Earnings Call Transcript - CBOE Q4 2022

Ken Hill, Vice President of Investor Relations

Hello, and welcome to the Cboe Global Markets Fourth Quarter 2022 Financial Results Conference Call. All participants will be in a listen-only mode. Please note, today's event is being recorded. I would now like to turn the conference over to Ken Hill, Vice President of Investor Relations. Mr. Hill, please go ahead. Good morning and thank you for joining us for our fourth quarter earnings conference call. On the call today, Ed Tilly, our Chairman 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 discuss our 2023 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; Dave Howson, our President; and our Chief Strategy Officer, John Deters. I would like to point out that this presentation will include the use of slides. We will be showing 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'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.

Ed Tilly, Chairman and CEO

Thank you, Ken. Good morning, and thanks for joining us today. I'm pleased to report on record fourth quarter and full year results for Cboe Global Markets. During the quarter, we grew net revenue 17% year-over-year to a record $457 million and adjusted diluted EPS by 6% to a record $1.80. These results capped a record year. We saw us grow net revenue 18% to a record $1.7 billion and adjusted diluted EPS 15% to a record $6.93. Our outstanding results were driven by strong volumes across our global network led by Derivatives complex and continued growth in our Data and Access Solutions business. Our Derivatives business delivered another outstanding quarter driven by robust performance in our index options franchise, where average daily volume increased 55% year-over-year while multi-list options trading increased 6% year-over-year to an ADV of 11.2 million contracts. We saw record volume across our suite of S&P 500 Index options products with fourth quarter ADV and SPX contract increasing 73% year-over-year to 2.7 million contracts. Our Mini-SPX options contract, known by the ticker XSP and 1/10 the size of the SPX options contract, increased 188% year-over-year to an ADV of nearly 66,000 contracts. Additionally, ADV for VIX options increased 7% year-over-year in the fourth quarter. During the quarter, net revenue in our Cash and Spot Markets business decreased 5% while we saw a 13% increase in net revenue for our Data and Access Solutions business, including strong organic net revenue growth of 10% year-over-year. We continue to execute on the transformational opportunities we saw in our business: Derivatives, Data and Access Solutions and Cboe Digital. I'll touch on Derivatives and Data and Access Solutions at a moment, but first, I want to provide an update on Cboe Digital. In November, we completed the syndication of minority equity interest with a group of 13 firms announced as investor partners in the Cboe Digital business. Our investor partners include many of the most sophisticated and active participants in fiat and digital asset markets globally and contribute to the momentum of the franchise. We are actively onboarding these partners to the Cboe Digital platform and look forward to working together to bring trust and transparency to the digital asset marketplace. Now more than ever, we believe the experience that established market operators provide with the benefits of their regulated framework is critical to helping enable the opportunities afforded by this asset class. With the onboarding of new participants and marketplace evolution, we have seen continued volume increase in industry-leading spreads in Cboe Digital to start the year with January average daily notional value topping a record $71 million. Our Derivatives business delivered strong results as we continue to expand access to our unique products to customers around the globe leveraging our extended distribution network. For the year, a record 558.4 million SPX contracts were traded with an ADV of 2.2 million contracts, a 63% increase year-over-year. We continue to see increased demand from our non-U.S. customers and liquidity providers for the ability to trade or hedge broad U.S. market and global equity volatility conveniently across all time zones day and night. As a result, we have seen a sizable increase in SPX volume during our global trading hour session with ADV increasing 216% year-over-year during the fourth quarter to nearly 55,000 contracts, capping off a record year for global trading hours with total volumes up 3x over the 2021 levels. This year is off to an even stronger start as January volumes ran approximately 55% above 2022 levels. In December, we also added XSP to our global trading hour session, enabling customers to trade this product nearly 24 hours a day, five days a week and providing the ability to adjust positions around the clock with even greater precision and flexibility. With the addition of Tuesday and Thursday expirations late last year for XSP, both SPX and XSP now offer options that expire every weekday. We continue to see increased demand for same-day trading in SPX with many market participants opening and trading positions on the same day the options expire as they engage in tactical trading strategies around market events. ADV for SPX options open on the same day of expiration increased 83% throughout 2022 and comprised over 43% of overall SPX volumes in the fourth quarter. With the utility and flexibility that options provide in any market environment as well as the varied trading strategies utilized by a diverse customer base, we believe we will continue to see sustained momentum in options trading as customers continue to tap the benefits this product offers. Turning to the VIX products. ADV and VIX options increased 7% year-over-year to over 550,000 contracts traded in the fourth quarter. During global trading hours, we saw VIX options volumes increase with ADV up 72% year-over-year in the quarter, and we have seen strong momentum to start the year as January volumes ran 56% above 2022 levels. Our Data and Access Solutions business posted strong results during the fourth quarter with the integration of our recent acquisitions continuing to fuel the durability of this business. Through our bundled debt offerings and cloud strategy, we were able to package high-quality data from across our markets and deliver to customers globally in a consistent and cost-effective manner, extending the reach of our content and opportunity for this business. Additionally, we continue to see strong customer uptake of Cboe Global Cloud, a real-time data streaming service to provide simple, efficient access to Cboe's robust suite of market data. We now have 25 customers connected to the service with 52% of revenue coming from the Asia Pacific region and 38% from Europe. Additionally, many customers are subscribing to multiple data products offered via Cboe Global Cloud. This diverse customer base reaffirms that our strategy of providing simple, efficient access to our market data is resonating with customers who want access to a global set of market data through a single unified service. Additionally, we have seen solid customer adoption of the Cboe One Canada Feed, a real-time market data feed that provides a comprehensive view of Canadian equities market data since launching last fall. As we integrate Cboe Australia and Cboe Japan post technology migration, we look forward to further expanding our portfolio of market data solutions globally. Through product innovation, thoughtful integration and superior customer service, we continue to expand our ecosystem as we build one of the world's largest and most comprehensive derivatives and securities networks. In our Global FX business, net revenues were up 14% year-over-year in the fourth quarter as the business expanded spot market share to a record 18.4% with average daily spot notional value traded of nearly $41 billion. Our non-deliverable forward volumes on Cboe SEF also grew significantly with annual ADNV of $836 million last year compared with $406 million in 2021. In Europe, the Cboe Europe Equities business continued to perform exceptionally well with overall market share reaching 24.9% in the fourth quarter. While we saw increased adoption of our services in Europe, it was our lit order books that predominantly drove our market share gains with lit-only market share rising from 21.9% at the start of the year to 27.3% in December 2022. Additionally, Cboe BIDS Europe remains the largest block trading platform during the fourth quarter with 34.5% market share of the European block trading market. At the end of 2022, the BIDS Europe platform had over 600 active traders across 243 buy-side firms and 28 sell-side participants. And we expect to have a strong pipeline of new firms this year. The strong foundation of participants utilizing Cboe BIDS Europe will create opportunities as we continue to expand the Cboe BIDS network around the globe. Moving to North America. The power of the BIDS network helped propel Cboe BIDS Canada to another record quarter with 65 million shares traded. Overall equities market share in Canada grew to 13.6% in the fourth quarter while U.S. equities market share was 13.1%. Turning to Asia Pacific. Cboe Australia market share grew to 17.2% in the fourth quarter, up from 16.1% in the previous year. We remain on track to extend the BIDS network to the region with the launch of Cboe BIDS Australia this month. Our experience bringing BIDS into new markets globally, including Europe and Canada, has enabled us to perfect our approach, and we are very excited about the demand we have seen from local participants for this distinctive block trading platform. We also remain on track to launch Cboe BIDS Japan in the fourth quarter of this year, further extending our reach of the BIDS network into another key global equity market. Additionally, in Japan, we saw our equities market share grow to 3.6% during 2022, up from 2.7% in 2021. We continue to be in full integration mode since announcing our last acquisition more than 14 months ago. As mentioned, subject to regulatory approvals, we plan to migrate Cboe Australia and Cboe Japan to Cboe technology this year with the Australian migration happening later this month alongside the launch of Cboe BIDS Australia. We've been working with our customers closely over the last year in preparation for the migrations. And look forward to the benefits of bringing both of these critical markets on to our technology, creating a seamless and consistent experience for customers and unlocking value for our global market participants. We have also continued to make solid progress enhancing the framework of our global listings business since welcoming NEO, a Canadian exchange last year. Our goal is to provide issuers with access to an integrated and global network of capital formation and secondary liquidity while working to harmonize our processes and create efficiencies for our customers around the globe. Building on a strong foundation as the second largest ETP listings venue in the U.S., we are enthusiastic about both the near- and long-term opportunities to grow and expand our listing business globally and believe we have the momentum as we kick off 2023. We are excited by the many growth opportunities we see across our ecosystem today. Brian will do a deeper dive on this in a moment, but this excitement is fueling our attractive 2023 revenue growth targets. Specifically, we anticipate total organic net revenues will increase in the range of 7% to 9% in 2023 above our medium-term guidance range of 5% to 7%. We anticipate that our Data and Access Solutions organic net revenues will grow at a robust 7% to 10% in the year ahead. While we expect to invest behind the meaningful opportunities we see in the market today, we expect that the investments we make this year will help position Cboe to grow in 2023 and beyond.

