CME Earnings: Low Trading Volumes Cut Into Revenues, Compress Margins
CME Group (NASDAQ:CME) announced its Q2 earnings on July 31, reporting a 10% year-on-year decline in net revenues to $732 million. CME’s transaction revenues dropped by 12% from the prior year quarter to $609 million. [1] Trading volumes of all derivative classes combined, including interest rates, energy, equities, metals and foreign exchange, declined sequentially (-4.5%) and annually (-13.2%), leading to a company-wide average of 12.6 million contracts traded per day. Additionally, the decline in the average rate per contract (RPC) to $0.765 per contract led to low transaction-based revenues for the company.
According to our estimates, the company’s adjusted EBITDA margin was about 5 percentage points lower than the prior year quarter at 66.2%. Margins compressed largely due to lower revenues, since many expenses incurred by exchanges are fixed in nature. So if trading volumes pick up in the coming quarters, it is likely to directly impact the company’s bottom line growth.
Our $68 price estimate for CME is about 8% lower than the current market price.
See our full analysis for CME Group
Volume Decline Across All Derivative Classes
Interest rate derivatives constituted over half of CME’s overall volumes at 6.7 million trades per day in the June quarter. CME’s total interest rate derivative trades rose by nearly 30% sequentially to 436 million contracts (or over 6.8 million contracts per day) in the year-ago period, as there was volatility in the global markets. Trading volumes of interest rate products rose in the months of May and June last year due to speculation about the Fed’s future monetary policy, especially those concerning tapering initiatives of the QE program. As a result of the spike in trading volumes in May and June last year, total contracts traded during Q2 this year were lower than the prior year quarter. However, the rate per contract (RPC) earned by CME during the first two months of Q2 2014 was higher than the year-ago period, due to which revenues generated by interest rate product trading was nearly the same as the prior year period. [2]
Equity contract volumes declined both sequentially (-12%) and y-o-y (-22%) in the June quarter to 156 million trades, or 2.5 million contracts per day. However, the rate of decline was lower than that faced by competing exchange operators such as NASDAQ OMX Group (NASDAQ:NDAQ) and Deutsche Boerse Group. [3] Management mentioned that its equity derivative trading division performed better than competing exchange operators due to an increase in trading activity in CME’s European exchange. The company’s international volume rose to 24% of the overall electronic trading volume from 20-22% in the last few quarters.
Additionally, energy contracts saw a sequential (-12%) and annual (-20%) decline in volumes to 91 million contracts for the quarter or less than 1.5 million contracts per day. Energy product trading was significantly higher in January and February this year due to the unusually cold winter, which led to volatility in gas prices. However, energy trading has been subdued in the U.S. since March – a trend which could continue through the next quarter. CME acquired the Trayport and FENICS businesses from GFI Group a day before the earnings call, with an aim to further its presence in the energy trading market in Europe.
The overall rate per contract (RPC) earned by CME during the quarter was slightly lower than the prior year quarter at $0.765 per contract. The company attributed the 1% decline in RPC to a higher mix of low-cost interest rate derivatives during the quarter. As a result of both decline in revenues and lower RPC, the company’s margins were lower than the prior year quarter. Margins could remain suppressed in the coming quarters if trading volumes remain low. We currently forecast EBITDA margins for 2014 to be about 150 basis points lower than 2013 levels.
Positive Outlook for Non-Transaction Business
Revenues generated by CME’s Market Data segment declined from about $390 million in 2012 to $315 million in 2013 due to the sale of CME’s Credit Market Analysis business to McGraw Hill. Subsequently, CME announced a hike in its annual subscription fee from $70 to $85. However, management mentioned that it doesn’t expect its subscriber base to fall as a result of the hike. [4] CME’s market data revenues grew by almost 13% to $90 million during Q2 and the growth is expected to continue through 2014. We forecast market data revenues to reach 2012 levels of around $370 million as a result of the 20% price hike.
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Notes:- CME Group Q2 2014 Earnings Call Transcript, Seeking Alpha, July 2014 [↩]
- CME Monthly Reports, CME Investor Relations, July 2014 [↩]
- Trading Volumes Of Eurex Group, Deutsche Boerse Investor Relations, July 2014 [↩]
- CME Q3 2012 Earnings Call Transcript, Seeking Alpha, November 2013 [↩]