X TMX Group Limited

• Diluted earnings per share of 93 cents in Q3/17, up 29% from Q3/16
  
  
• Adjusted diluted earnings per share of $1.06 in Q3/17, down 2% compared with Q3/16
  
  
• Revenue of $166.1 million in Q3/17, down 8% compared with Q3/16
  
  
• Revenue down 4% in Q3/17 over Q3/16, excluding divested businesses

TORONTO, Nov. 9, 2017 /CNW/ - TMX Group Limited [TSX:X] ("TMX Group") today announced results for the third quarter ended September 30, 2017.

Commenting on the third quarter of 2017 and looking towards the future, Lou Eccleston, Chief Executive Officer of TMX Group, said:

"Our results for the past quarter reflect the benefits of our diversified business model and our disciplined approach to managing expenses. We have done a great deal of work over the past three years to push TMX Group to the forefront in global trading, clearing, capital formation and information and analytics solutions. The focus on transforming the organization and strengthening our balance sheet positioned us well to make a successful bid for Trayport. This proposed acquisition will significantly expand our European base and our portfolio of technology driven solutions. We look to the future with great anticipation as we pursue accelerated, long-term organic growth to the benefit of our clients, our employees, and our shareholders."

Commenting on operating performance in the third quarter of 2017, John McKenzie, Chief Financial Officer of TMX Group, said:

"Our earnings performance during the past quarter demonstrates the strength and resiliency of our overall business, as we reported revenue growth in both the derivatives and energy businesses in the face of challenging conditions in capital markets. We moved to further diversify our revenue streams and increase the proportion of recurring revenue with the agreement to acquire Trayport. The impact from our recent efforts to streamline TMX Group resulted in a 11% decrease in operating expenses before strategic re-alignment expenses, which included the effect of selling businesses."

RESULTS OF OPERATIONS

Non-IFRS Financial Measures

Adjusted earnings per share and adjusted diluted earnings per share are non-IFRS measures and do not have standardized meanings prescribed by IFRS and are, therefore, unlikely to be comparable to similar measures presented by other companies.  We present adjusted earnings per share and adjusted diluted earnings per share to indicate ongoing financial performance from period to period, exclusive of a number of adjustments.  These adjustments include amortization of intangibles related to acquisitions, non-cash impairment charges, write-off of deferred income tax assets, increase in deferred income tax assets resulting from capital loss carryback, strategic re-alignment expenses and transaction related costs.  Management uses these measures, and excludes certain items, because it believes doing so results in a more effective analysis of underlying operating and financial performance, including, in some cases, our ability to generate cash.  Excluding these items also enables comparability across periods.  The exclusion of certain items does not imply that they are non-recurring or not useful to investors.

Additional IFRS Measures

Income from operations before strategic re-alignment expenses and income from operations are important indicators of TMX Group's ability to generate liquidity through operating cash flow to fund future working capital needs, service outstanding debts and fund future capital expenditures.  The intent of these performance measures is to provide additional useful information to investors and analysts; however, these measures should not be considered in isolation.

BOX (BOX Holdings)

In January 2015, BOX launched a program to incent subscribers to provide liquidity. In exchange for providing this liquidity and a nominal cash payment, subscribers received volume performance rights (VPRs), which are comprised of Class C units of BOX and an order flow commitment. The VPRs vest over 20 quarters of the 5-year order flow commitment period if minimum volume targets are achieved. If a subscriber fails to meet its minimum volume targets, its VPRs are available for reallocation to those subscribers that exceed their minimum volume targets, if any. Those VPRs may vest earlier. In September 2015, the VPR program was granted regulatory approval by the Securities Exchange Commission (SEC). Pursuant to the terms of the VPR program, subscribers became entitled to immediate economic participation in BOX for VPRs held.

As of July 1, 2016, we determined that we did not hold majority voting power on the board of directors as Class C units in certain vested VPRs became entitled to vote at board meetings.  As of this date, we no longer consolidated BOX as we ceased to hold the majority of voting power on the board of directors and exercise control.  As a result our financial results from July 1, 2016 forward do not include the results of BOX other than our share of BOX's net income (loss), which is reflected in Share of net income (loss) from equity accounted investees.  For periods prior to July 1, 2016 our financial results include the results from BOX on a consolidated basis.

Effective July 1, 2016, Derivatives revenue also includes revenue from licensing SOLA technology and providing other services to BOX.  This revenue was previously eliminated when BOX's operating results were consolidated in our financial statements.

