CME Earnings: Interest Rates, FX Derivatives Drive Q3 Results
CME Group (NASDAQ:CME) announced its Q3 earnings on Thursday, October 30, reporting a nearly 7% year-over-year rise in net revenues to $762 million. Clearing and transaction fee revenues grew by over 7% y-o-y to $642 million, while market data revenues registered 12% growth over the prior year quarter to $88 million. [1] According to our estimates, CME’s adjusted EBITDA margin in Q3 was almost a percentage point higher than the prior year quarter at 65.4%. Since most expenses incurred by exchanges are fixed in nature, revenue growth for CME had a direct impact on the company’s margin improvement.
We have an $80 price estimate for CME’s stock, which is roughly in line with the current market price.
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Trading Volumes Recover After A Slow Q2
The global exchange operator witnessed a decline in combined trading volumes across all derivative classes including interest rates, energy, equities, metals and foreign exchange, both sequentially (-4.5%) and annually (-13.2%) in the second quarter. Interest rate derivatives have constituted over half of CME’s overall volumes at 6.8 million trades per day. In 2013, trading volumes of interest rate products rose in the months of May and June due to speculation about the Fed’s future monetary policy, especially those concerning QE tapering. As a result of that spike in 2013, total contracts traded during Q2 this year were slightly lower than the prior year quarter. The resulting average trading volume of 12.6 million contracts traded per day, coupled with a mild decline in the average rate per contract (RPC), brought CME’s transaction-based revenues down 12% to $609 million. As a result, CME’s net revenues declined by 10% year-on-year to $732 million in Q2. [2]
In the third quarter of this year, CME saw solid growth in interest rate derivatives trading volumes, with the company averaging over 7.5 million contracts traded per day during the months of August and September, as traders begin to speculate when the Fed will start raising interest rates in 2015. [3] We currently forecast CME’s interest rate derivatives trading volumes for the full year to be 12% higher than the prior year period at 6.7 million contracts per day.
Foreign exchange (FX) derivatives trading volumes were suppressed in the first half of 2014, with CME’s average daily trades down by almost 30% compared to the prior year period at 700,000 trades per day. FX trading picked up in August and September, with the number of contracts traded per day crossing the 1 million mark during September for the first time since November 2012. The rise in volumes since August is attributable to growing speculation among traders about possible changes in monetary policies from the Fed and the European Central Bank (ECB). [4] The Fed announced the end of the QE program, which could help increase Treasury yields. On the other hand, the ECB announced that it would be reducing rates, which led the Euro to a one-year low. [5] As a result, FX derivatives trading could remain high through the end of this year.
Non-Trading Business Gets A Boost
CME announced that it signed a strategic agreement with the China Financial Futures Exchange (CFFEX) in October, which will enable CME to distribute CFFEX market data outside mainland China. CFFEX is the only derivatives exchange in mainland China, and it aims to extend its global reach with the help of this agreement. This will establish CME as the middleman between the Chinese markets and a vast array of global customers that want access to these markets. [6] At the start of the year, CME revised its annual market data subscription fee from $70 per customer last year to $85. Not only does the deal with CFFEX (and future deals with other global exchanges) allow CME to offer more data to its existing customers, it should help CME justify its price hikes and give it further pricing power. By our estimates, CME had a global market data subscriber base of about 375,000 customers in 2013, which could go down to about 360,000 customers in 2014, possibly due to the price hike. We forecast CME’s subscriber base to increase moderately to about 420,000 customers through the end of our forecast period.
Market data and information services contributed $267 million to CME’s top line through the first three quarters of 2014 – almost 12% higher than the comparable year ago period. According to CME’s management, revenues were higher than the prior year period despite a slight decline in its customer base, owing to the subscription fee hike and the elimination of waivers in March. [7] The company seems to be on course to achieve its expected revenues of over $360 million from the market data division in 2014.
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- CME Group Q3 2014 Earnings Call Transcript, Seeking Alpha, October 2014 [↩]
- CME Group Q2 2014 Earnings Call Transcript, Seeking Alpha, July 2014 [↩]
- CME Group Monthly Trade Metrics For September, CME Group Investor Relations, October 2014 [↩]
- CME Group FX Volumes Rise 20% as FED Speculation Reactivates USD Volatility, Forex Magnates, September 2014 [↩]
- Daily currency volumes rise in August as volatility picks up, Reuters, September 2014 [↩]
- CME Group and CFFEX Sign Market Data Agreement, Yahoo News, September 2014 [↩]
- CME Earnings Call Transcript Q2 2014, Seeking Alpha, July 2014 [↩]