Cboe Global Markets, Inc. (CBOE) Earnings Call Transcript & Summary

Good morning, and welcome to the Cboe Global Markets 2020 Fourth Quarter Financial Results Conference Call. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Debbie Koopman. Ms. Koopman, please go ahead.

Thanks, Steve. Good morning, and thank you for joining us for our fourth quarter earnings conference call. On the call today, Ed Tilly, our Chairman, President and CEO, will discuss our performance for the quarter and the year 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 and the full year as well as discuss our 2021 financial outlook. Following their comments, we will open the call to Q&A. Also joining us for Q&A will be our Chief Operating Officer, Chris Isaacson; and our Chief Strategy Officer, John Deters. In addition, I would like to point out that this presentation will include the use of slides. We will be showing the slides and providing commentary on each. A downloadable copy of the slide presentation is available on the Investor Relations portion of our website. During our remarks, we will make some forward-looking statements, which represent our current judgment on what the future may hold. And while we believe these judgments are reasonable, these forward-looking statements are not guarantees of future performance and involve certain assumptions, risks and uncertainties. Actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements. Please refer to our filings with the SEC for a full discussion of the factors that may affect any forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise after this conference call. During the course of the call this morning, we will be referring to non-GAAP measures as defined and reconciled in our earnings materials. Now I'd like to turn the call over to Ed.

