Q1 2021 TMX Group Ltd Earnings Call
Revenue from Sirius was up a 11% in Q1, 'twenty, one reflecting higher clearing and settlement revenue due to higher volumes increased depositor fee revenue as well as higher international revenues.
Net revenue in our GSA segment was up 7% over Q1, 'twenty with increases from both trade port and our traditional data.
The business.
Revenue from trade Port was up 11% in Canadian dollars and up 9% in Sterling.
The increase reflected of 5% increase in total subscribers increased sales of the traditional products and higher enterprise license renewals in Q1, 'twenty, one compared with the prior year.
Revenue in our traditional data businesses.
<unk> of 3% driven by an increase in both professional and nonprofessional subscribers, you should space quotes benchmarks and indices as well as co location.
The average number of professional market data subscriptions for <unk> products was up 3% in Q1, 'twenty, one compared with last year and an image subsidy of about 2%.
The higher revenue was partially offset by an unfavorable impact of approximately $1 4 million from the stronger Canadian dollar relative to the U S dollar over Q1 'twenty.
Now the illustrating in revenue.
The trick is trading and clearing revenues declined by 7% from Q1 'twenty to Q1 'twenty one.
While volumes in the mix were up 2% compared to last year. There was lower revenue per contract attributable to an unfavorable product mix. In addition, there was a decrease of approximately 90 per K in revenue related to our agreement to revise transitional services to box, which ended in June of 2020.
The operating expenses in the quarter increased by 9% compared to Q1 last year.
The increase reflected higher costs related to our short term employee performance incentive plan and sales commissions of approximately $5 1 million increased severance costs of approximately $1 2 million.
Your head count and payroll costs and increased software licenses and it costs.
The increases were somewhat offset by a decline in the long term employee performance incentive plan costs, lower travel entertainment expenses legal fees and marketing costs.
Sequentially revenue was up $32 $5 million of 15% with Q4 'twenty attributable to increases in revenue across all of our operating segments.
Operating expenses were up five 9 million of 5% from Q4, 'twenty, reflecting increased payroll taxes of $3 8 million.
The increase of pension expenses of $2 9 million higher head count higher short term and long term employee performance incentive costs.
And higher sales commissions.
These increases were partially offset by lower severance costs of $2 $8 million. The write off of discontinued initiatives in Q4, 'twenty and lower <unk> costs in Q1 'twenty one.
In February we financed $250 million of debentures at about 2% due February 2031.
A portion of the proceeds from the series of debentures was used to repay $116 million of our commercial paper.
We also renewed our normal course issuer bid program in February of allowing us to purchase up to 500000 shares or approximately 1% of the common shares outstanding.
The March four 2021 and March three 2022.
In Q1, 'twenty, one we spent $28 9 million repurchasing 226600 of our common shares under our <unk> program.
With the increase in our debt from the series of debentures are debt to EBITDA bridge.
Our debt to EBITDA or debt to adjusted EBITDA ratio was one nine times as of March 31 of from one eight times at the end of 2020.
We also held about $381 million of cash and marketable securities at the end of the quarter.
Which was about $260 million in excess of the $175 million, we target to retain for regulatory and credit facility purposes.
Yesterday evening, our board approved a 10% increase in the quarterly dividend from <unk> 70 to 77 per common share.
<unk> on June 11th to shareholders of record of May 28, which is our fourth increase in the dividend over the past three years at 41% of our adjusted EPS. This is consistent with our target payout ratio of 40% to 50% of.
And now I would like to turn the call back over to Paul.
Thanks, Gregg operator could you. Please outline the process for the question and answer session.
As a reminder, if you would like to ask the question. Please press Star then the number one on your telephone keypad and if you would like to withdraw your question press the pound key.
Cost per test the moment the compile the Q&A roster.
Your first question comes from the line of a Joffe Kwan with RBC capital markets. Your line is now open. The you may ask your question.
Hi, good morning.
My first question was the $5 million sales Commission expense that was booked in the quarter I'm, just trying to understand which part of the business was that getting driven from just hasnt been a line item.
Okay.
It kind of gets flagged very often around what happens in the compensation expense I'm just trying to understand how to think about how how this may play out in future quarters.
Yeah, Jeff. This is Frank can take that two of the combination of both short term incentive plan cost and sales commission cost of the primary businesses of the sales commission costs would be related to the global trading business, which includes <unk>.
As well as our trade port business.
Okay. Thanks.
And then just my other question was on the <unk>.
<unk> kind of monetization just wanted to get some insight too.
One of the costs have generally been kind of creeping up in the completion date seems to get pushed back is it Tim.
Is it something where the expected payback period or how do we how do we think about what that payback period is or is it something where this is something you really need to do.
