CBOE - AMEX

Good morning, everyone and welcome to the Cboe Global Markets Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ken Hill, Vice President of Investor Relations. Please go ahead, sir.

Good morning and thank you for joining us for our second quarter earnings conference call. On the call today, Ed Tilly, our Chairman and CEO, will discuss our performance for the quarter and provide an update on our strategic initiatives. Then, Brian Schell, our Executive Vice President, CFO and Treasurer, will provide an overview of our financial results for the quarter as well as an update on our 2022 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; Dave Howson, our President; and our Chief Strategy Officer, John Deters. 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 Web site. During our remarks, we will 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 the forward-looking statements. Please refer to our filings with the SEC for a full discussion on 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 will be referring to non-GAAP measures as defined and reconciled in our earnings materials. Now, I'd like to turn the call over to Ed.

Thanks, Ken. Good morning, and thanks for joining us today. Before I begin, I’m pleased to officially welcome Dave Howson to the U.S. He was relocated to Chicago last week from London and is overseeing Cboe's business lines globally in his new role as President. We are excited to have him here today. I’m pleased to report another strong quarter at Cboe Global Markets. During the quarter, we achieved record-setting revenue results, growing net revenue 21% year-over-year to a record $424 million, and adjusted diluted EPS grew by 21% to $1.67. Our solid second quarter results were driven by the continued diversification of our business as we continue to integrate recent acquisitions, with strong volume in our proprietary index products, increased trading activity in our cash equities businesses, and continued growth across our data and access solutions business. Our Derivatives business had another excellent quarter, driven by strong performance in our index options franchise, specifically SPX options, as well as a solid increase in our multi-listed options business. Record monthly activity in the SPX complex helped drive a 66% increase in average daily volume for the quarter, while VIX Futures were up 7% and VIX Options remained flat. Multi-listed options trading ADV increased 12% year-over-year. Our Cash and Spot Markets business performed remarkably well during the second quarter with net revenue increasing 7%, including 3% organic net revenue growth year-over-year. These results were driven by exceptionally strong performance in our European Equities segment, where average daily notional value traded was up 49% year-over-year. Additionally, Cboe European Equities market share increased nearly 6 percentage points year-over-year to 23.2%. Similar to the trends we saw last quarter, these results reflect, not just a favorable market backdrop, but the implementation of an analytics-driven campaign by our sales team to help clients achieve better results on Cboe Europe than is achievable on other venues. Our Data and Access Solutions business remains strong with the integration of our recent acquisitions continuing to fuel the durability of this business. Year-over-year net revenue increased 20%, with 14% organic net revenue growth. We continue to remain focused on executing on the significant opportunities we see in three core areas of our business: Data and Access Solutions, Derivatives and Cboe Digital. During the quarter, we made solid progress advancing each of these priorities, including closing the acquisition of ErisX on May 2. While the digital asset market environment has changed dramatically since we closed the ErisX transaction, which resulted in the accounting adjustment that Brian will discuss in more detail, our strategy has not changed. We remain excited by the compelling strategic opportunity for Cboe in the digital asset space. We believe the long-term opportunity within the digital asset space will continue to evolve. Now, more than ever, market participants want a trusted, transparent, regulated market for digital assets, which is fundamental to our strategy for this asset class. We are continuing to work closely with our partner group and expect to announce equity partners soon as we shape and define the future of Cboe Digital and the broader industry. Turning now to Derivatives, where our SPX franchise continued to flourish as we expanded access to customers to meet increased demand, both on and off the trading floor. With market uncertainty and heightened volatility continuing across the globe, market participants turn to Cboe’s derivatives and volatility products to help manage risk. Many of our newer initiatives, like the extension of trading hours for SPX and VIX Options to nearly 24 hours-a-day, 5 days-a-week, and the addition of Tuesday and Thursday expirations for SPX Weekly options, have outperformed our early expectations in 2022, further accelerating the strong growth across our core business. Since adding Tuesday and Thursday expirations for SPX Weekly options this Spring, our initial estimates indicate we’ve added on average over 200,000 incremental SPX contracts per day, reinforcing the trend we have seen of customers embracing shorter duration trading strategies. The expansion of our SPX Weeklys complex to include expiries every trading day has helped meet this customer demand. ADV in SPX contracts with zero days to expiration increased 120% since the start of 2021 with retail brokerage platforms accounting for over 80% of the volumes. Additionally, during Global Trading Hours, average daily volume in SPX Options increased 189% year-over-year, VIX