6 percent decline in futures RPC, primarily resulting from a shift in the mix of trading volume.

European Equities:

  • Net revenue of $24.3 million for European Equities increased 29 percent, reflecting growth in both net transaction fees and non-transaction revenue. Average daily notional value (ADNV) traded during the quarter was €10.6 billion, up 19 percent from last year’s fourth quarter, with net capture up 13 percent, reflecting a higher mix of periodic auctions volume and Cboe LIS (Large in Scale) trading.
  • For the fourth quarter of 2018, Cboe Europe Equities retained its position as the largest Pan-European stock exchange with 22.7 percent market share, up from 20.3 percent in the fourth quarter of 2017.

Global FX:

  • Global FX net revenue of $13.7 million increased $1.7 million or 14 percent, primarily due to higher net transaction fees compared with the fourth quarter of 2017. ADNV traded on the Cboe FX platform was $35.1 billion for the quarter, up 8 percent from last year’s fourth quarter.
  • Cboe FX market share increased to 15.3 percent from 14.9 percent in the fourth quarter of 2017.

 (1)A full reconciliation of our non-GAAP results to our GAAP results is included in the attached tables. See “Non-GAAP Information” in the accompanying financial tables.

2019 Fiscal Year Financial Guidance

The company provided the following guidance for the 2019 fiscal year:

  • Adjusted operating expenses are expected to be in a range of $420 to $428 million, representing a projected decline of 2 percent to a nominal increase compared to 2018’s adjusted operating expenses of $426.8 million. The guidance excludes the amortization of acquired intangible assets of $138 million, which the company plans to include in its non-GAAP reconciliation.²
  • Depreciation and amortization expense, which is included in adjusted operating expenses above, is expected to be in the range of $35 to $40 million, excluding the amortization of acquired intangible assets of $138 million.
  • The effective tax rate² on adjusted earnings for the full year is expected to be in the range of 27 to 29 percent. Significant changes in trading volume, expenses, federal, state and local tax laws or rates and other items could materially impact this expectation.
  • Capital expenditures are expected to be in the range of $50 to $55 million.

(2)Specific quantifications of the amounts that would be required to reconcile the company’s adjusted operating expenses guidance and the effective tax rate on adjusted earnings guidance are not available. The company believes that there is uncertainty and unpredictability with respect to certain of its GAAP measures, primarily related to acquisition-related expenses that would be required to reconcile to GAAP operating expenses and GAAP effective tax rate, which preclude the company from providing accurate guidance on certain forward-looking GAAP to non-GAAP reconciliations. The company believes that providing estimates of the amounts that would be required to reconcile the range of the company’s adjusted operating expenses and the effective tax rate on adjusted earnings would imply a degree of precision that would be confusing or misleading to investors for the reasons identified above.

Capital Management

The company paid cash dividends of $34.7 million, or $0.31 per share, during the fourth quarter of 2018.  For the full year 2018, the company paid cash dividends of $130.3 million and utilized $140.9 million to repurchase 1.3 million shares of its common stock under its share repurchase program at an average price of $104.52 per share.  As of December 31, 2018, the company had approximately $206.1 million of availability remaining under its existing share repurchase authorizations.

At December 31, 2018, the company had adjusted cash and financial investments¹ of $257.7 million.  Total debt as of December 31, 2018 was $1.2 billion.

Earnings Conference Call

Executives of Cboe Global Markets will host a conference call to review its fourth-quarter financial results today, February 8, 2019, at 8:30 a.m. ET/7:30 a.m. CT. The conference call and any accompanying slides will be publicly available via live webcast from the Investor Relations section of the company’s website at www.cboe.com under Events & Presentations. Participants may also listen via telephone by dialing (877) 255‑4313 from the United States, (866) 450‑4696 from Canada or (412) 317‑5466 for international callers. Telephone participants should place calls 10 minutes prior to the start of the call. The webcast will be archived on the company’s website for replay. A telephone replay of the earnings call also will be available from approximately 11:00 a.m. CT, February 8, 2019, through 11:00 p.m. CT, February 15, 2019, by calling (877) 344‑7529 from the U.S., (855) 669‑9658 from Canada or (412) 317‑0088 for international callers, using replay code 10126940.

