Deutsche Börse AG (DB1) Earnings Call Transcript & Summary

Welcome to the Deutsche Borse Group Analyst and Investor Conference Call Q3 2026. [Operator Instructions] Let me now turn the floor over to Mr. Jan Strecker.

Welcome, ladies and gentlemen, and thank you for joining us today to review our financial results for the third quarter 2026. Present on today's call are Stephan Leithner, our Chief Executive Officer; and Jens Schulte, our Chief Financial Officer. Stephan and Jens will take you through the presentation. And following their remarks, we will open the line for your questions. The presentation materials have been distributed by e-mail and are also available on our Investor Relations website. The call is being recorded, and a replay will be made available shortly after the conclusion of today's session. With that, let me now hand over to you, Stephan.

Thank you, Jan, and welcome, everyone. Q3 was a further proof point, both on operational delivery and on strategic direction. The quarter's financials confirm the momentum of our business and support another upgrade to our full year outlook. Three things for me personally stood up. SimCorp returned to double-digit growth. Commodities recovered after the Q2 normalization and the treasury result grew year-on-year for the first time since 2024. That combination gives us confidence to raise our guidance for the second time this year. Let me take you through 4 points and then add 2 strategic updates on Europe and digital assets. The first highlight I would like to make is the growth accelerated, and the quality of growth remains strong. Net revenue without the treasury result grew 14% in the third quarter compared with 9% in Q2. 6 of our 8 businesses delivered double-digit growth. I think this is a true testament to our portfolio. Importantly, this was not just a market-driven quarter. Around 3/4 of the growth or more than 10 percentage points was driven by underlying business fundamentals. The buy-side transformation, the euro fixed income ecosystem fund outsourcing, collateral management and the continued increase in demand for capital markets infrastructure. That said, we also benefited from a supportive cyclical backdrop. Mainly the strong derivatives activity we saw in September, driven by a synchronized rate hikes from the ECB and the Fed. So far, this supportive environment has continued into Q4. Why does this matter? Because it shows that the business can deliver high single-digit growth on its own and can move clearly into double digits when the market conditions are supportive. Let me also directly address the 3 Q2 topics some of you raised. In Software Solutions, net revenue growth amounted to 10%. The first component of the Tier 1 EMEA client expansion that moved from Q2 to Q3 has now been signed. So the Q2 slowdown was timing, not a change in momentum. We have seen questions on ARR growth, and Jens will address those heads on later on. In commodities, net revenue recovered to 11% growth after the Q2 normalization. In addition to the market environment, the underlying drivers, namely electrification, data center demand, the energy transition, the shift of OTC activity onto exchanges and our expansion in Japan are all playing out as expected. And the third point, as I said earlier, the treasury result grew 7% year-on-year. That is the first year-on-year growth since 2024. We have been signaling this inflection for several quarters. It is now visible in the numbers. For the first 9 months, total net revenue reached EUR 4.9 billion, that's around 75% of our upgraded full year target. This is consistent delivery across the portfolio. The second highlight I would like to make is the strongest growth came from the areas where we have been investing for years. Financial derivatives grew an exceptional 30%. In addition to the cyclical tailwinds in fixed income, the euro yield curve ecosystem continues to deepen. OTC Clearing made further progress in client onboarding and activation the change terms of our partnership program are improving the revenue quality of our OTC clearing business and support the growth plan over the next quarters. With this, our fixed income business is on track to outperform the 2026 aspiration we set at our Investor Day in November 2023, an ambition that was met with some skepticism at the time. What is particularly encouraging is that almost 60% of the fixed income growth we expected this year is secular in nature. The remaining 40% reflect a more volatile fixed income market environment and rising levels of debt outstanding, both of which were always a part of our thesis. And looking ahead, we see no reason why this elevated level of fixed income volatility should not continue into 2027. Among our investments, funds has been a big part and Fund Services delivered 18% growth in Q3, accelerating from 14% level in Q1 and Q2. We outsourcing and the shift towards capital markets-based retirement savings continue to reinforce each other. On all fronts, the regulatory work streams are progressing well. We continue to engage constructively with the European Commission and expect to end the prenotification period and formally filed in the near term. Other regulatory approvals are advancing as planned, and completion in the first half of 2027 remains from our standpoint on track. The rationale for all funds is unchanged. Clearstream and Allfunds largely operate in different parts of the fund value chain with complementary geographies and client bases. This is also fully aligned