Third Quarter 2020 Highlights*
- Diluted EPS for the Quarter of $1.01 , Up 7 Percent
- Adjusted Diluted EPS¹ for the Quarter of $1.11 , Down 14 Percent
- Net Revenue for the Quarter of $292.0 Million , Down 1 Percent
- EBITDA Margin¹ for the Quarter of 72.6 Percent Compared to 65.2 Percent in 2019
- Adjusted EBITDA Margin¹ for the Quarter of 65.9 Percent Compared to 70.9 Percent in 2019
- Returned $88 Million to Shareholders Through Share Repurchases and Dividends
CHICAGO , Oct. 30, 2020 /PRNewswire/ -- Cboe Global Markets, Inc. (Cboe: CBOE) today reported financial results for the third quarter of 2020.
"Our third quarter results highlight continued robust engagement among retail customers offset by decreased trading among institutional investors as a result of ongoing uncertainty regarding the global macro-environment. We continued throughout the quarter to diversify our products and services for customers of every type by advancing key growth initiatives, including the expansion of our market data offering and the completion of our MATCHNow and EuroCCP acquisitions, which will enable us to further leverage our index product expertise and broaden our customer reach in new geographies. We continue to make investments for future growth as evidenced in our recently announced plans to acquire BIDS Trading, a leading block trading venue, which would build upon our successful partnership in Europe with Cboe LIS and provide Cboe a presence in the growing off-exchange segment of the U.S. equities market," said Edward T. Tilly , Cboe Global Markets Chairman, President and Chief Executive Officer. "Despite the challenging trading environment, I have never been more excited about the opportunities ahead as a result of our ability to continue to successfully execute on meaningful initiatives to deliver increased value to our customers and our shareholders," Mr. Tilly added.
"We delivered adjusted EPS of $1.11 and an adjusted EBITDA margin of nearly 66 percent for the quarter, driven by the strength of our diversified business model. Although net revenue and adjusted earnings were down year-over-year, we continued to generate solid cash flow, invest in the growth of our business for the long-term, and returned nearly $88 million of capital to shareholders in the quarter through dividends and share repurchases," said Brian N. Schell, Cboe Global Markets Executive Vice President, Chief Financial Officer and Treasurer. "We remain focused on appropriate expense discipline as we execute our key strategic growth initiatives and strive to deliver long-term value to our shareholders."
*All comparisons are third quarter 2020 compared to the same period in 2019.
(1) A full reconciliation of our non-GAAP results to our GAAP results is included in the attached tables. See "Non-GAAP Information" in the accompanying financial tables.
Consolidated Third Quarter Results -Table 1
Table 1 below presents summary selected unaudited condensed consolidated financial information for the company as reported and on an adjusted basis for the three months ended September 30, 2020 and 2019.
Table 1 | |||||||||||||||||||||
Consolidated Third Quarter Results | 3Q20 | 3Q19 | |||||||||||||||||||
($ in millions except per share) | 3Q20 | 3Q19 | Change | Adjusted 1 | Adjusted 1 | Change | |||||||||||||||
Total Revenues Less Cost of Revenues | $ | 292.0 | $ | 294.0 | (1) | % | $ | 292.0 | $ | 294.0 | (1) | % | |||||||||
Total Operating Expenses | $ | 152.7 | $ | 146.6 | 4 | % | $ | 108.9 | $ | 96.5 | 13 | % | |||||||||
Operating Income | $ | 139.3 | $ | 147.4 | (5) | % | $ | 183.1 | $ | 197.5 | (7) | % | |||||||||
Operating Margin % | 47.7 | % | 50.1 | % | (2.4) | pp | 62.7 | % | 67.2 | % | (4.5) | pp | |||||||||
Net Income Allocated to Common Stockholders | $ | 109.6 | $ | 105.5 | 4 | % | $ | 120.5 | $ | 144.6 | (17) | % | |||||||||
Diluted EPS | $ | 1.01 | $ | 0.94 | 7 | % | $ | 1.11 | $ | 1.29 | (14) | % | |||||||||
EBITDA 1 | $ | 212.1 | $ | 191.6 | 11 | % | $ | 192.4 | $ | 208.3 | (8) | % | |||||||||
EBITDA Margin % 1 | 72.6 | % | 65.2 | % | 7.4 | pp | 65.9 | % | 70.9 | % | (5.0) | pp | |||||||||
Total revenues less cost of revenues (referred to as "net revenue") of $292.0 million decreased 1 percent compared to $294.0 million in the prior-year period, primarily reflecting lower net transaction and clearing fees 1 , due to lower trading volumes in index options and futures, offset somewhat by revenue contributed from acquisitions. In addition to acquisitions completed in the first half of the year, third quarter results include the acquisitions of EuroCCP, which closed on July 1, 2020 , and MATCHNow, which closed on August 4, 2020 .
