Cboe Global Markets Inc

F:C67

Earnings Call Transcript 2024-Q3

[Operator]

Thank you for standing by. My name is Jeannie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cboe Global Markets Third Quarter Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Ken Hill, Treasurer and Head of Investor Relations. You may begin.

[Kenneth Hill, executive]

Good morning, and thank you for joining us for our third quarter earnings conference call. On the call today, Fred Tomczyk, our CEO; and Dave Howson, our Global President, will discuss our performance for the quarter and provide an update on our strategic initiatives. Then Jill Griebenow, our Chief Financial Officer, will provide an overview of our financial results for the quarter as well as discuss our 2024 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.

I'd 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 website.

During our remarks, we'll 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 will be referring to non-GAAP measures as defined and reconciled in our earnings material.

Now I'd like to turn the call over to Fred.

[Frederic Tomczyk, executive]

Good morning, and thank you for joining us today. I'm pleased to report on another record quarter of results for Cboe Global Markets.

During the quarter, we grew net revenue 11% year-over-year to a record $532 million, and adjusted diluted earnings per share rose by 8% to a record $2.22. These results were driven by strong volumes in our Derivatives franchise, specifically our proprietary index options and futures products, solid volumes across our cash and spot markets, continued expansion of our Data and Access Solutions business and steady expense management.

Our Derivatives business delivered another record quarter as our organic net revenue increased 13% year-over-year. We saw solid volumes across our suite of S&P 500 Index option products, with third quarter ADV and the SPX contract increasing 7% year-over-year to 3.1 million contracts.

We also saw strong year-over-year growth in our volatility product suite during the third quarter as ADV increased 33% in VIX options and 20% in VIX futures. Given the secular and cyclical tailwinds in place, we believe we are well positioned as investors continue to utilize options in their portfolios and trading strategies.

Our cash and spot markets category delivered another strong quarter, with a revenue increasing 12% on a year-over-year basis. The contribution was broad-based with each of our global regions posting solid growth as compared to the third quarter of 2023.

Our Data and Access Solutions business continued to drive solid results with organic net revenue increasing 6% year-over-year for the third quarter. Given the acceleration we see in the trends during the month of September, we remain optimistic in the outlook for this business as we look to further leverage our global network and ecosystem to drive growth.

Overall, it was another solid quarter for both transaction and nontransaction revenues, and we are well positioned as we head into the final quarter of the year.

Over the past year as CEO, I have concentrated on sharpening our strategic focus and making important and deliberate decisions on how to best allocate our capital and resources to support our growth strategy.

Over the course of the strategic review process, we have made fundamental adjustments, including dialing back on our M&A activities, lowering expense growth and stabilizing margins, changing our capital allocation strategy to increase investments in organic initiatives and returning capital to our shareholders; and lastly, reallocating resources to align with our core strengths, specifically our Derivatives and Data and Access Solutions business and leading-edge technology.

As we move forward, we have set forth a strategic framework that we believe will ensure we are well positioned to drive growth and capitalize on opportunities we see in the market, and we are well aligned to the secular trends occurring in the market today.

This strategic framework includes investing in the continued growth of our core business, global derivatives, increasing recurring revenue opportunities through our Dn0A business, harnessing the power of our global network and client base to expand product reach and access, capitalizing on the dominance of the U.S. capital markets, leveraging our superior technology to drive innovation and product development and disciplined allocation of resources and capital towards long-term secular growth trends.

Our Derivatives business remains very resilient, supported by a growing customer base, demand for access to the U.S. market and an increasing demand for options. Given that options by their very nature expire, investors must repurchase new options to reposition themselves in the market, which in turn creates a quasi-recurring revenue stream that continues to increase for Cboe as investors shift to shorter-duration expirations and more frequent repositioning in response to market events.

Our derivatives ecosystem continued to flourish in the third quarter as traders and investors utilize our flagship VIX and S&P 500 Index option products across an ever-changing market environment, responding to geopolitical events, market volatility and uncertainty ahead of the U.S. election.

As a pioneer of listed options, Cboe has led the way in making options more accessible, transforming them from a small asset class into a key component of the global trading ecosystem. We remain optimistic about the growing retail participation in the options market.

Last month, we were excited to announce that Robinhood, one of the largest options trading platforms for retail investors, will begin offering Cboe's index options to their clients. We believe retail adoption of index options is just beginning, and Cboe is well positioned to cater to this growing demand.

Index options come with numerous benefits, and retail traders deserve access to those benefits as much as any institution, professional or wealthy investors. We are focused on 3 key pillars for supporting the growth of this important customer segment.

First, education. Cboe's Options Institute is equipping retail traders with the knowledge and empowering them through education. Second, access. We continue to broaden access to our products by working with retail brokers and meeting demand where it exists. And third, product. We continue to evolve our suite of index option products to provide opportunities for customers of all dimensions to trade a contract that is rightsized for them and on a time frame that suits their unique needs.

Additionally, we continue to focus on product innovation across our ecosystem and unlocking access to U.S. markets for international investors. Whether it be through increased accessibility, new products or education, we will continue to help people access this liquidity, efficiency and stability of the U.S. markets, while also providing trusted markets in local regions worldwide.

Turning to our Data and Access Solutions business. Our global footprint continue to help drive the momentum during the third quarter. Approximately 40% of the new sales in our D&A business came internationally through the first 3 quarters of the year.

Additionally, as we reallocated capital towards investment in our technology platform over the past year, we have seen these organic investments begin to bear fruit within our DnA business.