with the European savings and investment Union agenda, which needs exactly this kind of cross-border fund infrastructure. Security Services grew 10% in Q3, year-to-date 14%. Growth continues to benefit from fixed income issuance, retail participation and collateral management. After the very strong first half, this is a healthy and sustainable growth level. And last, on ISS STOXX, Ginny Gomez has moved quickly since taking over the CEO role in August. While there will be some restructuring to reflect the current environment, the focus is on executing the AI road map and reviewing the product portfolio. The aim remains to position ISS STOXX for the next phase of growth within the framework we set out at the Capital Markets Day a year ago. My third highlight I would like to emphasize is the margins continue to expand. For the first 9 months, EBITDA growth without treasury results reached 17%, and the overall EBITDA margin stood at 61% at the end of Q3. On costs, the headline increase in Q3 was 7%. The main driver was share-based compensation, a phasing effect linked to share price development. For the full year, we continue to expect operating cost growth of around 3% and excluding Allfunds related exceptional costs. Jens will provide the bridge in more detail. And the fourth and final highlight I would like to make is we are raising our guidance again. The core business is slightly ahead of the original plan. We confirm our guidance for net revenue without treasury results. Though based on the development in the first 9 months, we see potential to slightly exceed this level. The treasury result is now expected to exceed EUR 0.8 billion. And as a result, total net revenue is now expected to exceed the EUR 6.5 billion. This is the second guidance upgrade this year. It reflects 3 quarters of delivery, resilient growth in core business, expanding margins and the treasury result that is now contributing to growth again. So let me close with 2 broader strategic updates. The first is Europe. The move from Capital Markets Union to the savings and investment unit is more than a change in terminology. It puts investors and investments at the center of Europe's capital market strategy. The objective is clear. mobilized private capital at scale reduced dependence on bank intermediation and public funding and help finance Europe's innovation and growth for gender. The opportunity is large, EU households hold around EUR 35 trillion in financial assets with around EUR 10 trillion still in bank deposits. Equity ownership remains far below the U.S. level, even a modest shift from deposits into capital markets products would create a very large pool of long-term investment capital. We now see policy momentum from the bottom up to exactly support this. France has the PEA, which channels retail savings into domestic equities. Italy has the a tax advantage wrap up for long-term capital markets investment. Austria, my home country just yesterday, introduced a [indiscernible], a tax exempt securities account to build capital markets-based well for children from birth. Poland, a year ago has expanded its PPC system, enrolling millions of workers into capital markets-based workplace pension schemes. And now the big news in the way and the big hype for the moment is around Germany. As Germany is moving forward with the [indiscernible] the board and the full [indiscernible] enter similarly support system from children at birth or after 6 years. Adding a capital market-based component to both private and state pensions is a major step for Germany. Further national initiatives are being discussed. This is how change starts in Europe. Member states create working models and then the EU framework begins to align around it. So we are very optimistic for us. This is directly relevant. More big institutional retirement funds and retail participation means deeper markets, more fund activity, more demand for data, trading, clearing, settlement, supports the full investment life cycle exactly the space we are building out through our strategy leading the transformation. The second update I would like to give is around digital assets. Here as well, the move from concept to life market infrastructure is becoming more tangible. ECB's recently launched Pontes initiative is an important building block. As to wholesale digital Central Bank currency, [indiscernible] provides the digital cash lag that connects directly into Clearstream's digital securities infrastructure. This enables true delivery versus payment in Central Bank money for DLT-based assets, closing the GAAP institutional markets need before tokenization can scale. What gives us particular confidence is that we now have major sovereign governments and European supernational institutions in our pipeline as fully sized issuers, not pilots, but real production use of our infrastructure. Luxembourg kicked it off just last week. Beyond Clearstream, the Kraken partnership continues to develop across collateral management, Stablecoin connectivity and tokenized asset distribution.[ Mika ] and the broader European regulatory framework played to our strengths. Clients want digital innovation, but a wanted insight of trusted regulated infrastructure. That is where we intend to be leading. So let me conclude. We delivered 14% growth, upgraded guidance for the second time, and the pipeline is strong heading into Q4. The trajectory we laid out in the Capital Markets Day is intact, and it is accelerating. With that, let me hand it over to you, Jens.

