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

Good morning, everyone. Welcome to the Cboe Global Markets Annual Meeting of Stockholders. I'm Ed Tilly, the Chairman of the Board, President and Chief Executive Officer. I would like to thank you for joining us and to extend my best wishes for your health and the health of your families and colleagues. Similar to last year, we are conducting this year's meeting as a completely virtual Annual Meeting of Stockholders. A copy of the agenda and rules of procedure should be posted on the web portal. The procedure is as follows: first, I'll introduce our Board of Directors and some of our key executives; second, we will vote on the proposals listed in the proxy statement; third, I will update you on progress made at Cboe; fourth, we will take questions from stockholders; and finally, we will report the preliminary voting results. As is our custom, if you have a question about one of the proposals to be voted on, such question must be submitted in the field provided in the web portal at or before the time the proposals are before the meeting for consideration. Then after the conclusion of the business presentation, we will address appropriate general questions from stockholders regarding the company. To submit questions, please log in as a stockholder by entering the 16-digit control number you received with your proxy materials and submit the questions in the field provided in the web portal during the meeting. You may also refer to the rules of procedure for this meeting regarding questions. Now it is my privilege to introduce my fellow Director nominees: Bill Farrow; Ed Fitzpatrick; Ivan Fang; Janet Froetscher; Jill Goodman; Alex Matturri; Jennifer McPeek; Rick Palmore; Jamie Parisi; Joe Ratterman; Jill Sommers; Fred Tomczyk; and Gene Sunshine, our Lead Director. I would also like to thank Michael Richter, who did not stand for reelection as a Director at this annual meeting, for his dedicated service to Cboe. Michael served on the Bats' Board for nearly 8 years and came to Cboe as part of the Bats' acquisition in 2017. We appreciate his years of wise counsel and his contributions, both to Bats and Cboe. We wish him all the best. I will now introduce other Cboe's senior executives who are in attendance. Chris Isaacson, Executive Vice President and Chief Operating Officer; Brian Schell, Executive Vice President and Chief Financial Officer; and Pat Sexton, Executive Vice President, General Counsel and Corporate Secretary. I would also like to introduce our independent auditor, KPMG, represented today by John Rodi and Anupum Luhar. In addition, Peter Sablich, our representative from Broadridge is serving as our independent inspector of elections. I thank everyone for participating today. And now let us proceed with the formal business of our meeting. Pat Sexton and I have been appointed as proxies for this meeting. Will the Corporate Secretary now present the required formal documents and affirm that the meeting is duly convened for the transaction of business?

Thank you, Ed, and good morning. I have copies of the Notice of Meeting, the Proxy Statement, the company's 2020 Annual Report on Form 10-K, which includes the audited financial statements for the year ended December 31, 2020, and the forms of proxy, together with affidavits of mailing. In addition, the Board of Directors adopted resolutions providing for the meeting to be held at this time via live audio webcast and directing that notice to be given. The Board fixed March 18, 2021, as the record date for determining persons entitled to notice of and to vote at this meeting. The alphabetical list of the stockholders of record as of the record date is available on the web portal for inspection by stockholders. The inspector of elections reported that immediately prior to the commencement of this meeting, more than 83% of the outstanding shares of the company's common stock as of the close of business on the record date were presented in person or represented by proxy. Therefore, a quorum is present and the meeting is duly convened for the purpose -- purposes of transacting such business as may properly come before it.

Thank you, Pat. We have 3 proposals on which stockholders are voting at this meeting. There will be time for discussion of the proposals after they have been introduced. Each of the matters being brought before this meeting is described in the proxy statement that was mailed to stockholders entitled to vote at this meeting. On each matter, stockholders have 1 vote per share of common stock held as of the close of business March 18, 2021. The first item of business for consideration by stockholders is the election of Directors as described in the proxy statement. There are 14 Director nominees to be voted on at this annual meeting. The Directors elected today will hold office until the 2022 Annual Meeting of Stockholders and until their successors are duly elected and qualified. Our bylaws require advanced notice to the company of stockholders' intent to nominate persons as Directors. No such notice was received. Accordingly, I declare the nominations for directors closed. The second item of business is a nonbinding resolution to approve the compensation paid to our executive officers. The final item of the business before this meeting is the ratification of the appointment of KPMG as our independent registered public accounting firm for our 2021 fiscal year. This concludes the introduction of the proposals to be presented at this meeting. At this time, we will be opening the floor for comments on the proposals. You will have an opportunity to vote after any discussion. Comments on the matters other than the proposals should be held for later in the meeting. For now, we will only respond to questions germane to the proposals being put to a vote. If you have a question about one of the proposals to be voted on, such question must be submitted in the field provided in the web portal. We will not address questions from the press or analysts. You may also refer to the rules of procedure for this meeting regarding questions. I'm not seeing any questions. There being no further discussion, it is 9:06 a.m., and the polls are now open for voting. The voting is by proxy and online via the web portal used to access this meeting. If you have already voted by mailing in proxies or via telephone or internet, you should not vote at this meeting unless you wish to revoke your prior proxy. The polls will be closing shortly. [Voting]