The DnA technology investments have been focused on optimizing efficiencies across 3 core areas: access, data and insights. While we execute our organic growth strategy, we will continue to explore nonorganic opportunities that provide scale and broaden distribution inside key geographic markets.

To that end, during October, we acquired a 14.8% ownership stake in Japannext, a leading proprietary trading system in Japan. Japan is one of the largest and most important capital marketplaces in the world and is undergoing a lot of change.

As the regulatory landscape evolves and the market opens to more competition, we see tremendous opportunity for Cboe to compete. This investment reaffirms Cboe's strong commitment to Japan and will help us strengthen our relationships within the industry and expand our presence in the region.

With our global network largely built and our final technology migration wrapping up early next year, we now have the keys to unlock our future success, our strategic framework aligned with the secular trends, great technology and a common platform, our global footprint and strong free cash flow.

We remain committed to maintaining a flexible balance sheet, while investing in organic growth initiatives, our technology and operating efficiencies, in turn driving future revenue growth, enhanced margins and earnings growth for Cboe.

I'll now pass it over to Dave to discuss business line results.

[David Howson, executive]

Thanks, Fred. The third quarter was a strong one for our derivatives franchise, with Cboe producing a 13% increase in net revenue on a year-over-year basis. The increase was led by strength in our proprietary products with year-over-year volume growth of 7% in SPX options, 18% in XSP options. 20% in VIX futures and 33% in VIX options. The Q3 results are build on our strong first half trend, translating to an 11% increase in year-to-date derivatives net revenue as compared to 2023 level.

During the quarter, investors relied on the full range of the Cboe volatility toolkit as they navigated a rising geopolitical uncertainty, varying economic data points and election uncertainty. Perhaps, the most notable event last quarter was the August 5 yen carry trade unwind that produced one of the largest short-term volatility event since COVID and the global financial crisis.

Investors rushed for downside protection in the form of VIX options. VIX options ADV of 1.2 million contracts in August was the second highest on record trailing only February 2018. The higher vol-of-vol regime continued into September, extending demand for VIX options as VIX ADV totaled 945,000 contracts for the month, the second highest level of demand for VIX options in over 2 years.

Similar to past election cycles, the VIX term structure is pricing in increased uncertainty as we move through next week's elections, as evidenced by the term structures backwardation. And while investors have gravitated toward the higher convexity profile that VIX options offer during bouts of volatility, SPX volumes have remained healthy.

Interestingly, we have seen a variety of training styles used based on duration. With a more balanced put-call ratio for short duration trade versus longer duration trades that favor more put protection. 0 DTE volumes registered a 6-month high in October. And as the trading environment continues to evolve, we have seen our user base continue to expand, the use cases grow and our customer base season, all pointing to an increasingly durable use case for the product.

Building on our strong index product trends, we were pleased to launch Cboe S&P 500 Variance futures in September. The latest tool in the volatility toolkit provides an exchange-listed alternative to over-the-counter variant swaps and has an additive impact to activity across the SPX ecosystem.

On October 14, we launched VIX options on futures. These options physically settle into the underlying front month VIX future and provide a few key benefits. First, it allows us to provide access to our VIX options product through a wider set of market participants in the U.S. and abroad that may not have access to our securities options exchange.

Second, it allows us to offer more tenants, in particular, those with a shorter duration to meet customer demand. As we look to avenues of future growth, we are incredibly excited by the opportunity, both in the U.S. and abroad for our volatility toolkit.

Looking at the options asset class more holistically, we believe the potential to bring options to a greater portion of the U.S. customer base remains a meaningful opportunity for Cboe. The use of options in exchange traded products provides an innovative way for broker-dealer clients to access a variety of option strategies in a traditional ETF wrapper.

U.S. listed options-based ETFs have grown to an estimated $120 billion in AUM, with assets increasing over 600% over the past 3 years. As for more direct access to options trading, we estimate that less than 10% of customers at major retail broker-dealers are unable to trade options today, with some of our largest key customer platforms at a fraction of that amount.

The ability to introduce and educate broker-dealer customers as to the benefits of this fast-growing asset class is a secular tailwind we believe we can leverage for years to come.

Later this quarter, Robinhood will begin providing customers access to index options, enhancing their trading capabilities. Cboe's proprietary suite of index options provide broad U.S. market exposure, hedging capabilities against U.S. large cap and U.S. small-cap equity market volatility and can allow customers to generate income and capitalize on market movements.

We anticipate that the simplicity of cash settlement, the certainty of European-style exercise and the potential 60-40 tax treatment may resonate with Robinhood's active trader community.

Fred and I had the opportunity to take part in the HUB Summit 2024 two weeks ago, and I was inspired by the customer excitement around the new features and capabilities being rolled out as well as the hunger for greater education around how to most effectively use these tools in their portfolio.

Turning to cash and spot markets. Third quarter results continued the strong trends we saw in the second quarter, with third quarter net revenues increasing 12% year-over-year, pushing growth in our cash and spot market to 9% on a year-to-date basis.

In the third quarter, we saw year-over-year growth in every region as Cboe continued to leverage its scaled infrastructure to monetize a supportive market backdrop.

In North America, U.S. on-exchange net capture trends were again solid, and industry volumes were up 10% year-over-year. Our off-exchange business saw an improvement in volumes and capture on a year-over-year basis in the third quarter.

And rounding out our North American equity segment, stronger industry volumes and net capture helped drive another quarter of year-over-year growth for our Canadian equities business. We remain particularly excited about the outlook for our Canadian business as we remain on track with the migration of our Canadian market to Cboe technology in early 2025, subject to regulatory approval.