Thank you, Debbie. Good morning, and thank you for joining us today. I hope 2021 is off to a great start for everyone, and you're keeping safe and well as we continue to navigate this pandemic. I'm pleased to report that Cboe posted solid fourth quarter and record full year results, highlighting the strength and diversification of our global business. For the year, we grew net revenue by 10% and adjusted earnings per share by 11% despite an unprecedented macro-environment that for much of the year did not favor index trading. Our results were driven by record trading volumes in U.S. cash equities and multi-list options, fueled by strong retail trading, growth in recurring nontransactional revenues, and increased efficiency enabled by our fully integrated superior technology. Importantly, while achieving strong growth, we continue to successfully execute key growth initiatives to advance our strategy, to leverage product innovation and superior technology, expand our customer base and diversify our business mix with recurring revenue. We also maintained our commitment to operational excellence in 2020, as evidenced by the continuity and resiliency of our markets despite the year's unrelenting challenges. Our ability to provide reliable and continuous markets in that environment, while continuing to execute key strategic initiatives and post strong growth is a testament to the dedication and expertise of our entire global team. Additionally, our record results and strong cash flow generation enabled us to return $520 million to shareholders in 2020, a new all-time high and a 69% increase compared to 2019. Our commitment to returning capital to shareholders will continue in 2021 and beyond, reinforced by today's announcement regarding the Board's authorization of additional share buyback capacity. Turning to our targets and expectations for this year. We plan to leverage the deals we closed in 2020 to accelerate organic growth in 2021. Brian will do a deeper dive on this, but we plan to invest approximately $25 million in organic growth initiatives in 2021, which we expect to contribute to our incremental top line compounded average organic growth target of 4% to 6% over the midterm. As you've seen since our IPO, we have also allocated capital inorganically to help accelerate our strategy while returning capital to shareholders. Over the past 4 years, we have delivered 5% compound annual net revenue growth, while growing adjusted EPS by 19% on a pro forma basis, which reflects the strength of our strategy and our ability to perform in the most challenging cycles. The success of our ongoing diversification reinforces our confidence in continued growth. Additionally, while we're only 5 weeks into the new year, we are beginning to see institutional investors reengage in trading our index options and volatility products. In January, month-over-month volume increased by 77% in VIX futures, 68% in VIX options and 15% in SPX options. As we've noted in previous calls, we expected to see reengagement in these products once there was more clarity around the political and pandemic uncertainty that clouded investors' views on where the market was headed. Although much uncertainty remains around the COVID-19 pandemic, the vaccine rollout has begun. The new U.S. administration is in place, and the Brexit deal has been executed. We believe we will continue to see increased trading in our index products as the uncertainty of these and other previous market unknowns come into focus. Additionally, in response to customer demand, similar to VIX futures, we are planning to extend the 24/5 trading model to VIX and SPX options in the fourth quarter of this year, subject to regulatory review. Over 15% of trading in VIX futures, which already trade 24/5, took place in non-U.S. trading hours last year, up from 13% in 2019. Naturally, we believe 24/5 trading in VIX and SPX options will result in increased trading outside of U.S. hours as well. We began the year with a considerable amount of momentum from strategic progress made in 2020. We're excited about both near and long-term opportunities to grow and expand our business, driven in part by increases in proprietary product trading, recurring revenue and retail engagement while continuing to invest in long-term growth. Our ongoing strategy, which has reinforced the value of our unique platform and fueled our strong year-over-year growth remains consistent, further strengthen our core proprietary products, leverage our superior technology, increased recurring revenue, broaden our geographic footprint and expand our product line by asset class. We have exciting initiatives underway within each of these strategic pillars. But today, I'd like to focus on 4 incremental growth drivers. The opportunity to grow nontransactional revenue through Cboe Information Solutions, our plans to launch Cboe Europe Derivatives, expand BIDS trading and grow our retail training base. We're excited about our prospects to further increase recurring revenue through expanding and enhancing Cboe Information Solutions, our comprehensive suite of data solutions, analytics and indices. These products generate recurring revenue by providing market participants with value-added trading resources and support transactional growth in our proprietary products with tools that draw users to our markets and drive volume as they reestablish trading positions. As discussed in previous calls, last year's expansion of our Information Solutions offering through key acquisitions accelerate our ability to grow our recurring nontransactional revenue. In 2020, we reported 12% growth in recurring nontransactional revenue and 9% organic growth, and we expect to see incremental sustainable long-term growth as we continue to optimize these integrations in 2021. Importantly, our expansion of Information Solutions now allows us to interact with and add value to market participants at every step of the trade process. We are looking to enhance these customer support opportunities in 2021 with additional portfolio and risk analytics