Cboe Global Markets, Inc. (CBOE:CBOE) Q4 2023 Earnings Call Transcript

Cboe Global Markets, Inc. (CBOE:CBOE) Q4 2023 Earnings Call Transcript February 2, 2024

Cboe Global Markets, Inc. misses on earnings expectations. Reported EPS is $2 EPS, expectations were $2.02. Cboe Global Markets, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. I would like to welcome everyone to the Cboe Global Markets Fourth Quarter Earnings Call. [Operator Instructions] I’ll now hand the call over to Ken Hill, Vice President of Investor Relations and Treasurer. You may begin your conference.

Kenneth Hill : Good morning and thank you for joining us for our fourth quarter earnings conference call. On the call today, Fred Tomczyk, our CEO; and Dave Howson, our Global President will discuss our performance for the quarter and provide an update on our strategic initiatives. Then Jill Griebenow, our Executive Vice President, Chief Financial Officer, and Chief Accounting Officer, will provide an overview of our financial results for the quarter, as well as discuss our 2024 financial outlook. Following their comments, we will open the call to Q&A. Also joining us for Q&A will be Chris Isaacson, our Chief Operating Officer. 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’ll 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 call this morning, we’ll be referring to non-GAAP measures as defined and reconciled in our earnings materials. Now I’d like to turn the call over to Fred.

Fred Tomczyk : Good morning, and thanks for joining us today. I hope 2024 is off to a great start for everyone. I’m pleased to report on strong fourth quarter and full year results for Cboe Global Markets. During the quarter, we grew net revenue by 9% year-over-year to a record $499 million and adjusted diluted EPS by 14% to $2.06. These results capped another record year, which saw us grow net revenue 10% to our record $1.9 billion and adjusted earnings per share of 13% to our record $7.80. Our outstanding results were driven by record trading volumes across our derivatives business, continued durability and growth of our Data and Access Solutions business and disciplined expense management. Our Derivatives business delivered another record quarter as total organic net revenue increased 18%.

As more investors embraced the utility of options to help navigate any market environment, we saw total options average daily volume increased to a record 14.9 million contracts, driven by a 24% increase in index options. We saw record volumes across our suite of S&P 500 Index options products with fourth quarter ADV and the SPX contract increasing 22% year-over-year to 3.3 million contracts. We also saw solid performance in our volatility product suite with VIX options up 33% year-over-year. Our Data and Access Solutions business continue to perform well, and we continue to have a strong conviction in this business going forward as we look to unlock value and revenue opportunities across the globe. During the quarter, organic net revenue in our Data and Access solutions business increased 7%.

Net revenue in our cash and spot markets businesses decreased during the quarter, finishing a year of more muted volume activity across global equity markets. Overall, it was a strong quarter for both transaction and non-transaction growth that capped an excellent year for Cboe. Over the last few years Cboe has built out a unique global derivatives and securities network, with a network largely built, nearly all the acquisitions integrated, we are now turning our attention to unlocking the value of this network through strategic organic growth initiatives. As I highlighted last quarter, I’m focused on three key priorities that I believe will further strengthen Cboe and enhance shareholder value over the longer term. One, sharpening our strategic focus; two, effective allocation of our capital; and three, developing talent and management succession.

We’re working through our strategic review now, but I wanted to provide you some framework of how we’re approaching this process. First, we’re analyzing the secular trends driving market activity today, and how we can continue to maximize our core competencies and leverage our global platform and superior technology. We continue to see several key secular trends reshaping, trading in capital markets. As I sit here today, those trends continue to gather momentum and propel our business forward. First, the globalization of markets and subsequently our customer base. Our global customer base want access to all of our trading capabilities. They’re looking for efficiencies and a consistent experience trading across asset classes and geographies, which we can deliver.

Second, the unprecedented rise of the retail customer has transformed U.S. market in recent years. As with many global trends, we believe what has transpired in the U.S. market will evolve to other global jurisdictions as those markets typically follow a similar evolution. We believe this new generation of retail investors is here to stay and becoming more sophisticated as they increase their use of options to help execute their trading and investing strategies. We continue to see opportunity to service this key segment as the retail wave expands globally. Finally, technology and data, including emerging areas like cloud computing and artificial intelligence, continue to transform the world we live in and as a fuel that helps drive trading in our markets and products.

As our customers engage with markets around the world, high-quality technology and easily accessible relevant data is paramount. What differentiates Cboe and enables us to leverage these trends is our core strengths. First, our global footprint that we’ve now assembled; second, our renewed focus on superior technology; and three, our emphasis on greater product innovation. Our recent acquisitions have helped us to hone these core strengths, and we now have a solid foundation for continued organic initiatives that we expect to drive revenue growth and earnings growth in 2024 and beyond. Today, we are the only truly global derivatives and securities exchange. Our global equities footprint spans seven of the top 10 global equity markets, creating an unrivaled, consistent trading experience for our global customer base.

