Cboe Global Markets, Inc. Q4 FY2021 Earnings Call

Good morning, everyone, and welcome to the Cboe Global Markets Fourth Quarter 2021 Earnings Conference Call. As a reminder, this call is being recorded. At this time, for opening introductions, I would like to turn the call over to Ken Hill, Vice President of Investor Relations.

Good morning. 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 provide an update for 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 2022 financial outlook. Following their comments, we will open the call to Q&A. Also joining us for Q&A will be Chris Isaacson, our Chief Operating Officer; and John Deters, our Chief Strategy Officer. I'd 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 stated 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 material. Now I'd like to turn the call over to Ed.

Thank you, Ken. Good morning, and thanks for joining us today. I hope the year is off to a good start for all of you, and I hope the year ahead sees us turning the page in this global pandemic. I'm pleased to report on a strong fourth quarter and record full year results for Cboe Global Markets. For the year, we grew net revenue 18% to a record $1.5 billion and adjusted diluted EPS grew by 15%. For the quarter, we reported revenue growth across each of our business segments, reflecting strong year-over-year increases in both transaction and recurring non-transaction revenues. Our results were driven by higher volumes across our businesses, coupled with increased demand from our suite of data and access solutions. In our proprietary products, ADV increased by 50% in VIX futures, 10% in VIX options and 47% in SPX options. We also continue to see strong growth in multi-listed options trading with ADV up 21% year-over-year in the fourth quarter. During the quarter, we also announced key planned acquisitions designed to strategically expand our global network, including ErisX, which is expected to provide Cboe with spot trading, data, derivatives and clearing capabilities for digital assets through its regulated futures exchange and clearinghouse and Neo Exchange, which is expected to provide us with a significant presence in the Canadian equities market. We also invested as a limited partner in Trading Technologies, a global provider of professional trading software, connectivity and data solutions. The ErisX and Neo deals, which are subject to regulatory review and other customary closing conditions, are expected to further expand our ecosystem of market infrastructure and tradable products as we continue to build out one of the world's largest and most comprehensive derivatives and securities networks. Turning to our targets and expectations for this year. Similar to last year, we plan to leverage new and recent acquisitions to fuel future investment opportunities across our business in 2022. Our recent expansion into Asia Pacific, Canada and our planned reentry into digital assets further expands our global ecosystem, providing Cboe the ability to drive growth as we innovate, integrate and grow. To highlight a few recent examples. Last week, we reached two important milestones for these recent acquisitions. In Canada, we completed our year-long effort to migrate the technology platform of MATCHNow, the largest equities alternative system in Canada, to Cboe technology. We also launched Cboe BIDS Canada, bringing BIDS' leading block trading capabilities to the Canadian market. We were very pleased and grateful for the strong engagement and widespread support from customers, vendors, regulators and other market participants throughout the migration process. In Asia Pacific, we rebranded the Chi-X businesses to Cboe Australia and Cboe Japan and announced our planned technology migration road map for Cboe Australia, anticipating a February 27, 2023 migration of the exchange to Cboe technology pending regulatory review and approval. Brian will do a deeper dive in prepared remarks, but we plan to invest an incremental $23 million to $26 million of organic growth initiatives tied to revenue in 2022. Initiatives we expect to contribute to our top line and annual organic revenue growth target of 5% to 7% over the medium term. Our results from this year reaffirm our view that further investment in our business can help us deliver value for shareholders. Key to the long-term success of Cboe will be the ability to execute on the transformational opportunities we see in three core areas of our business: data and access solutions, derivatives and Cboe Digital. We will fuel these opportunities by executing against our ongoing strategy, which remains consistent: leverage our superior technology, further strengthen our core proprietary products, increase recurring revenue and expand our product line by geography and asset class. Let me begin with data and access solutions, where we continue to see strong momentum resulting in a 21% increase in our recurring non-transaction revenue for the quarter. This growth was driven by continued demand for access to our exchanges, proprietary market data and new subscribers to Cboe's front-end platforms. During the quarter, we were excited to launch Cboe Global Cloud, a cloud-based market data streaming service that aims to optimize the efficiency and delivery of Cboe's data services for market participants globally. The launch of Cboe Global Cloud is an excellent example of utilizing technology solutions to increase access for new and existing data products to new customers around the world. Prospective customers may not have access to one of our data centers, but they have an Internet connection and can now benefit from our truly unique data set that is unrivaled amongst exchanges. This year, we will be able to realize the full value of our global expansion efforts as we were able to add new data sets and penetrate new markets with our products and services. We are also focused on growing our index and analytics platforms and services and have made key hires that we believe can help fuel sales of this business. Data and Access Solutions posted a very strong fourth quarter to cap an excellent 2021, and we believe the business is positioned incredibly well