Brian Schell, Executive Vice President, CFO and Treasurer

Thanks, Ed, and good day to all of you. Let me remind everyone that unless specifically noted, my comments relate to 4Q '22 as compared to 4Q '21 and are based on our non-GAAP adjusted results. As Ed highlighted, Cboe posted another incredibly strong quarter to cap off a record year. Adjusted diluted earnings per share for the fourth quarter was up 6% on a year-over-year basis to a record $1.80. The strong performance was again characterized by the continued growth of our Derivatives franchise as well as a steady contribution from our Data and Access Solutions business. Over the course of the year, we made meaningful progress advancing our numerous initiatives, plans that span multiple asset classes and geographies. We see these investments as driving growth in Cboe as reflected in our 2022 record results and in the healthy outlook we have for our businesses. I want to quickly touch on some of the high-level takeaways from the fourth quarter before delving into the segment performance. Our fourth quarter net revenue increased 17%, setting another quarterly record at $457 million led by the strength in our Derivatives markets category and robust results from our Data and Access Solutions business. Specifically, Derivatives markets produced 33% year-over-year organic net revenue growth in the fourth quarter as innovations like Tuesday, Thursday expirations continue to resonate with customers and fuel same-day trading in our SPX complex. Data and Access Solutions net revenues increased 13%, up 10% on an organic basis, finishing a very strong year where D&A organic revenue increased by a very healthy 12%. Cash and Spot Markets net revenues decreased 5% during the quarter or 7% on an organic basis. Adjusted operating expenses increased 28% to $177 million. Adjusted EBITDA of $292 million also notched a quarterly high, up 11% from the fourth quarter of 2021. And as noted previously, our adjusted diluted earnings per share was a record $1.80, up 6% compared to last year's quarterly results. Turning to key drivers by segment. Our press release and the appendix of our slide deck include information detailing the key metrics for each of our business segments. So, I'll just provide summary thoughts. Our Options segment was a standout for the quarter, again delivering the strongest growth with net revenue increasing 35%. Results were driven by robust volumes in our index business and stronger revenue per contract, given the favorable mix trends. Total options ADV was up 15% as our higher-priced index options ADV increased 55% over 4Q '21 levels. RPC moved 25% higher, given a continued positive mix shift to index products and a stronger mix of higher-priced SPX options in our index business. And lastly, we continue to benefit from another quarter of double-digit growth in market data and access and capacity fees, up 34% and 15%, respectively, as compared to 4Q '21. North American Equities net revenue increased by 5% year-over-year. Results benefited from NEO, which was acquired in June of '22, contributing $5.5 million in net revenue during the quarter. In addition, access capacity fees increased 10% as compared to 4Q '21, and market data was up 4%. Net transaction fees fell by 4%, given a mixed volume environment across our businesses, softer market share and capture rates. The Europe and APAC segment reported a year-over-year decline in net revenue for the fourth quarter of 15%. However, adjusting for a $5.6 million FX impact given the stronger dollar during the quarter, net revenue fell by a more modest 4% on a constant currency basis, impacted by softer industry volumes in Europe. The lower activity levels were partially offset by a 5.1 percentage point increase in market share on a year-over-year basis, making Cboe Europe the largest stock exchange in Europe, again for the quarter. Fourth quarter net revenue decreased 10% in the future segment as transaction fees declined 15% on a year-over-year basis. Lower volumes were the primary driver of the decline, falling 16% in the fourth quarter '22 as compared to fourth quarter of '21. Non-transaction revenues continued to tick higher with access capacity fees up 2% and market data up 25% as compared to 4Q '21. And finally, net revenues in the FX segment were up a strong 14% as compared to 4Q '21, capping a very strong year for FX, where net revenues grew an impressive 18%. Net transaction and clearing fees in the fourth quarter benefited from a 21% increase in average daily notional value and higher levels of market share, hitting another quarterly record of 18.4%. Turning now to both Data and Access Solutions business. Organic revenues were up an impressive 12% for the full year. Net revenues were up 13% year-over-year in the fourth quarter, up 10% on an organic basis. As we have seen in past quarters, net revenue growth continues to be driven by additional subscriptions and units, accounting for over 90% of access fee growth and 58% of market data growth. In our data and access businesses, we saw robust physical and logical port usage in our options and equities businesses driven by increased demand for trading capacity. And on the market data side, the equity's top of book and options depth of book products continued to perform well. Cboe Global Indices feed also benefited from some pricing enhancements during the quarter. In 2023, we anticipate that trends will remain resilient as we are forecasting 7% to 10% organic net revenue growth for Data and Access Solutions, in line with our medium-term guidance range outlined at our November 2021 Investor Day. Turning to expenses. Total adjusted operating expenses were approximately $177 million for the quarter, up 28% compared to last year. Excluding the impact of acquisitions owned less than a year, adjusted operating expenses were up 21% or $28 million for the quarter, largely reflecting higher headcount as compared to fourth quarter of last year as well as some inflationary compensation adjustments and additional incentive compensation in 4Q '22. Moving to our expense guidance. We are introducing a full year 2023 expense guidance range of $779 million. This compares to our 2022 expense base of $652 million. There are three basic components to the year-over-year increase outlined on Slide 17 of our earnings presentation that I want to walk through in detail, namely expenses from 2022 acquisitions, revenue-enhancing investments we are making in our business and core expense growth. The first component is the normalization for the two transactions ErisX and NEO, we completed in 2022. We anticipate these deals will add approximately $36 million to $38 million in incremental expenses in 2023. In our expense base, we are again calling out growth-generating investments we are making, given the numerous attractive growth opportunities we see today. These are costs we expect to drive incremental revenue to our bottom line, furthering the robust growth trends we have enjoyed over the past few years. Specifically, we are investing in global listings, DNA expansion, a more aggressive marketing campaign given our 50-year anniversary as a company and targeted R&D efforts across our ecosystem. In 2023, we expect revenue-enhancing investments to be in the range of $28 million to $30 million accounting for roughly 4.5 percentage points of our 2023 adjusted expense growth. The last component, and the largest portion of the year-over-year increase, is our core expense growth, showing approximately $53 million to $59 million or 8% to 9% of our expense increase in 2023. I think it's important to understand the moving pieces within our core expense base. First, we continue to invest in the infrastructure of our business. As we strengthen our footprint as a multi-asset class global exchange and services provider, we will continue to invest behind a robust technology offering to deliver a best-in-class client experience. Roughly 2% of our expense growth in '22 was related to core infrastructure. And we would expect a similar contribution this year as we continue to build a cohesive offering around the globe, facilitating the expanded capacity, access and distribution of our products and services globally is important to our success, and we will continue to ensure Cboe can meet the needs of our clients. Unrelated to our infrastructure spend is an incremental two percentage points of expense growth we are attributing to the Consolidated Audit Trail or CAT project. These costs, which we have limited direct control over, are expected to add an incremental $10 million to $15 million to our 2023 expense base based on our initial estimates. The remaining core piece is related to our day-to-day cost of doing business. In '22, we talked about some inflationary pressures impacting these expenses. And while we do still feel some of those pressures today, we expect core day-to-day expenses to be up a modest 4% in '23, down from the 7% growth we saw in '22. Cboe has enjoyed some of the most consistent and most durable revenue growth, operating margins and earnings generation in the industry. The expense forecast we are providing today highlights the continued investment we are making to sustain those trends moving forward. To state this more directly, it is because of the investments we have made in our business that we generated record '22 results and are able to guide to a robust seven to nine percentage point increase in organic total net revenue in the year ahead. We believe that the investments we make in '23 will position us well to generate attractive returns for years to come. Now turning to a summary of full year guidance on the next slide, I want to call out some highlights for '23 following our record net revenue results in '22. For Data and Access Solutions, we expect net revenue growth to be in the 7% to 10% range for '23, in line with the medium-term guidance of 7% to 10% we introduced at our Investor Day a little more than a year ago. We expect acquisitions held less than a year to contribute around 0.5 percentage point to total net revenue growth in '23. Most importantly, we are guiding our organic total net revenue growth in the range of 7% to 9% for 2023. This is above our medium-term guidance of 5% to 7% introduced at our Investor Day a little more than a year ago, a function of our confidence in the durable growth of our business and the progress we are seeing behind the investments we have made to increase the access and distribution of our products in markets globally. During this year, we are introducing an expected contribution of $27 million to $33 million for minority investments benefiting our other income line. Cboe has made and we'll look to continue to make investments in businesses that align with our strategic vision. Our 4Q '21 investment in 7RIDGE with Cboe becoming a limited partner in the acquisition of Trading Technologies is a great example of how we plan to utilize our network of partners to invest in strategic assets. We look for the impact of these investments to become a more regular contributor to company earnings and are providing our best estimate of the benefits we anticipate in '23. We are introducing full year guidance on depreciation and amortization of $48 million to $52 million and expect the effective tax rate on adjusted earnings under the current tax laws to come in at 28.5% to 30.5% in '23. Outside of our annual guidance, interest expense for the fourth quarter of '22 was $15.7 million. Moving forward, we expect interest expense to be in the range of $14.5 million to $15.5 million for 1Q '23. On the capital front, our focus has been and remains maximizing shareholder value through the effective use of our capital. In the fourth quarter, we returned a total of $53 million to shareholders in the form of a $0.50 per share quarterly dividend and $15 million in the form of share repurchases. Year-to-date '23, we've also repurchased $30 million of our shares. We remain well positioned to invest in the business, support our dividend and opportunistically repurchase shares with $188 million in remaining capacity on our share repurchases authorization as of January 31, 2023. Our leverage ratio decreased to 1.5x at the end of the fourth quarter, down from 1.7x at September 30 and from 1.9x from June 30, reflecting our significant growth in earnings as well as the repayment of $120 million of our term loan facility in 4Q '22. Through prudent debt capital markets transactions, we have also locked in low medium- to longer-term fixed rates averaging below 3% on over 80% of our total debt. Overall, we remain committed to maintaining a flexible balance sheet and striving to put capital to work in the most value-enhancing way possible for shareholders. Given where we are today in our capital structure, we plan to shift slightly to prioritize opportunistic share repurchases over further debt pay down, given our leverage ratio at 1.5x at the end of 4Q '22. In summary, 2022 was a tremendous year of record revenue generation and earnings growth. We expect that momentum to continue, fueled by the attractive investments we are making across our ecosystem. We are incredibly pleased with the start to '23 and look forward to delivering attractive returns to our shareholders in the quarters ahead.