Our Europe and Asia Pacific segment delivered robust 22% year-over-year growth, led by a 32% increase in net transaction and clearing fees. For Europe specifically, Cboe was the largest European stock exchange throughout the third quarter, with our share of continuous trading volume hitting 33.4%, up more than a full percentage point versus last quarter.

Two products, in particular, speak to the success Cboe has had bringing alternative market mechanisms to investors. Periodic options achieved another market share record, accounting for 8.7% of continuous trading during the third quarter. In addition, Cboe BIDS Europe retained its position as the largest [ large in scale ] venue, adding 8 new buy-side clients during the quarter.

Turning to Asia Pacific. We continued solid contributions from both Australia and Japan. In Australia, Cboe grew market share to 20.8%, up 2.9 percentage points from the third quarter of 2023. In addition, net capture improved, and our results benefited from a 28% increase in average daily notional value traded during the quarter.

In Japan, market share hit 5.4% in the third quarter, a 2.1 percentage point improvement versus the third quarter of 2023. Volume trends remain robust with ADNV increasing 117% on a year-over-year basis.

The APAC region remains a key focus for CBA as we move forward, providing a number of opportunities across our ecosystem to fuel growth.

The solid cash market trends have helped us better monetize opportunities in our DnA business as evidenced by the 8% year-over-year third quarter growth in the market data and access services in the region.

And lastly, we anticipate continued strategic investment in the region to translate into increased brand awareness and improved sales efforts for the import of derivatives activity into the U.S.

Turning to Data and Access Solutions. Net revenues grew 6% as compared to the third quarter of 2023. The first 2 months saw a continuation of the slower trends that hindered the first half growth, but activity changed notably for us in September as net revenues grew a strong 9.7% as compared to September 2023.

We anticipate that these strong activity levels will carry through the fourth quarter and help us hit the lower end of our 7% to 10% DnA guidance range for 2024. The September strength on a year-over-year basis has been broad-based, with the index analytics and international businesses all producing solid year-over-year increases.

As we look forward, we expect growth will be driven by a continuation of the solid international trends with over 40% of new sales coming out from outside of the U.S. in the third quarter. In addition, the uptake from Dedicated Cores continues to exceed our expectations as we roll the functionality out across additional markets.

And finally, the redeployment of technology resources to revenue-generating activities is already translating to new data sets and sales in our DnA business.

Cboe's third quarter results highlight the power of the entire ecosystem with derivatives, cash and spot markets and data and access solutions, all delivering durable results. The fourth quarter is off to a solid start as we look to cap a robust year at Cboe.

With that, I will turn the call over to Jill.

[Jill Griebenow, executive]

Thanks, Dave. As Fred and Dave highlighted, Cboe posted a strong third quarter with adjusted diluted earnings per share up 8% on a year-over-year basis to a record $2.22. The third quarter results continue to illustrate the complementary and diversified nature of our business model with solid contributions from across Cboe ecosystem. I will provide some high-level takeaways from this quarter's operating results before going through an assessment of the segment results.

Our third quarter net revenue increased 11% versus the third quarter of 2023 to finish at a record $532 million. The growth was driven by strength in our Derivatives in cash and spot markets categories as well as solid results from our Data and Access Solutions business.

Specifically, derivatives markets produced 13% year-over-year net revenue growth in the third quarter as our proprietary product franchise, again, produced the same growth. Cash and spot markets organic net revenues grew 12% versus the third quarter of 2023, with all geographies contributing solid year-over-year growth.

Data and Access Solutions net revenues increased 6% on an organic basis during the quarter. As Dave highlighted earlier, we saw an acceleration of activity in September and remain confident in our ability to hit the lower end of our 7% to 10% targeted net revenue growth range for 2024.

Adjusted operating expenses increased 13% to $204 million for the quarter, with the year-over-year growth driven by higher compensation-related expenses as well as travel and promotional expenses, partially offset by a decrease in professional fees and outside services. And adjusted EBITDA of $342 million grew 7% versus the third quarter of 2023.

Turning to the key drivers by segment. Our press release in the appendix of our slide deck include information detailing the key metrics for our business segments, so I'll provide some highlights for each. The Options segment generated record net revenue with 10% year-over-year growth led by higher index options transaction fees.

Total Options ADV was up 2%, driven by a 13% increase in index options volume. Revenue per contract moved 10% higher as index options represented a higher percentage of total options volume and multi-listed options RPC increased 15%.

North American equities net revenue increased 3% on a year-over-year basis, reflecting higher transaction and clearing fees as well as access and capacity fees. Increased net transaction and clearance fees were driven by both higher industry volumes and stronger net capture rates.

On the nontransaction side, access and capacity fees increased 12% as compared to the third quarter of 2023. The Europe and APAC segment produced a 22% year-over-year increase in net revenue, a result of strong growth across both transaction and nontransaction revenues. Transaction revenue in Australia and Japan benefited from continued market share gains as well as increased volumes versus the third quarter of '23.

The Futures segment recorded 17% net revenue growth for the quarter with higher net transaction and clearing fees, reflecting a 19% increase in ADV. On the nontransaction side, market data revenues were up 9%.

And finally, the FX segment delivered another quarter of record net revenue, with 9% year-over-year growth driven by higher net transaction and clearing fees.

Turning now to Cboe's Data and Access Solutions business. Net revenues were up 6% on an organic basis in the third quarter. International sales continue to underpin the growth, with over 40% of new sales coming from outside the U.S. over the quarter.