offered through various delivery mechanisms, including Cboe Silexx, our proprietary order execution management system and through our APIs. Additionally, we plan to expand our market intelligence analytics and alerts to many market segments, including retail traders. We also plan to expand our global indices platform, which provides index calculation development and services with real-time distribution channels. Finally, we expect to further expand our offering of unique historical data sets and add high demand data sets like cryptocurrencies to the Information Solutions data suite. Turning now to the upcoming planned launch of Cboe Europe Derivatives. I'm pleased to say we are on track to launch in the second quarter of this year pending regulatory approval. Bringing to fruition our vision to unlock the potential we see for considerable growth in this market. Our highly successful European Equities business, Global Derivatives expertise and ownership of EuroCCP uniquely position us to simplify and bring new efficiencies to pan-European derivatives trading and clearing. We've worked closely with market participants in shaping our plans and have received very positive customer feedback and support. During the fourth quarter, we made strong progress on the technical buildout of the exchange and clearing platform and toward achieving the necessary regulatory approvals. Customer testing and optimization is ongoing. And we have commitments from clearing firms, order flow providers and market makers to be there on day 1. As we've said before, we think this market is ripe for significant structural growth. We are not aiming simply to take market share from incumbent exchanges. We intend to shape and grow overall derivatives trading in Europe with a novel market structure designed to attract both new and existing participants. While our revenue expectations for European derivatives in 2021 are modest, we are investing for long-term growth and looking for a gradual revenue build as we gain traction and expand our product offering to realize what we view as a paradigm shift in European Derivatives trading. Our new Amsterdam exchange, which we launched in 2019 in advance of Brexit will serve as home to our derivatives business in the region. I'll also note here that the flawless implementation of our Brexit strategy enabled us to seamlessly transition trading from our U.K. venue to Amsterdam at the start of the year. Also as a result of Brexit, we were excited to welcome back trading of Swiss shares on our U.K. venue yesterday. We are working with customers to reestablish our market share in Swiss equities trading, which was approximately 8% of Cboe's notional value traded in June of 2019 when Swiss trading was last available on our market. Turning now to our acquisition of BIDS trading, which we completed at the end of the fourth quarter. We're pleased to welcome Tim Mahoney to the team and the Cboe family. We have a successful track record of working with BIDS, which powers Cboe LIS, one of the largest block training platforms in Europe. While BIDS will continue to operate as an independently manage venue, the acquisition helps us to expand BIDS block training capabilities and services to other products and geographies, including Canada, as we look to further expand our presence in North American equities. We are well underway with our integration of MATCHNow. The Canadian ATS we acquired last year, and the BIDS acquisition provides additional features that we believe will help us disrupt the electronic block market in Canada and other markets in the future. BIDS has an extensive global network of more than 460 buy-side investment managers and sell-side constituents, which differentiates the platform and provides a strong foundation from which to expand into new markets. BIDS also provides us with a foothold in the off-exchange segment of the U.S. equity market, which now accounts for over 45% of overall U.S. equities trading. Moving on to retail trading. We believe the resurgence of the retail investor we saw in 2020 is here to stay. We are well equipped to deliver tailored products and services to meet the needs of these growing customer base and to evolve our education programs with retail-centric content to empower these new investors. Product innovation remains a core focus of the Cboe franchise. We plan to continue to expand our proprietary product offering with smaller contract sizes that appeal to both sophisticated retail traders and institutional investors. This includes Mini-VIX futures and Mini-SPX options, our recently announced Mini-Russell 2000 Index Options as well as additional retail-focused products in our pipeline, which we will extend our value-add to a broader unit-based -- universe of investors. Our strategy to nurture growth in these products, which is driven by a cross-functional team focused and dedicated client services, targets marketing initiatives and robust investor education is well underway. Additionally, we continue to see increased retail trading in U.S. equities and record volume in our retail priority program, which helps improve execution quality and trading outcomes for individual investors and firms that facilitate their orders. Volume and retail priority orders represented over 31% of total volume on Cboe EDGX with the exchange reaching record market share of 7.3% in the fourth quarter. In January, trading on EDGX set a new monthly average daily volume record as did retail priority orders, which were up 56% over December of 2020. We're excited to see growing retail engagement in the marketplace and are well positioned to invest in and leverage our core strengths, product and market innovation, technology, strong customer relationships and investor education to support this growing user base. We believe our investments in this area will benefit retail investors and create another sustainable long-term growth opportunity for Cboe. With that, I'll turn it over to Brian to walk through our 2020 performance and 2021 outlook in greater detail and then provide some closing remarks.

