CME Group Earnings Review: Suppressed Volumes Weigh On Q4 Results

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CME Group (NASDAQ:CME) announced its fourth quarter fiscal 2015 earnings on Friday, February 5. In line with our expectations, transaction and clearing revenues in the quarter were down 5% year on year (y-o-y) to $679 million, due to a slump in average daily volumes (ADVs). This resulted in a slight deterioration in total revenues in Q4 to $814 million. ((CME Group report fourth quarter results, CME Press Release, February 2016))

In terms of expenses, the company practiced strict fiscal discipline, restricting its costs to $344 million in Q4, down 7% y-o-y. However, due to higher licensing expenses, operating costs for the full year 2015 stayed flat at $1.3 billion, as compared to the previous year. Consequently, the estimated adjusted EBITDA margin improved only 230 basis points to 66.65% in 2015.

We have a $91 price estimate for CME, which is slightly higher than the current market price.

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See our full analysis for CME Group

Trade Revenues See Tepid Growth

Daily trade volumes were down 11% y-o-y to 13.2 million contracts per day in Q4, 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). [1] Despite this, owing to the gains made through the first nine months through September, full year 2015 volumes were 2% higher than the prior year, to a record 14 million contracts per day. Consequently, transaction-based revenues were 6% higher at $2.78 billion in 2015. CME Group expects to see increased trade volumes in the first quarter of 2016 on the back of increased volatility and uncertainty around oil prices and interest rates. Moreover, the company implemented a transaction fee increase in January 2016, which will likely result in an approximately 2 percent hike in transaction revenues, assuming the same volume levels and product mix.

The biggest jump in terms of ADV in 2015 was seen in energy derivatives, which increased 21% y-o-y to 1.97 million contracts per day, due to the continued volatility in oil prices and OPEC’s decision to not cut production. Moreover, the lifting of the 40-year ban on exporting crude outside the U.S contributed significantly to the trade volumes of this product. Going ahead, the company hopes to leverage the infrastructure shifts and the market dynamic shifts around oil due to the lift of the ban through its new storage contract, LOOP. ((CME Group fourth quarter earnings transcript, Seeking Alpha, February 2016))

Non-Transaction Businesses To Sustain Growth

Access and communication services refer to the connectivity charges that CME Group collects from its market data vendors and direct market data customers. Access and communication fees experienced lukewarm growth in the year 2015, increasing only marginally to $86 million.

Market data and information services revenues increased 10% y-o-y to $99 million in Q4 and 12% y-o-y to $400 million in the full year 2015 due to the reduction in fee waivers. Going forward, CME Group will move its market data clients, who previously received fee waivers, from a $42.50 per month per screen to a $85 per month per screen level, similar to other customers. This step, which usually occurs every two years, will likely reduce the company’s subscriber count, resulting in market data revenues to increase by only 4- 5% in 2016. ((CME Group fourth quarter earnings transcript, CME Press Release, February 2016))

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Notes:
  1. CME Group Volume Averaged A Record 14 Million Contracts per Day in 2015, Up 2 Percent from 2014, CME Press Release, January 2016 []