We continue to believe DnA is well positioned and anticipate an acceleration trends during the fourth quarter, helping us deliver on the lower end of the DnA revenue growth guidance of 7% to 10%. More specifically, we expect to see continued strength from demand for access across our global markets, particularly as we increase our presence in new geographies and leverage the distribution capabilities of Cboe Global Cloud.

The expansion of Dedicated Cores in our equities markets greatly enhancing our options access layer, and increasing capabilities around our data, access and insights as we reallocate technology resources from integration efforts to organic revenue-generating enhancement.

Turning to expenses. Total adjusted operating expenses were approximately $204 million for the quarter, up 13% compared to the third quarter of last year. The increase primarily resulted from higher compensation and benefits, given an increase in our short-term incentive accrual, driven by stronger revenue generation as well as a $10 million benefit in the third quarter of 2023 from executive departures that did not recur in '24.

In addition, travel and promotional expenses were also higher on a year-over-year basis as we saw some acceleration in our marketing efforts. I would note that adjusting for the impact of the 2023 executive departures, total adjusted operating expenses would have increased a more modest 7% year-over-year for the third quarter, in line with our efforts to stabilize margins given the 11% revenue growth during the quarter.

As we look ahead on Slide 16 to our 2024 guidance, we are raising our full year organic net revenue growth range to 7% to 9% from 6% to 8%. The updated guidance reflects our strong year-to-date results and a supportive outlook for the remainder of the year.

Given the positive revisions to our revenue guidance, we are increasing our full year 2024 adjusted expense guidance to $798 million to $808 million, up from our prior guidance of $795 million to $805 million. The $3 million increase captures the upward pressure on our short-term incentive bonus accrual, given our improved revenue guidance range as well as some targeted marketing spend to capitalize on the expanded access of our index options product suite.

We believe the refined revenue and expense guidance continues to strike the right balance as we look to drive long-term margin stability. Looking at our results on a year-to-date basis, we see that narrative reflected in the 80 basis point adjusted EBITDA margin expansion produced through the first 3 quarters of the year.

Looking at our full year guidance more broadly, we continue to anticipate hitting the lower end of our DnA organic net revenue guidance range of 7% to 10%. As Dave highlighted, September was a strong month for DnA revenue growth, and we expect to see those stronger trends carry through the fourth quarter.

Below the line, we are increasing our expectation for other income to $7 million to $9 million from $4 million to $6 million, given an increase in dividend income we realized during the third quarter. Within our earnings on investment line, we continue to expect $33 million to $37 million from positive marks on our investments.

In total, this raises our 2024 expected impact on nonoperating income to $40 million to $46 million from $37 million to $43 million. We are also increasing our full year guidance range for CapEx to $57 million to $63 million from $51 million to $57 million, primarily resulting from an acceleration of technology investments across our businesses. Depreciation and amortization is expected to remain in the range of $43 million to $47 million for the year.

And finally, we continue to expect the effective tax rate on adjusted earnings under the current tax laws to come in at 28.5% to 30.5% for 2024.

While we don't provide formal guidance on interest income or interest expense, I wanted to highlight that the third quarter included a benefit from a onetime true-up of interest earned from available-for-sale securities. Moving forward, we would expect a more modest impact and anticipate that interest expense, net of interest income, will be in the $7 million to $8 million range for the fourth quarter.

Turning to our balance sheet. Our third quarter leverage ratio remained at 1.1x, and we remain comfortable with our overall debt profile and the balance sheet flexibility it affords. The effective allocation of capital has been a cornerstone of our ongoing strategic review. We strive to allocate capital to where we see the greatest long-term opportunity, whether it be investments in internal projects or returning it to shareholders in the form of share repurchases and dividends.

During the third quarter, we repurchased approximately $25 million in shares, bringing our year-to-date repurchases to $204 million. In August, we announced a $500 million increase to our share repurchase authorization, boosting our total capacity available for share repurchases to approximately $680 million as of the end of September.

In addition to repurchases, we returned a total of $66 million to shareholders in the form of a $0.63 dividend during the quarter, a 15% year-over-year increase in our quarterly dividend. Factoring in both share repurchases and dividends through the third quarter, Cboe has returned a total of $387 million to shareholders. representing 56% of adjusted earnings year-to-date.

As we move forward, our strong free cash flow generation and flexible balance sheet afford us the opportunity to allocate capital and resources in the most value-enhancing activities, striking the right balance between investing in future revenue growth and improving shareholder returns. We look forward to building on our year-to-date progress in delivering durable growth in the quarters ahead.

Now I'd like to turn it back over to Fred for some closing comments before we open it up to Q&A.

[Frederic Tomczyk, executive]

In closing, we are pleased to report another strong quarter, delivering 8% adjusted diluted earnings per share growth year-over-year. Fundamentally, our business performed very well with year-to-date net revenue up 9% and adjusted expense growth at 6%.

As we head into the final quarter of the year, our balance sheet is strong, and we are well positioned to take advantage of opportunities as they arise.

With our new strategic framework, coupled with the strong fundamentals we are seeing across our business, we are very encouraged about the opportunities ahead of us and look forward to sharing more as we move into 2025.

[Kenneth Hill, executive]

At this point, we'd be happy to take questions. [Operator Instructions]

[Operator]

[Operator Instructions] Your first question comes from the line of Patrick Moley with Piper Sandler.

[Patrick Moley, analyst]

On the DnA revenue guidance, Jill, you said you expect to see a step-up in the fourth quarter that's going to get you to the low end of that 7% to 10% range.