Thanks, Ed, and good morning, everyone. I hope all of you and your families remain safe and healthy. Let me remind everyone that unless specifically noted, my comments relate to 4Q '20 as compared to 4Q '19, and are based on our non-GAAP adjusted results. We reported solid financial results for the quarter, again, highlighting diversification of our revenue streams and the contributions from our investments and acquisitions, reinforcing our strategic initiatives. Our net revenue increased 10%, with net transaction fees up 8% and revenue from our recurring nontransactional revenue up 16%, adjusted operating expenses increased 17%, adjusted EBITDA of $206 million was up 4%. And finally, our adjusted diluted earnings per share was $1.21 flat to last year. Turning to key drivers by segment. Our press release and the appendix of our slide deck includes information detailing the key metrics for each of our business segments. So I'll just provide summary thoughts. The growth in our options segment was driven by a continuation of strong trading in our multi-listed options and higher revenue from proprietary market data, offset somewhat by lower volumes in our proprietary products. Revenue from North American equities decreased as a result of lower data. Revenue from the SIP, including lower SIP audit recoveries, off-exchange or TRF volume hit new highs again in the fourth quarter, impacting our market share. In futures, the revenue decline was caused by lower trading volume and fixed futures. The revenue increase in European equities primarily reflects the addition of EuroCCP. And FX increased ADNV, drove higher transaction fees, and growth in access to capacity fees contributed to higher nontransactional revenue. We're also proud to announce our market share surge to a new record high of 16.7%. Turning to expenses. Total adjusted operating expenses were about $112 million for the quarter, up 17% against last year's fourth quarter. Excluding the impact of acquisitions, adjusted operating expenses were up 4% for the quarter and actually down 2% for the year. Majority of the expense variance related to acquisitions was compensation and benefits. Turning now to our 2021 guidance. As Ed noted, our plans for 2021 and beyond call for continued investments to drive long-term sustainable growth in our business. For 2021, our organic revenue target is a growth rate of 6% to 7% from our recurring nontransactional revenue, which we define as access capacity fees plus proprietary market data fees. Similar to prior years, we anticipate the majority of this growth to be driven by additional units versus pricing changes. After incorporating our ISG acquisitions, we expect the reported or total growth rate for this category to be 7% to 8%. In the aggregate, we expect the acquisitions closed in 2020 to contribute additional growth of 4% to 6% in 2021. Longer to midterm, we are targeting organic top line compounded average annual growth of 4% to 6%. Given our growth plans and strategic opportunities, we are planning incremental investment of $24 million to $26 million in 2021 to help increase that growth rate in the future, which I'll discuss further in a moment. Moving to our expense guidance. We expect adjusted operating expenses to be in a range of $531 million to $539 million versus $416 million in 2020. The projected $115 million to $123 million year-over-year expense increase falls into 3 main categories: 2020 normalization, core and incremental investment. First, 2020 normalization. Approximately $71 million or nearly 60% of the increase is due to incremental expenses from 2020 acquisitions or about $55 million, which will contribute to our long-term growth profile and nonrecurring savings in 2020 that we do not expect to repeat in 2021. The nonrecurring statements realized in 2020 include a COVID-related savings, the favorable accrual adjustments related to incentive compensation and facilities expenses and see delays in hiring, which were also caused by disruptions related to COVID 19. If you normalize our 2020 expenses for these items, projected expense increase is approximately 10%. Based on the current market outlook, we expect these costs will recur in 2022 and beyond. Although, as we demonstrated in 2020, we are able to optimize our cost to preserve our differentiated track record of margin expansion. Second, core expenses. We expect these expenses to increase by approximately $14 million to $18 million or 3% to 4% growth. This category includes our annual compensation adjustments, incremental infrastructure costs and otherwise general price increases. However, should we remain in a more locked down state for an extended period of time in 2021, we expect the expense growth should be muted. We expect to also incur incremental facility overlap costs of approximately $7 million to $8 million as we transition our Chicago headquarters and other office space. We do not expect the majority of this cost to recur in 2022. And finally, incremental investment. As Ed highlighted earlier, in support of our strategy, we plan to invest approximately $24 million to $26 million in 2021 to drive incremental and sustainable long-term organic revenue growth and high conviction, high return opportunities. This includes $9 million to $10 million for our previously announced European Derivatives buildout as well as investments aimed at supporting growth, index, options and futures, including developing, listing and distributing unique products and enhancing marketing, education and content, as well as our efforts to tap into the growing base of retail investors, among other initiatives. As we have demonstrated in the past, we have the flexibility to adjust the magnitude of our overall expense through the year. Should market conditions for our transaction revenue weakens, there are multiple levers with which we may adjust our investment levels to help realize the strong underlying margin profile of our business model. As the year develops, we will revisit how we are calibrating our investments to the current market reality to optimize both margins and long-term growth potential. Turning to our summary of full year guidance on the next slide. We expect depreciation and amortization to be $38 million to $42 million for 2021 compared to $34 million in 2020. This excludes amortization of intangibles of approximately $116 million. Moving to income taxes. Our effective tax rate on adjusted earnings for the quarter was 28.6%, above last year's fourth quarter rate of 24.7%. Absent the higher tax rate, earnings per share would have increased 6%, which reflects the impact of higher adjusted earnings, netted against the incremental benefit of reducing our share count by nearly 3% over the last 12 months. Our full-year 2021 tax rate on adjusted earnings is expected to be in the range of 27.5% to 29.5% versus 21 -- 28.1% in 2020. Finally, we expect 2021 capital spending to be in the range of $60 million to $65 million, reflecting expenditures for the buildout of a new trading floor and higher investments in technology and infrastructure to support our acquisitions and other growth initiatives. We expect 2021 to be an above trend line CapEx year due to the various investments noted. And over time, we expect CapEx to return to a more normalized level of $40 million to $45 million. While we're not providing full year guidance on interest expense, we wanted to highlight that absent any additional borrowing, significant changes in LIBOR, our quarterly interest expense for the first quarter of 2021 is expected to be $12 million to $13 million, which is slightly lower than the 4Q 2020 numbers, which include incremental fees related to refinancing costs. Moving to capital allocation. Our priorities have not changed as we remain committed to investing in our growth strategy while returning excess cash to shareholders through dividends and share repurchases. As you heard from Ed, recent acquisitions of EuroCCP and BIDS reflect conviction in our ability to deploy capital, to enhance organic growth and strategic value over time, leveraging the robust technology at the core of our strong operating leverage profile. From a capital return perspective, our record financial results in 2020 and cash flow generation enable us to return the highest amount of cash to shareholders since becoming a public company. We plan to continue being opportunistic for share repurchases, as highlighted by this morning's announcement of up to an additional $200 million in buyback capacity, bringing our total availability to approximately $400 million as of the end of January 2021. In December, we completed a $500 million bond offering used to fund the BIDS acquisition, repay amounts outstanding under our revolving line of credit and a portion of amounts under our term loan as well as other general corporate purposes. Our leverage ratio increased to 1.4x at December 31 from 1.1x at September 30 due to the higher debt outstanding. We ended the year with adjusted cash of $210 million, reflecting in part, higher balance associated with additional regulatory operating cash needs for EuroCCP. Now I'd like to turn it back to over to Ed for some closing comments before we open it up to Q&A.

