Q4 2019 Earnings Call
Good morning, welcome to treat Ueps worst quarter 2019 earnings conference call.
As a reminder, today's call is being recorded and will be available by play back to begin altering the colder ahead of your corporate development Investor Relations.
Rob. Please go ahead.
Thank you and good morning, joining me today for the call our C. I wouldn't be olesky will be the highlights for the quarter and provide a business update a precedent really helped who will die.
Deeper into some growth initiatives and Bob Warshaw, CFO, who will review our financial results.
Fourth quarter earnings release accompanying presentation and January one of these reports are available and Investor relations portion of <unk>.
I'd like to remind you that certain statements in this presentation and during the Q and they may relate to future Benson expectations and such constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Actual results may differ materially from these forward looking statements information concerning factors that could cause actual results to differ from forward looking statements containing our earnings release and periodic reports filed with the FCC.
In addition on today's call will reference certain non-GAAP measures more information regarding these non-GAAP measures, including reconciliations to GAAP measures are included in our earnings release and earnings presentation posted on our website.
Lastly, we provide certain marketing industry data, which is based on management's estimates in various industry sources for more information Seo earnings presentation posted on our website.
To recap this morning reporting GAAP earnings per diluted share of 25 cents, excluding certain non cash stock based compensation expense acquisition or affinity for the DNA and surgeon FX items and its you mean.
Effective tax rate of 26.4%.
We reported adjusted net income per diluted share of 26 cents.
We see the earnings release and form 10-K to be filed the FCC for additional information regarding the presentation of our historical results.
Now, let me turn the call over to leap.
Thanks, Ashley good morning, everyone and thank you for joining our fourth quarter earnings call.
Since our inception, we have harnessed the creativity of our employees Powerbar technology to solve problems for our growing global network of clients.
We also continue to respond to secular trends. These include the increasing sophistication of technology globalization of debt focus on reducing cost the proliferation of data driven decision, making and the growth for B T apps driving changes across other trading products.
These are the defining trends that we believe will fuel the digitization of markets and improvement in the quality of trade execution for our clients.
As you can see on slide four.
In 2019, our continued focus on client needs led to another strong year of execution of trade well.
Record volumes translated into a 13% and 15% revenue growth on a reported and constant currency basis, respectively.
As a result, we recorded our twentyth consecutive year of record revenues.
Scale generated by our strong topline results drove approximately 500 basis points of EBITDA margin expansion and 22% earnings growth.
And as our growth initiatives continues scale, we maintained our tradition of constant Oh, I'm, sorry, consistent and focused organic investment.
In institutional credit trading after leveraging the liquidity of our treasury platform to subordinate spotting, we continue to innovate by adding electronic portfolio trading.
Game changing protocol that has seen strong uptake by our clients.
We further enhanced AI price in credit.
That today prices over 19000 bonds and functions as the reference price for our electronic session and portfolio trades.
Beyond credit, we leveraged our multi asset class footprint to electronify asset swaps and improve our block trading solution for U.S. options. We've also expanded our U.S. treasury streaming offering to cater to institutional clients.
For the first time institutions are now able to consume customized liquidity complementing their RQ workflows on trade well.
Additionally, we executed several partnerships and integrations augmenting our offering for institutional municipal bonds with investor tools interest rate swaps with open Gammon Cassini end market data with ice to just to name a few.
2019 also marked another milestone for trade web as we began a new trapped or in our life as a publicly listed company.
Our IPO is elevated our brand globally and made us a more attractive destination for top tier talent.
During 2019, we added senior talent across cyber security data technology infrastructure and product management.
As we look ahead, we expect 2020 to be no different we will continue to operate with the growth mindset and best amplifier network enhance our global footprint and pioneer electronic solutions across our asset classes.
Our operating philosophy remains the same we will do this by leading advances in financial technology and continuing to strategically we're close with both existing and new clients.
Turning to slide five we reported the strongest fourth quarter in our history and set multiple new volume records across U.S. high grade in high yield credit and equity derivatives.
Specifically gross revenues of 197 million during the fourth quarter 19 were up 10.5% year on year on reported basis, and nearly 12% on a constant currency basis, despite significantly lower overall industry volumes and volatility backdrop when compared to the same period in 2018.
Our financial performance was once again was once again characterized by strong growth both domestically and internationally.
We continue to be pleased with our international <unk> progress and see a lot of potential to continue to scale, our footprint across European Asian, and emerging markets overtime.
Our double digit revenue growth and the resulting scale translated into improved profitability as our fourth quarter adjusted EBITDA margins increased to 46.9%.
Turning to slide six you can see the diversity of our revenue growth as our biggest asset classes rates and credit continue to grow strongly.
Specifically, they both registered their eighth consecutive quarter, a double digit revenue growth.
Our equities revenue decline year on year, given Trump challenging comparisons for the U.S. ETF market relative to the fourth quarter. In 18 that was marked by substantially elevated volatility and tax management trades given the market sell off in December of 2018.
Our data business grew 16% on a reported and constant currency basis.
Moving on to slide seven let me provide a brief update on our four main focus areas global interest rate swaps us treasuries us credit and global each yes.
