Intntl Sec Exchange (NYSE:ISE)
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The International Securities Exchange Holdings, Inc. (NYSE:ISE) today
reported that net income for the quarter ended March 31, 2007 increased
34.4% to $16.7 million, or $0.42 per share on a fully diluted basis.
This compares to $12.4 million, or $0.32 per share on a fully diluted
basis, in the same period in 2006.
Total consolidated revenues for the quarter increased 18.6% to $56.4
million from $47.5 million in the prior year. Gross margin, or total
revenues less cost of revenues, increased 21.5% to $50.5 million from
$41.6 million in the first quarter of 2006. Included in our consolidated
results are the revenues and expenses from the ISE Stock Exchange, our
stock exchange business segment.
Total revenues for the quarter from our options exchange business
segment increased 17.7% to $55.9 million. Gross margin, or total
revenues less cost of revenues, increased 21.2% to $50.4 million. The
average daily volume of equity and index options contracts traded
increased 16.3% to 2.8 million contracts. Our stock exchange business
segment recorded gross margin of $0.4 million, interest income of $0.5
million, total expenses of $3.9 million and minority interest of $3.0
million. Our stock exchange has no impact on our net income as losses
are allocated solely to the minority owners. Please refer to the section
titled “Segment Information”
for further information.
“The economic climate in the first quarter
provided a strong catalyst for growth in the options industry and ISE
remained at the forefront of this growth,”
said David Krell, ISE’s President and Chief
Executive Officer. “The volatility in the
financial markets spurred additional demand for options, and ISE
continued to meet this demand with new and innovative products that
address and anticipate the needs of investors. The cyclical trends that
we have witnessed in the financial markets, together with the ongoing
secular growth that we have experienced, bode well for the options
industry,” said Krell.
“We remain focused on realizing the organic
growth opportunities in our options business, while expanding into new
geographic markets and complementary asset classes. We recently
announced our plans to launch a new derivatives exchange, DEX™,
in partnership with the TSX Group. DEX is our first venture outside of
the U.S. markets and we expect to begin operations in March 2009. In
launching this new business, we will be able to trade options, futures
and options on futures on a variety of Canadian securities.”
“We are also excited about our latest
product, ISE FX OptionsTM, which we launched
earlier this month. The foreign exchange market continues to post
impressive growth rates, and we are optimistic that there is significant
untapped demand for this asset class. ISE FX Options provides investors
with effective risk management strategies and new trading opportunities
within the growing foreign exchange asset class. Going forward, we will
continue to introduce new products and new innovations, as we grow the
overall market and garner our fair share of this business,”
concluded Krell.
First Quarter Results – Options Exchange
Income Statement
Revenues
Transaction fee revenues increased to $43.9 million from $36.9 million
last year due to continued strong growth in trading volumes. Member fees
and other revenues increased to $7.3 million from $5.6 million in the
same period last year due to an increase in connectivity fees which are
charged to market makers based on quote capacity usage. There was also
an increase in connectivity fees from our subsidiary, Longitude, which
was acquired in March 2006. Market data revenues decreased to $4.7
million from $5.1 million in the prior year quarter due to our lower
market share of trades.
Cost of Revenues, Gross Margin
Cost of revenues for the first quarter decreased to $5.6 million from
$6.0 million in the prior year quarter. Gross margin increased to $50.4
million from $41.6 million in the first quarter of 2006.
Expenses
Total expenses for the first quarter of 2007 increased to $23.6 million
from $20.1 million in the first quarter of 2006. This increase was
principally due to an increase in compensation and benefits expenses, in
part attributable to higher stock-based incentive compensation.
Technology and communications expenses increased to $4.3 million from
$3.5 million due to increased network and capacity costs for our trading
system. Professional fees increased to $1.7 million from $1.3 million
due to higher legal fees. Marketing and business development expenses
decreased to $0.5 million from $0.6 million due to the timing of
marketing programs. Depreciation and amortization increased to $1.7
million from $1.5 million due to higher amortization expense of the
assets of Longitude.
Income, Margins and Taxes
Our pre-tax income for the first quarter of 2007 increased 28.1% to
$29.5 million from $23.1 million last year. Interest and investment
income increased to $2.8 million from $1.6 million primarily due to
interest income from higher cash balances.