Options increased 49%, and VIX Futures volumes increased 19%. Global customers want access to tools to manage risk and we continue to focus on expanding upon our core strength and finding new ways to deliver access to meet their needs. We continue to believe strongly in the durability of our Data and Access Solutions business going forward as we continue to integrate our recently acquired businesses and strive to further unlock value and revenue opportunities. Brian will expand on this later in the call, but we are updating our 2022 organic net revenue growth expectations for this business to a range of 10% to 13%, up from our prior guidance range of 8% to 11%. The record results during the quarter were driven by continued demand for access to our global exchange network, Cboe’s front-end platforms, and proprietary market data. Since the first quarter 2021, we have averaged 19% year-over-year growth and, as we continue to integrate and innovate, we believe there is more total addressable market to capture across trading, data and products, and we are well-positioned to capitalize on these opportunities through our Data and Access Solutions group. Three important areas of expansion we’re excited about include: distribution as a service, which leverages Cboe’s expansive network to provide data streaming services for vendors and partners; bundled data, which allows us to package high quality data from across markets to deliver consistent and cost effective data solutions to customers; and Cboe’s cloud strategy, which further extends Cboe’s data to new users and geographies, an important step towards broadening investor access to our proprietary content and market data globally. The last several years have been very exciting as we’ve evolved our business, broadened our geographic reach and extended access to our unique set of products and services around the globe. Today we are the only truly global market infrastructure provider, operating markets and delivering services around the world and around the clock, every day of the week. Around the globe, we’ve continued to see strong performance in all geographies and asset classes. Starting with our global FX business, we saw strong volumes with average daily notional volume topping $39.6 billion during the second quarter with market share of 17%. We also saw our full amount offering, which provides clients with a solution for larger order risk transference with low market impact, reach a new record of $11.8 billion ADV in the second quarter. We are also very encouraged by our product diversification strategy, in particular our higher margin NDF offering where we saw a 200% year-over-year increase to $785 million ADV. With continued rising inflation and interest rates, we continue to be bullish on the opportunities that exist for our FX business. Turning now to Europe, in addition to the strong results I noted earlier for our European equities business, Cboe BIDS Europe became the #1 block trading platform with a record 33% market share of the European block-trading market. Additionally, EuroCCP, our European clearing business, saw steady growth this quarter. We also continued to make progress on our European Derivatives initiative. And while early volume trends have been softer than we expected due to geopolitical events in Europe delaying customer onboarding timetables, we still believe strongly in the long-term strategy and vision for this business. Moving to Asia Pacific, Cboe Japan market share increased to 3.5%, up from 2.5% one year ago, as the new liquidity provider program introduced earlier this year continued to attract volume. In Australia, market share grew to 17% from 16% year-over-year and we are on track to migrate Cboe Australia to our proprietary technology in February 2023. Finally, in North America, we completed the acquisition of NEO last month, bolstering our market share in Canada and expanding our listings business globally. Our overall market share in Canada now tops 12.1%, including both NEO and MATCHNow, and we are working on integration plans that will help enable us to maximize the opportunities we see for our global equities and listings businesses. Our geographic and asset class diversification, coupled with our unique product set, enables us to meet the needs of an increasingly diverse set of customers around the world. Our global scale gives us the unmatched ability to efficiently scale and expand our business in new ways. With the closing of the acquisitions of ErisX and NEO in the second quarter, the entire Cboe team remains focused on extracting even greater value from the ecosystem we have created, integrating our platforms and positioning Cboe for its next wave of growth in the quarters ahead. We have acquired nine companies in the last 2 years, and we remain laser-focused on the various stages of integration for each of these companies. Each of these companies has brought a unique offering to Cboe and helped us achieve a greater global breadth of services and products, as well as new distribution channels. As we’ve stated before, we approach the integration of technology and teams holistically, avoiding siloes while maximizing synergies, both revenue and cost. This approach creates workflow efficiencies for customers, harmonizing technology and access points, creating a better experience for them. As we continue to architect our business for the future, our strategy remains focused on delivering products and services that create short, medium and long-term opportunities, helping to enable a cadence of consistent growth. We are excited to have all announced acquisitions closed and integration efforts well under way, which is creating strong momentum for our flywheel as we head into the second half of the year. With that, I’ll turn it over to Brian.

