The International Securities Exchange (NYSE:ISE) First Quarter
Financial Highlights -- GAAP Diluted Earnings Per Share of $0.32 --
Non-GAAP Diluted Earnings Per Share of $0.33 which excludes
expenses related to the ISE Stock Exchange -- Net income increases
40.1% to $12.4 million -- Average daily trading volume up 37.6% to
2.4 million equity and index options contracts -- Revenues up 28.9%
to $47.5 million -- Pre-tax margin of 53.3% The International
Securities Exchange (NYSE:ISE) today reported that net income for
the quarter ended March 31, 2006 increased 40.1% to a record $12.4
million, or $0.32 per share on a fully diluted basis. This compares
to $8.9 million, or $0.25 per share on a fully diluted basis, in
the same period in 2005. Non-GAAP net income, which excludes
incremental costs related to the development of our recently
announced equities exchange business, the ISE Stock Exchange, was
$12.9 million, or $0.33 per share on a fully diluted basis. A full
reconciliation of GAAP to non-GAAP results is included in this
release. Total revenues for the quarter increased 28.9% to $47.5
million versus $36.9 million in the prior year. Gross margin, or
total revenues less cost of revenues, increased 25.0% to $41.6
million as compared to $33.3 million in the first quarter of 2005.
The average daily volume of equity and index options contracts
traded increased 37.6% to 2.4 million contracts as compared to 1.7
million contracts in the year-ago quarter. "We delivered another
strong performance in the first three months of 2006 as our average
daily volume exceeded two million contracts for the second
consecutive quarter," said David Krell, ISE's President and Chief
Executive Officer. "The double digit growth in our core options
business fueled a 40% increase in net income once again reflecting
the operating leverage that is inherent in our business. We also
continued to post strong cash flow which we now share with our
stockholders by virtue of the implementation of the dividend policy
that we announced last year." "During the quarter, we made further
progress in executing our strategy to grow our Information and
Market Data products. In January, we announced the launch of a new
market data product which provides historical market data to
traders and investors to improve the effectiveness of their
respective trading strategies. This product is the latest offering
in our suite of market data products which will soon expand to
include depth-of-book and enhanced sentiment market data offerings.
Additional introductions of new products in this area will enable
us to monetize the significant amount of proprietary data that we
store in the normal course of our operations," added Krell. First
Quarter Results Revenues Total revenues for the first quarter of
2006 increased 28.9% to $47.5 million principally due to increased
trading volumes. This compares to revenues of $36.9 million in the
same period last year. -- Transaction fee revenues increased 38.0%
to $36.9 million in the first quarter from $26.7 million last year
due to increased trading volumes. Our net transaction fee revenues,
which exclude activity remittance fees and ETF and license fees,
increased 33.9% to $30.9 million from $23.1 million in the same
period last year. -- Other member fees increased 1.4% to $5.6
million from $5.5 million in the same period last year primarily
due to the sale of four additional Class B-2 memberships since the
first quarter of last year. -- Market data revenues increased 9.3%
to $5.1 million as compared to $4.6 million last year due to
increased profit generated by OPRA. Our revenue is based on our pro
rata share of total industry trades. Cost of Revenues -- Cost of
revenues for the first quarter of 2006 increased 64.3% to $6.0
million compared to $3.6 million in the first quarter of 2005
primarily due to a $1.6 million increase in activity remittance
fees that we pay to the SEC and a $0.7 million increase in license
fees associated with the increased volumes of certain ETFs and our
equity index products. Expenses Total expenses for the first
quarter of 2006 increased 22.6% to $21.0 million as compared to
$17.2 million in the first quarter of 2005. Included in our
expenses are incremental costs related to the development of the
ISE Stock Exchange of $0.9 million for the first quarter of 2006
and $0.1 million for the first quarter of 2005. Excluding these
costs, our expenses increased 18.1% year over year. -- Compensation
and benefits expenses increased 38.2% to $11.4 million from $8.2
million primarily due to a full quarter's effect of our stock-based
compensation program and increased headcount to support our overall
growth and new initiatives including the ISE Stock Exchange. In
total, headcount increased to 189 from 164 last year. -- Technology