Can you maybe just elaborate on what you're seeing there and the drivers? And then is this indicative of a more sustainable step-up or acceleration in DnA revenues? Or is it more so just related to timing of some of those cash collections and enterprise sales?

[David Howson, executive]

Thanks very much for the question, Patrick, and well done for keeping up the tradition of being the first in the queue there. And as we look back over time, you rightly pointed out that we do see inflection points and timing when it comes to the recognition of certain DnA revenues under that line item there. So that's certainly a factor that will come into play as we go forward.

In terms of the confidence in the drivers for the -- hitting the 7% to 10% guidance this year, it's really a roundabout 4 categories. The first is new sales. The new sales that we talked about on the call, 40% coming internationally there and the pipeline and the hiring that we're doing there internationally to really continue that pipeline of sales is where we draw confidence in terms of the new sales item.

Then there's pricing. The pricing changes that we put in place earlier this year as we periodically review pricing across our franchise and to make sure we're extracting the appropriate value for products, those impacts we'll be seeing continuing through this year and, of course, into next year.

Then the third area is technology investments, the results from the investments of the technology resources, freeing up from migrations over the last year bearing fruit this year. Those investments for the first half of this year are really beginning to pay off again this year and into next year.

I'll point out Dedicated Cores, that new access layer architecture for our equities venues in the United States really performing above our expectations. And we're rolling that out through to other markets later this year and into next year.

And then finally, from those technology investments and enhancements in the core platform, that allows us to have new insights generated, new data sets that really represent value for customers that they're willing to pay for. And those data and insights allow customers to optimize their interaction and -- with the core platform there.

So those 4 factors really giving that confidence as we see the short term, bringing this through into the new year where we see more growth.

[Operator]

Your next question comes from the line of Ben Budish with Barclays.

[Benjamin Budish, analyst]

I imagine in the near term, you're focused on some of the more recent opportunities. Robinhood and some of the other global brokers you've announced, I think, earlier in the year that added some Cboe products.

But as you think further out, how do you think about continuing to expand that opportunity set? Are there other major brokers in the U.S. or elsewhere that don't have an access to the full suite of Cboe products? Or is the opportunity really about sort of bringing more education to that kind of big chunk of customers who are either not enabled for options or not using the regulator? How do you think about those 2 different opportunity sets?

[David Howson, executive]

Yes. Thanks very much for the question. It's both. So we continue to see growth in new customer acquisition. We mentioned those Asia Pacific brokers we've talked about earlier on in this year coming on board for those new customers, as we talked about, really leaning into that secular growth trend of foreign assets invested appetite for access to the U.S. capital markets.

So we're going to continue to lean into that long-term trend to deliver long-term value. We're doing that through hiring, putting boots on the ground. We're doing that through extended marketing in region and education going hand-in-hand there.

And then secondly, when it comes to that retail brokerage platform and network you mentioned there, it's really about further penetration of those user bases. And we think we're in an early innings of adoption by users of retail brokers. And when we see the fact that we look at, for example, Robinhood, 24 million funded accounts, 4% of those are trading options.

So you see a real runway there. And in general, we see retail brokers having that long runway of customers that don't utilize options, but are being educated on their benefits as an additional tool in their toolkit. And that's where we're also investing in education and marketing, both in -- on our own, but also jointly with those retail brokers.

And so what we've seen in history is to inform us is that as our products are rolled out to retail brokers and their training platforms mature, as we've heard from Robinhood, they have plans to continue to roll out new features throughout next year.

We see durable growth there, and we expect to see our products really come into light because of the differentiation of the products themselves really being quite a compelling additive to a customer's portfolio as they begin to learn the intended benefits, the simplicity of a cash settled index option.

[Operator]

Your next question comes from the line of Dan Fannon with Jefferies.

[Daniel Fannon, analyst]

My question is for Fred. A year ago, on your first call, you talked about narrowing focus and margin improvement and capital return. And then as we sit here today, we see inorganic back on the table again and, I think, talking about that a little bit more.

So curious about kind of what the change in the strategic focus really was from a year ago to today and how we should think about inorganic versus organic growth priorities and capital return going forward.

[Frederic Tomczyk, executive]

Yes. I think relative to a year ago, if you go back, we had done a lot of acquisitions. We were doing a lot of migrations, and a lot of those acquisitions were small, and we're consuming a lot of the resources of the organization.

So we definitely slowed that down and took time to sort of say where do we really want to go here. And as I said, we've kind of gone back that M&A can't be the strategy. It can supplement a strategy or be additive to a strategy. But we have to have a strategy focused on organic growth, and that's what we've been trying to do.

So you've seen us get back to the Derivatives business, back into the Data and Access Solutions business, investing in our technology, et cetera. We also now have our balance sheet in good shape. In terms of -- our leverage ratios are low. We're in a good position there.

And I think on top of all that, our margins have stabilized, and we sort of -- and we've moderated the expense growth, which is down significantly year-over-year.

So we're now on a path where we're trying to drive organic growth. I've always said that we were going to slow down the M&A., but I've never said we were never going to do M&A. And the only reason for bringing up is just to keep all of our options open. As you think about where we are today in terms of how we deploy capital, our debt is in good position. So we really don't see us paying down debt here. There's really -- it's not a good use of our capital.

So we're very much focused on dividends, which we increased 15%, share repurchases, investing in organic growth. And considering inorganic opportunities, provided they make a difference and they have a strategic and financial rationale to them or they fit inside an area where we have a bigger strategic ambition.

The example I would use there is the investment in Japannext in Japan. We do see Japan as a big market and a changing market. And when you see a big market that's undergoing a lot of change, that usually creates opportunities for players like Cboe.

