CBOE - AMEX

Hello, and welcome to the Cboe Global Markets Fourth Quarter 2022 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Ken Hill, Vice President of Investor Relations. Mr. Hill, please go ahead.

Good morning and thank you for joining us for our fourth 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 discuss our 2023 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 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 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 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 Ed.

Thank you, Ken. Good morning, and thanks for joining us today. I'm pleased to report on record fourth quarter and full year results for Cboe Global Markets. During the quarter, we grew net revenue 17% year-over-year to a record $457 million and adjusted diluted EPS by 6% to a record $1.80. These results capped a record year. We saw us grow net revenue 18% to a record $1.7 billion and adjusted diluted EPS 15% to a record $6.93. Our outstanding results were driven by strong volumes across our global network led by Derivatives complex and continued growth in our Data and Access Solutions business. Our Derivatives business delivered another outstanding quarter driven by robust performance in our index options franchise, where average daily volume increased 55% year-over-year while multi-list options trading increased 6% year-over-year to an ADV of 11.2 million contracts. We saw record volume across our suite of S&P 500 Index options products with fourth quarter ADV and SPX contract increasing 73% year-over-year to 2.7 million contracts. Our Mini-SPX options contract, known by the ticker XSP and 1/10 the size of the SPX options contract, increased 188% year-over-year to an ADV of nearly 66,000 contracts. Additionally, ADV for VIX options increased 7% year-over-year in the fourth quarter. During the quarter, net revenue in our Cash and Spot Markets business decreased 5% while we saw a 13% increase in net revenue for our Data and Access Solutions business, including strong organic net revenue growth of 10% year-over-year. We continue to execute on the transformational opportunities we saw in our business: Derivatives, Data and Access Solutions and Cboe Digital. I'll touch on Derivatives and Data and Access Solutions at a moment, but first, I want to provide an update on Cboe Digital. In November, we completed the syndication of minority equity interest with a group of 13 firms announced as investor partners in the Cboe Digital business. Our investor partners include many of the most sophisticated and active participants in fiat and digital asset markets globally and contribute to the momentum of the franchise. We are actively onboarding these partners to the Cboe Digital platform and look forward to working together to bring trust and transparency to the digital asset marketplace. Now more than ever, we believe the experience that established market operators provide with the benefits of their regulated framework is critical to helping enable the opportunities afforded by this asset class. With the onboarding of new participants and marketplace evolution, we have seen continued volume increase in industry-leading spreads in Cboe Digital to start the year with January average daily notional value topping a record $71 million. Our Derivatives business delivered strong results as we continue to expand access to our unique products to customers around the globe leveraging our extended distribution network. For the year, a record 558.4 million SPX contracts were traded with an ADV of 2.2 million contracts, a 63% increase year-over-year. We continue to see increased demand from our non-U.S. customers and liquidity providers for the ability to trade or hedge broad U.S. market and global equity volatility conveniently across all time zones day and night. As a result, we have seen a sizable increase in SPX volume during our global trading hour session with ADV increasing 216% year-over-year during the fourth quarter to nearly 55,000 contracts, capping off a record year for global trading hours with total volumes up 3x over the 2021 levels. This year is off to an even stronger start as January volumes ran approximately 55% above 2022 levels. In December, we also added XSP to our global trading hour session, enabling customers to trade this product nearly 24 hours a day, five days a week and providing the ability to adjust positions around the clock with even greater precision and flexibility. With the addition of Tuesday and Thursday expirations late last year for XSP, both SPX and XSP now offer options that expire every weekday. We continue to see increased demand for same-day trading in SPX with many market participants opening and trading positions on the same day the options expire as they engage in tactical trading strategies around market events. ADV for SPX options open on the same day of expiration increased 83% throughout 2022 and comprised over 43% of overall SPX volumes in the fourth quarter. With the utility and flexibility that options provide in any market environment as well as the varied trading strategies utilized by a diverse customer base, we believe we will continue to see sustained momentum in options trading as customers continue to tap the benefits this product offers. Turning to the VIX products. ADV and VIX options increased 7% year-over-year to over 550,000 contracts traded in the fourth quarter. During global trading hours, we saw VIX options volumes increase with ADV up 72% year-over-year in the quarter, and we have seen strong momentum to start the year as January volumes ran 56% above 2022 levels. Our Data and Access Solutions business posted strong results during the fourth quarter with the integration of our recent acquisitions continuing to fuel the durability of this business. Through our bundled debt offerings and cloud strategy, we were able to package high-quality data from across our markets and deliver to customers globally in a consistent and cost-effective manner, extending the reach of our content and opportunity for this business. Additionally, we continue to see strong customer uptake of Cboe Global Cloud, a real-time data streaming service to provide simple, efficient access to Cboe's robust suite of market data. We now have 25 customers connected to the service with 52% of revenue coming from the Asia Pacific region and 38% from Europe. Additionally, many customers are subscribing to multiple data products offered via Cboe Global Cloud. This diverse customer base reaffirms that our strategy of providing simple, efficient access to our market data is resonating with customers who want access to a global set of market data through a single unified service. Additionally, we have seen solid customer adoption of the Cboe One Canada Feed, a real-time market data feed that provides a comprehensive view of Canadian equities market data since launching last fall. As we integrate Cboe Australia and Cboe Japan post technology migration, we look forward to further expanding our portfolio of market data solutions globally. Through product innovation, thoughtful integration and superior customer service, we continue to expand our ecosystem as we build one of the world's largest and most comprehensive derivatives and securities networks. In our Global FX business, net revenues were up 14% year-over-year in the fourth quarter as the business expanded spot market share to a record 18.4% with average daily spot notional value traded of nearly $41 billion. Our non-deliverable forward volumes on Cboe SEF also grew significantly with annual ADNV of $836 million last year compared with $406 million in 2021. In Europe, the Cboe Europe Equities business continued to perform exceptionally well with overall market share reaching 24.9% in the fourth quarter. While we saw increased adoption of our services in Europe, it was our lit order books that predominantly drove our market share gains with lit-only market share rising from 21.9% at the start of the year to 27.3% in December 2022. Additionally, Cboe BIDS Europe remains the largest block trading platform during the fourth quarter with 34.5% market share of the European block trading market. At the end of 2022, the BIDS Europe platform had over 600 active traders across 243 buy-side firms and 28 sell-side participants. And we expect to have a strong pipeline of new firms this year. The strong foundation of participants utilizing Cboe BIDS Europe will create opportunities as we continue to expand the Cboe BIDS network around the globe. Moving to North America. The power of the BIDS network helped propel Cboe BIDS Canada to another record quarter with 65 million shares traded. Overall equities market share in Canada grew to 13.6% in the fourth quarter while U.S. equities market share was 13.1%. Turning to Asia Pacific. Cboe Australia market share grew to 17.2% in the fourth quarter, up from 16.1% in the previous year. We remain on track to extend the BIDS network to the region with the launch of Cboe BIDS Australia this month. Our experience bringing BIDS into new markets globally, including Europe and Canada, has enabled us to perfect our approach, and we are very excited about the demand we have seen from local participants for this distinctive block trading platform. We also remain on track to launch Cboe BIDS Japan in the fourth quarter of this year, further extending our reach of the BIDS network into another key global equity market. Additionally, in Japan, we saw our equities market share grow to 3.6% during 2022, up from 2.7% in 2021. We continue to be in full integration mode since announcing our last acquisition more than 14 months ago. As mentioned, subject to regulatory approvals, we plan to migrate Cboe Australia and Cboe Japan to Cboe technology this year with the Australian migration happening later this month alongside the launch of Cboe BIDS Australia. We've been working with our customers closely over the last year in preparation for the migrations. And look forward to the benefits of bringing both of these critical markets on to our technology, creating a seamless and consistent experience for customers and unlocking value for our global market participants. We have also continued to make solid progress enhancing the framework of our global listings business since welcoming NEO, a Canadian exchange last year. Our goal is to provide issuers with access to an integrated and global network of capital formation and secondary liquidity while working to harmonize our processes and create efficiencies for our customers around the globe. Building on a strong foundation as the second largest ETP listings venue in the U.S., we are enthusiastic about both the near- and long-term opportunities to grow and expand our listing business globally and believe we have the momentum as we kick off 2023. We are excited by the many growth opportunities we see across our ecosystem today. Brian will do a deeper dive on this in a moment, but this excitement is fueling our attractive 2023 revenue growth targets. Specifically, we anticipate total organic net revenues will increase in the range of 7% to 9% in 2023 above our medium-term guidance range of 5% to 7%. We anticipate that our Data and Access Solutions organic net revenues will grow at a robust 7% to 10% in the year ahead. While we expect to invest behind the meaningful opportunities we see in the market today, we expect that the investments we make this year will help position Cboe to grow in 2023 and beyond. I'll turn it over to Brian to share more.

