Q4 2020 Cboe Global Markets Inc Earnings Call
Good morning, and welcome to the Seaport Global markets Twenty-twenty fourth quarter financial results Conference call.
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After todays presentation, there will be enough with your last question.
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Please note today's event is being recorded on <unk>.
The conference over to Debbie Koopman Ms. Koopman. Please go ahead.
Thanks, Steve Good morning, and thank you for joining us for our fourth quarter earnings conference call on the call today, Ed Tilly, our chairman President and CEO will discuss our performance for the quarter and the year provide an update on our strategic initiatives then Brian Schell, our executive Vice President CFO and Treasurer will provide an overview of our financial results for the quarter.
On the full year as well as discuss our 2021 financial outlook. Following their comments, we will open the call to Q&A also joining us for Q&A will be our chief operating officer, Chris Isaacson, and our Chief Strategy Officer, John Theater. In addition, I would like to point out that this presentation will include the use of slides, we will be showing the slides and providing commentary on each line.
Downloadable copy of the slide presentation is available on the Investor Relations portion of our website during our remarks, we'll make some forward looking statements, which represent our current judgment on what the future may hold on while we believe these judgments are reasonable. These forward looking statements are not guarantees of future performance and involve certain assumptions risks and uncertainties actual.
On outcomes and results may differ materially from what is expressed or implied in any forward looking statements. Please refer to our filings with the SEC for a full discussion of the factors that may affect any forward looking statements. We undertake no obligation to publicly update any forward looking statements, whether as a result of new information future events or otherwise after this conference call.
During the course of the call. This morning, we will be referring to non-GAAP measures as defined and reconciled in our earnings materials now I'd like to turn the call over to Ed.
Thank you Debbie.
Good morning, and thank you for joining us today I Hope 2021 is off to a great start for everyone and you are keeping safe and well as we continue to navigate this pandemic.
I'm pleased to report that she BOE posted solid fourth quarter and record full year results highlighting the strength and diversification of our global business for the year. We grew net revenue by 10% and adjusted earnings per share by 11% Despite an unprecedented on.
Macro environment that for much of the year did not favorite index trading.
Our results were driven by record trading volumes in the U S cash equities and multi list options fueled by strong retail trading growth in recurring non transactional revenues and increased efficiency enabled by our fully integrated superior technology.
Importantly, while achieving strong growth, we continue to successfully execute key growth initiatives to advance our strategy to leverage product innovation and superior technology expand our customer base and diversify our business mix with recurring revenue.
We also maintained our commitment to operational excellence in 2020, as evidenced by the continuity and resiliency of our markets. Despite the year's unrelenting challenges our ability to provide reliable and continuous markets in that environment, while continuing to execute key strategic initiatives and post strong growth is a testament to the.
<unk> and expertise of our entire global team.
Additionally, our record results and strong cash flow generation enabled us to return $520 million to shareholders in 2020, a new all time high and a 69% increase compared to 2019.
Our commitment to returning capital to shareholders will continue in 'twenty 'twenty, one and beyond reinforced by today's announcement regarding the board's authorization of additional share buyback capacity.
Turning to our targets and expectations for this year, we plan to leverage the deals we closed in 2020 to accelerate organic growth in 2021.
Brian will do a deeper dive on this but we plan to invest approximately $25 million on organic growth initiatives in 2021, which we expect to contribute towards incremental top line compounded average organic growth target of 4% to 6% over the midterm.
I've used as you've seen since our IPO. We have also allocated capital inorganically to help accelerate our strategy, while returning capital to shareholders over.
Over the past four years, we have delivered 5% compound annual net revenue growth, while growing adjusted EPS by 19% on a pro forma basis, which reflects the strength of our strategy and our ability to perform in the most challenging cycles. The success of our ongoing diversification reinforces our confidence in continued growth.
Additionally, while we're only five weeks into the new year, we are beginning to see institutional investors engaged and trading our index options and volatility products in January month over month volume increased by 77% and VIX futures, 68% and VIX options and 15% in SPX options.
As we've noted on previous calls we expected to see Reengagement and these products. Once there was more clarity around the political and pandemic uncertainty that clouded investors views on where the market was headed.
Although much uncertainty remains around the COVID-19 pandemic. The vaccine rollout has begun the new U S administration is in place and the Brexit deal has been executed. We believe we will continue to see increased trading on our index products as the uncertainty of these and other previous market on knowns come into focus.
Additionally, in response to customer demand similar to the ex futures, we are planning to extend the 24 or five trading model to VIX and SPX options in the fourth quarter of this year subject to regulatory review.
Over 15% of trading in VIX futures, which already trade 24 fives took place in non U S trading hours last year up from 13% in 2019 naturally we believe 24 or five trading in VIX and SPX options will result in increased trading outside of U S hours as well.
We began the year with a considerable amount of momentum from the strategic progress made in 2020.
We are excited about both the near and long term opportunities to grow and expand our business driven in part by increases in proprietary product trading recurring revenue and retail engagement, while continuing to invest in long term growth.
Our ongoing strategy, which has reinforced the value of our unique platform and fueled our strong year over year growth remains consistent.
Further strengthen our core proprietary products leverage our superior technology increase the recurring revenue broaden our geographic footprint and expand our product line by asset class.
We are exciting initiatives underway within each of these strategic pillars, but today I'd like to focus on for incremental growth drivers.
The opportunities to grow non transaction revenue through <unk> information solutions, our plans to launch CBOE Europe derivatives.
Expand bids trading and grow our retail trading base.
We're excited we're excited about our prospects to further increase recurring revenue to expanding and enhancing see bow information solutions, our comprehensive suite of data solutions analytics and indices.
These products generate recurring revenue by providing market participants with value added trading resources and support transactional growth on our proprietary products with tools that draw users to our markets and drive volume as they reestablished trading positions.
As discussed on previous calls last year's expansion of our information solutions offering through key acquisitions accelerate our ability to grow our recurring non transaction revenue.
In 2020, we reported 12% growth in recurring non transactional revenue and 9% organic growth and we expect to see incremental sustainable long term growth as we continue to optimize these integrations in 'twenty and 'twenty one.
