The Cboe Global Markets Second Quarter 2023 Financial Results Conference Call has begun, with Ken Hill, Vice President of Investor Relations, introducing Ed Tilly, Chairman and CEO, and Jill Griebenow, Executive Vice President, Chief Financial Officer, Treasurer and Chief Accounting Officer. They will be discussing the company's performance for the quarter and providing an outlook for 2023. Chris Isaacson, Chief Operating Officer; Dave Howson, President; and John Deters, Chief Strategy Officer, will also be available for Q&A. The presentation will include the use of slides, which can be downloaded from the Investor Relations page of the company website. Forward-looking statements may be made during the presentation, which involve certain assumptions, risks and uncertainties.

Cboe reported strong second quarter earnings with a 10% year-over-year increase in net revenue and a 7% increase in adjusted EPS. This was driven by strong volumes in their Derivatives franchise, specifically their proprietary index options products, and the continued global expansion of their Data and Access Solutions business. Additionally, Cboe published their fifth annual ESG report last month, disclosing their Scope 1 and Scope 2 emissions.

In the second quarter, Cboe Digital recorded strong volumes and received approval to expand their product offering to include margin futures contracts. These contracts will be physically and financially settled Bitcoin and Ether contracts and will enable customers to trade in a less capital intensive way. The Derivatives ecosystem also flourished in the second quarter as traders and investors used Cboe's flagship VIX and S&P 500 Index Options products. Cboe is continuing to engage with regulators and policy makers to advance the digital asset market.

The company has created flexible products that allow customers to trade contracts that fit their needs. During the second quarter, volume in proprietary index options increased 38%, and multi-listed options increased 2%. SPX options ADV increased 33%, and XSP options ADV increased 142%. Interest in 0DTE trading has gained a lot of attention, but standard monthly SPX options contract open interest was up 12% in June 2023. VIX options ADV increased 53%, making it the fourth best quarter on record.

Cboe is expanding its diverse offerings of proprietary index options products to meet the needs of its global customer base. This includes options on corporate bond index futures, cash settled index options written against ETFs, a Cboe S&P 500 Dispersion Index, and single stock options on Cboe Europe Derivatives Exchange. VIX and SPX options have been used interchangeably to manage and hedge risk, with ADV during global trading hours increasing 81% and 16% respectively. FINRA is expected to approve new margin requirements related to cash settled index options.

Cboe saw solid growth in its Data and Access Solutions business during the second quarter, with total net revenue increasing 9%. Looking ahead, they anticipate new opportunities across their Data and Access Solutions ecosystem to drive further growth, such as demand for Australian equity market data. They have also launched Cboe Global Listings to facilitate worldwide access to capital and secondary liquidity for companies and ETFs. Performance in their Cash and Spot Markets reflected the overall muted volumes seen across global equity markets in the second quarter.

Cboe achieved strong results in Europe, Asia-Pacific, and FX in the second quarter of 2022. In Europe, Cboe Europe Equities increased its market share by one percentage point year-over-year to 23.8%, Cboe BIDS Europe had 35.8% market share, and Cboe Clear Europe market share grew to 33.8%. In Australia, Cboe's market share was 18.2%. In Japan, equities market share was 4.1%, and Cboe is on track to launch Cboe BIDS Japan in the fourth quarter. In FX, net revenues were up 7% year-over-year and spot market share was 19.5%. Cboe also launched a new London matching engine for Cboe SEF, and NDF volumes increased 23% during the second quarter.

Cboe had a successful second quarter, with adjusted diluted earnings per share up 7% to $1.78. Net revenue increased 10% to $467 million due to strong performance from the Derivatives Markets category and Data and Access Solutions business. Cboe is looking to maximize long-term shareholder value through monetizing current opportunities and investing in future growth initiatives.

