Cboe Global Markets Inc at Goldman Sachs U.S. Financial Services Conference Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Alexander Blostein - Goldman Sachs - Analyst : Great. So why don't we start with a question on some of the strategic priorities and really looking back at sort of the progress you guys made this year. Remember, when Fred took over, and he was sitting on the stage with us last year, there's a couple of things that he wanted to accomplish, and you as a team wanted to accomplish, a number of things, but more targeted approach to M&A, stabilizing operating margins, shifting capital returns and allocation and reallocating resources kind of towards more core competency areas for Cboe, right? So it feels like a lot of that has been accomplished. So talk to us a little bit about what's next, what's on the priority list for '25.

Question: Alexander Blostein - Goldman Sachs - Analyst : There we go.

Question: Alexander Blostein - Goldman Sachs - Analyst : I got you. I got you. Okay. That was very comprehensive and a lot to cover, so let's unpack some of the areas. I wanted to start with retail. The rise of retail has been kind of a continuous and very powerful theme in trading markets. You mentioned that as well. It feels like after the US election, it got another boost, which may continue into 2025. People feel pretty enthusiastic about the state of the market. How is Cboe positioned to capitalize on this trend? I know you talked about Robinhood and that's maybe somewhat of a low hanging fruit, but what else do you do want to capitalize in retail? And aside from trading, there are other ways you guys could incrementally monetize this, whether, again, it is data or access or something like that.

Question: Alexander Blostein - Goldman Sachs - Analyst : Is there a way to frame the addressable market when it comes to non-US retail using some of your proprietary products. I'm assuming you're talking about SPX options largely maybe more. But just to start with that, if you kind of were to draw power between what's available and what's happening in the US but expanding outside the US, how much more material could that be in terms of the overall contribution of the business?

Question: Alexander Blostein - Goldman Sachs - Analyst : Got you. Okay. Let's talk about some of the products, starting with SPX. An enormous growth driver for you guys over the years. really powered by 0DTE options over the last two years or so. It does look like the rate of growth is starting to moderate for 0DTE to some extent. And some of that may be the market maker adoption or the broker-dealer adoption that's been largely mature, it does sound like you guys still see runway on the retail side of things. So help us understand like where is 0DTE in the maturity of its product and what would be sort of the next leg of growth would all of that be largely retail? Or is there still some kind of institutional demand that you guys could drive into that product?

Question: Alexander Blostein - Goldman Sachs - Analyst : Got it. On Robinhood, do you guys have any data from them so far? How the contract has been working, how they're adopting it since it was launched only, I guess, a couple of months ago?

Question: Alexander Blostein - Goldman Sachs - Analyst : Okay. And that obviously is going to be a lot more user-friendly for active traders who are more likely to use this product --

Question: Alexander Blostein - Goldman Sachs - Analyst : I got you. I got you. Okay. Great. You mentioned XSP, so the smaller SPX contract, also an important factor in the retail story. So let's maybe dig into that a little bit. I think you said that, that product has grown about 18% in the third quarter. So pretty healthy growth. Where are you seeing the customer uptake in that product how would you frame the addressable market within that. We've talked in the past about an alternative to SPY options. Is that still the typical kind of user case that you're going after? Or is there something else? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 11, 2024 / 6:00PM, CBOE.Z - Cboe Global Markets Inc at Goldman Sachs U.S. Financial Services Conference

Question: Alexander Blostein - Goldman Sachs - Analyst : Yes, definitely a nice complement to the franchise. Let's hit on VIX, just shifting gears a little bit. You announced two new strategies, two new products there, one being [varying] futures and then options on VIX futures, which I believe were launched in October. Talk to us a little bit about the uptake so far. What are you hearing from the customer base, what the reception has been? And ultimately, what would you define as a successful outcome for these kind of 12 to 18 months from now, just to give us some guidepost.

Question: Alexander Blostein - Goldman Sachs - Analyst : Got it. All right. Well, we'll stay tuned on both of those. Let's talk about pricing a little bit. You guys obviously run a proprietary suite of products. How are you thinking about your pricing power within those two? It doesn't feel like you've done a whole lot there in the last couple of years. But every time we see a couple of years go by and exchanges don't take pricing up on some of the proprietary product. It means it there for some level of pricing increase, maybe, maybe not. But how are you thinking about pricing for both the (inaudible)

Question: Alexander Blostein - Goldman Sachs - Analyst : I got you. Okay. Great. Let's shift gears, I want to talk about maybe some of the more competitive products. in the Cboe ecosystem. US equities and options, the multi-listed options business, it looks like the market share kind of continue to slip over the course of the year, not by a lot, but it's been coming down. At the same time, you did talk about bringing in non-US customers into your markets, which should theoretically at least improve the market share. What's the disconnect there? And I guess how are you thinking about the trade-off between market share and pricing because there's obviously some flexibility out there as well.

Question: Alexander Blostein - Goldman Sachs - Analyst : I got you. Great. I wanted to pivot to a couple of newer things you announced recently as well. securities financing transactions being one of them. It sounded like you have several firms expected join the platform over the next couple of months, couple of quarters, I forget exactly the time frame. But can you talk about just framing what this opportunity could look like? And I know from a regulatory perspective, Basel III end game was viewed as a potential tailwind to maybe more platforms and more firms joining the platform to an extent regulation gets rolled back or Basel III game may not even happen. How does that impact the opportunity?