These equity markets have provided strong and consistent cash flow generation for our business. But importantly, we see securities markets as the foundational element, table stakes in creating products and services that span the equities and derivatives landscape. Another strength is our technology, which has enabled us to be nimble and efficient operator of securities markets around the globe. With two major technology migrations completed last year in Australia and Japan, we now have all but one of our equities and equity derivatives markets running on our common technology platform. Our final technology integration is planned to take place in early 2025 with the migration of our Canadian market to Cboe technology. With nearly all of our acquisitions fully integrated, we are well positioned to unlock the incremental value from our global network by investing in organic growth initiatives in all of our businesses while enhancing and leveraging our global technology platform.

Over the last two years, our product innovation has driven an incredible evolution in the options market that makes us even more confident about the durability of our business. We’ve seen an increasingly diverse set of market participants turning to shorter duration options across our SPX complex, continuously hedging and repositioning on a day in and day out basis, not just during times of market volatility. Prior to the launch of Tuesday and Thursday options in the spring of 2022 0DTE as a percentage of SPX activity was in the low 20% range. In 2023, that reached 45% for the year and moved to 50% in January. With some product innovations like 0DTE drive immediate volumes, we know with other innovations like standing up a new derivatives market in Europe take time.

The remarkable thing about our business is that the core engine can continue to churn and produce revenue in the short-term while we continue to incubate new markets for long-term growth. In summary, we remain focused on creating a healthy ecosystems of product and services that create short, medium, and long-term opportunities, helping to enable a cadence of consistent growth. Additionally, we remain well positioned due to our disciplined capital allocation strategy. During the fourth quarter, we paid off all of our outstanding variable rate debt and we’re in a very good place with our leverage ratio as we begin 2024. We remain committed to maintaining a flexible balance sheet while investing in organic growth initiatives, our technology capabilities, and operating efficiencies to drive revenue growth and optimize our margin, and thereby drive earnings growth.

Finally, talent development and succession planning remains a priority for me. We continue to develop leadership in all functions across the company and optimize our organizational structure to support our global strategy. I’ll now turn the call over to Dave.

David Howson : Thanks, Fred. As we enter 2024, we are well positioned to capitalize on those trends and build on our record 2023 results. You have heard me speak in the past about the foundational elements that make up our ecosystem and the process we follow for moving up our cash, data, and derivatives value ladder. I want to start by outlining the ways we have strengthened the Cboe Foundation before looking at how we plan to unlock organic value across the ecosystem in 2024. Starting first with the Cash and Spot Markets. In 2023, we enhanced our presence in every major market open to competition around the globe, making the biggest advancements in the Asia Pacific region. In March 2023, we completed our technology migration and BIDS rollout for the Cboe Australia, and in the fourth quarter, we completed our technology migration and launch of the BIDS network in Japan.

This migration not only provided a uniform infrastructure to enhance our performance and trading capabilities in the region, but it unlocked opportunities across our value ladder for incremental data product offerings and the ability to add adjacent asset classes over time. With the Australian migration complete nearly a year ago, it serves as the most recent example of this expansion strategy in action. Since the migration, Cboe Australia has seen a solid increase in its market share, with Cboe’s continuous cash market share finishing December at 21.2%, up 3.5 percentage points as compared to December of 2022. The benefits of our regional expansion are not isolated to cash equities though, as we move up the value ladder, we see data and access solutions in the region grow, with Australian market data and access services growing by 11% in 2023.

The gains in Australia are illustrative of the broader globalization trend benefiting the Data and Access Solutions business. In fact, the fourth quarter represented the highest quarter ever for data sales to customers outside the U.S. Cboe Global Cloud, our real-time data streaming service, allows customers efficient access to Cboe’s robust suite of market data products. Today, nearly 80% of our cloud customers are located outside of the United States with the demand for 24/7 access to markets and market data only growing. Last on our value ladder but certainly not least. As we think about expanding our Derivatives capabilities, we remain steadfast in our efforts to bring U.S. market experience to global participants. Shifting market behavior takes time, and we are still in the early stages of this journey, but we are well aligned with the global ambitions for our broker-dealer partners.

We see Europe as a market right for this evolution with the value of volume traded for equity and index options running at just 6% of the size of the value traded in the U.S. despite comparable GDP. In the fourth quarter, our European derivatives exchange, CEDX, posted its best quarter since launch with the volumes up 85% year-over-year. More importantly, completing our index trading capabilities in the region, we successfully launched our single stock options offering in November. We currently have options on 127 companies in production today with plans for over 300 names later this quarter, subject to regulatory approvals and expect to commence a liquidity provider program in the months ahead. The movement of the value ladder from cash to data to derivatives provide the framework for establishing a flywheel of revenue generation.

Turning to Slide 8. It was another record quarter for SPX and a record year for the overall Index business as investors turn to our S&P 500 volatility toolkit to help navigate markets. SPX options volumes grew a robust 31% to a record ADV of 2.9 million contracts in 2023. Activity in the fourth quarter was a record 3.3 million contracts. Notably, while volumes grew across the board, we saw a more pronounced jump in coal volume as investors turn to options to quickly adjust their portfolios in the face of changing market conditions. Meanwhile, we continue to see sustained traction in our 0DTE expiry options. 0DTE activity grew a remarkable 60% year-over-year to comprise 45% of overall SPX activity. These ultra short-dated options have given investors the ability to hedge risk, generate income and express directional views more precisely and frequently.