Importantly, our expansion of information solutions now allows us to interact with and add value to market participants at every step of the trade process. We are looking to enhance these customer support opportunities in 2021 with additional portfolio on risk analytics offered through various delivery mechanisms, including C. Both silex ARPA.
Terry or execution management system and through our Apis.
Additionally, we plan to expand our market intelligence analytics and alerts to many market segments, including retail traders. We also plan to expand our global indices platform, which provides index calculation development and services with real time distribution channels.
Finally, we expect to further expand our offering of unique historical datasets and they had high demand datasets like crypto currencies to the information solutions data suite.
Turning now to the upcoming planned to launch of CBOE Europe derivatives I'm pleased to say we are on track to launch in the second quarter of this year pending regulatory approval, bringing to fruition our vision to unlock the potential we see for considerable growth in this market.
Our highly successful European equities business global derivatives expertise and ownership of Euro CCP uniquely position us to simplify and bring new efficiencies to pan European derivatives trading and clearing.
We've worked closely with market participants and shaping our plans and have received very positive customer feedback and support during.
During the fourth quarter, we made strong progress on the technical Buildout of the exchange and clearing platform and toward achieving the necessary regulatory approvals.
Customer testing and optimization is ongoing and we have commitments from clearing firms order flow providers and market makers to be there on day one.
As we've said before we think this market is ripe for significant structural growth, we are not aiming simply to take market share from incumbent exchanges, we intend to shape and growth overall derivatives trading in Europe with a novel market structure designed to attract both new and existing participants.
While our revenue expectations for European derivatives in 'twenty 'twenty, one on modest we are investing for long term growth and looking for a gradual revenue build as we gain traction and expand our product offering to realize what we view as a paradigm shift in European derivatives trading.
Our new Amsterdam exchange, which we launched in 2019 that in advance of Brexit will serve as home toward derivatives business in the region.
I'll note here that the flawless implementation of our Brexit strategy enabled us to seamlessly transition trading from our UK venue to Amsterdam at the start of the year.
Also as a result of Brexit, we were excited to welcome back trading of Swiss shares on our UK venue yesterday.
We are working with customers to reestablish our market share in Swiss equities trading, which was approximately 8% of see Bose notional value traded in June 2019, when Swiss trading was last available on our market.
Turning now to our acquisition of bids trading, which we completed at the end of the fourth quarter. We're pleased to welcome Tim Mahoney to the team on M. A C. Both family.
We have a successful track record of working with bids, which powers Siebel L. I S. One of the largest block trading platforms in Europe, while bids will continue to operate as an independently managed venue. The acquisition helps us to expand bids block trading capabilities and services to other products and geographies, including Canada as we look to further.
Spanned our presence in North American Equity's.
We are well underway with our integration on match now the Canadian a T. S. We acquired last year and the bids acquisition provides additional features that we believe will help us disrupt the electronic block market in Canada and other markets in the future.
<unk> has an extensive global network of more than 460 buy side investment managers and sell side constituents, which differentiates the platform and provides a strong foundation from which to expand into new markets.
But it's also provides us with a foothold in the off exchange segment of the U S equity market, which now accounts for over 45% of overall U S equities trading.
Moving on to retail trading we believe the resurgence of the retail investor we saw on 'twenty 'twenty is here to stay.
We are well equipped to deliver tailored products and services to meet the needs of these growing customer base and to evolve our education programs with retail centric content to empower these new investors.
Innovation remains a core focus of the <unk> franchise, we plan to continue to expand on our proprietary product offering with smaller contract sizes that appeal to both sophisticated retail traders and institutional investors.
This includes many VIX futures and mini SPX options, our recently announced many Russell 2000 index options as well as additional retail focused products in our pipeline, which we will extend our value add to a broader universe universe of investors.
Our strategy to nurture growth in these products, which is driven by a cross functional team focused and dedicated client services targets marketing initiatives and robust investor education is well underway.
<unk>, we continue to see increased retail trading in U S equities and record volume in our retail priority program, which helps improve execution quality and trading outcomes for individual investors and firms that facilitate their orders volume in retail priority orders represented over 31% of total volume on seaborne ejects the exchange reaching.
Record market share of seven 3% in the fourth quarter.
In January trading on their jokes set a new monthly average daily volume record as did retail priority orders, which were up 56% over December of 2020.
We're excited to see growing retail engagement in the marketplace and are well positioned to invest in and leverage our core strength product and market innovation technology strong customer relationships and investor education to support this growing user base.
We believe our investments in this area will benefit retail investors and create another sustainable long term growth opportunity for <unk> with that I'll turn it over to Brian to walk through our 2020 performance in 'twenty 'twenty, one outlook in greater detail and then provide some closing remarks.
Thanks, Pat and good morning, everyone I hope all of you on your families remain safe and healthy.
They remind everyone that unless specifically noted my comments relate to <unk> 'twenty as compared to <unk> 19, and are based on our non-GAAP adjusted results.
We reported solid financial results for the quarter.
Highlighting diversification of our revenue streams and the contributions from our investments and acquisitions reinforcing our strategic initiatives.
Our net revenue increased 10%.
With net transaction fees up 8% and revenue from our recurring non transaction revenue up 16%.
Operating expenses increased 17% adjusted.
Adjusted EBITDA of $206 million was up 4%.
And finally, our adjusted diluted earnings per share was $1 21 flat to last year.
Turning to the key drivers by segment, our press release and the appendix of our slide deck includes information detailing the key metrics for each of our business segments. So I'll just provide summary thoughts.
The growth in our options segment was driven by a continuation of strong trading in our multi listed options and higher revenue from prior Terry market data.
Somewhat by lower volumes in our proprietary products.
Revenue from North American Equity's decreased as a result of lower data.
From this debt, including a lower step audit recoveries.
Off exchange or Trs volume hit new highs again in the fourth quarter impacting on market share.
In futures the revenue decline was caused by lower trading volume in VIX futures.
The increase in European equities, primarily reflects the addition of CCP.
And FX increased ADR growth.
Growth higher transaction fees.
On growth in access and capacity fees contributed to higher non transactional revenue.
