##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 for the Quarterly Period Ended September 30, 2007
 OR
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 for the transition period from       to
 Commission file number: 001-32419
 optionsXpress Holdings, Inc.
  Delaware
    
    20-1444525(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 311 W. Monroe, Suite 1000, Chicago, Illinois
60606    (312) 630-3300
 þ o
  þ o o
 o þ




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##### 



Part I  FINANCIAL INFORMATION
    
    
    3Item 1.  Condensed Consolidated Financial Statements
    
    
    3Condensed Consolidated Statements of Financial Condition
    
    
    3Condensed Consolidated Statements of Operations
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3.  Quantitative and Qualitative Disclosures about Market Risk
    
    
    15Item 4.  Controls and Procedures
    
    
    15Part II  OTHER INFORMATION
    
    
    17Item 1.  Legal Proceedings
    
    
    17Item 1a.  Risk Factors
    
    
    17Item 6.  Exhibits
    
    
    17Signatures
    
    
    17EX-31.1 Section 302 Certification of the CEOEX-31.2 Section 302 Certification of the CFOEX-32.1 Section 906 Certification of the CEO and the CFOCertification of Principal Executive OfficerCertification of Principal Financial OfficerSection 1350 Certifications
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##### Table of Contents



Part I  FINANCIAL INFORMATION
 
 Item 1.  Condensed Consolidated Financial Statements
 optionsXpress Holdings, Inc.
 
 Condensed Consolidated Statements of Financial Condition
 (Unaudited)
  September 30,
    
    
    December 31,2007
    
    
    2006AssetsCash and cash equivalents
    
    $
    43,765
    
    
    $
    76,590Short-term investments
    
    
    141,525
    
    
    
    118,075Cash and investments segregated in compliance with federal regulations
    
    
    604,548
    
    
    
    281,288Receivables from brokerage customers, net
    
    
    162,887
    
    
    
    139,080Receivables from brokers, dealers and clearing organizations
    
    
    24,030
    
    
    
    21,601Deposits with clearing organizations
    
    
    24,433
    
    
    
    38,115Fixed assets, net
    
    
    12,388
    
    
    
    6,619Goodwill
    
    
    28,690
    
    
    
    79Other intangible assets, net
    
    
    4,125
    
    
    
    Other assets
    
    
    8,954
    
    
    
    6,077Total assets
    
    $
    1,055,345
    
    
    $
    687,524Liabilities and stockholders equityLiabilities:Payables to brokerage customers
    
    $
    783,581
    
    
    $
    476,890Payables to brokers, dealers and clearing organizations
    
    
    2,946
    
    
    
    17,422Accounts payable and accrued liabilities
    
    
    14,874
    
    
    
    8,748Current and deferred income taxes
    
    
    1,917
    
    
    
    3,636Total liabilities
    
    
    803,318
    
    
    
    506,696Stockholders equity:Common stock, $0.0001 par value, 250,000 shares authorized; September
30, 2007  62,971 shares issued and outstanding, December 31, 2006 
62,386 shares issued and outstanding
    
    
    6
    
    
    
    6Preferred stock, $0.0001 par value, 75,000 shares authorized; none issued
    
    
    
    
    
    
    Additional paid-in capital
    
    
    106,406
    
    
    
    93,183Accumulated other comprehensive income
    
    
    91
    
    
    
    28Retained earnings
    
    
    145,524
    
    
    
    87,611Total stockholders equity
    
    
    252,027
    
    
    
    180,828Total liabilities and stockholders equity
    
    $
    1,055,345
    
    
    $
    687,524
 See accompanying notes
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optionsXpress Holdings, Inc.
 
 Condensed Consolidated Statements of Operations
 (Unaudited)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:Commissions
    
    $
    39,606
    
    
    $
    28,363
    
    
    $
    109,917
    
    
    $
    92,815Other brokerage-related revenue
    
    
    9,640
    
    
    
    7,909
    
    
    
    26,609
    
    
    
    25,303Interest revenue and fees
    
    
    16,163
    
    
    
    7,799
    
    
    
    45,446
    
    
    
    19,447Interest expense
    
    
    (2,009
    )
    
    
    (286
    )
    
    
    (5,209
    )
    
    
    (286
    )Net interest revenue and fees
    
    
    14,154
    
    
    
    7,513
    
    
    
    40,237
    
    
    
    19,161Other income
    
    
    689
    
    
    