In our VIX complex, as markets rallied last year, volatility levels fell with the VIX falling from an average of 26 in 2022 to 17 in 2023. The lower VIX levels drove core buying as investors look to the complexity of VIX options to help protect against potential black swan event. Overall, VIX ADV jumped 40% to a record 743,000 contracts last year. As volumes continue to grow, so does the demand for new data sets, indices and tradable products. We have many noteworthy developments over 2023. In partnership with S&P Dow Jones Indices, we launched the Cboe 1-Day Volatility Index in April, options on futures for our Cboe iBoxx Bond Index futures in July, the Cboe S&P 500 Dispersion Index in September. And in October, we further expanded our benchmark VIX methodology by launching a new suite of four credit volatility indices.

Turning to Slide 9. As we start 2024, we see a supportive backdrop unfolding for our index products, aided by both strong secular forces and cyclical tailwinds. The increased utilization of options as a tool has been underway for decades, but we are still just scratching the surface on widespread adoption. Investors have become increasingly sophisticated over the years and interest, we’ve looked to foster through our leading investor education platform, the Options Institute. With additional online platforms planning to offer cash settle products in the year ahead, we see a runway to higher levels of accessibility and activity across our suite of derivative products. As you heard me mention earlier, the opportunity to bring a U.S. market experience to global participants is increasingly compelling.

While our current assets are aimed at providing a single access point to trade pan-European products, over time, we expect to leverage our access to other regions like Asia Pacific. Today, this shows up both directly through the continued growth in global trading hours activity. In 2023, SPX GTH expanded by a robust 85% and VIX GTH activity was up a solid 45%. Despite the growth across the complex, GTH for SPX options still represent under 3% of overall activity. And GTH for VIX options made up less than 1% of all VIX volumes, leaving meaningful potential for expansion. As we have seen in other markets, traders continue to demand greater flexibility in managing their risk profile. The growth in 0DTE activity speaks to the burgeoning need to manage intraday risk at greater levels.

Importantly, this trend remains firmly in place across market cycles and volatility ratios. Magnifying the impact from the structural tailwinds I just covered, there are a number of cyclical factors working in our favor today. A common misconception that we often hear is that we need higher volatility or a market sell-off to drive options volume growth. As you can see from the chart on the slide, this is far from the truth. Investors have turned to options to help manage risk when the outlook is uncertain. However, it’s important to know that risk runs both ways. And as we saw in Q4, investors turned to options to help manage the upside potential in the market, buying calls to quickly increase the equity exposure in the face of falling 10-year rates.

In fact, our Q4 2023 record volume days all occurred on market updates. And the last quarter was a record period for our SPX complex despite the index moving 11% higher and volatility levels falling dramatically. We believe that options provide an increasingly durable stream of revenue. Unlike cash equity products, options expire on an increasingly frequent basis, particularly as investors embrace shorter-duration trading strategies. This means that traders must continuously reassess the market, putting on and adjusting positions to manage risk, hedge exposure or generate income. Turning to Slide 10, I want to reinforce some of our more recent product innovations. In January 2024, we increased access to shorter-duration products with the launch of Tuesday and Thursday expiring Russell 2000 and Mini Russell 2000 index weekly options, providing small-cap investors with some of the same tools available to SPX traders.

For XSP, despite the roughly 80% ADV growth produced during 2023, we are even more excited about the potential for the XSP contract in 2024. We believe potential margin relief from the SEC will allow additional customers to benefit from XSP’s many advantages. Overall, the potential for regulatory approval coupled with a likelihood for our cash-settled products to be offered on additional online platforms should help catalyze incremental XSP uptake. On the data side, our partners play an important role in our growth. In 2024, we are excited to expand our collaboration with MSCI to include the launch of two new volatility indices and three new tradable products subject to regulatory approval. This is a great example of our continued relationship with MSCI and the growing demand for both more volatility indicators and tradable products to better manage market risk.

Touching more broadly on our Data and Access Solutions business on Slide 11, we posted another record quarter results with revenues increasing 7% on a year-over-year basis. For the full year, D&A grew 9% with organic growth making up 7.5 percentage points of a 9% growth. The year-over-year growth was again driven by client expansion and additional unit sales of our expanding portfolio of access and data solutions. Outside of our cloud capabilities that I mentioned earlier, we saw the opportunity to grow our business by strengthening our distribution capabilities, expanding our index capabilities and providing greater access to our markets around the world. I started my prepared remarks outlining the process we follow when building out our ecosystem of capabilities.

As we think about the key trends across our businesses, we believe we are well aligned in each of our major categories. This not only helps drive more durable revenue generation for more established products like our SPX suite but also allows for the build out of newer initiatives that can leverage a robust infrastructure already in place. Digital assets is one such product that touches each segment of our ecosystem. As we see markets increasingly move digital, we believe there will be greater demand for trusted and transparent markets. We were honored to have been chosen as a listing venue for 6 of the 11 Bitcoin ETFs made available for trading in January. Looking beyond the listing, cash trading and data benefits, a more vibrant crypto ecosystem is advantageous to our recently launched margin futures product.