We're also proud to announce our market share surged to a new record high of 16, 7%.
Turning to expenses total adjusted operating expenses were about $112 million for the quarter up 17% against last year's fourth quarter, excluding the impact of acquisitions adjusted operating expenses were up 4% for the quarter and actually down 2% for the year.
Majority of the expense variance related to acquisitions was compensation and benefits.
Turning now to our 2021 guidance.
As Ed noted our plans for 2021 and beyond call for continued investments to drive long term sustainable growth on our business for 2021, our organic revenue target is a growth rate of 6% to 7% from a recurring non transactional revenue, which we defined as access capacity fees plus proprietary.
Market data fees.
Similar to prior years, we anticipate the majority of this growth to be driven by additional units versus pricing changes.
After incorporating our ISG acquisitions, we expect our reported our total growth rate for this category to be 7% to 8%.
In the aggregate, we expect the acquisitions closed in 2020 to contribute additional growth of 4% to 6% in 2021.
Longer to mid term.
We are targeting organic top line compounded average annual growth of 4% to 6%.
Given our growth plans on strategic opportunities, we are planning incremental investment of $24 million to $26 million in 2021, count increase that growth rate in the future, which I'll discuss further in a moment.
Moving to our expense guidance.
We expect adjusted operating expenses to be in a range of $531 million to $539 million versus $416 million in 2020.
The projected $115 million to $123 million year over year expense increase falls into three main categories.
<unk> thousand 20 normalization.
Core net.
On incremental investment.
First 2020 normalization.
Approximately $71 million or nearly 60% of the increase is due to incremental expenses from 2020 acquisitions or about $55 million.
Which will contribute to our long term growth profile and.
And non recurring savings in 2020 that we do not expect to repeat in 2021.
Non recurring savings realized in 2020 include a COVID-19 related savings fees.
Favorable accrual adjustments related to incentive compensation and facilities expenses and see delays in hiring which were also caused by disruptions related to COVID-19.
If you normalize our 2020 expenses for these items projected expense increases of approximately 10%.
Based on the current market outlook, we expect these costs will recur in 2022 and beyond.
As we demonstrated in 2020, we are able to optimize our cost to preserve our differentiated track record of margin expansion.
Second core expenses.
We expect these expenses to increase by approximately $14 million to $18 million or 3% to 4% growth.
This category includes our annual compensation adjustments incremental infrastructure cost and otherwise general price increases however should remain at a more locked down state for an extended period of time in 2021, we expect expense growth should be muted.
We expect to also incur incremental facility overlap costs of approximately $7 million to $8 million as we transition our Chicago headquarters and other office space.
Do not expect the majority of this cost to recur in 2022.
And finally incremental investment.
As Ed highlighted earlier in support of our strategy, we plan to invest approximately $24 million to $26 million in 2021 to drive incremental and sustainable long term organic revenue growth and high conviction high return opportunities.
This includes $9 million to $10 million for our previously announced European derivatives Buildout as well as investments aimed at supporting growth of index options and futures, including developing listing and distributing unique products.
And enhancing marketing education and content.
As well as our efforts to tap into the growing base of retail investors among other initiatives.
As we have demonstrated in the past we have the flexibility to adjust the magnitude of our overall expense through the year should market conditions for our transaction revenue weekend.
There are multiple levers with which we may adjust our investment levels to help realize the strong underlying margin profile of our business model.
As the year develops we will revisit how we are calibrating our investment to the current market reality to optimize both margin and long term growth potential.
Turning to our summary of full year guidance on the next slide we expect depreciation and amortization to be $38 million to $42 million.
For 2021 compared to $34 million in 2026 excludes amortization of intangibles of approximately $116 million.
Moving to income taxes, our effective tax rate on adjusted earnings for the quarter was 28, 6% above last years fourth quarter rate of 24, 7%.
Absent the higher tax rate earnings per share would have increased 6%, which reflects the impact of higher adjusted earnings net it against the incremental benefit of reducing our share count by nearly 3%.
Over the last 12 months.
Our full year 2021 tax rate on adjusted earnings is expected to be in the range of 27, five to 29, 5% versus 21 28, 1% in 2020.
Finally, we expect 2020 on capital spending to be in a range of $60 million to $65 million, reflecting expenditures for the buildout of.
A new trading floor and higher investments in technology and infrastructure support our acquisitions and other growth initiatives we.
We expect 2021 to be an above trend line capex year due to the various investments noted.
And over time, we expect Capex to return to a more normalized level of $40 to $45 million.
While we're not providing full year guidance on interest expense, we wanted to highlight that absent any additional borrowings enabling it changes the LIBOR our quarterly interest expense for the first quarter of 2021 is expected to be $12 million to $13 million, which is slightly lower than the <unk> 2020 numbers, which include incremental fees related to refinancing costs.
Moving to capital allocation.
Our priorities have not changed as we remain committed to investing in our growth strategy, while returning excess cash to shareholders through dividends and share repurchases as you heard from my recent acquisitions of <unk> and bids reflect conviction and our ability to deploy capital to enhance organic growth and strategic value over time leverage.
The robust technology at the core of our strong operating leverage profile.
From a capital return perspective, our record financial results in 2020, and cash flow generation enabled us to return the highest amount of cash to shareholders since becoming a public company.
We plan to continue being opportunistic with share repurchases as highlighted by this morning's announcement of up to an additional $200 million in buyback capacity, bringing our total availability to approximately $400 million as of the end of January 2021.
In December we completed a $500 million bond offering used to fund the bids acquisition.
Repay amounts outstanding on our revolving line of credit and a portion of amounts under our term loan as well as other general corporate purposes, our leverage ratio increased to one four times at December 31st.
From one one times at September 30, due to the higher debt outstanding.
We ended the year with adjusted cash of $210 million, reflecting in part higher balance associated with additional regulatory operating cash needs for Euro CCP now I'd like to turn it back over to Ed for some closing comments before we open it up to Q&A.
Thanks, Brian.
In closing we are extremely proud of the results we delivered last year and are optimistic about opportunities to leverage our.