moving forward. We anticipate Data and Access Solutions organic revenues will grow at a 7% to 10% rate in 2022, consistent with our medium-term guidance provided at Investor Day in November. It was an exciting quarter for our derivatives businesses, and we continue to expand access to our products and services globally through new initiatives, including the successful launch of 24/5 trading for SPX and VIX options, scaling of our new European derivatives business and the continued engagement of retail customers in the options market. Additionally, while we're only five weeks into the new year, we are seeing strong volumes across our proprietary products franchise. In January, month-over-month volume increased 31% in VIX futures, 24% in VIX options and 17% in SPX options. We have seen a strong start to 24/5 trading since launching in late November, validating our belief that global customers want access to tools like our proprietary products around the clock. In January, average daily volume in SPX options during global trading hours was nearly 24,000 contracts, up from an ADV of approximately 11,000 contracts prior to the launch of 24/5. We are also seeing positive impact from VIX options as a result of the 24/5 trading initiative, and we look forward to continuing to expand access to our suite of proprietary products to new and existing customers. In that vein, earlier this week, we were excited to announce a planned March 14 launch date for Nanos pending regulatory approval. Nanos is a first-of-its-kind options contract designed to make trading more accessible for the retail trader. We are excited to have a number of retail brokers offering the product on day one, including Interactive Brokers, TradeStation, Tradier and thinkorswim, who recently added SPX and VIX options to their suite of products. As the retail market continues to grow, we remain committed to investing in education and product development to meet their unique needs. In tandem with Nanos' launch, the Options Institute will unveil new curriculum customized for a retail audience. We expect this market to continue to grow over time, and we look forward to welcoming a new generation of options traders with the launch of Nanos. As we expand access to new customers around the world, we have an opportunity to integrate them into the Cboe ecosystem across many touch points via access to new asset classes, products and services. This week, we also announced plans to expand SPX Weekly options with the addition of Tuesday and Thursday expirations pending regulatory approval. With these planned new listings, Cboe will offer SPX Weekly options that expire each and every trading day, providing traders with additional tools to manage their short-term U.S. equity market exposure and execute trading strategies with even greater frequency, precision and flexibility. We have seen increasing levels of interest and adoption for short-dated option strategies through our Monday, Wednesday and Friday weekly expiration contracts, driving trading volume growth in the SPX complex in recent years. We see the launch of Tuesday and Thursday expiries as a way to build on the success of existing weeklies and look forward to bringing these to the market. On the retail front, we saw solid growth in SPX options trading on retail broker platforms with ADV on those platforms up 8% from the third quarter, hitting a new all-time high. Turning now to Europe. I'm pleased to report that our recently launched European derivatives market continues to gain momentum. Since launching a few months ago, we have laid a strong foundation for future growth and product expansion. We grew the number of participants trading on the exchange and volume continues to grow month-over-month. The market is off to a strong start in 2022 with nearly 2,000 contracts traded in January, already surpassing our total in 2021. In terms of product expansion, we are planning to launch futures and options on four additional Cboe European country indices, Italy, Spain, Sweden and Norway, next quarter, subject to regulatory approval. And we have already secured market making support for this product complex expansion. Later in the second quarter, we plan to also launch weekly options on our Phase 1 index products, and our longer-term plans include a third phase of product expansion to include European single-stock options, subject to regulatory approvals. We are very excited about the many initiatives in the works with the derivatives franchise, and we find new ways to deliver access and meet client needs around the world. Turning to Cboe Digital and our planned acquisition of ErisX, which remains on track to close in the first half of 2022 and is subject to regulatory review and other customary closing conditions. We've been pleased with the reception from regulators and state approval processes progressing as expected. As the appetite for ownership of digital assets continues to grow, we believe Cboe can play a guiding role in shaping the trajectory of this revolutionary market. While this is a new asset class, we can apply our blueprint of success, operating trusted, transparent regulated markets to this experience. While much of the market focus today is on a transaction opportunity, we also see tremendous potential to generate and provide benchmark crypto data that is currently opaque and untimely in many instances. Our teams are working closely behind the scenes on integration and road map planning. We're also excited to close the transaction with the ErisX team and our incredible partner group of investors and engage market participants to chart Cboe's course in this exciting new frontier. We're excited about both the near and long-term opportunities to grow and expand our business, and believe we have strong momentum as we kick off 2022. We are well positioned to move up into attractive and expanding addressable markets across all of our businesses, and we couldn't be more excited about the opportunity set in front of us today. We expect these initiatives to help us further strengthen our position as one of the world's largest global derivatives and securities networks. With that, I will turn it over to Brian.

