UPDATE 2-CBOE Holdings quarterly profit jumps, tops Wall St estimates

Fri Feb 7, 2014 11:03am EST

By Tom Polansek

CHICAGO Feb 7 (Reuters) - CBOE Holdings Inc, which runs the largest U.S. stock-options market, reported a rise in quarterly profits on Friday as higher trading volumes generated more income from transaction fees.

A lower tax rate for the company during the fourth quarter, compared to a year earlier, helped lift earnings above Wall Street analysts' expectations.

Shares of CBOE, owner of the Chicago Board Options Exchange, rose 0.8 percent to $52.07.

"A lower tax rate drove the majority of the upside to our estimate and Street expectations," said Alex Kramm, a UBS analyst who covers CBOE.

Net income increased to $45.6 million, or 52 cents a share, in the quarter, from $39.2 million, or 45 cents a share, in the same period a year earlier. Analysts expected 48 cents a share, according to Thomson Reuters I/B/E/S.

The earnings represented CBOE's "best fourth-quarter results ever," the company said.

Total operating revenue soared to $141.8 million from $130.1 million in 2012.

"The numbers are certainly looking good," Sandler O'Neill analyst Rich Repetto told CBOE executives on a conference call.

The largest revenue driver, transaction fees, increased 9 percent for the quarter on a 22 percent jump in trading volumes, CBOE said. The gains were offset somewhat by an 11 percent decrease in average revenue per contract, as traders shifted toward less profitable products.

CBOE, under Chief Executive Officer Edward Tilly, has fought hard to boost its exclusive franchise in stock-index options, as it faces more competitors vying for market share in options on individual stocks. Its exclusively listed contracts command much higher trading fees than its other products.

In December, a judge dismissed a challenge by rival International Securities Exchange against CBOE's exclusive license to list options on certain key U.S. indexes.

The ruling was "a victory for innovation at CBOE," Tilly said on the conference call.

The Chicago Board Options Exchange is the sole market for lucrative options on the Standard & Poor's 500 Index and the Dow Jones industrial average, and others such as the S&P 100.

Trading in single-stock options during the quarter climbed 17 percent to an average of 1.91 million contracts a day from a year earlier. Trading in CBOE's index-options rose 12 percent to 1.45 million contracts daily.

CBOE makes about 66.6 cents in revenue for each index-option trade, versus only about 7.5 cents for each option on an individual share.

For taxes, CBOE reported an effective rate of 36.1 percent for the fourth quarter. That was below a rate of 39 percent during the fourth quarter of 2012, when excluding items related to prior years.

Higher-than-expected earnings stemmed from expense control, including the lower tax rate, said Christopher Harris, analyst for Wells Fargo Securities.

"While most of the beat was low quality, expense control was still a plus," he said.

CBOE came under pressure last year, along with other U.S. exchanges, for technical glitches that disrupted trading. The company is increasing spending this year on improvements to computer systems to prevent repeats of the shutdowns or glitches.

Shares of CBOE are down 0.2 percent so far this year, but up about 53 percent from a year ago. By comparison, exchange operator CME Group Inc is down almost 4 percent in 2014 and up 37 in the past 12 months.