Cboe Global Markets, Inc. Q4 FY2020 Earnings Call

Good morning and welcome to the Cboe Global Markets 2020 Fourth Quarter Financial Results Conference Call. All participants will be in listen-only mode. Operator instructions: After today’s presentation, there will be an opportunity to ask questions. Operator instructions: Please note, today’s event is being recorded. I would now like to turn 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 and 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 and 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 Deters. 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. A downloadable copy of the slide presentation is available on the Investor Relations portion of our website. During our remarks, we will make some forward-looking statements, which represent our current judgment on what the future may hold. And while we believe these judgments are reasonable, these forward-looking statements are not guarantees of future performance and involve certain assumptions, risks and uncertainties. Actual 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'll 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're keeping safe and well as we continue to navigate this pandemic. I'm pleased to report that Cboe 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 macro environment that for much of the year did not favor index trading, our results were driven by record trading volumes in U.S. cash equities and multi-listed options, fueled by strong retail trading growth and recurring non-transactional revenues, and increased efficiency enabled by our fully integrated superior technology. Importantly, while achieving strong growth, we continued 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 dedication 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 2021 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 in organic growth initiatives in 2021, which we expect to contribute to an incremental top-line compounded average organic growth target of 4% to 6% over the mid-term. As you've seen since our IPO, we have also allocated capital inorganically to help accelerate our strategy while returning capital to shareholders. 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're beginning to see institutional investors reengage in trading our index options and volatility products. In January, month-over-month volume increased by 77% in VIX futures, 68% in index options and 15% in SPX options. As we've noted in previous calls, we expected to see reengagement in 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 unknowns come into focus. Additionally, in response to customer demand similar to the futures market, we are planning to extend the 24x5 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 24x5, took place in non-U.S. trading hours last year, up from 13% in 2019. Naturally, we believe 24x5 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 strategic progress made in 2020. We are excited about both 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 recurring revenue, broaden our geographic footprint and expand our product line by asset class. We have exciting initiatives underway within each of these strategic pillars. But today I'd like to focus on four incremental growth drivers: the opportunity to grow non-transactional revenue through Cboe Information Solutions, our plans to launch Cboe Europe Derivatives, expand BIDS Trading and grow our retail trading base. We're excited about our prospects to further increase recurring revenue by expanding and enhancing Cboe 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 in our proprietary products with tools that draw users to our markets and drive volume as they reestablish trading positions. As discussed in previous calls, last year's expansion of our Information Solutions offering through key acquisitions accelerates our ability to grow our recurring non-transactional 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 2021. 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 and risk analytics offered through various delivery mechanisms, including Cboe Silexx, our proprietary order 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 data sets and add high-demand data sets like cryptocurrencies to the Information Solutions data suite. Turning now to the upcoming planned 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 EuroCCP uniquely position us to simplify and bring new efficiencies to pan-European derivatives trading and clearing. We’ve worked closely with market participants in shaping our plans and have received very positive customer feedback and support. During the fourth quarter we made strong progress on the technical build-out 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 reshape and grow 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 2021 are 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 in advance of Brexit, will serve as home to our derivatives business in the region. I’ll also note here that the flawless implementation of our Brexit strategy enabled us to seamlessly transition trading from our U.K. 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 U.K. venue yesterday. We are working with customers to re-establish our market share in Swiss equities trading, which was approximately 8% of Cboe's 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 are pleased to welcome Tim Mahoney to the team and the Cboe family. We have a successful track record of working with BIDS, which powers Cboe LIS, one of the largest block-trading platforms in Europe. While BIDS will continue to operate as an independently managed venue, the acquisition helps enable us to expand BIDS’ block trading capabilities and services to other products and geographies, including Canada, as we look to further expand our presence in North American equities. We are well underway with our integration of MatchNOW, the Canadian ATS 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. BIDS 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. BIDS also provides us with a foothold in the off-exchange segment of the U.S. equities market, which now accounts for over 45% of overall U.S. equities trading volume. Moving on to retail trading, we believe the resurgence of the retail investor we saw in 2020 is here to stay. We are well-equipped to deliver tailored products and services to meet the needs of this growing customer base and to evolve our education programs with retail-centric content to empower these new investors. Product innovation remains a core focus of the Cboe franchise, and we plan to continue to expand our proprietary product offering with smaller contract sizes that appeal to both sophisticated retail traders and institutional investors. This includes Mini VIX futures and Mini SPX options, our recently announced Mini Russell 2000 index options, as well as additional retail-focused products in our pipeline, which will extend our value add to a broader universe of investors. Our strategy to nurture growth in these products, which is driven by a cross-functional team focused on dedicated client services, targeted marketing initiatives and robust investor education, is well underway. Additionally, we continued 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 Cboe EDGX with the exchange reaching record market share of 7.3% in the fourth quarter. In January, trading on EDGX set a new monthly average daily volume record, as did retail priority orders which were up 56% over December 2020. We’re excited to see growing retail engagement in the marketplace, and are well-positioned to invest in and leverage our core strengths, 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 Cboe. With that, I’ll turn it over to Brian to walk through our 2020 performance and 2021 outlook in greater detail, and then I’ll provide some closing remarks.

