Q4 2023 Earnings Summary
- Cboe is experiencing strong growth in SPX options volumes, with January volumes up over 20% year-over-year, driven by increased adoption by both retail and institutional investors for managing macro portfolio risks. The onboarding of retail brokers like Robinhood in 2024 is expected to further drive growth.
- Cboe is strategically focusing on building out the derivatives side of the crypto market, leveraging its expertise to create a regulatory-friendly and robust ecosystem, which positions the company for growth in digital assets.
- Cboe's FX business is performing strongly, with market share reaching 21.3%, leveraging their global platform and technology, and enhancing synergies with their other businesses, contributing to overall growth.
- Cboe is experiencing regulatory uncertainty in its digital assets business, causing delays in developing a robust crypto derivatives market and requiring patience before seeing returns on investment.
- In the U.S. Cash Equities business, there was an unfavorable mix shift in volumes, leading to a fee capture decline of about 40% sequentially in Q4, due to competitive pressures and higher activity pushing customers into higher tiers, reducing net capture rates.
- The company provided a lower organic total net revenue growth guidance of 5% to 7% for 2024, compared to being well above that range in the past three years, indicating potential slowing growth momentum.
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SPX Volume Growth Q: Is SPX 0DTE volume growth sustainable? A: Management reported that SPX volumes reached 3.3 million contracts in Q4, with 50% of January's SPX options being 0DTE options. They see no logical ceiling for 0DTE trading, as institutional engagement has grown to nearly 70% of 0DTE volume. The SPX complex remains valuable for investors managing uncertainty through hedging and repositioning portfolios.
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Capital Allocation & Buybacks Q: Will share repurchases increase in 2024? A: With all floating rate debt paid off, the company has more capacity to deploy capital. Historically, they have been heavier on repurchases in the first quarter and will continue to be opportunistic, especially if they perceive weakness in the share price.
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Revenue Guidance & Expenses Q: Is revenue guidance conservative given past performance? A: Management maintains a 5% to 7% revenue growth guidance, aligning with their medium-term targets, despite strong performances above that range in prior years. They are comfortable with the current expense guidance but are prepared to invest more if revenue-generating opportunities arise.
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Strategic Focus & FX Business Q: Will CBOE deemphasize segments like FX? A: Management aims to sharpen Cboe's focus by investing where they see the biggest opportunities. While M&A activity has slowed, they will consider strategic, financially attractive opportunities. The FX business is performing well, and they remain comfortable with it as part of their global network.
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New Product Opportunities Q: Plans for new tradable products on indices? A: They are focusing on simplifying complex strategies and bringing capital efficiencies. A future on the dispersion index is expected later this year, subject to approvals. They've expanded MSCI contracts and introduced iBoxx credit futures, offering a variety of indicators across asset classes.
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Digital Assets Business Q: What is the outlook for Cboe Digital? A: Regulatory uncertainty has slowed the asset class's development, but management remains committed. They are focusing on building out the derivatives side of the crypto market, launching margin futures, and developing a robust ecosystem for retail and institutional participants.
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Expanding Access & Retail Platforms Q: How will expanding access drive growth? A: The company is onboarding several new retail brokers in 2024, including Robinhood later this year. They see significant potential in global trading hours, currently representing single-digit percentages, indicating room for growth. Expansion aims to increase both retail and institutional engagement in their volatility toolkit.
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Canada Platform Migration Q: Is Canadian migration for efficiency or market share? A: The migration aims to bring greater efficiency and functionality to the Canadian market, expecting both efficiency gains and market share growth. They have already launched BIDS in Canada and plan to unify platforms to enhance functionality.
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US Cash Equities Competitiveness Q: What drove fee capture decline in Q4? A: The decline was due to market dynamics, including higher volumes and a mix shift to sub-dollar trading. Increased activity pushed customers up tiers, reducing fee capture. They responded with fee changes in January and February, expecting capture to improve while maintaining market share.