CME Group Inc. — Q2 2023 Form 10-Q
Business context and reporting period. CME Group operates futures and options exchanges, clearing services, cash markets and market-data services. This unaudited report covers the quarter and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $1,360.2 million | $1,237.2 million | $2,801.8 million | $2,583.8 million |
| Operating income | $838.6 million | $749.7 million | $1,752.3 million | $1,608.8 million |
| Operating margin | 61.7% | 60.6% | 62.5% | 62.3% |
| Net income | $777.6 million | $662.5 million | $1,661.4 million | $1,373.5 million |
| Diluted EPS | $2.14 | $1.82 | $4.56 | $3.78 |
| Operating cash flow | Not separately stated | Not separately stated | $1,552.8 million | $1,416.7 million |
- Q2 revenue rose 10%, operating income 12%, net income 17% and diluted EPS 18% year over year. For the first six months, revenue rose 8%, net income 21% and diluted EPS 21%.
- Q2 clearing and transaction fees increased 9% to $1,118.3 million; market data revenue increased 8% to $163.1 million; other revenue increased 29% to $78.8 million. The six-month increases were 7%, 8% and 31%, respectively.
- Q2 futures and options average daily volume was 22.855 million contracts, down 1%; the average rate per contract rose 12% to $0.724. Six-month volume increased 2% and average rate rose 7%. Management attributed the higher rate primarily to a fee increase effective February 1, 2023, while volume varied across products.
- Q2 expenses rose 7% to $521.6 million; six-month expenses rose 8% to $1,049.5 million. Compensation, technology and professional-services costs increased, partly offset by lower licensing and building-maintenance costs.
- Investment income and related other non-operating expense both rose sharply as higher interest rates increased earnings on customer performance-bond and guaranty-fund cash, as well as interest distributed to clearing firms. Q2 collateral earnings were $1,540.1 million and related distribution expense was $1,432.8 million; six-month amounts were $2,796.4 million and $2,596.3 million. These largely offsetting gross amounts materially affect reported non-operating line items.
- Operating cash flow for the first six months was $1,552.8 million. Property purchases were $35.7 million. Cash and cash equivalents were $1.88 billion at June 30, 2023, versus $2.72 billion at year-end 2022. The cash-flow statement’s large financing outflow includes a $22.0 billion decrease in performance-bond and guaranty-fund contributions, so total cash movements include customer collateral flows.
- Long-term debt was $3.424 billion; the €15 million short-term note was repaid in May. The company reported no borrowings under its $2.3 billion general-purpose revolving facility or $7.0 billion clearing-house secured facility, and stated it was in compliance with debt covenants. It also reported $2.3 billion of excess general-purpose borrowing capacity.
- Performance bonds and guaranty-fund contributions were $113.2 billion on the balance sheet. CME held $100.3 billion in its Federal Reserve Bank of Chicago cash account. This collateral is distinct from cash available for general corporate use.
Changes, outlook and risks
- Interest-rate products grew as volatility and the transition from Eurodollar to SOFR contracts continued; SOFR volumes rose substantially while Eurodollar volumes declined. Equity-index volumes fell, while agricultural and metals volumes increased. Cash-market transaction fees declined, including lower BrokerTec and EBS activity.
- Management cited inflation, central-bank policy uncertainty, the collapse of two U.S. regional banks, weather uncertainty, OPEC production cuts and geopolitical conditions as factors affecting market volatility and trading activity.
- The filing provides no specific earnings or revenue guidance. Management said quarterly results are not necessarily indicative of future periods. It expected to maintain an investment-grade credit rating, citing cash generation and refinancing capacity.
- Risks include competition, technology and cybersecurity resilience, regulatory changes, dependence on third parties, trading-volume and rate-per-contract variability, clearing-member or counterparty credit and liquidity exposures, and execution of the Google Cloud transformation. Management reported no material change in risk factors or market-risk exposure since year-end 2022.
- A putative class action concerning Class B shareholder rights has been certified as a damages-only class; no trial date was set, and the company could not estimate a reasonably possible loss range. Management said it has strong defenses. No accrual was recorded for legal or regulatory matters because none were considered probable and estimable.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Investor facts to verify
- How sustainable are the fee-rate gains, including the February 2023 price increase, amid product and customer mix changes?
- Whether trading volumes and cash-market activity recover or weaken, particularly in equity indexes, BrokerTec and EBS.
- The net earnings sensitivity to interest rates and collateral balances, separating customer collateral investment income from related distributions to clearing firms.
- Corporate liquidity and debt maturities, while distinguishing unrestricted cash from clearing collateral and other restricted funds.
- Developments in the Class B shareholder litigation and the status, cost and execution risks of the Google Cloud transformation.