Q3 2019 Earnings Call
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I'd now like to talk about several Debbie Koopman, Matt.
Hi, Good morning, and thank you for joining us for a third quarter earnings conference call on the call today at Kelly, Our chairman President and CEO corridor and provide an update on our strategic initiative and Brian Shell, Our executive Vice President and CFO will provide an overview of our third quarter 2019 financial result, an updated guidance for certain financial metrics.
Following their comments, we'll open the call to Q when I also joining us for Q1 will be our chief operating officer. Besides our Chief strategy Officer, John theaters. In addition, I'd like to point out that this presentation link with the aside will be showing the flights to providing commentary on each.
A copy of the slide presentation is available on the Investor relations portion of our website.
Our remarks, we will make some forward looking statements, which represent our current judgment on what the future may hold and while we believe these judgment a reasonable. These forward looking statements are not guarantees of future performance in about certain assumptions risks and uncertainties actual outcomes and results may differ materially from what is expressed or implied in any forward looking statements. Please.
For two or filings with the FCC for full discussion at the factors that may affect any forward looking statements. We undertake no obligation to publicly update any forward looking statements whether as a result at new information future events or otherwise. After this conference call. During the course of the call. This morning, we'll be referring to non-GAAP measures as defined and reconciled in our Earth.
Material now I'd like to turn the call over <unk>. Thank you Debbie good morning, and thank you for joining us today.
I'm pleased to report on financial results for the third quarter 2019 at sea about global markets. We continue to focus on executing our strategic initiatives to drive long term growth, including the migration of Siebel options exchange to our proprietary technology that migration, which mark the final step on our company is multi <unk>.
Change technology integration was completed on October seven.
The successful completion of the integration provides our customers with a single world class trading experience across our markets and enhancing our value proposition for customers and shareholders alike.
This major step forward also enables us to redirect our technology efforts toward accelerating our organic growth as we pivot from integration to building new technologies, including the development of a state of the art research and data platform and enhancing the global distribution of our products.
We are grateful to our customers for their loyalty and assistance I think them for working with us throughout this major effort in return we're committed to continuously upgrading our technology to meet their evolving needs.
Slides with unparalleled service.
With that I will turn torrent overview of the trading and volatility landscape with an update on strategic growth initiatives to increase trading in our proprietary products.
Equity markets remain strong and volatile in the third quarter as ongoing <unk> global growth concerns continued.
Federal Reserve responded with rate cuts in July September and earlier this week, but in each instance, remade noncommittal regarding further isn't going forward.
We believe this uncertainty combined with a lack of concrete plans to resolve the U.S. try not trade war continued to drive hedging activity.
Index options and futures volume at steamboat climbed higher in the third quarter.
Index options volume rose, 13% year over year led by a 23% increase in VIX options trading and a 6% increase in SPX options.
SPX flux open interest also hit a new all time record high of more than 925000 contracts Siebel created flex options to provide investors with a customizable way to manage risk and a centrally cleared alternative to the O T C market.
Options based strategy is used by mutual funds.
And each chefs continued to be a key growth driver. According to Morningstar data assets under management tied to options based strategies hit a record $22 billion at the end of August and increase of 24%. This year and is on track for one of the biggest advances of the past decade.
Looking ahead and index options trading we responded to customer demand by adding Monday expiring options to access peak, our mini SPX contract, which provides our customers with a smaller notional contract able to address their more granular risk management needs. In addition, we listed October Twentyth and November .
20, as Friday, SPX options expirations, [laughter], providing greater precision around options positioning going into the 2020 presidential election.
Open interest grew to over 30000 contracts in just the first four weeks of trading.
Turning now to Threeq, you 19, VIX futures volume, which increased 19% year over year, primarily driven by robust volumes in August and continued growth in the volatility linked EGP complex.
Volatility linked ATP AOR, I'm, which reached 4.8 billion in early October its highest level since January 2018, and continues to be driven by growth in both long and Levered long funds.
Long and Levered long, a U.M. represented over 90% of totally U M versus its previous high of just under 40% in January 2018.
Education and client outreach is key to increasing trading and an expanding the customer base for all of our proprietary products.
In September we hosted our eighth annual European Risk Management conference held this year in Munich.
The event drew a near record number of participants from 16 countries to explore the latest and derivative strategy and risk management.
[noise] industry experts deliberate over 20 different presentations, what seems ranging from how changes in margin in capital requirements will affect portfolios to how institutional investors use option strategy is to manage risk.
Organic growth remains our primary focus we continue to evolve our sales and coverage teams, including adding top industry talent to better address our clients' needs and deliver best in class risk management solutions.
Now turning to European equities as announced this morning, Mark Hemsley President of Cibolo Europe is expected to retire at the end of February 2020. After 11 successful years of the company.
[noise] marks many contributions include positioning siebel Europe for future success by establishing a strong team up trading technology and capital markets experts Walmart remains at Siebel for several more months I would like to take this opportunity to offer my sincere. Thanks for his outstanding leadership deep industry expertise.
Yes, and valued council.
Housing currently COO of Zibo Europe is expected to succeed Mark since joining the company in 2013, Dave has worked closely with mark to shape and drive our Europe strategy and it's been to the driving force behind many of our successful product launches and technology initiatives.
Dave's appointment as part of a long established succession plan and he has the full support of the Cboes Wilbur markets Board and management team.
[noise] and others see about Europe developments, we recently launched our Netherlands based trade reporting facility and trading venue to provide customers with an E U venue to conduct equities trading and trade reporting activities for European economic areas stocks are fully operational touch venue enables us to continue to service our Pan Europe .
In customer base should future political and regulatory developments hamper cross border equity trading while also positioning us to further expand our business.