Our pre-tax margin for the first quarter increased to a record 58.6%
from 55.5% last year.
Our tax rate decreased to 43.5% from 44.0% in the first quarter of 2006
due to lower tax rates on our invested cash.
Net income for the first quarter increased 29.2% to $16.7 million from
$12.9 million in the prior year quarter.
Consolidated Balance Sheet
As of March 31, 2007, ISE had cash and cash equivalents and investments
in securities of $289.8 million, total assets of $402.0 million, and
stockholders' equity of $274.5 million. The Company recorded minority
interest of $33.3 million as of March 31, 2007, which represents
interests of minority shareholders in the ISE Stock Exchange. Included
in cash and cash equivalents is $34.8 million from the ISE Stock
Exchange which is reserved for its use. There were approximately 38.2
million shares of common stock outstanding.
First Quarter Business Highlights - Options Exchange
ISE was the largest equity options exchange for the first quarter of
2007 based on total equity options trading.
On January 9, 2007, ISE’s Board of
Directors declared a quarterly dividend of $0.05 per outstanding share
of its Class A Common Stock payable on March 30, 2007 to holders of
record as of the close of business on March 23, 2007.
On February 12, 2007, ISE completed the initial rollout of its Second
Market for options. Approximately 700 options classes now trade in the
Second Market. ISE also announced the addition of three Second Market
Competitive Market Makers (CMMs®): Lehman
Brothers Inc., DC Trading Partners LLC and Monadnock Capital
Management, LP. The total number of Second Market CMMs is now thirteen.
On February 21, 2007, ISE launched an enhanced version of ISEE Select™,
its customized sentiment data offering. New features include the
ability to chart intraday and historical sentiment values as well as
the capability to download the historical values for further analysis.
ISE also announced that OptionsDevil, Schaeffer's Investment Research,
SentimenTrader, and Terra Nova Financial, LLC joined the ISEE Select
marketing alliance.
On February 26, 2007, ISE entered into an agreement with First Trust
Advisors L.P. to create and list Exchange-Traded Funds (ETFs) on three
proprietary ISE indexes. First Trust plans to develop ETFs based on
the ISE Water Index (underlying index ticker: HHO), ISE-Revere Natural
Gas Index (underlying index ticker: FUM), and ISE ChIndia Index
(underlying index ticker: to be determined).
On February 27, 2007, ISE set a new record daily trading volume of
5,531,875 equity and index options contracts. Trading volume in the
Nasdaq-100 Index Tracking Stock (QQQQ) also reached a new high of
1,032,296 contracts.
On March 5, 2007, ISE and TSX Group announced the creation of DEX™,
a new Canadian derivatives exchange. DEX, which is scheduled to begin
operations in March 2009, will be owned 52% by TSX Group and 48% by
ISE and will list and trade options, futures and options on futures on
a range of Canadian securities.
On March 9, 2007, ISE traded its 2 billionth options contract. This
trade, which was in the Nasdaq-100(R) Trust Shares (QQQQ), took place
between Penson Financial Services, Inc. and Ronin Capital, LLC.
On March 27, 2007, ISE announced a partnership with Optionetics, Inc.,
a recognized leader in options education, in a joint effort to educate
retail investors about ISE FX Options™.
Optionetics will incorporate information and trading strategies for
ISE FX Options into its two-day seminar series, Trading the Foreign
Exchange Markets, which are executed by its affiliate, FX Trading
Education Corp. (FXTE).
On March 28, 2007, ISE announced that Timber Hill LLC, the market
making subsidiary of Interactive Brokers, will serve as the Primary
Market Maker (PMM®) for the first four
currency pairs of ISE FX Options that will be listed on the Exchange.
Additionally, Citigroup Derivatives Markets Inc., Lehman Brothers
Inc., and Optiver US, LLC will act as Competitive Market Makers (CMMs®)
in a variety of the products. Trading will initially take place in the
following four currency pairs: USD/EUR (Symbol: EUI), USD/GBP (Symbol:
BPX), USD/JPY (Symbol: YUK), and USD/CAD (Symbol: CDD).
