Cboe Global Markets, Inc. Q2 FY2021 Earnings Call

Good morning, everyone, and welcome to the Cboe Global Markets Second Quarter 2021 Earnings Conference Call. At this time for opening introductions, I would like to turn the call over to Debbie Koopman, Vice President of Investor Relations.

Thanks, Pete. Good morning and thank you for joining us for our second quarter earnings conference call. On the call today, Ed Tilly, our Chairman, President and CEO, will discuss our performance for the quarter 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 as well as an update on 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 want to welcome Ken Hill, who recently joined Cboe as the Vice President of Investor Relations. Ken will take the lead on IR effective August 1 as I support him and transition to retirement later this year. 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 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 that you are doing well and remaining safe and healthy. Our purpose is to operate a trusted, inclusive global marketplace supported by our guiding principles, which include active transparency. It is in this spirit that we issued a press release this morning regarding spot volatility indices and I want to comment on that before I dive into the results for the quarter. As outlined in the press release, we recently discovered instances where the spot VIX Index calculation differs from the calculation described in the VIX White Paper, which details the formulas used for deriving values related to VIX. Specifically, in certain instances, an index level was not produced at the applicable interval resulting in the dissemination of the prior index value. These instances relate only to the spot VIX Index, which is not a tradeable product. We believe the VIX tradable futures and options, as well as the NAV of products that track the daily closing prices, such as volatility ETP products, were not impacted. In addition, the calculation of the final settlement value for expiring VIX derivatives, which uses an independent process, was not impacted. We are investigating the degree of impact and the number of instances with respect to which the redissemination occurred, but based on our initial assessment, we believe that in the vast majority of cases, the current VIX index calculation yielded the same result as provided in the VIX White Paper. Now turning to slide 5. I am pleased to report on strong financial results for the second quarter of 2021 at Cboe Global Markets. We continued to deliver on our strategic growth plan, expanding on the foundation we laid over the last year as we build one of the world's largest global derivatives and securities trading networks. For the quarter, we reported year-over-year increases in both transaction and recurring non-transaction revenues, with net revenue up 18%, to over $350 million and adjusted EPS up 5%. Our solid results were driven by continued growth in recurring non-transaction revenues, increased trading volumes, and engagement of institutional clients trading our index options and volatility products. We saw strong year-over-year growth in our proprietary products. ADV increased by 40% in VIX futures, 41% in VIX options and 8% in SPX options. During the second quarter, we made excellent progress executing on the four key incremental growth drivers I outlined at the beginning of this year – the opportunity to grow recurring non-transaction revenue, the upcoming planned launch of Cboe Europe Derivatives, our expansion plans for BIDS Trading, and extending access to our products and services across geographies and market participants. July 1, we also closed our acquisition of Chi-X Asia Pacific. We are very excited to further expand in this new region and I'll share more about our plans later in the call. First, I'll touch on the solid growth of our recurring non-transaction revenue, powered by our Data and Access Solutions business. Similar to the first quarter, we exceeded our growth targets, achieving 21% growth during the second quarter. This increase included organic growth of 19% year-over-year, which was fueled by an equal contribution from both proprietary market data fees and access and capacity fees. As a result of this continued strong performance, we are increasing our 2021 organic growth target for recurring non-transaction revenue to a range of 12% to 13% from a range of 10% to 11%. The growth in non-transaction revenue was driven by new subscribers to Cboe's front-end platforms, such as Silexx, LiveVol Pro and TradeAlert, as well as demand for logical ports and market data, as customers look to gain global market access. Our Data and Access Solutions business provides a suite of data analytics, market intelligence, and execution services, allowing us to interact with and add value for market participants at every step of the trade process. Later this year, we plan to launch Cboe Global Data Cloud, which will provide cloud distribution for certain data products, creating a simple, efficient way for customers to access our data. Our goal is to optimize the efficiency and delivery of our data and access solutions to market participants across the globe. We believe the acquisition of Chi-X creates a tremendous opportunity for this business. Turning to Europe, I'm pleased to report that we received regulatory approvals this month to launch Cboe Europe Derivatives and we are on track to go live with this new market on September 6th. We have key market participants ready to support the exchange from day one, including banks, clearing firms, market makers and proprietary trading firms, who will help contribute to the provision of liquidity and client order flow. I am incredibly proud of our team and their dedication over the last 18 months, working remotely from their homes, to develop this new market designed to address the diverse needs of our customers. We believe that market participants will find tremendous benefit in being able to access a