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

Chris and Brian, can you hear me?

Yes. Yes.

Yes, we can hear you.

Okay. Great. So can we get started?

Yes. Let's do.

Okay. All right. All right. Well, thanks, everyone, for joining the virtual fireside chat. Sorry, we are having some technical difficulties, but we can hear both Chris and Brian here. So we are very delighted today to have Chris Isaacson and Brian Schell from Cboe Global Markets with us. Chris is the Chief Operating Officer of Cboe and came to the firm with the 2017 acquisition of Bats, in which he was a founding employee back in 2005. And Chris has a technology background, of course, as a software engineer and was instrumental in developing the Bats trading platform as well as leading the firms trading into multiple asset classes and geographies, which will be a theme in our conversation today as we discuss that continued expansion journey at Cboe now. And Brian Schell is the CFO and Treasurer and also came to Cboe with the Bats acquisition after having been CFO at Bats since he joined them in 2011. Brian has led Cboe's very disciplined cost control with continued operating margin expansion each year since joining, no pressure, Brian, as well as effective capital allocation that has helped Cboe reduce its share count each year while expanding with bolt-on acquisitions with prelimited debt. Anyway, thanks to both of you for being with us today.

Thank you, Brian. Appreciate you having us. absolutely.

It's excellent. So I'll start out with some questions if [indiscernible], and we'll leave some time for questions for the participants. [Operator Instructions]

So maybe we'll start off with you, Chris. But Brian, you can also add your thoughts on this as well. But -- so maybe let's start out with the big picture. You've made a number of relatively small but targeted acquisitions over the past couple of years that significantly expand the asset classes and geographies you're competing in. I think you are in some 18 markets globally now. So can you talk about the grand vision here? It's somewhat of an extension of what you did at Bats, Chris, but was the plan all along to build a leading exchange on a global basis? Or was it more about being opportunistic? And as the pieces came together, it made sense to expand the platform.

Yes. Great question, Brian, thanks again for having us. And I mean, this really has been the plan all along. Even Cboe's acquisition of Bats was in order to -- not just for technology but also to increase asset class and geographic diversity or expansion. So this has really been part of the strategy to become the leading securities and derivatives trading network globally. So the acquisitions you've seen us do over the past 18 months or so have been part of that. And while we had a strategy all along, I'd say it became clear with our recently announced acquisition of Chi-X Asia which will bring us into the region, the APAC region in earnest, allowing us to compete with great existing businesses in Australia and Japan that Chi-X Asia has built, but also increase our access and distribution of our global market data or the rest of our markets and our products. Think about the other acquisitions we've done the last 18 months, Hanweck, FT Options and Trade Alert, they help round out our data analytics offering pre, at and post trade. EuroCCP allows us to continue to grow European equities as well as now expand into European derivatives. We plan to launch those in September. MATCHNow gets us into Canada and then BIDS is this tremendous buy side network that in conjunction with the sell side is almost 500 of the largest asset managers in the world. So I'd say the strategy has been there all along. We can only tell part of it with each acquisition. And with the Chi-X Asia acquisition announced, all the pieces come together to unlock what we think is a pretty tremendous network and opportunity for us globally. Brian, would you add anything there?

Sorry. No, I think that's spot on, Chris. I mean as far as the ability to leverage that global distribution network. I'll just leave it at that.

Yes. No, that's great. And I guess, another way to think about that strategy, it's certainly different than what other exchanges have tried to accomplished with cross-border mega mergers or acquiring into different businesses that have changed their complexion of their revenue mix from trading into more recurring revenue streams. But can you talk more about that revenue mix going forward? How you think that may evolve in, say, the next 3 to 5 years in terms of the portion of revenues that you would deem recurring? And also what you -- whether do you think the diversity of asset classes and geographies can enable a more stable revenue growth profile going forward?

Yes. Let me just start this one quickly, and then I'll hand to Brian. So yes, the strategy is unique to us, and it draws on our strength of product innovation and leading-edge technology and the ability to acquire and integrate and build markets globally and operate them at scale. So with a truly global equities derivatives and FX franchise, we have a Futures and FX franchise. We have unique breadth and depth of data and analytics to offer to our global customers that no other competitor will have. So a global expansion is also driving demand for more [ 24/7 ] access of our markets. So I'll let Brian talk about revenue mix and growth as it relates to this unique strategy.

Yes. So I think it's a -- I'll put it this way. We didn't set out on a plan to say our revenue mix should look like x percent, y percent and z percent as far as how we're looking at that overall revenue mix. It's more about -- to Chris's earlier points about what we're trying to achieve from a strategic standpoint of meeting our global client needs and delivering those unique and those innovative products and services, and how do we enhance our trading experience. But as you think about to the question of how do you think they may evolve. Certainly, if current trends continue over a longer term because any 1 year you can have a different mix in revenues as you may see a spike in transaction revenue that may precede growth of nontransaction or transaction revenue. But over the longer term, we certainly see a higher growth rate for the nontransaction revenue over time. We continue to see growth in the transaction side as well. So we're not shying away from that, as you've seen. So it's going to continue to be a healthy mix. And like I said, it's not a bad outcome if that transaction mix is slightly higher. It just means that the products are having even higher adoption, particularly on proprietary side. And that's, obviously, an incredibly positive thing, both commercially building shareholder value, continue the adoption in the existing markets as well as, potentially future markets that they're not as heavily traded in. So -- but like I said, all else being equal, the nontransaction side is growing at a higher rate. So over time, we would expect this to see a higher mix, but that's not necessarily the outcome we're having to have, so to speak, to drive value. It's something that we see as an outcome of client demand for the data or the analytics services that we could touch on further later. And it's really, to Chris' point, leveraging that existing scale and that existing technology, products and networks that builds out that revenue profile that, in all likelihood, does end up diversifying the revenue stream because not necessarily all of those are going to move in exactly the same magnitude or order as each other.