Thanks Ed, and good morning, everyone. Let me remind everyone that unless specifically noted, my comments relate to 2Q '22 as compared to 2Q '21 and are based on our non-GAAP adjusted results. As Ed discussed, the first half of 2022 was an exceptionally strong one for Cboe. In the second quarter, adjusted diluted earnings per share was up 21% on a year-over-year basis to $1.67. A combination of continued investment across our businesses and a favorable operating environment continued to propel revenue above last quarter’s record levels. Quickly touching on some of the noteworthy takeaways from the second quarter. Our net revenue increased 21%, setting yet another quarterly record at $424 million, led by the strength in our Derivatives Markets and Data and Access Solutions categories. I would like to note that not only did each of our revenue categories, Derivatives, DnA, and Cash post a year-over-year gain, but every segment at Cboe from Options to FX posted a year-over-year increase, speaking to the diversity and truly broad-based strength in the second quarter results. Derivatives Markets produced 30% year-over-year organic net revenue growth in the second quarter given the continued strength of our index business. Data and Access Solutions net revenues were up 20%, up 14% on an organic basis, driven again by strong new subscription and unit growth, and Cash and Spot Markets produced 7% net revenue growth for the quarter, up 3% on an organic basis, on the back of strong volumes and market share in our European cash equities business. Adjusted operating expenses increased 22% to $157 million; adjusted EBITDA of $274 million was up 17%; and last, our adjusted diluted earnings per share was $1.67, up 21% compared to last year’s quarterly results. Before getting into the segment results, I want to spend a moment walking through the accounting adjustment we made this quarter for ErisX. As Ed mentioned, since we closed the ErisX transaction on May 2, the environment has changed dramatically. Given the observable publicly-traded peer valuations, digital asset prices, and intermediary dislocations, we felt it necessary to re-assess our holding value of ErisX. As a result of our analysis, along with the work of our third-party auditors and consultants, we booked a goodwill impairment of approximately $460 million, effectively writing goodwill in ErisX to zero, and recorded a deferred tax asset of approximately $116 million. Our book carrying value at June 30, 2022 is $220 million, reflecting the sum of tangible and intangible assets of approximately $104 million, and the deferred tax asset. We believe that our adjustment reflects the reality of the digital asset market environment today, but it in no way changes our commitment to the digital asset space or what we set out to do when we announced this transaction back in October. In fact, recent events only underscore the strong need for a transparent and trusted trading, clearing and data venue for digital assets. And we believe that Cboe, along with the help of our industry partners, is best positioned to provide those solutions. Turning to the key drivers by segment. Our press release and the appendix of our slide deck include information detailing the key metrics for each of our business segments, so I'll just provide summary thoughts. As mentioned earlier, we saw impressive year-over-year growth at each of our segments during the quarter. Options delivered the strongest growth with net revenue growing by 32%, driven by higher trading volumes in both proprietary and multi-listed options, better market share, as well as higher revenue per contract in index options. Total options ADV was up 18% as our higher-priced index options ADV increased 46%. Revenue per contract moved 21% higher given a continued positive mix shift to index products, and a stronger mix of higher priced SPX options in our index business. And lastly, we continued to benefit from another quarter of double-digit growth in market data and access and capacity fees, each up 29%, respectively. North American equities net revenue increased by 4% year-over-year. Solid industry volumes up 20%, helped drive the segment uptick. On the non-transaction side, access and capacity fees increased 15% and proprietary market data was up 8%. The Europe and APAC segment reported solid growth for the quarter, with net revenue up 20%. The increase was driven by higher volumes in Europe and the inclusion of Cboe Asia Pacific revenues of $8.2 million. Net transaction fee growth was 18%. During the quarter, FX rates were a headwind for the segment, impacting reported net revenue growth by nearly $4 million or 7%. Transaction fees were led higher by Cboe Europe’s equity ADV increasing 49% year-over-year given very strong industry volume growth and a nearly 6 percentage point increase in market share. Clearing fees benefited from an increase in clearing volumes of 21%. Second quarter net revenue increased 8% in the Futures segment as both transaction and non-transaction revenues posted year-over-year gains for the quarter. Volumes and rate per contract metrics were slightly better on a year-over-year basis. On the non-transaction side, access and capacity fees were up 21% and market data grew 24% as compared to the second quarter of 2021. And finally, net revenues in the FX segment were up 20%. Net transaction and clearing fees benefited from a 22% increase in average daily notional value as well as continued favorable market share trends. As Ed noted earlier, Cboe’s Data and Access Solutions net revenue growth has continued to accelerate, posting a 20% year-over-year increase, and an attractive 14% growth rate on an organic basis. Again, this strong growth was primarily driven by additional subscriptions and units, accounting for three quarters of the year-over-year revenue increase, as opposed to pricing changes. More specifically we saw robust physical and logical port usage in our options and equities businesses driven by increased demand for trading capacity. And on the market data side, the equities top-of-book and options depth of book products continued to perform well. As we look out over the remainder of 2022, we anticipate trends will remain healthy in the Data and Access Solutions business. We are raising our targeted 2022 DnA organic net revenue growth rate to a range of 10% to 13%, up from 8% to 11%, and above the 7% to 10% medium-term guidance range we outlined at our November Investor Day. Turning to expenses, total adjusted operating expenses were approximately $157 million for the quarter, up 22% compared to last year. Excluding the impact of acquisitions owned less than a year, adjusted operating expenses were up 12% or $15 million for the quarter. Moving to our expense guidance. We are increasing our full year 2022 expense guidance range to $659 to $667 million, up from our prior guidance of $647 million to $660 million, when including the acquisitions of ErisX and NEO. The increase is almost exclusively driven by higher incentive compensation as a result of our strong financial performance through the first half of this year, coupled with a positive outlook for the second half of 2022. We have long talked about Cboe’s pay for performance culture and our adjustments today reflect the outstanding work our entire associate base has done in driving outsized growth. And while our operating expenses are moving higher with revenues, we continue to expect $23 million to $26 million of the 2022 investment spend to directly drive incremental revenue growth and that approximately $10 million is needed for infrastructure enhancements to support and scale our business for greater levels of activity in the future. Overall, our updated 2022 expense guidance reflects our commitment to invest in high conviction growth opportunities as well as to attract and retain best-in-class talent driving our strong results. Now turning to a summary of full year guidance on the next slide, I want to call out some of the positive updates to our revenue targets that are reflected in our expense updates. As noted previously, we now anticipate DnA organic net revenue growth in 2022 will be in the 10% to 13% range, up from our prior guidance of 8% to 11% and our medium-term guidance of 7% to 10%. We continue to expect acquisitions held less than a year to contribute between 2 to 3 percentage points to total net revenue growth in 2022. Lastly, but certainly not least, our overall organic net revenue growth target is moving higher to 9% to 11%, up from our prior guidance of 5% to 7% for 2022. We believe our updated revenue guidance reflects not only the strong year-to-date results we have posted, but the confidence we have in the business moving forward. We are seeing a solid contribution from all of our operating segments, strengthening the broader ecosystem here at Cboe. And our full year guidance on depreciation and amortization, CapEx, and our effective tax rate on adjusted earnings under the current tax laws, remain unchanged. Our interest expense for the second quarter of 2022 was $14.6 million. Factoring in the incremental borrowing costs related to the financing put in place for ErisX and NEO, we expect interest expense to be in the range of $16 million to $17 million for 3Q '22. On the capital front, our focus has been, and remains maximizing shareholder value through the effective use of our capital. In the second quarter, we returned a total of $67 million to shareholders, comprised of $51 million in dividend payments and $16 million in share repurchases. We remain well-positioned to invest in the business, support our dividend, and opportunistically repurchase shares with $233 million in remaining capacity on our share repurchase authorization. Our leverage ratio increased in the second quarter to 1.9x, up from 1.6x at June 30 as our debt levels increased, related to the funding of our NEO and ErisX transactions. Overall, we remain committed to maintaining a flexible balance sheet and putting capital to work in the most value enhancing way possible for shareholders. In summary, Cboe reported an excellent second quarter. Our core business performed exceptionally well, and we are excited about our numerous short, medium and long-term investments. We look forward to continuing to deliver durable growth for investors in the quarters ahead. Now I’d like to turn it back over to Ed for some closing comments before we open it up to Q&A.

