CME Earnings Preview: Tepid Growth In Transaction-Based Revenues Likely
CME Group (NASDAQ:CME) is scheduled to announce its fourth quarter fiscal 2015 earnings on Friday, February 5. [1] After a sustained period of high trading activity through the year, CME Group witnessed a slowdown in the fourth quarter. Daily trade volumes were down 11% year on year to 13.2 million contracts per day, primarily due to a slump in average daily volumes (ADV) of interest rate (-18% y-o-y) and foreign exchange contracts (-19% y-o-y). Consequently, we expect transaction-based revenues to be suppressed in the quarter.
On the other hand, the company practiced strict fiscal discipline, curbing its operating expenses to $333 million in the third quarter and a little less than $1 billion in the nine months through September. This was a result of favorable foreign exchange rate fluctuations and decrease in compensation and benefit expenses. [2] Subsequently, our estimate for adjusted EBITDA margin improved by over 2 percentage points to 67.2% at the end of September. We expect adjusted EBITDA margins for the full year 2015 to improve further on the back of continued fiscal prudence.
We have a $91 price estimate for CME, which is slightly higher than the current market price. CME’s stock price fluctuated between $85 and $100 in 2015.
See our full analysis for CME Group
Transaction-Based Revenues To Witness Tepid Growth
CME averaged 14.4 million contracts traded per day in Q3, which was about 7% higher than the year-ago period. This was similar to the 10% and 6% annual growth in trade volumes witnessed by CME in Q1 and Q2, respectively. This led to a rise of 10% y-o-y to $2 billion in transaction-based revenues in the first three quarters combined. However, Q4 saw a downturn, with volumes falling 11% y-o-y to 13.2 million contracts per day. Nevertheless, daily trade volumes in 2015 were 2% higher than the prior year, to a record 14 million contracts per day. As a result, we expect full year trade revenues to see lukewarm growth. [3]
High volumes in 2015 can be attributed to the uncertainty in the global markets caused by deceleration of the Chinese economy, uncertain weather conditions, an oversupply of oil and European debt concerns. The biggest jump in terms of ADV in 2015 was seen in energy derivatives, which increased 21% y-o-y due to the continued volatility regarding oil prices and OPEC’s decision to not cut production.
ADVs for FX contracts jumped 9% y-o-y in 2015 due to speculation around the ECB’s monetary policy, debt concerns in Europe and the subsequent strengthening of the U.S. dollar.
Non-Transaction Businesses To Sustain Growth
Market data and information service revenues increased by an impressive 13% y-o-y to $300 million in the nine months through September. This can be attributed to a reduction in fee waivers for existing customers beginning in 2015. However, the increase was partially offset by a decline in market data subscriber count as a result of the new pricing policies.
Access and communication fees also experienced a boost of 5% y-o-y to $64 million, while other revenues increased by 9% y-o-y to $43 million. Overall, non-transaction revenues increased by 10% y-o-y in the period, to $408 million. We expect these revenues to continue their growth momentum in the final quarter, although hindered by additional competition from Intercontinental Exchange Group (NYSE:ICE). ((CME Group Inc. Reports Strong Third-Quarter 2015 Financial Results, CME Press Release, October 2015))
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- CME Group to report fourth quarter results, CME Press Release, January 2016 [↩]
- CME Group Inc. Reports Strong Third-Quarter 2015 Financial Results, CME Press Release, October 2015 [↩]
- CME Group Volume Averaged A Record 14 Million Contracts per Day in 2015, Up 2 Percent from 2014, CME Press Release, January 2016 [↩]