And so we're quite happy with that investment. And that's the way we kind of think about it. And so we're just keeping all of our options open as we look forward.

[Operator]

Your next question comes from the line of Alex Kramm with UBS.

[Alex Kramm, analyst]

Just in terms of some of the new initiatives, maybe give us an update on the VIX options on futures. I know it's only been a couple of weeks, but obviously, very limited volume so far.

Just -- I know there's a lot going on in the world, but just trying to get an update where you are in terms of bringing on market participants and liquidity. And what's the feedback been so far?

[David Howson, executive]

Thanks, Alex. Yes, we've had 2 product launches in the last couple of months, and one of them is VIX options on futures. Just a reminder that the aim there is to bring the VIX optionality to nonsecurities customers.

And because of the construct of the product itself, we're able to offer shorter dated trading to introduce daily expirations of the VIX options contract, so an expanded user base and really leaning that shorter dated need and want of the customer base there.

Variance futures, another new product additive to that S&P 500 Index core there to allow the pure play between implied and realized volatility. So 2 additive products. Both will need time to see, and the early signs are really good there.

We've got prices on the screen. We've got customers engaging, testing our strategies and testing out the plumbing works with a good pipeline of customers coming through.

So it will take time to season and germinate throughout the course of 2025 as customers begin to use them. We wanted to get them out there just before the election, so people could see how they might be priced and how they might be -- might perform rather than expecting any great deal of trading.

But really, that history through this particular time period is really useful to customers to really think about how they can use them in the strategies going forward because we've got no shortage of uncertainty coming both this year and into next year.

[Operator]

Your next question comes from the line of Alex Blostein with Goldman Sachs.

[Unknown Analyst]

This is Anthony on for Alex. You mentioned pricing's role and DnA revenue acceleration. I was wondering, what is the typical percentage increase we should be expecting across this revenue base from pricing increases? And then what are your expectations for pricing increases into 2025?

[David Howson, executive]

Yes. Thanks for the question. The pricing that we've put through, it varies. We have a vast array of access pricing at both physical and logical. We have market data products packaged and bundled in different ways for different customers. So there's really not a kind of blanket percentage increase I could point you to. It's really about assessing the relative value today versus competitor or comparable products and really making sure we keep those in line.

Maybe a better reference point for you would be that in Q3, our pricing contributed a roundabout 1/3 of the overall gross in Q3. And as we look forward to 2025, I've discussed a little bit earlier on the call, harder to really call necessarily, but we'd expect that 1/3 pricing kind of contribution to the overall growth there.

So what does that tell you? That tells you that actually, we see growth in the distribution and the runway of selling our products rather than needing pricing to be the strategy for growth there.

[Operator]

Your next question comes from the line of Owen Lau with Oppenheimer.

[Kwun Sum Lau, analyst]

So going back to Robinhood, I think it's an exciting partnership, but when do you expect Cboe to get more meaningful volume? You mentioned 24 million users, 4% trade options. How big is the addressable market? And is there anything Cboe can do to help drive higher volume in this channel?

[David Howson, executive]

Thanks, Owen. Yes, there's certainly a few things we can do and we've been doing them both this year and with some incremental investment towards the end of this year and into next.

It's going to be a journey, though. It's a journey for us, it's a journey for Robinhood and their customer base. So Robinhood have a new platform to roll out, which will take place throughout next year and begin to add increased functionality.

More generally, that brings increased competition amongst the vibrant group of retail brokers that we have as customers. So increased competition is a good sign there in the industry.

When we think about the customer base and the runway, yes, the numbers are in front, 24 million funded accounts, 4% trade options today. What we're doing to have with the education is really, really important here. And Fred and I got to see in physical manifestation of the Robinhood Conference as customers were eager to learn how to trade, spreads, how to sell premium, to generate income and have a diverse range of strategies in their portfolio.

So the education is where we're investing, both on our own and jointly with retail brokers like Robinhood and others to help get that evergreen education in the hands of the retail base, so that they can really achieve their own financial literacy and financial independence.

Then there's marketing. Marketing is really important, both again, jointly and individually to really feed into that education piece because the products are important here. The cash settled index options product is really, really key. The simplicity of cash settled,, trading bell to bell, the certainty of the European exercise knowing that one leg of your spread won't get called away.

And then there's a tax treatment, the potential for 60-40 tax treatment benefits really helping with the economics. So it's important we educate on that and that we market the benefits of that as well as we go through.

So where are we investing? Education, marketing and broadening out that access by putting more boots on the ground around the world to help feed what has already been a strong secular trend and one that we see continuing out into the future.

[Christopher Isaacson, executive]

Yes. Owen, I'd just like to add, and Dave covered it very well, but as they add our products and they mature their platforms and continue to grow the usage of our products, they're also -- they and other brokers are going international, which feeds right into our import strategy.

And then one thing that we haven't mentioned is defined outcome ETPs that are out there don't have usage of our products, but the customer doesn't have direct usage. So even if they're not going through a retail broker to directly trade our index options products, they may be using them through another product like Defined Outcome, which we think is a long-term secular trend that will carry on for a long time. So a lot of growth we see yet to come.

[Frederic Tomczyk, executive]

Yes. And I'll just sort of add on here for a second is just while we're excited about the launch of index options, I think in the longer term, their new trading platform, which is the first time they brought a real sort of active trader platform to their clients, over the longer term, we'll carry trading and options quite a bit over time.

[Operator]

Your next question comes from the line of Craig Siegenthaler with Bank of America.