Thanks, Brian. In closing, we are extremely proud of the results we delivered last year and are optimistic about opportunities to leverage our recent acquisitions to grow our business. Our operating results highlight the strength of our diversified business and our team's consistent execution of our strategy by further strengthening our core proprietary products, leveraging our superior technology, increasing recurring revenue, broadening our geographic footprint and expanding our product line by asset class, we will be well positioned to achieve our mission to build one of the world's largest global securities and derivatives trading networks. The investments we plan to make this year are expected to contribute to our long-term growth in 2022 and beyond. We also plan to continue to exercise disciplined expense management and efficient allocation of capital to create long-term shareholder value and believe we have the people, technology and expertise to continue to define markets in a very powerful way.

Thanks, Ed. With that, we'd be happy to take questions. [Operator Instructions], Steve?

[Operator Instructions] And the first question comes from Rich Repetto with Piper Sandler.

I guess my question is on the expenses, and this is on Slide 13, and thanks for the walk or the breakout. But I guess, Brian, 2 parts is just of the $55 million from M&A, how much of revenue offset direct revenue? Because I know BIDS is probably in the 40s in there. And then you're assuming that, I guess, the COVID situation, you don't have those savings. Is there a way that you could sort of walk us through if you assume that we're in this lockdown, semi-lockdown to midyear, which probably seems more like what's happening right now anyway? So anyway, those are the 2 questions I have.

Sure thing, Rich. I would say that without getting specifically with each expense for each of the transactions from 2020, each deal that we did, I think we announced that they were accretive or neutral. So you would have an expectation. And we gave a broad range of the revenue expectations across the prior years of that 4% to 6% on prior years. So I think that gives you a pretty good gauge of where we expect the revenue more than offset the expense adjustment that we've noted here on -- as you mentioned, Slide 13, for the $55 million. So in the aggregate, it's going to be accretive, as we noted previously. On the $16 million, I think, as a rough framework, and again, it's -- your guess is as good as mine. And obviously, we've got to put a number out there that we're kind of reflecting in our expense guide as far as 2021. Of the 3 categories I kind of mentioned, I would say high level, it's probably like 1/3, 1/3, 1/3 relative to continued savings for -- if there continues to be some lockdown and we really don't do anything during '21 as far as some of those incremental expenses that we have, some of that savings delay from the delayed hiring was probably 1/3 of that. And then the onetime savings is about 1/3 that we won't get the benefit. So that kind of gives you a frame of reference of like I said, with the COVID-19 related expenses and how that might expense -- impact the expenses for '21.

And the next question comes from Ken Worthington with JPMorgan.

How should we think about the level of additional investment spend embedded in the 2021 guidance? So you called out $25 million. As we get into 2022, what is truly one-time and what part of that $25 million would be expected to continue or even increase in 2022 and beyond?

Thanks, Ken. That's, again, a really good question as we think about this. And it's -- of the first spend of the buildout, and again, I don't want to get too specific on some of this, but I would say that going forward versus '22 certainly a portion of that European Derivative buildout will sustain for -- into '22. So I'd say about -- could be up to 1/4 of that will not repeat as we go forward because there's an incremental investment in the upfront years. Some of that was in '20 and obviously, you're seeing our projection for '21 as far as that buildout. As far as the strategic growth initiatives, and that will vary based on what we end up spending as far as how much of that is permanent and fixed versus on a go-forward basis. So I think that it's going to be -- and again, we'll provide more guidance to this as we move forward as we look at where the actual level of investment is, it's -- again, it's looking at -- the total dollar amount, again, will be geared toward that longer-term growth rate of the revenues or where we're seeing it projected. So again, it's a spend, I want to remind everyone that, that's a spend to really grow that top line revenue for the long term. And so the upfront investment spend, as we've said, with derivatives, as we said before, will have to occur before the actual revenue show up and certainly in '21 while we're planning. So I would say stay tuned. But certainly a portion of that, and I'm hesitant to give you a fixed number right now, will be variable and not occur in '22.