Yes. Thank you, Stephan, and welcome, everyone. Let me take you through the numbers and start with the 9-month overview on Page 2. Net revenue without the treasury results grew 12% across the first 9 months, driven by broad-based momentum across all 4 segments. What stands out is the quality of this growth. EBITDA without the treasury result grew 17%, 5 percentage points ahead of revenue and the EBITDA margin expanded to 61%. Three quarters in, the operating leverage story is no longer a promise, it is in the numbers. Operating costs for the 9 months increased by 5%. This includes approximately EUR 23 million of exceptional costs related to the Allfunds acquisition and an increase in share-based compensation linked to the strong development of our share price. Excluding these effects, underlying cost growth is in line with our guidance of 3%. Net profit attributable to Deutsche Borse shareholders increased 14% to EUR 1.7 billion. Cash EPS also grew 14% to approximately EUR 10. Turning to Page 3, the Q3 stand-alone view. Net revenue without the treasury results grew 14% with 6 of our 8 businesses delivering double-digit growth. As Stefan noted, approximately 3/4 of this growth was structural in nature, which we regard as a particularly strong outcome. The treasury result reached EUR 218 million, up 7% year-on-year. This confirms the inflection we have been signaling. As a result, total net revenue growth reached 13%. Operating costs increased by 7% to EUR 646 million. The headline number requires context. The main driver was a EUR 22 million year on the increase in share-based compensation. This is a phasing effect linked to the strong share price development in Q3 against the comparatively weak Q3 last year. It's not an underlying cost increase. In addition, the quarter included EUR 4 million of Allfunds related exceptional costs. Excluding these effects, underlying operating cost growth was 3%, driven by inflation and targeted investments. The result from financial investments reflects a negative valuation effect in Investment Management Solutions, which I will come to in a moment. This effect is partly offset by a mark-to-market gain in trading and clearing. Altogether, these effects result in a negative exceptional effect of EUR 9 million. EBITDA without the treasury result grew 19%, including the treasury result, EBITDA reached EUR 978 million. The financial result was net of EUR 47 million compared with negative EUR 40 million in the prior year. This increase mainly reflects the senior bond issued earlier this year and the hybrid as well as the convertible bonds issued in September. All in, cash EPS increased 18% to EUR 3.28. Now let me turn to the segments, starting with Investment Management Solutions on Page 4. Software Solutions delivered 10% net revenue growth to EUR 173 million, in line with our expectations. SAS net revenue grew 13%, while on-premise grew 11%. The ARR reached EUR 727 million, up 13% in constant currency or 15% on a reported basis within our guided corridor of 13% to 18%, with slightly lower ARR is also the result of a stronger euro. Growth remains broader based than in 2025 with close to 30 new client and expansion deals signed year-to-date. In Q3, approximately 45% of the ARR growth was driven by new clients and approximately 55% by the expansion of existing relationships. Regionally, APAC contributed 25% and the Americas, 22% ARR growth. For the full year, we continue to expect approximately 10% net revenue growth for software solutions supported by a strong pipeline and continued momentum. In ESG and Index, net revenue grew 4%. As part of that, index net revenue grew 16%, driven by growth in ETF licensees and other licensees, which now also includes the contribution from the recently acquired Scientific Data business. ESG was broadly stable overall, reflecting a combination of stable governance solutions, a 7% net revenue increase in ESG analytics and a small decline in Corporate Solutions. Market Intelligence continued to decline at a mid-single-digit rate. Segment EBITDA declined to EUR 88 million, 2 factors drove this. First, a negative result from financial investments of EUR 18 million related to a valuation effect of our minority investment in Clarity AI, which now has been sold to Glass Lewis, Second, operating costs in the segment increased 16% in Q3, which was driven by higher legal costs in the ISS STOXX business. the consolidation of the recently acquired Scientific Beta business and intra-year cost facing and software solutions. On a year-to-date basis, segment cost growth of 6% is broadly in line with our expectations. Turning to Page 5, Trading and Clearing. The segment delivered an outstanding quarter. Net revenue without the treasury result grew 19% to EUR 652 million, EBITDA with other treasury results surged 36%, the strongest operating leverage of any segment. The main reason for the significant increase is operational. However, I would note that the cost line benefited from a low double-digit onetime nondeductible VAT effect in the quarter. Financial derivatives was again the standout performer, with net revenue up 30% to EUR 357 million, the strongest quarterly growth rate since 2022. Within derivatives, equity and index grew a solid 18%. Fixed income derivatives grew 48% to a new record of EUR 181 million net revenue. This performance was driven by both secular and cyclical factors. On the secular side, the deepening of our euro yield curve ecosystem continued