    52
    
    
    
    1,454
    
    
    
    307Net revenues
    
    
    64,089
    
    
    
    43,837
    
    
    
    178,217
    
    
    
    137,586Expenses:Brokerage, clearing and other related expenses
    
    
    5,336
    
    
    
    5,292
    
    
    
    14,833
    
    
    
    16,919Compensation and benefits
    
    
    6,861
    
    
    
    5.566
    
    
    
    19,833
    
    
    
    15,456Advertising
    
    
    3,565
    
    
    
    1,751
    
    
    
    10,581
    
    
    
    5,303Quotation services
    
    
    1,900
    
    
    
    1,475
    
    
    
    5,561
    
    
    
    4,235Depreciation and amortization
    
    
    1,555
    
    
    
    915
    
    
    
    4,141
    
    
    
    2,440Technology and telecommunications
    
    
    930
    
    
    
    713
    
    
    
    2,695
    
    
    
    2,139Other
    
    
    2,597
    
    
    
    1,724
    
    
    
    6,571
    
    
    
    5,616Total expenses
    
    
    22,744
    
    
    
    17,436
    
    
    
    64,215
    
    
    
    52,108Income before income taxes
    
    
    41,345
    
    
    
    26,401
    
    
    
    114,002
    
    
    
    85,478Income taxes
    
    
    16,080
    
    
    
    10,139
    
    
    
    44,286
    
    
    
    33,173Net income
    
    $
    25,265
    
    
    $
    16,262
    
    
    $
    69,716
    
    
    $
    52,305Earnings per common share:Basic
    
    $
    0.40
    
    
    $
    0.26
    
    
    $
    1.11
    
    
    $
    0.84Diluted
    
    $
    0.40
    
    
    $
    0.26
    
    
    $
    1.10
    
    
    $
    0.84Weighted-average number of common shares:Basic
    
    
    62,965
    
    
    
    62,360
    
    
    
    62,897
    
    
    
    62,298Diluted
    
    
    63,159
    
    
    
    62,600
    
    
    
    63,099
    
    
    
    62,605
 See accompanying notes.
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optionsXpress Holdings, Inc.
 
 Condensed Consolidated Statements of Cash Flows
 (Unaudited)
  Nine Months EndedSeptember 30, 2007
    
    
    September 30, 2006Operating activitiesNet income
    
    $
    69,716
    
    
    $
    52,305Adjustments to reconcile net income to cash provided by (used in) operating activities:Depreciation and amortization
    
    
    4,141
    
    
    
    2,440Stock-based compensation
    
    
    1,340
    
    
    
    1,023Net deferred income taxes
    
    
    374
    
    
    
    (400
    )Gain on investment in non-consolidated affiliate
    
    
    (191
    )
    
    
    (37
    )Loss from abandonment of fixed assets
    
    
    94
    
    
    
    Payments for lease incentives
    
    
    116
    
    
    
    Changes in operating assets and liabilities:(Increase) decrease in:Cash and investments segregated in compliance with federal regulations
    
    
    (229,919
    )
    
    
    (239,132
    )Receivables from brokerage customers, net
    
    
    (23,041
    )
    
    
    (126,351
    )Receivables from brokers, dealers and clearing organizations
    
    
    (2,105
    )
    
    
    (20,925
    )Deposits with clearing organizations
    
    
    13,682
    
    
    
    (26,915
    )Other assets
    
    
    (2,553
    )
    
    
    (893
    )Increase (decrease) in:Payables to brokerage customers
    
    
    215,812
    
    
    
    381,422Payables to brokers, dealers and clearing organizations
    
    
    (14,476
    )
    
    
    11,516Accounts payable and accrued liabilities
    
    
    4,050
    
    
    
    4,233Current income taxes payable
    
    
    (2,093
    )
    
    
    2,158Net cash provided by operating activities
    
    
    34,947
    
    
    
    40,444Investing activitiesPurchases of short-term investments
    
    
    (64,000
    )
    
    
    (62,600
    )Proceeds from sales and maturities of short-term investments
    
    
    40,550
    
    
    
    40,649Purchases and development of computer software
    
    
    (1,934
    )
    
    
    (1,710
    )Purchases of fixed assets
    
    
    (7,183
    )
    
    
    (3,290
    )Loans to affiliates and non-affiliates
    
    
    
    
    
    
    (972
    )Cash used in acquisition
    
    
    (24,135
    )
    