And the next question comes from Dan Fannon with Jefferies.

My question is on kind of retail and some of the initiatives you're talking about in terms of the business spend. And so maybe what percentage of your business today do you think comes from retail? And I guess? Also, what makes you confident that the retail pickup is sustainable to make these levels of investments today?

Good. This is Ed Tilly. Let me start and I'll invite Chris to jump in. But sustainable. I think we've just seen an incredible demand that began last year. It continues -- it tends to be in single name options. So our education will be focused on the basics first. The educated investor is the one that's in day in, day out, year in, year out. And that's really what we will be targeting. So the responsibleness, the suitability, what derivatives and how derivatives can change the risk profile for investors is really we'll be concentrating on. And I think just even recently, we had 730 participants in our series of 21 for '21, which is 21 investment strategies for 2021. It's an incredible amount of turnout early on. So we're gauging the continuation by the interest in education. We're committed to it. So the investment we make is for the long term. And that conversion from straight Delta One trading into derivatives is really where Cboe's effort will be most concentrated. And then, Chris, maybe a little bit on the mix and what we see coming in on various products and how that's different across the uniqueness of our product set.

Sure. Thanks, Ed, and thanks for the question, Dan. So in addition to our education efforts, which Ed mentioned, we're also rolling out products. We rolled out retail priority on our EDGX equities market. As Ed mentioned in the script, we had a record volume there above 700 million shares. Retail priority is now 3 -- almost 3% of the entire U.S. equities market because retail investors and those who are facilitating those orders are getting better quality execution. So that's in equities. And then as we mentioned also during the script, we're rolling out products of more retail size with Mini VIX futures, Mini-SPX or XSP. We just announced Mini-Russell and we have some other things we're thinking about as well to appeal to this new retail investor base, this new wave of new generation of retail investors. So our goal is to empower and educate them about our products across our asset classes to arm them with what they need to be very successful for the long term. That's why we believe this can be sustainable for years to come.

And the next question comes from Alex Kramm with UBS.

Hopefully, last question on the expense side, and sorry if I missed this in the prepared remarks, but the facilities costs, when are those going to go away? So I guess, how long is the overlap and then secondarily, you didn't talk about cost synergies. So is the M&A number of $55 million, is that an x synergy number? Or are these deals really not cost synergy opportunities anyways, given that they are more bolt-ons?

Thanks, Alex. No, you weren't sleeping. So you -- we didn't cover those explicitly. So thanks for the question. As far as the overlap, we anticipate the majority of that to go away following into '22 as we transition the sites. And on the expense side as far as the ramp-up goes, almost -- well, really, those transactions were not a cost play. Those were, I would say, more gaining new capabilities and where we want to be and more on the revenue side. So we don't anticipate any expense synergies there.

Alex, I might just jump in on the expense side. So as Brian said, the difference synergy plays is as we highlighted -- as Ed highlighted, the especially Information Solutions is a great example of this, where we really -- those are purchases that we made in order to grow, to build what we believe is a world-class Information Solutions platform. And so this is about fueling growth, not cost synergies.

And the next question comes from Ken Hill with Loop Capital.

Ed, you touched on this in your prepared remarks a little bit, but I was hoping you could talk about the long term aspirations Cboe has around crypto, given you guys have had a product on the future side in the past. The ETF side has been pretty challenging for everyone involved. But overall, this is an asset class that continues to grow in standing. It's becoming more important to institutions, to retail so you touched a little bit on the agreement you have with CoinRoutes, I think, to provide indices and data to environment that's kind of murky. So I'd love your thoughts on, a, what that tenant will involve? And then kind of how you see that environment and ecosystem more broadly growing over time and what role Cboe plays there?