with all 3 pillars contributing strongly. OTC Clearing benefited from further client activation with a number of onboarded clients reaching 2,600, an activation rate of 20% and more than 90 EU buy-side clients activated in 2026. We also saw activated clients scale their activity beyond regulatory minimums, taking advantage of our strong view proposition. Notional outstanding crossed EUR 60 trillion for the first time, up 25% bringing our market share in euro-denominated OTC clearing products to 24%. Repo outstandings remain at record levels Prisma, our new portfolio risk margin methodology launched in May is already delivering billions of funding efficiencies to clients and is increasing the attractiveness of the product. On short-term interest rate derivatives, we committed at Q2 to review the approach after the summer. Activity levels remained solid, with trading volumes up 43% quarter-on-quarter and a 25% open interest market share in Ester However, the active account requirement has not yet had the disruptive force needed to shift substantial exposure. We remain committed to this franchise but are adjusting our investments to a commercially more sustainable level. The amended framework effective from November will have a positive net revenue impact of approximately EUR 10 million in '27. On the cyclical side, the synchronized rate hikes in September provided a meaningful tailwind for interest rate products, helping to drive fixed income derivatives volume to our highest level ever. Commodities recovered to 11% net revenue growth after the normalization in Q2, supported by strong power derivatives volumes with 25% growth. improving European power spot markets and continued strong momentum in Japan, where EEX extended order book trading to fully cover Asian Pacific business hours in September. Cash Equities net revenue grew 3%, with seasonally slower activity and a lower single-digit million one-off effect in infrastructure last year. FX and digital assets, net revenue grew 13%, driven by continued FX client wins and market share gains. The treasury results in trading and clearing grew 7% to EUR 62 million. This was driven by an increase in commodities where margin fees rose due to heightened market uncertainty. This was partly offset by a decline in financial derivatives, where higher netting efficiency reduced margin fee income. Moving to Fund Services on Page 6. Net revenue without the Treasury result grew 18% to EUR 144 million. EBITDA without the treasury result grew 26%. Fund processing revenue grew 19%, fueled by record levels of assets under custody, which crossed EUR 5.2 trillion and strong settlement activity. Fund Distribution revenue also grew 19%, reaching a new record quarter, supported by a continued increase in assets under distribution, which amounted to approximately EUR 950 billion. This is now the third consecutive quarter of mid- to high lease growth, which reflects outsourcing trends, capital markets base retirement savings and equity index levels. Now turning to Securities Services on Page 7. Security Services delivered another strong performance. Net revenue without the treasury result grew 10% to EUR 288 million. EBITDA without the treasury result increased 14%. The growth was driven by record levels of assets under custody, reaching almost EUR 18 trillion, driven mainly by international debt issuance. Within custody, collateral management revenues grew 22% to EUR 34 million, reflecting the continued increase in demand for collateral optimization services. Collateral management outstandings remained solidly above the EUR 1 trillion mark. Settlement revenues grew 90% despite a 10% decline in settlement transactions. The decline in transaction volumes is mainly due to a reallocation of ICSD transactions to the CSD in the context of the return of the banking license in our domestic business. The treasury results in Security Services grew 7% year-on-year to EUR 140 million, mainly driven by higher cash balances. And finally, let me conclude with our updated outlook on Page 8. As Stephan outlined, we are raising our full year guidance for the second year -- for the second time this year. Let me confirm the numbers. For net revenue without the treasury result, we confirm our guidance of approximately EUR 5.7 billion. Based on the trajectory of the first 9 months, we see potential to slightly exceed this level. Our own expectation, which is consistent with the current sell side consensus is right between EUR 5.7 billion and EUR 5.8 billion. EBITDA excluding the treasury results, is still expected to be around EUR 3.1 billion. I would point out that this figure includes the exceptional costs related to Allfunds that we expect in '26 and that were not part of the original guidance. After adjusting for these costs, the underlying EBITDA trajectory has also improved. The federal result is now expected to exceed EUR 0.8 billion, upgraded from our more than EUR 0.7 billion before. This reflects the Fed and ECB rate path and higher-than-expected cash balances. Accordingly, total net revenue is now expected to exceed EUR 6.5 billion, and total EBITDA is expected to reach approximately EUR 3.9 billion. Operating cost growth remains at approximately 3%, excluding the oil funds related exceptional costs. To sum up, double-digit growth, expanding margins treasury turning positive and guidance raised for the second time we are delivering. That concludes our presentation. We look forward to your questions.