While overall European equities volume remained light in the third quarter closing auction volumes continue to rise in Europe .
In response this past August we launched Seabolt closing costs, which we designed to bring needed competition to the post close trading session.
The new services intended to provide a cost effective one stop solution for customers looking to execute their post trade trading activities across 17 European markets.
In closing I'd like to think our team for the progress made throughout the third quarter and laying the foundation for our company's ongoing growth.
Their ability to successfully conclude a massive technology integration and upgrade on time and with little to no disruption to our customers is to be commended.
Our unique inexpensive product set now trades on one world class platform.
With this foundation in place we are redoubling, our efforts to mine the considerable opportunities we see to can for continued organic growth at Siebel global markets, We will leverage our technology and efficiently focused sales force and a new initiative to rebound that our educational efforts to expand our customer reach.
Just set new standards and trading resources and with our customers to define the marketplace of tomorrow.
With that I'll now turn it over to Brian .
Thanks, and good morning, everyone before I begin I want to remind everyone that unless specifically noted my comments relate to third quarter 2019, as compared to third quarter 2018 and are based on our non-GAAP adjusted results.
Overall, our net revenue was up 9% with net transaction fees up 7% and non transaction revenue up 11%.
Adjusted EBITDA rose 15%.
With margin, increasing 380 basis points to nearly 71%.
And finally, our adjusted diluted earnings per share increased 22% to dollar 29.
The press release, we issued this morning at our slide deck provide the key operating metrics on volume and revenue capture for each of our segments as well as an overview of key revenue variances.
I'd like to briefly highlight some of the key drivers influencing our performance in each business segment.
A consistent theme for C., but this year has been the growth of our recurring revenue stream of proprietary market data and accessing capacity fees combine they increased 6% in the quarter and 7% year to date compared to the same periods last year in line with our expectations for mid to high single digit growth in 2019.
We continue to see opportunity across all our asset classes and believed that the completion of our technology migration will provide additional revenue opportunity over the long term.
As it relates to proprietary market data about 75% of this growth.
This quarter was result of incremental subscriptions and nearly 85% of the growth of our access capacity fees was also triple to incremental units.
Now I'd like to turn into our segments.
And our option segment, the 10% or $13 million increase in net revenue was primarily driven by growth in that transaction fees and market data fees with non transaction fees up 10%.
Index options average daily volume radio TV was up 13% for the quarter and revenue per contract to ARPC was up 2% with the latter reflecting a change in mix within our SPX products.
In multi list options, a 15% increase in HBV was offset by 18% decline in RPC, reflecting higher volume based rebates as our market share moved up over 200 basis points year over year, and 130 basis points compared to second quarter 2019, driven by increased member order flow.
Turning to futures, 28% or 8 million dollar.
The increase in net revenue primarily resulted from a 7% increase the HBV and a 2% increase RPC the higher RPC year over year, primarily reflects the impact of new pricing implemented in the latter part of 2018 as well as lower volume based rebates.
Futures revenue also included $2.7 million for incremental equity received as a result of an agreement with American financial exchange related to the launch of FX futures on CFP.
This income was included in other revenue and is not expected to be a recurring item.
Turn to U.S. equities net revenue was up 6% or $4 million, primarily due to higher sept market data revenue as a result of audit recoveries of a similar amount.
This increase was offset somewhat by decrease in that transaction fees, resulting from a 23% decline in that capture on flat Matchday TV.
The net cash or decline reflects fee changes implemented in the second quarter aimed to capturing additional market share.
Market share for third quarter increased to 17.2% from 15.7% in the second quarter of 2019 and was down just slightly from last year's third quarter.
Net revenue for European equity decreased 7%, Arnie U.S. dollar basis, reflecting the unfavorable impact of foreign currency translation and lower market volumes on a local currency basis net revenue was down only 2%, reflecting a 13% decrease in transaction fees offset somewhat by 16% increase in non transaction revenue.
The growth in non transaction revenue reflects increases in excess capacity fees and other revenue, which includes licensing and trade reporting revenue.
Decline and that transaction fees was due to lower market volumes and market share offset somewhat by favorable net capture the higher capture resulted from continued strong periodic auctions and that last volume.
We attribute a portion of a lower volumes and market share to the ongoing uncertainty around the timing and final outcome of Brexit and Swiss equivalency.
Net revenue for global FX decreased 4% this quarter, reflecting a 12% decline in market volumes offset somewhat by 7% increase in net capture primarily reflecting the impact of fee changes made in 2018. In addition market share of 14.9% was down 70 basis points year over year.
Turning to expenses.
Total adjusted operating expenses were about $97 million for the quarter down 3% versus last year's third quarter. The key expense variance was in compensation and benefits, primarily resulting from a decrease in incentive and equity based compensation. They kind of incentive based compensation is aligned with our year to date financial performance versus targeted performance.
As a result, as a year to date decrease primarily in compensation and benefits relative to our original expectations. We're adjusting our full year 2019 expense guidance to be in the range of $390 million to $395 million down $15 million to $18 million from our previous guidance range.
With respect to our 2020 expense guidance, we still expect a range of for 20% to $228 million, which it takes into account among other things.
Keeping our targeted incentive compensation in 2020, the absence of approximately $6 million and favorable expense adjustments in 2019.
Transitioning to our new corporate headquarters in 2020 and moving.
Our trading floor in 2021, which creates some short term duplicative expenses.
The benefit of synergies expected to be realized in 2020 from a C. One technology migration and the continuation of investing to support our organic growth initiatives, which had referenced earlier.
We plan to finalize our 2020 expense guidance on the next earnings call.