In January, Cboe Digital became the only U.S. regulated exchange to offer spots, leverage derivatives and clearing on a single platform. 2024 is off to a strong start, and we look forward to capitalize on the numerous opportunities across our business to drive long-term shareholder value. With that, I will turn the call over to Jill.

Jill Griebenow: Thanks, Dave. As Fred and Dave highlighted, Cboe posted a strong fourth quarter with adjusted diluted earnings per share up 14% on a year-over-year basis to $2.06, equaling our previous quarterly record. On a full year basis, adjusted diluted earnings per share were up 13% to a record $7.80 as Cboe generated strong net revenue growth of 10%, hitting a record $1.9 billion for 2023. I am incredibly pleased with the 2023 results and will provide some high-level takeaways from the quarter before delving into an assessment of the segment results and our 2024 guidance. Our fourth quarter net revenue increased 9% to finish at a record $499 million. The growth was again driven by the strength in our Derivatives market category and the solid results from our Data and Access Solutions business.

Specifically, Derivatives market produced 18% year-over-year organic net revenue growth in the fourth quarter as we set numerous records across our proprietary product franchise for the fourth quarter and full year. Data and Access Solutions net revenues increased 7% on an organic basis during the quarter. We are pleased with the revenue trends and are confident in our ability to deliver durable growth in 2024. Cash and Spot Markets net revenues decreased 11% during the quarter on an organic basis, given headwinds in our North American Equities business. Adjusted operating expenses increased 9% to $192 million with the year-over-year growth driven by higher compensation and benefits during the quarter. And adjusted EBITDA of $321 million grew a solid 10% versus the fourth quarter of 2022.

Turning to the key drivers by segment. Our press release and the appendix of our slide deck include information detailing the key metrics of our business segments, so I’ll provide some highlights for each. The Options segment provided robust growth to cap an outstanding year. Net revenue grew 15% led by a strong contribution from our Index business and favorable revenue per contract trend, given the mix shift to index options. Total options ADV was up 2% as our higher-priced index options ADV increased 24% over fourth quarter 2022 level. Revenue per contract moved 20% higher, given a continued positive contribution of higher capture index products. And access and capacity fees were up 6% as compared to the fourth quarter of 2022. North American Equities net revenue was down 10% on a year-over-year basis in the fourth quarter driven by lower net transaction fees.

The decrease was driven by a decline in our U.S. equities on exchange net capture as unfavorable mix shift and higher client volumes pushed more clients into higher tiers, resulting in a negative impact on our overall net capture rate. With our recent fee filings, we have already taken steps to enhance our capture dynamics while maintaining market share as we look to maximize revenue potential for the segment. Partially offsetting some of the headwinds in the U.S. on-exchange business, Canadian equities and our BIDS businesses were solid for the quarter. And on the non-transaction side, access and capacity fees increased 7%, and proprietary market data was up 6%. The Europe and APAC segment reported a 9% year-over-year increase in net revenue as stronger non-transaction revenues and favorable foreign exchange trends again outpaced volume headwinds in European Equities.

Market data, access and capacity and other, which includes the positive impact of interest income during the quarter, were up a combined 14% on a year-over-year basis. Transaction revenue in Japan and Australia benefited from solid market share gains. The Futures segment reported the strongest year-over-year growth of all of our segments for the quarter with net revenue up a robust 21%. Activity in the segment accelerated as volumes increased 21% on a year-over-year basis, and rate per contract improved by 2%. On the non-transaction side, access and capacity fees continue to perform well, up 6% versus the fourth quarter of last year. And market data revenues increased by 15%. And finally, net revenue in the FX segment notched another quarterly gain, growing by 12%, making it the eleventh consecutive quarter of year-over-year net revenue gains for the segment.

Net transaction fees revenue was up 8% as average daily notional value increased by 15%, and market share hit another record at 21.3% for the quarter. Turning now to Cboe’s Data and Access Solutions business. Net revenues were up a solid 7% on an organic basis in the fourth quarter, bringing the full year total net revenue growth to 9% and organic net revenue growth to 7.5% in 2023. Net revenue growth continued to be driven by additional subscriptions and units, accounting for 84% of the organic market data growth and just over half of the organic access and capacity fees growth during the fourth quarter. We are pleased with the organic net revenue trends for the segment and believe the momentum positions us well to hit our 2024 and medium-term guidance range of 7% to 10%.

More specifically, we expect to see continued strength from increasing demand for access across our global markets, particularly given our leverage to growing asset classes and expansion into new regions, proprietary data sales and options analytics benefiting from the sustained growth across our derivatives complex. And finally, we anticipate a continued focus on our sales effort to distribute our content globally for market data to indices, adding to the enhanced distribution capabilities that the Cboe Global Cloud presents. Turning to expenses. Total adjusted operating expenses were approximately $192 million for the quarter, up 9% compared to last year. The increase was a product of compensation and benefits, given higher headcount as well as higher technology support services to support the investment in our key growth initiatives during the quarter.