In the second quarter, Derivatives Markets had 21% year-over-year organic net revenue growth, Data and Access Solutions had a 9.4% increase, and Cash and Spot Markets had an 11% decrease. The Options segment had the highest growth, with a 20% increase in net revenue. North American equities saw a 2% decrease, but NEO's acquisition in June of 2022 contributed $3.6 million in inorganic net revenue. Access and capacity fees increased 6%, and market data increased 1%.

Net transaction fees were down 13% in the US due to lower industry volumes, but market share remained relatively constant when adjusted for off-exchange market volume and auction activity. In Europe and APAC, net revenue decreased 5%, largely due to softer industry volumes, but market share increased nearly one percentage point. Futures segment net revenue decreased 1% due to an 11% decrease in volumes, partially offset by a 9% increase in RPC. Access and capacity fees in the Futures segment increased 6%. The FX segment saw a 7% increase in net revenue due to a 6% increase in net transaction fees and a 19.5% market share. Lastly, Cboe's Data and Access Solutions business saw a 9.4% increase in net revenue, up 7.4% organically, driven by additional subscriptions and units.

Cboe Global is pleased with the acceleration of organic net revenue growth and is confident in hitting their full year guidance range of 7-10%. The company expects solid contributions from proprietary data sales and Cboe Global Indices, as well as from data sales and access in Australia. Total adjusted operating expenses were up 22% compared to last year, largely due to higher headcount, increased travel and promotional spend, and corporate brand marketing costs. There was also a one-time $5 million true-up to reclassify certain capitalized charges to operating expenses. Going forward, no more adjustments are expected for previously capitalized charges.

The full year 2023 expense guidance range has been lowered from $769 million to $779 million to $766 million to $774 million. This increase is due to expenses from 2022 acquisitions, growth investments, and core expense growth. The two 2022 acquisitions are expected to add $30 million to $31 million in expenses, growth investments are estimated to be $25 million to $27 million, and core expense growth is estimated to be $59 million to $64 million. This includes an additional $5 million for CAT expenses and a one-time reclassification of certain capitalized charges of $5 million, which are partially offset by lower expected depreciation and amortization expenses.

Cboe is reaffirming its organic total net revenue growth range of 7-9% for 2023, and its DnA organic net revenue growth rate of 7-10%. The other income benefit from minority investments is expected to be in the range of $34 million to $40 million, and the full year guidance on depreciation and amortization has been lowered to $40 million to $44 million. The effective tax rate on adjusted earnings is expected to be 28.5-30.5%, and net interest expense for the second quarter of 2023 was $13.9 million. Cboe is focusing on maximizing long-term shareholder value through the effective use of its capital.

In the second quarter, Cboe returned $61 million to shareholders in dividends and share repurchases, and paid down $140 million on their term loan facility. The leverage ratio declined to 1.4 times from 1.5 times in the prior quarter. Edward Tilly commented that the first half of the year had been busy and that the company was on stronger footing than ever. He also suggested that the company was expecting an evolution in how customers trade, leading to an increase in SPX volumes.

Edward Tilly discusses the growth of derivatives exposure for both retail and institutional customers. He notes the increase in retail customers due to the pandemic, as well as the benefits of the XSP contract, which is designed to be more accessible to retail customers. He also notes the increasing popularity of very short-dated contracts, which are being adopted by retail platforms. He states that this is an exciting new exposure and expects the growth to continue in the coming quarters.

David Howson explains Cboe's XSP product, which is a one-tenth-size SPX contract that is cash settled and has European exercise. It also has the potential for beneficial tax treatment and the ability to be written against ETFs with margin offsets for hedging. Cboe is optimistic about the increased adoption of XSP and the potential for individual retail investors to use shorter-dated options.

Edward Tilly discussed the excitement around zero days to expiry and cash settlement options, which have increased in popularity, with retail brokerage platforms such as Robinhood looking to offer cash settled options in the future. Alex Kramm asked about the roadmap for zero DTE in other areas such as single stock options and whether there is a risk that this could take away from the benefits seen with index options.