Since all stockholders have had adequate time to vote, it is 9:07, and the polls are now closed. While the preliminary proxies and online votes are being tabulated by the inspector of elections, I will report on Cboe's accomplishments in 2020 and provide an overview of the company's progress to date in 2021 as well as strategic initiatives going forward. Following my presentation, we will take questions and then there will be a preliminary report on the results of the elections. Before I begin, let me remind you that this presentation does contain some forward-looking statements, which involve risks and uncertainties. Actual results may vary. Please refer to our filings with the SEC for more detailed information about the risks and uncertainties. While this meeting is primarily procedural, let me take a few minutes to provide a brief overview of our 2020 results, update you on our recent business developments and highlight how we are working to define markets while focusing on building one of the world's largest global derivatives and securities networks. 2020 was an extraordinary year by all measures. Cboe posted record results for the year, highlighting the strength and diversification of our global business. We grew net revenue by 10% and adjusted EPS 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 non-transactional revenues and increased efficiency enabled by our fully integrated superior technology. Furthermore, in 2020, we completed 6 strategic acquisitions that combined, align with our growth strategy to expand our product line across asset class, broaden our geographic reach, diversify our business mix with recurring revenue and leverage our technology advantage. We believe each of the deals closed in 2020 will help us accelerate organic growth in 2021 and beyond. 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. We entered 2021 well positioned to build on the strategic progress we made in 2020 and are off to a strong start. We reported solid financial results for the first quarter of 2021. As expected, we had more difficult comparisons in the first quarter this year against last year's record first quarter earnings, and we saw exceptionally strong trading as the COVID-19 pandemic began sweeping the globe. For the quarter, net revenue was up 2%, and adjusted EPS was down 7% year-over-year. However, we saw very strong sequential growth across business segments, with net revenue up 19% over the fourth quarter of 2020 and adjusted EPS up 26%. Our solid results were driven by record trading in multi-listed options and continued growth in our recurring non-transaction revenues as well as the contribution from the acquisitions we completed in 2020. In addition, with increased certainty around the political landscape, progress around the COVID-19 vaccine rollout, the reopening of businesses and various companies returning to work, we have seen institutional investors reengage with our index options and volatility products this year. Quarter-over-quarter, volume in the first quarter increased 63% index futures and 19% in index options. Turning to our targets and expectations for this year. 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 have seen since our IPO, we have also allocated capital inorganically to help accelerate our growth strategy while returning capital to shareholders. We have exciting initiatives underway with each of our strategic pillars, but I'd like to focus my update today on 4 key incremental growth drivers: the opportunity to grow recurring non-transaction revenue, our plans to launch Cboe Europe Derivatives, expand BIDS Trading and efforts to extend across -- extend access to our products and services, including our retail trading base. In 2021, we are maintaining our focus on investing in long-term growth, building on the strong foundation we laid last year and are excited about the momentum we are seeing across our business. In March, we announced plans to acquire Chi-X Asia Pacific, which will provide Cboe with a single point-of-entry into 2 of the world's largest securities markets, Australia and Japan. I'll touch on this exciting deal in a moment. But first, let me update on the key incremental growth drivers I noted earlier, and how this planned acquisition complements several of these growth initiatives. I'll begin with the progress we made growing non-transaction revenues. During the first quarter, we achieved 17% growth year-over-year in recurring non-transaction revenues, exceeding our expectations. This increase includes organic growth of 14% as -- 14%. As a result, we recently increased our 2021 growth target for organic recurring non-transactional revenues to a range of 10% to 11% from a range of 6% to 7%. One of our top priorities remains the continued global expansion of our data and analytics offering, and we recently announced the creation of Cboe Data and Access Solutions, a new division that will lead our charge to become a leader in global data and analytics. Turning to Cboe Europe derivatives. We plan to go live with this new market on September 6, subject to regulatory approvals. Most importantly, we have a critical mass of key market participants ready to support the exchange from day 1, including banks, clearing firms, market makers and proprietary trading firms will help contribute to the provision of liquidity and client order flow on the new market. While our 2021 revenue expectations for European derivatives are modest, we are investing for long-term growth and looking for a gradual revenue build as we gain traction, expand our product offering and unlock the potential we see for considerable growth in this market. Moving to BIDS Trading, we see significant opportunity to leverage the planned Chi-X Asia Pacific acquisition to bring BIDS' industry-leading block-chaining capabilities to this new geography. With BIDS' current network covering major North American and European equities markets, the planned addition of Asia Pacific equities is expected to create a global block trading platform to serve a broader base of customers. We also remain committed to extending access to our products and services through product innovation, enhancement of our markets