Question: Alexander Blostein - Goldman Sachs - Analyst : What is the economic model to CBOE look like? Is it clearing fee on a transaction basis, what are those fees if you're going to help us frame like, I don't know, $1 billion of notional comes across like what is that?

Question: Alexander Blostein - Goldman Sachs - Analyst : Got it. All right. Let's talk about Data Vantage (inaudible) taking it short. Okay. So the target is 7% to 10%. You guys will be at the lower end of that this year, as we talked about, maybe unpack kind of the reasons why some of the slippage, not outside of the guidance but towards the lower end of the guidance. But again, more importantly, what does it mean for 2025 to an extent there's any sort of pent-up demand that did not come through this year? Are you thinking about next year? Any early thoughts on how that could look like?

Question: Alexander Blostein - Goldman Sachs - Analyst : So into next year thinking closer to the middle of the range? Or kind of how are you thinking about the magnitude of that improvement as you're thinking about 2025?

Question: Alexander Blostein - Goldman Sachs - Analyst : Fair enough. Fair enough. I think I'll try. So I might now get a better answer on the expenses, which is my next topic, but we'll try there as well. I guess the way I would want to frame it, you guys have done a really nice job sort of moderating the pace of expense growth and really pivoting and redirecting investments into areas where you could see the most organic revenue growth, which was obviously a welcome move. All that said, it feels like you're talking about the margin opportunity business from more of a margin stability perspective as opposed to much of a margin improvement (inaudible) running in a 63%-ish range. The peak was in the high 60s, maybe even had like a 71 any given quarter. But is the current range is likely where we're going to live or there's still an opportunity to get into that high 60s range. Unidentified Participant I think, as you alluded to, we did see an acceleration in expense growth over the past several years, completed nine acquisitions over the course of three years. I think in 2022, our expenses ramped up 22%. Last year, it was another 15%. However, this year, in our most recently issued guidance, we've messaged a range of 6% to 8%, which is obviously nearly half of what they increased a year ago. So with that uptick in expenses, you did see compression or actually degrading of the actual margin. I think what we've messaged, one of the key themes that came out of the strategic review that you hit on earlier was stabilization of the margins. Stabilization of the margins is definitely top of mind for us as is disciplined expense management. So -- to the extent that we do have incremental expenses, what we're doing is ensuring that they're definitely attached to revenue-generating opportunities. So just to point to a few of the examples that Dave already listed today the Robinhood launch of index options. There's an opportunity there for us. We're investing from a marketing perspective, from an educational perspective. The securities financing transactions initiative that he mentioned -- that investment has been ongoing for about 18 months to build that. However, that starts producing revenue already in 2025. In APAC, the opportunity for increased data and access sales. So opportunities there to hire local sales resources on the ground in the local language. Is that a just very subtle uptick in expenses? It is. But on the flip side, there's net revenue attached with it. So again, it's a balancing act of really trying to rein in that expense growth, but still investing organically in the business to continue to grow that net revenue longer term. Getting back to your original question as to the margins, 70%. I think, again, this margin stabilization, the mid-60s, again, it's just that discipline. It's the balance of continuing to invest in the business to grow that long-term net revenue while really watching the margins, watching the expenses, ensuring that net revenue is there for years to come. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 11, 2024 / 6:00PM, CBOE.Z - Cboe Global Markets Inc at Goldman Sachs U.S. Financial Services Conference

Question: Alexander Blostein - Goldman Sachs - Analyst : Are these more capability deals, in other words, things that you already have, just adding on top of that? Or you would consider also doing something larger, more like a larger consolidation deal. There are not many of those. But just kind of thinking about the scope of a transaction, if you were to do something.

Question: Alexander Blostein - Goldman Sachs - Analyst : Okay. All right. Fair enough. A couple of minutes left here. So let's hit on capital returns. That's also been a nice pivot. The pace of share repurchase has improved. The balance sheet is in a great place. What are your sort of capital return priorities, but also give us a bit of a framework that's kind of in the -- we just pretend there's no deals, right? In absence of any meaningful transaction, what should the payout look like over the next 12 to 18 months? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 11, 2024 / 6:00PM, CBOE.Z - Cboe Global Markets Inc at Goldman Sachs U.S. Financial Services Conference Unidentified Participant I think from that perspective, it's a combination and the balance of a number of different levers from a capital allocation perspective. So share repurchases, as you mentioned, we messaged in our most recent earnings call that we've already repurchased upwards of $200 million in shares for 2024. Other levers that we look to from the capital allocation perspective, our quarterly dividend. So we do have a history of paying the quarterly dividends. And then we have increased it consistently in the third quarter, which we did again here in 2024. The return through those two aspects will be balanced against, I think, the organic investment in the business. Again, just continuing to invest where it makes sense to drive that long-term net revenue growth as well as just some potential dry powder. It's nice. We appreciate the balance sheet flexibility that we have. So again, from a capital return perspective, it will be a combination, continue to be opportunistic from a share repurchase perspective and continuing on the track of the dividend as well.