Starting with our largest rates product by revenue interest rate swaps. Our total volumes were up over 30% year on year during the fourth quarter with swaps greater than one year in duration growing by over 11%.
We continue to be very focused on driving electronification higher in this market by partnering with our clients to broaden our products that enhance our functionality and improve workflows.
Moving on to treasuries, well, our volumes were down 3% year on year, given the challenging market conditions during the fourth quarter I'm pleased that our organic growth initiatives have allowed us to take share here using a variety of trading protocols in both the institutional in wholesale sectors.
We estimate that our share.
As of yearend was 12 and a half a percent of the U.S. treasury market.
We hit another record on our wholesale streaming platform as we continue to leverage our proprietary technology to actively onboard a healthy pipeline of dealers.
Traction has continued into 2020 with streams, reaching another record in January.
The U.S. Treasury closing price initiative in partnership with ice has generated a lot of interest in the industry given the demand for trusted reference price data.
We have already enhance the methodology and are currently engaged with a variety of industry bodies and participants to drive adoption.
We have made rapid strides in U.S. corporate credit during the fourth quarter as we continue with the current wave of innovation.
We estimate that our overall share in I agreed in high yield increased to a record, 15.8% and 4.3% respectively with electronic share also hitting new records.
Our institutional client count increased by 18% year over year.
We see significant runway to grow as our network and liquidity continue to become stronger.
The momentum has continued into 2020 as we reported new volume records for both overall high grade and high yield trading in January.
As our strategy of focusing on the entire us credit market, including making strong inroads into the institutional sector continues to pay off.
Finally, with institutionally jeffs volumes were up 5% as organic growth efforts in Europe more than offset subdued market volatility.
Going ahead, we remain well positioned to benefit from the continued growth of EPS globally.
Today, we see a broad range of clients interacting over our EFT platform from pension funds to wealth managers to hedge funds as our solutions continue to facilitate the transfer of block risk more quickly and efficiently then alternative venues.
Building on our success in each yes over the past few quarters, we've developed in our Q solution for us options still early days for that but the business is off to a promising start and nicely complements our flagship ETF barbecue offering.
With that.
I will turn it over to Billy to give you some more color on trading automated global swaps and portfolio trading.
Thanks Lee.
So our markets continue to evolve gradually led by the twin driving forces of workflows simplification and advances and risk management, but once in a while a single innovation like portfolio trading really revolutionizes the weight trading as Don I'll talk about that in a bit but let me start with an update on multiyear trend that is unfolding around over the counter trading.
Nation, and how we are using AI X to be the market leader on slide eight.
The search for liquidity continues to become more quantitative we're helping our clients navigate the growing complexity involved in stage in order to improve execution outcomes with rules based trading for years dealers have continued to invest in auto quoting capabilities Eightx allows the buy side to interact with dealers more fish.
Certainly by sending inquiries at an automated fashion. This is a win win solution for both sides. We are leading this automation of trading in fixed income Etfs and now across derivatives, leveraging our whole leveraging our wide network and our mess integrations today, approximately 25% over into two institutional trades.
Our driven by X. with plenty of room to grow our top 10, AI ex users have automated over 50% of the trades they tend to trade web on average doubling their usage over the last four years.
After adding a record number of new clients in 2019. The pipeline remains strong. We're also seeing trade sizes gradually increasing especially as AI ex continues to penetrate swaps trading behavior is changing as we speak and we're still in the early days of adoption. There is plenty of room for automation to grow each.
And within our top 100, and most sophisticated clients.
Another key growth area for us as global interest rate swaps 2019 was another record year. The investments we made to respond to market structure changes like the advent of central clearing and demand for compression tools are paying off our ability to also offered trading and correlated and adjacent asset classes like mortgages and government bonds.
Have also helped attract more swap traders to our platform. It has also allowed us to connect markets with innovations like electronic multi asset package trading when combined with trade with expertise in navigating regulatory change. We believe we have become the leading venue for clients to trade interest rate swaps are more.
I can share continues to increase and we believe our offering is resonating across currencies. It's important to note that the volume growth is not just confined to Europe. Our regional that is undergoing rapid change post minted too we are seeing broader based regional growth on the regulatory front, we're partnering with market participants to help them transition swaps.
I believe from LIBOR indices.
Specifically, we are providing transparency into risk free rates and portfolio solutions to switch reference rates.
Improving client workflows has been fundamental to everything we do a trade web and swaps is no different we're now expanding our request for market solution or RFM to include more swap types. RFM is a great example of a solution, where we have partnered with our clients to move large risk efficiently and electronically while mirror.
In the protocols used in voice execution, we're focused on ensuring that clients have access to the broadest scope of protocols to execute their interest rate swaps.
Turning to credit on slide nine 2019 further validated our differentiated approach to the credit market. We're laser focused on the big picture, which is helping clients leverage our search engine and then illiquid market to find the other side of a trade.
Our focus our heritage of pioneering electronic solutions across asset classes and the creative talent that we referred to earlier has helped US lead the current wave of innovation in corporate credit.