Ed Tilly, Chairman and CEO

Thanks, Brian. In summary, Cboe delivered a very strong fourth quarter to close the year. And 2022's record results give us increased confidence that if we continue to invest in high-value growth initiatives that further expand the Cboe ecosystem, we can continue to deliver strong long-term results for our investors. I'm also proud of the work we did to advance our corporate ESG initiatives in 2022. We will continue to look for opportunities to support our communities and associates while driving for a more sustainable future. I would like to thank our team for the incredible results achieved during the fourth quarter to cap off a fantastic year. As we enter our 50th year of business, we are more optimistic than ever about the future. Our history of innovation, client service and good citizenship will be the foundation for building trusted markets for the next 50 years. I am extremely proud to lead this incredible team and our organization as we continue to push Cboe to new heights.

Ken Hill, Vice President of Investor Relations

At this point, we'd be happy to take questions. We ask that you please limit your questions to one per person to allow time to get to everyone. Feel free to get back in the queue. And if time permits, we'll take a second question.

Operator, Operator

Thank you. At this time, we will begin the question-and-answer session. And this morning's first question comes from Rich Repetto with Piper Sandler.

Rich Repetto, Analyst

Yes. My question is about expenses and their growth. Brian, I calculated that last year the overall expense increase, excluding acquisitions, was 13.5%. I expected a decrease, but it appears to be 13% excluding acquisitions again this year. When you consider only the core, beyond the acquisitions, could you explain what the tangible payback is? I know you mentioned something about minority investments, but it seems like other exchanges are investing significantly less than that. I’m trying to understand the 13% growth rate we've seen in investments and core expenses over the past two years.