Three Months Ended September 30, 2017 Compared with Three Months Ended September 30, 2016

The information below reflects the financial statements of TMX Group for the quarter ended September 30, 2017 compared with the quarter ended September 30, 2016.

Net income attributable to TMX Group shareholders

Net income attributable to TMX Group shareholders in Q3/17 was $51.9 million, or $0.94 per common share on a basic basis and $0.93 per common share on a diluted basis, compared with a net income of $39.2 million, or $0.72 per common share on a basic and diluted basis, for Q3/16. The increase in net income in Q3/17 reflected lower operating expenses before strategic re-alignment expenses and no strategic re-alignment expenses, partially offset by significantly lower revenue.  In addition, we incurred lower net finance costs in Q3/17 compared with Q3/16. The increase in diluted earnings per share was partially offset by the impact from an increase in the number of weighted-average common shares outstanding in Q3/17 compared with Q3/16.  In addition, during Q3/16, we recorded non-cash income tax adjustments of approximately $2.0 million (net) largely related to the de-consolidation of results from BOX, which reduced income tax expense, and increased net income and earnings per share.

Adjusted Earnings per Share⁵ Reconciliation for Q3/17 and Q3/16  

The following is a reconciliation of earnings per share⁶ to adjusted earnings per share⁷:

Adjusted diluted earnings per share decreased by 2% from $1.08 in Q3/16 to $1.06 in Q3/17.  The decrease in adjusted diluted earnings per share reflected significantly lower revenue partially offset by lower operating expenses before strategic re-alignment expenses, excluding amortization of intangibles related to acquisitions, and lower net finance costs.  The decrease also reflected the impact from an increase in the number of weighted-average common shares outstanding in Q3/17 compared with Q3/16.  In addition, during Q3/16, we recorded non-cash income tax adjustments of approximately $2.0 million (net) largely related to the de-consolidation of results from BOX, which reduced income tax expense, and increased adjusted earnings per share. 

Revenue

In 2015, we undertook a strategic realignment of our operations and revised our reporting segments information for the year ended December 31, 2015. In Q4/16 we further revised operations and our reporting for our Efficient Markets operating segment.  This segment has been separated into Equities and Fixed Income Trading and Clearing and Energy Trading and Clearing.  Effective Q4/16, we now report revenue in the following categories:

• Capital Formation
• Equity and Fixed Income Trading and Clearing
• Derivatives Trading and Clearing
• Energy Trading and Clearing
• Market Insights
• Other (includes Market Solutions, which was previously reported with Efficient Markets)

Results for Q3/16 have been restated to conform to this new structure.

Revenue was $166.1 million in Q3/17, down $14.2 million or 8% compared with $180.3 million in Q3/16 largely attributable to a decline in Market Insights revenue reflecting both a $1.4 million decrease in revenue from Razor Risk (sold on December 31, 2016), and a $6.5 million decrease in revenue from TMX Atrium (sold on April 30, 2017).  Revenue for Q3/17 decreased by 4% over Q3/16, excluding the Razor Risk and TMX Atrium businesses. There were also declines in Capital Formation and Equity trading revenue.  Other revenue also declined largely due to the impact from recognizing net foreign exchange losses on U.S. dollar net monetary assets in Q3/17 compared with net foreign exchange gains in Q3/16.  The decreases in revenue were somewhat offset by increases in Fixed Income Trading and CDS revenue, Derivatives Trading and Clearing revenue from MX and CDCC, as well as Energy Trading and Clearing revenue.

Operating expenses before strategic re-alignment expenses

Operating expenses before strategic re-alignment expenses in Q3/17 were $92.5 million, down $11.8 million or 11%, from $104.3 million in Q3/16. There were reduced costs related to Razor Risk and TMX Atrium of approximately $2.8 million and approximately $6.5 million respectively, as well as lower compensation and benefits costs (including employee performance incentive plan costs) of approximately $2.7 million related to our strategic re-alignment initiative. In addition, during Q3/16, there was a write-off of approximately $2.8 million in costs related to discontinued products.  The decreases in costs were partially offset by approximately $2.2 million of increased severance costs (not included as part of strategic re-alignment expenses) and a change in bad debt expense.  

Additional Information

Income tax expense and effective tax rate

• The effective tax rate for Q3/17 was lower than our statutory tax rate of approximately 27% due to an adjustment related to foreign exchange gains.
  