We're defining the future of electronic credit trading by using our proprietary technology to integrate liquidity across the traditional retail institutional and wholesale sectors. Our multi sector presence allows us to focus on bringing electronic workflows to 100% of the U.S. credit market today as measured by trace.
Electronic and digital execution work flow options and credit have never been better for customers and you can find all of them at trade web.
During the fourth quarter quarter, our market share increased materially as our network continue to season and client engagement improved as we mentioned the momentum has continued into January and we believe we have significant runway to add more clients and grow our share approach across both high grade and high yield credit.
When we step back we're pleased to report that our differentiated strategy and focused investment is firing on all cylinders. Our growth was was broad based across both traditional protocol such as all to all in our view and also across the next generation of innovations that we are leading such as net slotting session trading and connecting.
Tell liquidity into institutional arc to use and portfolio trading.
We're very excited about the future of portfolio treating which we see growing in tandem with the growth of fixed income Etfs and increasing.
Decision of real time.
Reference pricing sourced from tools like trade web proprietary AI price.
This is a light bulb moment with our most sophisticated.
And largest clients, it's a global trend and we believe more clients will follow we estimate portfolio trading has grown rapidly over the last 18 months to now account for 3% to 4% of trace.
This is another win win solution that addresses the inefficiencies in list trading clients are able to now trade large and complex baskets containing a mix of bonds across the liquidity spectrum at an attractive price with speed and certainty.
Dealers are able to increase balance sheet velocity and reduced holding periods. Many dealers have created or in the process of creating dedicated portfolio das dedicated portfolio trading desks to capitalize on this they're also investing heavily in improving their tools to price and manage this risk looking ahead, we expect clay.
And demand to continue to increase and dealers to continue to play a central role in driving the broad based adoption of portfolio trading.
Let me turn it over to Bob to discuss our financials in more detail.
Thanks, Kelly and good morning.
As we indicated our continued year over year growth in fourth quarter, our full year 2019, gross and volumes revenue earnings and improved margin and our volumes in January 2020 latest have confidence by providing sustained value for our clients. We also are creating sustained value for our shareholders.
As it goes through the numbers all comparisons will be to the prior year period, unless otherwise noted.
Let me begin with an overview our volumes on slide 10.
We reported quarterly Eightv of 685 billion up 16%.
You can see the growth was broad based we believe the diversity of our business is one of our strengths.
Slide 11 provides a summary of our quarterly earnings performance strong volume growth I. Just described translated into gross revenues, increasing by nearly 11% by 12% on a constant currency basis.
We derived approximately 35% of our revenues from international customers and recall that 30% of our revenue base is dominated in currencies other than dollars predominantly in euros.
Our variable revenues increased by 14% and our total trading revenue increased by 10%.
Fixed revenues related to our four major asset classes continue to grow as expected. We continue to expect a low single digit growth rate going forward.
Other information services increased by 22% due to growth in our reporting business.
Adjusted EBITDA margin came in at 46.9% expanded nicely road fourth quarter 18, as we continued to benefit from scale and the lack of IPO related costs.
Full year, adjusted EBITDA margin increased to 45.5% from 40.8% 2018.
All in we reported adjusted net income per diluted share 26 cents.
Slide 12 lays out the trends and fees per million.
We have not many changes GRP schedules the trends I'm about to describe are driven by mix of the various products within our four asset classes.
In sum our blended fee per million declined 3% year over year.
But excluding lower fee promoted short tenure swaps, our blended fee permitting was up 2% year over year.
Let's spend a minute reviewing the underlying trends by asset class.
Starting with rates average fees relating to reach decreased slightly due to mix shift toward short term swaps. Excluding short tenure swaps people move is up year over year, primarily due to growth and non TV mortgage activity, which carries a higher fee per million.
Continuing to credit average fee from million for credit increased 9%.
This was primarily driven by mix shift away from derivatives products due to higher growth in cash products as our investments to grow electronic credit payoff.
Continuing with equities averaged $50 million decreased 20%.
This was primarily driven by growth in us equity options, which carry lower fee familiar than our other equity products.
We expect us equity options continue to grow as we onboard clients as liquidity builds.
Finally within money market fee for million decreased 9%. This is primarily driven by growth in repo, which carries a lower fee per million that other money market products.
Slide 13 details our expenses.
At a high level, we continue to invest for growth there's been no change to our philosophy here.
While our fourth quarter operating expenses declined year over year, our full year 2019, adjusted expenses grew more than 4% and almost 5% on a constant currency basis in line with our expectations.
As a reminder, adjusted expenses excludes non cash stock based compensation expense related to options acquisition refinished related DNA and certain FX related gains and losses.
Adjusted expenses for the fourth quarter declined 6.5%, 7% on a constant currency basis recall, approximately 15% of our expense base is denominated in currencies other than dollars predominantly in steroid.
Fourth quarter 19, operating expenses were lower than compared to fourth quarter 2018, due the timing of performance related compensation accruals 2018.
Adjusted non comp expense declined 3.5% or 4.2% on a constant currency basis.
Specifically general and administrative fees declined as increased public company insurance expenses more than offset primarily by onetime items such as a decrease in our bad debt reserve.