truly pan-European, transparent, efficient, and lit derivatives market. Our overall business in Europe was exceptionally strong in the second quarter and we expect the launch of Cboe Europe Derivatives to build on this momentum. As we've said before, we see a significant opportunity to grow the overall derivatives market in Europe. We are not aiming simply to take market share from incumbent exchanges. We intend to reshape and expand derivatives trading across Europe with a novel market structure designed to attract both new and existing participants. We're excited to get started doing just that in September. Moving to BIDS Trading. Last month, we announced plans to launch Cboe LIS powered by BIDS in Canada in February 2022. Based on our highly successful offering in Europe, our Canadian LIS offering, which is subject to regulatory approval, will combine the industry-leading block trading capabilities from MATCHNow, the Canadian alternative trading system Cboe acquired last year, and BIDS to create an enhanced market center for block-sized liquidity. The launch of BIDS in Canada will be coupled with the planned migration of MATCHNow to Cboe technology, further extending our world-class trading platform. BIDS has established itself as the premier block trading destination in the US and Europe and we are excited about our plans to expand the BIDS network to Canada and Asia Pacific, first into Australia and then Japan, to serve an even broader base of customers. As we broaden our global footprint by entering new markets and launching new products and services, we further our goal of expanding access to a broader base of customers – both institutional and retail. Last month, we announced a November 21st launch for our extended global trading hours for VIX and SPX options, as part of our 24-by-5 initiative, subject to regulatory review. The lengthened global trading hours will complement our entry into Asia Pacific with the Chi-X acquisition and are designed to help meet growing investor demand for the ability to manage risk more efficiently, react to global macroeconomic events as they happen and adjust SPX and VIX options positions around the clock. We've seen steady growth this year in SPX options trading on retail broker platforms as retail engagement across the market continues. Monthly ADV in SPX options on retail platforms has increased more than 50% since the start of the year. We've also continued to see strong growth in multi-listed options trading with ADV increasing 11% year-over-year in the second quarter. We see opportunity with the growing retail audience and remain committed to investing in education and product development to meet their unique needs. Product innovation remains a core focus of the Cboe franchise, and we continue to evaluate opportunities to expand our proprietary product offering with smaller contract sizes that appeal to both retail traders and institutional investors. Enhancing and expanding our education offering from the Options Institute remains a top priority. Last quarter, the Options Institute hosted numerous webcasts and training sessions for market participants and also launched a new learning management system for retail and institutional investors looking to learn more about derivatives. We are currently demoing this system with clients, and plan to make it available for on-demand online education later this year. Additionally, we've cultivated an expert team of derivatives specialists to serve as adjunct faculty instructors for the Options Institute and look forward to hosting classes beginning this fall. These distinguished practitioners specialize in derivatives products, operations and risk management, decision theory, and research and we look forward to engaging with and educating investors on the benefits derivatives can provide to their investment portfolios. And last, we closed our acquisition of Chi-X at the beginning of July, enabling us to establish a significant presence in the Asia-Pacific region. This acquisition marks a pivotal moment in our corporate evolution. We are now a truly global market infrastructure provider, operating markets and delivering products and services around the world every day of the week and around the clock. We plan to migrate Chi-X to Cboe technology over time and the team is busy working through the integration plan and timeline. Offering one, unified technology platform will help provide market participants with greater access to Cboe's diverse product set and more efficiency, resiliency and functionality when trading across Cboe's markets. As we move forward, we see a significant opportunity to expand our ecosystem of market infrastructure and tradable products into one of the world's largest and most comprehensive global derivatives and securities networks. We have proven ourselves as a nimble and efficient operator of securities markets around the globe. But more importantly, we see securities markets as the foundational element in creating products and services that span the equities and derivatives landscape. Our transactional expertise allows us to create, package and distribute a host of market data, analytics and index products. Having recognized benchmark indices allows us to, in turn, develop additional tradable products and new markets for these products to trade, creating a virtuous circle of transaction and non-transaction product growth at Cboe. You only have to look at the success of Cboe Europe, which started out as a small equity market and is now on the cusp of launching a pan-European derivatives market, to realize the power and potential of these relationships. I'm extremely pleased with our performance this quarter and I want to thank all Cboe employees for their hard work and also welcome Chi-X to the Cboe family. We look forward to delivering enhanced value to our customers and our shareholders as we broaden our global network and access to Cboe's unique products and services. With that, I'll turn it over to Brian.

