The speaker, Ken Hill, welcomes everyone to the Cboe Global Markets First Quarter Earnings Call and introduces the CEO and Global President who will discuss the company's performance and strategic initiatives. The Chief Financial Officer will then provide an overview of the financial results and future outlook. The presentation will include the use of slides and forward-looking statements will be made. Non-GAAP measures will also be referenced during the call.

Fred Tomczyk, CEO of Cboe Global Markets, reported strong first quarter results with net revenues increasing by 7% and adjusted diluted earnings per share by 13%. This was driven by strong volumes in their Derivatives franchise, particularly in proprietary index option products, as well as growth in their Data and Access Solutions business. Cash and Spot Markets were stable, but overall it was a strong quarter for both transaction and non-transaction revenue growth. Tomczyk remains focused on three priorities for future growth: sharpening strategic focus, effective capital allocation, and disciplined expense management.

Cboe has announced plans to refocus its digital asset business to leverage its core strengths in derivatives, technology, and product innovation. This includes transitioning its digital assets derivatives to its global derivatives franchise and winding down its digital asset trading platform. The decision was made due to the lack of regulatory clarity in the digital space and the company's desire to focus on areas with greater growth and profitability. Cboe will also align and unify its clearing operations globally and maintain its clearing of Bitcoin and Ether futures. These changes are expected to enhance efficiencies and sharpen the company's focus.

The company is focused on optimizing their business operations and product development globally to better serve their clients. They are also realigning their digital business and investing in organic growth initiatives, technology capabilities, and operating efficiencies. Share repurchases remain an important component of their capital allocation strategy. Despite low volatility in the first quarter, the company saw strong results in the global derivatives category, with average daily volume up 17% year-over-year. January and February were the second and third highest SPX volume months on record.

Investors took advantage of low volatility levels to hedge their portfolios with SPX puts, leading to a higher share of total volume. The resilience of index options volume in the face of cyclical headwinds demonstrates the strength of the secular drivers of the business. There is room for growth, as seen with the launch of Tuesday and Thursday expiries for Russell 2000 index options, which hit a 5-year high in February. Retail options trading is also on the rise, with more platforms coming online later this year. The SEC recently approved a margin relief plan, expected to benefit the SPX, Russell 2000, and MSCI index options. Overwriting funds have grown in popularity, with total AUM increasing significantly since the pandemic.

The company is seeing increased interest from retail and RIA communities in using options to enhance their portfolios. The recent margin relief approval is expected to further drive adoption of options. The company is well positioned for the rest of the year, but may benefit if there is a shift in investor sentiment. VIX options volume surged in April due to escalating tensions in the Middle East, and Q2 is expected to be a high quarter for VIX options. The need for options to manage positions, hedge exposures, and generate income is increasing due to inflation, rising rates, and the upcoming U.S. election. Trading metrics in non-U.S. hours are also increasing.

In April, GTH activity accounted for a small percentage of SPX and VIX options activity, indicating potential for non-U.S. customers to access U.S. markets. CEDX, our European derivatives platform, saw record volumes in March and expanded its list of single-stock options. D&A net revenues grew thanks to client expansion and sales of access and data products. Data growth was strong outside of the Americas, particularly in Australia and Europe. Our cash and spot businesses had solid results in the first quarter, and our progress in these markets has the potential to generate additional revenue streams globally.

The paragraph discusses Cboe's performance in various regions during the first quarter of 2023. In North America, there was a rebound in U.S. on-exchange net capture rates and an improvement in Canadian market share. Cboe Europe was the largest exchange in terms of value traded and is set to launch securities financing transactions clearing services in the third quarter. In Asia Pacific, there was strong momentum in Australia and Japan, with Cboe gaining market share and seeing significant volume growth.

The recently announced digital reorganization at Cboe will allow the company to compete more aggressively and expand their transaction and non-transaction revenues. The reorganization leverages their global derivatives and clearing capabilities, consolidating their futures products onto one market and allowing for more efficient trading for clients. This will also benefit newer products like digital asset futures, which can tap into Cboe's experienced sales force and technology infrastructure. The unification of clearing operations on a global basis will be overseen by Vikesh Patel, the current President of Cboe Clear Europe.

Cboe Clear Europe will continue to operate as a central clearing counterparty for European equities and derivatives, while also adding Cboe Clear Digital for Bitcoin and Ether futures. The company had a strong first quarter with record earnings, driven by growth in derivatives and Data and Access Solutions. Cash and Spot Markets saw stable results. Cboe is confident in its ability to achieve targeted net revenue growth in 2024.

