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CBOE > SEC Filings for CBOE > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for CBOE HOLDINGS, INC.

Form 10-Q for CBOE HOLDINGS, INC.


6-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto, included in Item 1 in this Quarterly Report on Form 10-Q, and the audited consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2013, and as contained in that report, the information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." This discussion contains forward-looking information. Please see "Forward-Looking Statements" for a discussion of the uncertainties, risks and assumptions associated with these statements.

RESULTS OF OPERATIONS

Three months ended June 30, 2014 compared to the three months ended June 30, 2013

Overview

The following summarizes changes in our financial performance for the three
months ended June 30, 2014 compared to the same period in 2013.
                                                                                            Percent
                                           2014              2013          Inc./(Dec.)       Change
                                           (in millions, except per share amounts)
Total operating revenues              $     143.9       $     150.8       $      (6.9 )        (4.5 )%
Total operating expenses                     74.2              75.4              (1.2 )        (1.6 )%
Operating income                             69.7              75.4              (5.7 )        (7.5 )%
Total other expense                          (0.3 )            (0.5 )             0.2         (32.1 )%
Income before income taxes                   69.4              74.9              (5.5 )        (7.3 )%
Income tax provision                         26.4              28.7              (2.3 )        (8.0 )%
Net income                            $      43.0       $      46.2       $      (3.2 )        (6.9 )%
Net income allocated to common
stockholders                          $      42.6       $      45.5       $      (2.9 )        (6.3 )%
Operating income percentage                  48.4 %            50.0 %
Net income percentage                        29.9 %            30.6 %
Diluted net income per share
allocated to common stockholders      $      0.50       $      0.52



            Total operating revenues decreased primarily due to lower
             transaction fees resulting from a shift in product mix and lower
             average revenue per contract, partially offset by higher market data
             fees.



            Total operating expenses decreased primarily due to decreases in
             employee costs and outside services, partially offset by higher
             depreciation and amortization.

Operating Revenues

Total operating revenues for the three months ended June 30, 2014 were $143.9 million, a decrease of $6.9 million, or 4.5%, compared with the same period in 2013. The following summarizes changes in total operating revenues for the three months ended June 30, 2014 compared to the same period in 2013.


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                                                                                 Percent
                                     2014           2013          Inc./(Dec.)     Change
                                               (in millions)
Transaction fees                   $  97.9    $         106.1    $      (8.2 )    (7.7 )%
Access fees                           14.8               15.0           (0.2 )    (1.0 )%
Exchange services and other fees       9.7                9.3            0.4       3.9  %
Market data fees                       7.8                5.7            2.1      36.4  %
Regulatory fees                        9.8               10.5           (0.7 )    (6.7 )%
Other revenue                          3.9                4.2           (0.3 )    (6.5 )%
Total operating revenues           $ 143.9    $         150.8    $      (6.9 )    (4.5 )%

Transaction Fees

Transaction fees decreased 7.7% to $97.9 million for the three months ended June 30, 2014, compared with $106.1 million for the same period in 2013. This decrease was due to a 4.1% decline in total trading volume and a decrease in average revenue per contract of 3.8%. The decrease in average revenue per contract resulted primarily from a shift in the mix of trading volume and higher volume-based incentives, primarily driven by increased volume in equities. For the three months ended June 30, 2014, trading volume in SPX options and VIX futures decreased 14.2% and 9.3%, respectively, compared to the prior year period. These decreases were partially offset by higher trading volume in VIX options of 9.8%. Our highest average revenue per contract products, index options and futures contracts, accounted for 33.9% of trading volume during the second quarter of 2014 down from 34.7% in the second quarter of 2013.

Our share of total U.S. options industry volume increased to 30.3% from 27.4% in the prior year period resulting primarily from higher volume in our equity product category. Trading volume is impacted by many factors, including:
macroeconomic events, market volatility, regulatory actions or considerations, availability of capital, competition, pricing, number of trading days in the period and seasonality.

