Cboe Global Markets reported a strong first quarter in 2024 with net revenues increasing by 7% year-over-year to $502 million and adjusted diluted earnings per share growing by 13% to $2.15.
Derivatives and Data Solutions Performance
The Derivatives business saw an 8% year-over-year organic net revenue increase, driven by strong volumes in S&P 500 index option products and volatility products.
Data and Access Solutions business also reported an 8% year-over-year organic net revenue increase.
Strategic Focus and Capital Allocation
Cboe announced plans to refocus its digital asset business, integrating digital assets derivatives into its global derivatives and planning to transition Bitcoin and Ether futures contracts.
The company plans to wind down operations of the Cboe Digital Spot Market in Q3 2024 due to regulatory uncertainties in the U.S.
Cboe intends to align and unify clearing operations globally, maintaining Cboe Clear Digital for clearing Bitcoin and Ether futures.
Share repurchases continue as an important component of Cboe’s capital allocation strategy.
Global Derivatives and Market Expansion
Despite low volatility, SPX options volume remained strong with a 17% year-over-year increase, and VIX options volume surged to a 6-year high in April due to geopolitical tensions.
Expansion in European derivatives and APAC markets, including record index derivative volumes on CDEX and market share gains in Australia and Japan.
Financial Outlook and Capital Allocation
Cboe expects a one-time estimated pretax charge related to the digital realignment but anticipates annualized savings from winding down the digital spot platform.
Full-year 2024 guidance includes organic total net revenue growth at the higher end of the 5% to 7% range and reaffirmed DnA organic net revenue growth of 7% to 10%.
Capital return to shareholders included a $0.55 per share quarterly dividend and $89 million in share repurchases in Q1, with continued repurchase activity in April.
Closing Remarks
Cboe’s leadership expressed confidence in the company’s strong start to 2024 and its positioning for continued success throughout the year.
Question and Answer
Revenue Growth Expectations and Confidence
Question
How does Cboe’s guidance for organic total net revenue growth at the higher end of the 5% to 7% range reflect expectations for continued strong performance, particularly in light of potential headwinds and a slowdown in index option volumes? What factors contribute to the confidence in this guidance?
Answer
Cboe’s confidence in the higher end of the revenue growth range is supported by the strong first-quarter results, with a 7% increase compared to the same period in 2023, driven by the derivatives markets business and Data and Access (DnA) segment.
The company also cites the robust performance in April as a contributing factor to its confidence in the guidance.
Various potential drivers, such as geopolitical tensions, inflation, interest rates, and the U.S. elections, are expected to continue driving activity and usage of Cboe’s diverse ecosystem, supporting the higher end of the revenue growth range.
Data and Access (DnA) Growth Outlook and Confidence
Question
Given the tougher comps in the second quarter for the Data and Access (DnA) segment, particularly in light of the strong 8% growth in the first quarter, how confident is Cboe in achieving the 7% to 10% medium-term guidance for DnA revenue growth? What factors contribute to this confidence?
Answer
Cboe remains confident in the 7% to 10% DnA revenue growth guidance, citing solid year-over-year growth across all asset classes and regions during the first quarter, with particular strength in new subscriptions and units.
The company highlights the record growth in market data and access services from outside the Americas, reaching 43% of total growth, indicating strong international demand and adoption.
Various factors, including the recent re-platforming of Cboe Australia, new product packaging and bundling, and technology enhancements in the core platform, are expected to contribute to sustained growth and support the 7% to 10% guidance.
0DTE SPX Mix and Future Trends
Question
With the 0DTE SPX mix stabilizing around 50% and potential factors like the recent Robinhood launch, what are Cboe’s updated thoughts on the future direction of the 0DTE mix over the next 12 months? What other factors are most sensitive to adoption of 0DTE options?
Answer
While the 0DTE SPX mix has stabilized around 50%, the breakdown between retail and nonretail participants has shifted, with nonretail (including professional retail) accounting for just over two-thirds of the mix, indicating increased adoption by funds, strategies, portfolio managers, and systematic strategies.
Factors contributing to the growth of 0DTE options include the availability of historical data for institutional and systematic funds to train models, leading to increased adoption and usage.
The company highlights the growth of 0DTE options across various volatility ratings and market cycles, indicating their appeal as shorter-term risk management strategies that are less sensitive to broader macro trends.
Recurring Nature of 0DTE Complex and Growth Drivers
Question
How does Cboe view the recurring nature of 0DTE options compared to other products, and what are the primary growth drivers for the 0DTE complex? How much of the expected growth is attributed to increased adoption and regular usage versus potential changes in volatility or VIX levels?
Answer
The nature of options, which expire, necessitates continuous engagement from customers as they refresh their positions and manage their exposure or views in the market. This results in higher engagement rates compared to products like equities, contributing to the more recurring nature of option trading revenue.
The growth of 0DTE options is driven by various factors, including the appeal of shorter-term risk management strategies, increased adoption by funds and bank QIS deploying systematic strategies with shorter-dated views, and the availability of historical data for training models, leading to broader market participation and activity.
Global Access and Customer Demand
Question
What portion of Cboe’s Data and Access (DnA) revenue or customer base is currently seeking global access, and what is the potential for this aspect of the business going forward? How does Cboe’s global access initiative contribute to growth and customer value?
Answer
The 43% growth rate from outside the Americas in the Data and Access (DnA) segment serves as a positive indicator of the demand for global access.
Cboe’s global access initiative enables customers to access and leverage a wide range of data sets and products from Cboe’s 27 markets through a single technology platform, leading to increased utility and value for customers.