First Quarter Business Highlights - Stock Exchange
On January 24, 2007, the ISE Stock Exchange added all of the
securities that comprise the S&P 1500 to its fully-displayed stock
market. Additionally, the ISE Stock Exchange now offers full route-out
capabilities to prevent trade-throughs.
On February 5, 2007, ISE announced that Lava Trading Inc. added the
ISE Stock Exchange as an equity execution destination. Lava joins
other trading solutions providers connected to the ISE Stock Exchange,
including InstaQuote, MIXIT, Neovest, Portware, Orc Software, and
Order Execution Services.
On February 13, 2007, ISE completed the rollout of its fully-displayed
stock market for the ISE Stock Exchange. Traders can now access
approximately 6,000 National Market System (NMS) securities through
both ISE's non-displayed liquidity pool, MidPoint Match™
and its displayed market.
On March 5, 2007, the Regulation NMS Order Protection Rule went into
effect for exchanges. The ISE Stock Exchange was created to operate
most effectively in a Reg NMS environment and was fully compliant
prior to the March effective date.
INTERNATIONAL SECURITIES EXCHANGE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
Three Months Ended
March 31,
2007
2006
Revenues:
Transaction fees
$
44,478
$
36,867
Member fees and other
7,117
5,622
Market data
4,809
5,055
Total revenues
56,404
47,544
Cost of revenues:
Activity remittance fees
4,079
4,345
License fees, liquidity rebates, and brokerage fees
1,829
1,625
Total cost of revenues
5,908
5,970
Gross margin
50,496
41,574
Expenses:
Compensation and benefits
15,071
11,368
Technology and communications
4,563
3,518
Occupancy
1,461
1,318
Professional fees
2,080
1,628
Marketing and business development
784
622
Depreciation and amortization
1,866
1,517
Other
1,417
1,033
Total direct expenses
27,242
21,004
Reorganization
-
24
Total expenses
27,242
21,028
Operating income
23,254
20,546
Interest and investment income
3,233
1,611
Minority interest
3,040
-
Income before provision for income taxes
29,527
22,157
Provision for income taxes
12,843
9,739
Net income
$
16,684
$
12,418
Earnings per share:
Basic
$
0.44
$
0.33
Diluted
$
0.42
$
0.32
Weighted average number of shares outstanding:
Basic
38,137
37,102
Diluted
40,095
39,254
INTERNATIONAL SECURITIES EXCHANGE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands)
March 31,
2007
December 31,
2006
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
190,244
$
200,015
Accounts receivable, net
41,342
34,815
Income tax receivable
8,997
9,644
Securities owned
67,906
60,090
Other current assets
5,475
2,415
Total current assets
313,964
306,979
Securities owned
31,616
32,724
Fixed assets, net
30,443
29,009
Deferred tax asset, net
20,288
21,932
Other assets
5,643
5,781
Total assets
401,954
396,425
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses
19,183
19,430
Compensation and benefits payable
4,055
12,453
Deferred revenue
6,015
5,129
Payment for order flow payable
11,886
10,262
Total current liabilities
41,139
47,274
Deferred revenue
49,675
50,954
Other liabilities
3,401
3,609
Total liabilities
94,215
101,837
Minority interest
33,283
36,323
STOCKHOLDERS' EQUITY
274,456
258,265
Total liabilities, minority interest and stockholders' equity
$
401,954
$
396,425
INTERNATIONAL SECURITIES EXCHANGE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Three Months Ended
March 31,
2007
2006
Cash flows from operating activities:
Net income
$
16,684
$
12,418
Adjustments to reconcile net income to cash provided by/(used in)
operating activities:
Depreciation and amortization
1,866
1,517
Minority interest
(3,040)
2,882
Stock based compensation
2,991
2,024
Deferred taxes
1,644
1,136
Unrealized gain on securities owned and available for sale
securities, net
(32)
(296)
Excess tax benefits from share-based payment arrangements
(2,366)
(3,314)
(Increase)/decrease in operating assets:
Accounts receivable, net
(6,527)
(4,329)
Income tax receivable
3,013
370
Securities owned
1,323
2,033
Other assets
(3,064)
578
Increase/(decrease) in operating liabilities:
Accounts payable and accrued expenses
(247)
(1,462)
Compensation and benefits payable
(8,398)
(4,998)
Income tax payable
-
(372)
Deferred revenue
(393)
677
Payment for order flow payable
1,624
(2,189)
Other liabilities
(208)
(177)
Net cash provided by operating activities
4,870
6,498
Cash flows from investing activities:
Purchase of fixed assets
(3,158)
(852)
Purchase of intangible assets
-
(2,000)
Purchase of available for sale securities
(7,979)
-
Maturities of available for sale securities
-
4,973
Net cash (used in)/provided by investing activities
(11,137)
2,121
Cash flows from financing activities:
Dividend
(1,941)
(1,894)
Proceeds from options exercised
266
294
Share repurchase
(4,195)
(1,971)
Excess tax benefits from share-based payment arrangements
2,366
3,314
Net cash used in financing activities
(3,504)
(257)
(Decrease)/Increase in cash and cash equivalents
(9,771)
8,362
Cash and cash equivalents, beginning of period
200,015
170,927
Cash and cash equivalents, end of period
$
190,244
$
179,289
INTERNATIONAL SECURITIES EXCHANGE HOLDINGS, INC.