Average revenue per contract, discussed in more detail below, is impacted by our fee structure, which includes volume based incentive programs, mix of products traded, the account type (customer, firm, market-maker, etc.) and the manner in which a trade is executed (electronic, open-outcry, etc.) The implementation of fee changes, which may increase or decrease our average revenue per contract, is primarily to ensure that we are competitive in the options marketplace and to ultimately improve and continue to drive order flow to our exchanges. We cannot predict the trading patterns of exchange participants, which may be based on factors outside our control, but we can attempt to price our products at levels that are competitive in our market.

The following summarizes transaction fees by product category for the three months ended June 30, 2014 compared to the same period in 2013.

                                                                              Percent
                                  2014           2013          Inc./(Dec.)     Change
                                            (in millions)
Equities                         $  9.0    $           9.2    $      (0.2 )    (2.6 )%
Indexes                            62.1               66.6           (4.5 )    (6.8 )%
Exchange-traded products            9.7               12.5           (2.8 )   (22.1 )%
Total options transaction fees     80.8               88.3           (7.5 )    (8.5 )%
Futures                            17.1               17.8           (0.7 )    (3.8 )%
Total transaction fees           $ 97.9    $         106.1    $      (8.2 )    (7.7 )%


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Trading Volume

Our average daily volume ("ADV") for the three months ended June 30, 2014 was 4.83 million contracts, down 2.6% compared with 4.96 million contracts for the same period in 2013. The Company experienced ADV decreases across all product categories, except equities. Total trading days for the three months ended June 30, 2014 and 2013 were sixty-three and sixty-four, respectively.

The following summarizes changes in total trading volume and ADV by product category for the three months ended June 30, 2014 compared to the same period in 2013.

                              2014                      2013                Volume             ADV
                      Volume         ADV        Volume        ADV       Percent Change    Percent Change
                                      (in millions)
Equities               113.8         1.80          102.1       1.60           11.5  %           13.2  %
Indexes                 92.7         1.47           98.8       1.54           (6.1 )%           (4.6 )%
Exchange-traded
products                87.5         1.39          105.0       1.64          (16.7 )%          (15.4 )%
Total options
contracts              294.0         4.66          305.9       4.78           (3.9 )%           (2.5 )%
Futures contracts       10.4         0.17           11.5       0.18           (9.4 )%           (7.8 )%
Total contracts        304.4         4.83          317.4       4.96           (4.1 )%           (2.6 )%

The following provides the percentage of volume by product category for the three months ended June 30, 2014 and 2013.

                            2014      2013
Equities                    37.4 %    32.2 %
Indexes                     30.5 %    31.1 %
Exchange-traded products    28.7 %    33.1 %
Futures                      3.4 %     3.6 %
Total                      100.0 %   100.0 %

Average Revenue Per Contract

Average revenue per contract was $0.322 for the three months ended June 30,
2014, a decrease of 3.8% compared with $0.334 for the same period in 2013.
Average revenue per contract represents transaction fees divided by total
contracts cleared.

The following summarizes average revenue per contract by product category for
the three months ended June 30, 2014 compared to the same period in 2013.

                                                                   Percent
                                               2014       2013      Change
Equities                                     $ 0.079    $ 0.090    (12.6 )%
Indexes                                        0.670      0.675     (0.7 )%
Exchange-traded products                       0.111      0.119     (6.5 )%
Total options average revenue per contract     0.275      0.289     (4.8 )%
Futures                                        1.639      1.544      6.2  %
Total average revenue per contract           $ 0.322    $ 0.334     (3.8 )%

Factors contributing to the decrease in total average revenue per contract for the three months ended June 30, 2014 compared to the same period in 2013 included:


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Product Mix - We experienced a shift in volume to equities, our lowest average revenue per contract product category.

Rate structure - Our rate structure includes sliding scales, volume discounts, volume incentive programs and caps on fees as part of our effort to increase liquidity and market share in multiply-listed options. Average revenue per contract on multiply-listed options (equities and exchange-traded products) decreased 12.6% and 6.5%, respectively. These decreases resulted primarily from increases in volume-based incentives for certain multiply-listed options (equities and exchange-traded products).