and communications expenses increased 4.0% to $3.5 million compared
to $3.4 million in the first quarter of 2005 primarily due to fees
paid to OMX for additional enhancements and maintenance and other
costs related to our core trading system. -- Occupancy expenses
increased 19.3% to $1.3 million primarily due to additional office
space leased to support the growth of our core options business as
well as the ISE Stock Exchange. -- Professional fees increased 9.5%
to $1.6 million primarily due to higher accounting fees related to
public company matters and higher technology consulting fees
related to the ISE Stock Exchange. -- Marketing and business
development expenses increased 6.1% to $0.6 million. --
Depreciation and amortization expenses increased 1.3% to $1.5
million. -- Other expenses increased 34.3% to $1.0 million
primarily due to increased insurance expenses subsequent to our
initial public offering and other general and administrative
expenses. -- Reorganization costs decreased 76.5% to $24.0 thousand
as compared to $102.0 thousand last year that resulted from our
decision to reorganize into a holding company structure. Income,
Margins and Taxes Pre-tax income increased 35.0% to $22.2 million
versus $16.4 million last year. Included in pre-tax income is
interest and investment income which increased to $1.6 million
compared to $0.3 million primarily due to higher cash balances. Our
pre-tax margin for the first quarter increased to 53.3% from 49.4%
last year. Excluding incremental costs related to the ISE Stock
Exchange, our pre-tax margins increased to 55.5% from 49.7% last
year. Our tax rate decreased to 44.0% for the first quarter as
compared to 46.0% last year primarily due to a lower tax rate on
returns from our invested cash. Net income for the first quarter
increased 40.1% to $12.4 million from $8.9 million in the prior
year quarter. Excluding incremental costs related to the ISE Stock
Exchange, net income increased 44.9% to $12.9 million from $8.9
million in the prior quarter. Balance Sheet As of March 31, 2006,
ISE had cash and cash equivalents of $179.3 million, total assets
of $289.1 million, and stockholders' equity of $199.2 million.
There were approximately 39.3 million shares of common stock
outstanding on a fully diluted basis. The Company recorded minority
interest of $2.9 million as of March 31, 2006, representing
interest of a minority shareholder in the Company's subsidiary
Longitude LLC. First Quarter Business Highlights -- ISE was the
largest equity options exchange for the first quarter of 2006 based
on total equity options trading. -- ISE set a new monthly average
daily volume record of 2.7 million equity and index options
contracts traded for the month of January and a new average daily
volume record of 2.4 million equity and index options contracts
traded for the quarter. -- ISE set a new daily trading volume
record of 4.6 million equity and index options contracts on January
20, 2006. -- In March 2006, ISE declared and paid a quarterly
dividend of $0.05 per outstanding share of its Class A Common
Stock. -- On January 24, 2006, ISE announced the launch of a new
market data offering that provides comprehensive historical market
data. -- On March 24, 2006, the Company acquired the intellectual
property and other related assets of Longitude, Inc., inventor of a
proprietary and patented technology that uses parimutuel principles
to run derivatives auctions that aggregate liquidity and produce
fair and efficient market-driven prices. The new entity, Longitude
LLC, became an operating unit of ISE, which retains
majority-ownership in partnership with Goldman Sachs. Goldman Sachs
had a pre-existing interest in the entity which it is increasing as
a result of the transaction. -0- *T INTERNATIONAL SECURITIES
EXCHANGE, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands,
except per share amounts) (unaudited) Three Months Ended March 31,
March 31, 2006 2005 --------- --------- Revenues: Transaction fees
$36,867 $26,714 Other member fees 5,622 5,546 Market data 5,055
4,625 --------- --------- Total revenues 47,544 36,885 Cost of
revenues: Activity remittance fees 4,345 2,702 License fees 1,625
931 --------- --------- Total cost of revenues 5,970 3,633 Gross
margin 41,574 33,252 Expenses: Compensation and benefits 11,368
8,227 Technology and communications 3,518 3,383 Occupancy 1,318
1,105 Professional fees 1,628 1,487 Marketing and business
development 622 586 Depreciation and amortization 1,517 1,498 Other
1,033 769 --------- --------- Total direct expense 21,004 17,055
Reorganization 24 102 Offering cost - - --------- --------- Total
expenses 21,028 17,157 --------- --------- Operating income 20,546
16,095 Interest and investment income 1,611 322 --------- ---------
Income before provision for income taxes 22,157 16,417 Provision