Thanks, Ed, and good day to all of you. Let me remind everyone that unless specifically noted, my comments relate to 4Q '22 as compared to 4Q '21 and are based on our non-GAAP adjusted results. As Ed highlighted, Cboe posted another incredibly strong quarter to cap off a record year. Adjusted diluted earnings per share for the fourth quarter was up 6% on a year-over-year basis to a record $1.80. The strong performance was again characterized by the continued growth of our Derivatives franchise as well as a steady contribution from our Data and Access Solutions business. Over the course of the year, we made meaningful progress advancing our numerous initiatives, plans that span multiple asset classes and geographies. We see these investments as driving growth in Cboe as reflected in our 2022 record results and in the healthy outlook we have for our businesses. I want to quickly touch on some of the high-level takeaways from the fourth quarter before delving into the segment performance. Our fourth quarter net revenue increased 17%, setting another quarterly record at $457 million led by the strength in our Derivatives markets category and robust results from our Data and Access Solutions business. Specifically, Derivatives markets produced 33% year-over-year organic net revenue growth in the fourth quarter as innovations like Tuesday, Thursday expirations continue to resonate with customers and fuel same-day trading in our SPX complex. Data and Access Solutions net revenues increased 13%, up 10% on an organic basis, finishing a very strong year where D&A organic revenue increased by a very healthy 12%. Cash and Spot Markets net revenues decreased 5% during the quarter or 7% on an organic basis. Adjusted operating expenses increased 28% to $177 million. Adjusted EBITDA of $292 million also notched a quarterly high, up 11% from the fourth quarter of 2021. And as noted previously, our adjusted diluted earnings per share was a record $1.80, up 6% compared to last year's quarterly results. Turning to 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. Our Options segment was a standout for the quarter, again delivering the strongest growth with net revenue increasing 35%. Results were driven by robust volumes in our index business and stronger revenue per contract, given the favorable mix trends. Total options ADV was up 15% as our higher-priced index options ADV increased 55% over 4Q '21 levels. RPC moved 25% 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 continue to benefit from another quarter of double-digit growth in market data and access and capacity fees, up 34% and 15%, respectively, as compared to 4Q '21. North American Equities net revenue increased by 5% year-over-year. Results benefited from NEO, which was acquired in June of '22, contributing $5.5 million in net revenue during the quarter. In addition, access capacity fees increased 10% as compared to 4Q '21, and market data was up 4%. Net transaction fees fell by 4%, given a mixed volume environment across our businesses, softer market share and capture rates. The Europe and APAC segment reported a year-over-year decline in net revenue for the fourth quarter of 15%. However, adjusting for a $5.6 million FX impact given the stronger dollar during the quarter, net revenue fell by a more modest 4% on a constant currency basis, impacted by softer industry volumes in Europe. The lower activity levels were partially offset by a 5.1 percentage point increase in market share on a year-over-year basis, making Cboe Europe the largest stock exchange in Europe, again for the quarter. Fourth quarter net revenue decreased 10% in the future segment as transaction fees declined 15% on a year-over-year basis. Lower volumes were the primary driver of the decline, falling 16% in the fourth quarter '22 as compared to fourth quarter of '21. Non-transaction revenues continued to tick higher with access capacity fees up 2% and market data up 25% as compared to 4Q '21. And finally, net revenues in the FX segment were up a strong 14% as compared to 4Q '21, capping a very strong year for FX, where net revenues grew an impressive 18%. Net transaction and clearing fees in the fourth quarter benefited from a 21% increase in average daily notional value and higher levels of market share, hitting another quarterly record of 18.4%. Turning now to both Data and Access Solutions business. Organic revenues were up an impressive 12% for the full year. Net revenues were up 13% year-over-year in the fourth quarter, up 10% on an organic basis. As we have seen in past quarters, net revenue growth continues to be driven by additional subscriptions and units, accounting for over 90% of access fee growth and 58% of market data growth. In our data and access businesses, 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 equity's top of book and options depth of book products continued to perform well. Cboe Global Indices feed also benefited from some pricing enhancements during the quarter. In 2023, we anticipate that trends will remain resilient as we are forecasting 7% to 10% organic net revenue growth for Data and Access Solutions, in line with our medium-term guidance range outlined at our November 2021 Investor Day. Turning to expenses. Total adjusted operating expenses were approximately $177 million for the quarter, up 28% compared to last year. Excluding the impact of acquisitions owned less than a year, adjusted operating expenses were up 21% or $28 million for the quarter, largely reflecting higher headcount as compared to fourth quarter of last year as well as some inflationary comp adjustments and additional incentive compensation in 4Q '22. Moving to our expense guidance. We are introducing a full year 2023 expense guidance range of $779 million. This compares to our 2022 expense base of $652 million. There are three basic components to the year-over-year increase outlined on Slide 17 of our earnings presentation that I want to walk through in detail, namely expenses from 2022 acquisitions, revenue-enhancing investments we are making in our business and core expense growth. The first component is the normalization for the two transactions ErisX and NEO, we completed in 2022. We anticipate these deals will add approximately $36 million to $38 million in incremental expenses in 2023. In our expense base, we are again calling out growth-generating investments we are making, given the numerous attractive growth opportunities we see today. These