Just because of the alternative of not doing anything just more costly.
Yes, it's a great question Jeff.
The real nature of whats the challenge in terms of bringing this to the finish line and we actually have on the flip side of your question, we actually see the silver lining that we are getting closer to the finish line. The initiative. The challenge of the stage of that right. Now is the completion of what I would call. It user of accepted acceptance testing of the program and getting ready to take it to these.
To the clients for them to test themselves and as you can imagine one of the things thats been the most challenging through the last year under a COVID-19 environment is to be able to do that work around user acceptance testing.
Can't have our people travel of normally we would have our people travel to join the team in India with Tcs is doing the work to do that last leg of work. So that that testing phase has been extended in terms of getting the completed.
Tcs's of phenomenal partner here, but as you can imagine.
India is quite challenged by COVID-19. So there is some risk that we are managing through there. So when we look at the the path to completion. This is really just a question of time.
We're not putting additional capital into the program. There is not additional material external expenses, it's around extending the timeframe. So we can complete testing and have a good program with the street to do the property of implement onto the implementation and testing for them that works with their schedule of their timing.
And the costs as we built the day and again, it's just us extending really our internal resources of our larger period of time, So I see of Jeff more of an opportunity cost related to the the.
The the go live date as opposed to really a bigger capex spend for the FERC.
Okay, great. Thank you.
Your next question comes from Nick <unk> with CIBC capital markets.
Your line is now open you may ask your question.
Good morning, Nick.
Hey, good morning.
Just wanted to I was wondering if theres any additional <unk>.
Detail I could ask you to share on the trade signal acquisition, maybe just either in terms of the general <unk>.
Materiality of the transaction value or whether this business should be expected to produce a positive earnings contribution just maybe some additional insight around that transaction would be helpful. There.
Yeah, I'm happy to give you some more insight and obviously when we when we closed this quarter there'll be some more detail in there.
But you should you should consider this.
Strategically similar to the deal we did with Vizio Tech year.
The year and a half ago in terms of acquiring of capability that we can integrate and deploy across it and size wise this would be smaller than the <unk> transaction, so not material from a size standpoint to the Tms.
We do anticipate it will be accretive from an earnings standpoint, but again, it's not going to be material into the size, but we do expect to be able to grow. It. So trade signal is actually a partner, we know really well already we actually do deploy their software through to some of our clients as the preferred partner partners. A day. So we know their team really well we're extremely excited.
To be able to bring them into the <unk> family and what it will allow us to do is to take their advanced analytic capability and really deployed across jewel to more trade port clients exactly the same scale up as we did with the visual Tech auto trader program and we've talked about in our M&A strategy about the potential of sometimes.
Wiring smaller businesses integrating them and scaling them up the other piece of it's really interesting and exciting about what trade single does of their their analytics and charging capability is not specific to the energy sector. So there will be opportunities to look for where we can use it throughout the broader Tms franchise as well and we're excited to get the opportunity to do that now that we're closing.
Okay. That's helpful.
And then can you tell us a bit more about the agreement you signed with the broker to use trade port screens for refined oil products.
Interested to hear what that arrangement would entail.
Whether you consider that to be a material opportunity per transport.
I considered to be the first step in a long term material opportunity. So as we've talked before very much. When you are building out new markets with trade port its building blocks of adding more liquidity over time to get to that critical math. So this is a really important piece. The the type of arrangement of the similar to other broker arrangements that we've got with Freeport.
And as you remember we've got brokers that are partnered on on gas on power on other products. So this is really that first of all ray in terms of having a material broker light up the screen with refined oil in multiple jurisdictions that gives us the opportunity and ability to sell and deploy to get more trader subscribers tied into that as well and start building the <unk>.
Quiddity, and we would anticipate from that beachhead, you will see both more traders of more brokers come on to interact with that liquidity. So very much as we've talked about how we build out <unk> in the U S. It's piece by piece of this is another example of doing that.
But it is a it is a long term strategy. So we've got to build this over time.
Yes makes sense.
Okay. That's good that's it from me thank you.
Your next question comes from Brian Bedell.
With Deutsche Bank. Your line is open you may ask your question.
Great. Thanks, good morning folks.
Morning, Brian.
Good morning, Mitch.
Jonathan back to you.
Some of your comments on the retail activity. If you want of if you can spend the minutes of SKU.
Maybe outline how you see this different from the trends that are happening in the U S. We are seeing somewhat of a slowdown in retail in the U S part of that seems to be.
Back to work.
Type of of mindset in terms of improvements the COVID-19.
If you can talk about maybe some of the differences that you are seeing in the structural change.
In retail.
And whether the 46%.
Something in the in the 40 percentage points of that volume you think can be maintained.