KEY STATISTICAL INFORMATION - OPTIONS BUSINESS
Three Months Ended
March 31,
2007
2006
Trading Days
61
62
Average daily trading volume (1) (2)
Equity and Index Options
Total U.S. industry equity and index options traded (in thousands)
9,990
7,828
Our equity and index options traded (in thousands)
2,773
2,384
Our market share of equity and index options traded
27.8%
30.5%
Equity Options
Total U.S. industry equity options traded (in thousands)
9,033
7,202
Our equity options traded (in thousands)
2,728
2,356
Our market share of equity options traded
30.2%
32.7%
Index Options
Total U.S. industry index options traded (in thousands)
957
626
Our index options traded (in thousands)
45
28
Our market share of index options traded
4.7%
4.5%
Our member total trading volume (sides, in thousands): (3)
Account type:
Customer
141,620
127,302
Firm proprietary
47,089
32,232
Market maker
149,680
136,097
Total Sides
338,389
295,631
Our market share of total industry trading: (4)
Customer
29.4%
32.1%
Firm proprietary
23.6%
24.9%
Market maker
27.9%
30.6%
Revenue:
Average transaction fee per side (5)
$0.130
$0.125
Average cost of transaction fee per side (6)
($0.016)
($0.020)
Average net transaction fee per side (6)
$0.113
$0.105
Average transaction fee per revenue side (7)
$0.174
$0.176
Our trades:(8)
Average contracts per trade
18.5
16.2
Average trades per day (in thousands)
150.1
147.2
Total trades (in thousands)
9,156
9,126
Our market share of industry trade volume
31.7%
33.8%
Our listed issues: (9)
Average number of issues traded during the period
1,643
854
Our Members (average number trading during period)
PMMs
10
10
CMMs
147
142
EAMs
110
102
Total
267
254
Employees (period average)
Full-time equivalent (10)
182
189
(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 generally do not charge our members for executing
non-broker-dealer customer orders on our exchange except for options
on our premium products as well as options for listings in our
Second Market.
(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 generally do not charge our members for executing
non-broker-dealer customer orders on our exchange except for options
on our premium products as well as options for listings in our
Second Market. 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.
(6) Average cost of transaction fee per side is calculated by
subtracting cost of revenues from transaction fees, which we refer
to as net transaction fees, and dividing the result by the total
number of sides 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.
(10) Excludes full-time equivalent employees of ISE Stock Exchange,
LLC, beginning April 2006.
Segment Information
We operate two segments – an options exchange
segment and a stock exchange segment. Pursuant to the terms of our
agreement with the strategic investors of the ISE Stock Exchange and in
accordance with U.S. GAAP, we are the primary beneficiary of the ISE
Stock Exchange and consolidated its financial results. We exercise a
majority of the voting interest of the ISE Stock Exchange; however, all
losses are allocated solely to the minority owners. Consolidation of the
ISE Stock Exchange does not currently have any effect on our net results
of operations and will not until it generates net profits. Therefore,
consolidation increases our revenues and expenses to reflect 100% of the
ISE Stock Exchange’s results; however, these
revenues and expenses are offset dollar-for-dollar by minority interest
since we are not required to recognize any of its losses.