In the first quarter, adjusted operating expenses increased by 4%, while adjusted EBITDA grew by 9%. This was due to higher compensation-related expenses and technology support services. The adjusted EBITDA margin also improved by 1.4% on a year-over-year basis and by nearly 3 percentage points sequentially. In terms of business segments, the options segment saw a 10% increase in net revenues, driven by higher index option transaction fees and recurring non-transaction revenue. North American Equities net revenue decreased by 1%, mainly due to lower market data and steady transaction and clearing fees. However, access and capacity fees increased by 5%.

The Europe and APAC segment of Cboe Global Markets saw a 10% increase in net revenue, driven by growth in non-transaction revenue and market share gains in Australia and Japan. The Futures segment saw a 2% decrease in net revenue due to lower volume, but non-transaction revenue from access and capacity fees and market data fees increased. The FX segment also saw a slight decrease in net revenue, but market share increased. Cboe's Data and Access Solutions business had an 8% increase in net revenue, driven by new subscriptions and unit growth. The company expects to see continued growth in this area and aims for a 7% to 10% increase in revenue for the full year. Operating expenses for the quarter were approximately $193 million, a 4% increase from last year.

The company's increase in expenses was due to higher compensation and benefits and technology support services, partially offset by a decline in professional fees and outside services. The company has lowered its expense guidance for 2024, taking into account first quarter results, reduced costs from a digital realignment, and a higher bonus accrual. The realignment is expected to result in a one-time charge and annualized savings, and the company is reaffirming its growth expectations for net revenue.

In the first quarter of 2024, the company will be breaking out their other income line into earnings and investments and other income. The expected aggregate benefit for non-operating income remains unchanged at $37 million to $43 million. They anticipate $33 million to $37 million from positive marks on investments and $4 million to $6 million in dividend income. Their full year guidance for CapEx is $51 million to $57 million and depreciation and amortization is expected to be $43 million to $47 million. The effective tax rate on adjusted earnings is expected to be 28.5% to 30.5%. They expect net expense to be $9 million to $10 million in the second quarter. The company returned $58.5 million to shareholders in the form of a dividend and repurchased $89 million in shares in the first quarter. They plan to continue repurchasing shares based on their healthy free cash flow generation. Their leverage ratio declined to 1.1x and they remain comfortable with their debt profile. They have locked in low fixed rates on their outstanding debt.

The speaker discusses the company's plans to allocate capital and resources in a way that will enhance value and balance future growth and margins. They express confidence in their strong start to 2024 and their ability to deliver shareholder returns. The call is then opened up for questions, with one allowed per person. The first question is about the company's expectation for organic total net revenue growth to be at the higher end of the 5-7% range, despite a slowdown in index option volumes and tough comps for the rest of the year. The speaker responds by saying they are confident in their guidance and thank the questioner for their inquiry.

The company saw strong net revenue results in the first quarter, driven by their derivatives markets business and D&A. This, along with a strong April, has given them confidence in guiding towards the higher end of their 5% to 7% range. They will continue to monitor and refine projections, but feel good about the higher end of the range. The company's diverse ecosystem is expected to perform well in the rest of the year, with potential drivers such as geopolitical tensions, inflation, interest rates, and the U.S. elections. In the call, they discussed the tough comps in the second quarter for D&A, but remain confident in their medium-term guide of 7% to 10%.

The speaker remains confident in the 7% to 10% growth guide and notes that there was solid growth in all asset classes and regions during the quarter. They also mention that 43% of the growth in market data and access services came from outside of the Americas. They believe that the growth will continue throughout the year, with the re-platforming of Cboe Australia and the introduction of new products and technology enhancements. They also mention that 0DTE SPX volumes have increased, but the mix has stabilized at around 50%.

David Howson discusses the growth of 0DTE mix in the first quarter and how it has increased year-over-year, with non-retail making up 2/3 of the mix. He also mentions the addition of Tuesday and Thursday expirations and how data from these expirations is being used by institutional and systematic funds to train models. He notes that the 0DTE mix grew in a lower volatility environment in Q1 and expects to see continued growth in shorter-term risk management strategies. The upcoming volatility-related events in the latter half of the year could also be potential drivers for the SPX complex.