During the year.
Yes, it's a great question and I'll give you my perspective, which of course is my perspective.
I won't be able to crystal ball, what this will actually shaped out to be but some of the differences that we see north of the border with the in terms of retail trade also is tied to the structural difference in our marketplace. So as you know with both <unk> MTS that venture the venture market is the small cap market is.
As a high retail participation market in general So we're U S saw the lift more around some of the <unk> stock phenomenon and push around single names in our venture market, which is <unk> hundred plus small named companies.
Seen that lift about 175% in terms of that trading activity. So it is more broad based and it also helps to fuel a new issue market. So we continue to have new issues are coming to market that will want to participate in that liquidity. So there is some some of the self sustaining components to it.
And as you indicated as we've gotten through kind of March and April while we have seen that that that total activity start to normalize somewhat it's been normalizing more on the senior market, where I think year over year, we're up about 5% and that's off the big base of Q1 of 2020 were in the venture exchange and our Alpha market, which is our inverted market, which also caters.
The retail they continued to be quite strong I think 80% 80 plus percent of an alpine and of 170 ish percent adventure. So some of those structural parties pieces around investor participation are continuing we are still seeing.
Elevated levels of clearing volumes.
And what I don't know yet is what is going to be that new normal that we get to but we do believe it's going to be at a level that is above pre COVID-19 retail engagement and it goes to those pieces around more retailers with direct access better tools low cost of capital and higher discretionary spending for <unk>.
The people at our home.
The other piece in terms of the the <unk>.
Return to office environment Youre seeing in the U S that will be longer in the Canadian marketplace in terms of the both the rollout of vaccines in the the lightening of restrictions. So we do expect that environment to continue likely at least through the summer.
Alright, that's good context, and then maybe just the second question also on that COVID-19.
The addition of listing fees were extremely strong.
In the first quarter due to the surge of activity, maybe just your outlook on how thats trending and if you're.
I'm the senior similar type of structural theme, helping that as well as we move into the.
The next few quarters.
Yeah, and part of our visibility goes to the the pipeline and workload of our team that actually manages that file activity and that pipeline has not abated and also the the teams in our capital formation groups continue to be very busy working with companies that are looking at new issues. So.
And it's an area, where it's very difficult to get long term visibility, but in that near term visibility we continue to see the pipeline quite strong.
Great great. Thank you so much.
Your next question comes from the ground writing with TD Securities. Your line is open you may ask your question.
Hey, good morning good.
Good morning group.
Yeah, I'll just start on the compensation side can you just.
Thank you Matt had mentioned in the.
Repair the months, but it didnt capture it all like is there any seasonality here in the compensation in Q1.
Other just normal seasonality of perhaps.
Elevated costs related to the strong revenue.
In the quarter.
Yes.
Greg This is Frank here.
The seasonality aspect in Q1 would be related to the payroll taxes.
But the $3 8 million quarter per quarter.
So that would subside going forward and the other.
Of the pieces as you mentioned the the short term incentive plans those are going to be tied to our revenue and EBIT performance.
Of that that's the thing that would obviously continue as long as the revenues and EBIT the form at the same levels.
Okay understood.
And the.
On the deliver the side just trying to get a little bit better understanding of what's driving the capture rate. So I looked at.
Sales volumes in particular, those were down year over year, and so equity index futures.
Contrast, your equity option volumes were up quite a bit year over year are those some of the key.
Factors that are driving the lower capture rate.
When I look at things year over year.
Quarter over quarter.
Yes.
The spectra go ahead, Frank Yeah. You did you did mentioned the do the two big factors being the lower interest rate mix. So.
Down year over year, those will carry higher capture rates as well as the index derivatives portion of that.
So those are the two main areas and then just dimensional so that the that box.
Well it was down about 19000 in the quarter as well given that the contract expiry.
But per Gram, what I don't want to lose sight of the fact, there is still the biggest driver is as Frank said, it's the short term interest rate product. The <unk> product is down about kind of 25% year over year in the interest rate environment. We're in now Q1 of last year was a very strong quarter for those products before we had kind of of the COVID-19 cliff on rates.
But there is a really good story in here because the the strategy we've been pursuing over a number of years of adding new product.
Particularly around new single stock futures are new two year fixed income future products. Those have all been part of the growth side. So.
Historical Amex terms.
A turndown in the short term rate environment. It would just be a decline in the franchise, we're seeing a more broad product mix. So we can see lift in other parts of the franchise that are continuing to grow and in 2021. We've also had some new exciting product launches as well theyre going to contribute to future growth.
So our launch of as I said, the two year product earlier in this year that means trading over 10000 contracts a day now we've launched a dividend futures product and very recently and now we've launched Etfs ETF options on bitcoin in ethers. So that was a new development in our ETF franchise and now we will have options on those that will contribute to future growth that youll see in <unk>.