Thanks, Ed. And good morning, everyone. Let me remind everyone that unless specifically noted, my comments relate to 2Q 2021 as compared to 2Q 2020 and are based on our non-GAAP adjusted results. As Ed just indicated, we reported strong financial results for the quarter, seeing solid contributions from our proprietary trading products as well as our data and access solutions. Earnings in the second quarter increased on a year-over-year basis as we build a more balanced and diversified company. We remain steadfast in our efforts to become one of the world's largest global derivatives and securities networks, enhancing value to our customers as well as our shareholders. Now, a quick review of the quarter. Our net revenue increased 18%, net transaction fees were up 19% and recurring non-transaction revenue was up 21%. Adjusted operating expenses increased 34%. Adjusted EBITDA of $234 million was up 11%. And finally, our adjusted diluted earnings per share was $1.38, up 5% compared to last year's quarterly results. 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 revenue increase in our options segment, which accounted for a majority of our total net revenue growth, was driven by higher trading volumes in both our proprietary and multi-listed options. Total options ADV was up 12% as we saw double-digit increases in both index and multi-listed options. Revenue per contract also moved higher by 5%, given positive mix shift to index products and a strong increase in our multi-listed options RPC, up 31%. And we continued to benefit from solid growth in recurring non-transaction revenue, particularly access and capacity fees, in this segment. North American equities revenue decreased 2% year-over-year as industry equity volumes in the US declined by 15% and Cboe's market share trended lower, primarily reflecting incremental share going off exchange. While our overall market share has trended lower, our continuous trading market share has held up relatively well and we are optimistic about the many innovations we have introduced, and plan to introduce, to the market, including retail priority, Quote Depletion Protection, earlier trading hours and periodic auctions. The volume declines in 2Q were partially offset by a $10 million contribution from BIDS and MATCHNow for the quarter. Lastly, recurring non-transaction revenue increased by more than $4 million or 15%, with organic growth of 14%. Second quarter revenue increased in futures by 31% on the back of a 49% increase in ADV. The revenue increase in Europe primarily reflects the addition of EuroCCP, which contributed $11.7 million during the quarter and the impact of favorable foreign currency translation. Underlying trends are strong in the business as average daily notional value traded on Cboe European Equities was up 16%, outpacing the broader market's 5% increase. Net capture also rose 7% during the quarter. And finally, the 1% net revenue growth in FX was a result of slightly higher trading activity. Turning to expenses, total adjusted operating expenses were approximately $128 million for the quarter, up 34% compared to last year. Excluding the impact of acquisitions owned less than a year, adjusted operating expenses were up 16% or $16 million for the quarter. Most of the expense variance related to the acquisitions was compensation and benefits. Cboe's recurring non-transaction revenue momentum accelerated in the second quarter with year-over-year organic growth reaching 19%. Again, this strong growth was largely a product of additional subscriptions and units as opposed to price increases. More specifically we are seeing both physical and logical port usage has accelerated in our equities and options businesses, driven by increased demand for trading capacity. On the market data side, we have seen equities also perform well as the strength of Cboe One and top-of-book products have driven market data growth, both domestically and internationally. We are excited to build on our strong organic growth trends with the addition of Chi-X and its revenue base that is approximately two-thirds recurring in nature. We are increasing our organic growth outlook by 2 percentage points to 12% to 13%. As we factor in the Chi-X contribution, our total non-transaction revenue growth is now expected to reach 15% to 16% for 2021, up 4 percentage points versus our prior expectation. Overall, our recurring non-transaction businesses remain a critical component of the Cboe growth story and one that we expect to continue to accelerate and diversify our revenue stream over time. Moving to our expense guidance, we are reaffirming our full year range of $531 million to $539 million. Importantly, our unchanged guidance range now includes the full impact of Chi-X, an incremental $13 million, which is expected to be completely offset by expense reductions related to COVID-19 in 2020 that have continued into 2021 longer than we initially expected, a reduction in facilities overlap given our ability to expand space in one of our existing locations, and lower compensation expenses due to hiring at a slower pace than we initially expected within both our core operating expenses as well as some of our strategic growth initiatives. Note that we expect the incremental Chi-X expenses to be more than offset by its incremental revenues. We