As Ed spoke to, fourth quarter was a very strong finish to an exciting and record-setting year at Cboe. Overall adjusted earnings per share were up 41% on a year-over-year basis and 17% sequentially, as both the transaction and non-transaction businesses turned in excellent results. Furthermore, as we look at trends through January, we have seen continued acceleration across our businesses. Quickly looking back at some of the noteworthy takeaways from the fourth quarter, our net revenue increased 27%, matching another quarterly record. Net transaction fees were up 42% and recurring non-transaction revenue was up 21%. Adjusted operating expenses increased 23%. Adjusted EBITDA of $264 million was up 28%. And last, but certainly not least, our adjusted diluted earnings per share was a record $1.70, up 41% 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 from each of our business segments. So I'll just provide summary thoughts. We saw year-over-year growth in all of our segments for the second consecutive quarter. Options delivered exceptional growth of 25%, driven by higher trading volumes in both our proprietary multi-listed options as well as higher revenue per contract, or RPC, and index options. Total auctions ADV was up 23% as we again saw double-digit increases in both index and multi-listed options. RPC moved higher by 9%, given a positive mix shift to index products and a solid increase in our index options RPC, up 5%. And lastly, we continue to benefit from another quarter of double-digit growth in recurring non-transaction revenue, particularly access and capacity fees, which were up 20% as compared to the fourth quarter of 2020. North American Equities net revenue increased 24% year-over-year as industry volumes moved slightly higher, further helped by solid growth in proprietary market data fees and access to capacity fees. Net capture meaningfully improved on a year-over-year basis, somewhat offset by a decline in market share. As we move forward, we continue to look to strike the right balance between market share and pricing, while delivering on quality market data, innovative new order types and functionality to the market. For the quarter, BIDS contributed $8.5 million in net revenue. Lastly, recurring non-transaction organic revenue increased by more than $4 million or 13%. The Europe and APAC segment delivered outsized growth in the fourth quarter of 2021, with net revenue up 46%. The increase was driven by higher volumes and the inclusion of Chi-X Asia-Pacific revenues of $8.5 million. Clearing fee growth outpaced transactions as settlement volumes were up 25%, clearing volumes up 19% and European equity market ADV was up 17%, coupled with market share growth of 230 basis points. Fourth quarter revenue increased in futures by 39%, benefiting from a 44% increase in ADV and a 5% increase in capture. We continue to see steady engagement in our futures business to start the year, with January ADV up 32% from fourth quarter levels. And finally, revenues in the FX segment increased 6% as compared to the fourth quarter of 2020 as net capture moved higher and trading volumes remained steady. During the quarter, Cboe recorded its sixth consecutive record ADV quarter at $725 million versus $135 million in fourth quarter 2020. Cboe's recurring non-transaction revenue growth accelerated from strong third quarter levels, with a year-over-year organic growth reaching 15% in the fourth quarter. Again, the strong growth was primarily driven by additional subscriptions and units as opposed to price increases. More specifically, we saw robust physical and logical port usage in our equities and options businesses driven by increased demand for trading capacity. And on the market data side, the equities top of book and options depth of book products are performing well. As we look to 2022, we see tremendous potential for the Data and Access Solutions business. We are targeting D&A organic net revenue growth to run in the 7% to 10% range for the year, in line with the medium-term guidance we delivered at our November Investor Day. We look to continue to invest strategically in the business to unlock its full potential within the Cboe ecosystem. Turning to expenses. Total adjusted operating expenses were approximately $138 million for the quarter, up 23% compared to last year. Excluding the impact of acquisitions owned less than a year, adjusted operating expenses were up 13% or $15 million for the quarter. Most of the expense variance related to the acquisitions was compensation and benefits. Moving to our expense guidance. We are introducing a full year expense guidance range of $617 million to $625 million for 2022. This guidance incorporates our run rate expenses as of December, coupled with a healthy level of investment spend in the year ahead, a reflection of our conviction in the many high-margin, high-return opportunities ahead of us. Throughout 2021, we have consistently messaged that we would be investing in our business, strengthening our global infrastructure and laying the groundwork to support future growth. We see 2022 as a year where we make many of those investments. We expect $23 million to $26 million of the 2022 investment spend to directly drive incremental revenue growth at higher levels of activity in the future. I think it's important to spend some time illustrating how some of our recent investments have