We expect DNA to trend around 10 to 11 million a quarter, excluding the impact of FX going forward in 2020.
Professional fees declined primarily due to reduced consulting and legal fees in part driven by holding costs and fourth quarter 18 tied to the IPO.
Occupancy increased due to higher cost tied to our Amsterdam offices that we opened in response to Brexit.
Slide 14 detailed capital management and our guidance.
First on our cash position and dividend policy, we ended fourth quarter, holding 416 billion unrestricted cash cash equivalents and free cash flow for the year reached 267 million.
Capex for the year was 45 million, an increase of 6% year over year inline with expectations.
With this quarter's earnings the board declared a quarterly dividend of eight cents per class a class b share.
Turning to guidance for 2020, we will continue to invest in 2020 and are expecting adjusted expenses to range from 495 million to 510 million.
Midpoint of this range, we represent an approximate 8% increase we believe we can drive operating margin expansion at either end of this range.
As Liam Billy mentioned harnessing data to drive execution is an important part of our story as such our guidance includes $5 million investments, primarily tied to our data strategy.
We also continue to invest in cyber security risks.
Our guidance also includes approximately $3 million of duplicative rent expense in advance of potential office in 2021.
We're still finalizing specifics of our move we're working with landlords minimized the duplicative expenses, we may occur.
We are forecasting purposes, we are now assuming a non-GAAP tax rate for 2020 of 22% compared to 26.4% 2019.
The lower tax rate is driven by both changes in marginal tax rates across various jurisdictions as well as windfall benefits from the peers or as part of our share based compensation.
We expect these changes to occur in subsequent years.
We expect capex to be about $45 million to $50 million.
Acquisition refunded transaction related DNA, which we adjust out due to the increases to the increase associated with pushed out accounting is expected to be 110.
Finally, let me discuss our share count we've updated our quarterly share count sensitivity for 2020, helping calibrate your models fluctuations our share price.
Now I'll turn it back to leave for concluding remarks.
Thanks, Bob.
29 team was another record year marked by numerous milestones for the company and our products. We continue to expand our opportunity set across all of our businesses and we are very excited by the potential we see for trade web.
We're focused on capitalizing on the various growth opportunities ahead of us and continuing to strike the right balance between investing for the future and driving margin expansion to create long term value for our shareholders.
Mark is that we operate in our fundamentally changing as we speak we believe the digitization of fixed income is accelerating and this technology fueled transition.
We'll continue to play out for years to come.
As such we believe that our multi asset multi sector multi protocol and global presence gives trade web the ideal vantage point to both participate in and lead the next generation of progress.
The momentum from 2019 is carried over into 2020, so far with January volumes, increasing 29% with broad based growth across our four asset classes and new volume records in mortgages.
European government bonds.
US corporate credit and repo.
I'd like to conclude my remarks by thanking our clients for their business and partnership in the quarter and I want to thank my colleagues for their efforts that contributed to our strongest fourth quarter in our history and a truly record year for trade web.
With that I'll turn it back to Ashley for your questions.
Lastly, as a reminder, please limit yourself to one question only feel free to hop back into queue and ask additional questions that began.
Enable end at 930 Eastern time operate at you cannot take up quickly.
Ladies and gentlemen, if you have a question or comment at this time. Please press star than the one key on your Touchtone telephone. Your question has been answered your question with yourself from the Q. Please press the pound.
First question comes from Rich Repetto with Piper Sandler.
Yes, good morning, Lee and Billy and Bob.
I guess since I have one question.
I guess I'll go to.
The portfolio trading.
Side of it and I know you you.
Made a lot of comments on automation and how to the market continues to move in that direction could you talk about the portfolio trading side and I know you include that.
Billy as fully electronic are these trades.
Truly fully electronic and what's the outlook there how can that.
How can that grow an impact your fully electronic share.
In credit, Yes, Hey, rich how are you.
Very good question. So the answer is free to answer is yes, we looked at that is fully electronic business.
I think evolution around portfolio trading is going to be from what we would consider noncomp trading into more competitive environment type trading.
I've described it as the kind of light bulb moment with customers and I think absolutely it's an innovation.
Not to be.
Yes.
At any level dismissed.
It is one of those things where once clients understand the value of it they absolutely onboard and start and start their usage that way.
On some level, it's about on the client perspective, do they get better levels. When they send out bid lists offer lists or do they get better levels when they send out portfolio trades and 100%, we're seeing more and more clients using portfolio trades, we have never dismissed rich the reality that there are always going to be some voice.
Process trades in the marketplace, and we think thats important investments for us, but 100%, we think about portfolio trades as fully electronic trades.
And there is risk transfer transference and these portfolio trades.
You reported.
100%.
Got it yeah. Thank you thanks.
Our next question comes from already Goff from Credit Suisse.
Hey, good morning, everyone.
So I was hoping you could give us an update on some of your new European initiatives and just overall growth expectations from that region.
Just curious what type of traction you're seeing from recent rollouts.
Leading portfolio trading costs asset.
Not too much in the region and then you know if you're seeing any.