expect our expense spend to increase sequentially in 3Q and 4Q, and we expect to see positive returns from the investments we are making. Specifically, our investments reflect our plan to increase access to our existing products and services, especially growth in our index options and futures by developing, listing, and distributing unique products, enhancing our marketing, education, and content, and increasing our efforts to tap into the growing base of retail investors. Turning now to a summary of full-year guidance on the next slide. We are lowering our guidance for depreciation and amortization to $34 million to $38 million from $38 million to $42 million. Our CapEx guidance range moves $5 million lower to $55 million to $60 million, and while our effective tax rate for the second quarter was 30.1%, above last year's rate of 26.7% and above our guided range of 27.5% to 29.5%, we are reaffirming the guidance for the full year under the current tax laws. However, we now expect the adjusted effective tax rate for the full year to be at the higher end of the guidance range given where we are in 2021 through June. While we are not providing full year guidance on interest expense, we note that we drew an additional $110 million on our term loan credit agreement at the end of the second quarter to fund a portion of the Chi-X deal. Going forward, absent any additional borrowing and significant changes to LIBOR, our interest expense for the third quarter of 2021 is expected to be $11.5 million to $12 million, slightly below our second quarter expense of $12.3 million, reflecting more favorable rates associated with amendments to our term loan facility and EuroCCP credit facility that were effective late June and early July, respectively. In addition to the investment priorities we outlined earlier in the call, we remain committed to returning excess cash to shareholders through dividends and share repurchases. From a capital return perspective, our strong cash flow generation enabled us to return $79 million to shareholders through dividends and share repurchases in the second quarter. We plan to continue to use our share repurchase capacity opportunistically. Our leverage ratio increased slightly versus the prior quarter to 1.5 times at June 30 as a result of the additional term loan financing used to partially fund the Chi-X acquisition. Overall, our balance sheet remains unencumbered as we look to put incremental capital to use in the most value enhancing way possible for shareholders. In summary, we are pleased to report solid 2Q results. We are even more excited about the momentum we are carrying into the remainder of this year with an increase in guidance for our non-transaction revenue growth rate, overall, and importantly organic, and our unchanged expense guidance range despite the addition of Chi-X expenses. We believe we have made, and expect to continue to make, investments that are set to deliver growth and increased value to our shareholders. 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. Before we turn to Q&A, I wanted to quickly highlight a couple of important corporate developments. As we accelerate our growth and operations on a global scale, we remain focused on our environmental footprint, social responsibilities, and opportunities to make a difference in the communities in which we live and work. To that end, last month, we announced a new community engagement program, Cboe Empowers. This program provides mentorship, scholarships, and guidance to under-resourced students through their educational journey from elementary school to career. Cboe Empowers is our most ambitious philanthropic endeavor to date. We couldn't be more excited to help equip the next generation with opportunity to realize the career choices available to them as they embark on building their future. Additional information about this exciting program, as well as some of the other important initiatives we are focused on regarding environmental, social and corporate governance, is included in our recently-published ESG report. We are committed to doing our part to help ensure we are tackling the important challenges our global community is facing today and in the future. I'd also like to take a minute to express my immense gratitude to Debbie Koopman for her service to Cboe as she will be retiring in November. During her 13 years with us, she has built Cboe's investor relations program from the ground up, played a major role in our transition to a public company through our successful IPO in 2010, and has been pivotal in the execution of our acquisition strategy. She has helped shape and communicate Cboe's vision and mission to the investment community, developing strong relationships with our shareholders, potential investors and research analysts. I have always appreciated her sharp wit, tough questions, friendship and indelible laugh and will miss working with her. We are thrilled to have Ken Hill succeeding Debbie as Vice President of Investor Relations. He joined us last month and is working closely with Debbie to ensure a smooth transition. His experience and expertise in capital markets make him a perfect fit for this role. We wish Debbie all the best in her retirement. I'll now pass it back to Debbie for instructions on the Q&A portion of the call.