[Craig Siegenthaler, analyst]

My question is on the strategic review. So now that it's complete, how is the Board thinking about divestments? And we know you shut down the spot crypto exchange earlier this year. Are there other noncore assets that you can divest or close that would enhance margins and profits?

[Frederic Tomczyk, executive]

Look, first off, the Board is very much focused as we think about, now that we've stabilized our margins, is very -- we're very, very much focused on growth and growth into areas where we see secular trends that Cboe has core strengths that it could lean into.

And I talked about that early. So that's where the focus is right now. It's all strategy though. This is a journey. It's not an event. And over time, as business has evolved or the market evolves, that may or may not happen. But right now, we're very much focused on growth as opposed to divesting.

[Operator]

Your next question comes from the line of Ashish Sabadra with RBC Capital.

[Ashish Sabadra, analyst]

I just wanted to drill down further on the DnA acceleration and wanted to better understand the plans for further expanding the Dedicated Cores as well as the rollout of the Cboe Cloud, how is that coming out?

[Christopher Isaacson, executive]

Yes, I'll take that one. Thanks for the question. So Dedicated Cores, we're excited for the growth we've seen in the U.S. We currently just have that rolled out in U.S. equity markets, our 4 U.S. equity exchanges. We'll be bringing that to Europe, to the U.K. first in the fourth quarter.

And then in the first quarter of next year, we plan to bring that to Australia and then eventually, hopefully, to Japan and Canada. So staggered rollout here, but the demand we've seen from customers and the improvements we've seen in the U.S. have been above our expectations. And then what was the second part of your question?

[Ashish Sabadra, analyst]

The rollout of Cboe Cloud.

[Christopher Isaacson, executive]

Thank you. Thank you for the clarification. So Cboe Global Cloud, we're quite excited. As mentioned in our prepared remarks, 79% of that growth is coming from outside of the U.S. We see more of that. And as we end this year and head into next year, we plan to invest further in greater distribution around the world to grow Cboe Global Cloud.

The amount of data that folks want into the U.S. is just continuing to grow because people want access to the U.S. And usually, the precursor for wanting access to the U.S. market is wanting to get our data.

So that's why we think a lot of the growth in Cboe Global Cloud is coming outside of the U.S. So we think this bodes well, not just for DnA revenue, but for a long-term transaction revenue.

[Operator]

Your next question comes from the line of Kyle Voigt with KBW.

[Kyle Voigt, analyst]

So introducing every day expirations in SPX has obviously been really successful in growing the SPX volume pie, introducing new strategies and hedging opportunities for your clients.

I'm just curious if you've seriously considered adding additional expirations to SPX from here in terms of intraday or multiple expirations per day. What are the operational challenges with potentially doing that? And how close could that be?

[David Howson, executive]

Thanks very much for the question. As we think about product development more holistically, it's about looking to simplify the complex, bringing transparency to anywhere there's opacity or any information kind of barriers and bringing OTC trading on exchange and really allowing for a more flexible trading styles and trading patterns.

And that's really looking to bring both for smaller users, every investment strategy to every wallet size, but also having a suite of products in the volatility toolkit that can really allow customers to be nimble around market cycles and volatility regimes.

So when it comes to that product development, you can see we added VIX options on futures and Variance Futures, which really build around that core. And when we think about where we go next, it's really driven by the customers. And the customers at this point are not asking us for an extra expiry during the day. They're looking for extra flexibility and precision that they can bring to managing that risk over time.

And that's the benefit of a Variance Future as well as a VIX options on future. You can have more precision over the management of your risk profile over time. Once a day for the moment seems to be enough for the customer base, so we don't see any compelling demand to try and add expirations during the day.

But I would point out that the benefit is with a cash settled product, intraday expirations would be way more easy to achieve than a physically settled product, which would have attendant complexities, which wouldn't allow it to go there.

[Operator]

Your next question comes from the line of Bill Katzwith TD Cowen.

[William Katz, analyst]

So I've heard two themes today. One is sort of top line growth, but the second one is a fair amount of investment spending. I think you've said boots on the ground for a bit of time as well. How should we be thinking about, at least preliminary, the rate of core expense growth for next year?

And I noticed your EBITDA margin actually slipped a couple of percentage points, both quarter-on-quarter and year-on-year. So are we close to peak margin for the business as you think about maybe the in-play between revenue and expense growth?

[Jill Griebenow, executive]

Thanks for the question. I think we did mention in the prepared remarks that the third quarter expenses did trend a bit high due to some comparables from the third quarter 2023 favorability that did not recur in third quarter of 2024. So looking at it more holistically on a year-to-date basis, very much in line with where we projected to be.

And while I won't comment quite yet on 2025 guidance, we'll share more on that with you in early February. What I will remind you of is just our focus on disciplined expense management and stabilizing the margin.

So you do see our expense growth rate here in 2024, the range of 6% to 8% compared to 15% expense growth from '23 to '24. So again, not going on record with a number for 2025, but just know that we continue to be focused on stabilizing that margin and are very much aware that the operating expenses are indeed a key component to stabilizing that margin.

[Operator]

Your next question comes from the line of Ken Worthington with JPMorgan.

[Madeline Daleiden, analyst]

This is Madeline Daleiden on for Ken. We have a quick one on multi-listed options. The market share loss that you've been seeing 2024 to date versus '23 comps, we think from competition seems to have reaccelerated in the third quarter. First, is this the correct read? And second, is there anything you can do or are doing to combat such share loss?