led to higher levels of revenue growth. Most recently, Cboe has invested purposely in Data and Access Solutions, European clearing and derivatives and the expansion of core product set, with initiatives like 24/5 and a planned launch of Nanos. While we are by no means finished, we are already seeing attractive returns that contribute to today's 41% year-over-year growth in EPS for the fourth quarter and record results for the full year. More specifically, in Data and Access Solutions, we delivered 21% growth in recurring non-transaction revenue for the fourth quarter and 20% growth for the full year. This growth was made possible by investing and integrating recent acquisitions to build a global distribution and sales platform. As we look to take the D&A business to the next level, we are investing in cloud capabilities, hiring senior sales talent and further building out our index franchise to help unlock the full potential of the platform and broaden our potential revenue expansion opportunities in the years ahead. EuroCCP was an investment we made a little over 1.5 years ago that is driving more meaningful revenue at Cboe. Not only has EuroCCP vastly exceeded our initial expectations, but it has also laid the groundwork for European derivatives business that is beginning to take shape. While European derivatives is still a minimal contributor today, we have seen January contract volume and open interest nearly triple from December levels. We will look to expand on that growth with plans to introduce four new contracts in April and weekly options later in the second quarter of this year, pending regulatory approval. Lastly, 24/5 trading on the SPX and VIX options contracts went live on November 21. As Ed highlighted, in only a short amount of time, 24/5 has delivered incremental volumes to our platform, not to mention the ancillary benefits of greater market data and access fees and an expanded customer base. We expect to continue to invest in our infrastructure to facilitate greater volumes across our platforms. We believe these initiatives exemplify our philosophy at Cboe: leverage our superior technology, further strengthen our core proprietary products, increase recurring revenue and expand our product line by geography and asset class. While not included in our formal 2022 expense guidance range of $617 million to $625 million, we believe the pending acquisitions of ErisX and Neo have the potential to add an incremental $36 million to $42 million of expenses in 2022, contingent on the timing of closings, which are subject to regulatory reviews and other customary closing conditions. We anticipate a potential revenue offset for more than half of the expense in 2022, with an expectation that the additions are EBITDA positive on a combined basis in year two. The company plans to further update its guidance for 2022 after the acquisitions close, which is expected in the first half of this year. Looking forward, we see numerous opportunities to invest in ways that fuel sustainable earnings growth for years to come. Investments have delivered a double-digit return on invested capital that shareholders have received and they come to expect. Now turning to a summary of full year guidance on the next slide. We are reaffirming many of the elements you've heard us speak to at our Investor Day back in November. Specifically, we anticipate D&A organic net revenue growth will be in the 7% to 10% range. Acquisitions held less than a year are expected to add 1 to 3 percentage points to total net revenue growth this year. Inorganic net revenue growth is expected to be 5% to 7% in 2022. Depreciation and amortization is expected to be in the $40 million to $44 million range. Our CapEx guidance range is $47 million to $52 million for the full year, and we anticipate our tax rate will fall in the 27.5% to 29.5% range for 2022 under the current tax laws. Our interest expense for the fourth quarter of 2021 was $11.1 million. During the first quarter, we anticipate incremental borrowing costs as we put financing in place for the acquisitions of ErisX and Neo, which includes an expanded and longer-tenured revolving credit facility. Given this expected activity in the debt markets, interest expense is expected to be in the range of $12 million to $12.5 million for 1Q '22. While the investment priorities have taken on a bigger role in our capital allocation strategy, as of late, we remain committed to returning excess cash to shareholders through dividends and share repurchases. In total, we returned $52 million to shareholders through dividends in the fourth quarter. We remain opportunistic around share repurchases, with $319 million in remaining repurchase authorization available. Our leverage ratio decreased slightly versus the prior quarter to 1.3 times at December 31 as our debt levels remained steady on a sequential basis. Given the anticipated funding of Neo and ErisX, we expect our leverage ratio to expand in the quarters ahead, but we remain committed to maintaining a flexible balance sheet over time. In summary, Cboe delivered a very strong fourth quarter to close the year, and 2021's record results give us increased confidence that if we continue to invest in the Cboe ecosystem, we can continue to deliver strong long-term results for investors. Now I'd like to turn it back over to Ed for some closing comments before we open it up to Q&A.