Recent acquisitions to grow our business our operating results highlight the strength of our diversified business and our teams consistent execution of our strategy by further strengthening our core proprietary products leveraging our superior technology, increasing recurring revenue broadening our geographic footprint and expanding our product line by asset class.
Yes, we will be well positioned to achieve our mission to build one of the worlds largest global securities and derivatives trading networks.
The investments we plan to make this year are expected to contribute to our long term growth in 2022 and beyond we also plan to continue to exercise disciplined expense management and efficient allocation of capital to create long term shareholder value and believe we have the people technology and expertise to continue to find markets in a very powerful way.
<unk>.
Thanks, Ed.
With that we'd be happy to take questions. We ask that you. Please limit your questions to one per person to allow time to get to everyone feel.
Yeah on free to get back in the queue and if time permits we'll take a second question Keith.
Thank you I just mentioned we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Speaker phone please pick up your handset before pressing the keys to try your question. Please press Star then two.
Time, we will pause momentarily to assemble the roster.
And the first question comes from Rich Repetto with Piper Sandler.
Yeah. Good morning, Ed Good morning, Brian.
I guess my question is on the on the expenses and this is on slide 13, and thanks for the the Walker that breakout.
But I.
I guess Brian.
Two parts.
The $55 million in from M&A, how much of a revenue offset direct revenue because I know bids as you know probably in the forties in there and then youre, assuming that I guess the COVID-19 situation.
You don't have those savings.
Is there a way that you could sort of walk us through if you assumed debt.
We're in this lockdown semi locked down low to mid year, which probably seems more like what's happening right now anyway.
So anyway those are the two questions on it.
Sure. Thanks, Rich I would say that without getting specifically with each expense for each of the transactions from 2020.
Each each deal that we did I think we announced that they were accretive or neutral. So you would have an expectation and we gave a broad range of the revenue expectations across the.
The prior years of that 4% to 6% on <unk>.
Prior year. So I think that gives you a pretty good gauge of where we expect the revenue more than offset the expense adjustment to.
That we've noted here on just mentioned slide 13 for the $55 million. So.
In aggregate is going to be accretive as we noted previously on the debt.
$16 million I think as a rough framework.
And again it's.
Your guess is as good as mine and obviously, we've got to put a number out there that were kind of reflecting in our expense guide as far as 2021.
The three categories I kind of mentioned I would say high level, it's probably like a third a third a third a rare.
Relative to.
<unk>.
Continued savings for if there is continues to be some locked down and we really don't do anything during 'twenty, one as far as some of those incremental expenses debt that we have.
Some of that savings delay from the delayed hiring was probably a third of that and then the onetime statements was about a third.
Net debt, we won't get the benefits of that kind of gives you a framework referenced of.
Like I said with the COVID-19 related expenses, and how that might Inc, and expense impact expenses for 'twenty one.
Got it. Thank you go box go Brady.
Oh geez.
Yes.
Wow.
Thank you Andy on the next question comes on Ken Worthington with JP Morgan.
Hi, good morning, how are you.
Should we think about the level of additional investment spend embedded into 2021 guidance. So you called out $25 million as we get into 2022, what is truly one time.
And what part of that $25 million would be expected to continue or even increase in 2022 and beyond.
Thanks, Ken that's a really good question as we think about this and.
It's the first spend.
The build out and again I want to get too specific on some of this but.
I would say that going forward.
Versus 'twenty two.
Certainly a portion of that European derivatives, Buildout will sustain four enter into 'twenty. Two so I would say about could it be up to a quarter of that will not repeat as we go forward because there is incremental investment in the upfront mirrors some of that was in two.
And obviously youre seeing our protection for 'twenty, one as far as that build out as far as the key strategic growth initiatives.
And that will vary based on what we end up spending as far as how much of that is permanent and fixed versus on a go forward basis.
So I think that it's going to be and again, we'll provide more guidance on this as we move forward.
As we look at where the actual level of investment is.
Yes.
Again, it's Lee.
Looking that.
The total dollar amount again will be geared toward that longer term growth rate of the revenues on where we're seeing it projected so.
Again, it's a.
Our spend I want to remind everyone that to spend to really grow that top line revenue for the long term.
<unk>.
So.
The upfront investment spend as we as we said with derivatives as we've said before we will have to occur before the actual revenue show up in certainly in 'twenty, one with why we're planning so I would say stay tuned, but certainly a portion of that and I'm hesitant to give you a fix number right now.
<unk> will be variable and not occur in 'twenty two.
Okay. Okay. Thank you. Thank you very much.
Thank you and the next question comes from Dan Fannon with Jefferies.
Thanks. So my question is on kind of retail and some of the initiatives you're talking about in terms of the spend and then maybe what percentage of your business. Today do you think comes from retail and I guess also what makes you confident that the retail pick up is sustainable to make these levels of investments today.
Good day said, Julian let me start and invite Chris to jump in but with sustainable I think we've just seen an incredible demand that began last year. It continues.
It tends to be in single name options. So our education will be focused on the basics first.
Educate investors the one that's in day in day out year in year out and that's really what we will be targeting so the responsible miss the suitability what derivatives and how derivatives can change the risk profile for investors is really well, we'll be concentrating on and I think just even recent.
Lee we.
We had 730 participants.
Participants in our series of 'twenty, one for 'twenty, one, which is 21 invest in investment strategies for <unk> for 2021, it's an incredible amount of turn out on early on so we're engaging the continuation by the interest in education, we're committed to it so the investment we.
<unk> is for the long term.
Conversion from straight Delta one trading into derivatives is really where see boats effort will be most concentrated and then Chris maybe a little bit on the mix and what we see coming in on various products and how that's different across the uniqueness of our product set share.
Thanks, Ed and thanks for the question Dan So in <unk>.
Addition to our education efforts, which I had mentioned.
We're also also rolling out products, we rolled out in retail priority on our Ajax equities market.
As Ed mentioned in his script, we had a record volume there above 700 million shares on.
Retail priority is now three almost 3% on the entire U S equities market.
Because retail investors and those who are facilitating those orders are getting better quality execution. So that's in equities.
And then as we mentioned also during the script.
Rolling out products of more retail size with many VIX futures mini SPX, where access P. We just announced many right.