  
• In Q3/16, we recorded non-cash income tax adjustments of approximately $2.0 million (net) largely related to the de-consolidation of results from BOX, which reduced income tax expense. Excluding these items the effective tax rate for Q3/16 would have been approximately 27%.

Nine Months ended September 30, 2017 Compared with Nine Months ended September 30, 2016

The information below reflects the financial statements of TMX Group for the nine months ended September 30, 2017 compared with the nine months ended September 30, 2016.

Net income attributable to TMX Group shareholders

Net income attributable to TMX Group shareholders in the nine months ended September 30, 2017 was $165.7 million, or $3.00 per common share on a basic basis and $2.97 per common share on a diluted basis, compared with a net income of $143.8 million, or $2.64 per common share on a basic and diluted basis, for the nine months ended September 30, 2016. The increase in net income in the nine months ended September 30, 2017 reflected lower operating expenses before strategic re-alignment expenses and no strategic re-alignment expenses, partially offset by lower revenue. There was also a decrease in income tax expense of approximately $2.4 million relating to a capital loss carryback, which increased net income in the nine months ended September 30, 2017. In addition, we incurred lower net finance costs in the nine months ended September 30, 2017 compared with the nine months ended September 30, 2016. These increases in net income were partially offset by a non-cash income tax adjustment of $2.9 million relating to the write off of deferred income tax assets and a non-cash impairment charge of $4.8 million, both amounts related to TMX Atrium.  There was also an unfavorable impact on basic and diluted earnings per share from an increase in the number of weighted-average common shares outstanding in the nine months ended September 30, 2017 compared with the nine months ended September 30, 2016.

Adjusted Earnings per Share Reconciliation for Nine Months ended September 30, 2017 and Nine Months ended September 30, 2016¹⁵

The following is a reconciliation of earnings per share to adjusted earnings per share:

Adjusted diluted earnings per share increased by 4% from $3.30 in the nine months ended September 30, 2016 to $3.44 in the nine months ended September 30, 2017.  The increase in adjusted diluted earnings per share reflected significantly lower operating expenses, before strategic re-alignment expenses, excluding amortization of intangibles related to acquisitions, partially offset by lower revenue.  In addition, we incurred lower net finance costs in the nine months ended September 30, 2017 compared with the nine months ended September 30, 2016.  The increase in basic and diluted earnings per share were partially offset by the impact from an increase in the number of weighted-average common shares outstanding in the nine months ended September 30, 2017 compared with the nine months ended September 30, 2016.

Revenue

Results for the nine months ended September 30, 2016 have been restated to conform to the new structure discussed above.

Revenue was $542.5 million in the nine months ended September 30, 2017, down $10.1 million or 2% compared with $552.6 million in the nine months ended September 30, 2016.  There were decreases in Equities Trading as well as Derivatives Trading and Clearing from de-consolidating BOX, and a decline in Market Insights revenue reflecting both a $4.5 million decrease in revenue from Razor Risk (sold on December 31, 2016) and a $11.1 million decrease in revenue from TMX Atrium (sold on April 30, 2017).  The decrease in Other revenue was primarily due to recognizing higher net foreign exchange losses on U.S. dollar and other non-Canadian denominated net monetary assets in the nine months ended September 30, 2017 compared with the nine months ended September 30, 2016 and reclassifying revenue from BOX's regulatory entity from Other revenue to Derivatives Trading and Clearing revenue effective July 1, 2016.  The decreases were offset by increases in Capital Formation, Fixed Income Trading, CDS, and Energy Trading and Clearing revenue.  Revenue for the nine months ended September 30, 2017 increased by 2% over the nine months ended September 30, 2016, excluding the Razor Risk and TMX Atrium businesses and the $6.5 million net impact from de-consolidating BOX (effective July 1, 2016).

Operating expenses before strategic re-alignment expenses

Operating expenses before strategic re-alignment expenses in the nine months ended September 30, 2017 were $295.9 million, down $22.0 million or 7%, from $317.9 million in the nine months ended September 30, 2016. There were lower compensation and benefits costs (including employee performance incentive plan costs) of approximately $8.9 million related to our strategic re-alignment initiative, as well as reduced costs related to Razor Risk and TMX Atrium of approximately $9.8 million and approximately $12.4 million respectively.  Effective July 1, 2016, we excluded operating expenses related to BOX when we ceased to consolidate BOX's results from operations, which were approximately $7.6 million in 1H/16. The decreases in costs were partially offset by approximately $5.6 million of higher employee performance incentive plan costs and increased severance costs of $5.3 million (not included as part of strategic re-alignment expenses).  There was also a change in bad debt expenses and increased project costs in the nine months ended September 30, 2017 compared with the nine months ended September 30, 2016.