Yes, a client demand weakening at all from that region as well that'd be really helpful. Like some of your peers have noted seeing thanks much.
Well, thanks, sorry, good morning honestly.
Yeah, Europe is a key component of our international growth story, we see a lot of opportunity within a number of areas in Europe, the corporate cash credit business the interest rate swap business and as you mention portfolio trading believes that we spoke about that a bit.
It is really a global trend we just.
Started doing it in a meaningful way.
In Europe.
And as Bill said, we just think Theres a lot of room to go with this the percentages are going up quite rapidly in terms of.
Both of us and and in Europe, and so you know adoption continues it's still relatively early days with this we've been doing portfolio trading now as a company for over a year. So weve clearly been the leader in this space I think as a result.
We have a nice meaningful share of activity in portfolio trading.
We also have as you mentioned the multi asset package activity that started in Europe, that's kind of asset swaps in my old speak.
Really started with the Sterling market.
In Sterling swaps, but we're rolling that out now to other currencies, that's part of our whole connect the dots.
Concept and you'll hear us talk about that a lot and we basically linked together.
The swap market and the bond market electronically, it's a market that's existed for some time the.
The.
Package trading in the asset swap trading obviously has been going on for 20 plus years, but we're doing it now electronically thats, a real time saver and a real efficiency.
To be able to link these markets you have to be in both of the markets too to begin to Lincoln.
Europe, we're also seeing as in the U.S. them.
Beginning of the move away from LIBOR to the global risk free rates, that's something we're spending a good deal a time on and.
Also in Europe, we have a focus on.
Emerging markets that continues so there's there's an awful lot happening in Europe.
It's it's been a great area of growth for us.
Great place to innovate and we're very excited about.
The opportunities over there.
Got it thank you.
[laughter].
Our next question comes from Ken Hill Rosenblatt.
Hi, good morning.
In the prepared remarks. Thank you highlighted you expanded the U.S treasury streaming offering to institutional clients.
The customize liquidated a little bit I was hoping to kind of flush that out a little bit us to maybe what you're seeing from a competitive environment perspective, there and then maybe how that's being implemented and client behaviors and how that might be kind of additive to you guys versus more of our Q tight processor.
Yes, we have that that's a great question. So we have that business that we call stack.
And we think that look we think that there are certain types of clients in certain environments that are going to want to consume streams pricing and we think thats an important evolution of the government bond market, we feel very strongly that we've always been a leader in this space and we think playing a leadership role around this evolution is obviously a very important thing.
[music].
It is our Q and that type of trading going away absolutely not but there is going to be evolution. Some of that evolution will be around streaming and we're going to play leadership role around that.
In terms of in terms of the kind of competitive environment that you're describing the one thing I would say is obviously, it's pretty in the rate space, It's a pretty crowded landscape. Obviously, we have.
Trade webinar leadership role that we played you have Bloomberg.
You have seen in the you have NASDAQ you have pfenex, it's a pretty tight a long list of competitors in that field when we step back a little bit one of the things that makes us feel pretty confident about our our offering is just the breadth of of offering that we have and that we offer to clients.
So 100% kind of laser focused on this space and a strong feeling that streaming is an important strategy and we're glad that we're in it and were led that we're playing a leadership role around it.
Hi, Thanks for the detailed.
Yes.
Our next question comes from Alex both from a Goldman Sachs.
Hi, good morning, everybody.
I was hoping to dig a little bit deeper into the recent share gains you guys you've seen in a credit business feels like again to that dynamic has been accelerating quite a bit in terms of volumes, but maybe you spent a little bit of time in terms of the incremental.
Revenues incremental areas of revenue growth within that product.
So what are the capture rate you get you guys are seeing on that sort of incremental volume you've seen over the last couple of quarters.
Hey, Alex is really one way I think we would describe it a little bit as you kind of hurt US you hardly and I talked a little bit in the prepared remarks.
Around something important which is like creating efficiencies for our clients right that is how to kind of something trade ueps always dawn, so little bit of our oxygen.
And I say this and kind of a very obviously, we have a lot of clients right and some of our clients our asset managers some of our clients our bank some of our clients or hedge funds.
Some of our clients or wealth manager some of our clients were alternative market makers right. So we don't always necessarily think about like the boxes around.
Institutional trading and DDD trading and D to C trading right like if you think about the credit landscape for a second it's pretty interesting right. You have obviously clients that trade with dealers give clients that trade with clients and obviously, that's the kind of all to all environment that we've all spoken about a lot you have.
Dealers that trade with dealers that I think we've played a very strong roll around that innovation in our suite product.
Right and then you have actually dealers that send out RF cues that clients respond to so you have this very kind of evolving market structure in credit and if you step back a little bit and you see that treat whether it's actually like the company Thats playing the leadership role in all of these segments and that's really kind of how we think about.
Our business, which is how do we create efficiencies for clients and how do we put in the that's on the table, where we're going to player leadership role as this market structure evolves.
And thats, the kind of the best way I can kind of answer that.