Thanks, Brian. In closing, it's an exciting time at Cboe as we continue to execute on our strategy and initiatives, aimed at accelerating growth and value creation as we innovate, integrate and grow. We are extremely proud of the record results we delivered in 2021, and I'm even more excited about the opportunities ahead. The investments we plan to make this year are expected to contribute to our long-term growth in 2022 and beyond. I want to thank the entire Cboe team for their dedication and hard work to continue to put Cboe to new heights. With that, I'll turn it to Ken for instructions on the Q&A portion of the call.

Thank you. At this point, we will be happy to take your questions. The operator will provide instructions on how to ask a question.

The operator will now provide instructions for the question-and-answer session.

Good morning, Ed, good morning, Brian. And I guess there's plenty of interesting strategic questions, but to start off, I'll stick with expenses here. And first, I'm trying to understand the conservatism because you're well below what was implied for the fourth quarter. And then on the expense question, I guess, as we look forward, it looks like you're going to invest $70 million to $80 million, half of that in Neo, half of that in other. You gave some revenue impact on Neo and ErisX. But what about the revenue impact on the other roughly $35 million of investments you're making in 2022?

Sure. Thanks, Rich. A couple of things there. As far as the conservative kind of comments on the expense guide overall, what makes the difference, say, '21 versus '22, the '21 guide, as we look back on it is being conservative is obviously not new to the organization. We will make sure we lay out there the expectations what we think we're going to need as far as the investment to execute, particularly to deliver the top line and the bottom line results. Last year was a lot of growth, highly reliant on a lot of incremental headcount resources and some other investments along the way that, frankly, were never in doubt as far as making those high conviction investments. It just took a little longer to get them in place than what was originally anticipated. So the timing is more what drove the amount of investment that was recorded in '21 versus where that effort was and the total where we think the run rate is, and you're seeing a little bit of that bleed into '22. And so as we look at what's different or unique about '22, is it more or less conservative than '21? We're obviously going to put forth what we think is a very achievable plan as far as what we think it will take for investment. But at this point it is a little bit more mixed. It still reflects incremental people to help deliver some of the initiatives that we're focused on. We could talk more about those. It has some incremental marketing delivered from some of the initiatives that we're talking about with respect to our growth initiatives around D&A and the derivatives. And you heard about the recent launches of what we're doing around Nanos and the additional weekly expiration. We're doing more around our tech services spend. Again, directly back to D&A and the additional offerings over there, I mentioned a little bit around our software development capitalization is a little bit less, say, than the prior year, again adding a little bit more to that expense. And then as we look at December and you say, well, here it is conservative, sandbagging in, I look at the December numbers where we wrap up. And I roll that forward on just a pure annualized rate, when you look at that number, that's a much healthier growth rate; the gap of the incremental investment that we're laying out is pretty close to what you're seeing there. So if I move to the second part of your question about revenue expectations — return expectations on those incremental investments — if you look at those incremental investments, we laid out roughly that $10 million for infrastructure. Again, that's hard to tie to a specific revenue initiative, but it's all about supporting the broader Cboe global network — look, we've all read about the incremental cyber attacks that are occurring and what's going on. So making core investments around the basics there, continuing to support our distribution network, continued integration work that goes across the entire network — if we're going to be running a trusted marketplace with high reliability, high uptime, working on that next development as far as staying leading edge, that requires that continuous pace of investment and spend. But the specific revenue initiatives that we tied to are specifically around D&A and then derivatives, and it's probably high level D&A closer to two-thirds of that number, derivatives around one-third in the way it's pacing out. Regarding the D&A numbers as far as what we look for, we've talked about cloud, how we rolled that out last year. We talked about incremental people from a sales standpoint, making our platform more robust, adding more marketing effort. That return, we envision is actually very short. It's high triple-digit on that investment as far as achieving that growth rate. As far as the other initiatives around derivatives — and we've talked about this last year — the 24/5. Again, that's immediately already returned the investment from '21. It's already a triple-digit return. It's already matched the investment of what we're seeing this year. European derivatives, again, this guidance hasn't changed with where we talked about that. That's more of a two- to three-year timeframe, where we expect to see a beneficial higher ROI, again approaching triple-digit if we hit those revenue targets. We talked about Nanos. As we look at that launch and the incremental investment there, that should be a very high return within a 12-month time frame with that success. And then finally, we mentioned Neo and ErisX. Again, as we look through those, those will pace back and that ROI will be a little bit longer term. But as we look at those investments, as we look to enhance those platforms, deliver those new products, again, we talked about in our release and our guidance that we expect — that's a little bit more of a year two as far as that being EBITDA positive, again, requires some of that initial investment upfront in this first year in 2022.