<unk> going forward.
Okay.
Okay understood.
And then my last question would just be.
The the refined oil.
Product that you've added to the trade point screen it sounds like you're partnering with one.
Dealer in particular is that of global rollout.
And then secondly is it related at all to you of course.
Part of your partnership into intermodal in the U S.
So it is a global rollouts of it is multi region. Its a global inter broker dealer that we are working with.
I do not suspect it will be the last one we anticipate getting other brokers signed up to be complementary with that.
As we also build the trader subscription around that as well.
It is complementary to what we're doing with nodal in the U S. Because it is adding more product to the <unk> screen.
Total is much I mean their business is really on GAAP and power of Theyre not.
Active of material away and refined oil so it's complementary and continue to build out more.
Demand for the <unk> port screen in North America.
The way I would consider it.
Okay. That's helpful. Thank you.
Once again, we would like to ask the question. Please press Star then the number one on your telephone keypad again, if you would like to ask the question. Please press Star then the number one on your telephone keypad. Your next question comes from high net coin national.
Barack financial.
Your line is open you may ask your question.
Yeah, Hey, good morning.
Morning, Jamie.
Hi, Matt.
First the first question is just on the.
On the on the Trust services line, obviously, a nice little bump there in the in the quarter can you break down exactly what was driving that in terms of not just the higher activity.
Capital formation in general that is helping to support that and I guess that would be sustainable through.
Through the next quarter and then a follow up on the topic.
Yes, there's really two components to it and then I'll ask Paul to jump in here.
I don't get all of it but if you remember when we talked about trust last year when activity levels were lower about at the same time, we were building a much larger client base. So we were continuing to add new clients to the trust platform and on the expectation when when activity started to resume we would see that lift so you're certainly seeing that that lift in activity.
In terms of trust and transfer agent activity and now across a larger client base than we would've had a year or two years ago, but it's also complemented with the work. We are now of doing around our ability to support dealers. So we've got the dealer capability in terms of supporting them with the trust franchise as well. So it adds a new element of growth that wasn't there a year ago Paul.
Do you want to add to that.
So those of the components sharp.
Okay, Great and then the the follow up is just related to the <unk> acquisition you provided some.
Some high level of revenue.
EBIT that number is at the time of the acquisition.
Would it be fair to say of that.
Those numbers have also increase just in line with the increased activity that we're seeing here are or is there anything you can share in terms of an update around the contribution from ASP when it closes.
Not at this stage Jamie of its something that we will update on when we get the closing.
Okay great.
Second question then is.
Is around to the capture rates and in the.
The the equities in the Fi trading buckets, obviously quite a bit lower this quarter as youre seeing that pretty good.
The trading volumes on venture an alpha the.
I guess the.
My assumption here is that the capture rates are going to continue to be somewhat depressed. The as you still seem pretty strong volume is there.
Is there anything else in that number this quarter that would.
Maybe one of direct me otherwise.
Hey, Jamie of Hey, Frank Here, I think you recapture of the main elements there the the ryzen and <unk> venture being at a lower capturing the TSA does the other portion in there in outlet itself given the high retail volume.
Especially with the securities less than the dollar they do carry a higher.
A higher credit assets also intra product mix within alpha as well that contributed to the to the lower to the overall overall over cap rates as you indicated.
Okay, Great and the last one is just in the the Gia bucket and looking at the subscriptions.
Pretty decent growth in <unk> or <unk> in the mix.
Do you think thats, primarily related to increased activity on the retail side or is there something more sustainable there in terms of the.
The GSA a revenues.
What actually those subscription growth are generally across the board. So there is certainly an element that's that's driven by that driving retail activity and more of more eyeballs on that activity, but you do see that youre seeing lift across the market depth of product as well youre seeing the lift across the amex subscriptions, which tend to be more professionally oriented as well.
So it is more broad based.
And one thing to add there John also is on our usage based quotes given again the high retail activity. That's something that you are seeing as.
As well as not reflected in the underlying subscriber growth numbers change.
Okay, great. Thank you very much.
Thanks, Jamie.
Alright, there are no further questions at this time I will now hand, the call back to Paul Malcolmson.
Oh, Thanks, operator, just a reminder, that our annual and special meeting of shareholders will take place in the virtual format at two o'clock. This afternoon.
We invite all of you to join us through the Lumi webcast.
And thank you everyone for listening today, if you have any further questions. The contact information from media as well as for Investor Relations at our press release, and we'd be happy to get back to you stay well and stay safe everyone.
Thank you and that concludes today's conference. Thank you all for joining you may now disconnect.
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