are costs we expect to drive incremental revenue to our bottom line, furthering the robust growth trends we have enjoyed over the past few years. Specifically, we are investing in global listings, DNA expansion, a more aggressive marketing campaign given our 50-year anniversary as a company and targeted R&D efforts across our ecosystem. In 2023, we expect revenue-enhancing investments to be in the range of $28 million to $30 million accounting for roughly 4.5 percentage points of our 2023 adjusted expense growth. The last component and the largest portion of the year-over-year increase is our core expense growth, showing approximately $53 million to $59 million or 8% to 9% of our expense increase in 2023. I think it's important to understand the moving pieces within our core expense base. First, we continue to invest in the infrastructure of our business. As we strengthen our footprint as a multi-asset class global exchange and services provider, we will continue to invest behind a robust technology offering to deliver a best-in-class client experience. Roughly 2% of our expense growth in '22 was related to core infrastructure. And we would expect a similar contribution this year as we continue to build a cohesive offering around the globe, facilitating the expanded capacity, access and distribution of our products and services globally is important to our success, and we will continue to ensure Cboe can meet the needs of our clients. Unrelated to our infrastructure spend is an incremental two percentage points of expense growth we are attributing to the Consolidated Audit Trail or CAT project. These costs, which we have limited direct control over, are expected to add an incremental $10 million to $15 million to our 2023 expense base based on our initial estimates. The remaining core piece is related to our day-to-day cost of doing business. In '22, we talked about some inflationary pressures impacting these expenses. And while we do still feel some of those pressures today, we expect core day-to-day expenses to be up a modest 4% in '23, down from the 7% growth we saw in '22. Cboe has enjoyed some of the most consistent and most durable revenue growth, operating margins and earnings generation in the industry. The expense forecast we are providing today highlights the continued investment we are making to sustain those trends moving forward. To state this more directly, it is because of the investments we have made in our business that we generated record '22 results and are able to guide to a robust seven to nine percentage point increase in organic total net revenue in the year ahead. We believe that the investments we make in '23 will position us well to generate attractive return for years to come. Now turning to a summary of full year guidance on the next slide, I want to call out some highlights for '23 following our record net revenue results in '22. For Data and Access Solutions, we expect net revenue growth to be in the 7% to 10% range for '23, in line with the medium-term guidance of 7% to 10% we introduced at our Investor Day a little more than a year ago. We expect acquisitions held less than a year to contribute around 0.5 percentage point to total net revenue growth in '23. Most importantly, we are guiding our organic total net revenue growth in the range of 7% to 9% for 2023. This is above our medium-term guidance of 5% to 7% introduced at our Investor Day a little more than a year ago, a function of our confidence in the durable growth of our business and the progress we are seeing behind the investments we have made to increase the access and distribution of our products in markets globally. During this year, we are introducing an expected contribution of $27 million to $33 million for minority investments benefiting our other income line. Cboe has made and we'll look to continue to make investments in businesses that align with our strategic vision. Our 4Q '21 investment in 7RIDGE with Cboe becoming a limited partner in the acquisition of Trading Technologies is a great example of how we plan to utilize our network of partners to invest in strategic assets. We look for the impact of these investments to become a more regular contributor to company earnings and are providing our best estimate of the benefits we anticipate in '23. We are introducing full year guidance on depreciation and amortization of $48 million to $52 million and expect the effective tax rate on adjusted earnings under the current tax laws to come in at 28.5% to 30.5% in '23. Outside of our annual guidance, interest expense for the fourth quarter of '22 was $15.7 million. Moving forward, we expect interest expense to be in the range of $14.5 million to $15.5 million for 1Q '23. On the capital front, our focus has been and remains maximizing shareholder value through the effective use of our capital. In the fourth quarter, we returned total of $53 million to shareholders in the form of a $0.50 per share quarterly dividend and $15 million in the form of share repurchases. Year-to-date '23, we've also repurchased $30 million of our shares. We remain well positioned to invest in the business, support our dividend and opportunistically repurchase shares with $188 million in remaining capacity on our share repurchases authorization as of January 31, 2023. Our leverage ratio decreased to 1.5x at the end of the fourth quarter, down from 1.7x at September 30 and from 1.9x from June 30, reflecting our significant growth in earnings as well as the repayment of $120 million of our term loan facility in 4Q '22. And through prudent debt capital markets transactions, we have also locked in low medium- to longer-term fixed rates averaging below 3% on over 80% of our total debt. Overall, we remain committed to maintaining a flexible balance sheet and striving to put capital to work in the most value-enhancing way possible for shareholders. Given where we are today in our capital structure, we plan to shift slightly to prioritize opportunistic share repurchases over further debt pay down, given our leverage ratio at 1.5x at the end of 4Q '22. In summary, 2022 was a tremendous year of record revenue generation and earnings growth. We expect that momentum to continue, fueled by the attractive investments we are making across our ecosystem. We are incredibly pleased with the start to '23 and look forward to delivering attractive returns to our shareholders 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.