    
    (79
    )Net cash used in investing activities
    
    
    (56,702
    )
    
    
    (28,002
    )Financing activitiesExercise of stock options
    
    
    509
    
    
    
    701Excess tax benefit for stock-based compensation
    
    
    202
    
    
    
    623Purchases through employee stock purchase plan
    
    
    22
    
    
    
    11Dividends paid
    
    
    (11,803
    )
    
    
    (9,350
    )Net cash used in financing activities
    
    
    (11,070
    )
    
    
    (8,015
    )Net increase (decrease) in cash and cash equivalents
    
    
    (32,825
    )
    
    
    4,427Cash and cash equivalents, beginning of period
    
    
    76,590
    
    
    
    10,258Cash and cash equivalents, end of period
    
    $
    43,765
    
    
    $
    14,685Supplemental cash flow information:Income taxes paid
    
    $
    45,794
    
    
    $
    30,778Interest paid
    
    
    5,209
    
    
    
    286Supplemental disclosure of non-cash activity:Non-cash unrealized gain on short-term investments
    
    $
    
    
    
    $
    24Non-cash foreign currency translation
    
    
    63
    
    
    
    (3
    )Issuance of common stock in acquisition
    
    
    11,150
    
    
    
    
 See accompanying notes.
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optionsXpress Holdings, Inc.
 
 Notes to Condensed Consolidated Financial Statements
 (Unaudited)
  Basis of Presentation and Nature of Operations
 Basis of Presentation
    Nature of Operations
   Recently Issued Accounting Pronouncements
 Fair
Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities.
 6




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2. Business Acquisition
   3. Summary of Significant Accounting Policies
  Income Taxes 
 Cash and Investments Segregated in Compliance with Federal Regulations
 Goodwill 
 Other Intangible Assets 
 Earnings Per Share 
 4. Stock-Based Compensation
   5. Guarantees and Contingencies
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6. Goodwill and Other Intangible Assets
  Balance as of December 31, 2006
    
    $
    79Goodwill from the XpressTrade acquisition
    
    
    28,611Balance as of September 30, 2007
    
    $
    28,690
   8




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Original
    
    
    Accumulated
    
    
    CarryingValue
    
    
    Amortization
    
    
    ValueCustomer relationships
    
    $
    4,500
    
    
    $
    675
    
    
    $
    3,825Trade name
    
    
    300
    
    
    
    
    
    
    
    300$
    4,800
    
    
    $
    675
    
    
    $
    4,125
  7. Capitalization
 Common Stock
   Preferred Stock
  Dividends
    8. Regulatory Requirements
    9. Earnings Per Share
  9




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    25,265
    
    
    $
    16,262
    
    
    $
    69,716
    
    
    $
    52,305Weighted-average number of
common shares outstanding 
basic
    
    
    62,965
    
    
    
    62,360
    
    
    
    62,897
    
    
    
    62,298Effect of dilutive securities
    
    
    194
    
    
    
    240
    
    
    
    202
    
    
    
    307Weighted-average number of
common shares outstanding 
diluted
    
    
    63,159
    
    
    
    62,600
    
    
    
    63,099
    
    
    
    62,605Basic EPS
    
    $
    0.40
    
    
    $
    0.26
    
    
    $
    1.11
    
    
    $
    0.84Diluted EPS
    
    $
    0.40
    
    
    $
    0.26
    
    
    $
    1.10
    
    
    $
    0.84
 
 Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations
 FORWARD-LOOKING STATEMENTS
    
    
    the statements about our intention to pay dividends;
    
    the statements about future growth in online brokerage accounts, options trading and online options trading;
    
    the statement that on a per trade basis, brokerage, clearing and other related expenses generally decrease
as the number of customer trades increase;
    
    the statements about continuing to expand our product offering and our customer base and the costs
associated with such expansion;
    
    the statements concerning future growth of our futures business, international operations and brokersXpress;
    
    the statements concerning continued financing options; and
    
    the statements regarding scalability of our systems and the cost of capacity increases.
 Results of Operations
  10




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Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Results of OperationsNet revenues (in thousands)
    
    $
    64,089
    
    
    $
    43,837
    
    
    $
    178,217
    
    
    $
    137,586Brokerage, clearing, and other related expenses
    
    
    8.3
    %
    
    
    12.1
    %
    
    
    8.3
    %
    
    
    12.3
    %Compensation and benefits
    
    
    10.7
    
    
    
