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CBOE hopes to increase trading in volatility index contracts, which are among its most profitable products. The price and volume of VIX futures tend to have an inverse relationship with the S&P 500 index.

CBOE posts 2 percent increase in fourth quarter earnings

by Peter Rawlings
Feb 09, 2012

CBOE Holdings Inc., buoyed by heightened trading volume of its highest-margin futures and options products, topped analyst expectations by posting a 2 percent bump in in its fourth quarter earnings Thursday.

The Chicago-based company, which operates the Chicago Board Options Exchange, said net income for the quarter ended Dec. 31 rose to $31.3 million, or 35 cents per diluted share, from $30.7 million, or 31 cents per diluted share, in the year-ago quarter--exceeding by a penny the 34 cents a share analysts surveyed by Bloomberg LP had predicted.

The rise in earnings per share was aided by a 9 percent decrease in outstanding shares in the fourth quarter compared to the year-ago period, as the company continued to implement its stock buyback plan.

CBOE took in $120.2 million in revenue in the fourth quarter, up 2.4 percent from $117.4 million in the year-ago quarter.

The revenue increase was fueled by greater trading of some of its most profitable contracts, such as VIX futures―which are tied to the company's volatility index. CBOE has tried recently to grow the market for its VIX products beyond their traditional traders―hedge fund managers, market-makers and banks―to a broader base of consumers. The volume of VIX futures traded at the CBOE increased 33 percent in the fourth quarter of 2011, to 2.4 million from 1.8 million in the year-ago quarter.

“Their VIX products have been some of the most successful growth products in all of financial services,” said Matthew Heinz, an analyst with Stifel Nicolaus, “and they're now looking to expand the usage of those products.”

While CBOE did not provide specific earnings guidance for 2012, the company did project expenses to rise between 4 and 7 percent as the company continues new initiatives, such as advertising its VIX contracts, begun in 2011.

“The VIX products are something that companies that are heavily invested in equity portfolios, such as insurance companies, could be interested in,” Stifel Nicolaus’ Heinz said, though he cautioned that this could be a tricky sell for CBOE. “There are those who would rather ride the ups and downs of the market and live with the volatility because hedging will limit their returns.”

The company's projected increase in 2012 expenses should be offset somewhat by an anticipated drop in its consolidated tax rate―from 41.9 percent to approximately 41.5 percent―reflecting in part controversial new tax breaks approved by the Illinois state legislature in December, Chief Operating Officer Edward Tilly said on a conference call. The company paid $100.7 million in taxes for all of 2011.

CBOE's profit for the latest year rose 40 percent to $137.1 million, or $1.52 per diluted share from $98.2 million, or $1.03 per diluted share, in 2010. The company’s full-year revenue climbed 16 percent to $508.1 million in 2011 from $437.1 million in the year prior.

Shares of CBOE rose 17 cents Thursday, to close at $26.47.