(1)A full reconciliation of our non-GAAP results to our GAAP results is included in the attached tables. See “Non-GAAP Information” in the accompanying financial tables.

About Cboe Global Markets

Cboe Global Markets, Inc. (Cboe: CBOE) is one of the world’s largest exchange holding companies, offering cutting-edge trading and investment solutions to investors around the world. The company is committed to relentless innovation, connecting global markets with world-class technology, and providing seamless solutions that enhance the customer experience.

Cboe offers trading across a diverse range of products in multiple asset classes and geographies, including options, futures, U.S. and European equities, exchange-traded products (ETPs), global foreign exchange (FX) and multi-asset volatility products based on the Cboe Volatility Index (VIX Index), the world’s barometer for equity market volatility.

Cboe’s trading venues include the largest options exchange in the U.S. and the largest stock exchange by value traded in Europe. In addition, the company is one of the largest stock exchange operators in the U.S. and a leading market globally for ETP trading.

The company is headquartered in Chicago with offices in Kansas City, New York, London, San Francisco, Singapore, Hong Kong and Ecuador. For more information, visit www.cboe.com.

Cautionary Statements Regarding Forward-Looking Information

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve a number of risks and uncertainties. You can identify these statements by forward-looking words such as “may,” “might,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” and the negative of these terms and other comparable terminology. All statements that reflect our expectations, assumptions or projections about the future other than statements of historical fact are forward-looking statements. These forward-looking statements, which are subject to known and unknown risks, uncertainties and assumptions about us, may include projections of our future financial performance based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from those expressed or implied by the forward-looking statements.

We operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Some factors that could cause actual results to differ include: the loss of our right to exclusively list and trade certain index options and futures products; economic, political and market conditions; compliance with legal and regulatory obligations; price competition and consolidation in our industry; decreases in trading volumes, market data fees or a shift in the mix of products traded on our exchanges; legislative or regulatory changes; increasing competition by foreign and domestic entities; our dependence on and exposure to risk from third parties; our index providers’ ability to maintain the quality and integrity of their indexes and to perform under our agreements; our ability to operate our business without violating the intellectual property rights of others and the costs associated with protecting our intellectual property rights; our ability to attract and retain skilled management and other personnel, including those experienced with post-acquisition integration; our ability to accommodate trading volume and transaction traffic, including significant increases, without failure or degradation of performance of our systems; our ability to protect our systems and communication networks from security risks, including cyber-attacks and unauthorized disclosure of confidential information; challenges to our use of open source software code; our ability to meet our compliance obligations, including managing potential conflicts between our regulatory responsibilities and our for-profit status; damage to our reputation; the ability of our compliance and risk management methods to effectively monitor and manage our risks; our ability to manage our growth and strategic acquisitions or alliances effectively; unanticipated difficulties or expenditures relating to the acquisition of Bats Global Markets, Inc., including, without limitation, difficulties that result in the failure to realize expected synergies, accretion, efficiencies and cost savings from the acquisition within the expected time period (if at all), whether in connection with integration, migrating trading platforms, broadening distribution of product offerings or otherwise; restrictions imposed by our debt obligations; our ability to maintain an investment grade credit rating; potential difficulties in our migration of trading platforms and our ability to retain employees as a result of the acquisition; and the accuracy of our estimates and expectations. More detailed information about factors that may affect our actual results to differ may be found in our filings with the SEC, including in our Annual Report on Form 10-K for the year ended December 31, 2017 and other filings made from time to time with the SEC.

We do not undertake, and we expressly disclaim, any duty to update any forward-looking statement whether as a result of new information, future events or otherwise, except as required by law. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

The condensed consolidated statements of income and balance sheets are unaudited and subject to reclassification.

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S. Jack Heffernan Ph.D. Funds Manager at HEFFX holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.

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