Thanks, Brian. In summary, Cboe delivered a very strong fourth quarter to close the year. And 2022's record results give us increased confidence that if we continue to invest in high-value growth initiatives that further expand the Cboe ecosystem, we can continue to deliver strong long-term results for our investors. I'm also proud of the work we did to advance our corporate ESG initiatives in 2022. We will continue to look for opportunities to support our communities and associates while driving for a more sustainable future. I would like to thank our team for the incredible results achieved during the fourth quarter to cap off a fantastic year. As we enter our 50th year of business, we are more optimistic than ever about the future. Our history of innovation, client service and good citizenship will be the foundation for building trusted markets for the next 50 years. I am extremely proud to lead this incredible team and our organization as we continue to push Cboe to new heights.

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.

Thank you. At this time, we will begin the question-and-answer session. [Operator Instructions] And this morning's first question comes from Rich Repetto with Piper Sandler.

Yes. I guess my question is going to be focused on expenses and expense growth. I guess, Brian, I calculate last year the overall expense increase when you subtract the acquisitions was 13.5%. And I thought we would expect a step down. It looks like 13% ex the acquisitions again this year. So, I guess when you look at just the core -- everything beyond the acquisitions, so can you explain, what's the tangible payback? I know you had something about minority investments, but is this the ongoing -- it looks like other exchanges are investing less than half of that, and just trying to understand this 13% growth rate each of the last two years in investments and core expenses.

Yes, Rich, great question. I think a foundational to probably a lot of folks when they're looking at the guidance. So, we do want to spend some time kind of continuing to walk through that. So I'll break it up into a couple of parts here, again, to your thoughts around the core and then the incremental revenue investments and where that was. And honestly, to your last comment about the other exchanges in that profile, I will suggest that our revenue and earnings profile actually is different and actually, I think, has been fairly strong relative to that as well over the last couple of years. So we've taken a very explicit, very transparent approach to growing that long-term growth rate. So if we look at behind the core, and this is the -- I'll say the -- one of the issues of having, I'll call it a relatively smaller say some of our peers, but also, I'd say, high-margin, a very efficient exchange in the first place so that if there is a slight uptick, it shows, right? We're very transparent about what those expenses are and where they show up. So as we break out the core, as I alluded to in my prepared remarks about looking at the incremental regulatory expenses coming from the consolidated audit trail, right, that's going to hit us a little bit higher from a pure expense standpoint. We're laying it out there so we can see that as far as what's driving that expense base higher, given our history with what we've seen where that project is going. With respect to infrastructure, if you look at the incredible amount of volume, and I'll ask Chris Isaacson to jump in later here about what this exchange operations have been able to do as far as volumes and the ability to actually continue to facilitate that capacity, and our belief that it's important for us to continue to be a trusted marketplace. So it was important for us to continue to invest and facilitate that increased capacity, both in the U.S. and the non-U.S. markets, again, which many of those markets saw record peak volumes at some point during '22. And technology and operations handled that with really no issues. And in the midst of all this also, we're doing a replatforming in Japan and Australia. Again, all right now, slightly incremental expense as we layer in as we go into 2024 moving forward. And then you look at the overall core of those other incremental I talked about is, again, we're still, as I mentioned at the end of last year, we still have to incorporate some of the inflationary pressures. We're seeing that moderate a bit. But again, it's against a lot of the expense categories, not just comp. As far as the revenue growth investments and you made an explicit where do you see some of the payoff for that, I'll ask Dave to jump in here as well as some of the other teams. As we kind of walk us through and remind folks, there was a little bit of a similar question at the beginning of last year, as you recall, as we broke this out for everyone. So, I'm going to take a walk back as our big investment thesis and how we thought about growing and the approach of growing Cboe is, right, the underlying themes of increasing our global network, increased access and distribution, providing new and existing products. And given the size, again, those incremental investments, we call them out, we want to give investors transparency. Here's what we're doing, and here's our expectations for growth. So if you go back and think about what did we carve out for 2021, right? We talked about the EU derivatives, we're going to launch that, again, based on the back of the success of acquisition of then EuroCCP, now Cboe Clear, Cboe Euroclear, right? We talked about the investments in our U.S. Derivatives business with 24x5, incremental investment in sales and marketing teams. We started beginning the dialogue around DNA, around incremental investment around sales, products, marketing and cloud, really leaning into the cloud as far as increasing access and distribution enable that. And then with BIDS, we started rolling that out to our other geographies with respect to Canada. As we think about how did that contribute then to the success of '21 and '22, it did help growth in '21 but again, starting to set the foundation for growth in '22 as we saw continued another record year. So, we do expect to see those -- that continue, right? And we expect to see some of that BIDS and European derivatives investments in '21, more of a '24, '25 continued payoff. Shift to '22, shift to last year, we had this conversation, right? So we called out DNA, sales, products, marketing and further leaning into cloud to increase access. And like I said, Dave will talk about kind of some of the success we've seen there more explicitly. We talked about more of the U.S. Derivatives investment with respect to incremental sales, distribution and product innovation that we did around the Derivatives. The continuation of the EU Derivatives rollout, again, we pushed that to a more of '24, '25 contribution. And then finalizing the Canadian rollout and starting in Australia with respect to this. Again, we saw the efforts from D&A and U.S. Derivatives initiatives add to 2022 results with the continued expectations that '24, '25 are going to continue growth drivers. Now flip to 2023, and that is a backdrop as we continue to lay this out, continuing themes here, right? D&A, as I mentioned earlier in my prepared remarks around incremental sales products, cloud investment and marketing, more U.S. Derivatives investment around the sales and expanded marketing, continuation of our EU Derivatives buildout to a less extend this year, looking to expand with our listings, a new listings effort around globally. In BIDS, finalizing Australia and Japan, a targeted disciplined R&D effort. So, we continue to expect to see some benefit in the current year, again, but supporting that longer-term growth rate and support those efforts for both today and tomorrow. And you'll see a little bit more of that this year and a little bit bigger around the marketing category as we continue to create a broader brand awareness around Cboe, again, creating a foundation for that incremental growth. So first, I'd like to turn it over to Dave to more address these, I'll call it, the revenue growth investments. And then, Chris, I know I mentioned, we'll talk some of the core as we go back to that.

