CME Group Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited consolidated results; comparisons are with the corresponding 2022 periods. CME Group operates futures and options exchanges, clearing services, cash markets and market-data services.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $1,337.8m | $1,227.8m | $4,139.6m | $3,811.6m |
| Operating income | $820.2m | $738.8m | $2,572.5m | $2,347.6m |
| Operating margin | 61.3% | 60.2% | 62.1% | 61.6% |
| Net income | $750.2m | $679.6m | $2,411.6m | $2,053.1m |
| Diluted EPS | $2.06 | $1.87 | $6.62 | $5.64 |
Revenue increased 9% in both periods; operating expenses rose 6% in Q3 and 7% year to date. Clearing and transaction fees rose 9% in Q3 and 8% year to date; market-data revenue rose 9% and 8%, respectively. Other revenue increased 13% in Q3 and 24% year to date. Effective tax rates were 23.0% for Q3 and 23.4% year to date.
For futures and options, Q3 contract volume declined 2%, while average rate per contract increased 12% to $0.707. Year-to-date volume was essentially flat and average rate increased 9% to $0.696. Management attributed the higher rate primarily to fee increases effective February 1, 2023. Average daily volume was nearly flat in Q3 and up 1% year to date; electronic trading represented 93% of year-to-date volume.
Cash flow, balance sheet and liquidity
- Operating cash flow was $2,409.5m for the first nine months, up 16% from $2,074.5m. Investing cash flow was positive $41.3m, versus negative $464.1m in 2022, which included a $410m investment in S&P Dow Jones Indices.
- Cash dividends paid were $2,835.4m year to date. Financing cash flow was negative $50,927.8m, largely reflecting a $48,057.1m decrease in performance-bond and guaranty-fund contributions.
- At September 30, cash and cash equivalents were $2.3bn, versus $2.7bn at year-end 2022. Long-term debt was $3.425bn; short-term debt was zero following repayment of €15m notes in May. The filing reports no borrowings under its $2.3bn general-purpose revolver or $7.0bn clearing-house facility; general-purpose revolver capacity was approximately $2.3bn.
- Performance bonds and guaranty-fund contributions were $87.2bn, down from $135.2bn at year-end, with an equal corresponding liability. These client-related balances substantially affect reported total assets and liabilities and should not be confused with corporate cash or debt.
- Reported investment income included earnings on reinvested client collateral of $1,246.5m in Q3 and $4,042.9m year to date. Related interest distributions to clearing firms were $1,160.5m and $3,756.8m, respectively. Management linked the increases to higher interest rates.
Material changes, outlook and risks
- Higher rates on client collateral drove substantial increases in both investment income and related distribution expense. Other non-operating income (expense) was negative $1,155.6m in Q3 and negative $3,733.7m year to date; total non-operating income remained positive at $154.1m and $575.1m, respectively.
- Product activity was mixed: year-to-date interest-rate, agricultural and metals average daily volumes rose 10%, 15% and 14%, respectively, while equity-index volume declined 14% and foreign-exchange volume declined 5%. SOFR activity expanded as markets transitioned from Eurodollar contracts; CME stopped offering Eurodollar trading in June 2023.
- Management cited interest-rate and energy-market volatility, weather uncertainty and geopolitical risks as factors supporting activity in some products, while lower equity volatility contributed to weaker equity-index volumes. No specific financial guidance or quantitative outlook is provided in the supplied filing text.
- Operating expenses included higher technology support costs associated with the Google Cloud transformation and employee separation and restructuring costs; a layoff affecting 3% of employees occurred in Q3. Management reported no material change in market-risk exposure, risk factors or internal financial controls.
- A putative Class B shareholder class action, pending since 2014, has a certified damages-only class; no trial date was set. The company says it has strong defenses, but cannot estimate a possible loss. No accrual was recorded for legal or regulatory contingencies because none were considered probable and estimable.
Important facts for investors to verify
- How much earnings growth is attributable to core exchange and clearing activity versus interest earned on client collateral and the related pass-through distributions.
- Whether the February 2023 fee increases and product mix can sustain average-rate-per-contract growth amid flat or uneven volumes.
- The sustainability of expense growth, especially technology, compensation and restructuring costs.
- Liquidity and dividend capacity after substantial dividend payments, considering corporate cash separately from clearing-house collateral and available credit facilities.
- Developments in the Class B shareholder litigation and any resulting change to the company’s loss assessment.