I have some other things we're thinking about it as well to appeal to this new retail investor base. This new wave of new generation of retail investors. So our goal is to empower and educate them on.
Our products across our asset classes.
Two to arm them with what they need to be very successful for the long term. That's why we believe this can be sustainable.
For years to come.
Great. Thank you.
Thank you and the next question comes from Alex Kramm with UBS.
Hey, good morning, everyone. Hopefully last question on the expense side and sorry, if I missed this in the prepared remarks, but the facilities costs are one of those kind of go away.
And so I guess, how long is the overlap and then secondarily you didn't talk about cost synergies on a its always the M&A number of $55 million in it.
Synergy number or are these deals really not cost synergy opportunities anyways, given that they're more bolt ons.
Thanks, Alex note you Werent sleeping so you'd think we didn't cover that explicitly so.
For the question as far as the overlap of.
Chesapeake the majority of that to go away.
Following into 'twenty, two as we transition the sites.
And on the.
The expense side as far as the ramp up goes on.
Almost well really those transactions, we're not a cost play those were.
I would say more.
Gaining new capabilities, and where we wanted to be in more on the revenue side. So we don't anticipate any.
Expense synergies there.
Makes sense. Thanks.
Alex I might just jump in on on the expense side. So as Brian said, there's these one on synergy places as we highlighted as Ed highlighted the especially information solutions is a great example of this where we really those are purchases that we made in order to grow to build what we believe is a world class information solutions platform.
And so this is about fueling growth not cost synergies.
Yeah understood. Thanks again.
Thank you and the next question comes from Ken Hill with loop capital.
Hi, good morning, everyone.
You touched on this in your prepared remarks, a little bit on I was hoping you could talk about the long term aspirations chemo has around crypto given you guys have had a product on the future side in the past the ETF side, it's been pretty challenging for everyone involved.
But overall this is an asset class on continues to grow on standing, it's becoming more important to institutional to retail.
So you touched a little bit on the agreement you have with quite math I think to provide indices data.
Environment, that's kind of murky, so I'd love your thoughts on what that tenant will involved and then kind of how you see that environment ecosystem more broadly growing overtime and what role <unk> plays there.
I Love the way you frame that the ecosystem is really what we were after when we launched albeit probably a bit early a few years ago, we too saw the potential in the interests and while not a huge asset class as <unk>.
Measured by a U M certainly by turnover in trade. So we know there's a great deal of interest from the trading community and growing interest as you point out institutionally for some exposure. So when I warm up like that you can tell that we are planning how to reenter this space very measured.
And cautiously but.
I could not describe it any better that the importance of the ecosystem, what we see by vibrant derivatives markets.
Cash settle markets retail accessible markets you mentioned etp's on Etfs, all very important for a successful exposure to crypto so.
In the planning stages, but we plan on re entering that market over time, and it's just a matter of US right now on prioritization, so stay tuned in development and want to get back into the space.
Okay understood, Thanks, and John just to just to follow up on that.
Line routes you touched on the coin routes partnership will start with transparent pricing and irregularly irregular weighted framework when we werent crypto earlier that was our approach.
We think that the ecosystem and crypto is that much further developed its rapidly developing space and so there's a reason we kind of started on the on the pricing side as we believe that plays into ultimately any product that we would look to look to launch its critically important that we have.
Transparent pricing framework for folks to understand the value of those assets.
Got it thanks, Tom Thanks, Ed.
Thank you and the next question comes from Mike Carrier with Bank of America.
Good morning, and thanks for taking the question.
The mid term outlook for organic revenue growth of 46% on is that total revenue growth and then if so can you just provide a bit of perspective on how that breaks down on the non transaction side versus the transaction day and in areas, where you are more confident on the transaction price.
Yeah, I'll start with that thanks for that.
Question, how should we think about that.
We know that personal share off with dean that medium term target.
And it's not obviously on next year guide, because we know that sometimes there's unpredictability in transaction revenue quarter over quarter or even.
A few quarters over time and so that's why we want to make sure people understood are.
Our view over a call it a medium term and also it's incredibly consistent with works on what we've achieved over the last four years as Ed kind of reference to earlier.
I would say that we know it's going to be a combination we already laid out the non transaction revenue growth expectation.
As far as our proprietary products.
The excuse me the proprietary market data and access capacity fees.
How we laid that out on.
Obviously, you have for US you have the the ship they take plans, which is at best probably flat.
And then you have the remainder being made up on.
On the transaction revenue side again that has over time versus any one period of time. So that's I think hey, if you look at the primary drivers on how that looks and what we've achieved.
But again, it's we're looking to as you can just see the math and you do the numbers is that look there's going to be more recurring revenue as we continue to build that youre seeing a more diversified revenue base.
And frankly, it's just a it's a higher conviction that over time.
That we're building that sustainable revenue and Thats, how thats growing and youre going to have the impact of.
On the acquisitions that we talked about which again is not in that organic number but as that rolls into that number over time again, we feel good about how that continues to grow as well.
Alright makes sense. Thanks.
Thank you and the next question comes from Ari Ghosh with credit Suisse.
Hey, good morning, everyone.
Given that the outlook looks a little more favorable for your profit stream could you talk about certain segments within the institutional customer base that remain pressure and that had been slower to engage and I guess related to that you know given the strength and expansion of your Iot footprint on all the opportunities to leverage this maybe cross sell.
Some of the Underpenetrated customer.
Asset managers pension funds.
You've had a lot of educational efforts and are.
They typically had modest exposure do you have a bold management product line.
Thanks, Gary Great question I'll start with the first and then invite John and Chris on the ISG in particular, there's a profit.
<unk> segment I think if you just take a half a step back.
And what we discussed primarily for the.
Three quarters of last year after the huge volumes.
Volumes and volatility spiked in the first quarter was institutions told us that they are on the sidelines, there's too much uncertainty out there right. If you think about this pandemic just being defined U S elections on the map on uncertainty there led to a runoff election, Brexit coming going closing not closing.
And told US once some of those uncertainties were past that there'd be reengagement that there needs to be and there's a demand for exposure in both broadly in the U S market and that's what we're seeing in January so just basically feeding back directly.