Additional Information

Impairment charges

• In Q1/17 we determined that the fair value of TMX Atrium was below its carrying value, resulting in impairment charges relating to the write-down of goodwill.  In February 2017, we entered into an agreement to sell TMX Atrium.  The transaction closed on April 30, 2017 (see INITIATIVES AND ACCOMPLISHMENTS - Market Insights in Management's Discussion and Analysis (MD&A) for Q3/17), and there was no material gain or loss on sale in Q2/17.

Income tax expense and effective tax rate                         

• In the nine months ended September 30, 2016, we recorded non-cash income tax adjustments of approximately $2.0 million (net) largely related to the de-consolidation of results from BOX, which reduced income tax expense.  Excluding these items the effective tax rate would have been approximately 27% for the nine months ended September 30, 2016.

FINANCIAL STATEMENTS GOVERNANCE PRACTICE

The Finance & Audit Committee of the Board of Directors of TMX Group (Board) reviewed this press release as well as the Q3/17 unaudited condensed consolidated interim financial statements and related MD&A and recommended they be approved by the Board of Directors.  Following review by the full Board, the Q3/17 unaudited condensed consolidated financial statements, MD&A and the contents of this press release were approved.

CONSOLIDATED FINANCIAL STATEMENTS

Our Q3/17 unaudited condensed consolidated interim financial statements are prepared in accordance with IFRS and are reported in Canadian dollars unless otherwise indicated. Financial measures contained in the MD&A and this press release are based on financial statements prepared in accordance with IFRS, unless otherwise specified and are in Canadian dollars unless otherwise indicated. 

ACCESS TO QUARTERLY MATERIALS

TMX Group has filed its Q3/17 unaudited condensed consolidated interim financial statements and MD&A with Canadian securities regulators.  These documents may be accessed through www.sedar.com, or on the TMX Group website at www.tmx.com.  We are not incorporating information contained on the website in this press release. In addition, copies of these documents will be available upon request, at no cost, by contacting TMX Group Investor Relations by phone at (416) 947-4277 or by e-mail at TMXshareholder@tmx.com.

CAUTION REGARDING FORWARD-LOOKING INFORMATION

This press release of TMX Group contains "forward-looking information" (as defined in applicable Canadian securities legislation) that is based on expectations, assumptions, estimates, projections and other factors that management believes to be relevant as of the date of this press release. Often, but not always, such forward-looking information can be identified by the use of forward-looking words such as "plans," "expects," "is expected," "budget," "scheduled," "targeted," "estimates," "forecasts," "intends," "anticipates," "believes," or variations or the negatives of such words and phrases or statements that certain actions, events or results "may," "could," "would," "might," or "will" be taken, occur or be achieved or not be taken, occur or be achieved. Forward-looking information, by its nature, requires us to make assumptions and is subject to significant risks and uncertainties which may give rise to the possibility that our expectations or conclusions will not prove to be accurate and that our assumptions may not be correct.