Once we have completed our 2020 business plan, including any potential negative CNL impact from the amount of software development expensed versus capitalized.
With the final technology migration complete we are reaffirming our run rate synergy target with a high degree of confidence Chris Isaacson and his team concluded the technology migration in line with the updated plan established in May of 2018.
We expect to exit 2019, with $80 million, a run rate synergies and exit 2020 with $85 million note that the remaining $5 million a run rate synergies in 2020, well be reflected in a reduction in cost of revenues versus operating expenses.
Turning to income taxes, our effective tax rate on adjusted earnings for the quarter was 24.1% below our prior guidance and lower than last year's third quarter rate of 26.4%. The tax rate decrease was primarily due to benefits related to tax reform and Rex nice upon the completion of our 2018 U.S. federal income tax rate.
Sure.
We are adjusting our full year 2019 tax rate on adjusted earnings guidance to be in a range of 25.5% to 27.5% down from 27% to 29%.
We're also adjusting our guidance for capital spending to $35 million to $40 million down from $50 million to $55 million due to a shift in timing for leasehold improvements associated with our Chicago headquarters relocation. We now expect those dollars to move into 2020. Furthermore, we are reaffirming our guidance range for depreciation amortization of 35.
To $40 million for 2018.
Before I review, our capital allocation activities, we discussed the potential sale of our headquarters building in our last earnings call I'd like to note that the cash proceeds from the sale the potential sale is expected to be less than $30 million and they're not likely to be received until sometime in 2021.
Turning to capital allocation, we remain committed to a disciplined and consistent capital allocation strategy that includes reinvesting in our business.
Complementing our organic growth potential acquisitions, and providing steady distributions to our shareholders through increased dividends and opportunistic share repurchases in order to maximize shareholder value.
During the third quarter, we returned over $40 million to shareholders through dividends and $52 million through share repurchases.
Furthermore, earlier this week, our board increased our share repurchase authorization by $250 million.
Including this new authorization and share repurchases of over $55 million in October we had approximately $313 million share repurchase authorization available at October Thirtyth 2019.
During the quarter, we also used $50 million to reduce debt under our term loan agreement.
Our debt now stands at $875 million, and we have $250 million in availability under our revolver. If a short term funding need arises at quarter end, our leverage ratio stands at 1.1 times down from 1.2 times at the end of the second quarter and we ended the quarter with adjusted cash of $151 million.
In summary.
It is executing our strategic initiatives and setting the stage for both short term and long term performance with our continued focus on defining markets globally growing our proprietary index products growing our recurring revenue stream leveraging our freed up technology resources to focus on organic growth initiatives disciplined expense management to leverage the scale of our business delivering on our synergy target.
Maintaining balance sheet flexibility and the capital allocation plan that allows us to invest in the growth of our business returning capital shareholders through dividends and opportunistic share repurchases with that I will turn it over to Debbie for instructions are MCU and a portion of the call right.
The happy to take your question, we ask that you. Please limit your questions to one for person to allow time to get everyone feel free to get back into queue and if time permits will take a second question Keith.
Yes. Thank you again last question just press Star then one of your touched on a file.
If you would like to withdraw your question. Please press Star then so this time, we a pause momentarily to assemble the roster.
And the first question comes from Rich Repetto with Sandler O'neill.
Yes, good morning, Ed Good morning, Brian .
First I want to give a shout out to Mark I know he's been a big contributors to the European success over over a decade now so we're going to Miss some.
Next to that rich thank you.
Next I guess, Brian on the expense guidance, you certainly outperformed this quarter you lowered guidance for the year when we run through the numbers and take a look at what the guidance for next year that for 20 428 compared to the mid pointed this year I mean, it's still looks looks like an 8%.
Increase at the midpoint I mean, it's.
And I would expect you'd still get some pretty called carryover synergies. So could you walk us through or how you're looking at where these the expense increases at least initially right now that you got in those numbers.
Did you rich just to clarify you're talking about for 2020.
Yes, so as you look through the if you think about the math of how were kind of getting to that kind of that consistent.
Kind of range that we put out there for 2020.
When we walk back through it I kind of gave you a list of items that you need to factor in your calculus for 2020 is.
And I'll walk through it just just briefly again is.
When you look at some of the items that we had a favorable impact of with a senior leadership departure. There were some some accounting adjustments. There I think we quantified that to six $7 million I previously when I personally like to add back what I'm, hoping to target to make on incentive compensation for the entire.
Organization, that's another quantify that call it $10 million to $15 million that would just riyadh right back onto the expense base rolling forward.
When you look at the impact of the and we've laid out a cable and thanks to Debbie koopman of working with the finance team and helping to analysts in the investment to understand laying that table out today fully understand the timing and how those expense synergies hit.
Our income statement is we're looking for all round here at roughly $20 million of benefit coming into 2020 that we didnt get the run rate benefit of in 2019, that's largely offset if you look at our our historical core growth expense rate expense rate growth.
Of roughly it's been ranging over 4% to 6% overtime.
And if you take even at a at the low end of that roughly the 4% on a base of roughly four at $400 million, that's largely offsets the synergies that we incremental synergies vector realized so that puts us in the low for.
Oh for 10 to 15 range.
Of of expenses into 2020.
And then we've as you've heard us talk about with the an incremental investments that we're focusing on what we want to do as far as.
Continuing to to plough.
Our efforts back into the organic growth of the business that's going to require additional operating expense we've talked about some of the duplicate short term expenses of some of the occupancy that we have and a little bit of the wildcard. There is and this is this is a really high class problem to have.
With the the wonderful World Class technology team that we have is that the efficiency of which they developed technology in how we look at our software capitalization process. We do follow gap, we absolutely follow gap, but they spend that they had the such a smaller footprint and the speed of which they did.
