CME Group Inc. — Q1 2020 Form 10-Q
Business context and period: Unaudited consolidated results for the quarter ended March 31, 2020, compared with Q1 2019. CME Group operates futures and options exchanges, clearing services, cash markets and market-data businesses.
Financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $1,522.1 million | $1,179.6 million | +29% |
| Operating income | $959.9 million | $631.0 million | +52% |
| Operating margin | 63.1% | 53.5% | +9.6 percentage points |
| Net income attributable to CME Group | $766.2 million | $496.9 million | +54% |
| Diluted EPS | $2.14 | $1.39 | +54% |
| Operating cash flow | $757.1 million | $669.2 million | +13% |
- Clearing and transaction fees increased 34% to $1,278.8 million, driven chiefly by higher trading volumes. Market data revenue was nearly flat at $131.5 million; other revenue rose 15% to $111.8 million.
- Average daily futures and options volume increased 45% to 27.0 million contracts. Interest rates rose 34%, equity indexes 106%, energy 38%, and metals 58%. The average rate per contract fell 5% to $0.676, partly reflecting a higher share of lower-rate equity index and Micro E-mini contracts.
- Total expenses increased 2% to $562.2 million. Licensing and other fee-agreement expense rose 83% to $73.9 million, and the company recorded impairment charges related to subsidiary intangible and fixed assets. Lower compensation expense partly offset these increases.
- Net non-operating income was $29.4 million versus $9.2 million. Investment income fell 46% to $95.9 million, largely due to lower interest rates on reinvested clearing collateral; lower other non-operating expense and higher equity earnings partly offset the decline.
- Cash and cash equivalents were $851.7 million at quarter-end, down from $1,551.4 million at year-end 2019. Long-term debt was $3,539.8 million, including $100.0 million of commercial paper. The company reported approximately $2.3 billion of unused general-purpose revolving capacity and no borrowings on its separate $7.0 billion clearing-house facility.
- Cash used in financing was $1,413.9 million, including $1,197.6 million of cash dividends. The filing reports a $0.85-per-share dividend for the quarter in the equity statement and declared a further regular $0.85-per-share dividend payable June 25, 2020.
- Performance-bond and guaranty-fund assets and corresponding liabilities each totaled about $100.4 billion, up sharply from about $37.1 billion at year-end, reflecting increased margin requirements. These customer-related balances should not be confused with cash available for general corporate purposes.
Material changes, outlook and risks
- Management attributed markedly higher trading activity and revenue to exceptional market volatility associated with the COVID-19 outbreak, government and business responses, Federal Reserve rate cuts, and turbulence in energy markets. The filing gives no quantified earnings or revenue guidance.
- CME closed its open-outcry trading floors on March 13, 2020; trading shifted to electronic platforms. Management said the pandemic’s future effects were highly uncertain and could materially affect operations, clients, results, financial condition and liquidity. Risks identified include operational and workforce disruption, cyber threats, clearing-member stress or default, and weaker economic activity that could reduce hedging demand.
- Cash-flow performance benefited from higher trading activity, while revenue concentration remains relevant: one firm generated about 10% of clearing and transaction fees, and the two largest market-data resellers represented about 35% of market-data revenue.
- A CFTC case concerning alleged disclosure of confidential customer information was set for trial in October 2020; the company said it had strong defenses. No accrual was recorded for legal matters because none were considered probable and estimable. The filing also disclosed a $310 million contingent guarantee to SGX under a mutual offset agreement.
- The company reported compliance with debt-facility covenants and regulatory financial requirements. Its market-risk exposure had not materially changed since December 31, 2019. No subsequent events were identified through issuance of the financial statements.
Important facts for investors to verify
- Whether the exceptional Q1 volatility-driven volume and revenue levels persisted after the quarter, and how later pandemic conditions affected trading activity.
- How the lower average rate per contract, product mix and customer incentives affect revenue and margins as volumes normalize.
- The distinction between corporate liquidity and the much larger, matched performance-bond and guaranty-fund balances; also confirm dividend cash outflows and available borrowing capacity.
- Developments in the CFTC litigation, clearing-member credit and liquidity exposure, and the $310 million SGX contingent guarantee.
- The sustainability of earnings given lower investment yields, disclosed impairment charges and reliance on concentrated clearing-firm and market-data-reseller relationships.