Edward Tilly and Alex Kramm discussed the importance of cash settlement when it comes to retail platform exposure. They explained that taking physical delivery at the end of the day can result in gap risk the next day, and that cash settlement allows for no risk or exposure the next morning. They believe that offering zero day single name exposure is beneficial for individual retail investors, and that the macro hedging or broad market exposure is best represented with Cboe products. They concluded that any growth in the industry is good growth.

Dave Howson of Cboe discussed the outlook for a spot Bitcoin ETF in the U.S. He believes that approval of such an ETF would be beneficial for the industry, investors, and Cboe Digital, which has the ability to offer spot and margin cash and physically settled futures on one platform.

Edward Tilly responds to a question about the company's M&A strategy and how it relates to expense management. He addresses the focus on product introduction versus acquisitions and how incremental margins may be favorable for product launches. He discusses the potential for positive operating leverage in the coming year. Jill Griebenow and Dave then provide additional insights.

The company has two approaches to growth: offering solutions to customers in the form of high-margin contracts, and keeping an eye out for jurisdictions open for competition in major marketplaces. The company has various levers to inform their capital allocation strategy, which includes organic or inorganic investment in the business, a steady dividend rate, and share repurchases. They have also financed certain acquisitions.

The company is looking to optimize their business by increasing prices on their transaction businesses to reflect the value of their offerings and to encourage a greater diversity of flows. For their Data and Access Solutions business, they are looking to maximize revenue capture and increase the number of new subscribers.

Edward Tilly discussed the competitive landscape in the multi-list options space, noting that Cboe currently has around 27% market share. He also noted that the new entrants are focusing on the price time maker/taker portion of the market, which makes up 20% of the overall market. He expects the pricing schedules to be highly aggressive, going for lower margin business.

CBOE is not looking to compete with NYSE and NASDAQ for large, blue-chip listings, but is instead focusing on leveraging its existing infrastructure and ETP listings business to target niche markets of companies with a market cap between $50 million and $500 million. These companies are driven by technology and research and fall into categories such as Cleantech, FinTech, and Critical Minerals. CBOE is looking to engage with customers and issuers from these underserved markets and is particularly interested in Critical Minerals companies in Canada and Australia.

Edward Tilly addresses Brian Bedell's questions about the global product that can be used across global customers and the CAT build. Chris comments on the process of the CAT exposure and build, and Jill provides information on the cost and how it affects growth rate.

Chris Isaacson, Jill Griebenow, and Edward Tilly discussed the visibility of the CAT build and the cost estimates associated with it. They also discussed the differences between global products, the network effect, and the data that comes off of exchanges. They recognize the importance of liquidity providers and have been rolling out technology migrations to provide them with global access.

David Howson discusses the replatforming of the Japanese exchange in November and the benefits for customers, such as uniformity in interaction point of view, a low incremental effort for customers to deliver new capabilities, and the ability to deliver data in multiple forms to customers. He also mentions the BIDS network, the short volume equity volume report, and the capability to bring functionality across the globe on the basis of the uniform platform.

Chris Isaacson and David Howson provide detailed answers to Brian Bedell's questions regarding the global growth of the company's tradable products and pricing increases. They explain that the platform migrations provide immediate improvements, while customers adjusting and plugging in to the new platform will provide durable improvements over the coming quarters. They also note that there has been a slight increase in pricing proportions.

Edward Tilly discussed the momentum behind Cboe Indices, such as the exclusive distribution of Morningstar indices and the common APIs to onboard new data sets. He highlighted the derivative overlay indices forming defined outcome products as an area with great traction, and mentioned that Cboe also began to calculate their own indices for their European index platform this quarter. Kenneth Hill then concluded the call.

The conference has ended and attendees are thanked for attending. They are also wished a great weekend.

This summary was generated with AI and may contain some inaccuracies.