CME Group office in Chicago.

CME Group Earnings Beat Expectations

By Minghe Hu

Medill Reports

CME Group Inc.(Nasdaq:CME), the world’s largest futures exchange, reported Thursday net income roared to $2.9 billion, or $8.63 per diluted share, in its fourth quarter ended Dec. 31, from $373.4 million, or $1.10 per diluted share a year earlier, assisted by a $2.4 billion tax benefit as a result of tax reform.

“We are very pleased with the tax reform. We believe it’s good for our customers, intermediaries, and good for the markets,” said John Peschier, managing director of investor relations of CME, in a conference call.

Adjusted to exclude the tax benefit, income was $383 million, or $1.12 per diluted share, down 1.1 percent compared with $387.3, or $1.14 per share, in the same quarter a year ago, exceeding the Wall Street expectation of $1.09 per share. Revenue decreased 1.4 percent to $900 million from $912.9 million.

Quarterly Revenues of CME Group. Source: Bloomberg

Quarterly Revenues of CME Group. Source: Bloomberg. Feb. 1, 2018(Minghe Hu/MEDILL)

The clearing and transaction fees in the year ended Dec. 31, which made up most of the revenue, were up 2 percent compared with a year ago.

“Clearing and transaction fees drove the most upside to our estimate, which included $5 mm of contractually required OTC revenue from the wind down of the European business,” wrote Alex Kramm, an analyst at UBS Investment Research, in a note, “as well as a surprise beat on market data, which was driven by audit fees and derived data sales.”

“We were aggressive in optimizing our operations,” said Terry Duffy, CME Group chairman and chief executive officer in a press release. “As you know, we sold investments we had in other exchanges, we wound down our European Exchange and Clearing House, we announced the exit of our Credit Default Swaps Clearing business, and we focused on making investments in new product launches as well as our market data, audit, and derived data functions.”

Full-year 2017 record average daily volume was 16.3 million contracts, up 4 percent from 2016, including annual records for energy, agricultural commodities, metals, total options and electronic options. The non-U.S. average daily volume increased 10 percent for the year. The energy business was up 40 percent from customers overseas.

“Our primary goals in 2017 were to expand our global customer base, continue to innovate across our diverse product set and focus on operation efficiency,” said Duffy in the release. “We set annual volume records in three of our six assets classes as well as in total options.”

CME reported an 11 percent growth in the options business driven by increased trading on Globex, an electronic trading system providing users across the world with 24-hour access to global markets, which led to the annual volume records and records in total options last year.

A management focus in a conference call was “the electronification of our markets, how it gives us much better access to international participants and how when you electronify our markets we see a much higher velocity of growth,” as stated by Sean Tully, senior managing director of CME.

Full-year revenue was $3.64 billion, up 1.1 percent from $3.60 billion a year ago, while annual earnings were $4.1 billion, or $11.9 per diluted share, up 165 percent from $1.5 billion, or $4.53 per diluted share, a year ago.

Addressing bitcoin futures, Duffy said that even with a relatively low open interest of 1,500 compared to other products, CME will continue to work with CFTC to keep developing the product, which has been around for only nine years.

“We also designed this product as you know to make sure that we did not attract the small retail participants. That’s not something that we wanted to be a part of. So our contract is much larger than our friends down the street’s contract,” said Duffy, referring to Chicago Board Options Exchange Inc.

CME Group shares closed at $158.91, up $5.43 or 3.4 percent in NASDAQ trading.

Photo at top: A Chicago office of CME Group. (Minghe Hu/MEDILL)