Thank you, Brian. Before I close, I wanted to highlight our 2022 ESG Report, which was published last month. This report covers the important progress we have made on our environmental, social and governance initiatives, including our commitment to reach net-zero emissions by 2050, an exciting endeavor designed to help ensure Cboe does its part to help combat climate change. I want to thank the entire Cboe team and our customers for another great quarter. I couldn’t be more excited about the progress we continue to make and I believe we are well-positioned to continue to innovate, integrate and grow as we head into the second half of the year.

At this point, we'd be happy to take questions. We ask that you please limit your questions to one per person to allow time to get to everyone. Feel free to get back in the queue. And if time permits, we'll take a second question.

[Operator Instructions] And this morning's first question comes from Rich Repetto with Piper Sandler.

Good morning, Ed. Good morning, Brian and team. Ed, I think I'll focus on the SPX complex because you've seen such strong results there. And thanks for all the detail. I guess the question is, we've seen a pullback, it seems like retail is driving a good portion of it as well as your own innovation with the weekly contracts and volatility. But I guess, with the year-to-date run versus last year, the index options run 30% up. So I guess the question is around the resilience, and whether the retail is -- you think is going to be sticky, sticky enough going forward? Because we've seen in other products, we've seen retail retract, like we haven't seen it in index options here, I guess. So, comments on the index options. This is the question, Ed. Thanks.

Got you. Thanks, Rich, Good setup. It's really a continuation of the entire year. And if you recall from the last quarter, we called out that options really look relatively cheap. And what we mean by that is the movements in the S&P 500, what they're realizing, the daily moves in excess of 1%. And we look at implied volatility with the price of those options are, they're relatively cheap. So there's a lot of attention, both institutional and retail platforms, looking at that complex and finding great opportunity. And you call out exactly the list that we've seen after adding Tuesdays and Thursdays, that interest is coming from retail platforms. That appears to be sustainable. What I mean by that is, even in the days where the realized movement of the S&P 500 is less than at 1%. Volume doesn't really track and doesn't fall off much. So we like what we're seeing as the daily interest is building. And we see that continuing, obviously past the quarter that we've just reported into July, for sure. So see no sign of letting up. I think we're learning a lot from adding dailies. And as I called out in the prepared remarks, to the tune of a couple 100,000 contracts a day additive in the complex, those are all good signs for us. So I think for now, in this environment, we look out over the volatility term structure, the market is telling us this uncertainty will continue. And we think no reason to think that the interest from retail platforms won't continue. So super short, dated options still in favor. And adding those dailies really has met the demand for that exposure. So we expect that to continue on. Thanks, Rich.

Great. Thanks, Ed.

Thank you. And the next question comes from Ken Worthington with J.P. Morgan.

Hi, good morning. Thanks for taking the question. In terms of the European index options business, a couple of questions maybe to set the stage, what is the level of open interest that you reached during the quarter? And then as we think about the target client and the early days of the build out here, where do you think you might have the greatest success, and where are you focused? And then for management to consider this initiative successful, and for you to continue to invest here, what are you hoping to see in terms of the volume in open interest levels over, I don't know, the next year or pick your timeframe. But what is the ramp that you continue to expect to keep you engaged here? Thank you.

Hi, Ken. This is David Howson. Thanks very much for the question there. So throughout the quarter, we had a few interesting results as we continue to execute on the plan. Those geopolitical results did impact some of the speed of the onboarding and alter our expectations a little. However, we launched eight new products across four country benchmarks. And the open interest that you mentioned there peaked at 28% higher during the quarter compared to the prior quarter. We also saw options volume at 67% for the quarter as well. In terms of the plan, we continue to execute on that. We do see the realization of what we call success there in our guide coming a year later than previously stated. However, for us, success continues to be onboarding new clients, increased pricing picture [ph] in the futures and the options contract. As we said, right at the start here, this is a journey rather than an event as we build brand new platform, brand new trading and clearing here. So we continue to be convinced by the opportunities there and the value proposition here as we build out over the next coming years.

Okay. What is the level of open interest? You keep putting growth, but is it -- are we talking small numbers, or is it big numbers? What is the contract level?

Ken, that's right. It's early days, just over 1,500 contracts open interest for the complex was with the peak.

Perfect. Thank you so much.

Thank you. And the next question comes from Gautam Sawant with Credit Suisse.