And in a separate way, obviously, Alex like when we talk about portfolio trading and net spotting and those types of innovations, we're talking about how we derive value and efficiencies for our buy side clients. So so doing that with our buy side clients in our institutional business is.
Always a massive in huge priority for us.
Think of others had one thing to that and that is.
That happens one of the impacts as we would expect that cash credit will continue to grow faster than our derivatives piece of.
Credit and so when you look at fees per million, we'd expect that start lending higher over time as well. So thats just a byproduct of with those described.
Gotcha, great. Thanks very much.
Our next question comes from Michael Cypress with Morgan.
Hey, good morning, Thanks for taking the question I was just hoping to hear an update on your business and the strategy in China.
In particular, how does the recent trait dl impact any sort of timing or development in your view of international access to Chinese bond markets I think the market there and your build out of the business at any impact that you're seeing there in terms of activity volumes from the current virus and I guess, maybe more big picture what risk you seek to the China growth story longer term.
Right. Thanks, Michael.
It's we yeah. These like the international demand for access to China and their bond markets.
Continues to continues to grow and be very real.
Our focus has been on increasing the participation with this electronification.
Mainly with asset managers.
So we continue to kind of outperform that segment in terms of capturing real money demand.
And we and we account for a significant majority of the net inflows into China via bond connect the current.
Corona virus situation and market conditions.
Putting aside the humanitarian impact definitely create some short term volatility.
You know our execution plans, our long term outlook for our China business is unchanged, we continue to see significant secular growth and international demand for participation in China's bond market.
We had a situation in January that.
You see from our volumes our average daily volume went down but some of that was also the fact that the Chinese new year actually hit in January this year and last year, the Chinese new year.
Lunar calendar actually hit in February so there was a little bit of that timing and of course the markets were close I think for a day in January has resulted in front of ours. So.
Short term.
It's a challenging situation for all of US who have having some of our team based in China and for the markets there, but medium term longer term, we continue to be very committed.
And expect.
We'll get out of this just fine.
Okay.
Yes.
Great. Thanks.
Sure.
Again, ladies and gentlemen, if you have a question or comment at this time. Please press Star then the lumpy on your Touchtone telephone.
Next question comes from Michael Carrier with Bank of America.
Hey, Good morning. This is actually from their Merck was the on for Michael Thanks for taking my question.
I believe highlighted several times on the call that your laser focused on both investments in the business to drive revenue growth and margin expansion.
But given the new appears to keep pushing incinerate segment and.
And then they're already many well funded period I guess, how confident are you that you're spending enough.
Defend your market share revenues and I guess, Rob any details you can provide on what kind of margin expansion you're budgeting on the low and high end of your guide.
Right so.
So of course rates part of our franchise as long been are.
Leading.
Kind of component of our revenues and we've been known for for many years and as Billy pointed out you're pointing out it's a pretty competitive space has been for as long as we've been in the market.
And yet we've grown from day, one and continue to grow and have grown in right up until the fourth quarter and even the January numbers that you see so.
We like our trajectory, we like our opportunity set it's all about innovation, it's all about creativity about building the software that meets the client's needs and demands.
It's about being clever, but mostly it's about listening to the clients and as I've said before connecting some of the dots between markets that allow for greater flow.
And I expect we'll just continue on that path and we are obviously investing and building new things and different innovations.
And the results I think kind of speak for themselves.
We're on that same same track.
I think in terms of the guidance I'm going though what Bob.
Comment on that sort of the expense guidance.
Yes, I think as we said.
On either side of the expense guidance, we believe we can still experience.
Deliver some margin improvement and the reason for that I think is several several parts. One is as we've talked a lot about over the last quarters is.
We have a scale business and as we get to different stages, our investments in different.
Products, we start to see that scale.
Prove and we believe that will continue to improve through 2020.
In the products that we've been investing in both from new investments would show, which will also deliver some value. So I think.
That's the first thing I think I'd say I think the second thing is that part of the reason that works. It's because we have certain amount of our expense. If we can compensation expense and verb variable against a performance both on revenue and on earnings and so it's kind of.
It's to the it happens it goes up if we get more revenue than we.
Two or more earnings but.
It's sort of goes up more slowly than the scale of the revenue and the earnings. So I think that also is the way that weve.
Put in.
Devices, I guess youre, calling that to make sure that we are continuing to deliver more value with new revenue.
I think the last thing I'd say is.
As you as there are obviously some cost we had 2019 that were related to sort of first being a public company. We don't expect those to increase substantially the same way did in 2019 and yet in 2019, we demonstrated so still deliver substantial margin growth in spite of having to absorb the costs being public company, there's still some more of those.
The shop, but for the most part that's now it's kind of what we think is sort of a status quo and so growth again, we'll get sort of delivered against that.
Not that substantially increasing.
In that regards and I think those are some samples of the kinds of things. We're doing we're obviously always looking expenses figure out if we can be more efficient, but the primary drivers as.
As you would notice.
The scaling compensation.
Perfect. Thanks again.
Our next question as follow up question for Michael from Morgan Stanley.
Hey, Thanks for taking a follow up I just wanted to circle back on the ETF business I'm just curious what the mix is between fixed income he apps versus equities versus say commodities and other types of products and.