Boy, I love the way you frame that. The ecosystem is really what we were after when we launched, albeit, probably a bit early, a few years ago. We too saw the potential and the interest. And while not a huge asset class as measured by AUM, certainly by turnover in trade. So we know there's a great deal of interest from the trading community and growing interest, as you point out, institutionally for some exposure. So when I warm up like that, you can tell that we are planning how to re-enter the space, very measured and cautiously. But I could not describe it any better that the importance of the ecosystem, what we see by vibrant derivatives markets, cash settle markets, retail accessible markets, you mentioned ETPs and ETNs, all very important for a successful exposure to crypto. So in the planning stages, but we plan on reentering that market over time, and it's just a matter of us right now on prioritization. So stay tuned in development and want to get back into the space.

Ken, this is John. Just to follow-up on that. It's -- the CoinRoutes, you touched on the CoinRoutes partnership. We'll start with transparent pricing and a regulated framework when we were in crypto earlier. That was our approach. We think that the ecosystem in crypto is that much further developed. It's a rapidly developing space. And so there's a reason we kind of started on the pricing side is we believe that plays into, ultimately, any product that we would look to launch. It's critically important that we have a transparent pricing framework for folks to understand the value of those assets.

And the next question comes from Mike Carrier with Bank of America.

Just on the midterm outlook for organic revenue growth of 4% to 6%. Is that total revenue growth? And then if so, can you just provide a bit of perspective on how that breaks down on the nontransaction side versus the transaction side? And then areas where you're more confident on the transaction side?

Yes, I'll start with that. Thanks for the question there. As we think about that. It's -- we know that -- first of all I'll start off with that medium-term target, and it's not obviously a next year guide because we know that sometimes there's unpredictability in transaction revenue quarter-over-quarter or even a few quarters over time. And so that's why we want to make sure people understood our view over, call it, a medium term. And also, it's incredibly consistent with what we've achieved over the last 4 years, as Ed kind of referenced to earlier. I would say that we -- it's going to be a combination. We already laid out the nontransaction revenue growth expectation as far as our proprietary products -- the proprietary market and access capacity fees how we laid that out. Obviously, you have -- for us, you have the SIP, the take plans, which is at best, probably flat. And then you have the remainder being made up on the transaction revenue side. Again, that is over time versus any one period of time. So that's, I think, how if you look at the primary drivers of how that looks and what we've achieved. But again, it's -- we're looking to -- as you can just see the math and you do the numbers, is that, look, there's going to be more recurring revenues as we continue to build that. You're seeing a more diversified base. And frankly, it's just -- it's a higher conviction that over time, that we're building that sustainable revenue, and that's how that's growing. And you're going to have the impact of the acquisitions that we talked about, which again, is not in that organic number, but as that rolls into that number over time, again, we feel good about how that continues to grow as well.

And the next question comes from Ari Ghosh with Crédit Suisse.

So given that the outlook looks a little more favorable for your prop stream, could you talk about certain segments within the institutional customer base that remain pressured and that have been slower to engage? And I guess related to that, given the strength and expansion of your ISG footprint, are there opportunities to leverage this and maybe cross-sell to some of the underpenetrated customers like either asset managers or pension funds, where you've had a lot of educational efforts and specifically had modest exposure to your [ bold ] management product?

Thanks, Ari, great question. I'll start with the first and then invite John and Chris on the ISG, in particular. So prop product segment, I think, if you just take half a step back, and what we discussed primarily for the 3 quarters of last year after the huge volumes and volatility spike in the first quarter, once institutions told us that they're on the sidelines, there's too much uncertainty out there, right? If you think about this, pandemic just being defined U.S. elections on the map, uncertainty there, led to a runoff election, Brexit coming, going, closing, not closing and told us once some of those uncertainties were passed, that there'd be reengagement, that there needs to be, and there's a demand for exposure more broadly in the U.S. market, and that's what we're seeing in January. So just basically feeding back directly from those institutional users in their plans and moving forward, and we're seeing that engagement. So that's really not surprising to us. Stressed, I think, maybe your word, probably a little bit too much of a reach. I think we're seeing more broadly interest in short-term moves and volatility. A lot of that led by the volatility in single names. Raising volatility overall. And then if we look at VIX options, we see interest in buying puts. When people realize or investors realize, gosh, that spike, don't think that's sustainable. We saw that last week, and we saw put buying, and sure enough, investors in this cycle tended to be right. So we see engagement across now a variety of macro trading cycles, and I like it. The engagement is up and down our proprietary products, led by institutions reengagement. So I don't think I'd call any segment out on not reengaging maybe some slower than others, but it's engagement each and every day. And we like to see what we're seeing in January, I'd love to see that continue. Chris and John, maybe on the ISG question.