As we look ahead on Slide 18 to our 2024 guidance, we are introducing our full-year 2024 adjusted expense guidance range of $798 million to $808 million. After two years of relatively elevated expense growth as we integrated numerous acquisitions and invested heavily in growth initiatives, we are slowing the pace of expense growth to help provide greater margin stability moving forward. Our 2024 expense guidance of $798 million to $808 million represents roughly 6% growth on the bottom end and 8% growth on the top end or just under a 5% increase at the midpoint if using the fourth quarter of 2023 at the baseline. Importantly, this lower growth rate should not be viewed as a lack of desire or ability to invest in attractive long-term growth opportunities across our businesses, but rather highlights a more refined effort to manage expense growth to better align with revenue generation and stabilize the margins of our businesses.

Looking at our full year guidance more broadly, we are introducing an organic total net revenue growth range of 5% to 7% for 2024. This is in line with our medium-term guidance of 5% to 7% introduced over two years ago as we continue to execute on our vision for the company. We are also introducing a D&A organic net revenue growth target range of 7% to 10% for 2024, also in line with our medium-term expectations. The D&A category has been a durable growth driver over the years, and we remain comfortable in our ability to hit our objectives in 2024. In the other income line, we anticipate a $37 million to $43 million benefit in 2024 from positive marks on our investments in the 7RIDGE fund, which owns trading technologies. Our full year guidance on CapEx calls for an expected range of $51 million to $57 million in 2024.

And depreciation and amortization is expected to be in the range of $43 million to $47 million for the year. We expect the effective tax rate on adjusted earnings under the current tax laws to come in at 28.5% to 30.5% for 2024. And finally, outside of our annual guidance, we expect net interest expense to be in the range of $10 million to $11 million for the first quarter of 2024. Before moving on from our guidance section, I want to spend a minute on Slide 19 to highlight how Cboe has performed against our medium-term expectations historically. Looking back over the last six years, we performed well against our target as we’ve executed on our strategic ambitions. Our goal for the last few years has been to grow total organic net revenue by 5% to 7% and organic D&A revenue by 7% to 10% each year, something we have consistently achieved.

Given the durable nature of both our non-transaction and transaction businesses, particularly given the increasingly recurring nature of our Derivative franchise, we believe we are well positioned to build on our historical performance and look forward to innovating and leveraging our global platform. 2024 is off to another strong start. And as we have done in the past, we will fine-tune our annual guidance expectations to reflect the current environment throughout the year. On the capital front, our focus remains maximizing long-term shareholder value through effective capital management. In the fourth quarter, we returned a total of $58.5 million to shareholders in the form of a $0.55 per share quarterly dividend. In addition, we repurchased $5.8 million in shares at the end of the fourth quarter.

Moving forward, we will look to opportunistically repurchase shares, given our continued strong free cash flow generation. Turning to our balance sheet. We paid down the remaining $75 million on our term loan facility during the quarter. Our fourth quarter leverage ratio declined to 1.2x from 1.3x in the prior quarter as a result of the debt pay down. Overall, we remain comfortable with our debt profile and the balance sheet flexibility it affords, having locked in low-, medium- to longer-term fixed rate averaging below 3% on our outstanding debt. Embedded in our expense, revenue and capital expectations, we are always looking to strike the right balance between investing in future growth and optimizing our margins. We look forward to executing on our growth drivers in the year ahead and delivering solid shareholder returns in 2024.

Now, I’d like to turn it back over to Fred for some closing comments before we open it up to Q&A.

Fred Tomczyk: We are excited about both the near- and long-term opportunities to grow and expand our business and believe we have strong momentum as we head into 2024. We are well positioned to leverage our global footprint, our leading-edge technology and continued product innovation to unlock the value of a global network that Cboe has built. And I am excited about the opportunities we see to drive revenue and earnings growth across our platforms.

Kenneth Hill: At this point, we’d be happy to take questions. [Operator Instructions]

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Ben Budish from Barclays Capital.

Ben Budish: I wanted to ask about the revenue guidance for this year. Jill, you made a comment about how you’re well positioned to build on historical performance. And if you look at the last three years, you’ve been well above that range. And I guess the question is sort of are you sticking with your medium-term target? Or does 5 to 7 represent sort of how you see the year unfolding right now? And maybe kind of alongside that, how do you maybe frame up the OpEx guidance in the context of the revenue growth? I think you sort of indicated well, if there’s a lot of opportunity, we might spend more. If there’s less opportunity, might spend less. How do those pieces all fit together?

Jill Griebenow: You bet. I’ll start it off here. And I think when looking at our revenue guidance of the 5% to 7%, as you alluded to, that’s our medium-term guidance that we’re going out there with really looking at the strong finish to 2023, looking at that momentum, building in steadily over 2024. We did have a strong January though, so we will continue to monitor. And obviously, we’ll adjust the guidance going forward on a quarterly basis. As it relates to the operating expense piece, again, trying to harmonize that with revenue opportunities, feel very comfortable now that we’re at more of a steady state with the guidance range that we’ve gone out there with. To the extent, though, that we identify revenue-generating opportunities, we are definitely well positioned to invest in those, and we’ll evaluate those as they come.

Operator: Our next question comes from the line of Dan Fannon of Jefferies.

Dan Fannon: Fred, I was hoping to get an update on your goal of sharpening Cboe’s focus. As we think about 2024, are there certain segments or products that are deemphasized in terms of investment? And then more specifically, how do you think about — or your thoughts around the strategic importance of the FX business, which doesn’t really seem to harmonize with some of your other products?