Where are you seeing the bigger opportunity. If you were to look at the market by.
Geographic region, but also by my strategy as well.
Yes, thanks, Thanks for that question.
EPS for us is pretty reflective of the overall market.
The breakdowns between equities fixed income.
I know were known as a fixed income platform, but in the chip space. We are broadly reflective of the underlying volumes in the marketplace splits between DTF.
Sorry, equities and fixed income so theres theres nothing there I do think you know the correlations that we see with the credit markets.
Obviously of particular interest to us the links into the portfolio trading that we've built.
That is kind of the evolution of the credit market.
Is particularly interesting to us because we're not.
In sort of meaningful player in the underlying equity instruments, but we are obviously corporate bonds in derivatives and all the other things that make up Bcf. So we see those connections as.
Kind of harbinger of future growth opportunity future connectivity, whether it's the clients that were bringing into our system.
That our liquidity providers or focus on MTF. Some linked into credit those are those are really interesting things to us but.
I answer your your first question, what's our split it's reflective of what's going on in the market between these fixed income each yes.
Okay, great. Thank you.
Our next question comes from Kenworth.
And with JP Morgan.
Hi, good morning.
Maybe we can talk a little bit about the tax guidance at 22%.
Those pre IPO post IPO youre really looking at a 26.4% tax rate and there's a pretty decent gap between 20 to 26. So I can talk about what's driving the change in tax outlook.
Is this more unique to 2020 or 22% something we can think about is the best guess as we look to further into the future.
Thanks, Hey has a great question I love talking about taxes. So it's it makes my morning fish.
Sure So making sure exactly there's really two primary things that are causing the change in a few other smaller things two primary things are as we spent a good amount of time. This last year looking at where revenue is sourced in how we and with the different jurisdictional tax rates are we determined there were some marginal tax rate.
Savings that we could.
Ingest into our tax calculations and that's about 50% of the change.
So that's a that's a major piece of it a lot of work associated with is pretty complicated but thats.
So basically jurisdictional marginal tax rate thing.
Another big piece of it is how one accounts for PR shoes, and I think that we call it for a windfall.
Benefit because it relates to.
When we book the expense or PR shoes, we book at for accounting purposes at the basically the value of the of equity at time of issuance of the Prs you were looking for tax purposes.
The point in time when it best in the value of equity at that time. So there is a much higher expense associated with tax purposes, and for accounting purposes, and as we sort of and.
Raveled all the different pieces of equity in particular Prs use have this particular impact and Thats a good part of the rest of it theres. Some R&D credits, we've done there's certain things related to guilty into the which I'm sure. You don't want me to talk about as foreign tax.
Benefits, but thats the major pieces of it we decided to change the rate because we believe this is a multi year impact.
Certainly goes to the next couple three years, so 2020 122.
We'll obviously update if we if we see a material change and as you know we tend to once we make these sherman this for the year. It's the rate that we plan to use for the year unless there is material change at some point, but that's the that's the story behind it.
Great well, thank you very much.
Our next question as a follow up question, Alex mostly with Goldman Sachs.
Hey, guys. Thanks, Thanks for the follow up real quick on on data, specifically refitted if looks like.
Quarterly number picked up there sequentially and I think going back to the FPL remember there was a new contract do you guys had in place with repetitive that kind of temporary raised how much you guys are well not temporarily but on a one off base I guess kind of rate how much you're making from that contract. So what sort of drove the increase in the quarter is a good run rate and how are you thinking.
The refitted revenues longer term.
Thanks, Alex.
Yeah look theres, there's I mean, let me just to take a little bit of a broader lens on data. We we think there's plenty of room or to use data to further drive execution and refinish live in particular allows us to redistribute data to our clients around the world.
Contractions repetitive should grow over time, we have delivery milestones we achieved them. We can continue to have growth. There. We don't feel at all restricted it's been a great partnership.
We had some nice growth as you saw in the fourth quarter.
We don't talk about.
What our expectations are for for revenue going forward. So I don't want to kind of weighed into that.
World of in the say data is a very important you know component of our business.
And for the markets in general as we all know.
With the.
Increase of Electronification.
And the way the trading desks are changing with data scientists Quants, we've got a real focus on how we can further monetize our data.
You know and.
Right now it's been about sort of how do we use the data to really drive more intelligent execution, but theres theres a number of different paths that we're investigating with respect to date up we're very excited about what we're doing Scott.
The AI price that we've we've built.
It's now being used in our sweet protocols and it's coming from retail sectors in certain sectors were working on.
A number of different closing price standards that are I Aasco compliant, we just did that would treasuries with.
I use we did and previously with let's see in guilds.
We have GCA. So data is a meaningful focus for us going forward and we think that there were affinity of deal that we have in place as incredibly complimentary to our overall strategy.
In data.
Great. Thanks very much.
Sure.
Our next question comes from Michael Carrier with Bank of America.
Hi, Thanks for taking my follow up just a quick one on capital management.
The tremendous cash bill despite your investment.
So any update you can give on your thoughts around the dividend and maybe some decent dialogue going forward on possibly increasing the dividend I guess over the long term.