Brian Schell, Executive Vice President, CFO and Treasurer

Yes, Rich, that's a great question. It's fundamental for many when considering our guidance, so we want to clarify that. I'll divide my response into a few parts, addressing your points about the core and incremental revenue investments. Regarding your comment about other exchanges, I believe our revenue and earnings profile is distinct and has remained quite strong compared to them over the past couple of years. We've taken a clear and transparent approach to increasing our long-term growth rate. When we examine the core business, one challenge we face is that, although we are smaller than some peers, we are also a high-margin, efficient exchange; any slight increase is evident. We openly disclose our expenses and their sources. As I noted in my introductory remarks, we're facing increased regulatory expenses from the consolidated audit trail, which will impact our expenses. We're making those factors clear as we assess what's driving the higher costs, considering our experience with that project's evolution. On the infrastructure front, we have seen significant volume, and I'd like Chris Isaacson to elaborate later on what our exchange operations have accomplished in terms of volume and ensuring capacity. We believe it's crucial to maintain our status as a trusted marketplace, which is why we're committed to investing in capacity enhancement in both U.S. and international markets. Many of those markets achieved record peak volumes at various points in 2022, and our technology and operations managed that very effectively. Additionally, we're undergoing a replatforming in Japan and Australia. This will result in slight incremental expenses as we progress into 2024. Lastly, regarding the overall core and the incremental investments, as I mentioned at the end of last year, we still need to account for some inflationary pressures. While we've seen some moderation, it still affects various expense categories, not just compensation. Regarding the revenue growth investments, I'll ask Dave to join in along with some of the other teams. To provide some context, we faced a similar question at the beginning of last year, so let me revisit our main investment strategy and our approach to growing Cboe. The key themes involve expanding our global network, increasing access and distribution, and offering new and existing products. We want to give investors clarity on the incremental investments we're making and our growth expectations. Looking back at what we planned for 2021, we mentioned launching EU derivatives in light of our successful acquisition of EuroCCP, which is now Cboe Clear and Cboe Euroclear. We also focused on investing in our U.S. Derivatives business with a 24x5 model, hiring more sales and marketing teams, and we began discussions around DNA, focusing on investments in sales, products, marketing, and leveraging cloud technology to enhance access and distribution. We started implementing BIDS in other regions, including Canada. These initiatives contributed to our growth in 2021 and helped set the stage for a record 2022. We anticipate ongoing payoffs from these investments through 2024 and 2025. Moving to 2022, we had ongoing discussions around DNA, sales, product development, marketing, and further emphasizing cloud technology to enhance access. Dave will elaborate on our successes in this regard. We also made significant investments in U.S. Derivatives, focusing on additional sales, distribution, and product innovation while extending our EU Derivatives rollout, which we expect to yield contributions in 2024 and 2025. We finalized our Canadian rollout and began operations in Australia. The initiatives from D&A and U.S. Derivatives positively impacted our 2022 results, and we project ongoing growth drivers through 2024 and 2025. Now looking at 2023, as we continue to implement our strategy, we will focus again on D&A, including sales products, cloud investments, and marketing, along with further U.S. Derivatives investments and a global effort for new listings. In BIDS, we aim to finalize our efforts in Australia and Japan, along with a disciplined approach to R&D. We expect to see benefits this year while also supporting long-term growth. Marketing will play a larger role as we work to enhance brand awareness for Cboe, laying the groundwork for further growth.

Dave Howson, President

Thanks, Brian. Yes, as Brian mentioned, we are focused on our revenue investments to take advantage of the opportunities we have to strengthen the foundation we've established. We have a vast network across 26 markets globally, and we aim to leverage our momentum to enhance those solid foundations and provide unique offerings. Additionally, we are looking for new opportunities to expand into adjacent markets from a strong position. I would highlight, as Brian pointed out, our success in education, content, sales, and marketing. The global trading hours more than tripled in 2022, and we plan to capitalize on that as we think about expanding access and distribution. With the inclusion of the Mini-SPX in 24x5 and the addition of Tuesday and Thursday trading, our sales and marketing efforts in the APAC region will be key as we utilize the on-the-ground presence from our Asia-Pacific acquisition. D&A exceeded my expectations for 2022 with fantastic growth of 12%. We will continue to focus on sales and quantitative analytic marketing as we aim to expand our products and services globally. Our options analytics capability will soon be introduced in Europe. The cloud has been a consistent theme over the years, with 2022 seeing 72% of all revenue coming from incremental sales across our nine products and five regions dedicated to cloud. We look forward to investing this year to integrate Cboe Digital data, which will provide excellent spreads and enhance our existing quality data set for our 24/7 channel. Last year also highlighted successful themes in our index business, with defined outcome and override strategy bench showcasing remarkable gains in 2022. And then the continuous theme of selling the package and bundle data so Cboe One Canada there really showing great green shoots for this year. Listings is another one I'd probably drill down a little bit more into. The opportunity that is afforded us by having those listings exchanges around the world is unique. We get to provide a global cohesive offering across legal frameworks, liquidity provision in conjunction with our liquidity partners and also access and help navigating global regulators as we go there. So, great opportunity there coming off that great standpoint, number two in the U.S. as an ETP listings venue with 28 increase in some rather large name issuers in the U.S. BIDS has been a fantastic story for us since our partnership began. After we completed the acquisition of BIDS, we quickly became the leading block trading venue in Europe. This year, we are focusing on expanding our people, sales, and marketing efforts as we consider opportunities in the Asia Pacific region. In Canada, we added 76 buy-side clients within a year and, with 243 connections to Europe, we recognize the growth potential that we will pursue in the Asia Pacific market. Research and development is crucial for us, as we are a product company known for our exceptional offerings. This year, we established Cboe Labs to concentrate on developing innovative methods to measure and benchmark exposures, providing our customers with a variety of defined outcome opportunities, especially evident in the SPX complex last year. Lastly, our marketing strategy encompasses all these efforts, focusing on technology and collaboration with partners and suppliers as we celebrate our 50th anniversary and explore new regions with new products, particularly in Asia Pacific, while enhancing our digital presence to reach new audiences and better penetrate the markets in which we operate.

Operator, Operator

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

Ken Worthington, Analyst

With the syndicate in place now for Cboe Digital, can you give us more details on the investments you plan to make here? And I think one of the goals is to enhance flow in the platform for 2023. If you can give us some approach on how you want to build that liquidity. And to the extent that things have changed for Cboe Digital since FTX has imploded, how has your strategy evolved in the recent quarter since the environment seems to have changed quite a bit?

