Q1 2024 Earnings Summary
- Cboe expects to achieve the higher end of its 5% to 7% organic net revenue growth guidance for 2024, driven by strong first-quarter results and continued momentum in April, particularly in its derivatives markets and Data and Access (DnA) businesses.
- Cboe is returning significant capital to shareholders through share repurchases and dividends, supported by a strong balance sheet and robust free cash flow generation, demonstrating confidence in its business and future growth prospects.
- Cboe sees considerable growth opportunities in its global derivatives franchise and DnA business, focusing on resource allocation to drive revenue and earnings growth, leveraging their high-margin, capital-light business model to enhance shareholder value over the long term.
- Slowing Index Options Volume and Facing Tough Comparisons: Analysts pointed out that index option volumes have slowed down and that Cboe is facing tough year-over-year comparisons, which could impact revenue growth sustainability. While the company expressed confidence in their guidance, there are concerns about maintaining growth rates in the face of these challenges.
- Uncertainty Amid Strategic Review and Digital Business Realignment: Cboe is undergoing a strategic review process and has announced a realignment of its digital assets business, leading to uncertainty about its future direction. The potential pivot away from certain areas and the lack of clarity on strategic focus may affect growth prospects and investor confidence.
- Reliance on 0DTE Options Growth with Limited New Drivers: The company has significantly benefited from the growth of zero-days-to-expiration (0DTE) options. However, there are concerns about whether Cboe has similar growth drivers moving forward. The CEO acknowledged that while they have opportunities, they might not have another catalyst like 0DTE options in the near term, and that equities markets are harder to grow.
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Revenue Guidance Outlook
Q: Why guide revenue growth to higher end of 5%-7% range?
A: Management expects organic total net revenue growth at the higher end of 5%-7%, driven by strong first-quarter results—revenues were 7% higher than first quarter 2023—particularly in the derivatives markets and DnA business. Despite index option volumes slowing down and tough comps ahead, they feel confident given the strong April performance and potential drivers like geopolitical tensions, inflation, interest rates, and U.S. elections. -
0DTE SPX Options Growth
Q: Where is 0DTE SPX options mix heading in next 12 months?
A: The mix of 0DTE SPX options stabilized around 50%, with April at 50% and Q1 at 48% of SPX options volume. Management sees continued growth driven by increased participation from funds and strategies adopting shorter-term risk management. They note that 0DTE volumes grew 3% from Q4 to Q1, even in lower volatility environments, and expect potential drivers like geopolitical tensions and U.S. elections to sustain this growth. -
DnA Revenue Growth Confidence
Q: Confidence in achieving 7%-10% DnA revenue growth amid tough comps?
A: Management remains confident in the 7%-10% DnA revenue growth target, noting 8% growth in the first quarter. They highlight solid growth across all asset classes and regions, with 43% of market data and access services growth coming from outside the Americas—a record percentage. New products, bundling initiatives, and technology enhancements are expected to contribute to sustained growth despite tougher comps ahead. -
Strategic Review and Cost Savings
Q: Update on strategic review and areas of pivot?
A: Management is deeply engaged in their strategic review, focusing on areas that drive long-term growth. They recently realigned their digital strategy, focusing on crypto futures where they have regulatory clarity and strengths in derivatives. This move is expected to yield $11 million to $15 million in annualized cost savings, primarily from expense reductions, with no material revenue impact anticipated in 2024. -
Share Buyback Pace
Q: Can you elaborate on the size and pace of the buyback?
A: With a leverage ratio down to 1.1x and strong free cash flow, management engaged in elevated share repurchases in the first quarter. They plan to continue opportunistic buybacks, especially when they perceive weakness in the share price, while balancing capital allocation towards organic growth initiatives and maintaining a quarterly dividend. -
CDX Revenue and Profitability Outlook
Q: When will CDX revenues and profitability ramp up?
A: CDX achieved a record month in March, with index derivatives volume up 30% year-over-year in Q1. They've revamped liquidity programs and expanded single-stock options coverage to over 90% of open interest and average daily volume in Europe. Anticipating more market makers and a major global retail brokerage platform to join soon, they expect gradual growth in liquidity and volumes, which they will monitor for future profitability. -
Digital Assets Strategy Realignment
Q: How will the realignment affect your digital asset strategy?
A: The realignment focuses on crypto futures, leveraging Cboe's strengths and regulatory clarity in derivatives. By bringing crypto futures onto a single, scaled platform with broad distribution, they aim to create alternative liquidity pools and have greater autonomy in product development, aligning with their expertise in global derivatives and clearing. -
Credit Index Products Opportunity
Q: What's the opportunity in credit index products?
A: Cboe offers two iBoxx futures contracts and options on those futures, closely aligning with the LQD and HYG ETFs. These products provide fixed-income funds and international customers a way to manage and hedge exposure to credit markets. Management views this as a key differentiator and a strategic entry into the credit space, offering alternative liquidity pools for exposure management.