Access Fees

Access fees for the three months ended June 30, 2014 and 2013 were $14.8 million and $15.0 million, respectively.

Exchange Services and Other Fees

Exchange services and other fees for the three months ended June 30, 2014 increased to $9.7 million from $9.3 million for the same period in 2013.

Market Data Fees

Market data fees for the three months ended June 30, 2014 increased to $7.8 million from $5.7 million for the same period in 2013. Market data fees represent income derived from OPRA as well as the Company's market data services, which for the three months ended June 30, 2014 each totaled $3.9 million and, for the same period in 2013, totaled $2.9 million and $2.8 million, respectively. Income derived from OPRA is allocated based on each exchange's share of total cleared options transactions. The Company's share of total cleared options transactions increased to 24.4% from 20.9%, for the same period in 2013. Revenue generated from the Company's market data services, which provide current and historical options and futures data, increased $1.1 million primarily due to an increase in subscribers to CBOE Streaming Markets and other market data services.

Regulatory Fees

Regulatory fees for the three months ended June 30, 2014 decreased to $9.8 million from $10.5 million for the same period in 2013. The decrease in regulatory fees primarily resulted from lower Trading Permit Holder customer volume industry-wide as compared to the same period in 2013, partially offset by an increase in the options regulatory fee rate in 2014 and a reduction in regulatory fees received for regulatory services provided to CBOE Stock Exchange, LLC ("CBSX") which ceased trading operations on April 30, 2014. On August 1, 2014, CBOE and C2 lowered the options regulatory fee rate for the remainder of 2014. With the reduction in services provided to CBSX and the reduction in options regulatory fee rate, if customer volume remains consistent with current levels for the remainder of the year, we would expect regulatory fees to decline in the third and fourth quarter of 2014 as compared to the first and second quarter of 2014.

The Company's regulatory fees are primarily based on the number of customer contracts traded by Trading Permit Holders throughout the listed United States options industry. Under the rules of each of our options exchanges, as required by the SEC, any revenue derived from regulatory fees and fines cannot be used for non-regulatory purposes.

Concentration of Revenue

At June 30, 2014, there were approximately one hundred Trading Permit Holders that are clearing members of OCC. Two clearing members account for 54% of transaction and other fees collected through the OCC for the three months ended June 30, 2014. The next largest clearing member accounted for approximately 9% of transaction and other fees collected through the OCC. No one Trading Permit Holder using the services of the top two clearing members represented more than 40% of transaction and other fees collected through the OCC, for the respective clearing member, in the three months ended June 30, 2014. Should a clearing member withdraw from CBOE, we believe the Trading Permit Holder portion of that clearing member's trading activity would likely transfer to another clearing member.

The two largest clearing members mentioned above clear the majority of the market-maker sides of transactions at CBOE, C2 and at all of the U.S. options exchanges. If either of these clearing members were to withdraw from the business of market-maker clearing and market-makers were unable to transfer to another clearing member, this could create significant disruption to the U.S. options markets, including ours.


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Operating Expenses

Total operating expenses decreased $1.2 million, or 1.6%, to $74.2 million for
the three months ended June 30, 2014 from $75.4 million for the same period in
2013. This decrease was primarily due to lower employee costs and outside
services, partially offset by higher depreciation and amortization.

The following summarizes changes in operating expenses for the three months
ended June 30, 2014 compared to the same period in 2013.

                                                                               Percent
                                   2014           2013          Inc./(Dec.)     Change
                                             (in millions)
Employee costs                    $ 30.3    $          31.2    $      (0.9 )    (3.0 )%
Depreciation and amortization        9.9                8.6            1.3      14.8  %
Data processing                      4.8                4.6            0.2       5.2  %
Outside services                     7.9                9.6           (1.7 )   (18.5 )%
Royalty fees                        14.7               14.5            0.2       1.3  %
Trading volume incentives            1.1                0.9            0.2      23.3  %
Travel and promotional expenses      2.4                2.6           (0.2 )    (5.7 )%
Facilities costs                     1.6                1.3            0.3      27.5  %
Other expenses                       1.5                2.1           (0.6 )   (27.8 )%
Total operating expenses          $ 74.2    $          75.4    $      (1.2 )    (1.6 )%