The growth more tied to earnings or any other metric.
Hey.
I'll take that.
Thanks for the question it's.
This is as we kind of look at this as.
We obviously have year of IPO when we had some other cash uses we have the pre IPO dividend as we're heading to 2020, we are looking at.
Potential uses for cash would have central theme is delivering value back to shareholders and that's in a number of ways, obviously acquisitions, a potential increasing dividends potentially buybacks. So I'll go through all three of those quickly buybacks. We don't have any current plans to do it.
And we have not.
And if we change that obviously, we'll make that announcement.
On dividends, we've talked about sort of tracking that against.
How we're doing on cash flow and.
Obviously, the sources of cash flow and I think there we're going to walk a little slowly, but we're we're again, it's up to the board as to whether we increased or not and so because in the reason we walked will slowly is because we want to make sure that as ideas come up inside of our for was about possible thing we might want to look at externally that were not the.
We retain as much of the cash to do that particularly this year as well as well.
As we're examining those things and.
Thats really the story focus on value for shareholders and three ways, we do it and suddenly and organic growth is one of the things. We said, we'd look at and we're going to make sure we accumulate cash to support that.
At least through this.
Okay perfect. Thanks.
Our next question comes from Patrick US, obviously with Raymond James.
Hey, good morning, so for the entirety of 2019. Your commission revenue grew by 33%. While you transaction fee revenue grew by 14% can you expand the dynamics underline why commission revenue would have grown a fair amount faster than transaction revenue.
It's a bit of an accounting historical definition problem and that commission revenue isn't exactly in every case. What you think is commission revenues not for example, all related to our our.
Our wholesale voice business, which is I think we consider it normally.
It has to do is the way we.
Have collected revenue overtime in some of the other products, that's not directly and its looks more transactional so without going to the pretty detailed so that's really it's something which we may look to refine a little bit as this year goes on we needed to be consistent with past comparisons.
Our counting statements, which is what makes a little bit noisy less than.
10% of our total revenue is related to voice, which is where you would normally think commissions coming from and so we have some some models and our some of our electronic products that are commission like but not commission and they end up in that category.
That's helpful.
Got it thank you.
Our next question comes from Rich Repetto with Piper soon.
Yes, thanks for taking my follow up and I apologize. If this has been asked I've been jumping back and forth here, but on expenses Bob.
Actually I mean this has played out almost exactly as as you talked about as far as margin expansion being.
500 basis point margin expansion year to year, So I guess and you had a 78% incremental margin in the year. So this whole idea about revenue growth outpacing expense growth definitely played out. So my question is expenses grew 5% of 4.5% this year.
You get them going 8% next year.
And we're off to good start in volume, but I guess the question is was there anything peculiar why you accelerated the expense growth for next year. When you had an IPO yeah. This year and it only grew five.
Yes, I think and we identify some of the reasons for that.
There's a couple of things one in that number is the potential that we may have some overlap rent expense if we.
We are likely to move our offices in 2021, but as you know that sometimes require six or seven month lead up to the event and so there's some potential cost there only potential because we're negotiating food with different landlords about ways to not have to spend that money. This year. That's what we end up doing in terms of.
Being on a new space that time, and the new space has mostly do with when leases are up to that sort of thing for our New York office.
So that's one piece of it the second pieces.
We wanted we wanted to identify as new expense some of the additional expenses were doing on related to data in particular.
As Liam really both talked about how important data come to our execution business and so we've become focusing more and more how to sort of unleash more and more of our data for that purpose and yes offer that might come as a specific revenue opportunities as well, but that's really what focus has been a good part of there's about 5 million, that's mostly due to data in some due to.
Cyber and rest, but it's mostly due to expanding our capabilities in in effect farming are our large data pools.
Execution.
And so that's why we thought it was we are adding some expense its investment.
Towards execution, and we thought we should identified and be pretty specific obviously, a 3 million. That's identified may not actually happens when I look I would have what I was just add staff, which is pretty much Bob said, but I'll just reiterate it.
Our view is this a growth business, we have a lot of different opportunities in front of us around the world different asset classes to come products.
Et cetera, et cetera, and we're going to continue to invest in the business to seize those opportunities.
Are we going to continue to be focused on enhancing margin of course, we are right. We've got some softer in how our shareholders view our performance.
For the business, but first and foremost we think theres a lot of opportunity out there in a lot of potential for growth. So we're going to continue to invest and people dust regions investing businesses and mostly investing in innovation.
With respect to technology, which you know money right now the last thing I'll add to that is as we indicated we think at both ends of the range, we're still going to get margin expansion. So it's kind of done in the context of can we get margin expansion and invest and we said we believe weekend and we believe we can.
[music].
Got it thank you.
Thanks Rich.
I'm not showing any further questions. This time next on the call back over time.
Well, okay, great. Thank you all very much for joining us. This morning, we're really excited about obviously, what we got done last year and even more excited about where we have to look forward to in 2020. So thank you very much.
Ladies and gentlemen, does conclude todays presentation you may now disconnect and have a wonderful day.
Okay.