Thanks, Brian. Yes. As Brian said, really, we're looking for the revenue investments to really capitalize on opportunities that we see to build on the foundation that we've built. We've got this tremendous network, 26 markets around the globe. We're looking to lean into where we have momentum to build on those strong foundations to offer differentiated offerings, but also to look for white space to look for the opportunity to move into those adjacencies with it from a position of strength. I'd probably call out the -- Brian gave a great backdrop of the previous year. You'll see that continuing into this year. And in particular, as you look at the results of 2022, these should really all be pretty -- make some good sense. As to the five areas top entailed with marketing and surrounded with marketing throughout the message here. So you've got Derivatives, you've got D&A, listings, BIDS and research and development. Certainly, Derivatives there, you heard Ed and Brian describe a great result. So leaning into education, content, sales and marketing, that global trading hours tripling volumes in 2022 really looking to lean into that as we think about broadening the access and distribution, XSP, the Mini-SPX being added to 24x5 in the back end of last year with the addition of Tuesday, Thursday, really sales and marketing there pushing into the APAC region and really capitalizing on the boots on the ground we have from the Asia-Pacific acquisition. D&A exceeded my expectations for 2022. That 12% growth, they're fantastic. And so continue to lean in their sales, quantitive analytic marketing as we look to move those products and services into -- throughout the rest of the globe. Think about our options analytics capability we're going to be bringing to Europe. Cloud is a great theme that's been here throughout the years. 2022 saw 72% of all revenue as incremental sales. That's across the nine products, five regions that we've got set up for cloud right now. And we're really looking forward to investing this year to add Cboe Digital data to that, some great spreads coming through this year from Cboe Digital, adding a new quality data set to the CCC-wide channel 24/7 data that's leaning into expanding the distribution there. And last year, we saw themes around defined outcome and override strategy bench for the index business. We saw great gains in 2022 as well. And then the continuous theme of selling the package and bundle data so Cboe One Canada there really showing great green shoots for this year. Listings is another one I'd probably drill down a little bit more into. The opportunity that is afforded us by having those listings exchanges around the world is unique. We get to provide a global cohesive offering across legal frameworks, liquidity provision in conjunction with our liquidity partners and also access and help navigating global regulators as we go there. So, great opportunity there coming off that great standpoint, number two in the U.S. as an ETP listings, venue with 28 increase in some rather large name issuers in the U.S. And then BIDS, BIDS has been a great story for us since the beginning of the partnership. But after we closed the acquisition with BIDS, we saw us spring to the -- grow to the number one block trading venue in Europe there. So we're leaning into that with people, sales and marketing this year as we think about Asia Pacific. Canada, 76 buy side added within one year. And when you look at the 243 connected to Europe, you can see the growth potential there that we're going to be leaning into as we go through into the Asia Pacific region. Then research and development, key thing for us, we're a product company with some world-renowned products. We formed Cboe Labs this year to really focus completely on how we can develop new ways to measure and benchmark exposures and bring those to the marketplace to afford our customers a range of defined outcome opportunities, which we saw really come to fruition in the SPX complex, in particular, last year. And finally, marketing wraps the whole thing. It's about people, technology, working with partners and suppliers from the tailwind of our 50th year anniversary here as we go into new regions with new products, Asia Pacific and lean into digital, bringing our awareness to new regions, new audiences so that we can better penetrate the markets that we operate in.

Thank you. And the next question comes from Ken Worthington with JPMorgan.

With the syndicate in place now for Cboe Digital, can you give us more details on the investments you plan to make here? And I think one of the goals is to enhance flow in the platform for 2023. If you can give us some approach on how you want to build that liquidity. And to the extent that things have changed for Cboe Digital since FTX has imploded, how has your strategy evolved in the recent quarter since the environment seems to have changed quite a bit?