Well up and implement it doesn't allow for a large accumulation of dollars on any one project such that it triggers our software capitalization development threshold. So that it enters the balance sheet and therefore, it's just immediately expensed so while on a cash flow basis, it's much much more efficient overtime.
It Doesnt show up and it shows up as a short term GAAP expense issue as if we're spending more money. We're in reality the benefit the organization is actually better from a cash flow standpoint.
And it just doesn't show up.
But in a PML basis until say 567 years down the road when the amortization of what has been capitalize eventually runs off so it's it's a wonderful problem to have animal highlighted for everyone and try and model that out.
But I shaking my head look at Chris you're killing me, but anyway, so, but it's a wonderful problem to have again, but the efficiency and and so that that very quickly as you add those 456 items back into the run rate from 2019, we very easily get back to that range.
Okay, thanks, or run that running through that and I won't make any a smart guy comments about Alan Dean conservatism.
Yeah.
[laughter] Jeez I am sure he is listening.
Sure.
He is proud right now [laughter].
Thank you and the next question comes on Ken Worthington with JP Morgan.
Hi, good morning.
The new technology launch for C. One what changes have you seen in trading metrics thus far.
And our the changes to treating functionality or protocol that are now being implemented or contemplated for SPX or VIX as a result to the migration and then you mentioned the opportunity for new data access and other products as the results of the migration. So can you update us on your your thoughts or even timing here.
Yes, good morning, Ken Thanks for the question.
Extremely pleased to report on the successful migration and what we've seen thus far as Ed mentioned, we were not to calm world class platform across our equity options and futures exchanges and what we've seen in the first four weeks today's the end of the fourth week post migration.
What we've seen thus far as a more deterministic platform.
As Brian mentioned, we're actually now already on weekly software releases. So weve found a new normal normal operations, which allows us to better respond to our customers in a more agile way theres better capacity.
Better risk controls and improve complex or handling as a major part of this integration. We also made some pretty material enhancements to the VIX settlement process to improve liquidity.
You are asking about SPX and VIX.
I'm very pleased to report October 16th we had our first monthly VIX settlement.
As a result of those changes.
Traded almost a 128000 contracts.
Right at the mid market.
Those changes included providing better certainty for conversions have traded settlement.
We have a lot better visibility.
An access into the auction because we're providing more granular market data to market participants.
We improved the clarity of the rules around settlement and we are in forcing them systematically.
This is all led this all led to increased participation by by members.
So thinking about a 40% tighter spread around the auction.
And so as a leading global leader in volatility will continue.
To engage with customers to see how we can continue to improve this process, but extremely pleased about the overall migration, what we're seeing and thus far as well as that first VIX settlement. You asked also about 2020 in the data platform. The data platform is really the one of the key initiatives. We're very excited about for 2020.
Let's say, we have really five goals with that platform one to enable better data driven decision, making for us and our customers to to provide actionable insight.
Within across all of our markets.
We want to standardize and monetize our historical data in a better way.
I want to facilitate new tradable products.
And finally, better define and measure our increased sales and distribution efforts that Ed and Brian both talked about across our customer segments and geographies us, but especially in our prop products. So.
Oh that data platform and we're just getting started we just finished migration. So we're in the design phase right now, but we think this data platform is going to give us better visibility into product usage highlight capital inefficiencies that we can help solve.
And give us better cross market analytics, and this is really us doubling down on previous investments we've made.
Smaller investments if you think about investments that seebohm made with live all.
For enhanced derive data and even a previous effort in our FX market around liquidity management that has driven growth in that business line. We're extremely excited about this for 2020, Chris I think you left out of the silex influx integration, we called out flux and the growth of open interest. So maybe if you can touch on that a bit too because it does add.
Color to enhancements for us Jackson product offering.
In a much bigger way so maybe just a couple of words on that as part of the integration can we we obviously boss silos silex about two years ago 2017, and we we immediately saw the opportunity there to have silex as the front end to be used to Interflex orders and we should we showed you the.
Next growth this year, that's been tremendous and with the migration Silex is now the front end for all flex for our customers and on the first day are the first week, we try to more the hundred thousand contracts through the silex platform on flex and however, we expect that we'll continue to add more features and functionality.
For flex there's already a laundry list that folks have brought forward and we're excited to to work through that list as we enter 2020.
And then I'd like to punch one more.
The points, you made and I can't stress enough, how capital efficiencies in recognizing potential offsets among our product sets that make or break the adoption of new product and certainly we expect with capital efficiencies and identifying those margin offsets a show.
I would increase.
Existing customers being able to engage with a new ways of our existing products and then much bigger ways. So a lot of information coming as a result of the completion of this platform, but it is a 2020 effort and that's what we want to deliver to the marketplace.
Okay, great. Thank you very much.
Thank you and the next question comes from Michael Carrier with Bank of America Merrill Lynch.
Good morning, Thanks for taking the question.
Hey, Brian just two quick clarification on the guidance in 20, you mentioned, the 10 to 15 million and incentive comp.
I guess just.
I want you to predict volumes, but just what environment or maybe metrics you need to meet or hit that level I'm just given that obviously 2019 was tougher for the whole industry and it seems like incentive comp is on the low side. So just wanted to make sure.
That tied into like a similar kind of revenue environment for your expectations and then just on your tax guide.
You mentioned the lower for 19 does that flow into 20 or too early to tell but any guidance there would be helpful. Thanks.
Thanks, good questions for clarification for 20.
And so on the 2020 I I will just say that the and again. This is all contingent upon a 2020 business plan and what.