Okay. Sorry about the joke for the holidays, guys.

Wow. You can't help them sell that.

Rich, that was a little low, but we're thankful for a good season.

We've seen a real surge in engagement from retail over the last two years, driven by some combination of maybe COVID, zero commissions, market appreciation. I'm sure there's a dozen other things. As you look at Cboe's great 2021 results, what portion of the success you had last year would you actually attribute to the retail effect? So you've got a ton of initiatives. There's a lot of things driving your good results, but really focusing on this retail effect. And given the tech mean sell-off and greater leverage of brokers like Robinhood, how do you think about this durability of retail engagement? Is it something because options are used to not only speculate but hedge, it's going to be really durable? Or do you think there's some fragility to what we've seen?

So thank you. To start, Ken, and I'll ask Brian to clean up with kind of the percentage of how that's contributed. It's a little opaque in the derivatives world due to a lack of clarity at OCC. But let me frame it a little higher level. We do see this as being durable. Because our core has always been an education piece, and once you introduce a retail trader who is used to a pretty simple P&L scheme — the longer you're short, the payout is a 45-degree angle — options offer versatility. Options allow you to customize that payout scheme, customize the risk parameters and exposure and still have exposure in a given underlying individual stock or the broader market. So our education really focuses on the versatility for retail. Once you teach that, you create a long-term participant. And that's what we're all about and why we think there's runway here more broadly on retail. We are in the access business, so how do we extend that exposure uniquely for Cboe? The product set alone is strong. Many retail traders want broad U.S. exposure. If you look at the notional size of our most successful contracts with the S&P 500, it's quite expensive notionally for retail exposure. So we're launching Nanos — very simple, one multiplier concept. If you look at the average notional value of option exposure in the S&P 500, roughly $5,000; Nanos reduces that notional by a factor of 10. That's an incredible way to learn the power and the tools of options trading. We love that. So that's the concept behind that. It will make it simple, make it easy, make it accessible. So then we look at what's the fastest-growing portion of our S&P 500 complex. Well, weeklies are super short dated and low premium. Adding Tuesday and Thursday expirations gives traders more precision and answers demand coming from really short-dated exposure. So add Tuesday and Thursday. All of that builds on the continuation of what we've seen in the last two years of retail growth. We want to be part of the story, open up access and teach. Brian, over to you or Chris, for a little bit more color on how we saw that breakdown.