as well as expansion of our customer base, both institutional and retail, and have made solid progress on this initiative. Last month, we extended trading hours on our EDGX Equities Exchange to allow for trading beginning at 4:00 a.m. Eastern Time, and the volume we are handling during this early market session has exceeded our expectations. EDGX is now handling more than 11% of the volume during this early trading session. Last month, we also received approval from the SEC to launch our innovative Periodic Auctions in the U.S., paving the way for us to provide customers with an on-exchange alternative to off-exchange electronic block trading by enabling them to trade in size while helping to reduce market impact. We continue to see strong customer adoption of a related product in Europe, and we're excited to build on its success by providing a new version of this product to our U.S. customer base. This long-awaited approval in the U.S. was the result of our steadfast commitment to improving markets for our customers, and we look forward to launching this offering in the third quarter of this year. We are also planning to extend global trading hours for VIX and SPX options in the fourth quarter of this year as part of our 24/5 initiative, subject to regulatory review. The length in global trading hours will complement our planned entry into Asia Pacific and are designed to help meet growing investor demand for the ability to manage this more efficiently, react to global macroeconomic events as they are happening and adjust SPX and VIX options positions around the clock. The uptick in market engagement from retail and institutional investors alike reinforces the importance of our ongoing commitment to education. Our new core derivatives curriculum from the Options Institute has been met with positive feedback from early participants at all experience levels. We've expanded the derivatives educational webinar series to include foundational knowledge of options, pricing metals and strategies, and we are on track to launch our first set of online on-demand courses in June to further build understanding of derivative strategies and applications. Turning now to our plans to acquire CHi-X Asia Pacific. We believe this deal significantly advances our mission to build one of the world's largest global derivatives and securities trading networks, enabling the further extension of our product offerings to our global network of customers. In addition, we believe this exciting investment will complement our North American and European operations and provide a foothold in the key Asia Pacific region, positioning us to become a truly global marketplace for our customers. Chi-X is one of the most successful alternative market operators in Asia Pacific with core exchange operations in Australia and Japan and a significant sales presence in the region. Asia Pacific is an untapped market for Cboe, and we're excited about the potential to offer our unique proprietary products and other services to clients in the region. As Cboe expands its operations on a global scale, we are equally committed to being a local partner in the communities in which we live and work. Our goal is to have a positive impact on the world's greater good through the 3 pillars of ESG: environmental, social, and governance. We recognize that operating in a socially responsible manner helps grow the long-term interest of our investors, associates, customers and community members. Furthermore, we recognize that our many accomplishments would not be possible without the strength of our associates. At our core, Cboe is defining markets by putting people first, our associates working together with our customers, regulators and the broader industry to find solutions to meet today's challenges. Therefore, in an unmanageably chaotic and difficult year marked by the pandemic, geopolitical tensions and social unrest, we came together as a community. From the Board of Directors and executive team, to associates around the world, to examine and prioritize how we can advance racial equity, diversity and inclusion within Cboe, in 2020, we founded the Diversity Leadership Council with a vision to help the organization challenge bias, embrace differences and become a stronger team. While the women -- while the Cboe Women's Initiative, established in 2019, continues to increase the representation of women at Cboe, strengthen their voices and cultivate opportunities for their growth and advancement. I look forward to updating you on the progress going forward. Additionally, I'm pleased to report that Cboe plans to publish its third ESG report in the coming weeks. The report builds on our prior reports and provides a comprehensive update on our key metrics and progress since our first 2 reports and can be accessed on our website. In closing, our record results in 2020 and strong cash flow generation enable us to return $520 million to shareholders in 2020, an all-time high and a 69% increase compared to 2019. Additionally, we have raised the quarterly dividend each year for 10 consecutive years, including a 17% increase in 2020. And we plan to continue growing the dividend as part of our steadfast commitment to returning capital to shareholders in 2021 and beyond. Looking forward, our cash and capital positions remain strong. And we are confident that the actions we are taking to implement our strategic initiatives will drive free cash flow and create long-term sustainable value to our shareholders as we continue to focus on our strategic initiatives. With the solid foundation we built, the clear vision we've created and the exceptional Board and team of global associates we have in place, I'm excited and energized by the opportunities ahead. 2021 will be a year of investment and growth for Cboe, enabled by the continued execution of our strategy to further fuel organic growth in our business over the long term. I believe we have the people, technology and expertise to continue to define markets in a very powerful way, and achieve our mission to build one of the world's largest global securities and derivatives trading networks. Thank you for your continued trust and confidence in Cboe.