[David Howson, executive]

Thanks very much. We've seen a number of new entrants into the U.S. multi-list space over time. Those new entrants have really been focused on lower capture rate flows. And what we focus on as a business is really optimizing revenues through a balance of share and capture. And what you saw also in the numbers is a 15% increase year-over-year in that capture rate.

And then when it comes to what we can do to stay and remain competitive, certainly, that is a focus for us. We compete, of course, as we mentioned on pricing with pricing down to really fine-tune the market quality and the interaction on each one of our options medallions.

Secondly, there's functionality, new order types and differentiated capabilities, which draw a certain types of flows to our exchanges versus others.

And then finally, it's technology, and that's really been the focus of this year. We mentioned it earlier in the call the new options access architecture coming to [ VIX ] options earlier in the quarter, and Chris might have a couple of things to say about that in a moment.

But those technology enhancements have really benefited the platform, but actually also opened up the capability to add new data and insights. And that's important because the customers are then able to further optimize their strategies and how they behave in the platform.

And then the last thing I'll say before passing to Chris for any thoughts is we're investing in talent. We're investing in talent to really help us think about how we become more competitive. And we're investing some of our data and analytics, our quantitative analyst resource into assessing how we can be even more competitive there. But I would point you back to the capture increase there that we did see with the market share.

[Christopher Isaacson, executive]

Yes. And I'd just add to Dave's comments on multi-listed options market share, it is a competitive space, but we're here to compete on pricing, functionality, technology and data. We did roll out a new options access architecture on 1 of our 4 options markets. That was in mid-August.

So the results are still early. We're a couple of months in, but we're very encouraged by what we've seen on our -- one of our exchanges thus far. We've seen better market share. We've seen a lot of efficiency of the use of the system and a lot of use of data as well.

And as Dave mentioned, we're investing in talent here. We're going to use that talent to focus on data in this competitive marketplace. But we're here to win, and we like our position from here.

[Operator]

Your next question comes from the line of Chris Allen with Citi.

[Christopher Allen, analyst]

Just kind of following up on a couple of the prior questions. Just trying to think about how -- the investment needs for growth moving forward. You obviously have a strong balance sheet, strong free cash flow, flexible balance sheet, a good position there. You basically have a lot of talent that has been integrated, but you can repurpose them to drive growth.

And then you're investing overseas in the international front. Just wondering if you could frame out the magnitude of investment you need to drive growth from here.and maybe some color just where are you investing on the talent side or internationally specifically.

[David Howson, executive]

Yes, thanks for the question. I think a few of us might have a couple of things to say here, but I'll kick it off. So the investment is really in line with that strategic framework. It's into derivatives. It's into data and access, and it's into technology.

And when you look at derivatives, some of the key strands of the growth there are the growth in retail that we've talked about earlier on the call. So we're investing behind that. That's education, that's marketing, that's talent.

We're investing on that need, that desire to access the U.S. market, that's the import strategy. So that's boots on the ground, that's sales people, that's knowledgeable derivative salespeople with the network in region, natural language speakers who can have high-level conversations with customers around the world.

It's also investment on the import side in terms of breaking down any pathway barriers that might exist, whether it be access to data or whether it be legal approval to be able to market in the region.

Multi-list, we just covered that quite solely in terms of where we're investing in data analytics and talent there. And then product for derivatives, product innovation is a key thing for us. That's a marginal and opportunity cost for us, but we listen to customers and we'll forever be innovating around products and looking for new products to launch. And we've got some in the pipeline for next year that we've already talked about, whether that be the dispersion futures or other capabilities.

Data and access, we've talked about that on the call as well. That's investing in analytics, investing in index capability around that defined outcome space, that embedded option space in derivatives. And for our index business, we get a lot. We own about 80%, 90% of the ETFs and are listed with Cboe in the Defined Outcome space.

And then it's looking for incremental insights that Chris talked about that. And then on the technology side, I'll hand over to Chris and maybe to Jill for any particular insights she might have.

[Christopher Isaacson, executive]

Just a couple of comments here on the redeployment of resources. As I mentioned in the prepared remarks, we'll finish our Canadian migration here in March. That will be our last migration to the Cboe technology platform. We're excited about that.

We've spent a fair amount of time, a lot of resources this year making that happen. We think that's worth it, but those will free up a substantial amount of them to focus on high-growth areas, like derivatives and DnA going forward.

And Jill can probably talk to the CapEx, but we've accelerated some CapEx, like she mentioned. And then I'll just end with the data and AI. We are investing heavily in our data and analytics platform and also focused on AI not just to drive productivity within the organization, but to explore and enhance revenue opportunities to our customers.

I'll hand to Jill.

[Jill Griebenow, executive]

Thank you. And just to wrap this up here, you correctly alluded that our balance sheet is in very strong position. We do have a lot of strategic flexibility there, which is a great position to be in.

I think where we sit today, we're aiming to just allocate that capital in our resources in the most value-enhancing way, just trying to strike the right balance between investing in the future revenue growth and then optimizing our margins.

[Operator]

Unfortunately, we have run out of time for questions. I will now turn the conference back over to the Cboe management team for closing remarks.

[Frederic Tomczyk, executive]

Thank you, and thanks, everyone, for joining our call today and for your questions. I think you'll see from our tone and the questions that came to us, we are pivoting basically to get very focused away from the migration work, on to investing in organic growth and very much leaning into where Cboe has core strengths, but also where we see the long-term secular trends.

And we're going to continue to do that. And as we've said earlier, our balance sheet is in a great position here, such that we can take advantage of opportunities as we see them. And so we'll see you next quarter.

[Operator]

This concludes today's conference call. Thank you for joining. You may now disconnect.