The speaker discusses the recurring nature of 0DTE options and how they result in higher engagement from customers due to the need to refresh positions and manage risk. They also mention the increasing use of shorter-dated strategies by funds and banks, which leads to a more durable engagement in the platform. They note that volatility in the market is not the only factor driving activity, as they have seen diverse use throughout the year.

Fred Tomczyk adds that option trading revenue is more recurring than equity trading revenue because options expire and positions need to be reestablished. Brian Bedell asks about the portion of customers using global access, and David Howson explains that the 43% growth rate from outside the Americas is a good indicator of the increasing use of global access. Customers can access a variety of data sets from the cloud and expand their use across 27 markets.

The paragraph discusses how Cboe has seen success with onboarding retail brokers in the Asia Pacific region to their platform. They have a single technology platform and consistent access point, making it easy for customers to access multiple data sets and analytics. Cboe takes a one-firm approach to sales, training all salespeople globally on their various data and assets. This allows them to cross-sell multiple data sets and provide incremental insights to customers.

The speaker is discussing the growth of Cboe over the past 2 years, specifically in their derivatives and equities franchises. They mention a "land-and-expand" strategy and increased pull-through with expanded access. The focus for investors should be on revenue growth, particularly in the derivatives and D&A areas. The company also plans to have a more disciplined approach to expense management and may pursue smaller M&A opportunities.

The organization is now focusing on delivering organic growth and integrating recent acquisitions. This has freed up resources and capital, allowing for return to shareholders through dividends and buybacks. The company sees potential for growth in their global footprint and expanding market share in Japan, Australia, and Canada. While they may not have another 0DTE opportunity, they believe the SPX complex has high demand worldwide. The company is targeting 7% to 10% revenue growth in the next few years and sees potential in various products to drive this growth.

The company expects growth in the short and medium term to come from selling existing data products internationally and expanding access to global trading hours. They also see potential for growth in their index and risk market analytics businesses. In terms of new data products, they plan to bundle and package existing data, such as the open and closed dates for SPX options, to meet customer demand and create innovative insights.

The company is focused on increasing access and distribution of their data, with plans to use new technologies and distribution mechanisms to get their data closer to customers. They have completed platform migrations and will be rolling out access improvements globally. There may be potential strategic pivots in other areas, and the company expects $11 million to $15 million in annualized savings from recent changes.

The company is expecting to save $11 million to $15 million in expenses annually, but does not anticipate a significant impact on revenue in 2024. The management team is currently in the process of reviewing the company's strategy and will present their findings to the Board in the summer and possibly again in October. The goal of the strategy review is to identify areas for growth and value creation for shareholders through disciplined capital allocation. The company's high margins and capital-light business model make resource allocation, particularly in technology and capital, crucial for long-term value creation. A question was also asked about CEDX, but it is not mentioned in the summary.

The speaker discusses the record activity levels in March and the 30% increase in Q1 for index derivatives. They have revamped their liquidity provider program and expanded coverage for single-stock options. They are anticipating more market makers and a major global retail brokerage platform to join. They will monitor volumes and activity and expect profitability and revenue to increase, as they have a scaled infrastructure in Europe.

The company is making a relatively small incremental investment in a new exchange product and clearinghouse, and will continue to work with customers to onboard them. They will review this throughout the year and keep investors updated. The buyback in the first quarter was larger than usual due to the company's strong balance sheet and opportunistic share repurchases. They plan to continue to deploy capital through dividends and share repurchases, especially when the share price is low, as they stand behind the stock and have strong free cash flow.

Cboe is planning to invest in their business for long-term growth while also maintaining a balance. In response to a question about their digital assets strategy, Cboe explains that they see the greatest opportunity in the crypto derivatives space and plan to leverage their existing infrastructure and resources to bring these products onto their platform. This will allow them to offer a range of versatile functionality and have more control over their product offerings.

Cboe is focused on their strengths and regulatory clarity in the derivatives market for digital assets. They are launching new credit index products and are looking for partnership opportunities in the electronifying credit market. Their vision is to be a trusted and efficient market for credit products.

David Howson discusses the benefits of Cboe's futures products, which include options on those futures contracts. These products are useful for fixed income funds that cannot trade securities and for international customers looking for exposure to key benchmarks. The alignment of these products with the HYG and LQD ETFs is a key differentiator for Cboe's credit offering. The call concludes with Fred Tomczyk expressing confidence in the company's strong start to 2024 and plans to maintain momentum for the rest of the year.

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