From those institutional users in their plans and moving forward and we're seeing that engagement. So that's really not surprising to us stress.
Stressed I think maybe your word probably a little bit.
Too much of a reach I think we're seeing more broadly in.
Interest in short term moves in volatility a lot of that led by the volatility and single names.
<unk> volatility overall and then if we look at VIX options, we see interest in buying puts when people realize our investors realize gosh that spike don't think that's sustainable we saw that last week and we saw put buying insurer enough.
Investors in this cycle tended to be right. So we've seen engagement across now a variety of macro.
Trading cycles, and I like it the engagement is up and down on.
Institute, our proprietary products led by institutions re engagement. So I don't think I'd call any segment out on not re engaging maybe some slower than others, but it's engagement each and every day and we like to see what were seeing in January loved to see that continue Chris and John maybe on the ISG question.
Yes, just as we think about engaging with customers not just institutions, but customers in general.
She just fits so nicely with our prop products, because usually starts with data and we have unique datasets to give them.
And then once they have data and they have proved out whatever model they might be looking at our investing strategy then they need access to.
We've invested a lot in silex and other tools and then they need to manage risk once they get positions on and we have what we think is a complete risk management suite for for them to manage position. So.
You get data access and then managing your portfolio with risks and we feel like you have a full suite for them to really engage and use our products.
They're very efficient and effective manner, and I'll end with offering unique products and an example would be flex there for instance, which is getting a broad use for target outcome investing.
Thank you.
That's an example of us using our products and our tools software product.
Appeals to certain customers, where they're looking for specific outcomes.
And really leading and inventing that space.
Alright ill jump in as well. This is John I think on the ISG question really to Chris's point, when we when we think about them and it's not just the ISG acquisitions, but when we think about M&A, we think very deeply about how.
The asset fits into the.
The machinery of a broader network and in this case really there's a tight fit with those acquisitions because what they do is they drive the decision making process.
For.
Largely institutional investors on that side. This is a long term trend it's not a it's not a one year trend on a two year trend we're in the middle phases I'd say on.
Of institutions automating their decision, making processes, especially from complex instruments like those that drive on our proprietary product revenues and so automating things like the pricing evaluation process risk mitigation on margin processes, we're giving tools two inch.
Institutions to allow them to two to automate their processes and engage more deeply in our product set. So so we see a lot of long term potential and remember we're doing this.
All the while while we extract.
Revenues, because there's value in the product itself. So not only are people trading more.
As a result of the ISG products, but the ISG products themselves have value and they are contributing to our growing base of recurring revenues.
I appreciate all the color thanks al.
Thank you and the next question comes from Alex <unk> with Goldman Sachs.
Great Hey, good morning, everybody.
Was hoping we could spend a minute on your capital priorities as you think about 'twenty, one I know, Brian each had kind of broader strokes nothing has really changed but you guys. Obviously been pretty active on the on the M&A front in the last couple of years.
Leverage came up a little bit as well, so maybe help us kind of walk through the use of free cash flow over the next sort of 12 months between deleveraging recharged.
We charge shareholders and anything else on the M&A front.
Yeah. Thanks, Good question again, just reiterating that.
The strength of the cash flows that we generate and will continue to deploy those which again with the approach of achieving net long term.
Shareholder value growth.
I think what you have seen is that conversion deploy the capital to enhance the growth.
Global network standpoint from a products from an access organically inorganically again trying to make sure we're leveraging our infrastructure to grow for the long term.
<unk>.
Part of the keeping that balance sheet I'll call it.
Low leverage.
Is that if theres something that that does become attractive is it that makes sense, we want to make sure we could potentially deploy that capital, but absent that again, the prioritization really hasnt changed its the continuing dialogue again, we have with the board we have the management team you see it reflected in the share repurchase increase with the growing with the confidence and outlook for the stock is.
Growing the.
The repurchase authorization, but again the prioritization of.
Look it's we're going to focus on organic initiatives as we've talked about the focus of the call today on our guidance going forward. We always continue to have a commitment to that an annual dividend increase.
We again and then with the share repurchase as I mentioned, we will continue to look for that to be on.
Opportunistic.
And depending on where all those rank or excuse me, where that last one the share repurchase and Delevering I personally don't see as much value and delevering.
Today versus.
Say for example, absent anything else continuing to return cash to shareholders.
So de levering.
From where we are today is not I would say a big focus of that capital deployment great.
Great. Thanks very much.
Thank you and the next question comes from Brian Bedell with Deutsche Bank.
Oh, Great Hey, good morning folks. Thanks for taking my question, maybe one just a tie expenses and revenue.
Together, so just quickly on the expense outlook as debt are you considering the January.
On trends are in in the expense forecast.
The flavor of kind of the volume outlook.
Do you have for 'twenty, one, but then on the strategic growth initiatives.
Brian, but what's the thought on the payback on timing of revenue gain.
Gaining revenue attributable to those expenses and if you can also talk about the European derivatives.
Effort in terms of when do you think you have positive revenue thereafter.
After obviously market maker payment.
Sure. Thanks, I'm not sure I understood. The first part of your question about <unk>.
Okay.
It depends on the volume.
The 531 to $5 39 expense guide are you.
And essentially a strong burner burner volume environment that we're seeing here in January given that you know you were calling for retail trading to be an institutional investors to come back in the market and.
I get the view was that this would be a sort of.
You know more sustainable revenue trading environment.
Okay. So if I think I understand that I was I will say that.
January and on already flipped with my response doesn't make a year so.
That has been strong volumes.
And so it does.
Certainly play into how we thought about the year on what can be achieved so having that as a backdrop, we're not using january to inform our entire year on what we're doing but there is obviously some trends that we're seeing continue on as Ed talked about as the rest of the team has talked about from the institutional activity from the retail activity on a go forward basis and the various products in there.
Various asset classes.
As far as the investment spend outlook and.
Where do we expect to see the return how long and that will vary by each.
As we've talked about it and Ed mentioned the.
Worthy investment priorities were with respect to non transaction revenue growth European derivatives build out.
The beds expansion.