Fred Tomczyk: Okay. So first, I think on the sharpening the focus, I mean, back to when I was on the Board and the strategy of Cboe was more asset classes, more geographies, and I thought that was pretty broad. So now that I’m the CEO, basically want to sharpen that focus, which I have always been on my predecessor about sharpening that focus and making some choices. I think where we are right now is basically, we’ve built this global network. We’ve got the global platform. We’ve got most of the technology converted. We have one left. I think it’s now up to us to sharpen our focus in terms of where we see the biggest opportunity to invest organically to drive growth across that platform now that we have one common technology platform.

Definitely, the M&A activity has slowed down and will continue to be slowed down. But we will continue to look at things on an opportunistic basis where we see something that’s of interest to us, but we want to make sure it’s strategic, it’s financially attractive and it drives good shareholder value over time. With respect to the FX business, it’s performing well. It’s been a good business for us. So we remain happy with that business. I understand our core game is securities and securities derivatives businesses, but the FX business continues to perform well for us. And we don’t need the money or anything. So I think right now, we’re very comfortable with our position there.

David Howson: So, Dan, I would add, obviously, the FX business performed very well within that market share for 21.3%. And when you think about it in relation to the other businesses, it is a global business. And we are building a global securities and derivatives network. And the technology platform that runs the FX business really suits the needs of that space very well. And it allowed us to step into an adjacency there with only a small incremental investment as we look at the U.S. treasuries platform that we’ve been building out. And there, we launched and we’re now seeing early trades and a good pipeline there. So the business has a good runway for us. And it being global and that overlap of client base, the synergy there really something we find quite powerful.

Fred Tomczyk: Yes. And as we go through the strategic review, we’ll continue to sharpen our focus. But as we’re early in the process, once we get through it more, we’ll be clear to everyone about exactly how we’re sharpening our focus.

Operator: Our next question comes from the line of Ken Worthington of JPMorgan.

Ken Worthington: It looks like the pace of relative growth in 0DTE is leveling off in SPX. So it’s 44% in 2Q, 48% in 3Q. You said it was 50% in January. Is there a logical ceiling in terms of how high 0DTE can be of total SPX volumes? And how do you think about growth of SPX over the next few years if 0DTE is not a principal driver?

David Howson: Thanks a lot, Ken. SPX volumes there in Q4 about 3.3 million contracts, a good solid run into January as well as we go through. When you think about the SPX complex and then even take a step back to overall Cboe’s volatility toolkit that we talk about, that is the complex that investors have found great utility to be nimble and to manage that uncertainty where we will be hedging, positioning and repositioning portfolio across tenants. It’s not just about 0DTE, and that’s where you see that fluctuation in the percentage of trading that is 0DTE really depend on what’s happening. Some of our biggest volume days have indeed seen a lower proportion of 0DTE trading as people reposition their portfolios, potentially catch up to a market rally or simply hedge a broader portfolio.

So that percentage of 0DTE has flexed over time. It’s really in that range of 40% to 50% there. But the great thing we see is that overall utility of the complex. And with 0DTE itself, if you drill down one step further, we’ve seen that evolution of the growth of non-retail engagement in the usage of shorter-dated tenors. Last year, around about 55% to, call it, 60% of overall 0DTE in SPX was what we call non-retail, which includes professional retail in that non-retail segment. This quarter just gone, it’s nearly 70%, around about 68%. So great thing there is the engagement from the institutional side of the market, they’re really finding greater utility. And as you mentioned, 0DTE, in general, that shorter-dated tenor applicability for customers out there, we added Tuesday and Thursday, we said in prepared remarks, to the Russell complex really allowing small cap investors many the same strategies that they’re enjoying in that — in the bigger SPX large-cap U.S. market index there.

Operator: Our next question comes from the line of Alex Blostein of Goldman Sachs.

Alex Blostein: Staying on the SPX question for another minute. It looks like the volumes in January have really decoupled versus sort of other equity markets. So January SPX volumes think up over 20 year-over-year. 0DTE obviously is a contributor, but it looks like the monthlies has grown as well. That’s sort of very much in contrast to what are we seeing in single name options and cash equities and CME equity derivatives. So just curious what has been the driver? Is there anything new kind of happening underneath the surface with respect to the new customer bases or just broader adoption that you could point to?

David Howson: We see some rotation there, certainly different strategies deployed. And we see and hear many of our customers talking about actually an interest in single name options capability. We hear on earnings calls like this a variety of liquidity providers and retail brokers really continuing to engage in options in general. The overall adoption for index options and particularly the SPX is really that elevated macro uncertainty that people are dealing with, managing their portfolios on that macro basis as they adjust to news, the uncertainty, the Fed, inflation, growth estimates. And of course, the U.S. election is really contributing to people really telling that index suite to really be able to manage that portfolio risk and actually fine-tune exposures as they look throughout the year there.

Operator: Our next question comes from the line of Alex Kramm from UBS Financial.