What we work with our board as far as where we are and what are those targets and as we set our compensation and what our target should be.
That is not final and obviously the extent that we can disclose things that we will and we can't and our proxy things of that nature, but but broadly I would just say that it will have to be it will be a better environment growth. We are largely focused on growth and that incentive comp is there to be make sure. It's in alignment with growth. So I can't really provides you the clarity on.
What those numbers are other than I can assure you that.
As it has that sustains the sounds we are paid to grow this business and that shareholder value and so there's an expectation that the numbers that we deliver are better than where they were previously so I don't need to be flip, but I just don't have a specific metrics to give you.
On that number as far as our those metrics go let me take a little higher though Brian and kind of answer the question a little bit repeating what we said last quarter and what we've identified the demand from our customer base for more knowledge and product use case that investment in our team has already started.
And so the restructure to redefine global client services team is really built in has been built over the last six months to better align the sales and coverage with our customers needs, that's where it starts so if.
We align and we're going to tell our board that Theres, an organic growth story for 2020, and we have the team on the field ready to go that's how the incentive comp and Thats, how the structure changes and that's what we're going to be presenting to our board in the December December cycle for our business plan for 2020, but it is organic growth story that's.
Already started with the people.
Michael This is John it just what we're on that topic also theres a theres its unintentional tie in here with what Chris was talking about in terms of.
Our our data platform build out in 2020, which is that.
We need to be able to understand very precisely where to target our global client services teams efforts and then once they've targeted those efforts in a particular area to benchmark. Our performance. How are we doing how are we doing reaching those clients and educating them. So all of this is is really a kind of a holistic.
Offered to accelerate our organic growth into 2020.
Hello, I think.
Yes, the tax rate if yes, sure and then a follow up on the on the tax rate. If you look at our tax rate and what's driving the the lower numbers the at lower effective tax rate and I think if you look in context for where we were in 18, where we've guided for 19 and then just a peak at 2020.
I think about that the lower numbers of what you've seen have largely been driven by discrete items.
That aren't necessarily as predictable clearly.
No year over year, and if you look at 2018 for example.
We had close to four percentage points of discrete items that that kind of lowered our our rate.
Can you look at the back that out that was roughly 29% affect your tax rate. If you look at.
The midpoint of 2019, and where we are in and you look at the discrete items.
Of where we are and we back those out we get close to that 20, 829% level as cars as far as where that kind of run rate goes.
2020 will largely be.
Indicative of.
The level of discrete items that we have but I would say its anchors around closer to that 20, 829% range of what we've seen in 18 and 19 I know some of the other exchanges have talked about.
The foreign derived intangible income benefit that they've received and they recognize that benefit with some clarity around the 2018.
Tax return as they have updated their returns and receive some final technical guidance, we do not have as large of a benefit from that just given the relative composition of of our revenue base. There is small some it's it's marginal and it's just not same order of magnitude as the other changes.
So we don't expect that same continuation somewhere to what others have reported going into 2020 rate.
All right. Thanks for all the color.
Thank you and the next question comes from Chris Allen with Compass point.
Good morning, everyone I just wanted to follow up on Kens question earlier about the C. The impact of the migration I Wonder if you give us any color in terms of what the impacts men from maybe from a depth of book perspective impact on spreads in the market just looking for something to kind of quantify.
Market quality impact and also can you give us an update in terms of.
The key products the trades continue to trade on the floor, where they currently stand in terms of percentage of four based trading whether you've seen any impact from the initial migration. Thanks.
Yes, Thanks, Chris I'll take that question. So, yes, I'd say, it's a little early to draw any firm conclusions given we're just four weeks and.
But it will just went off offer thanks to our customers on the day after migration, we all the customers that trade on Friday trade on Monday, So liquidity metrics I don't have any hard and from market quality metrics to give you. All I can say is that the the break between.
Floor in electronic trading is roughly the same maybe a percentage or to a higher or lower depending upon the day.
We continue to see market share.
And market share in volumes that are.
Basically identical to what they were for instance.
If you look at October the 11, the Friday after migrations of five days in.
Our market share in our volume were basically identical to what they were on October the fourth which was pretty amazing from my perspective, thanks to our customers engagement and a on a great effort by the Steve Associates. So.
It'll early to say on exactly how market quality metrics are going to be going forward. We can probably provide a lot more color on the next call.
On that I did provide some mark quality metrics around the VIX settlement as I said, 40% tighter spreads leading into that critical settlement.
Well, we've seen thus far is positive but too early to have any firm conclusions.
Thanks.
Thank you. Thank you and the next question comes valves crime with CBS .
Hey, good morning, everyone. Just wanted to shift gears to the equities business for second I think you gave a decent amount of color on kind of like the quarter over quarter.
Pricing decline the net capture decline, but just wanted you to flush it out maybe a little bit more and the reason why you ask as I mean, obviously, a third quarter is a good volume quarter to quarter over your volumes were up 11% quarter over quarter.
If you look at Ed in terms of revenues for the whole segment, even including the pickup and market data revenues you back out the audit fees I mean, I think you made $3 million less quarter over quarter. So just wondering what you're doing exactly there because the math doesn't seem to make sense.
No. That's a that's a fair point and we knew that going in that this is a.
Versus managing it I'll call it quarter over quarter, either consecutive or year over year is that we we announced we were very clear that we were not happy with the market share that where we were call. It the second quarter. The prior year and we made those pricing changes and it was a series of pricing changes on the various exchange medallion and.
Where we wanted to reestablish a higher number than where we were sitting and we looked at that as a long term play is that we know that shorter term, we could potentially have a slip in the overall net revenue number with some of the pricing changes, we're making but we believe that long term value.