Good morning, and thank you for taking my questions. Can you please walk through where the strongest demand for DnA is coming from? And what is the initial feedback that you're getting from institutions in response to bundling global data and connectivity? And just to touch base a little bit further, you recently announced the partnership with Snowflake. Can you walk us through how that partnership will enhance analytics? And if you expect that to generate future expense savings by moving to the cloud from your current on-premise system?

Yes, thanks for the question. I'll kick that off with the first half of that. And then I'll flip it over to Chris, to talk about the Snowflake question separately. Again, this is a continued really strong story that we've seen going back into, really last year and even before that. But, again, we're continuing to see the upside of the higher volumes, areas like the logical ports, physical connectivity, just overall broader access that we're continuing to see clients ramp up their access, new clients wanting access, as they continue to see the -- across the global network build. And in particular, where we're seeing is on the market data side, which is obviously part of that is you asked specific question of where we're seeing that demand. If we look at that, where is the composition of that incremental growth? What we're seeing is increasing demand for the U.S data, primarily coming from international participants. Of the growth that we had, 60% was outside the U.S of that growth, that broader pool that 60%, 44% was EMEA, 16% was APAC, that makes up that 60%. So we're continuing to see that strength of that demand for the data. And we don't see any reason why that's going to change. Actually, we are -- as we look at our pipeline, and we look at our future growth prospects going out into the years is as we continue to build the networks in those countries. We only see the opportunity for success, and leveraging that network for not only those organic sales of that market, but also again the broader network, which then leads into your next question about the opportunity to bundle. A lot of our client base is global. They do like that global network and being able to leverage into the Cboe system and that consistency of data and the technology that we're building out over time. So we see opportunities to bundle geographic, we see opportunities, different asset classes, that we're continuing to explore, again, across the entire network. So that's really driving the optimism in the actual results that we see today. I think I hit your questions. And with that, I'll turn it over, Chris.

Yes, thanks, Brian, and thanks for the question. Good question. So on the Snowflake part of that question, so we announced this partnership with Snowflake. This is regarding an internal data analytics platform that we built. Over the last couple of years, we'd actually mentioned on one of these calls one or two of these calls a few years ago, we've learned so much there, we started to use that and provide better insights for our customers. The results of that are -- which can be seen with the European market share and how we are providing better insights, execution and [indiscernible]. This scales that effort globally allows us to bring in all of our global businesses and provide better insights to our customers so they can trade better on all of our global markets. So excited about this partnership with Snowflake, which is separate and distinct from Cboe Global Cloud, but part of our overall global cloud strategy as we scale our platforms to meet the needs of our global business.

Gautam, this is John. Just one follow-up to both of those Brian and Chris's points. It's worth noting that as we think about the M&A we've done recently to expand globally, there are, obviously multiple layers of benefit there. First layer is intrinsic, the organic growth Within each platform. Second layer is technology integration, a consistent, seamless network that we provide our global customers. And then another layer is the global cross-sell, and we've obviously been in COVID environment for 2 years. Members of our exec team, there are certain offices we're just travelling to you now. And so we're seeing the beginnings of those fruits of the cross-sell effort in the global network integration. And to be sure, given where we are in the travel cycle, that is probably in early phases.

Understood. Thank you very much.

Thank you. And the next question comes from Alex Kramm with UBS.

Hey, good morning, everyone. I just wanted to touch base on the two recent acquisitions. One, I think originally you hadn't disclosed the purchase prices, but they obviously in the queue, I think. But can you; one, actually review, kind of like the revenue contribution and where that all flows. But then also given the ErisX situation, you made this comment that you're still excited about the acquisition of the opportunity set there. But now, obviously, you spent almost $500 million on this. I know it's less than 5% of your market cap or close to it. And now you're writing this whole thing down. So just wondering how we should be thinking about returns on that acquisition relative to maybe buybacks that you could have done. So I know this is fresh and new, and it's a new asset class, but it just seems like it's a -- it's somewhat material to what we've seen so far. So just wanted to make sure that as you've been very acquisitive that there's return hurdles as you approach these new opportunities. Thank you.

Sure. Alex, I'll take NEO briefly and then we'll take to the ErisX because I also want to bring in Chris as well in this and -- as well as the team can chime in. But on the NEO as we look at that return, which didn't highlight, but -- right now, that is going better than actually planned -- slightly better than planned. And it's already contributing, although relatively small, to our overall contribution. So it is accretive already, day one. So again, continued to be excited about continuing to measure that positive ROI, we've set it up for about a 10% hurdle rate that we have, when we build our business cases, looking for what it can contribute organically, and then continue to add revenue synergies, broadly across the organization. Going specifically to the ErisX transaction, fundamentally, nothing has changed. As far as what we see the contribution of what this platform does for us and where we see this market going granted, as we disclosed, and you'll see the disclosure [indiscernible] chance to see the Q is that the external environment did change, but it actually just reinforces where we actually think we're going. But the specifics on the financials, the adjustment was about 60%. So you're -- when you talked about the near total write-off, that's just the intangible part of it. You got to look at the total net book value. So it's about 60%. Again, not that that's something to brag about, but that is reflective of what we think the value is, at this point in time, given the external environment. Again, our job is to make sure our financial statements fairly represent our view of our performance and what that looks like, overall. So that's the overall perspective. Back to the press release to that when we initially announced the acquisition of ErisX, we put a 2 to 3 year timeframe on a positive contribution to EBITDA at the end of the day. So again, nothing has changed, absent, albeit not small, this adjustment to fair value, as far as that we recorded today. So with that, then I'll turn it over to Chris to talk a little bit more about kind of, again, where we think this is headed.

