Bats Acquisition Expenses Sink CBOE Earnings in Q1 2017

Consolidated results for Q1 2017 include Bats’ metrics for the period from March 1 through March 31.

The Chicago Board Options Exchange Holdings (NASDAQ: CBOE), the operator of the largest US options marketplace, has released its financial metrics for the first quarter ending March 31, 2017, which are now reported on a consolidated basis to include the business of its newly-acquired Bats Global Markets Inc.

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The exchange operator noted that its consolidated results for the Q1 2017 include Bats’ metrics for the period from March 1 through March 31, 2017. In addition, it now reports five business segments (Options, Futures, U.S. Equities, European Equities and Global FX) instead of the one reporting segment it used to prior to the acquisition of Bats.

During Q1 2017, CBOE Holdings disclosed a net revenue at $193.4 million, up 35 percent year-on-year from $143.1 million contracts back in Q1 2016. This corresponded to a $39.2 million net revenue contribution from Bats for the month of March and increases in transaction fees and other revenue for legacy CBOE. Excluding Bats’ contribution, CBOE’s organic net revenue was $154.2 million, up $11.1 million or 8 percent relative to last year.

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In terms of its operating costs, CBOE reported total operating expenses at $167.3 million in the three month period through March 2017, higher by 163 percent year-on-year from $63.6 million in the same quarter a year earlier. The exchange attributed the higher costs primarily to a $65.2 million in acquisition related expenses, as well as other operational outgoings. Further, it revealed that operating expenses of $14.2 million were related to Bats’ business during March.

Profit Metrics also Lower

As a result, the higher expenses affected CBOE’s operating income which declined to $26.1 million in Q1 2017, lower by a factor of 67 percent when compared to $79.5 million in Q1 2016. This weakness extended to CBOE’s diluted earnings per share (EPS), which came in at just $0.16 during Q1 2017, down -73% YoY from $0.60 in the last year’s first quarter.

Commenting on the results, Edward Tilly, CBOE Holdings’ Chairman and CEO, said: “We were pleased to complete our acquisition of Bats this quarter and hit the ground running with a comprehensive integration plan to realize the opportunities we see to enhance our financial strength, accelerate our strategic growth initiatives and provide new areas of growth to deliver greater value to CBOE shareholders.”

Mr. Tilly added: “While the Bats integration is a top priority, we also remain laser focused on growing our proprietary products. Despite record low realized volatility in the first quarter, trading on VIX futures rose 18 percent while trading in our index options increased 7 percent compared with first-quarter 2016, led by record trading in SPX options and significantly outpacing the options industry, which posted a 4 percent decline in average daily volume.”

Alan Dean, CBOE Holdings’ Chief Financial Officer, also noted: “Our strong cash flow generation allowed us to reduce our debt position of $1.65 billion to $1.50 billion at quarter end. In addition, we are very pleased with our progress on synergy realization, reinforcing our confidence in meeting or exceeding our stated goals of $50 million in annualized synergies in year three and $65 million in year five post the close.”

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