All of that business requires a level of market share.
That's closer to where we are today and such that it continues to promote the value of our market data the value of our access capacity fees. So it's you have to look at it in combination over a longer term trend versus a quarter quarter over change is the way I'd encourage.
It certainly when we look at it so we are encouraged.
Well to to hopefully take that same point of view and they're looking at the value overall, what we're doing too.
To manage that business and Alex Yes, Brian covered it well, but even today. We this was all all in preparation for we will launch retail priority today on the edge ex book the market share.
Gain is primarily come on edge ex where we're trying to invite retail back to that market now with this new feature that's not really based on lower net capture or buying the market shares based on functionality in priority. We're we're quite pleased with the progress we made in the third quarter exactly as we intended to do as Brian said this a long term.
Investment in a business that we're committed to it and were well continue to compete for that market share and tune.
Capture as we go long.
Makes sense that that's competitive thank you.
Thank you as the next question comes from Brian modalities, such a bank.
Great. Thanks, Good morning, guys.
Maybe just to go back on the expenses for 2020 to think about it in a different lance.
Adjusted operating margin land, so solid margin this quarter.
As we think about 2020 in that expense outlook.
Is it possible to improve on this margin or do you view. This this third quarter that as a high point and then just different components of that maybe if you can comment on to what extent you think trading volume you could improve as the results of the better liquidity in functionality of the of the new system.
And then Brian Brian just wanted to talk about the duplicate expenses from the.
Headquarters a transition that in 2020 number okay. I think there were several operating three three or four questions I will try to break this has pretty good data.
Yes.
Right.
So I try and maybe duplicate the the or excuse me duplicate I'll try to group the expense questions together hopefully get those and then I think we'll move the trading volume slash improvement to liquidity as as as of as of the last item will try to address.
And I'm sure. The teams look I mean, they probably don't want me to it but anyway. So we'll let's talk about the improve margin. So the margin that we have is is that we have a margin threshold and we don't manage the business by I have to have X percent of EBITDA margin again.
They are a short term measure of how effective you were and maybe a particular quarter over.
A period of time and so we're looking at that.
I think it's better to look at margins over at least on an annual basis versus any one quarter, we had some.
Look for example, we had some other income that hit this quarter.
What kind of always part of the core run rate of what we're doing that we're certainly activities that we did to earn that that income and if you back out some those items. The EBITDA margin was probably closer to that it probably declined by 150 basis points roughly of that 68.5% to 69% versus closer to 71.
So that were reported and I measure I do like to look at is as you look at performance is what is the margin on the incremental revenues over different periods and in this particular quarter and you see this a lot are certainly we've seen this when you introduce synergies and you are becoming more efficient a lot of times the margin on an increment.
No revenue is in excess of 100%, which we did in this quarter and that is.
Reflective of the activities that we're doing the cost discipline and a bunch of different circumstances, but again, that's that's nice to claim in any one quarter. When it goes up like that and again that is not something it is inconsistent or set a better way. It is something we would expect to see in an environment, where we're seeing synergy starting to show up in an organ.
Innovation over the long term so.
Are we targeting a ex excess 70% margin in the future that would be great to achieve but thats not something we're driving when we go into growth mode.
And we put in investment mode. There may be some quarters, where that margin, maybe slightly lower but as with all scale businesses.
When you see that incremental tick up in volume at any one period of time, you better see a very efficient margin on that incremental revenue, which I think we've been able to continue to demonstrate.
Overtime.
On the duplicative expenses.
Provide a little bit more guidance to that as we roll in on the next earnings call as far as the overall order of magnitude and how that impacts the run rate, but again, that's just something that we want to provide some clarity on as far as that reconciliation coming out of 19 into 20, and again Thats a short term impact of more of a 2020 as.
We carry some of the costs of both called both locations really preparing ourselves for a much more efficient 21, and 22, which is actually one of the whole one of the primary reasons of of moving the headquarters location and the trading floor is that this is a long term benefit that we will achieve that won't show up on the expense.
In 2000, Tony So before this until they before I turn it over to Chris for another comment I think on.
The system this system enhancements in the migration to one common platform I think it's important for us to look at volume Doesnt originate with a technology upgrade it really allows our customers to express their best market and to express how it is they like to be represented in the marketplace no better.
I think than this technology integration. So I think we'll get the best of their desires and.
They're expression of risk going forward more importantly, I think if you refer back to our prepared remarks is the street. The world is looking for us to provide with them the ability to hedge what is going to be certainly at this point looking forward and uncertain 2020.
The listing in the open interest in November October November SPX series, that's a first first the demand to list and second the adoption of a news cycle in series around the presidential election.
In answering that need.
That's more telling to us into how we look at a potentially volatile only today I'd also say, there's a pickup in interest around the primary which we've never seen so we're going into 2020 ready and I want crist actually to be able to punch the readiness from I. systems perspective, but most importantly.
The team on the Street as I said, we've got the team who is going to be out in front of our customers.
Explaining to them the opportunities the products use cases in what is already setting up to be uncertainty, but but Chris really I don't want to minimize though the importance of having this upgrade and having a completed yes, I mean as Ed mentioned, it's all about customers being able to manage their risk and represent their best Centrus and the technology.
Lets say that we believe it will facilitate that better over the long term with a massive migration as this was for us and our customers honestly there still adjusting these are the first few weeks.
The new system feels a lot different to them than the old system and so there is still tuning on their side and I honestly expect that through.
Probably the next month or two as they get the feel for it but ultimately I mentioned, the hence risk controls better complex water handling we believe it the functionality of the technology is going to facilitate more.
More trading over the long term and I mentioned already.
