Trading Weakness Again Stung Deutsche Boerse’s Profits in 3Q

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Deutsche Boerse DB1 reported a 50% year-over-year decline in profits for the third quarter, as the German exchange operator was hurt by a weak trading environment that has constricted volumes. The company’s current revenue expectations fell short of analysts projections.

For the third quarter, Deutsche Boerse earned EUR 160 million, down from EUR 317 million in 2011′s third quarter. On a per-share basis earnings fell to EUR 0.85 (0.87 when adjusted for unusual items) from EUR 1.70. Net revenue slumped by nearly 19% on a year-over-year basis to EUR 471 million. The company has booked close to EUR 1.5 billion in net revenue for the first nine months of 2012 and management is projecting a yearly total of about EUR 1.95 billion, a little short of the target of slightly above EUR 2 billion.

The revenue decline was steep at Eurex, the company’s derivatives operation and the largest contributor to Deutsche Boerse’s top line. At Eurex, net revenue for the quarter dropped by about 26% to nearly EUR 205 million. Volume in European derivatives fell by 30% while volume in Deutsche Boerse’s U.S. options business declined by 33%, both on a year-over-year basis. Factors behind the volume decline included what the company called a “cautious trading stance,” competition in U.S. options trading and difficult year-over-year comparisons, since the third quarter of 2011 was a relatively busy period. Net revenue at Xetra, the segment that houses Deutsche Boerse’s cash trading operation, fell by about 32% to EUR 52 million as Xetra trading volume fell 37%.

In total operating costs fell about 8% during the third quarter and are up about 2% over the nine month period, both on a year-over-year basis. The company does plan to keep making expenditures on growth projects. Adjusting operating expenses for the costs of efficiency programs and the impact of merger-related issues, the company would have posted an EBIT margin of about 52% in the third quarter.

Deutsche Boerse, like other exchanges, continues to face headwinds from an uncooperative trading environment. Absent a material weakening of economic conditions, analysts tend to agree with the company’s thinking that 2013 should see an increase in net revenue from 2012′s weakened base. Much will depend on the trading situation, however, which does pose risks to the downside, though there are potentially profitable opportunities down the line in areas such as OTC derivatives clearing.

 

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