Alex Kramm: Sorry if I missed this earlier, but can you talk a little bit more about capital allocation, in particular, as it relates to share buybacks? I think the fourth quarter, I think, roughly $6 million or so, but I know you also paid off some debt. So was that now behind us? Is — can you talk about the pace of buybacks you see and how you think about it from an opportunistic versus consistent kind of framework for this year?

Jill Griebenow: You bet. So as you’ve alluded to, we did have, I mean, just $5.8 million worth of share repurchases in the fourth quarter, so considered relatively light. But if you look back on a historical basis, we do have a history of being heavier on the repurchase front during the first quarter of each year. And then also, as you’ve alluded to, we have paid off all of the floating rate debt, which gives us — just affords us more in the way of capacity and ability to deploy capital. So as we’ve done in the past, we will continue to be opportunistic as it relates to share repurchases. If we see any perceived weakness in the share price, we will absolutely get in back to the — behind it. And then again, just continue with our routine practice as well on top of that.

Operator: Our next question comes from the line of Owen Lau of Oppenheimer.

Owen Lau: Thank you for providing Slide 9 about 2024 catalyst. Could you please add more color on these catalysts of why the adoption and expanded access? It will be great if you can remind us how many existing retail platforms have index options trading, how many more you expect to come online in 2024? And then for global trading hour, how should we think about the incremental volume?

David Howson: Thanks very much, Owen. The expanding access is obviously a big focus for us now with a global footprint that allows us more boots on the ground, more access to local customers who would like to gain an access exposure to the Cboe volatility toolkit, in particular, the SPX and VIX options there. The single-digit percentage of overall volumes that we see in global trading hours really, we think, provides a solid runway when we look at other potential comparables out there. And so our focus is really adding those new retail brokers and brokers internationally that you spoke about there. We’ve got several coming on in 2024, including, obviously, we’ve heard on various earnings calls the addition of Robinhood likely later on this year, which we find very exciting for that complex as a whole from the SPX all the way through to the XSP products.

And that’s really a key focus for us onboarding new participants to the complex. But also, I would note that the expansion of the institutional, the non-retail engagement in the SPX complex has been really compelling and interesting for us as that liquidity has built the quality of the order book, the pricing, the capability to trade as and when investors need to really draw in new strategies as well, for example, from QIS desk and so on. So we’re excited about new strategies and new funds deploying capital into SPX more broadly. So that really speaks to that increased wider adoption not just from retail, but from new institutional strategies that can gain benefit from that solid ecosystem that we’ve been able to build out.

Operator: Our next question comes from the line of Michael Cyprys from Morgan Stanley.

Michael Cyprys: I was hoping you could speak to the new indices that you’ve launched over the past year across asset classes, including the credit volatility indices. And maybe you could talk to some of the opportunities that you see for introducing tradable products, where that stands, what that product road map looks like across asset classes? And as you look out over the next couple of years, where might there be other opportunities for creating other proprietary index-related products?

David Howson: Thanks very much. The focus of product development here at Cboe really is that simplification of potentially OTC and complex strategies, really striving to bring capital efficiencies to our customers across wallet sizes, so bringing investment strategies to all wallet sizes. So just look at the global trading hours we just spoke about, think about the XSP is bringing the SPX exposure, the S&P 500 exposure to a smaller wallet size, the Russell Tuesday, Thursday there, all good organic initiatives. When you think about the indices we launched last year, you’ve got the dispersion index and the credit VIX as you mentioned. The dispersion index there, we aim to have a future available on that indicator later on this year, subject to regulatory approvals and final product design requirements.

And then think about the expansion of the MSCI contract, three new tradable products, two volatility indices there, more exposures you’ve got now at Cboe. With index options, you have global exposures, you’ve got U.S. exposure and you’ve got small cap exposures that you can trade with the potential for further product development from there. And then we mentioned finally, new asset classes. We’ve already got the iBoxx credit futures, that first listed credit future available in the United States, really amenable to funds that cannot trade securities to be able to manage their risk and hedge any portfolio risk there as well. The option on futures that we launched last year will also bring optionality to that new asset class. When you combine them together, you think about credit mix with a credit future as you think about dispersion index next to the VIX Index, you’ve got a variety of indicators from a variety of slices of exposures and asset classes that customers can come to Cboe and in a single place, manage all of those in a single place.

So what you should see — expect to see from Cboe is as we build these liquidity pools and these ecosystems that we will incrementally push these forward. But always, we’re going to be led by customer demand. So we’re going to go wherever our customers ask us to go. So that will be an evolving process as we go through year to year.

Operator: Our next question comes from the line of Brian Bedell of Deutsche Bank.

Brian Bedell: Great. Maybe shifting gears outside the U.S., the Canadian migration onto the Cboe platform, and that’s the combination of NEO and MATCHNow. Can you just talk about whether that’s more of an efficiency initiative? Or is that something that you think can enhance your market share in Canada? And maybe just talk broadly about your strategy. I know you’ve been bringing bids there as well, and if you can touch on your listings game plan with NEO.