for income taxes 9,739 7,556 --------- --------- Net income $12,418
$8,861 ========= ========= Earnings per share: Basic $0.33 $0.27
Diluted $0.32 $0.25 Weighted average number of shares outstanding:
Basic 37,102 33,059 Diluted 39,254 34,946 INTERNATIONAL SECURITIES
EXCHANGE, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (in
thousands) March 31, December 31, 2006 2005 ------------
------------ (unaudited) ASSETS Current assets: Cash and cash
equivalents $179,289 $170,927 Accounts receivable, net 39,364
35,048 Income tax receivable 2,944 - Securities owned 4,934 9,890
Other current assets 2,164 2,745 ------------ ------------ Total
current assets 228,695 218,610 Securities owned 5,507 7,244
Accounts receivable 600 587 Fixed assets, net 28,557 29,205
Deferred tax asset, net 21,197 22,333 Other assets 4,503 2,517
------------ ------------ Total assets 289,059 280,496 ============
============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES
Current liabilities: Accounts payable, accrued expenses and other
liabilities 13,944 15,406 Compensation and benefits payable 3,373
8,371 Deferred revenue 5,161 4,687 Income taxes payable - 372
Payment for order flow payable 10,044 12,233 ------------
------------ Total current liabilities 32,522 41,069 Deferred
revenue 50,441 50,238 Other liabilities 4,034 4,211 ------------
------------ Total liabilities 86,997 95,518 ------------
------------ Minority interest 2,882 - STOCKHOLDERS' EQUITY 199,180
184,978 ------------ ------------ Total liabilities &
stockholders' equity $289,059 $280,496 ============ ============
INTERNATIONAL SECURITIES EXCHANGE, INC. CONSOLIDATED STATEMENTS OF
CASH FLOWS (In thousands) (unaudited) Three Months Ended March 31,
2006 2005 --------- --------- Cash flows from operating activities:
Net income $12,418 $8,861 Adjustments to reconcile net income to
cash provided by/(used in) operating activities: Depreciation and
amortization 1,517 1,498 Minority interest 2,882 - Stock based
compensation 2,024 379 Deferred taxes 1,136 (1,513) Unrealized
(gain)/loss on securities owned and available for sale securities,
net (296) 58 Excess tax benefits from share-based payment
arrangements (3,314) - (Increase)/decrease in operating assets:
Accounts receivable, net (4,329) (3,498) Income tax receivable 370
8,195 Securities owned 2,033 3,895 Other assets 578 3,216
Increase/(decrease) in operating liabilities: Accounts payable and
accrued expenses (1,462) 5,917 Compensation and benefits payable
(4,998) (10,250) Income tax payable (372) - Deferred revenue 677
(768) Payment for order flow payable (2,189) 8,602 Other
liabilities (177) (183) --------- --------- Net cash provided by
operating activities 6,498 24,409 --------- --------- Cash flows
from investing activities: Purchase of fixed assets (852) (274)
Purchase of intangible assets (2,000) Maturities of available for
sale securities 4,973 - --------- --------- Net cash provided
by/(used in) investing activities 2,121 (274) --------- ---------
Cash flows from financing activities: Dividend (1,894) (11,784) Net
proceeds from initial public offering - 70,673 Proceeds from
options exercised 294 - Share repurchases (1,971) - Excess tax
benefits from share-based payment arrangements 3,314 - ---------
--------- Net cash provided by/(used in) financing activities (257)
58,889 --------- --------- Increase in cash and cash equivalents
8,362 83,024 Cash and cash equivalents, beginning of period 170,927
44,847 --------- --------- Cash and cash equivalents, end of period
$179,289 $127,871 ========= ========= INTERNATIONAL SECURITIES
EXCHANGE, INC. KEY STATISTICAL INFORMATION Three Months Ended March
31, March 31, 2006 2005 --------- --------- Trading Days 62 61
----------------------------------------------------------------------
Average daily trading volume: (1) (2) Equity and Index Options
------------------------ Total U.S. industry equity and index
options traded (in thousands) 7,828 5,700 Our equity and index
options traded (in thousands) 2,384 1,733 Our market share of
equity and index options traded 30.5% 30.4% Equity Options
-------------- Total U.S. industry equity options traded (in
thousands) 7,202 5,223 Our equity options traded (in thousands)
2,356 1,727 Our market share of equity options traded 32.7% 33.1%
Index Options ------------- Total U.S. industry index options
traded (in thousands) 626 477 Our index options traded (in
thousands) 28 5 Our market share of index options traded 4.5% 1.1%
----------------------------------------------------------------------
Our member total trading volume (sides, in thousands): (3) Customer
127,302 87,507 Firm proprietary 32,232 18,219 Market maker 136,097
105,649 --------- --------- Total sides 295,631 211,375
----------------------------------------------------------------------