On the retail the 24 by five extended trading hours all of those things are coming more or less online as we've talked about.
In <unk>.
2020, and more on the latter half of 2020 and and we said these are investments in 'twenty four eight excuse me in 'twenty one for a 22.
Kind of more significant growth contribution for revenue so.
I cant go right now and say, it's going to happen in this quarter other than.
There is a possibility that yes, we're going to expect to see some revenues in 'twenty, one but again its later in the year.
But the real expectation that debt I think our investment committee should have is that it's a 22 revenue growth delivery and again, what we're looking to make sure that we're delivering on is at the end of the day, we're trying to have a secular growth of the business and again, we see the increasing need for the data and analytics a need for better.
Access and addressing that demand with a new product new geography, which again is represented by four.
Kind of areas that we're prioritizing so that's a long winded way of saying I'm not going to give you revenue guidance.
As far as 21.
And that we expect to start seeing that in 'twenty, two and beyond and obviously.
And this is true probably with most firms we see a really really large ROI on organic activities debt that especially if we can leverage the existing infrastructure.
And you can leverage the existing network that we have today and really meeting a demand and excess capacity that we see.
Really high ROI and Thats again, Thats, a two to three year look.
And again Thats helps contribute to that medium to long term growth rate that we talked about upfront.
So let me let me see if I can just summarize it a bit what we see happening in January as predicted as re engagement at the institutional level that it's eliminating last quarter's headwind when institutions were on the sideline waiting for uncertainty to pass.
Separate and apart from the investment, we're making for the future and Brian laid them out I think 25.
The extension of bids our continued investment in ISG and obviously, our mid year launch of European derivatives, all in Q and ready.
To make an impact for us in 2022 wouldn't be on that's the way we're looking at it.
That's great color. Thank you so much Brian.
I just also want to hit European derivatives, we're super excited about this.
And it just bears out the statistics in 2020, we're up 50% of the U S market in terms of European <unk>.
The European market is flat to down.
On equity derivatives.
It just highlights the opportunity to grow the pie there, it's going to be a build but.
It's a super exciting thing for us.
And that's starting in later on.
Revenue perspective later in 'twenty, one I think is what you intimated in the first part of the comments.
Yeah correct.
That's right so launch mid year, a steady buildup.
Into the back end of the year.
Okay, great. Thank you.
Thank you and the next question comes from Chris Harris with Wells Fargo.
Great. Thanks.
Can you guys.
Share your view on what a change in the SEC leadership might mean for the industry and CBOE specifically.
Let me, let me start with more broadly.
The FCC and the long term view and relationship we've had I would sum it up as an incredibly healthy tension where both the SEC and simo put the investor retail Investor first and foremost in our thinking as in our day to day, it's on our operations, it's in new product.
<unk>, it's an order handling it's on all our comment letters, we both had been aligned with trying.
To do what is best for our market structure wise, the investing public I think that will continue our expectation of the new chair is he's putting together his team.
We'll be a very healthy.
<unk> relationship with his frontline the listed exchanges.
Or where price discovery happens.
I'm I'm I'm sure, there's chairman and his team will.
We'll understand that and I'm looking forward to just some incredibly healthy dialogue, so very optimistic going into the change Chris operationally I think.
I hope continues as the engagement we've seen in the SEC, primarily this year about the.
Let exchanges and how what an incredible role they played in maintaining.
Stability in the most uncertain times I hope that continues I think it will but Chris I think the amount of time the team at the SEC has spent with us and regular calls updates on communication is a model for the future, but a couple of words from you I think operationally is important yes.
Chris So we've had great dialogue continued great dialogue with the Commission staff, we look forward to continuing on working with them. Obviously in January we saw record volumes and across many asset classes U S equities U S options just.
Incredible volume really and really the.
The market structure worked as designed and I think we will see the FCC focused on Investor protection on Investor Education, which very much aligns with what our goals are as well, which is investor education empowerment, and making sure the market structure serving.
The investor investing public well on that's really lit markets at the center on it.
And those markets.
And Ccp's et cetera.
They showed very well in January despite some kind of unprecedented events.
Okay. Thank you.
Thank you and the next question Mr. Owen Lau with Oppenheimer.
Good morning. Thank you for taking my question. So a quick one from me on Slide 14, your organic growth for recurring non transaction revenue was 9% in 2020.
What are the factors that make you to guide only 262, 7% in 2021.
So are you being conservative or they are like any reasons, you want to call out debt, which slowed down to growth. Thank you.
No I would say that.
We actually.
Still pretty.
Pleased with the kind of that mid to high single digit growth rate.
We.
As that base gets larger as you note.
There were some.
We continue to look at our penetration is where the opportunity is obviously coming out of the gate. We look at our pipeline, we look at where we are.
We are going to be conservative, where we are but we're still pretty pleased with that growth rate. We still think theres opportunity. We still look at where we are from a geographic standpoint as far as where are we seeing growth coming across the asset classes, where they are coming across from the U S.
EMEA, APAC and where it's generating those growth targets you've heard.
Ed and Chris and John talked about ISG.
ISG opportunities that are out there.
From the index services from the historical datasets to the new data and analytics services and expanding the customer base. So again, we actually like that growth rate.
And some of that is a normalization from the growth rate from where we were from the prior year with some of the acquisitions, but but overall.
I think it reflects a very a very good expectation for a go forward basis.
Alright, Thank you very much.
Thank you and the next question comes from Kyle Voigt with K B W.
Hi, good morning.
Can I just follow up on the prior FCC question.
Market data market data infrastructure reform is passed in December.
Obviously, there was a really long road to potential implementation, but how should investors be thinking about your sip fees on your competing consolidator model or maybe your profit data revenues, if theres more depth of bulk conventionally.
Yes.
Chris Thanks.
I'll jump in on that.
So we've made our views on.
Both the governance the government's proposal on order as well as in the infrastructure rule pretty clear on all of our comments layers on free to those.
We are broadly have broadly been supportive of increasing the quality of the content on the ships and over the years have been very supportive of it.
Improving the technology as well, so, but we do we do defer on certain points with the SEC on both the governance on infrastructure proposals. So we think there is opportunity for.