Yes. Thanks, Ken. Thanks for the question. We continue to be very excited about Cboe Digital. And as Ed mentioned in his opening remarks, we're coming off a record month in January after closing the syndicate of those 13 great investors that are deeply embedded within both traditional finance and in the crypto space. So, we have industry-leading spreads now in Bitcoin and Ethereum. About 1 basis point is what we're seeing through the month of January. So why we continue to be excited about this and focused on the future is we're working with the CFTC on margin futures. And we're looking forward to the approval there of bringing that to the market in a way that has not been brought to the market in the U.S. thus far, continuing the onboarding of that syndicate as they -- about half of them are now onboard, and others are in different phases of onboarding. And our strategy relating to how has it changed, if at all, since the FTX bankruptcy, I would say our strategy is unchanged, while the market has gone up and down as far as crypto prices, our strategy has stayed the same. We're going to bring a trusted, transparent regulated market to crypto to Cboe Digital. We're going to bring intermediary-friendly products and services. And we're going to access ultimately to end users through those intermediaries, which we view as great partners and clearly, as part of our syndicate. So, we see growth in this nascent asset class for years to come, and that's where we're building a strong foundation right now alongside and with this syndicate. So, margin futures expand the distribution of our data as the market quality has improved dramatically, as Dave mentioned, and continuing to grow as we onboard this syndicate.

Ken, this is John Deters. Just a couple of other points to tag on there, I think first of all, when you look at the data, it's interesting. The number of active addresses for Bitcoin, for example, has stayed relatively consistent since really the Three Arrows Capital collapse, so even through the FTX issue. And what does that tell you? It tells you that engagement overall has stayed fairly consistent once the period when leverage was taken out of the system. So what our partners are seeing, and this is really one of the great benefits of having this around us they're seeing that the remaining customers and the new customers that continue to come into the space are gravitating towards highly compliant, regulated marketplaces. You heard this from China, for example, in his conversation in December. And so when this market ultimately begins to grow from its stabilization period today, we believe we're set to be -- among the winners in this space. We're investing for the long term.

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

Can you please walk us through the growth dynamics in the data and access segment? Organic growth came in at 12% in 2022 above your medium term 7% to 10% guidance. But on your 2023 outlook, you kept it in the range. Can you expand on what some of the new product sale opportunities are? And if there is a growth deceleration or maybe some of the factors that drove the elevated growth in 2022, is that why you stick to the medium-term range?

Yes, that's a good question, Ken. So as you point out, 2022 was a phenomenal year with a 12% growth there. We continue with the industry-leading 7% to 10% guide as we really see continued opportunities to build on what we've built there. We talked about the revenue investments to really build that great platform for the index business to make everything scalable and also the cloud investments there. As we look forward to build on that growth rate of 7% to 10% after a 12% year is really solid and reflects our excitement for this particular segment. So, what we're excited about is, again, the cloud opportunity. I mentioned that 72% of incremental revenue that came through there for the business, for the cloud portion of the business in 2022. The great story there is that we see people taking different portions of the data, whether it'd be Australian, European or Canadian data through that single unified source. So, the opportunity there to continue to grow the sales and access as it comes through there. And then also adding new data sets, we mentioned the Cboe Digital addition to the CCCY channel then 24/7 Cboe global indices channel, so really excited about that as we go forward. And then leaning in again to that defined outcome override strategy trend we've seen as within the home of those index calculations and many of the listings associated with those products from global issuers that we've been able to attract to the platform. And then, it's the options analytics, we're going to move that capability by adding the European data sets and bringing that capability to Europe with our customers that take their U.S. product there looking to expand that into Europe. And then, the growth really is predominantly around selling what we have is growth of existing subscribers and units at the platform there. And when you look at it, you look back on 2020, you see 60% of new market data sales coming from outside of the U.S. You can see the real focus there as we think internationally.

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

I want to switch gears to the SPX ecosystem and specifically the zero DTE trading. I'm curious to what degree you see a real ecosystem building there, particularly on the institutional side. I guess what I'm asking is, I think people still believe 50%, 80% of that business is retail. And institutionals, I think, are entering the market. And -- but what I hear is that trading more around certain events versus being there systematically every day. So just wondering, are you seeing that maybe changing this business this zero DTE becoming a real ecosystem? And then more importantly, what are you doing to maybe encourage and educate those institutional investors that maybe a little bit more sticky than some of the retail folks that you never know about?

Thanks, Alex. I'll start. So, we are seeing institutional flow certainly in the zero DTE. But I think most importantly is it's not the expense of more traditional and historical third Friday, that's the good news. That base remains very, very constant. So any new movement into the dailies similar to retail looks to be accretive or new flow and new strategies. And it is very much based on the moves that we see over the last year or so, substantial and meaningful moves in the S&P 500 on a daily basis today, yesterday, basically every day this week is a perfect example. As far as education, it's -- you really make the products available for institutions, and institutions talk to other practitioners on the success or not of new strategies. So our focus has been on wallet size and having products for everyone to access the zero DTE. In particular, we called out the 1/10 size SPX and XSP and watching that growth. I would point to that as being more retail. And the SPX volume and growth that are coming from retail platforms are still small orders and still a mix between single leg and multi-leg strategy. So you hear the theme repeated here defined outcome investing tends to be much more sustainable, and that's what we're teaching. Institutions, I think, will catch on and add to that traditional third Friday and simply just gain more exposures on short dated.

Thank you. And the next question comes from Dan Fannon with Jefferies.

Brian, I want to come back to expenses, and I know you just gave a lot of color on the growth and what the initiatives are. I was hoping you could put some numbers around the ROI or the incremental revenue growth you're expecting from those investments. But also to maybe avoid some of the confusion going forward, how do we think about normalized expense growth? Or are you in a multiyear period where we should be thinking about growth investments plus core expense growth? So this elevated expense growth isn't just for '23, it should be over a multiyear period.