[Operator Instructions] Our first question comes from Benjamin Goy at Deutsche Bank.

With SimCorp, one question, thanks for reiterating the full year guidance, but just to double check on that, given last year, you had a strong Q4. It might have been the largest company win or the largest contract win in SimCorp's history. Just maybe you can talk a bit about more about the pipeline going into Q4 and why it makes confidence to improve slightly your 9-month run rate over the full year.

Thanks, Benjamin, for the question and focusing back in on SimCorp Into Q4, indeed, the last year was very strong. It's part of the business nature, as we have said over the last few years. That hasn't really changed in that sense as we have a very high pipeline expectation into Q4 despite sort of many of our clients now signing up earlier. In this context, the client that has been driving the move between Q2 and Q3, we still have a material sort of add-on and upsell part of that. And then it's a very broad-based pipeline that goes into Q4. So we are very confident, but thanks for reminding us also how demanding is going to be. we share that, but we are very confident. We see good progress. I mean these situations are deep in discussions. These are not things that are on an ideal list. There's all deep in discussions, and therefore, it's often the timing, but we feel comfortable.

Your next question comes from Arnaud Giblat with BNB Paribas.

I've got my questions on OTC clearing. So clearly, a very significant growth year-on-year. I was just wondering if you could give us a bit more in terms of what quantum that represents looking for a split between the [ derivatives ] business and the [ FG ] business? And secondly, could you discuss a bit more detail on the building box behind talk about some on the call, but just wondering if you could try and qualify whether it's the onboarding or the potential for entire to trade more that is driving this? What are the key drivers? And how sustainable is this going to [indiscernible]. How do we think about the next 2 years paying out here?

So first of all, on the first part of your question, OTC clearing growth, I mean as you know, it's part of the overall fixed income road map. We've been growing all elements, but OTC clearing has indeed also been growing by 40% even ahead of volumes, has a couple of effects in here that we also flagged over Q2 already. One was the fact that we have a tendency or let's say, some trend towards nonpackaged deals and engaging more buy-side clients in the game, and that actually helps us overall on the -- from less netting of deals before that. Second one is we had adjusted our partnership program terms a bit. That also generated some additional growth. And then the rest is really underlying growth of the franchise, if you wish. So I would say that that's on OTC clearing. And second part of the question...

Maple business, similar, right? It's broadly EUR 100 million business. It benefits from the environment, so more demand for collateralized money market transaction. So this is really largely structural in nature from our point of view.

Your next question comes from Michael Werner at UBS.

Congrats on the results. A quick question, if you don't mind. We've seen you've raised guidance twice this year. You've indicated that the strength in terms of activity has continued into Q4. That means you're generating essentially more cash this year. Does that give you -- or how do you think about that in terms of flexibility, in terms of potential shareholder returns as we look out over the next 6 months or so?