Those better risk controls better safety also new features and functionality such as with flex to help facilitate those new products that are really catching on.
That's great color. Thank you very much.
Thank you add the next question comes on Kyle vote with KBW.
Hi, good morning.
Maybe just that sorry to do this but one more on the on expenses.
And just the long term organic expense growth rate that you mentioned that 4% to 6% historically.
And that's also kind of shaping that 2020 guidance.
And your peers globally, and most of our growing expenses in that.
4% organic expense growth range, just wondering if you could provide more color as to whether or not that 46% long term growth rate is the right range going forward.
How often that is at that under review by that by the management team and then also if you think it is I guess, where is the incremental expense spend going versus your global peers as a positive manner certain segment that requires more investment.
I mean thats it Thats a great question and I think thats evolves over time is that I don't think I have necessarily any incremental insights into call. It that longer term nature of it I think that the what we do focus on is.
I just go back to our strategy of what and I don't think Thats a strategy all the Senate changes in 21 or 22, and I think it's been a consistent theme.
Of this organization is.
Driving our investment driving our efforts into the growth of the proprietary product suite of what we do today and.
Whether that's going to come in the form of technology, where that's going into form of and whether that's through a.
Incremental hardware spend but we have such an efficient hardware footprint right now that that typically has not been a big expense driver as far as that growth rate goes.
If I look at the impact of our technology refresh from that hardware standpoint, again, that's not necessarily a big driver that's going to continue to contribute to a higher 4% to 6% growth rate in the long term. So I would say it's more around the activities that we have versus being able to identify that's going to show up in.
And compensation costs is going to show up at facilities or it's going to show up in X Y and Z. It's more of that is I think what you would we look at it is what are the activities initiatives in projects around growing that core growth rate versus looking at specific line item as here's where I would expect to see.
I think there's also a penetration aspect to the to the expense pride and and call you touched on it a bit.
We are we're distributing.
This unique product set way more broadly this is not a mature product and in order. We want that face time, we want that interaction and we're willing to go out there as Brian points out and spend the money and the time to grow this product we are not at the end of the lifecycle and SPX.
Futures are VIX options and I think it's a big difference when you compare us to our competitors and what it is they look to a long term organic growth, it's a little bit puzzling to us organic growth for us is truly that we are growing this product set yet again like I think the point. There is is that it's a you have to have that longer term perspective. So is.
If there is something that we believe has a real strong growth potential that we need to pursue you could potentially see that expense number tick up in any one particular year.
But we have to hold ourselves accountable and make sure that has the appropriate return on that investment and by the way I think that's that's.
Growth profile organic growth crop profile and our I think our outperformance goes beyond strictly the proprietary products or the way, we look at data growth and data when we target mid to high single digits.
That requires some investment and we do that because that data typically the data we sell supports incremental trading in our in our venues and our proprietary products. So it's it's beneficial cycle. If we were looking at.
The whole complex in a low to mid single digits growth trajectory that just implies very very different expense growth profile.
That's really helpful. Thank you so much.
Thank you and Thats why the kinds of hours Boston with Goldman Sachs.
Hey, good morning, everyone I.
I was hoping to get your perspective on a transmission seen in October quite a challenging month for the industry as a whole, but when I look at the proprietary products at Cubo VIX futures VIX options SPX options things seem to be underperforming, whether the cash markets or other diverted bucket. So.
Looking to get a little more color sort of what's going on underneath the hood, whether the migration has caused any sort of temporary slowdown because if we look at.
Kind of external metrics, whether it's like the PPA or fixed infrastructure. It it doesn't feel particularly different than what we've seen in the past, but the volumes look a lot weaker so kind of trying to get sounds what's going on thanks.
Alex I can't believe we made this far into the call without a macro market observation from US. It's you know it's what we live every day, we absolutely love. It so happy to do that and I think you're right. So let's take the last week Monday, and Tuesday of this week and compare those proprietary products. The ones you outlined that we stack them together.
Comparing them to Wednesday, and yesterday, and we see the effect on our volumes in just a small change or small adjustment in the market. So to your point onemillion half a million six in that that product stack compared to yesterday, two and a half to 2.6 million contracts.
It's a massive change in a short period of time, and it's just a small change and the perception of the market and its whether or not this this upward trend that we've observed over the last months, we'll continue or not and what happens on a small and slight correction liking. This to the observations that we had in the probably does.
Second quarter call. When we're looking back on the January and February volumes. This is the same if you Miss the rally the end of last year's started around Christmas Eve and continued through February you played catch up in the entire month of January and there was very very little interest in hedging youre chasing the upside.
And how we measure that and what our observations.
As we look at the interest in buying offside calls as opposed to hedging and the engagement in.
Our VIX complex and as SPX out of the money puts so three weeks ago call buying was at a one year low everyone was focused on downside and since then call volume to managers to a one year high. So that's that catch up we look but look at the trends in the marketplace and we understand what or how our customers are.
Our engaging and while no model can predict the future we do see patterns in the past and we look how our customers are engaging going forward. So I go back to the observation in the demand in and around the anticipated uncertainty for 20, Tony and I was very very comfortable after watching yesterday in the day before that there.
As customers ready to engage back into hedging when you're done chasing and so that's the that's the color over the last two weeks or so.
And more to comment in real time is.
Often as we can update you will be happy to do that but thats, what we do.
But that migration itself didn't really have much to deal with I would say it had nothing to do with volumes.
You just see the engagement its instant.
When there's a need to come back and hedge and if again if its global risk dollar denominated you come to see Evault period.
Got it thanks.
Thank you and the next question comes on Chris Harris with Wells Fargo.
Thank you.
Can you guys give us your thoughts on the outlook for RPC.