The ships to continue as they are.
With some enhancements as well as our proprietary market data and continue to be valuable for those who decide to purchase it.
We don't we don't see them as mutually exclusive and we see them as complementary.
Yeah.
Yeah.
Thank you and the next question comes on Chris Allen with Compass point.
Hey, good morning, guys.
Wanted to ask about the.
The impact from acquisitions next year quarter to 6% I think equates to about.
$50 million to $75 million on incremental revenues I'm, just wondering what was the revenue generation. So far this year and what are the different components I think.
I think bids trailing 12 month revenues were running about $42 million as of June.
And then Youre a clear second half of this year is about $14 million is $20 million annualized Canadian equities. Another seven 5 million on annualized basis. So just wondering like what are the different components of getting numbers, a little bit higher than what your guidance implies.
I'm sorry, Chris was your a number I'm sorry. Your question was specifically around 20 or.
Sure.
Yes.
The revenue what's the revenue what was the revenue contribution deals in 2020, and then what's baked into the expectation for the 2021 impact which is about $50 million to $75 million.
Because bids.
Bids impact and then the run rates of the current deals that we can see.
Pause about $77 5 million and that doesn't assume any impact from the the derivatives rollout in Europe or any growth.
Well right the derivatives rolling to correct. The drone is rollout is purely was more on the expense as we wrote that off as far as the excuse me as we rolled that into the overall.
Expense guidance.
I think the 4% to 6%.
Right for going forward.
I think that's more of a math question. So I think I'm not sure what additional color I can provide there as far as what that looks like.
And then as you look at the 2020 numbers I don't know if I have the total dollar amount in front of me as far as.
<unk>.
The specific 2020 contribution I can certainly get that to you just don't have that number all aggregated.
From each of those individual I'll, just say that the run rate on a go forward basis again is we feel good about that 4% to 6% range.
And with all the announcements that we've had around including the bids numbers that we gave you, but we can certainly follow up on the specific detailed thats included in the.
And the 2020.
Got it okay. Thanks.
Thank you.
On the next question as a follow up from Alex Kramm with UBS.
Yeah, Hey, Thanks, sorry, just a couple of quick follow ups to end the call here.
As a housekeeping questions coming back to the Euro CCP.
Can you just flesh out what happened there sequentially.
In terms of the revenues I think they were down.
On a quarter over quarter decent amount, but but cleared volume was up but you don't provide a lot of revenue capture metrics. There. So anything you can help so we model that stuff better and then speaking of bids.
Again as it comes in now.
Can you just help us through the geography of the.
In in your on your income statement on rather than your segments. I mean, these there's a U S and the Europe business Youre going to break this up on where should we be including this for the time being.
Yes.
Yeah.
So the.
20.
For the debt is going to roll up into North American Equity's is where we're going to see that.
And we will provide.
As much.
Kind of color as we can around the metrics there so look for that on a go forward basis.
Our volume release on.
The overall.
Euro CCP revenue.
And the volumes.
On the revenue we were up.
We saw a little bit as youll see with the capture and and over time, we'll provide more and more color as far as some of the what the capture and the metrics that go there.
But anytime we see with some of the volume increases you're going to see a little bit of mix shift within the fee schedule with respect to tears types of clearing types of settlements.
Overall, we're actually pleased with the <unk> growth rate.
The <unk> actually had a little bit of a lift because of our liquidity credit that we're able to take advantage of an <unk>, but from a pure I'll call from a transaction basis, we actually had a nice lift overall in revenue.
Okay. Thank you.
Thank you and last question is a follow up from rich Repetto with Piper Sandler.
Yes. Good morning, again first I just wanted to stay on as little unconscious.
I didn't make the connection between bats in Kansas City, but I didn't mean to send.
Right.
[laughter] trying to forgive you rich.
Okay, but I didn't really have a follow up question is on.
There's been a number of questions on the retail front.
Frenzy that debt, we've seen in trading in and all the issues around it but I guess I wanted to ask you Chris.
What do you see as potential solutions.
To it.
Yes.
On all of it you can do or the FCC or or anybody else.
Rich I don't do you need a solution.
A good way to put it I think I don't know I don't know that I'd categorize as solution.
<unk> see.
Education.
What is the hunger why why what is the motivating factor on some of these investment decisions what is the duration. What's the goal I think my reference to investing in retail is understanding the exposure that retail is looking for understanding the strategies and being able to bring to market contracts and exposures that R. R.
Directly focused on what the retail investor up today is looking for which is different perhaps than the retail investor of yesterday. So for us as I've said, we continue to say rich and I love. The question because it's a great way to wrap this up we can solve everything with education and transparency we've truly can.
And our options Institute is armed and ready to engage with new retail our research and development team are engaged with them. We teased that we're looking at contracts to bring to the market.
Address the needs of the new retail investor that's what we're gonna be focused on I don't think theres, a fixing that needs to be done out there, but education certainly does.
Provide for a day in day out year on year out investor Who's engaged trading suitable contracts.
And ones that we will help them with the basics and as I say sophisticated strategies will then follow.
Okay. Okay. Thank you very much go Brady.
[laughter]. Thank you on the next question is a fall from Colin White with K B W.
Hey, Thanks for taking my follow up.
Just a modeling question on the on other revenues of $13 9 million was that increase related to year on CCD trade reporting or something else and then just wondering how sustainable that level loans.
So that's going to be a collection of any number of things. It does have a little bit of the CCP items in it it's going to.
And that's one where you don't we don't always have as much visibility to but it's going to be a collection of matters and.
I would say what we do on I'll be honest with from a modeling standpoint, we kind of look at the aggregate and see where the ebbs and flows have been over prior periods in a row forward basis. Its just not a material item net debt, we look at but there is a slightly higher contribution from euro CCP.
Okay. Thank you.
Thank you and that does conclude the question and answer session. So I'd like to return to Florida, Debbie Koopman for any closing comments.
Thank you.
Based on our call. This morning, we appreciate your time and continued interest in our company I'll be available for any follow ups. Thank you. Thank you. The conference has now concluded. Thank you for attending today's presentation.
On your lines.
Okay.
Yeah.