Thank you for the question. Indeed, I mean, business performance is good. And so cash flow generation is also good. we will consider that when we dimensioned the dividend and also the share buybacks, of course, going into next year. As you know, our dividend policy in any case is already to gradually increase DPS over the years, right? And you also know that what our current step with is. And so -- so there is, of course, that is something that we will consider and that also plays into that. And share buybacks, as we said, I mean, despite the fact that we are probably closing all funds, as we said in the first half of next year, we will still, nevertheless, do share by base. And as I said, I mean, we will dimension those share buybacks once we run into the beginning of next year. But you're absolutely right, we will certainly consider the increased cash flow performance.

Our next question comes from Grace Dargan with Barclays.

Maybe if I could just come back on SimCorp, but think more into '27 and '28 kind of ignoring the accounting change. How should we be thinking about the pipeline there? You've obviously seen a decline in ARR this year. Are those challenges still continuing? Or should we be thinking more about an underlying acceleration? I guess, how should we think about that growth in the U.S., your expansion, et cetera?

Thanks a lot for the question around that Grace. I don't think we see a sort of a change to what we observe right now, not meaning in a deceleration. That's more effect quarter-by-quarter that we have seen, which I think is in the context of the overall very good results as gets highlighted. We don't see that as a slowdown at all, the 13% this quarter. So we will return to our normal pattern that we said before. And I think you see that also in looking at our guidance out to 2028, we feel comfortable to have a continued strong momentum and that will be made more visible, more reliable after the accounting change that we are planning for the end of the year.

Our next question comes from Hubert Lam with Bank of America.

Just got one question. It seems like the ESG has finally stabilized this quarter. Just wondering from your point of view, has it bottomed? Or how should we think about this group going forward?

Yes. I mean overall, I would say the business is performing very well. And the underlying -- I mean, the underlying structural drivers, as we always said, also in that business are still intact, right? I mean we still see that trend towards outsourcing in that industry. And still, I mean, as we're always confirming, we have a very stable client base that also is fully with us here. So we would believe that stable momentum, we will keep up. And then we gradually as we said, work our way through the regulatory scrutiny situation. But yes, I mean it's a good momentum in that business also considering the situation that we are in.

Our next question comes from Enrico Bolzoni with JPMorgan.

I had one on the German pension reform. Can you per up provide some additional color on what sort of actions you have taken or implemented to benefit from the various tailwind to they expect will come from this initiative and I think about more trading, more retail trading, but also more custody more settlements. So clearly, your business might be impacted on multiple levels. So what have you done? How have you positioned the business? And what should we think in terms of time line of these benefits materializing in your P&L?

Thank you very much, Enrico question. We clearly need to be careful to not be too long in the answer because it truly penetrates across. And as I mentioned in my introductory remarks, this isn't only about Germany. I mean it's very exciting to see Germany has the biggest economy really doing that and going through a paradigm change. But specifically to your question, we have prepared on a number of fronts. The one is in the more narrow trading environment. I mean if you just take [indiscernible], we have offered -- we have tailored the offering on the exchange to the retail market. we have really emphasized very strongly the position on the ETF side. I mean we have crossed 3,000 ETFs. We have the biggest ETF venue in Europe far beyond sort of on the continent anywhere else is the case. That's an important part of that feeds from that. It goes more broadly, clearly from our side that Stock is the European brand on the index side. I mean much of this will happen in passive or semi-passive if I call, many of those active ETFs in reality, we're still heavily relying on indices. We feel well positioned with a strong set of partners on the asset management on the issuer side. And then it really goes from there through the entire value chain, as you have outlined, and that's on the fund side, in particular, I mean, is a good reason why sort of the fund distribution is so much at the core of our strategy. And with Allfunds one more time, we will not just cover this in Germany. But as I alluded to earlier, a number of the European markets where traditional Allfunds is strong, are equally introducing new instruments. Again, Spain, one of them just 2 or 3 weeks ago. So I think it just shows the data system as fund distribution will benefit in Germany and across Europe. And last but not least, all of that needs to be custodied, which isn't the case when we talk about cash deposits or bank deposits, we don't see any of those obviously from retail customers. The volume growth that you see in our funds business as well as in our domestic CSE business is very much supported by that. So I think it's a unique event in a way across the value chain, which has many years to run.