Thanks Ed, and good morning everyone. I hope all of you and your families remain safe and healthy. Let me remind everyone that unless specifically noted, my comments relate to 4Q20 as compared to 4Q19 and are based on our non-GAAP adjusted results. We reported solid financial results for the quarter, again, highlighting the 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-transactional revenue up 16%; adjusted operating expenses increased 17%; 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 proprietary market data, offset somewhat by lower volumes in our proprietary products. Revenue from North American equities decreased as a result of lower data revenue from the SIP, including lower SIP audit recoveries. Off-exchange or TRF volume hit new highs again in the fourth quarter, impacting our market share. In Futures, the revenue decline was caused by lower trading volume in VIX futures. The revenue increase in European Equities primarily reflects the addition of EuroCCP. In FX, increased ADNV drove higher transaction fees and 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. The majority of the expense variance related to the 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 in our business. For 2021, our organic revenue target is a growth rate of 6% to 7% from our recurring non-transactional revenue, which we define as access and 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 the reported or 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 growth of 4% to 6%. Given our growth plans and strategic opportunities, we are planning incremental investment of $24 million to $26 million in 2021 to help 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: 2020 normalization, core, and 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, a non-recurring savings in 2020 that we do not expect to repeat in 2021. The non-recurring savings realized in 2020 include: a) COVID-related savings; b) favorable accrual adjustments related to incentive compensation and facilities expenses; and c) delays in hiring, which were also caused by disruptions related to COVID-19. If you normalize our 2020 expenses for these items, the projected expense increase is approximately 10%. Based on the current market outlook, we expect these costs will recur in 2022 and beyond, although as we demonstrated in 2020, we are able to optimize our costs 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 costs and otherwise general price increases. However, should we remain in a more locked-down state for an extended period of time in 2021, the expected 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. We 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 in high-conviction, high-return opportunities. This includes $9 million to $10 million for our previously announced European Derivatives build-out, as well as investments aimed at supporting growth in 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 spend through the year. Should market conditions for our transaction revenue weaken, 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 investments to the current market reality to optimize both margins 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 2020. This 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 year’s 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 netted 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 a range of 27.5% to 29.5%, versus 28.1% in 2020. Finally, we expect 2021 capital spending to be in the range of $60 million to $65 million, reflecting expenditures for the build-out of a new trading floor and higher investments in technology and infrastructure to support our acquisitions and other growth initiatives. 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 million to $45 million. While we are not providing full year guidance on interest expense, we wanted to highlight that absent any additional borrowing and significant changes to 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 4Q 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 Ed, recent acquisitions of EuroCCP and BIDS reflect conviction in our ability to deploy capital to enhance organic growth and strategic value over time, leveraging 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 under our revolving line of credit and a portion of amounts outstanding under our term loan, as well as other general corporate purposes. Our leverage ratio increased to 1.4x at December 31 from 1.1x at September 30, due to the higher debt outstanding. We ended the year with adjusted cash of $210 million, reflecting in part, higher balances associated with additional regulatory and operating cash needs for EuroCCP. Now I’d like to turn it back 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 team’s 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, we will be well-positioned to achieve our mission to build one of the world’s 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 define markets in a very powerful way.

Thanks, Ed. With that, we would 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 free to get back in the queue. And if time permits, we'll take a second question. Steve?