Yes. We'll break it down a little by asset class, because you see the ebbs and flows. Again, the opaqueness persists, so the percentages won't be as precise as we'd like. Starting with the North American equities franchise, we saw a lot of lean-stock trading, very retail focused. January volumes were solid; though January of last year was even higher. As you look at retail percentages in the U.S. equities market, they trended down as the year progressed, so the contribution was meaningful earlier but moderated later in the year. So it was a nice contributor, but not the majority. I would say it was a stronger contributor within options. As Ed mentioned, retail is active in multi-listed options and is increasingly looking for broader exposures. We are optimistic that the retail percentage could grow in our derivatives complex with the retail channel. We expect continued growth in it and will continue to pursue that with our retail efforts and new product launches. Chris, anything to add?

Just a couple of items. In January, we've seen incredibly strong volumes with a couple of days at all-time records for OCC volume with strong retail engagement. As Ed and Brian mentioned, we're excited about the brokers that are ready to go day one with Nanos. While retail drove a lot of growth in 2021, we do see that enduring through '22 and hopefully beyond.

I hate to ask a volume and trade environment question on the proprietary products, but it seems like the market environment has changed significantly year-to-date. Maybe it does make sense. Rates are moving higher, there's more divergence in asset classes and markets, et cetera. So can you talk about what is different — what you're seeing from customers, strategies, et cetera? In particular, contrast what we've seen over the last few years because we got used to a low-vol environment where sometimes we'd get spurts of volatility and then it would get quiet again. I know you don't have a crystal ball, but does what you're seeing out there seem more sustainable, and is this something we should get more excited about from a cyclical perspective?

Alex, great question. We share the excitement. What we're seeing now appears more sustainable than previous spikes. The uncertainty — Russia tensions, oil prices, supply chain challenges and expectations about rate moves — is driving sustained activity. Institutions are repositioning, and options products respond to that uncertainty. For example, the VIX can move substantially in a short period; we saw an 8% move recently. That is a large move for a relatively inexpensive contract and gets attention. At the same time, SPX at-the-money vol can compress quickly. So you get both opportunities: volatility-based trades and attractive opportunities in SPX implied vs realized volatility. We're seeing month-over-month engagement carry through January, which is strong. Given the uncertainty, there's reason to think activity could continue for a while.

I appreciate all the granular guidance, Brian. Maybe if you could talk a little about the growth path on D&A. You did very well in '21 and are heading in with good momentum relative to that 7% to 10% range. Given how the volume environment has performed and customer traction, what would be upside potential drivers to the high end of that 7% to 10% range for this year? I know you don't want to redo guidance, but just thinking about what would continue that momentum. And secondly, could you talk about any upside from revenue contribution from the European derivatives effort now that we're seeing volume increase in January? A timeline to get to that $25 million annual revenue number for European derivatives would be helpful.

Sure. It's helpful to look at the three main components of D&A. The largest is market data and access — that's the bulk of the revenue. To move the overall growth rate higher, most upside will need to come from that component. We have a strong pipeline in market data sales and expect incremental traction internationally with our APAC entry, selling U.S. data internationally and local data as well. The second component is risk and market analytics; we expect a nice growth rate there, and that may benefit EMEA. The third is the index side; within the U.S. there is huge opportunity, and traction from sales and more products, like ESG-related indices, could add upside. Regarding Europe, Chris?

We are seeing strong demand for U.S. data into Europe and APAC and vice versa. That's a global network coming together, and we still have a lot of room to sell into Europe and APAC with the existing data we have, especially as we add more datasets to Cboe Global Cloud. We currently have North American data there — indices and futures — and we'll be adding more this year, including analytics and European data. On European derivatives, onboarding has gone well; January was very encouraging, surpassing all of 2021 volume in a single month. It's tracking on or ahead of schedule. The team there is doing a wonderful job under Dave and An and Cecil with our CCP, another investment we made that is paying off and is key to our long-term success in Europe.

I was hoping we could spend a minute on your medium-term expense growth philosophy and sort of the growth algorithm. The 2022 guidance was helpful. The decline in margins is probably not that surprising. How long do you expect the elevated pace of incremental investments to last — essentially double what your core expense growth is in 2022? Is it just a 2022 thing or will there be spillover? I'm not asking for 2023 guidance, but when should we expect Cboe to return to positive operating leverage on comp?

