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CME Nosedives YoY on Weak Top Line

CME NDAQ

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CME Group Inc. (CME - Analyst Report) reported third-quarter 2012 operating earnings per share of 70 cents, breezing past the Zacks Consensus Estimate by a penny but significantly lagging behind the year-ago quarter’s earnings of 95 cents.

Operating net income plunged 26.1% year over year to $233.7 million. This excluded the tax provision worth $16 million associated with escalations in deferred income tax liabilities related to S&P Dow Jones Indices and the company's acquisition of Pivot Inc.

Including these adjustments, the quarterly GAAP net income was $218.0 million or 66 cents per share. However, no such extraordinary items were recorded in the year-ago quarter.

CME Group’s total revenue for the reported quarter nosedived 21.8% year over year to $683.2 million. It also fell shy of the Zacks Consensus Estimate of $685 million. The significant drop was primarily due to a momentous decline in clearing and transaction fees as a result of lower or poor average daily volumes across interest rates, equities, foreign exchange, energy and metals asset classes. These were marginally offset by stable average rate per contract.

CME Group’s average daily volume plummeted 26% year over year to 10.8 million contracts in the reported quarter. However, total average rate per contract climbed 6% from the year-ago quarter to 82.2 cents. The volumes constituted mostly of lower-priced products across asset-class that require higher volume discounts.

CME Group’s clearing and transaction fees decreased 23.2% year over year to $562.2 million, while accounting for 82% of the total revenue. Additionally, revenue from market data and information services decelerated 22.6% year over year to $82.8 million. However, revenue earned from access and communication fee surged 93.3% year over year to $23.2 million, while other revenues plunged 33.3% year over year to $15.0 million.

However, total operating expenses dipped 4.9% year over year to $287.2 million. However, excluding non-recurring items, operating expenses were flat year over year to $302.9 million, which is within management’s projection. Operating income fell 30.8% year over year to $396.0 million. Subsequently, operating margin slashed to 58.0% from 65.4% in the year-ago quarter.

Meanwhile, CME Group recorded a non-operating expense of $0.2 million against $26.2 million in the year-ago quarter, primarily owing to higher interest and borrowing costs.

Financial Update

As of September 30, 2012, CME Group had $2.1 billion of cash and marketable securities, higher than $1.1 billion at 2011-end, while long-term debt stood at $2.106 billion, in line with the 2011-end level.

As of September 30, 2012, CME Group had total assets of $39.86 billion (down from $40.76 billion as of December 31, 2011) while total shareholders’ equity stood at $21.71 billion (up from $21.55 billion as of December 31, 2011). The company did not repurchase shares during the reported quarter.

Guidance

In April 2012, management had projected the effective tax rate to be 41% for the remaining quarters of 2012. Previously, CME Group had also disclosed its aim of maintaining expense growth below 5% for 2012 and beyond.

Dividend Update

On August 24, 2012, the board of CME Group declared a regular third-quarter dividend of 45 cents per share, which was paid on September 25, 2012, to shareholders of record as on September 10, 2012. The dividend reflects the effect of 5-for-1 stock split of its common stock.

On May 24, 2012, the board of CME Group announced a 5-for-1 common stock split, in the form of a 400% stock dividend. The dividend was paid on July 20, 2012, to shareholders of record as on July 10, 2012.

Peer Take

Yesterday, NASDAQ OMX Group Inc. (NDAQ - Analyst Report) reported its third quarter operating earnings per share of 62 cents, which surpassed the Zacks Consensus Estimate by a couple of cents. However, it fell shy of the prior-year quarter’s earnings of 67 cents by a nickel, based on weak volumes across businesses. Meanwhile, CME Group’s another prime peer – NYSE Euronext Inc. is scheduled to release its results before the market opens on November 6, 2012.

Currently, CME carries a Zacks Rank #4, which translates into a short-term Sell rating, while the long-term recommendation remains Neutral.

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