Right. Yes. And then maybe just one more point on that before we get into some more of the data and analytics side of the equation. But you did say on the 1Q call that you expect that organic growth and recurring revenue to be about 10% to 11% this year. I know you couldn't provide that, obviously, for '22 or '23, it's early. But just in the context of leveraging this much broader product set and geographical footprint. And do you have an expectation of what maybe a normalized organic annual pace of recurring revenue growth could be, say, over, say, a 5-year horizon from here?

I don't -- let's see. I don't doubt you for asking the same question in a different way but that's okay. That's what you do.

We got to try here.

I would say that -- yes, exactly. So -- but I would just kind of go back to our original kind of that medium- to longer-term guidance of feeling good about achieving that 4% to 6% organic revenue growth rate over that time frame. And as the growing mix of nontransaction to transaction revenue does occur, almost mathematically, it has to grow at a slightly higher growth rate than, say, the rest of the business, assuming transaction revenue is slightly less. And of course, there's a piece of our revenue stream that's the SIP, that's just not going to grow in any material way. It's been relatively flat. We just assume it's flat. So to overcome that, call it, roughly 10% of the revenue mix, we do expect to see the nontransaction revenue grow at or better than the kind of that aggregate growth rate of that 4% to 6% over that medium- to long-term period but without that specific number to say, well, it's going to be double digit or it's going to be X, Y and Z. But like I said, where we sit right now, we continue to be very confident in our trajectory. The things that we're building right now that will continue to drive in the future. One thing I just want to bring you back to and remind you of is that this growth rate wasn't an accident, meaning we were building a lot of infrastructure and components to the nontransaction revenue business with respect to access fees, with respect to the market data, with respect to the analytics platform through the combination of incremental resources for sales, incremental products, robust technology to be able to deliver the computing cycles with respect to the index business. All of those things didn't just kind of happen overnight. They've been building for the last 3, 4, 5 years to enable a stronger growth rate. Yes, there have been some positive macro environments that's helped facilitate some of that. But a lot of this, again, has been building over multiple years to start seeing some of the growth rate we're seeing today.

Yes. Yes. I don't think that's completely understood by everyone in terms of the architecture of building that. So it really is -- it does seem like an emerging recurring revenue growth story. Maybe just to delve more deeply into the components of that revenue stream. So you recently combined your information services, market data and access services into one data and analytic solution group to be lead by Cathy Clay. Can we start off with how you're doing on selling the data and analytics services you acquired over the past couple of years, so FT Options, Silexx, LiveVol, Hanweck, et cetera. And to what extent you're seeing synergies in offering these products and services to even just the legacy customer set?

Yes, Brian, it's a great question, following on Brian Schell's previous answer. Like we've been building this for a while. The acquisitions of last year really have augmented and complemented what we already had. And putting this group all under Cathy Clay with both real-time market data but also enhanced data and now access services just made a lot of logical sense. And I think this has been appreciated by investors now just how much data and access we have to sell as one unit. So to your question about what we've seen about these entities we purchased last year. We've seen a lot of synergies of selling data as a package to customers but also using that data across our different businesses. For instance, Hanweck's driving market data for FT, Silexx, Trader Alert. Hanweck's providing data for our European derivatives launch that will help with the daily settlement prices. [indiscernible] data shop, which is our e-commerce site for enhanced and historical data, we've just added 7 new data sets to that in the last week. So those data sets are coming from these new entities as well as from some existing ones and we're putting the pieces together. And also, we've completed the Silexx migration on the trading fort. That's now become the primary order entry management system for the trading forts, handling about 3% of the overall U.S. options market between 2.5%, 3% per month. So these pieces that we've been putting together for the past years, are really starting to fit into place like a nice puzzle, and it's really starting to produce the revenue mix and really, the revenue growth, nontransaction revenue growth that we are excited to see. I'd also mention on the existing nontransaction revenue previous to these acquisitions. There's been tremendous effort over in Europe with -- to prepare for Brexit, which was a tremendous success for us. We first responded to MiFID II, and then Brexit happened really overnight. It finally came to fruition in January. We had prepared for that for multiple years. We've set up an Amsterdam office and a trading venue and volume switched overnight, people needed access to that new venue, and that's coming through with the transaction or the nontransaction revenue, and they're going to continue to need access to that new trading venue as a result of Brexit, in addition of the trading venues they already had. So we've made an opportunity out of that regulatory change.

Yes. And speaking of Europe, maybe just talking a little bit about your newer trading geographies and capabilities. So European derivatives, obviously, is a big initiative. And it just move, like you said, into Canada with MATCHNow and then soon in Japan and Australia along with the BIDS capability, which you're taking global. To what extent do you think you can add or create additional data and analytic capabilities that adds your recurring revenue growth profile with these moves?