Thanks, Alex. As we look out to 2023, while we aren't giving formal guidance, we do expect a more moderated expense growth rate in 2023 versus what you've seen in '21 and '22, independent of acquisitions. The investments in '21 and '22 were purposeful: core infrastructure, revenue growth initiatives and platform expansion. We'll continue to invest where we see high conviction, high-margin opportunities — particularly data, derivatives and digital — and we'll provide visibility on performance and returns for these initiatives so investors can assess progress. So expect moderation in expense growth beyond 2022, but we won't provide a specific percentage today.

For ErisX, could you give an update on your initial thought process about adding new products? How does the current digital asset trading environment like the Bitcoin price impact your thought process? And on the $36 million to $42 million additional expense assumption for ErisX and Neo, could you talk about when you expect Cboe to close these two deals, in your assumptions?

I'll take that. On ErisX, we're moving toward close, working through state and federal approvals. As we said, we hope to close in the first half of this year given previous guidance. Regarding new products, there is a new listing process that ErisX has put together that's well thought through, and we'll consider new products based on customer demand, understanding that we will need to add new products within the confines of those rules as we grow the business. We're excited about ErisX because it gives us spot, data, derivatives and clearing in a trusted marketplace. Very excited about closing this transaction in the first half.

Just the timing assumptions — like are you assuming the beginning of the second quarter or end of the first quarter for modeling purposes? I just want to make sure we model this correctly.

I'd say it's a combination. It could be as early as March and could be into the second quarter as well. That's why there's a range. We're talking about two transactions that require regulatory approvals and multiple closing conditions. First half is our expectation, and the highest scenario is both closed before the start of the second half. We'll update guidance once we have firm close dates, but for now we're reliant on the regulatory approval process which can vary in pace.

This is John. On the question about how the price of Bitcoin impacts our view: we've been in the digital asset space well prior to our ErisX agreement and have confidence in this space. It's early innings and we are actively talking to partners and clients. The investment and enthusiasm across the ecosystem remain strong. We're optimistic about the opportunity. It also highlights the value ErisX brings — spot, derivatives and clearing — which enables hedging of these price movements going forward. We see great value in the product set.

Maybe a question on capital management. Second straight quarter with no buybacks. Should we expect repurchases to remain paused ahead of the ErisX and any deal close? And thinking about capital priorities: your leverage ratio is modest and has been declining with EBITDA growth. How do buybacks rank versus additional M&A given the current environment?

I don't want to give a precise prediction on timing of buybacks. The pause has put us in a good position from a flexibility standpoint and allows us to reengage in share buybacks in a more meaningful way going forward. The pause gives flexibility should we need it. We do expect to return capital through buybacks in 2023, but I won't predict exact timing. In our capital allocation framework, returning excess cash is important, but we're also focused on investing in the enterprise where we see value. When M&A opportunities that grow the enterprise and produce strong returns arise, we'll invest; if excess cash remains after that, we'll deploy it to buybacks.

I wanted to circle back to the cloud data offering. Could you elaborate on that offering and the economics and vision you have for it? More broadly on cloud: which markets and offerings are on the cloud today, and how do you think about the opportunity for migrating markets to cloud over time? What makes the most sense to move sooner versus later?

Great question. We launched Cboe Global Cloud on November 1 and have initial customers, largely new customers who needed this access method. Current datasets there include U.S. equities, futures and indices data. We'll be adding more data this year from Europe and analytics, and eventually APAC. Data can be consumed via AWS today. Beyond data, the cloud is ready for non-latency-sensitive applications such as clearing and other back-office processes. However, for matching where microseconds and nanoseconds matter, the cloud still has room to evolve; cloud providers are investing heavily and we are evaluating. Our approach is client-driven: as customers demand migration, we will support it. Right now, the primary cloud opportunity is data and certain clearing/back-office functions, with matching to be evaluated over time.

As that was the last question, I would like to return the floor to management for any closing comments.

Great. This completes our call for this morning. We appreciate all the interest and questions on the call today. If you have any follow-ups, please feel free to reach out. Thank you again.

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