Employee Costs

For the three months ended June 30, 2014, employee costs were $30.3 million, or 21.1% of total operating revenues, compared with $31.2 million, or 20.7% of total operating revenues, for the same period in 2013. This represented a decrease of $0.9 million, or 3.0%, from the prior period. The decrease was primarily attributed to lower stock-based compensation expense of $1.8 million due largely to the fact that, in May 2013, shares were granted to the Chief Executive Officer and President and Chief Operating Officer totaling $2.5 million, of which 50% vested upon grant. The decrease in stock-based compensation was partially offset by an increase in salaries of $1.3 million resulting from increases in staffing.

Depreciation and Amortization

For the three months ended June 30, 2014, depreciation and amortization costs were $9.9 million compared with $8.6 million, for the same period in 2013. This represented an increase of $1.3 million, which primarily resulted from increased capital spending to harden and enhance our trading platform and operations.

Outside Services

Expenses related to outside services decreased to $7.9 million for the three months ended June 30, 2014 from $9.6 million for the same period in 2013. This $1.7 million decrease primarily resulted from lower legal costs.

Royalty Fees

Royalty fees for the three months ended June 30, 2014 were $14.7 million compared with $14.5 million for the same period in 2013, an increase of $0.2 million. For the three months ended June 30, 2014, royalty fees related to proprietary products were down due to lower volume, this was mostly offset by higher fees paid to market participants for order flow directed to our exchanges and higher fees associated with dissemination of certain market data.

Operating Income

As a result of the items above, operating income for the three months ended June 30, 2014 was $69.7 million compared to $75.4 million for the same period in 2013, a decrease of $5.7 million.


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Income before Income Taxes

Income before income taxes for the three months ended June 30, 2014 was $69.4 million compared to $74.9 million for the same period in 2013, a decrease of $5.5 million.

Income Tax Provision

For the three months ended June 30, 2014, the income tax provision was $26.4 million compared to $28.7 million for the same period in 2013. The effective tax rate was 38.1% and 38.4% for the three months ended June 30, 2014 and 2013, respectively.

Net Income

As a result of the items above, net income allocated to common stockholders for the three months ended June 30, 2014 was $42.6 million compared to $45.5 million for the same period in 2013, a decrease of $2.9 million. Basic and diluted net income per share allocated to common stockholders were $0.50 and $0.52 for the three months ended June 30, 2014 and 2013, respectively.

Six months ended June 30, 2014 compared to the six months ended June 30, 2013

Overview

The following summarizes changes in financial performance for the six months ended June 30, 2014 compared to the same period in 2013.

                                                                                                Percent
                                           2014              2013            Inc./(Dec.)         Change
                                             (in millions, except per share amounts)
Total operating revenues              $     301.8       $     293.5       $           8.3           2.8  %
Total operating expenses                    150.1             148.7                   1.4           0.9  %
Operating income                            151.7             144.8                   6.9           4.8  %
Total other expense                          (0.8 )            (1.2 )                 0.4         (31.7 )%
Income before income taxes                  150.9             143.6                   7.3           5.1  %
Income tax provision                         58.9              55.1                   3.8           7.0  %
Net income                            $      92.0       $      88.5       $           3.5           4.0  %
Net income allocated to common
stockholders                          $      91.1       $      87.3       $           3.8           4.4  %
Operating income percentage                  50.3 %            49.3 %
Net income percentage                        30.5 %            30.2 %
Diluted net income per share
allocated to common stockholders      $      1.06       $      1.00

Total operating revenues increased primarily due to higher transaction fees and market data fees.

            Total operating expenses increased primarily due to higher employee
             costs, depreciation and amortization and royalty fees, partially
             offset by lower outside services.



            The Company's market share of total exchange traded options
             contracts was 30.0% for the six months ended June 30, 2014 compared
             with 26.4% for the same period in 2013.