INTERNATIONAL SECURITIES EXCHANGE HOLDINGS, INC.
STATEMENTS OF OPERATIONS BY BUSINESS SEGMENT
(in thousands)
(unaudited)
Three Months Ended
Three Months Ended
March 31, 2007
March 31, 2006
Options
Exchange
Stock
Exchange
Elimination
ISE
Holdings
Options
Exchange
Stock
Exchange
ISE
Holdings
Revenues:
Transaction fees
$
43,885
$
593
$
-
$
44,478
$
36,867
$
-
$
36,867
Member fees and other
7,310
74
(267)
7,117
5,622
-
5,622
Market data
4,743
66
-
4,809
5,055
-
5,055
Total revenues
55,938
733
(267)
56,404
47,544
-
47,544
Cost of revenues:
Activity remittance fees
3,897
182
-
4,079
4,345
-
4,345
License fees, liquidity rebates, and brokerage fees
1,656
173
-
1,829
1,625
-
1,625
Total cost of revenues
5,553
355
-
5,908
5,970
-
5,970
Gross margin
50,385
378
(267)
50,496
41,574
-
41,574
Expenses:
Compensation and benefits
12,798
2,502
(229)
15,071
10,933
435
11,368
Technology and communications
4,271
296
(4)
4,563
3,460
58
3,518
Occupancy
1,260
221
(20)
1,461
1,277
41
1,318
Professional fees
1,697
383
-
2,080
1,278
350
1,628
Marketing and business development
537
247
-
784
622
-
622
Depreciation and amortization
1,729
147
(10)
1,866
1,509
8
1,517
Other
1,335
86
(4)
1,417
1,025
8
1,033
Total direct expenses
23,627
3,882
(267)
27,242
20,104
900
21,004
Reorganization
-
-
-
-
24
-
24
Total expenses
23,627
3,882
(267)
27,242
20,128
900
21,028
Operating income
26,758
(3,504)
-
23,254
21,446
(900)
20,546
Interest and investment income
2,769
464
-
3,233
1,611
-
1,611
Minority interest
-
3,040
-
3,040
-
-
-
Income before provision for income taxes
29,527
-
-
29,527
23,057
(900)
22,157
Provision for income taxes
12,843
-
-
12,843
10,144
(405)
9,739
Net income
$
16,684
$
-
$
-
$
16,684
$
12,913
$
(495)
$
12,418
Earnings Conference Call
ISE will host a conference call to discuss its first quarter 2007
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) 599-9795 and dialing the participant
passcode 90542572. An archived recording of the call will be available
from 10:30 a.m. on April 25, 2007 until midnight on April 26, 2007 and
can be accessed by calling (888) 286-8010 and dialing the participant
passcode 98916666. 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
International Securities Exchange Holdings, Inc. (NYSE: ISE), through
its subsidiaries, operates a family of innovative securities markets.
ISE is founded on the principle that technology and competition create
better, more efficient markets for investors and consists of an options
exchange, a stock exchange and an alternative markets platform. ISE
continually enhances its trading systems and develops new products to
provide investors with the best marketplace and investment tools to
trade smarter.
ISE developed a unique market structure for advanced screen-based
trading systems and in May 2000 launched the first fully electronic US
options exchange. Currently, ISE operates the largest U.S. equity
options exchange and is among the leading options exchanges in the
world. ISE offers index options, including a portfolio of proprietary
index products, and enhanced market data products for sophisticated
investors. ISE FX Options™ launched in the
second quarter of 2007.
ISE Stock Exchange, launched in September 2006 with strategic partners,
includes an innovative MidPoint Match™
platform which offers investors continuous price improvement. MidPoint
Match was integrated with a fully displayed Best Bid Offer market in the
fourth quarter of 2006.
ISE’s alternative markets business currently
consists of an events market trading platform known as Longitude.
Longitude’s patented and proprietary
technology provides a unique parimutuel structure for derivatives
auctions which results in greater trading and pricing flexibility for
market participants.
For more information about ISE and its options exchange, visit www.iseoptions.com
and for more information about ISE Stock Exchange, visit www.isestock.com.
Additionally, to learn more about ISE alternative markets technology,
visit www.longitude.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.
-ISE-