Examples of forward-looking information in this press release include, but are not limited to, the anticipated benefits of the transactions to both TMX Group and Trayport; the expected impact on TMX Group's earnings and adjusted earnings per share; the ability to integrate Trayport into TMX Group and the potential synergies; the acquisition of Trayport bolstering TMX Group's strategy to shift towards recurring data and analytics revenue globally; the impact on TMX Group's capital markets, derivatives and energy markets and market insights businesses as a result of a European presence; the expected conversion to the SaaS model and the timing thereof; potential for geographic expansion; the ability for TMX Group to accelerate Trayport's growth; the source and amount of funds to fund the acquisition; the ability of TMX Group to refinance the new credit facility or otherwise de-leverage and the timing thereof; the ability to obtain required regulatory approval; and the timeliness for the transactions and the completion of the transactions; expected cash expenditures related to the integration of our clearing platforms and costs associated with consolidation of office premises,, statements related to cost reductions, strategic realignment expenses and TMX Group's business integration initiative including the integration of clearing platforms, and anticipated cost savings related to consolidation of office premises,  factors relating to stock, derivatives and energy exchanges and clearing houses and the business, strategic goals and priorities, market conditions, pricing, proposed technology and other initiatives, financial results or financial condition, operations and prospects of TMX Group which are subject to significant risks and uncertainties. These risks include: competition from other exchanges or marketplaces, including alternative trading systems and new technologies, on a national and international basis; dependence on the economy of Canada; adverse effects on our results caused by global economic conditions or  uncertainties including changes in business cycles that impact our sector; failure to retain and attract qualified personnel; geopolitical and other factors which could cause business interruption; dependence on information technology; vulnerability of our networks and third party service providers to security risks, including cyber attacks; failure to properly identify or implement our strategies; regulatory constraints; constraints imposed by our level of indebtedness, risks of litigation or other proceedings; dependence on adequate numbers of customers; failure to develop, market or gain acceptance of new products; failure to effectively integrate acquisitions, including the Trayport acquisition, to achieve planned economics or divest under performing businesses; currency risk; adverse effect of new business activities; adverse effects from business divestitures; not being able to meet cash requirements because of our holding company structure and restrictions on paying dividends; dependence on third-party suppliers and service providers; dependence of trading operations on a small number of clients; risks associated with our clearing operations; challenges related to international expansion; restrictions on ownership of TMX Group common shares; inability to protect our intellectual property; adverse effect of a systemic market event on certain of our businesses; risks associated with the credit of customers; cost structures being largely fixed; the failure to realize cost reductions in the amount or the time frame anticipated; dependence on market activity that cannot be controlled; the regulatory constraints that apply to the business of TMX Group and its regulated subsidiaries, costs of on exchange clearing and depository services, trading volumes (which could be higher or lower than estimated) and revenues; future levels of revenues being lower than expected or costs being higher than expected.

Forward-looking information is based on a number of assumptions which may prove to be incorrect, including, but not limited to, assumptions in connection with the ability of TMX Group to successfully compete against global and regional marketplaces; business and economic conditions generally; exchange rates (including estimates of exchange rates from Canadian dollars to the U.S. dollar or British pound sterling), commodities prices, the level of trading and activity on markets, and particularly the level of trading in TMX Group's key products; business development and marketing and sales activity; the continued availability of financing on appropriate terms for future projects; productivity at TMX Group, as well as that of TMX Group's competitors; market competition; research and development activities; the successful introduction and client acceptance of new products; successful introduction of various technology assets and capabilities; the impact on TMX Group and its customers of various regulations; TMX Group's ongoing relations with its employees; and the extent of any labour, equipment or other disruptions at any of its operations of any significance other than any planned maintenance or similar shutdowns.

While we anticipate that subsequent events and developments may cause our views to change, we have no intention to update this forward-looking information, except as required by applicable securities law. This forward-looking information should not be relied upon as representing our views as of any date subsequent to the date of this press release.  We have attempted to identify important factors that could cause actual actions, events or results to differ materially from those current expectations described in forward-looking information.  However, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended and that could cause actual actions, events or results to differ materially from current expectations.  There can be no assurance that forward-looking information will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements.  Accordingly, readers should not place undue reliance on forward-looking information.  These factors are not intended to represent a complete list of the factors that could affect us.  A description of the above-mentioned items is contained under the heading RISKS AND UNCERTAINTIES in the 2016 Annual MD&A.

About TMX Group (TSX:X)

TMX Group's key subsidiaries operate cash and derivative markets and clearinghouses for multiple asset classes including equities, fixed income and energy. Toronto Stock Exchange, TSX Venture Exchange, TSX Alpha Exchange, The Canadian Depository for Securities, Montréal Exchange, Canadian Derivatives Clearing Corporation, and other TMX Group companies provide listing markets, trading markets, clearing facilities, depository services, data products and other services to the global financial community. TMX Group is headquartered in Toronto and operates offices across Canada (Montréal, Calgary and Vancouver), in key U.S. markets (New York, Houston) as well as in London, Beijing, Singapore and Israel. For more information about TMX Group, visit our website at http://www.tmx.com. Follow TMX Group on Twitter: @TMXGroup.

Teleconference / Audio Webcast

TMX Group will host a teleconference / audio webcast to discuss the financial results for Q3/17.

Time: 8:00 a.m. - 9:00 a.m. ET on Friday, November 10, 2017

To teleconference participants: Please call the following number at least 15 minutes prior to the start of the event.

The audio webcast of the conference call will also be available on TMX Group's website at www.tmx.com, under Investor Relations.

Teleconference Number: 647-427-7450 or 1-888-231-8191

Audio Replay: 416-849-0833 or 1-855-859-2056

The passcode for the replay is 97893964

SOURCE TMX Group Limited