Kind of across the complex and then.
Related to that with the migration of C. One.
Might we see better stability and multi list RPC.
So I would look at let's start with we look we'll start with us equities.
As we've already talked about you heard earlier comments about the competitive nature of that and so.
And with we don't see that competitive environment changing in any way.
Chris Isaacson highlighted.
Our continued focus on continuing to bring.
Functionality and and competitive and we talked about the retail priority and things that we are dealing to continue to enhance our position and what we do and the benefits we provide to our customers not just the repricing chain. So, but we don't expect that pricing environment to necessarily change or be radically different from the U.S. equity standpoint.
From the U.S. options target from the multi less standpoint.
That is also obviously equally competitive environment we've seen.
Some of the benefits of.
I would say the the various technology of what we're doing.
Two.
To where we are with respect to that the c., but migration platform and.
Particularly when we see the most of this we've actually seen improvement on there.
But when we look at the factors influencing RPC for ordering or if we look back in the third quarter. We have seen increased concentration of the large participants in the mix changes and market share on Bcxfour Jackson see too.
And we've seen a little bit of a shift in mix also.
On the with that when we saw the slight decline in the multi list you see.
The higher volume with the with the market maker rebate tiers, resulting an increase volume base rebates rebates excuse me.
So we've seen we've seen that happen and that's not a bad thing Thats a good thing as far as if the and very hard to protect as far as where that goes so have we potentially bottomed out.
I think that we probably hit that bottom a while ago with respect to that whether it's a five or six that capture but it's obviously offset by incremental volumes and market share that we see within the multi list.
With respect to FX, that's also very competitive environment, and we will see some ebbs and flows.
Quarter over quarter again, that's we've seen some growth in that business due to what we've done uniquely as far as our curated liquidity the different products that we're bringing bringing we've talked about full amount and what that's done and the different pricing around that so that's been a very nice growth story traditionally as well, even though we may see some macro ebbs and flows that that may depressing.
The volumes, we continue to see reasonable efforts there from that standpoint.
And I'd just add in European equities, as we've introduced new trading mechanisms like periodic auctions and see if oil is the larger the trade size the less frequent the trades the higher the capture is on that and that's helped us even as people are waiting for what's going to happen with Brexit. The the RPC has gone up in the European equities business. So as we think about capture.
Yes, we're definitely very very competitive enough multi list or competitive markets, but we're also looking and introducing a trading mechanisms that potentially can offer higher capture because are providing more value on those.
And those trading situations to our customers and then the wrap up on the the proprietary.
As Ed mentioned earlier as far as where we believe where we are as far as our growth cycle. Again. This is not a ratchet up the price because we need incremental revenue and show that growth. This is a unit sorry. This is a volume sorry. This is a secular story of how do we move that organic needle and if not to RPC as far as the revenue standpoint, so that's not a.
A lever that we anticipate being a big driver for us going far showing up in the revenue line item.
There may be adjustments due to some volume rebates and things that we've mentioned that would show up there might be some mix shifts that might show up.
Largely it's not something that were specifically planning on driving incremental revenues through price adjustments at the RPC line item.
Yes.
Thank you and the next question comes from I'll allow with Oppenheimer <unk> company.
Good morning, and thank you for taking my question.
Just following up Chris' comments relate to two aspects and retail party program given the backdrop of zero trading Commission what pass your conversation with the on I brokers and auto brokerage firms like being like over the past month. So in terms of allocating resources do you think rebate.
The more important than execution quality going forward in terms of getting the trade and then finally, how you're going to up position cibolo to capture any additional opportunity if thats Andy Thank you.
Hello, and thanks for the question very very very astute questioning there so.
I think retail brokers are very very focused on execution quality and that's the reason that we're bringing out retail priority today is they want a faster time to execution for their retail limit orders to the marketable limit orders are already going to wholesalers, but the the retail them in orders.
Can come back to the exchanges dig dig if with us they enhance priority, which will improve their time to execution.
The zero commissions and how it will impact.
Those retail brokers in their order routing I think they're going to continue to be very very focused on execution quality. In fact in 2020, there's additional disclosure regime coming out.
Around real called rule six us six that will demand more disclosure about routing practices, which I think is a positive development.
And there there may be more scrutiny or focus on payment for order flow, but this is why we are excited about retail priority. We think it's a it's a win for retail brokers.
It's a win for retail customers they'll get a better trading outcome.
And we also look forward to bring in potentially in 2020, some newer cypress functionality for institutional.
As to shortage as well.
I want I just this is John I, just I'd add.
Great points by Chris I think.
A high level the way, we think about this trend playing out as sort of a natural progression and its it. It's a step zero is quite an absolute number so that it takes people by surprise, but few wind the clock back 10 15 years. This is this has been going on.
And we were sort of we meeting exchanges broadly we were some of the first to feel the impact of competitive pressures and our our execution fees on equities have come down quite dramatically to a point, where thats not the really the crux of.
Economic conversation with the retail brokers more to Chris is point, it's around execution quality, because if you're getting compensated through.
Basically monetizing the bid ask spread you you have to make absolutely sure that your customers aren't in some way being disadvantage. So you have to have the right algorithms in place you have to have the right data to back up.
That analysis, and Thats, where we really how about the the retail brokers are great great friends of ours overall, they're democratizing finance that should grow the pie and thats, what we like to see overtime.
Thank you very much that's very helpful.
Thank you.
There are no questions that present higher I look to return the Florida management, Frank closing comments.
Secondly to call. This morning, we appreciate your time and continued interest in Siebel global market.
Thanks.
Thank you conference has now concluded. Thank you for today today's presentation not a centralized.