Operator instructions: And the first question comes from Rich Repetto with Piper Sandler.

Yes. Good morning, Ed. Good morning, Brian. I guess my question is on the expenses. This is on Slide 13 and thanks for the walk or the breakout. But I guess Brian, two parts: of the $55 million from M&A, how much revenue offset directly? Because I know BIDS is probably in the 40s in there. And then you're assuming that, I guess, the COVID situation, you don't have those savings. Is there a way that you could sort of walk us through if you assume that we're in this lockdown, semi-lockdown to midyear, which probably seems more like what's happening right now anyway. So anyway, those are two questions on it.

Sure. Thanks, Rich. I would say that without getting specific with each expense for each of the transactions from 2020, 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 prior year, so that 4% to 6% on prior year. So I think that gives you a pretty good gauge of where we expect the revenue more than offset the expense adjustment that we've noted here on, as you mentioned, Slide 13 for the $55 million. So in the aggregate it's going to be accretive as we noted previously. On the $16 million, I think, as a rough framework—and again, your guess is as good as mine and obviously we've got to put a number out there that we're kind of reflecting in our expense guide as far as 2021—Of the three categories I kind of mentioned, I would say high level, it's probably like a third, a third, a third relative to continued savings for—if there's continued lockdown and we really don't do anything during '21 as far as some of those incremental expenses that we have. Some of that savings delay from the delayed hiring was probably a third of that. And then the one-time savings is about a third that we won't get the benefit of. So that kind of gives you a frame of reference of, like I said, with the COVID-19 related expenses and how that might impact the expenses for '21.

Got it. Thank you. Go Bucs go Brady.

Thank you. And the next question comes from Ken Worthington with JPMorgan.

Hi, good morning. How should we think about the level of additional investments spent embedded in the 2021 guidance, so you call that $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. Again, really good question. As we think about this, it's the upfront spend for the build-out. And again, I won't get too specific on some of this, but I would say that going forward versus '22, certainly a portion of that European Derivative build-out will sustain into '22. So I'd say about a—could be up to a quarter of that will not repeat as we go forward because there's an incremental investment in the upfront years. Some of that was in '20 and obviously you're seeing our projection for '21, as far as that build-out. As far as the strategic growth initiatives, 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 it's going to be—and again, we'll provide more guidance to this as we move forward. As we look at the actual level of investment, the total dollar amount will be geared toward that longer-term growth rate of the revenues where we're seeing it projected. So again, it's a spend to really grow that top-line revenue for the long term. And so the upfront investment spend as we said with derivatives will have to occur before the actual revenue shows up and certainly in '21 we're planning. So I would say stay tuned, but certainly a portion of that—and I'm hesitant to give you a fixed number right now—will be variable and may not occur in '22.

Okay, okay. Thank you very much.

Thank you. And the next question comes from Dan Fannon with Jefferies.

Thanks. My question is on retail and some of the initiatives you're talking about from the spend. Maybe what percentage of your business today do you think comes from retail? And I guess also what makes you confident that the retail pickup is sustainable to make these levels of investments today?

Good. This is Ed Tilly. Let me start and invite Chris to jump in. But sustainable, I think we've just seen an incredible demand that began last year, it continues, and it tends to be in single-name options. So our education will be focused on the basics first. The educated investor is the one that's in day in, day out, year in, year out. And that's really what we will be targeting. The responsibility, the suitability, what derivatives are and how derivatives can change the risk profile for investors is really what we'll be concentrating on. And I think just even recently, we had 730 participants in our series of '21 for '21, which is 21 investment strategies for 2021. It's an incredible amount of turnout early on. So we're gauging the continuation by the interest in education; we're committed to it. So the investment we make is for the long term, and that conversion from straight delta-one trading to derivatives is really where Cboe's effort will be most concentrated. 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 products.

Sure. Thanks, Ed, and thanks for the question, Dan. So in addition to our education efforts that Ed mentioned, we're also rolling out products. We rolled out Retail Priority on our EDGX equities market. As Ed mentioned in his script, we had a record volume there above 700 million shares. Retail Priority is now almost 3% of the entire U.S. equities market because retail investors and those who are facilitating those orders are getting better quality execution. That's equities. And then as we mentioned also during the script, we're rolling out products of more retail size, with Mini VIX futures, Mini SPX options, and we just announced Mini Russell 2000 options and we have some other things we're thinking about as well to appeal to this new generation of retail investors. So our goal is to empower and educate them about our products across our asset classes 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 those going to go away? So I guess how long is the overlap? And then secondarily, you didn't talk about cost synergies? Is that $55 million an ex-synergy number or are these deals really not cost synergy opportunities anyways, given that they’re more bolt-ons? Thanks.

