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CBOE Revenue Hits a Sweet Spot

On Aug. 4, options and derivatives exchange holding company CBOE Holdings (NASDAQ: CBOE) reported second-quarter 2017 results, its first complete quarter to include the operations of Bats Global Marketplace, which the corporation acquired in February 2017. As expected, revenue surged, and net income also enjoyed an appreciable boost:

CBOE Holdings: The raw numbers

Metric Q2 2017 Q2 2016 Year-Over-Year Growth
Revenue $266.9 million $144.1 million 85.2%
Net income $67.3 million $50.7 million 32.7%
Diluted earnings per share $0.60 $0.62 (3.2%)

Data source: CBOE Holdings, Inc.

What happened with CBOE Holdings this quarter?

Image source: Getty Images.

  • The exchange operator hit a revenue sweet spot, with its top line gaining not only from acquired revenue, but from native growth of existing business. Organic revenue expanded 5% to $152 million versus the prior year quarter. Management attributed the performance to a 19% increase in the trading of VIX (CBOE Volatility Index) futures, as well as heavier trading in proprietary index options.

  • Acquiring Bats has diminished CBOE's reliance on transaction volume. During the quarter, non-transaction revenue (i.e. income from fees and services) jumped to 42% of total revenue, an increase of 10 percentage points compared to the second quarter of 2016.

  • Operating income margin declined roughly 10 percentage points to 44.1%. However, after adjusting for the amortization of intangibles acquired in the Bats deal, as well as acquisition-related expenses, adjusted operating margin reached 62%. Thus, CBOE's operating margin has improved post-acquisition.

  • Despite higher net income, diluted earnings per share decreased 3%. In the first quarter of 2017, CBOE issued $2.4 billion worth of common stock to complete the Bats transaction, diluting existing stockholders.

  • The combined company now reports under five major segments: Options, U.S. Equities, Futures, European Equities, and Global FX (forex).

  • Within these segments, comparing results on a pro forma basis (i.e. as if results had been combined in the comparable prior year quarter), Options revenue advanced 2% to $126.7 million, and both U.S. Equities and European Equities improved by 3%, to $74.4 million and $18.5 million, respectively.

  • Futures and Global FX saw more meaningful gains, with Futures rising by 20% to $36.2 million, and Global FX climbing 21% to $10.9 million.

  • The company announced that it's won 39% of all new U.S. Exchange Traded Fund (ETF) listings so far this year.

  • CBOE also announced that it's obtained exclusive global rights to use Gemini Trust Company's cryptocurrency market data, which will enable CBOE to begin offering bitcoin derivative products. CEO Edward Tilly stated that the organization intends to begin offering bitcoin cash-settled futures on its CFE exchange in late 2017 or early 2018, pending regulatory approval.

  • During the quarter, CBOE paid down $75 million of the $1 billion term loan undertaken for the Bats acquisition, on top of the $150 million repaid in the first quarter.

  • CBOE increased its quarterly dividend by 8% to $0.27 per share.

What management had to say

During the company's conference call, various executives of the combined CBOE and Bats businesses gave their perspectives on the current quarter and future opportunity. Brian Schell, CFO of Bats, succinctly summarized results for the combined companies:

...During the second quarter, we built on the strong momentum we experienced in the first quarter and continued to demonstrate the strength of our proprietary index products, generating strong organic growth; diversifying and stabilizing our revenue streams with increased mix of non-transaction revenues; disciplined expense management; leveraging the scale of our business model, producing higher profitability margins; an integration plan on track with a strong cost synergy realization; and finally, ongoing focus on capital allocation by reducing debt and increasing our quarterly dividend.

Looking forward

CBOE doesn't provide detailed revenue and earnings guidance, but it does disclose operating expense targets. CBOE expects full-year 2017 adjusted operating expense to fall toward the lower end of a range of between $415 million and $423 million. This goal excludes acquisition expenses of nearly $70 million, while reflecting projected cost-synergies. Reaching this range would compare nicely to 2016's adjusted pro forma operating expense of $417 million: A rising top line with controlled expense growth means the company is gaining favorable operating leverage from its sizable merger.

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Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends CBOE Holdings. The Motley Fool has a disclosure policy.