Total operating expenses were $152.7 million versus $146.6 million in the third quarter of 2019. Adjusted operating expenses¹ of $108.9 million increased 13 percent compared with $96.5 million in the third quarter of 2019, primarily due to acquisitions, resulting in higher compensation and benefits and technology support services.
Operating income decreased by 5 percent to $139.3 million and adjusted operating income¹ decreased by 7 percent to $183.1 million as a result of lower net revenue and higher operating expenses.
Non-operating income for the quarter includes a $32.6 million bargain purchase gain related to the EuroCCP acquisition, which is included in the non-GAAP reconciliation 1 . The gain reflects the difference between the purchase price and the fair value of the assets acquired.
The effective tax rate for the third quarter of 2020 was 32.7 percent compared with 24.8 percent in the third quarter of 2019. The higher effective tax rate in 2020 is primarily due to the remeasurement of deferred tax liabilities as a result of an increase in the statutory tax rate in the United Kingdom . The effective tax rate on adjusted earnings¹ in the third quarter of 2020 was 30.8 percent compared with 24.1 percent in last year's third quarter. The higher effective tax rate on adjusted earnings was primarily due to additional expense recognized upon the completion of the company's 2019 U.S. federal income tax return.
Diluted EPS for the third quarter of 2020 was $1.01 , up 7 percent. Adjusted diluted EPS 1 of $1.11 decreased 14 percent compared to 2019's third-quarter results.
The EBITDA margin for the third quarter was 72.6 percent compared to 65.2 percent in the third quarter of 2019. The adjusted EBITDA margin was 65.9 percent compared to 70.9 percent for the same period last year.
Business Segment Information:
Table 2 | ||||||||||
Total Revenues Less Cost of Revenues by | ||||||||||
Business Segment | ||||||||||
(in millions) | 3Q20 | 3Q19 | Change | |||||||
Options | $ | 148.1 | $ | 146.5 | 1 | % | ||||
North American Equities | 75.8 | 75.4 | 1 | % | ||||||
Futures | 23.3 | 38.3 | (39) | % | ||||||
European Equities | 31.6 | 20.7 | 53 | % | ||||||
Global FX | 13.2 | 13.1 | 1 | % | ||||||
Total | $ | 292.0 | $ | 294.0 | (1) | % | ||||
(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 $148.1 million was up $1.6 million , or 1 percent, from the third quarter of 2019, primarily due to higher market data revenue, which included $4.5 million contributed from acquisitions made in the first half of the year, as well as a decrease in royalty fees.
Net transaction fees¹ decreased $10.6 million , as revenue per contract ("RPC") declined by 27 percent, offset somewhat by a total options average daily volume ("ADV") increase of 24 percent compared to the third quarter 2019. The decrease in total options RPC was mainly due to a mix shift, with multi-listed options representing a higher percentage of total options volume. The RPC for multi-listed options was unchanged and the RPC for index options increased 12 percent, primarily reflecting a shift in the product mix, as well as fee changes implemented in the first quarter 2020.
Cboe's Options business had total market share of 32.4 percent for the third quarter of 2020 compared to 39.0 percent in the third quarter of 2019, reflecting a mix shift in trading volume resulting from a higher percentage of ADV from multi-listed options versus index options. Cboe's multi-listed options market share for the quarter decreased to 29.0 percent compared to 32.2 percent in the third quarter of 2019.