Thanks, Alex. No, you weren't sleeping. So you— we didn't cover those explicitly. So thanks for the question. As far as the overlap, we anticipate the majority of that to go away following into '22 as we transition the sites. And on the expense side, as far as the ramp-up goes, almost all of those transactions were not a cost play. Those were, I would say, more about gaining new capabilities and where we want to be more on the revenue side. So we don't anticipate any expense synergies there.

Alex, I might just jump in on the expense side. So there's different synergy places as we highlighted—especially Information Solutions is a great example of this where these are acquisitions 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.

Makes sense. Thanks.

Thank you. And the next question comes from Ken Hill with Loop Capital.

Hey, good morning, everyone. Ed you touched on this in your prepared remarks a little bit, but I was hoping you could talk about the long-term aspirations for Cboe around crypto given you guys have had a product on the futures side in the past. The ETF side has been pretty challenging for everyone involved. But overall this is an asset class that continues to grow and is becoming more important to institutional and retail. So you touched a little bit on the agreement you have with CoinRoutes I think to provide indices and data in an environment that's kind of murky. I'd love your thoughts on, A, what that kind of will involve, and then kind of how you see that environment ecosystem more broadly growing over time and what role Cboe plays there?

Boy, I love the way you framed 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 and the interest and while not a huge asset class as measured by AUM, certainly by turnover and trades. So we know there's a great deal of interest from the trading community and growing interest institutionally for some exposure. When I warm up like that, you can tell that we are planning how to reenter the space, very measured and cautiously. But I could not describe it any better than the importance of the ecosystem: what we see are vibrant derivatives markets, cash-settled markets, retail-accessible markets, ETPs and ETNs—all very important for a successful exposure to crypto. So we're in the planning stages, but we plan on reentering that market over time, and it's just a matter of our prioritization right now. So stay tuned for development; we want to get back into the space.

Ken, this is John. Just to follow up on that, the CoinRoutes partnership will start with transparent pricing and a regulated framework. We'll start on the pricing side as we believe that's critical. We think the ecosystem in crypto is much further developed today; it's a rapidly developing space. It's critically important that we have a transparent pricing framework for folks to understand the value of those assets. When we weren't in crypto earlier, that was our approach, and we believe that approach still makes sense.

Understood. Thanks very much.

Thank you. And the next question comes from Mike Carrier with Bank of America.

Good morning, and thanks for taking the question. Just on the midterm outlook for organic revenue growth of 4% to 6%: is that total revenue growth? And then if so, can you provide a bit of perspective on how that breaks down on the non-transaction side versus the transaction side? And then areas where you're more confident on the transaction front? Thanks.

Yes, I'll start with that. Thanks for the question. As we think about that, it's a medium-term target. It's not obviously a next-year guide, because we know that sometimes there's unpredictability in transaction revenue quarter-over-quarter or even a few quarters over time. So that's why we want to make sure people understood our view over the medium term. Also it's consistent with what we've achieved over the last four years as Ed referenced earlier. I would say that it's going to be a combination. We already laid out the non-transaction revenue growth expectation. As far as our proprietary market and access capacity fees, we laid that out. Obviously, you have the SIP take plans, which are at best probably flat, and then you have the remainder being made up on the transaction revenue side. Again, that is over time versus any one period of time. So if you look at the primary drivers, what we've achieved, the math shows that there's going to be more recurring revenue as we continue to build that, you're seeing a more diversified revenue base, and that's a higher conviction that over time we're building sustainable revenue, and that's how that's growing. And you're going to have the impact of the acquisitions that we talked about, which again is not in that organic number but rolls into that number over time. We feel good about how that continues to grow as well.

All right. Makes sense. Thanks.

Thank you. And the next question comes from Ari Ghosh with Credit Suisse.

Hi, a couple of questions on the products segment and ISG. First, are you seeing institutional reengagement in your proprietary products? And second, how should we think about the value and impact of the ISG acquisitions on trading and recurring revenues over time?