Thanks, Ed. At this point, 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. Operator?

Operator: Instructions were provided to participants on how to queue for questions. And this morning's first question comes from Rich Repetto with Piper Sandler.

I've got to extend my appreciation and thanks to Debbie. You've had a heck of a run. And it goes all the way back beyond the CBOE to the CBOT as well. But thank you for all the help you've given the investment community. She said this is the last call. She said, 'You better ask about growth.' So, I will ask about growth. On the organic growth going up by 200 basis points and then the non-transactional recurring going up by about 400 basis points, is it roughly the explanation here 2% organic lift and then 2% from Chi-X on the recurring side? And then, just a little bit more deeper color on it? It seems like Cathy Clay and your reorganization is benefiting you. And then, on the Chi-X side, can you go through once again why that is so high percentage of non-transactional recurring revenue?

Thanks for the call out to Debbie. You're right. She's been an anchor for us long before the IPO. So, thank you for calling that out. As for growth, couldn't be more excited to share with you a little bit more color there. And, yes, Cathy's business is really set up nicely for us. The timing is perfect. We definitely have the right leader there. But, Brian, why don't you take it over?

We do love this question, Rich. So, I'll just reiterate a couple of things. One, on the access capacity, we've kind of seen that strength all year long. Again, reflecting, like I said, accelerated demand for overall capacity to access our markets, showing the quality and depth in what we're doing there. And again, that is across the board. That is options, equities, Europe. Actually, the strongest on a pure growth rate is European equities. From an overall contribution, it's still coming from the options business as well as North American equities. On the market data side, I would say a couple of things I want to hit there as well, is that I hinted that that growth is actually coming also internationally and domestically. If we look at just the market data growth, we're seeing that more than 50% is actually coming internationally. So, we're still seeing really good strength there as far as what's happening. And then, I would say from the incremental guidance that we're seeing, we look at our pipeline, we have assumptions around attrition, that may or may not happen. I will tell you, what we're seeing is, the things that we've been doing, the continuous enhancements that the team is making, we've seen a decline in the attrition rate. So, we're actually seeing better results than we had originally forecasted. So, the attrition rate is down from what we've experienced in the past. So, we're seeing it be even stickier than it was in the past. So, that's driving a lot of the incremental guide on the growth rate in the non-transaction revenue. On the Chi-X, yes, that is a bit of uniqueness to the market structure of Australia and Japan, particularly Australia. If you look at the overall mix, it's roughly a 50/50 between market data and access and capacity fees, a little bit more leaning towards market data. And it's a higher percentage of the overall mix within Australia.

The next question comes from Alex Kramm with UBS.