Yes. Thanks, Dan. Good color and I'm happy to provide a little bit more around that. The -- I would say part of this is as we continue to see that return. And a little bit of this is we'll continue to provide the, I'll call it, the incremental contribution to the extent that we can, the -- with the network that we have, and we don't have a perfect clarity given the way the clearing works as to some of the investments and the increment of every single initiative. We know that in the aggregate, when you look at the broader ecosystem that as you increase access and distribution and, let's say, for the SPX complex and the things that we've done there, right? So, we may see that incremental trading volume on certain initiatives and broadening 24x5, for example, introducing the new more expirations. The collective benefit of that is hard to separate into any one single niche from that investment. So, we tend to look at it in totality to try and measure it again because we don't have the clarity of the back end to see exactly who traded what. But we can see the broader volumes or so we have some limited view of that, but we will look at it, like I said, in the aggregate and continue to make an assessment every year as to did that exceed our, at a minimum, that invested return on invested capital. And because that is our more primary, I'll call it, preference as far as capital allocation goes, those organic initiatives to generate incremental returns, so as we think about that, we'll continue to evaluate that on a -- some of that might be a multiyear basis to understand the traction behind that. I would say that -- and we said this last year, again, I think the moderation maybe was a little bit less than maybe what folks were expecting. But we would expect in '24 and '25 as we've continued to expand the network and as we start seeing some of these initiatives take off, we expect to see some -- a little bit of margin expansion in some of those new initiatives from the -- particularly from the acquisitions that are coming on board, right? It's -- the wonderful thing actually, we love our margins, we love the scale of our core business. And as we continue to expand when we bring some of those operations on, right, you're going to get a bit of a mixed dilution as far as margin goes. But you're having some really strong revenue -- future revenue opportunity. And you're going to start seeing that in '24 and '25. And so, we would expect to see more margin expansion. And you'd see a moderation of that adjusted operating expense growth kind of beyond '23. So I want to say we're going to back off of the growth investments. Again, we've called that out, I'll call it because of our efficiency and what we've done historically. And we don't want to just blur that and say, we're just -- the way that we're spending. So, we want to call it out, continue to measure those returns. We have a return on invested capital expectation of greater than 10% on everything that we do. Again, some of those are going to be multiyear periods to wait to measure, and some of those will be current year. So that's the framework with how we're thinking about it. And I would say without giving explicit guidance for '24 and '25, we would expect to see that growth rate moderating.

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

Maybe just building on Dan's question. The -- how do you think about that long-term sort of trajectory of pass because obviously, there's so many different growth opportunities, and you're really building a very large ecosystem across both trading and in recurring revenue streams. But with -- as you see those opportunities continue to unfold, is there a desire to continue to invest? And are you thinking maybe in the long term, you start to shorten some of those time frames for profitability? Or is it sort of the sky's the limit on the potential for investment? And then just maybe real specifically, are we still looking at $25 million in annual revenue for European Derivatives in year three, which I believe will be 2025 and then the timing to get to profitability in Cboe Digital.

So I'll try to make sure I got all those. Okay. So on the first one, on the -- similar to following up on Dan's question, the one thing I realized, and thank you for kind of asking to expand on that is the point that I didn't make as clearly as I would like to is with these investments and say, we have the -- we might see an increase in transactional activity, say, the SPX complex or the other project in this complex, what we see with that also is incremental D&A. We see the incremental non-transaction pieces because of the need for incremental access. You'll see that incremental access fees. You'll see that in incremental market data fees. Dave touched on that as far as we've seen that growth. And then by enhancing the distribution or our ability then to deliver that, we're seeing that growth of not only share of wallet, say, in the access, but also then more new clients. And I'll pass it over to Dave here in a second as we continue to round that out. So, we'll see it across the entire flywheel as far as maybe some of the underlying, but also the transaction and non-transaction side as that entire ecosystem continues to build. So -- and Dave, do you want to expand on that a little bit and then maybe talk about the EU Derivatives? And then we'll come back to -- and then maybe follow up with you and Chris on the Cboe Digital?

Sure. So, I guess I'll start with the European Derivatives piece. The last quarter, the value proposition, the opportunity set remains the same. The customer feedback remains the same. And the gap between the volumes of trading of index options between the two regions remains the same. Q4, we saw good growth. It was a record quarter in terms of volumes on the platform with new customers coming on, particularly in futures. And as we laid out in the past last time, it's about getting that stable price picture in the futures, then it will be the options that follow suit from that. And then for us this year, the single stock options launched in Q4 completely rounds out the offering in order for us to bring together the full ecosystem and offer the full benefits of a single margin pool and a single lit on screen market there in Europe. So for us, the three-year guide, which we moved a year last -- we reported last quarter. So the exit of 2025 is still the target for us. And then...

Yes, I'll take that. On Cboe Digital, as we said on the slide there, this has been Slide 11. It's a long-term growth trajectory for us. And we haven't put out guidance on exactly when we'll have breakeven there. But a lot of this is dependent upon our Derivatives growth, margin futures and as we said, onboarding the syndicate as we bring them on. So, we haven't put out exact breakeven timing, but we are very bullish on the long-term growth trajectory for that business.

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

Going back to Cboe Digital, I think you guys are planning to list more tokens beyond the five tokens you have. Could you please talk about what other tokens you feel comfortable to list? And what's the process and timing of getting approval so that you can -- these tokens?

Chris, let me start, and then I think you can give a view of the Board and the direction. But really, what we're most sensitive to is regulation as we went -- gone into this eyes wide open. And you've been following along with the rest of us that there's uncertainty over regulation and oversight. We're embracing that regulation. So, we need clarity around securities versus non-securities. But our customers, our syndication partners are interested with us in broadening beyond the current coin offering. But we are patient. We have said this is a long-term play, a long-term move for us. So, we will be participating in and helping to form what the future looks like for oversight regulation. But we are very much -- we're very sensitive to where the SEC and the CTC come out on classification. Chris, a little bit more?

Yes, I think Ed covered it well there. We are going to be very conservative on our listing. We do desire to list new coins as there's clarity around regulation and as we see genuine customer demand from our customers and intermediaries. But we'll make sure that there's clarity there before we start listing the coins.

Owen, this is John. Additional thought there. We mentioned that we see real stability in the market. And that doesn't mean that the market won't be unchanged in this new environment. And among the things that we see going forward is that there will be an increased concentration on the tokens people feel comfortable with from a regulatory standpoint, from a compliance standpoint. So that -- I think that's just the reality we see going forward. And we're fine with that. We recently had a reach up from significant asset manager who wasn't prepared to join us in our first iteration, really interested in considering offering exposures to their clients. And they're not talking about the long tail of smaller assets. They're really focused on the most embedded, the most comfortable and understood exposures. That's the opportunity for us.