Thanks, Ari. Great question. I'll start with the first and then invite John and Chris on the ISG in particular. The products segment: if you take a half step back, what we discussed for much of last year was that after the huge volumes and volatility spike in the first quarter, institutions told us that they were on the sidelines—there's too much uncertainty out there. If you think about the pandemic, the U.S. elections, uncertainty around where markets were headed, institutions told us once some of those uncertainties were passed there'd be reengagement. That's what we're seeing in January. So that's not surprising to us. There's interest in short-term moves and volatility, much of that led by volatility in single names, raising volatility overall. With VIX options, we see interest in buying puts when people realize cash spike—these aren't always sustainable—but we did see put buying last week, and investors in this cycle tended to be right. So we see engagement across a variety of macro trading cycles. Institutions are reengaging. We don't want to call any segments out as not reengaging, maybe some are slower than others, but engagement is increasing each day. We'd like to see what we're seeing in January continue. Chris and John, maybe you can add on ISG.

Yes, Ari, as we think about engaging with customers—both institutions and others—ISG fits nicely with our products because it usually starts with data. We have unique data sets to give them, and once they have data and have proved out whatever model they might be looking at, they use execution tools like Silexx. Then they need to manage risk once they have positions on, and we have a complete risk management suite for them to manage position. So it starts with data, then access, then portfolio and risk management. Information Solutions is an example where these purchases were made to build what we believe is a world-class Information Solutions platform that drives engagement in our product set.

Ari, this is John. I'll add that when we think about the ISG acquisitions, we think very deeply about how each asset fits into the machinery of our broader network. In this case, there's a tight fit because these tools drive decision making for institutional investors. This is a long-term trend: institutions are automating their decision processes for complex instruments that drive our proprietary product revenues. Automating pricing evaluation, risk mitigation and margin processes gives institutions tools to engage more deeply in our product set. We see long-term potential. And remember, the ISG products themselves have value and are contributing to our growing base of recurring revenues.

Appreciate all the color. Thanks.

Thank you. And the next question comes from Alex Blostein with Goldman Sachs.

Great. Hey, good morning, everybody. I was hoping we could spend a minute on your capital priorities as you think about '21. I know Brian had kind of broader strokes, nothing has really changed. But you guys obviously been pretty active on the M&A front in the last couple 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 12 months between deleveraging, return to shareholders, and anything else on the M&A front?

Yes, thanks. Good question. Again, the strength of the cash flows that we generate will continue to be deployed to achieve long-term shareholder value. You have seen conviction to deploy capital to enhance growth—globally, by product, and organically and inorganically—leveraging robust technology and operating leverage. Part of keeping the balance sheet at low leverage is that if something attractive arises we want to be able to deploy capital. But absent that, the prioritization hasn't changed: focus on organic initiatives, continue commitment to our annual dividend increase, and opportunistic share repurchases. We announced increased buyback authorization reflecting confidence in outlook. Personally, I don't see as much value in delevering today versus, for example, returning cash to shareholders opportunistically. So delevering from where we are today is not a big focus of capital deployment.

Great. Thanks very much.

Thank you. And the next question comes from Brian Bedell with Deutsche Bank.

Great. Good morning, folks. Thanks for taking my question. Wanted to tie expenses and revenue together. On the expense outlook, are you considering the January trends in the expense forecasts just as a flavor of the volume outlook you have for '21? And then on the strategic growth initiatives, Brian, what's the thought on the payback timing of revenue attributable to those expenses? And can you talk about the European Derivatives effort in terms of when you'll have positive revenue there after market maker payments?

Sure. If I understand correctly, January has been strong volume and it does play into how we thought about the year and what can be achieved. But we are not using January to inform the entire year—there's unpredictability. The investments—European Derivatives, ISG, BIDS expansion, retail, 24x5—are coming online and while we expect some revenue in '21, the real expectation is revenue delivery in '22 and beyond. We will revisit how we calibrate investments to market reality through the year. We expect high ROI on organic activities that leverage existing infrastructure, and that's a 2- to 3-year look, contributing to the medium-term growth rate.