Yes. Good morning, Alex. Good question. So as Brian mentioned, our strategy is unchanged, our excitement for this asset class is unchanged. There's obviously been a fundamental repricing in this asset class. But we think that actually provides a strategic tailwind for us with trusted transparent regulated markets. Just to remind you that we have -- with ErisX, we have a great foundation to build upon with exchange clearing data and derivatives. And our roadmap includes margin futures, settled futures and that roadmap is the same now. So we're committed to this asset class, we obviously had to recognize that the asset class is fundamentally been repriced, which was what we've done, but we are committed to it and excited about the future.

Fair enough. [Multiple speakers].

So briefly, this is John, I want to weigh in on what we're hearing from the market because it's important. We've told the Street that we're out there talking to potential partners on this project. And what we're hearing from them is they see the demand. So we hear that from them, we trust them. These are largely intermediaries. It's an intermediary focused initiative. And those intermediaries touch, we estimate over 80% of the traditional asset volume from retail customers, so they have a good line of sight. And what you see in the data in terms of volumes is that if you take crypto currency as a whole, and you look at 2021, is a bit of an anomalous year. We're looking at going back to 50% CAGR to 2020. And that's -- that still remains a robust growth rate. So they're in this for the long haul. These partners, they're asking us questions like, where can I trade in a framework that has robust coin listing risk parameters? Where can I trade in a framework that is unconflicted, where pricing is reliable and not manufactured to create elevated spreads? They're asking where can I trade in a framework where there isn't hidden, dangerous leverage? And those are things that we're offering. So it's reasonable to think that over the medium-term, we garner our fair share of the market.

All right. Thanks, again. Lot of great color.

Thank you. And our next question comes from Brian Bedell with Deutsche Bank.

Great, thanks. Good morning, folks. Maybe just also on ErisX and NEO, but actually more on NEO in the Canadian game plan. But one quick, just detail, NEO is racking better-than-expected and just the guidance still stands that you expect the acquisitions to -- or just the revenue contribution to offset more than half of the expenses in '22, that there is a $35 million. And then also the outlook on the EBITDA positive on a combined basis. Does that still stand? And then the second attached question is the NEO strategy in Canada, if you can elaborate a little bit more? That looks like you've grown -- if I’m calculating it right at 12% to 13% market share combined with MATCHNow in trading volume in Canada. Maybe you could just dissect a little bit the trading strategy versus I think there's also a small listing strategy there as well.

Yes, thanks. Thanks, Brian. So bottom line, we have not changed that perspective, as far as the contribution. Short answer. So with that I will turn it to Dave, as far as kind of the outlook, kind of the business strategy go-forward look.

Yes, thanks very much, Brian. To dissect it nicely as you did between trading and listing strategies because the listing strategy goes global as the opportunity in trading with Canada. So Canada, in general, we think about it combined with a MATCHNow footprint that we already have there, so that the big migration or rollout that we had earlier in the new year, along with MATCHNow bringing global client base, we've seen new international clients really come into the Canadian marketplace and the block space, so very encouraging there. And then in general, in terms of the order books, the more vanilla order book trading protocols, we see really nice opportunities there for further feature enhancements, as we look across our franchise globally, what we find useful for customers will be brought in time to the Canadian landscape. And then also, with pricing, we have pricing levers to pull there along with the general data and analytics that we've talked about to do the pricing, and they tried to really talk to customers about what we can do that in terms of the order book qualities. So listings, then we've got really interesting opportunities we've now got today, over 241 listings and Canada itself 168 ETPs, three new Vanguard ETFs this quarter really great progress, 55 corporates really focused on the innovation economy. And I think about that as a global strategy, when we think about Australia, winning 30% of ETP listings there, same story in the U.S. We can actually begin to go to issuers a capital raise with a global offering, and really that's how we're going to be thinking through our strategy as we go forward and really present that to yourself customers and the marketplace.

That sounds exciting. So is there a stronger revenue growth outlook over the long-term as a result of this strategy, given it's starting to track in better-than-expected as well?

I'll dive in here a little bit is that I would say, obviously, we think there's an opportunity as we continue to put that in place. As we continue look at the revenue synergies, I think with respect as we look at the overall Cboe network, I think it's just becoming increasingly important component is that as far as we're seeing early wins and successes, so Dave, if you want to talk a little bit more about that as well.

Yes, as I mentioned earlier in my answer, the BIDS roll out earlier this year seems great early traction, but particularly to point to the addition of new customers in Europe, really wanted to trade US and Canada. And, in fact, as we think about the rollout BIDS again in Australia in February next year, you've seen early on boards from those superannuation funds really coming to say, hey, we want to on board now to trade what you've got, because we know you're coming to Australia, we want to be ready for that. And we see that across the slate really with the intermediaries there coming to us early on to get involved with that re-platforming we're doing in Australia in February of next year.

It's worth a quick note on the coverage, again, to the span that we've now got a place. Our markets cover something like 80% of global GDP, and over 90% of developed market GDP. And this is really a unique way to tie together those trading opportunities across all those markets. There is no competitor that offers that span of services to the trading community.