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Operating Revenues

Total operating revenues for the six months ended June 30, 2014 were $301.8
million, an increase of $8.3 million, or 2.8%, compared with the same period in
2013. The following summarizes changes in total operating revenues for the six
months ended June 30, 2014 compared to the same period in 2013.

                                                                                 Percent
                                     2014           2013          Inc./(Dec.)     Change
                                               (in millions)
Transaction fees                   $ 210.7    $         205.2    $       5.5       2.7  %
Access fees                           30.1               30.7           (0.6 )    (1.9 )%
Exchange services and other fees      19.2               18.4            0.8       4.2  %
Market data fees                      15.0               11.3            3.7      32.9  %
Regulatory fees                       19.6               20.1           (0.5 )    (2.7 )%
Other revenue                          7.2                7.8           (0.6 )    (6.4 )%
Total operating revenues             301.8    $         293.5    $       8.3       2.8  %

Transaction Fees

Transaction fees increased 2.7% to $210.7 million for the six months ended June 30, 2014, compared with $205.2 million for the same period in 2013. This increase was primarily due to an 11.7% increase in total trading volume, partially offset by an 8.1% decrease in average revenue per contract. The Company experienced volume increases across all product categories. The volume increases in indexes and futures were driven by increases in VIX options and VIX futures of 17.2% and 10.3%, respectively. The decrease in average revenue per contract resulted from a shift in volume mix from our highest average revenue per contract products, index options and futures contracts, to our lowest average revenue per contract product, equities. In addition to the shift in product mix, we also experienced an increase in volume-based incentives resulting primarily from higher relative volume for certain multiply-listed options (equities and exchange-traded products). Transaction fees accounted for 69.8% and 69.9% of total operating revenues for the six months ended June 30, 2014 and 2013, respectively.

The following summarizes transaction fees by product category for the six months ended June 30, 2014 and 2013.

                                                                               Percent
                                   2014           2013          Inc./(Dec.)     Change
                                             (in millions)
Equities                         $  19.7    $          22.7    $      (3.0 )   (13.4 )%
Indexes                            133.5              127.0            6.5       5.1  %
Exchange-traded products            20.4               22.8           (2.4 )   (10.1 )%
Total options transaction fees     173.6              172.5            1.1       0.6  %
Futures                             37.1               32.7            4.4      13.4  %
Total transaction fees           $ 210.7    $         205.2    $       5.5       2.7  %

Trading Volume

Our average daily trading volume for the six months ended June 30, 2014 was 5.22 million contracts, up 11.7% compared with 4.67 million for the same period in 2013. Total trading days for the six months ended June 30, 2014 and 2013 were one hundred twenty-four.


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The following summarizes changes in total trading volume and ADV by product category for the six months ended June 30, 2014 compared to the same period in 2013.

                              2014                      2013                  Volume              ADV
                      Volume         ADV         Volume        ADV        Percent Change     Percent Change
                                      (in millions)
Equities               245.9         1.98         198.3         1.60             24.0 %             24.0 %
Indexes                199.4         1.61         188.8         1.52              5.6 %              5.6 %
Exchange-traded
products               179.2         1.45         171.4         1.38              4.5 %              4.5 %
Total options
contracts              624.5         5.04         558.5         4.50             11.8 %             11.8 %
Futures                 22.8         0.18          20.8         0.17             10.0 %             10.0 %
Total contracts        647.3         5.22         579.3         4.67             11.7 %             11.7 %

The following provides the percentage of volume by product category for the six months ended June 30, 2014 and 2013.

                            2014      2013
Equities                    38.0 %    34.2 %
Indexes                     30.8 %    32.6 %
Exchange-traded products    27.7 %    29.6 %
Futures                      3.5 %     3.6 %
Total                      100.0 %   100.0 %

Average Revenue Per Contract

Average revenue per contract was $0.326 for the six months ended June 30, 2014,
a decrease of 8.1% compared with $0.354 for the same period in 2013. The
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