So to summarize, what we see happening in January, as predicted, is reengagement at the institutional level, eliminating last quarter's headwind when institutions were on the sideline waiting for uncertainty to pass. Separate from the investments we're making for the future, the 24x5 extension, BIDS, ISG investments, and our midyear launch of European Derivatives are all in queue and ready to make an impact for us in 2022 and beyond.

That's great color. Thank you so much.

Brian, I just want to add on European Derivatives: we're super excited about this. The statistics in 2020 show we're up 50% in U.S market in terms of European derivatives activity while the European market is flat to down on equity derivatives. It highlights the opportunity to grow the pie there. It's going to be a build, but it's super exciting for us.

Thank you. And the next question comes from Chris Harris with Wells Fargo.

Great, thanks. Can you share your view on what a change in the SEC leadership might mean for the industry and Cboe specifically?

Let me start more broadly. The SEC and exchanges have had an incredibly healthy tension where both the SEC and Cboe put the investor—the retail investor—first and foremost. I think that will continue. Our expectation of the new chair is a very healthy relationship with the exchanges. We're where price discovery happens, and I expect the new chair and his team will understand that. I'm optimistic about the change. Operationally, I hope the engagement we've seen with the SEC, particularly this year about lit exchanges and their role in maintaining stability in uncertain times, continues. The amount of time the SEC staff has spent with us in regular calls, updates and communication is a model for the future.

We've had a great dialogue with commission staff and look forward to continuing to work with them. In January we saw record volumes across many asset classes—U.S. equities, U.S. options—and the market structure worked as designed. I think the SEC will stay focused on investor protection and investor education, which aligns with our goals of investor education, empowerment and ensuring market structure serves the investing public well. Lit markets and CCPs performed well in January despite unprecedented events.

Okay. Thank you.

Thank you. And the next question comes from Owen Lau with Oppenheimer.

Good morning. Thank you for taking my question. On Slide 14, your organic growth for recurring non-transactional revenue was 9% in 2020. What are the factors that lead you to guide only to 6% to 7% in 2021? Are you being conservative or are there reasons that slow down the growth?

No, I would say we're still pretty pleased with the mid- to high-single-digit growth rate. As that base gets larger, some normalization occurs. We continue to look at penetration opportunities across geographies—U.S., EMEA, APAC—and asset classes. ISG presents additional opportunities in indices and historical datasets, and expanding the customer base. So we actually like that growth rate; some of it is normalization from the prior year with acquisitions, but overall it's a good expectation for a go-forward basis.

All right. Thank you very much.

Thank you. And the next question comes from Kyle Voigt with KBW.

Hi, good morning. A quick one on the market data infrastructure reform passed in December. How should investors think about your SIP fees under a competing consolidator model? Or maybe your proprietary data revenues if there's more depth-of-book eventually included?

Maybe Chris can take that. Thanks.

Kyle, we've made our views on both the governance proposal and infrastructure rule clear in our comment letters. Broadly, we've been supportive of increasing the quality of SIP content and improving technology. We differ with the SEC on certain points. We see opportunity for the SIPs to continue with enhancements alongside proprietary market data that remain valuable for customers who choose to purchase it. We view them as complementary, not mutually exclusive.

Thank you.

Thank you. And the next question comes from Chris Allen with Compass Point.

Hey, morning, guys. I wanted to ask about the impact from acquisitions next year. The 4% to 6% equates to about $50 million to $75 million of incremental revenues. Just wondering what was the revenue contribution so far this year? And what are the different components? I think BIDS trailing 12-month revenues were running about $42 million as of June. Then EuroCCP second half of the year is about $14 million to $20 million annualized in equities, another $7.5 million annualized basis. So just wondering what the different components are and getting numbers a little higher than what your guidance implies.

I'm sorry, Chris, I didn't catch every number. For the 4% to 6% range, it's more of the aggregate expectation. I don't have the specific aggregated dollar amount from each acquisition in front of me to recite here, but we can follow up with more specific detail on 2020 contribution by deal. The run rate on a go-forward basis supports the 4% to 6% range. We can follow up with more detail after the call.

Okay. Thanks.

Thank you. And the next is a follow-up from Alex Kramm with UBS.

Yes. Coming back to EuroCCP, can you flesh out what happened there sequentially in terms of revenues? I think there was a decent quarter-over-quarter move but cleared volume was up. You don't provide a lot of revenue capture metrics there. Anything you can help with so we can model better? And speaking of BIDS, how should we map that into segments—U.S. or Europe—on the income statement for now?