Chris Isaacson, Chief Operating Officer

Yes, thank you, Ken, for your question. We remain very enthusiastic about Cboe Digital. As Ed mentioned in his opening remarks, we are coming off a record month in January after successfully closing the syndicate with 13 notable investors who are well-established in both traditional finance and the crypto sector. We are now experiencing industry-leading spreads in Bitcoin and Ethereum, averaging about 1 basis point for January. Our excitement about the future is driven by our collaboration with the CFTC on margin futures, and we are eager for approval to introduce this to the market in a unique way that hasn't been done in the U.S. yet. Additionally, we are continuing the onboarding process for our syndicate, with approximately half already onboard and others at various stages in the onboarding journey. And our strategy relating to how has it changed, if at all, since the FTX bankruptcy, I would say our strategy is unchanged, while the market has gone up and down as far as crypto prices, our strategy has stayed the same. We're going to bring a trusted, transparent regulated market to crypto to Cboe Digital. We're going to bring intermediary-friendly products and services. And we're going to access ultimately to end users through those intermediaries, which we view as great partners and clearly, as part of our syndicate. So, we see growth in this nascent asset class for years to come, and that's where we're building a strong foundation right now alongside and with this syndicate. So, margin futures expand the distribution of our data as the market quality has improved dramatically, as Dave mentioned, and continuing to grow as we onboard this syndicate.

John Deters, Chief Strategy Officer

Ken, this is John Deters. I want to add a couple of points. First, the data is interesting. The number of active Bitcoin addresses has remained relatively stable since the collapse of Three Arrows Capital, even through the FTX situation. This indicates that overall engagement has stayed fairly consistent since the leverage was removed from the system. Our partners are observing that both existing and new customers are leaning towards highly compliant and regulated marketplaces. You heard this mentioned by China in his conversation in December. As the market begins to grow from its current stabilization phase, we believe we are positioned to be among the leaders in this space. We are focused on long-term investments.

Operator, Operator

Thank you. And the next question comes from Gautam Sawant with Credit Suisse.

Gautam Sawant, Analyst

Can you please walk us through the growth dynamics in the data and access segment? Organic growth came in at 12% in 2022 above your medium term 7% to 10% guidance. But on your 2023 outlook, you kept it in the range. Can you expand on what some of the new product sale opportunities are? And if there is a growth deceleration or maybe some of the factors that drove the elevated growth in 2022, is that why you stick to the medium-term range?

John Deters, Chief Strategy Officer

Yes, that's a good question, Ken. So as you point out, 2022 was a phenomenal year with a 12% growth there. We continue with the industry-leading 7% to 10% guide as we really see continued opportunities to build on what we've built there. We talked about the revenue investments to really build that great platform for the index business to make everything scalable and also the cloud investments there. As we look forward to build on that growth rate of 7% to 10% after a 12% year is really solid and reflects our excitement for this particular segment. So, what we're excited about is, again, the cloud opportunity. I mentioned that 72% of incremental revenue that came through there for the business, for the cloud portion of the business in 2022. The great story there is that we see people taking different portions of the data, whether it'd be Australian, European or Canadian data through that single unified source. So, the opportunity there to continue to grow the sales and access as it comes through there. And then also adding new data sets, we mentioned the Cboe Digital addition to the CCCY channel then 24/7 Cboe global indices channel, so really excited about that as we go forward. And then leaning in again to that defined outcome override strategy trend we've seen as within the home of those index calculations and many of the listings associated with those products from global issuers that we've been able to attract to the platform. And then, it's the options analytics, we're going to move that capability by adding the European data sets and bringing that capability to Europe with our customers that take their U.S. product there looking to expand that into Europe. And then, the growth really is predominantly around selling what we have is growth of existing subscribers and units at the platform there. And when you look at it, you look back on 2020, you see 60% of new market data sales coming from outside of the U.S. You can see the real focus there as we think internationally.

Operator, Operator

Thank you. And the next question comes from Alex Kramm with UBS.

Alex Kramm, Analyst

I want to shift focus to the SPX ecosystem, particularly regarding zero DTE trading. I'm interested in your perspective on the development of a true ecosystem in this area, especially from the institutional side. It seems people still believe that a significant portion of this market, perhaps 50% to 80%, is dominated by retail traders. However, institutions appear to be entering the space, primarily trading around specific events rather than consistently every day. Are you noticing any changes that might indicate zero DTE is evolving into a more established ecosystem? Additionally, what steps are you taking to engage and educate institutional investors to become more committed compared to retail participants, who can be more unpredictable?

Ed Tilly, Chairman and CEO

Thanks, Alex. I'll start. We are noticing institutional flow in the zero DTE space, but importantly, it's not at the expense of the more traditional and historical third Friday, which is encouraging. That base remains very consistent. Any new activity in the dailies appears to be additive, similar to retail, with new flows and strategies emerging. This is largely driven by the significant daily fluctuations we have observed in the S&P 500 over the past year, as illustrated by the movements this week. Regarding education, we are ensuring that our products are accessible to institutions, which can then share insights with other practitioners about the success or failure of new strategies. We are focusing on wallet size and creating products that cater to everyone interested in zero DTE options. Specifically, we've highlighted the 1/10 size SPX and XSP and are tracking their growth. This seems to be driven more by retail activity. The SPX volume and growth coming from retail platforms mainly consist of small orders and a mix of single-leg and multi-leg strategies. The recurring theme here is that defined outcome investing tends to be more sustainable, and that's what we are teaching. I believe institutions will eventually adopt this approach and complement it with traditional third Friday strategies, leading to greater exposure to short-dated options.