Our market share of total industry trading: (4) Customer 32.1%
30.7% Firm proprietary 24.9% 21.2% Market maker 30.6% 32.6%
----------------------------------------------------------------------
Revenue: Average transaction fee per side (5) $0.125 $0.126 Average
cost of transaction fee per side (6) ($0.020) ($0.017) ---------
--------- Average net transaction fee per side (6) $0.105 $0.109
Average transaction fee per revenue side (7) $0.176 $0.180
----------------------------------------------------------------------
Our trades: (8) Average contracts per trade 16.2 17.1 Average
trades per day (in thousands) 147.2 101 Total trades (in thousands)
9,126 6,163 Our market share of industry trades 33.8% 35.6%
----------------------------------------------------------------------
Our listed issues: (9) Average number of issues traded during the
period 854 705
----------------------------------------------------------------------
Our members (average number trading during period) PMMs 10 10 CMMs
142 139 EAMs 102 94 --------- --------- Total 254 243
----------------------------------------------------------------------
Employees at end of period 189 164
----------------------------------------------------------------------
(1) Represents single counted contract volume. For example, a
transaction of 500 contracts on our exchange is counted as a single
500 contract transaction for purposes of calculating our volumes,
even though we may receive transaction fees from parties on both
sides of the transaction, one side of a transaction, or in some
cases, neither side of a transaction. (2) Our market share is
calculated based on the number of contracts executed on our
exchange as a percentage of total industry contract volume. (3)
Represents each side of a buy or sell transaction. For example, a
transaction of 500 contracts on our exchange is counted as two
sides of 500 contracts, representing a buy and a sell transaction.
We do not currently receive transaction fees from non-broker-dealer
customer sides, except for options on our premium products. (4)
Represents our market share of total U.S. industry equity and index
trading for members trading on our exchange based on contract
trading volume. (5) Average transaction fee per side is calculated
by dividing our transaction fees by the total number of sides
executed on our exchange. We have charged our members for executing
non-broker-dealer customer orders on our exchange except for
options on our premium products. Comparing our average transaction
fee per side to our average transaction fee per revenue side
reflects the negative effect of our fee waivers or reductions on
our revenues, on a per side basis. For the three months ended March
31, 2006 and March 31, 2005, we have waived and discounted $9,541
and $6,511 of our fees, respectively. (6) Average net transaction
fee per side is calculated by subtracting cost of sales from
transaction fees and dividing the result by the total number of
sided executed on our exchange. (7) Our average transaction fee per
revenue side reflects the transaction fee we charge to our market
participants per our publicly available pricing schedules. These
schedules were part of rule proposals that became effective upon
filing pursuant to Section 19(b)(3)(A) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). The Securities and
Exchange Commission may abrogate such rule proposals within 60 days
of filing if it determines that such action is necessary or
appropriate in the public interest, for the protection of investors
or otherwise in furtherance of the purposes of the Exchange Act.
(8) Members can have several contracts per trade. Trades represent
the number of trades cleared through The Option Clearing
Corporation, or the OCC. Market data revenue is generated on a per
trade basis, not on a contract basis. (9) By "issues" we mean the
number of securities underlying our options. We trade multiple
options series on each underlying security. *T GAAP to Non-GAAP
Reconciliation In an effort to provide investors with additional
information regarding the Company's results as determined by U.S.
generally accepted accounting principles, or GAAP, the Company also
discloses certain non-GAAP information which management believes
provides useful information to investors. Management reviews this
non-GAAP financial measurement when evaluating the Company's
financial performance and results of operations; therefore, we
believe it is useful to provide information with respect to these
non-GAAP measurements so as to share this perspective of
management. Non-GAAP measurements do not have any standardized
meaning and are therefore unlikely to be comparable to similar
measures presented by other companies. These non-GAAP financial
measures should be considered in the context with our GAAP results.