Not to ask the same question again on Chi-X, but I know you've given some revenue numbers, specifically in the past, that you said it's a fast growing business. So, can you just update us on current run rates? And then also, maybe a little bit more specifically, in terms of where this is all going to fall from a modeling perspective? Is this going to be a new segment or where it's going to go? And then, maybe expand on the immediate plans here for the business in terms of regional expansion or where you think you can make the most impact quickly in terms of enhancing technology or order types? What's really the plan of attack in the next 6, 12, 18 months?

Let's go in reverse. Chris, you want to start off with the plan, I think what you and Dave have outlined. So, let's give a little bit more clarity there. Brian, you can fill in on the first part of the question. So, let's start in reverse if that's okay, Alex, and I appreciate it.

In the integration plan, as we do normally with integrations, we do plan to migrate to our technology. We plan to first bring BIDS to the region first in Australia, then in Japan. We haven't put out specific dates, but we're moving swiftly now that we have the transaction closed and working with our new colleagues there. We would migrate likely first Australia and then Japan to Cboe technologies, the same platform we use to run all of our equity options and futures market. So, we're moving very quickly. We'll have more firm dates in the coming months. We're really pleased with the initial work with our colleagues. They're very excited about the growth opportunities in Asia, both for those existing equity markets, but also the access and distribution it gives us for our other products around the world.

Chris, why don't you pick up then also on the effort at the end of fourth quarter, end of the year on 24/5, as you say, with existing products and our bigger presence in the region?

As Ed mentioned in his opening remarks, on November 21, we plan to extend trading hours to nearly 24/5 for SPX and VIX options on our Cboe options market. That will better align with our CFE futures or VIX futures that are already trading 24/5. This is in direct response to customer demand. They want to trade these options products around the clock. We want to provide them that access. We're adding a curb session here in September. It will be right after the market closes U.S. time. Then, nearly 24/5 coming in November. We're excited about that and being able to distribute those to our APAC customers, as well as those in other regions that may want to trade during those hours.

Alex, on the growth rate, I think we've historically said that we've seen some of the growth rates in the kind of the 20% ranges and where we are. We see that momentum continuing, whether that's kind of low-20s or mid-teens as we look forward. We see that business continuing to grow. We haven't seen the slowdown from when we started talking with them to where we are today.

To Rich's prior question as well, a question of why non-transaction revenues are substantial in this business: when we diligenced the business, it was one of the really interesting things we found about the platforms of the two countries. They're highly connected. They're indispensable platforms in both countries. As a result, you see reflected, people really needing to take that access, take the data from both platforms. Where you can grow from there, to your question Alex, relative to the size of the Chi-X businesses, we see a market opportunity, just looking at the incumbents of 20 times the size of the revenues of these businesses, and our aspiration is always to grow the pie, not just to take share from the incumbent. So, we think it's a clear case where we can take the business from its position today.

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

I was hoping you could expand a little bit more on this increased subscription and incremental units dynamic for non-transaction revenues you described earlier. Sounds like increased demand for access fees really across the board, across all your markets. How much of that is coming from existing customers versus new customers? If it is more of a new dynamic, can you characterize who they are? And then, given tremendous amount of volume growth in both equities and options over the last 12 months, how much of that do you think could be cyclical versus secular?

I don't have the exact numbers you're looking for, but I'll discuss high level trends. You're going to have some new customers, but the bulk of that is coming from existing customers. You're seeing a reflection of two things: the offerings we're providing and some macro factors. We're seeing higher volumes, so customers want more access and capacity. You're seeing influence from macro and from customers figuring out their analytics and adding incremental ports. We're seeing a combination of both. The primary growth driver is existing customers, with some new customers contributing. That mix provides diversity as we try to touch several levers to keep momentum moving forward.

The next question comes from Owen Lau with Oppenheimer.

Could you please give us an update of your product roadmap of Cboe, your derivatives after it goes live? Which products you feel very strong about, given your initial conversation with clients? And how should investors expect the pace of your product launch?