    12.7
    
    
    
    11.1
    
    
    
    11.2Advertising
    
    
    5.6
    
    
    
    4.0
    
    
    
    6.0
    
    
    
    3.9Quotation services
    
    
    3.0
    
    
    
    3.4
    
    
    
    3.1
    
    
    
    3.1Depreciation and amortization
    
    
    2.4
    
    
    
    2.1
    
    
    
    2.3
    
    
    
    1.8Technology and telecommunication
    
    
    1.4
    
    
    
    1.6
    
    
    
    1.5
    
    
    
    1.5Other
    
    
    4.1
    
    
    
    3.9
    
    
    
    3.7
    
    
    
    4.1Income before income taxes
    
    
    64.5
    
    
    
    60.2
    
    
    
    64.0
    
    
    
    62.1Income taxes
    
    
    25.1
    
    
    
    23.1
    
    
    
    24.9
    
    
    
    24.1Net income
    
    
    39.4
    
    
    
    37.1
    
    
    
    39.1
    
    
    
    38.0
 Statistical Data
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Statistical DataNumber of customer accounts (1)
    
    
    247,800
    
    
    
    196,400
    
    
    
    247,800
    
    
    
    196,400Daily average revenue trades (DARTs) (2)
    
    
    36,900
    
    
    
    24,100
    
    
    
    33,500
    
    
    
    27,300Customer trades per account (3)
    
    
    38
    
    
    
    32
    
    
    
    37
    
    
    
    39Average commission per trade
    
    $
    17.16
    
    
    $
    18.84
    
    
    $
    17.61
    
    
    $
    18.12Option trades as a % of total trades
    
    
    66
    %
    
    
    75
    %
    
    
    66
    %
    
    
    74
    %Advertising expense per net new customer account (4)
    
    $
    285
    
    
    $
    130
    
    
    $
    309
    
    
    $
    115Total client assets (000s)
    
    $
    5,621,323
    
    
    $
    4,263,623
    
    
    $
    5,621,323
    
    
    $
    4,263,623Client margin balances (000s)
    
    $
    166,146
    
    
    $
    120,261
    
    
    $
    166,146
    
    
    $
    120,261
 
 (1)
    
    Customer accounts are open, numbered accounts.(2)
    
    DARTs are total revenue-generating trades for a period divided by the number of trading days in that period.(3)
    
    Customer trades per account are total trades divided by the average number of customer accounts during the
period. Customer trades are annualized.(4)
    
    Calculated based on net new customer accounts opened during the period. Three Months Ended September 30, 2007 versus September 30, 2006
 Overview
  
    
    total customer accounts increased by 51,400 to 247,800, or 26%;
    
    total trades increased by 802,900 to 2,308,400, or 53%; and
    
    average commission per trade decreased by $1.68 to $17.16, or 9%.
 Net revenues
   11




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Brokerage, clearing, and other related expenses
  Compensation and benefits
  Advertising
  Quotation services
  Depreciation and amortization
  Technology and telecommunication
  Other
  Income taxes
  Net income
  Nine Months Ended September 30, 2007 versus September 30, 2006
 Overview
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
    
    total customer accounts increased by 51,400 to 247,800, or 26%;
    
    total trades increased by 1,120,100 to 6,243,400, or 22%; and
    
    average commission per trade decreased by $0.51 to $17.61, or 3%.
 Net revenues
   Brokerage, clearing, and other related expenses
  Compensation and benefits
  Advertising
  Quotation services
  Depreciation and amortization
  Technology and telecommunication
  13




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Other
  Income taxes
  Net income
  Liquidity and Capital Resources
     Credit Facility
   Cash Flow
   14




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Capital Expenditures
  
 Item 3.  Quantitative and Qualitative Disclosures about Market Risk
     
 Item 4.  Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  15




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Changes in Internal Control over Financial Reporting
  16




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Part II  OTHER INFORMATION
 
 Item 1.  Legal Proceedings
  
 Item 1a.  Risk Factors
  
 Item 6.  Exhibits
    
 Signatures
  Date: November 9, 2007
    
    optionsXpress Holdings, Inc.(Registrant)By:
    
    /s/ DAVID A. FISHERDavid A. FisherChief Executive Officer (Principal Executive Officer)By:
    
    /s/ ADAM J. DEWITTAdam J. DeWittChief Financial Officer (Principal Financial and
Accounting Officer)
 17