This concludes our presentation. Welcome to the Q&A portion of the meeting. I'm Debbie Koopman, Head of Investor Relations at Cboe Global Markets. [Operator Instructions] We want to thank you for all the questions you submitted during the meeting. So let's go ahead and get started.

The first question has to do with when we expect the sale of our 400 South LaSalle building and the completion of the Cboe trading floor relocation. Ed?

Let me invite -- sorry. Let's invite Brian Schell onto the call.

Certainly. The -- we have no definitive time frame for the sale of the 400 400 South LaSalle building, but we continue to market the property actively. As far as the new trading floor, it is projected to open in the second quarter of 2022.

Thank you, Brian.

Let's keep Brian on the line. I think the next question might involve him, too. The next question has to do with the Biden tax plan, what impact do we think the Biden tax plan would have on our company? And do we see other things such as robotics or algos that might balance that headwind?

Regarding the Biden tax plan as proposed, broadly, would certainly increase our corporate income tax expense and income tax rate. There are obviously a lot of details that would need to be filled in should it be passed in one form or another. So it would be still very early and too -- frankly, just too early to provide any further projections regarding other detailed proposals that may or may not make it through any legislation and certainly, on the tax side. And as far as other tailwinds, again, or headwinds regarding automation or retail or impact that could offset, again, it's too early until we see the details.

Thank you. Another question. With the success of weekly options, are there plans to add additional expirations or daily expirations?

We do love the opportunity to offer and meet the demands of our customers. So Monday, Wednesday, Friday expiry in the SPX was an attempt at that. But further dividing up the availability for access into our markets is something under constant review but it is always with the goal to meet the demands of our user base as it's changing -- as becoming, as noted in the prior question, much more retail-focused. We have noticed that retail traders do, in fact, like super short-dated options. So something under consideration and something we're always looking for. I appreciate that question.

An additional question came in. Will your R&D expenses increase in 2021 as well as patents?

Why don't we invite Brian back, but for the most part, I'll talk in more general terms, Cboe has always been involved in research and development and new products. Looking at existing products and bringing existing products back to the development phase and making sure that we always have the right contracts listed. But in particular, Brian, if you'd like to comment on our view into the expenses going forward in R&D. I'd invite you to chime in.

Great. Thanks, Ed. Yes, we certainly do see an increase in expenses, and we laid that out at the beginning of this year when we were announcing our -- the end-of-year earnings and our projections going forward and guidance. And we did provide some insights into incremental investments that we're making towards innovation towards what people traditionally what we've called those R&D activities. Will patents result -- that certainly is a potential outcome of that -- of those investments. But certainly, it's something that we are allocating more and more of our expenses to that innovation and all driving towards longer-term growth, and hopefully, longer-term shareholder value.

Thanks, Brian.

So, Brian, I think it's important to point out -- Brian, that we don't see patent process itself as being burdensome at all from an expense side. As a matter of fact, a wonderful patent office internally, and that we can supplement with external help. So I don't see that as being anything material as far as expense going forward.

With there being no further questions, I'll turn it back over to Ed.

Thank you, Debbie. Now that we have completed the question-and-answer session of the meeting. Will the Corporate Secretary please report on the preliminary results of the election.

Yes. Thank you, Ed. more than approximately 92% of the shares of the company's common stock cast on this matter have been voted for the election of each of the nominees named in the proxy statement that are standing for election at this annual meeting. Accordingly, each of the nominees has been elected to serve as a Director. Congratulations. More than approximately 91% of the shares of the company's common stock cast on this matter have been voted in favor of the nonbinding resolution to approve the compensation paid to our executive officers. Therefore, stockholders have approved this resolution. And finally, more than approximately 99% of the shares of the company's common stock represented at this meeting have been voted in favor of the ratification of the appointment of KPMG LLP as the company's independent registered public accounting firm for the 2021 fiscal year. Accordingly, the appointment of KPMG is so ratified.

Thank you, Pat. This concludes our meeting, and the annual meeting is adjourned.