We are on time. As I said in the prepared remarks, regulatory review and approvals are coming along nicely. We're operationally ready. Starting with the six indices that we laid out over the last couple of quarters is how we're starting. From there, we'll look to expand with more country-specific exposure. The model is important: being able to express interest across Europe in one CCP delivers capital efficiencies, and the efficiency of a lit, accessible market rewards liquidity providers. The benefit is customers will see an accessible market, market makers rewarded for the liquidity they post from open to close, and the efficiency of having one CCP where cross-European exposure can be optimally cleared. This is not solely a market share play; it's about expanding opportunity for growth and allowing customers to express opinions in individual countries and pan-European risk.

We are super excited about this. We recognize it's a long-term investment and the build will be somewhat slow in 2021, which is why we haven't projected massive revenues in 2021. But this is the start of a long-term growth play under the leadership of Dave Howson and the team in Europe. We've had good demand across the ecosystem, good readiness, and we're right on schedule. Starting with those six indices first, and then eventually expanding to more country-specific products, more single-stock options, and futures. We have a long-term growth path that our customers want.

Our next question comes from Brian Bedell with Deutsche Bank.

Maybe back on recurring revenue. The updated guidance for the second half of 2021, is that based on the current subscription value that you have in the ground right now and what Chi-X Asia has right now? Or are there increasing penetration of data, especially with the Chi-X business factored into that guidance? And then, as we look into 2022, it's probably early, but given that opportunity, can you talk about the confidence of potentially generating double-digit recurring revenue growth on an organic basis, not including acquisitions in 2022?

Brian, you want to start?

I'll try to unpack that. Our non-transaction revenue growth expectation is conservative and primarily reflects what we see today and relative to our growth last year. We've seen consecutive quarters of this category continuing to grow, running against higher comps year-over-year. The short answer is it primarily reflects what we see today, factoring in lower attrition rates and some slightly stronger pipeline with some probability of success over time. It's sometimes hard to predict when those opportunities will materialize, but that's somewhat factored in.

Historically, Chi-X has shown double-digit growth on both the transaction side and the data and access side. When we framed the strategic benefits of the deal, we talked about three levels: transaction growth opportunity (market share), data distribution, and the BIDS/connectivity opportunity. This is a two-way data distribution opportunity: distributing our existing data properties into the Asia-Pacific theater where we had limited representation, and distributing data from those markets into our existing markets where we have significant presence. BIDS will drive both transaction volume and the data opportunity in Australia and Japan.

Just to add on data, we're adding to the different data sets we're able to offer with the transactions from last year and broader data sets from our markets. The 'what' is increasing, the 'where' we're distributing data is increasing, and the 'how'—for example Cboe Global Data Cloud—is increasing. We think this is a secular growth path for us.

Our next question comes from Kyle Voigt with KBW.

You've done several bolt-on type acquisitions over the past 18 months. Are you seeking out deals specifically in that smaller size range? Looking ahead, is there a strong preference for bolt-on size transactions or would you be open to larger type acquisitions, whether scale or more transformational as well?

The answer is yes, we are open. We're not afraid to look at a larger deal, though we don't have a need to do so. More important than size is the type of transaction. We focus on deals in our core—assets that fill out our suite of products and services that help customers pre, at and post trade. We look at asset classes and geographies where we have an advantage to compete. If a country or region is open for competition, we want to study how to compete in a way that when customers see Cboe they see trust, knowledge, reliability and consistency. We'll look globally and continue to look for opportunities to expand presence in regions where we already operate.

To add to Ed's point, smaller acquisitions can be extensions of our organic capabilities. We think we're quite good at integration and these deals can drive organic growth. In the case of Chi-X, the returns on the capital deployed have been meaningful. So, it's not that we favor small versus large; both can play useful roles in our strategy.

And the next question comes from Michael Cyprys with Morgan Stanley.