Operator, Operator

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

Dan Fannon, Analyst

Brian, I want to come back to expenses, and I know you just gave a lot of color on the growth and what the initiatives are. I was hoping you could put some numbers around the ROI or the incremental revenue growth you're expecting from those investments. But also to maybe avoid some of the confusion going forward, how do we think about normalized expense growth? Or are you in a multiyear period where we should be thinking about growth investments plus core expense growth? So this elevated expense growth isn't just for '23, it should be over a multiyear period.

Brian Schell, Executive Vice President, CFO and Treasurer

Thanks, Dan. I'll provide some additional details on that. As we see returns continue, we will also offer incremental contributions where possible based on our network. However, the clarity regarding specific investments and initiatives is not perfect due to the complexities of the clearing process. While examining the broader ecosystem, it's evident that increased access and distribution, particularly in the SPX complex and related efforts, may lead to higher trading volumes for certain initiatives like broadening our offerings and introducing new expirations. It's challenging to isolate the collective benefits of these investments into specific areas, so we analyze the situation as a whole. Though we lack detailed visibility into individual trades, we can assess general volume trends. Our strategy is to review these initiatives annually to determine if they meet or exceed minimum return expectations on invested capital, as generating additional returns through organic initiatives is our primary capital allocation focus. This assessment might occur over multiple years to gauge their traction. Last year, we mentioned that the moderation might not have been as significant as some anticipated. Looking ahead to 2024 and 2025, as we further expand our network and see these initiatives gain traction, we anticipate some margin expansion, particularly from incoming acquisitions. While we value our strong margins and the scale of our core business, expanding operations could introduce some margin dilution. However, this also brings promising revenue opportunities that should manifest in 2024 and 2025. We expect margin growth and a moderation in the rate of adjusted operating expense growth beyond 2023. We are not planning to reduce growth investments as our historical efficiency drives our approach. We aim to keep measuring returns, with a target return on invested capital of over 10% on all efforts. Some metrics will reflect multiyear assessments while others will focus on the current year. This is our overall perspective, and while we aren’t providing explicit guidance for 2024 and 2025, we anticipate a moderation in growth rates.

Operator, Operator

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

Brian Bedell, Analyst

Building on Dan's question, how do you view the long-term trajectory of growth given the various opportunities available? You're creating a substantial ecosystem in both trading and recurring revenue streams. As these opportunities develop, do you plan to continue investing? Are you considering shortening the time frames for achieving profitability in the long term, or is there considerable potential for ongoing investment? Specifically, are you still targeting $25 million in annual revenue for European Derivatives by year three, which would be 2025, and what is the timeline for reaching profitability in Cboe Digital?

Brian Schell, Executive Vice President, CFO and Treasurer

I'll try to cover everything. Regarding the first question, similar to what Dan asked, I appreciate the chance to elaborate. One important point I didn't express clearly is that with these investments, we might witness an uptick in transactional activity, for instance in the SPX complex or other related projects. Alongside this, we anticipate incremental depreciation and amortization. There will also be additional non-transactional components due to the need for greater access, which will manifest as increased access fees and market data fees. Dave mentioned this growth earlier. By improving our distribution and delivery capabilities, we are not just increasing our share of wallet in access but also attracting new clients. I’ll hand it over to Dave shortly to provide more details. We'll observe this growth across the entire system, reflecting both underlying factors and transaction as well as non-transaction components as the ecosystem develops. Dave, would you like to elaborate further and discuss the EU Derivatives? Then we can return to you and Chris regarding Cboe Digital.

Dave Howson, President

Sure. I'll begin with the European Derivatives segment. In the last quarter, the value proposition and the opportunities available remain unchanged. Customer feedback is consistent, and the difference in trading volumes of index options between the two regions has not shifted. In the fourth quarter, we experienced significant growth, achieving record volumes on the platform with new clients, especially in futures. As mentioned previously, establishing a stable price picture in futures is crucial, as we expect the options to follow suit. This year, the launch of single stock options in the fourth quarter completes our offering, allowing us to create a comprehensive ecosystem that delivers the advantages of a unified margin pool and a single lit market in Europe. Our three-year plan, which we adjusted last quarter, aims for an exit in 2025 and remains our target.

Chris Isaacson, Chief Operating Officer

Yes, I'll take that. On Cboe Digital, as we said on the slide there, this has been Slide 11. It's a long-term growth trajectory for us. And we haven't put out guidance on exactly when we'll have breakeven there. But a lot of this is dependent upon our Derivatives growth, margin futures and as we said, onboarding the syndicate as we bring them on. So, we haven't put out exact breakeven timing, but we are very bullish on the long-term growth trajectory for that business.

Operator, Operator

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

Owen Lau, Analyst

Going back to Cboe Digital, I think you are planning to list more tokens beyond the five you currently have. Could you discuss what other tokens you feel ready to list? Also, what is the process and timeline for obtaining approval for these tokens?

Ed Tilly, Chairman and CEO

Chris, let me start, and then I think you can provide the Board's perspective and direction. What we're most concerned about is regulation, and we are approaching this with clear awareness. As you know, there is uncertainty regarding regulations and oversight. We are accepting this regulation and require clarity on the distinction between securities and non-securities. Our customers and syndication partners are eager to expand beyond the current coin offering, but we are taking a patient approach. We have stated that this is a long-term strategy for us. We will actively participate in shaping the future of oversight regulation. However, we are very mindful of the positions of the SEC and CFTC regarding classification.

Chris Isaacson, Chief Operating Officer

Yes, I think Ed covered it well there. We are going to be very conservative on our listing. We do desire to list new coins as there's clarity around regulation and as we see genuine customer demand from our customers and intermediaries. But we'll make sure that there's clarity there before we start listing the coins.