The company’s land-and-expand strategy involves onboarding customers with one data set and then cross-selling multiple other data sets and analytics, driving pull-through and contributing to the growth of the Global Trading Hours (GTH) platform.
Focus Areas and Investment Strategy
Question
Given the evolving profile of Cboe’s business and the completion of the 0DTE growth cycle, what should investors focus on in the next two years to gauge the company’s investment thesis and growth trajectory? How does the company’s focus on revenue growth, expense management, and capital allocation contribute to long-term value creation?
Answer
Investors should continue to focus on Cboe’s revenue growth, particularly in the derivatives and DnA segments, which are the primary growth platforms for the company.
Cboe is implementing a more disciplined expense management process, shifting resources from smaller M&A activities to organic growth initiatives and integration of previous acquisitions, while also maintaining a strong balance sheet and generating free cash flow to support capital return to shareholders.
The company sees opportunities for growth through its global footprint, land-and-expand strategy, and market share expansion in new markets, while also recognizing the challenges of finding another growth driver on the scale of 0DTE.
DnA Growth Drivers and Opportunities
Question
Within the Data and Access (DnA) segment, what are the biggest opportunities for driving growth within the 7% to 10% target over the next couple of years? Which specific products or areas are expected to be the primary drivers of growth, and will this growth come from new products, increased penetration of existing products, or expansion into new customer segments?
Answer
The key focus areas for DnA growth include selling existing data products internationally, expanding the index business, particularly through derivative index strategy benchmarks, and driving adoption of global options analytics capabilities.
The company also sees significant potential in expanding access to its markets during global trading hours, with only 2% to 3% of SPX options currently trading during those hours, indicating a substantial runway for growth.
New data products and insights will be developed by packaging and bundling existing data and leveraging the expanding liquidity ecosystem, with a focus on meeting customer demand and creating innovative solutions.
Cboe’s Strategic Review Process and Future Plans
Question
Where does Cboe stand in its strategic review process, and are there any other areas, beyond the recent decision on Cboe Digital, where the company is considering pivoting away? What are the potential implications of this review for Cboe’s future strategy and focus areas?
Answer
Cboe is currently in the heart of its strategic review process, having completed analysis of market trends, SWOT analysis, and competitor assessments.
The company is actively discussing and debating the areas of focus with the management team and will review these with the Board, with potential updates expected later this year. The strategic review is focused on identifying areas where resources can be best allocated to drive revenue, earnings growth, and shareholder value.
Cboe’s future strategy will likely involve a continued focus on its derivatives franchise and the globalization of that business, as well as opportunities in the DnA segment, while maintaining a disciplined approach to expense management and capital allocation.
CDX Performance and Profitability
Question
Can you provide more details on the recent performance of Cboe Derivatives Exchange (CDX), including the record activity levels in March, the current status of incentives for trading, and the expected timeline for CDX to become a profitable and revenue-generating business?
Answer
CDX experienced record activity levels in March, with first-quarter index derivatives volume up 30% year-over-year, driven by the liquidity provider program revamp and the extension of single-stock options coverage in the European landscape.
The company is actively onboarding more market makers and anticipates the launch of a major global retail brokerage platform in the coming months, which will further contribute to building a core liquidity ecosystem and supporting sales and marketing efforts.
While the timeline for CDX to become profitable is not specified, the company highlights the incremental investment required as relatively small due to the existing scaled infrastructure in Europe, allowing for a patient approach to onboarding customers and growing the business.
Share Repurchase Strategy and Capital Allocation
Question
Can you provide insights into Cboe’s share repurchase strategy, particularly the size and pace of buybacks following the relatively large repurchases in the first quarter and April? What factors influence the decision-making process around share repurchases and capital allocation?
Answer
Cboe’s comfortable balance sheet position, with a leverage ratio of 1.1x at the end of the first quarter and the repayment of floating rate debt, provides flexibility and supports a more active share repurchase approach.
The first quarter historically sees heavier share repurchases, and the company also takes advantage of perceived weakness in the share price to opportunistically repurchase shares.
Cboe remains mindful of organic growth initiatives and the need for dry powder to invest in the business while balancing capital return to shareholders through dividends and buybacks.
Cboe’s Realignment in Digital Assets
Question
Can you elaborate on why Cboe believes it can be competitive in the Bitcoin futures trading market without a spot offering, and what this realignment means for the company’s broader strategy in the digital asset ecosystem? How does this strategic shift align with Cboe’s strengths and capabilities?
Answer
Cboe’s decision to focus on Bitcoin futures trading without a spot offering is based on the company’s assessment of its assets, capabilities, and strengths, as well as the opportunities it sees in the cryptocurrency derivatives space.
The move allows Cboe to leverage its scaled infrastructure, existing global resources, and expertise in derivatives and clearing to create an alternative liquidity pool for customers to express and manage exposure to crypto assets.
This realignment is driven by the recognition of the challenges and lack of regulatory clarity in the spot and cash spot markets for digital assets, leading the company to focus on building a trusted, liquid, and efficient market where it has regulatory certainty and can bring all participants together.
Credit Index Products and Opportunities
Question
Can you provide an update on the credit index products that Cboe is launching, and what is the overall opportunity set within credit index products, including potential new partnership opportunities? How does Cboe envision its role in the evolving credit markets, particularly as new investor types enter the marketplace and electronification continues?
Answer
Cboe currently offers two iBoxx futures contracts and options on those futures, providing a valuable tool for fixed income funds that cannot trade securities and for international customers seeking exposure to the HYG and LQD ETFs.
The key differentiator of Cboe’s credit offering is the alignment of its futures products with the core underlying exposure, tracking the HYG and LQD ETFs closely and offering a touch of exposure to these key benchmarks.