North American Equities:
North American Equities net revenue of $75.8 million was up $0.4 million , or 1 percent, primarily due to higher revenue from access and capacity fees and net transaction fees 1 , offset somewhat by lower market data revenue.
Cboe U.S. Equities exchanges had market share of 15.1 percent for the third quarter of 2020 compared to 17.2 percent in the third quarter of 2019. The decrease was primarily due to higher off-exchange trading volume during the third quarter of 2020, which hit new highs, averaging nearly 43 percent of total market volume, compared to 36 percent in the third quarter of 2019. Market share for September increased 50 basis points compared to August, reflecting positive response to pricing adjustments aimed at attracting off-exchange volume.
Futures:
Futures net revenue of $23.3 million decreased $15.0 million , or 39 percent, primarily due to a decline in net transaction fees 1 .
Net transaction fees¹ decreased $14.4 million , or 46 percent, reflecting a 38 percent decrease in ADV and a 13 percent decline in RPC. The RPC decline was primarily due to the introduction of mini-VIX futures, which is one-tenth the size of the standard VIX futures and has a lower fee per contract.
European Equities:
European Equities net revenue of $31.6 million increased by 53 percent, primarily reflecting the addition of EuroCCP, which accounted for $10.3 million in additional revenue, as well as higher access and capacity fees. Average daily notional value ("ADNV") for the overall market was down 8 percent during the quarter and ADNV traded for Cboe Europe was ¬5.6 billion, down 18 percent from last year's third quarter, with net capture up 5 percent.
For the third quarter of 2020, Cboe European Equities had 17.7 percent market share, down from 19.8 percent in the third quarter of 2019, primarily as a result of market profile shifts that impacted order flow to Cboe, as well as an increase in over-the-counter trading. Market share for the third quarter increased 190 basis points compared to the second quarter of 2020, reflecting positive response to a new pricing program and strong performance in our Periodic Auctions offering.
Global FX:
Global FX net revenue of $13.2 million increased 1 percent, primarily due to higher access and capacity fees, offsetting lower net transaction fees 1 compared with the third quarter of 2019. ADNV traded on the Cboe FX platform was $30.2 billion for the quarter, down 1 percent from last year's third quarter and net capture per one million dollars traded was $2.70 for third-quarter 2020, down 4 percent compared to $2.80 in the third-quarter 2019.
Cboe FX market share increased to 15.9 percent for the quarter compared to 14.1 percent in last year's third quarter.
(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.
2020 Fiscal Year Financial Guidance
The company updated its guidance for the 2020 fiscal year as noted below. This guidance takes into account the company's acquisitions completed through September 30, 2020 , as well as its investment in launching pan-European derivatives trading and clearing, which is subject to regulatory approval.
Adjusted operating expenses are now expected to be in the range of $415 to $420 million , down from the previous guidance of $436 to $444 million , primarily reflecting lower compensation costs, including incentive-based compensation, professional fees and travel and marketing expenses. The guidance excludes the amortization of acquired intangible assets, which is now expected to be $124 million versus prior guidance of $120 million . The company plans to include this amount in its non-GAAP reconciliation.¹
Depreciation and amortization expense, which is included in adjusted operating expenses above, is now expected to be in the range of $32 to $36 million , down from previous guidance of $34 to $38 million , excluding the expected amortization of acquired intangible assets of $124 million . The decrease reflects a lower level of capital spending.
The effective tax rate¹ on adjusted earnings for the full year is now expected to be in the range of 27.0 to 29.0 percent, up from the prior range of 26.5 to 28.5 percent, which incorporates a higher tax rate for the third quarter. 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 now expected to be in the range of $45 to $50 million , down compared to prior guidance of $65 to $70 million , reflecting a shift in the timing of certain expenditures, as well as lower spending for certain projects.
(1) S pecific 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 $45.8 million , or $0.42 per share, during the third quarter of 2020 and utilized $41.8 million to repurchase 0.5 million shares of its common stock under its share repurchase program at an average price of $89.92 per share. In addition, through ...