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

I wanted to circle back to your revenue outlook, your total revenue guide of 7% to 9% organic total firm-wide. That includes the D&A, right, but also I imagine also captures transactional revenues in there as well. So just a question on that, what areas do you anticipate being most meaningful and contributing on the transactional side to your 7% to 9% organic revenue growth? What underpins your confidence and strength in that into '23?

Thanks for the question, Michael. The continued momentum that we see in the interest and engagement from our broad range of customers did execute in a broad range of strategies in the -- on our Derivatives complex forms a good portion of the driver for the continued revenues growth of 7% to 9% into next year. As you say, that's total. So it does include the Data and Access Solutions as well, which is also a combating driver as part of that growth guide that we've given that as we see the growth of the utility in -- that customers are finding in deploying option strategies we see that continuing throughout the year. And really one of the catalysts there last year, of course, was the addition of the Tuesday and Thursday weekly contract expirations that opened up the opportunities that Ed talked about earlier on. I think in the quarters past, what we called out is when investors move from the binary outcome of being long or short in Delta 1 and employ option strategies that allow them to define their outcome that is an incredibly sustainable, sticky, if you will, strategy. So, we continue to teach that here in our institute. We continue to bring new products to the market through Cboe Labs, and we engage with our customers globally as the demand for particular for U.S. Derivatives. But if you follow along like we do listening to and observing what retail platform operators are saying, that Derivatives demand is global. We see that. And of course, our concentration while primarily leading into '23 is U.S.-based as Dave laid out, we see potential, obviously, in Derivatives as we broaden the scope in Europe.

Thank you. And the next question comes from Andrew Bond with Rosenblatt.

Just on fixed futures volumes. We know there seems to be a bit of a mix shift in customer hedging to SPX and as your DTE option contracts with implied volatility underperforming realized vol. Outside of changes in some of these dynamics and more unknown unknowns, what could Cboe do on the innovation front and perhaps education front to boost volume growth of VIX features?

We'll start with just from an exchange perspective. We've recognized the power of the stack, the interplay and the rotation. We've talked about that for years that our customers are very rational in the way they deploy their hedges or exposure. You've called this out. If in the -- over the last year, the observations of incredibly large moves interday like today, yesterday, as I said earlier, all this week, the Greeks associated with the exposure in the SPX allow -- customers believe that they allow themselves a much better chance of monetizing those positions. Gamma, for example, the group that you pick up in the SPX. We did see in the observation yesterday is when investors think that the market may have run too far, they do grab the optionality and the hedge that's afforded by fixed exposure. So again, indifferent from -- basically indifferent from the economics there, what we are -- have always said is the rotation makes sense. The hedges are rational. So, we continue to teach the differences in the expected payout and just want to make sure that we're bringing those exposures to customers with every sized wallet and teaching that through many contracts in futures, for example. And of course, I mentioned earlier, XSP is the mini-500. So that's the approach, but we do see Derivatives as sticky and sustainable.

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

Maybe just one more on expenses. I apologize, Brian. But I wonder if you could talk about the potential expense flex and how dependent it is on the revenue environment. So for example, if revenues came in below the low end of that 7% to 9% organic guidance range, should we expect a similar outcome in terms of coming in line with the expense guidance range? And would there be any pause on investments? And then likewise, if revenues come in above the guidance range, should that cause expense growth to move higher than the range? Or should we expect the incremental growth to fall to the bottom line? So, any kind of framework you could help us with understanding that the really the expense flex on either end of that range will be helpful?

Thanks Kyle. I think your next -- if you choose to have another career as a CFO as part of that, that would be awesome. So, I think you think about exactly the way we frame that and the way we've talked about it, right, is that we've laid out this guidance. We've laid out our plans. We have certain expectations around how these investments are going to contribute to the revenue and some of the traction we think we will gain. So, there's definitely opportunity to flex. There's obviously our natural flex that is a part of our incentive plan, our short-term incentive plan that will flex based on how we're doing relative to, I would say, these very strong growth targets that we've set aside, so we set for ourselves. So, there's definitely an inherent part of that is that we are not achieving that, we will titrate the various levers there to say, how does this pull back to make sure we get to those earnings expectations of what we're trying to deliver for shareholders and continue to measure that. And then on a go-forward basis, outside of, call it, that incentive structure as far as exceeding expectations. We're a little bit more cautious on the upside. We'll be faster to move on the downside as far as pulling that back, if we don't see the results that we're expecting, but we'd be more cautious to actually raise it as you've probably seen historically with some of that kind of expense growth going forward. So that's the way I would frame it, Kyle.

Thank you. And the next question comes from Rick Fellinger with Autonomous.

I was hoping you could speak to the competitive environment in SPX options. Your competitor has now announced their intention to launch daily expirations for their micro S&P futures. Do you expect us to have any direct impact on the success you've been seeing?

I don't. Just a reminder to everyone on the call, the amount of retail futures accounts is dwarfed by the amount of retail securities accounts. It's quite a bit more difficult to open futures accounts for retail that is not to take any away from the effort. But once a retail investor is satisfied and happy with liquidity, which is what we provide each and every day, they tend to be sticky. So, the liquidity and the experience we measure each and every day, we try to make that experience better. I think feeding the system and growing the pie, if there are investors for futures, we think that's a good thing. So, the daily exposures and what our competitors might be doing in the space on daily futures, we just think the opportunity to pilot the awareness is growing. And we're confident that we will continue to be the leader in this space.

And this concludes the question-and-answer session. I'd now like to turn the floor to management for any closing comments.

Yes. So that completes our call for today. Thanks, everyone, for the time and the interest in the Company, and have a great weekend. Thanks.