We have disclosed financial measures that reference our net
transaction fees which we define as our transaction fees less
activity remittance fees and ETF and index license fees. Under
GAAP, activity remittance fees and ETF and index license fees are
required to be recorded on a gross basis. Since activity remittance
fees and ETF and index license fees are entirely offset by
corresponding amounts in transaction fees, management believes that
presenting net transaction fees provides a clearer measure of our
transaction related performance. We have also disclosed financial
measures that exclude incremental costs related to the development
of our new equities exchange business, the ISE Stock Exchange.
These costs do not relate to our core business of operating an
equities and index options exchange. Management believes that
presenting our results excluding these costs provides a clearer
measure of our results and performance. -0- *T INTERNATIONAL
SECURITIES EXCHANGE, INC. GAAP TO NON GAAP RECONCILIATION (in
thousands, except per share amounts) (unaudited) Three Months Ended
March 31, March 31, 2006 2005 --------- --------- GAAP Transaction
fees, as reported $36,867 $26,714 Less activity remittance fees
4,345 2,702 Less license fees 1,625 931 --------- --------- Net
transaction fees, as adjusted 30,897 23,081 --------- ---------
GAAP Total expenses, as reported $21,028 $17,157 Less ISE Stock
Exchange direct expenses 900 117 --------- --------- Total expenses
excluding ISE Stock Exchange expenses 20,128 17,040 ---------
--------- GAAP Income before provision for income taxes, as
reported 22,157 16,417 Less ISE Stock Exchange direct expenses 900
117 --------- --------- Income before provision for income taxes
excluding ISE Stock Exchange expenses 23,057 16,534 ---------
--------- GAAP Net income, as reported $12,418 $8,861 Less ISE
Stock Exchange direct expenses, net of tax 495 64 ---------
--------- Net income excluding ISE Stock Exchange expenses 12,913
8,925 --------- --------- GAAP Diluted earnings per share, as
reported $0.32 $0.25 Less ISE Stock Exchange direct expenses, net
of tax 0.01 0.01 --------- --------- Diluted earnings per share
excluding ISE Stock Exchange expenses $0.33 $0.26 ---------
--------- Gross Margin 41,574 33,252 GAAP pre-tax margins, as
reported 53.3% 49.4% Pre-tax margins excluding ISE Stock Exchange
expenses 55.5% 49.7% *T Earnings Conference Call ISE will host a
conference call to discuss its first quarter 2006 results at 8:30
a.m. Eastern Time today. The conference call will be web cast and
can be accessed on the Investor Relations section of ISE's web site
at www.iseoptions.com. An investor presentation that will be
referenced during the call will be posted to the web site.
Investors can also listen to the conference call by calling (800)
659-1966 and dialing the participant passcode 35471845. An archived
recording of the call will be available from 10:30 a.m. on April
27, 2006 until midnight on April 28, 2006 and can be accessed by
calling (888) 286-8010 and dialing the participant passcode
23592545. An archived replay of the call will be available on the
Investor Relations section of the Company's web site at
www.iseoptions.com. ISE Background The International Securities
Exchange (ISE) is one of the leading marketplaces for trading
derivatives and equities, founded on the principle that technology
fosters and infuses new efficiencies and operational innovations
into securities trading. ISE developed an innovative market
structure that integrated auction market principles into an
advanced screen-based trading system launching the first fully
electronic US options exchange in May 2000. It is now the world's
largest equity options exchange. ISE continually enhances its
trading systems and develops new products, including indexes and
market data, to provide investors with the best marketplace and
investment tools to trade smarter. For more information about ISE,
its options products and its technology, visit www.iseoptions.com
and for more information about the ISE Stock Exchange LLC, visit
www.isestock.com. Certain matters discussed in this press release
are "forward looking statements" intended to qualify for the safe
harbor from liability established by the Private Securities
Litigation Reform Act of 1995. These statements relate to future
events or our future financial performance, and involve known and
unknown risks, uncertainties and other factors that may cause our
actual results, levels of activity, performance or achievements, to
be materially different from those contemplated by the forward
looking statements. We undertake no ongoing obligation, other than
that imposed by law, to update these statements. Factors that could
affect our results, levels of activity, performance or achievements
and cause them to materially differ from those contained in the
forward looking statements can be found in our filings with the
Securities and Exchange Commission, including our annual report on
Form 10-K, current reports on Form 8-K and quarterly reports on
Form 10-Q.
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