I wanted to ask about market data. You guys have made a number of acquisitions here, maybe you could update us on your sales strategy on the market data front. How are your sales teams organized? How are you bringing them together? To what extent do you operate them separately? How are you using the sales teams to accelerate growth?

I'll tee that up and Brian will provide more detail. Last quarter, we announced that Cathy Clay will be leading a new division with data and access services and solutions, which is very important to us. Brian, how should they track and model this?

There are two things to emphasize. First, there's incremental momentum with Cathy pulling things together. We're focused on analytics and computational offerings versus real time data—making it more digestible to meet outside customer demand. That helps accelerate sales. Second, cross-sell across asset classes is important. Incremental growth has come out of our equities business, and it's not just the market data sales team. Transaction-focused teams are also talking to clients about the quality of market data and different offerings. That cross-sell across asset classes and geographies is helping drive momentum. We want to incent that behavior and continue to rally our teams to grow revenue holistically.

Importantly, the combined sales effort of real-time and enhanced market data with FT, TradeAlert and the analytics that Hanweck provides is an incredibly powerful, expandable and portable platform and relationship. We only started pulling this together a quarter ago, so keep watching this; we're excited about it.

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

On slide 12, in the non-transaction revenues chart, the percentage of subscriptions in incremental units has declined over the last two quarters. Am I reading this right to say you've been able to take a little bit more pricing? If so, where have you had incremental pricing power, or is there still upside from pricing? Also, on your summary chart slides, you had a bullet on positive traction in corporate bond index futures in the futures business. Can you update us on that opportunity? We haven't heard about it in a while.

On pricing, it was an introduction of some pricing that was more of a normalization rather than a strategic shift. It was on the equity side of the business and was relatively minor given the overall mix; it showed up because there hadn't been much pricing action recently. So, we don't view it as an explicit change in strategy. On the futures, that's been a strong growth story. Relative to the overall scale of the business, it's not huge yet, but it's meaningful growth. If you look at the iBoxx complex, we've seen roughly a 90% growth rate from where we were before, and we also saw growth sequentially from the first quarter, on the order of about 20% across that complex. It's nice momentum that's continuing to build.

Alex, great question. This is how things start. Volume growth in this area attracts attention. We're focused on the demand for large blocks, particularly in high yield, and solving for block trade size is what we'll be discussing in future quarters.

And the next question also is a follow-up from Brian Bedell with Deutsche Bank.

Just wanted to ask about U.S. equity market structure. What's your view on getting more volume on lit exchanges? Do you think allowing exchanges to use finer tick sizes to match off-exchange increments is realistic and helpful? And any update on the regulatory view on market data?

We believe the SEC is looking at the right approach. The Chair has called for a review. From our perspective, any movement that allows for more competition and price discovery and creates an equal playing field is positive. These are healthy discussions and we're ready to participate in the debate.

We think now is a good time for the commission to be looking at this under Chair Gensler, who is focused on outcomes for investors. The market is operating well today, but changes could improve outcomes. Changes in tick sizes, particularly aligning on-exchange tick sizes with off-exchange increments, could help level the playing field. The growth of off-exchange volume is hard to ignore. We support displayed quotes, transparent markets, and tick size reform could help. We also support greater disclosure and transparency around best execution. We don't advocate dramatic reforms, but we think it's time to review tick sizes. On market data, nothing material to update; we continue to track it closely and welcome the focus on these important issues for retail investors.

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

Thanks, Keith. Appreciate it. That concludes the call. But before we end, I just wanted to take a minute to thank everybody for your kind words. It's been extremely gratifying working with all of you over the years. I was going to say more, but I don't know I'm going to be able to. It's been great. I appreciate your friendship and working with all of you. It's a great opportunity to be part of the Cboe team. I look forward—I will miss everybody. I do look forward to my new role in retirement; in December, I'm going to be a grandma. That will be my new title going forward.

Thank you, Debbie.

Thank you. That does conclude today's teleconference. Thank you so much for attending today's presentation. You may now disconnect your lines.