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Poor Top Line Spoils CME's 1Q

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CME Group Inc. (CME - Free Report) reported its first-quarter 2012 operating earnings per share of $4.02, which stood at par with the Zacks Consensus Estimate of $4.02, but lagged the earnings of $4.36 reported in the year-ago quarter. Net income slipped 8.9% to $266.6 million.

Moreover, the year-ago quarter’s net operating income of $292.6 million excluding the $164 million benefit within tax expense associated with a change in the expected effective tax rate and its impact on the deferred tax expense and the release of reserves related to a foreign investment.

Including this benefit, net income in the year-ago quarter was $456.6 million or $6.81 per share. However, no such extraordinary items were recorded in the quarter.

CME Group’s total revenue for the reported quarter declined 6.9% year over year to $774.6 million, also lagging the Zacks Consensus Estimate of $784 million. The year-over-year dip was primarily due to a modest decline in clearing and transaction fees, along with lower average daily volumes across most asset classes and a stable average rate per contract.

CME Group’s average daily volume plunged 11% year over year to 13.8 million contracts in the reported quarter. However, total average rate per contract was 81.1 cents, up 0.3 cents from the year-ago quarter. The volumes constituted mostly of lower-priced products across asset-class that require higher volume discounts.

CME Group’s clearing and transaction fees decreased 10.2% to $621.1 million, while accounting for 80% of the total revenue. However, revenue earned from market data and information services improved 6.7% year over year to $114.2 million. Revenue from access and communication fees surged 71.3% year over year to $19.7 million, while other revenues declined 10.1% year over year to $19.6 million.

Meanwhile, total operating expenses climbed up 5.2% year over year to $323.4 million, in line with management’s projection. Operating income also plunged 13.9% year over year to $451.2 million. Consequently, operating margin dipped to 58.2% from 63.0% in the year-ago quarter.

Additionally, CME Group’s non-operating expense spiked 42.4% year over year to $17.8 million, primarily owing to interest expense and borrowing costs of $29.1 million and equity losses of $0.8 million, partially offset by $12.1 million of investment income.

Financial Update

As of March 31, 2012, CME Group had $1.1 billion of cash and marketable securities and $2.107 billion of long-term debt, both in line with 2011-end position.

As of March 31, 2012, CME Group had total assets of $39.29 billion (down from $40.76 billion as of December 31, 2011) while total shareholders' equity stood at $21.55 billion (at par with the same as of December 31, 2011). The company did not repurchase shares during the reported quarter.


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

Dividend Update

On February 2, 2012, the board of CME Group announced a 59% hike in its regular quarterly dividend to $2.23 per share from $1.40 per share, thereby increasing its payout target to 50% from the prior 35%.

Additionally, the company’s board declared an additional, annual variable dividend, totaling $3.00 per share in 2012. This variable dividend shall now be CME Group’s regular annual dividend policy, which will be paid out with the regular dividend in the first quarter every year. However, the variable dividend will depend on the company’s operational growth.

Accordingly, on March 26, 2012, both the hiked regular and variable dividends were paid to the shareholders of record as on March 9, 2012.

Peer Take

Yesterday, NASDAQ OMX Group Inc. (NDAQ - Free Report) reported its first quarter operating earnings per share of 61 cents that fell shy of the Zacks Consensus Estimate of 63 cents, but were in line with the prior-year quarter’s earnings. Meanwhile, CME Group’s another prime peer, NYSE Euronext Inc. is scheduled to release its results before the market opens on April 30, 2012.

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