That's all great color. Thanks so much.

Thank you. And the next question comes from Owen Lau with Oppenheimer.

Good morning, and thank you for taking my question. I actually have a broader base question. I guess the stock was resilient compared to the broader market in the first half of this year. For the second half, could you please talk about your outlook of the economy, and how investors should think about volatility, your organic growth in DnA, and also your international expansion, and how people can still grow in the second half of this year? Thank you.

So let me start with a broader trading environment. And we're just informed on by volatility term structure and how our customers are pricing risk over time. The elevation in the back months still say that there is risk in the marketplace. And for us, that continues to be trading opportunity, positioning opportunity and really positioning around the broader economic drivers in not just the U.S market, but the global market. So we are informed by that volatility service and don't see much changing in the short-term, meaning continued growth and adoption and engagement in the SPX complex. And in particular, we'll be watching and learning how we can continue to roll out contracts that meet the demand of investors. And in this case, the growth has come from retail platforms. So a lot of effort and concentration on that adoption of super short dated, the utility. And from there, hopefully, we'll be able to teach and broaden the base of users and adoption. Then I'll turn over to Brian for a little bit more color.

Yes, and I would -- I want to remind folks that when we kind of came into the year, and it's a continuation of last year is the organic investments that we're making to set up the potential for this organic growth, with respect to the incremental investments we're making around, the ability to deliver DnA and data through the cloud, what we've done around enabling greater trading environment with 24/5, Tuesday, Thursday launch, the incremental marketing and branding, the Nanos launch, EU derivatives and a lot of those we've talked about. And that investment is, again, you're starting to see that payoff, both in terms of people and the marketing and the sales, and what we're doing. Specifically about, the DnA element and what you’ve asked about right is, is again, we're continuing to see that stickiness, the quality of the access, the quality of the market data that we're getting and being able to offer, again, across all asset classes, it's not just in one, obviously there's higher contribution within the derivatives franchise given the size and our placement there. But again, the confidence in continuing to deliver that growth. You'll see the forecast is slightly lower as far as the outlook than in the first half. We are going against higher comps from last year. We had great third, fourth -- third quarter and fourth quarter growth rates in DnA last year. Again, we're still confident in our continued growth. Again, the comparison is a little bit hard, but we are up for the challenge. But as far as those initiatives, right, we talked about distribution as a service, you saw the recent announcement around Morningstar and being able to leverage our existing networks. We're excited about packaging or global content, again, across geographies and asset classes. And then John had mentioned earlier, again, is that organic opportunity just within say, for example, within Australia and Japan and our recent entry there and within Canada, so those items are really continued, again, give us confidence about the growth rate as we head into the rest of this year. And then obviously, conviction around the medium to longer term growth opportunity of DnA.

And if I may, just a quick chime in on another global asset class or in the Cboe FX business, had a good quarter in this environment. Activity is high, but also in terms of extensions into a new asset class we expect in the latter half of this year to see UST, U.S Treasuries go live, we received FINRA approval, and we have onboarding of customers coming on into the latter part of this year.

Got it. Thank you very much.

Thank you. And the next question comes from Michael Cyprys with Morgan Stanley.

Hey, good morning, and thanks for taking the question. So you guys have added the new Tuesday, Thursday expiries, but I was hoping you could comment on what other types of contracts you guys might be able to introduce. And then more broadly, as you look at your business and the industry, what would you say is left to convert in terms of activity from OTC to exchange traded products? And how might you size that longer term opportunities versus more near-term? Thank you.

Yes, I think what we're learning from Tuesday, Thursday, and what we should be contemplating is in cash settled derivatives, which are really in vogue in the super short dated the possible expansion of our smaller contracts like SXP, which is one-tenth at our Nano contract, which is just getting early adoption as retail -- further adoption for retail platforms, [indiscernible] for example, just came online, which is a good move for us as we roll out strategies that have historically been institutional based. And of course now for retail platforms interest in the 500, the Nano was really designed for the early retail adopter and retail platforms for exposure in the broader market and giving them the same access to the S&P 500. So we're in early days on the Nano contract, and I think, a reinvigoration of an access view [ph] which as I said, one-tenth SPX. So I like that. And I like continuing to look at how to expand Tuesday, Thursday into contracts that are more retail focused. So I think that's what you should see us. As far as the OTC, really the opportunity would be in the volatility complex where OTC tends to be notionally roughly the same size. We say roughly the same size as what you see trading listed. That conversion, we have to look at sensitivities around the execution costs, trading listed versus the risk of trading bilaterally or clearing bilaterally off exchange. So a lot of work to do in the opportunity set around the OTC index, but I wouldn't say as much in SPX.

Great. Thank you.

Thank you. And the next question comes from Kyle Voigt with KBW.

Hi, good morning. Maybe just a follow-up question on SPX. Just wondering now like, what percentage of that overall complex do you believe is being retail today? I always thought of that as being far more driven by institutional flow than retail. And if institutions are still the primary users there, also do you have any insights on like, which types of institutional users have driven this kind of recent surge and volumes we've seen over the last three quarters or so, whether that's equity asset managers or options, specific funds or other types of institutional users?