So BIDS will roll up into North American equities and we'll provide as much color as we can around metrics going forward. On EuroCCP, we were pleased with 3Q to 4Q growth. The third quarter had a little lift from a liquidity credit that we took advantage of, but from a pure transaction standpoint we had a nice lift overall in revenues. You will see some mix shift within the fee schedule with respect to tiers and types of clearing and settlement, but overall we're pleased with the trend.

Okay, thank you.

Thank you. And the next is a follow-up from Rich Repetto with Piper Sandler.

Yes. Good morning again. First, I would just want to say it was one conscious—I didn't mean to offend anybody about Kansas City. I do have a follow-up. There's been a number of questions on the retail frenzy that we've seen in trading and all the issues around it. I wanted to ask you, Ed or Chris, what do you see as potential solutions to it? Is there anything that you can do or the SEC or anyone else should do?

Rich, I don't think there's a single 'solution' to this. Transparency and education are key. Understanding the motivation, the duration, and goals of investment decisions is critical. For us, investing in retail means understanding the exposure retail is looking for and bringing to market contracts and exposures directly focused on those needs. We plan to focus on education—our Options Institute is ready to engage with new retail investors—and to develop contracts that address the needs of the new retail investor. Education and transparency help create day-in, day-out, year-in, year-out investors who trade suitable contracts. That's where we'll focus.

Okay, thank you very much. Go Brady.

Thank you. And the next is a follow-up from Kyle Voigt with KBW.

Hey, thanks for taking my follow-up. Just a modeling question on the 'other revenues' line of $13.9 million—does that increase relate to your CCP, trade reporting, or something else? And how sustainable is that level?

So that's a collection of a number of things. It does have a bit of the EuroCCP items in it. It's a collection of various matters. From a modeling standpoint, we look at the aggregate and see where the ebbs and flows have been over prior periods and on a roll-forward basis. It's not a material item for us in isolation, but there is a slightly higher contribution from our CCP.

Thank you.

Thank you. And the next question comes from Chris Allen with Compass Point as a follow-up.

Hey, thanks. I had one more question on the acquisition contributions: you mentioned you'd follow up. That would be helpful. Thanks.

Yes, we'll follow up with more detailed specifics on the contributions of each acquisition in 2020.

Thank you. And the next is a follow-up from Alex Kramm with UBS.

Yes. Hey, thanks. Sorry, just a couple of quick housekeeping follow-ups. These are housekeeping questions. Coming back to EuroCCP, can you just flesh out what happened there sequentially? In terms of the revenues, I think they were down quarter-over-quarter a decent amount, but cleared volume was up. You don't provide a lot of revenue capture metrics there. So anything you can help with so we model better? And then speaking of BIDS, as this comes in now, can you just help us the geography of the reporting—should we include this in North America for the time being?

We've addressed the EuroCCP points earlier. For BIDS, include it in North American equities and we'll continue to provide more detail in our metrics and future releases.

Thank you. And the next is a follow-up from Rich Repetto with Piper Sandler.

Yes. Good morning again. On potential solutions to the retail frenzy, you mentioned education and transparency. Anything that the SEC or exchanges should do on market structure terms? Or do you think education is really the main lever?

Rich, I don't think there's a fix beyond education and transparency. Understanding the exposures and motivations, the duration, and the goals behind trades is important. For us, bringing tailored contracts and making sure investors understand suitability and risks is the most productive approach. Education provides responsible long-term investors and better trading outcomes. That’s where our focus will remain.

Okay. Thank you. Go Brady.

Thank you. And the next is a follow-up from Kyle Voigt with KBW.

Hi, thanks. Just on other revenues of $13.9 million—does that increase relate to CCP trade reporting or something else? How sustainable is it?

As I said earlier, it's a collection of items, including a contribution from EuroCCP. It's not a material line for modeling in isolation, but there is slightly higher contribution from our CCP operations.

Thank you. That concludes the question-and-answer session. I would like to return the floor to Debbie Koopman for any closing comments.

Thank you. That completes our call this morning. We appreciate your time and continued interest in our company. I'll be available for any follow-up. Thank you.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.