Christopher Isaacson: Brian, this is Chris Isaacson. I’ll start with that. So yes, with the NEO migration to Cboe technology planned for Q1 of next year, I’d say it’s all of the above. Yes, we do expect it to be more efficient. It’s part of our platform migration to become more efficient to please our customers. But then on the back of those migrations, we have historically seen market share growth as well as Data and Access Solutions revenue growth or pull-through, which in fact is happening right now, both in Australia and Japan. So we want to bring not just greater efficiency but greater functionality to the Canadian market and the unified platform. We have already launched BIDS there when we migrated MATCHNow back in 2022.

We want to continue to grow BIDS in Canada as well as provide that unified platform. So in order for us to realize our aspirations in Canada, we need to complete this migration seamlessly as we’ve done elsewhere. I’m really pleased that this is the final one on the list to do. We’re going to do it excellently while we also focus on organic growth initiatives.

David Howson: And certainly, I would add to that a little bit in that the customer networks and relationships we have globally alone we’ve been able to bring to bear in Canada, look at the market share growth to 15.3% from 13.6% year-over-year. And with that common platform, that global reach, it means that we’re able to also turbocharge BIDS and other trading initiatives. With a single platform, we can bring new functionalities to Canada and that common experience Chris talked about. And then you mentioned that the corporate listings business in Canada is a strong part of the business there. And with our exchanges around the world for a small incremental investment, we can actually begin to offer customers a global experience.

And that’s shown through actually in the ETP growth that we’ve got from a listings perspective in North America, 56 new ETPs launched in Q4 against 34 in Q3. And in fact, in January already, we’re on track for 40 new ETPs. So just think about the uniformity of that global scale really coming into the forefront there as we think about all of our footprints around the world.

Operator: Our next question comes from the line of Kyle Voigt from KBW.

Kyle Voigt: Maybe a question on the U.S. Cash Equities business. You mentioned the unfavorable mix shift of volumes but also some of the fee changes that you recently made that should bring back up the capture rate. So I guess can you just elaborate a competitive environment there? Is that what is primarily driving the shift in volumes? Or is it something else driving it? And the fee capture there has been in a pretty wide range with fee capture down about 40% sequentially. So just wondering if you could help frame how much of the fee capture decline in 4Q you could potentially recapture with these fee changes as we look out to the first quarter?

David Howson: Yes, certainly. I think the headline is a stronger market dynamic in December is the headline for Q4. When you look at our addressable market share across Q4 is around about 26% of the addressable market. So that’s outside of the TRS at the close. In December, it went up to over 27%. And that market dynamic, as you mentioned, there’s a confluence of contributing factors. That was number one. Volumes hit 12.4 billion shares on a daily basis in December, higher than the 10 or 11 or so for prior months. The mix shift, the higher percentage of sub dollar trading in December went up to 19% of overall trading versus 30% from earlier months and certainly showing that higher retail engagement in December. And finally, layering on to that, a higher activity from market makers pushed customers up through tiers in December and really reduced that capture.

And as Jill said, we responded as this convention in U.S. equities market on a monthly price change basis in January. We’ve seen our capture come back up, and we’ve managed to maintain market share while doing that. We announced more changes for February, and we expect that trend to continue while achieving stable market share. So really, headline is market dynamics fee changes allow us to be more competitive there, but we are doing a number of things to be more competitive across our multi-list environment throughout the rest of 2024.

Operator: Our next question comes from the line of Patrick Moley of Piper Sandler.

Patrick Moley: I just had a question on Cboe Digital. I think, Dave, you said in your prepared remarks, you thought digital assets was an area where you’re going to see greater demand going forward. I think on the last call, Fred, you maybe alluded to possibly pulling back some investment in Cboe Digital. I wanted to see how maybe some things played out. So just in the wake of this Bitcoin ETF approval, was hoping to just get an update on your vision for that business and maybe how you expect things to evolve over the next couple of years?

Fred Tomczyk: Okay. Thanks, Patrick. I mean, certainly, this space with the regulatory uncertainty has caused this asset class to take longer to develop both than we anticipated. Having said that, there continues to be an asset class that there’s a lot of interest in. And what many participants are looking for is what we’re trying to build: a regulatory-friendly and robust market for crypto. Obviously, we’re happy we got the crypto ETF so. We’ve launched margin future. So we’re doing that. But we also recognize it’s going to take time to build an ecosystem for a new and emerging asset class. So we’re trying to be patient but continue to focus on it. Right now, we’re very much focused on building out the derivative side of the crypto market, which is our bread and butter.

That’s what we’re known for. And that number two, building on a robust ecosystem of both retail and institutional market participants. And as I said, these things take time with the new and emerging asset class. But we’ll continue to monitor, make decisions accordingly. But we think we’ll be patient here and continue to try to innovate and build a more robust market and build on the derivative side. That’s where we’re focused right now.

Operator: [Operator Instructions]

Fred Tomczyk: Okay. Do you want me to say anything?

Operator: There appear to be no further questions at this time. Mr. Ken Hill, Vice President of Investor Relations and Treasurer, I’ll turn the call back over to you.

Kenneth Hill: Okay. Thanks, everyone. Thanks for the time — your time today. We have a robust investor conference schedule here over the next five to six weeks, and we hope to see many of you. All the best to 2024. Thanks.

Operator: Thank you. This concludes today’s conference call. We thank you for participating, and you may now disconnect.