Yes, it's a great question. And I want to be really careful when we choose our words. You'll note that I say retail platform and don't necessarily mean that that's a retail trader on a retail platform. There are pros coming through retail platforms, many times in algorithms. I would expect the great many of the daily expiry growth is algos loving the short dated exposure. And in a market that's moving, as I say, implied move of roughly 1% a day, terrific opportunity. So the growth from retail platforms in the single day and the participations in the 80s. So really, really high concentration retail platform in those weekly options. Third Friday continues to be traditionally more broad market, greater position hedging as similar as what we see in the VIX complex. So really adoption in those weekly is that big growth coming from retail platform.

Thank you. And the next question is a follow-up from Rich Repetto with Piper Sandler.

Yes, hi, guys. I’ve been sort of looking at the expense side of it in more detail. And I know you had $12 million this quarter, Brian, for increased for the incentive comp. And I guess the question is, when you add all, I think the base is 5.53 from last year, and that's incorporating the 2021 expenses. But if you look at everything, except for the acquisitions this year, it looks like about a 14% increase between the core enhancements, revenue enhancements, infrastructure and incentive. So we had 14% ex acquisitions and I’m just trying to see if that's right. It looks like the consensus revenue estimate right now is up 13%. So do you think the analysts are picking up the revenue enhancements? Or that you got 23 to, I think $26 million built in for that?

Yes, so I would -- I'm not sure I completely follow the expense math, but we can kind of take that offline to make sure as far as the percentages go. I think the thing to focus on is that at least when we are pulling in some of the acquisitions onto the revenue and expense line items, obviously some of the financial statements don't quite have the same margin. So there's going to be a little bit of a slightly higher growth rate on the expenses again just year-over-year, given that size. So again, we're managing that. And then we obviously would plan to continue to grow that top line, obviously fast in the short line, no great surprise there. But as far as picking up the expenses, we try to provide that guidance, and that visibility along the way. If you look at, for example, if you just look at excluding the acquisitions, and you look at kind of that 2Q run rate, and you analyze that 2Q run rate relative to what we forecasted at the end of the day, there's really not a significant growth rate that we haven't already factored in into that projection. And again, just to make sure we're clear on that, that $12 million, as far as the increment, that's a full year, it's not just this first half of the year. Again, that's a full year perspective as far as what we've done in some of the expectations to build into that entire forecast.

I guess to make it simpler, if you take -- just take your expense guidance is 6.59 to 6.67, subtract Neo to 30 to 35. Those -- the increases ex Neo and ErisX are about 14%, I guess. The expense increase is ex acquisitions appear to be a 14%, If I'm doing my math, right.

Sure. Sorry, yes. So part of that growth also includes the run rate of the [indiscernible] transactions from the prior year as well, which is, I will call it making that number higher than, say a pure organic expense growth rate.

But I thought the 5.53 base included the normalized 2021 for expenses, for the acquisition, I could be wrong on that. Okay, I'm good. We can talk offline on this.

That way we can just get on the same -- the same page there. Thanks, Rich.

Thank you. And we also have a follow-up from Gautam Sawant with Credit Suisse.

Hey, just two quick questions here. One follow-up is just on the revenue outlook for the acquisitions this year. I think you had previously talked about the 50%. I don't know if you provided an update or I missed it. Just what expectations are for the revenue contribution this year relative to expenses?

We didn't actually frame it relative to expenses, it was more of [indiscernible] transaction. So we have said that we expected 2% to 3% incremental revenue growth.

Okay, got it. And then just one more on the European business. As we look at the market share in cash equities there, it has a very positive trajectory. Can you please expand on some of the key factors that are helping the platform compete with some of the incumbent exchanges in that region? And then where you think the market share could potentially settle out in the future? And then also what data points is the sales team going out with to these institutions to get them to choose Cboe and route their trading volume to the platform? Thank you.

Great. Thanks very much for the question there. So, as we see that 60 [ph] basis point increase year-over-year, a couple of drivers that I would point to there. One is the liquidity provision scheme we introduced in 2020. That really started an inflection point in market share, which improved the market quality to an extent where we were able to use our data and analytics platform, the one that we'll be leveraging Snowflake to provide data and analytics to show to our customers that actually what we call the effective market share, the share that -- you should be providing to Cboe based on its best bidding offer at any point in time warrants a higher proportion of order flow to be sent to as we saw a great response there from major top 10 customers responding to that in the back half of last year, and with others still yet to make changes. So the trajectory on the lit order books very positive there. It is a competitive environment. So there will be responses, but we are very well-positioned in order to continue to respond and provide data. The evidence is the quality of the platform. Second driver to point to there is a another data analytics campaign around the BIDS offering in Europe, both increasing that network of new customers onboarding, new clients, but also once again, evidencing through data and analytics. The advantage of trading on the Cboe BIDS Europe platform where we see uniquely with liquidity opportunities for our institutional and intermediary customers, really resulting in a 32% market share for block trading for the BIDS platform in Europe, really leaving as they're about 6 percentage points ahead of the nearest competitor in Europe with a good gain quarter-over-quarter. So really the BIDS and the lit platform working well for us there with the final point really being on periodic auctions which have seen increased market share of the overall market, given the utility, but also in the local market. And also, just to mention, we've launched that in the United States and seeing some early traction with some margin trades going off within the platform. Did I cover all your questions?

Yes. Got it. Thank you.

Thank you. And this concludes our question-and-answer session. I would like to turn the conference back over to Ken Hill for any closing comments.

Like to thank you for your interest in our company and have a great weekend everyone.