Yes. Just as we think about engaging with customers, not just institutions, but customers in general, ISG just fits so nicely with our prop products because usually starts with data, and we have unique data sets to give them. And then once they have data and they've proved out whatever model they might be looking at our investing strategy, they need an access, which we've invested a lot in Silexx and other tools. And then they need to manage risk once they get positions on. And we have what we think is a complete risk management suite for them to manage position. So you get data, then access and then managing your portfolio with risks, and we feel like we have a full suite for them to really engage and use our products in a very efficient and effective manner. And I'll end with offering unique products, an example would be FLEX there, for instance, which is getting a broad use for target outcome investing. I just think it's that's an example of us using our products and our tools offer a product that appeals to certain customers, where they're looking for specific outcomes and really leading and inventing that space.

Ari, I'll just jump in as well. This is John. I think on the ISG question, really, to Chris' point, when we think about -- I mean, it's not just the ISG acquisition, but when we think about M&A, we think very deeply about how the asset fits into the machinery of our broader network. And in this case, really, there's a tight fit with those acquisitions because what they do is they drive the decision-making process for large institutional investors on that side. This is a long-term trend. It's not a 1-year trend, not a 2-year trend. We're in the middle phases, I'd say, of institutions automating their decision-making processes, especially from complex instruments like those that drive our proprietary product revenues. And so automating things like the pricing evaluation process, risk mitigation, margin processes, we're giving tools to institutions to allow them to automate their processes and engage more deeply in our product set. So we see a lot of long-term potential. And remember, we're doing this all the while, while we extract revenues because there's value in the product itself. So not only are people trading more as a result of the ISG products, but the IST products themselves, have value, and they're contributing to our growing base of recurring revenues.

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

I was hoping we could spend a minute on your capital priorities as you think about '21. I know, Brian, you said kind of broader strokes, nothing has really changed, but you guys have obviously been pretty active on the M&A front in the last couple of years. Leverage came up a little bit as well. So maybe help us kind of walk through the use of free cash flow over the next sort of 12 months between deleveraging, return to shareholders and anything else on the M&A front?

Yes. Good question. Again, just reiterating and the strength of the cash flows that we generate, and we'll continue to deploy those, which, again, with the approach of achieving that long-term shareholder value growth. I think what you have seen is that conviction to deploy the capital to enhance the growth, global network standpoint, from products, from an access organically, inorganically. Again, trying to make sure we're leveraging our infrastructure to grow for the long term. And part of the -- keeping that balance sheet, I'll call it, low leverage is that if there's something that does become attractive that makes sense, we want to make sure we could potentially deploy that capital. But absent that, again, the prioritization really hasn't changed. It's a continuing dialogue, again, we have with the Board, we have the management team. You see it reflected in the share repurchase increase, with the confidence and outlook for the stock is growing the repurchase authorization. But again, the prioritization of, look, it's -- we're going to focus on organic initiatives, as we talked about, been the focus of the call today and our guidance going forward. We always continue to have a commitment to that -- an annual dividend increase. We -- again, and then with the share repurchase, as I mentioned, we'll continue to look for that to be opportunistic. And depending on where all those rank -- or excuse me, where that -- the last one, the share repurchase and delevering. I personally don't see as much value in delevering today versus, say, for example, absent anything else, continue to return cash to shareholders. So delevering from where we are today is not, I would say, a big focus of that capital deployment.

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

Maybe one just to tie expenses and revenue together. So just quickly, just on the expense outlook, is that -- are you considering the January trends in the expense forecast, just, I guess, a flavor of kind of the volume outlook you have for '21. But then on the strategic growth initiatives, Brian, what's the thought on the payback on timing of revenue -- gaining revenue attributable to those expenses? And if you can also talk about the European Derivatives effort in terms of when do you think you'll have positive revenue there after obviously market maker payment?

Sure. I'm not sure I understood the first part of your question about ...