John Deters, Chief Strategy Officer

Owen, this is John. I wanted to add that we observe genuine stability in the market. However, this does not imply that the market will remain unchanged in this new environment. Moving forward, we anticipate a greater emphasis on the tokens that people are comfortable with from both regulatory and compliance perspectives. I believe that is the reality we face going forward, and we accept that. Recently, we were approached by a significant asset manager who wasn't ready to collaborate with us initially but is now interested in exploring opportunities to offer exposures to their clients. Their focus is not on the smaller assets but rather on the most well-established and understood exposures. That presents a promising opportunity for us.

Operator, Operator

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

Michael Cyprys, Analyst

I wanted to circle back to your revenue outlook, your total revenue guide of 7% to 9% organic total firm-wide. That includes the D&A, right, but also I imagine also captures transactional revenues in there as well. So just a question on that, what areas do you anticipate being most meaningful and contributing on the transactional side to your 7% to 9% organic revenue growth? What underpins your confidence and strength in that into '23?

Ed Tilly, Chairman and CEO

Thank you for the question, Michael. The ongoing interest and engagement from our diverse customer base has been an important factor driving our revenue growth of 7% to 9% projected for next year. This total includes revenues from Data and Access Solutions, which are also contributing to this growth. We are observing the increasing use of option strategies by customers, and we anticipate this trend will continue throughout the year. One of the key developments last year was the introduction of the Tuesday and Thursday weekly contract expirations, which created new opportunities. In previous quarters, we've highlighted how investors transitioning from binary long or short positions in Delta 1 to using options strategies that allow them to define their outcomes represents a sustainable approach. We continue to promote this through our institute and introduce new products via Cboe Labs, while engaging with customers worldwide, especially regarding the demand for U.S. Derivatives. From what we observe in the retail platform sector, there's a global demand for Derivatives. While our focus for 2023 remains primarily on the U.S. market, we recognize the potential for growth in Derivatives as we expand our presence in Europe.

Operator, Operator

Thank you. And the next question comes from Andrew Bond with Rosenblatt.

Andrew Bond, Analyst

Just on fixed futures volumes. We know there seems to be a bit of a mix shift in customer hedging to SPX and as your DTE option contracts with implied volatility underperforming realized vol. Outside of changes in some of these dynamics and more unknown unknowns, what could Cboe do on the innovation front and perhaps education front to boost volume growth of VIX features?

Ed Tilly, Chairman and CEO

We'll begin by discussing the exchange perspective. We understand the effectiveness of the stack, its interactions, and the rotation. We have communicated for years that our customers make rational decisions regarding their hedges and exposures. Over the past year, we have noticed significant intraday movements, similar to what we are experiencing today and this week. The Greeks related to SPX exposure provide our customers with a better opportunity to monetize their positions. For instance, in yesterday's observation, when investors feel the market may have moved too far, they tend to seek the optionality and the hedges offered by fixed exposure. Regardless of the economics, we maintain that the rotation is logical and the hedges are rational. We continue to educate about the differences in expected payouts and strive to make these exposures available to customers of all sizes, particularly through various futures contracts. Additionally, the XSP is the mini-500, which is part of our strategy. We also view derivatives as reliable and enduring.

Operator, Operator

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

Kyle Voigt, Analyst

Maybe just one more on expenses. I apologize, Brian. But I wonder if you could talk about the potential expense flex and how dependent it is on the revenue environment. So for example, if revenues came in below the low end of that 7% to 9% organic guidance range, should we expect a similar outcome in terms of coming in line with the expense guidance range? And would there be any pause on investments? And then likewise, if revenues come in above the guidance range, should that cause expense growth to move higher than the range? Or should we expect the incremental growth to fall to the bottom line? So, any kind of framework you could help us with understanding that the really the expense flex on either end of that range will be helpful?

Ed Tilly, Chairman and CEO

Thank you, Kyle. Regarding your future career possibilities as a CFO, that would be great. Our guidance and plans are clearly outlined, and we have specific expectations for how our investments will impact revenue and the traction we anticipate. There is definite flexibility in our approach, particularly within our incentive plan, which adjusts based on our performance against the strong growth targets we’ve established. If we fall short of those targets, we will carefully consider how to adjust our strategies to meet the earnings expectations set for our shareholders. Looking ahead, while we are more conservative on the upside with expenses, we will be quicker to make adjustments downward if we don't achieve the anticipated results. However, we tend to be more cautious about increasing expenses, as has been evident historically. That summarizes my perspective, Kyle.

Operator, Operator

Thank you. And the next question comes from Rick Fellinger with Autonomous.

Rick Fellinger, Analyst

I was hoping you could speak to the competitive environment in SPX options. Your competitor has now announced their intention to launch daily expirations for their micro S&P futures. Do you expect us to have any direct impact on the success you've been seeing?

Ed Tilly, Chairman and CEO

I don't. Just a reminder to everyone on the call, the amount of retail futures accounts is dwarfed by the amount of retail securities accounts. It's quite a bit more difficult to open futures accounts for retail that is not to take any away from the effort. But once a retail investor is satisfied and happy with liquidity, which is what we provide each and every day, they tend to be sticky. So, the liquidity and the experience we measure each and every day, we try to make that experience better. I think feeding the system and growing the pie, if there are investors for futures, we think that's a good thing. So, the daily exposures and what our competitors might be doing in the space on daily futures, we just think the opportunity to pilot the awareness is growing. And we're confident that we will continue to be the leader in this space.

Ken Hill, Vice President of Investor Relations

And this concludes the question-and-answer session. I'd now like to turn the floor to management for any closing comments. Yes. So that completes our call for today. Thanks, everyone, for the time and the interest in the Company, and have a great weekend. Thanks.

Operator, Operator

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