TMX Group Ltd

TSX:X

Earnings Call Analysis

Strong Financial Performance Underpinning Growth

TMX Group reported robust financial results for the third quarter of 2024, achieving a revenue of $353.8 million, a significant 23% increase from the prior year. This stellar performance was primarily driven by the inclusion of TMX VettaFi and organic revenue growth of 12%. Adjusted diluted earnings per share rose by 17%, highlighting operational efficiencies despite a slight decline in diluted earnings per share down 3%. This financial performance reflects TMX's diverse business model and strong market position.

Segment Growth: A Detailed Look

In the third quarter, several segments within TMX showed remarkable growth. The Global Solutions, Insights and Analytics (GSIA) segment grew by 41%, largely due to a $31.1 million contribution from TMX VettaFi. Even without VettaFi, this segment still saw an 11% growth, driven by TMX Trayport, which itself recorded a 22% increase in revenue. TMX VettaFi's assets under management grew to USD 37.8 billion, marking a sequential growth of 5% and a year-over-year increase of 15%, reflecting strong demand in the indexing business.

Trading and Clearing Gains

The Derivatives Trading and Clearing segment reported a 23% revenue growth this quarter, fueled by record volumes and a 31% increase in clearing revenues. TMX's equities and fixed-income trading areas also saw a gain of 13%, driven by overall volume increases—14% on the TSX and 8% on the TSX Venture Exchange. This reflects a healthy trading environment and strong investor engagement, which are likely to sustain growth going forward.

Headwinds and Resilience in Capital Formation

Despite the positive trends, TMX faced challenges in their Capital Formation segment, where revenue fell by 2%. This decline stemmed from lower additional listing fees amid a tougher funding environment. Nonetheless, TMX is actively working to attract new companies to its ecosystem and capitalize on cross-listings from international markets. Successful examples include recent listings that underscore TMX's prowess in providing platforms for emerging businesses.

Future Growth Initiatives and Strategic Acquisitions

TMX Group is investing in its future growth through strategic acquisitions such as Newsfile and iNDEX Research. These companies are expected to enhance TMX’s operational capabilities, particularly in news dissemination and index management. The management expects these acquisitions to be accretive to earnings per share by 2025, emphasizing TMX's commitment to expanding its market offerings. Furthermore, TMX is pursuing initiatives across new markets, including climate and power markets, indicating a strategic approach to diversification.

Dividends and Leverage Management

The TMX board has approved a quarterly dividend of $0.19 per share, showcasing a strong commitment to returning value to shareholders. The company maintained a healthy dividend payout ratio of 46% in Q3, aligned with its targets. TMX is also focusing on its deleveraging strategy, aiming to reach a targeted debt-to-EBITDA ratio of 1.5x to 2.5x by the end of 2025, while strategically managing acquisitions and growth investments.

Outlook: Navigating Market Dynamics

Looking forward, TMX executives expressed cautious optimism. They project stable, low single-digit expense growth moving into 2025, reflecting careful management amid varying market conditions. The recent strength in equity trading and increased volumes in the derivatives market demonstrate positive momentum. However, TMX acknowledges potential headwinds from macroeconomic factors affecting capital formation, highlighting the need to adapt to changing market dynamics.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the TMX Group Limited Third Quarter 2024 Financial Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Amin Mousavian, VP of Investor Relations and Treasury. Please go ahead.

[Amin Mousavian, executive]

Merci Jennie. Bonjour tout. Good morning, everyone. We join you from our Montreal office this morning to discuss the 2024 third quarter results for TMX Group. We announced our results for another outstanding quarter late yesterday and copies of our press release and MD&A are available on tmx.com under Investor Relations. This morning, we have with us John McKenzie, our Chief Executive Officer; and David Arnold, our Chief Financial Officer.

Following the opening remarks, we'll have a question-and-answer session. Before we begin, let's cover our forward-looking legal disclosure. Certain statements made during this call may relate to future events and expectations and constitute forward-looking information within the meaning of the Canadian Securities Law. Actual results may differ materially from these expectations and additional information is contained in our press release and periodic reports that we have filed with the regulatory authorities.

Now I will turn the call over to John.

[John McKenzie, executive]

Well, thanks, Amin, and good morning, everyone. Thanks for joining the call today, and it's a pleasure to be here in Montreal, where last night, we had the pleasure of joining with colleagues and celebrating 150 years of the Montreal Exchange. [Foreign Language] And a happy Halloween to everyone as well listening. To you and your families our promise to you today is all treats in the call, no tricks.

So as disclosed in last night's press release and the financial statements, TMX did deliver excellent results for the third quarter, featuring strong performances across the enterprise in both traditional business areas as well as in our newer growth areas and in both domestic and global marketplaces.

Our success in the quarter and sustained momentum during the first 9 months of 2024 showcases TMX's core winning traits, a diverse and dynamic business model made up of complementary businesses, a strong balance sheet, supporting our growth aspirations, a track record of strategic execution and leading-edge technology with the unwavering commitment of TMX's people here in Montreal, across the country and around the world to serving our growing client base with excellence and purpose.

Now at our Investor Day in June, we identified four priority areas to leverage the foundational strength of our core business to accelerate growth beyond the fundamental concepts of listing, trading and market data and to reach beyond Canadian borders. And before I turn to TMX's year-to-date performance, I want to highlight two recent investments we have made to help build on our position of strength well into the future to move beyond the core in Global Solutions, Insights and Analytics and in Capital Formation.

Now as you know, earlier last year, prior to the acquisition, we made an initial investment in VettaFi, which included a commercial agreement. It became pretty clear over a relatively short period of time working together that the TMX Datalinx VettaFi partnership has the potential to turbocharge our GSIA growth strategy and to bring new, exciting and adaptive solutions to better serve the ETF community, a key segment of our client base.

Now TMX VettaFi, the team's commitment to seeking out competitive advantages for clients across the index and ETF ecosystem and determined and propulsive growth mindset has proven to be a tremendous fit. Since the founding of the company three years ago, VettaFi has focused on seizing the strategic opportunities to augment their suite of client offerings and expand the global footprint. And earlier this month, TMX VettaFi acquired iNDEX Research, an end-to-end index provider that designs and manages indices with more than $10 billion in linked assets under management across both equities and fixed income markets.

It's the third suite acquired in the past 18 months following the 2023 acquisitions of ROBO Global and the EQM Indexes. And the acquisition of iNDEX Research fits squarely within TMX's long-term strategy and transformational growth objectives to expand internationally and bolster our GSIA segment. And importantly, iNDEX Research brings new operational and client service capabilities focused on the EMEA region to TMX VettaFi plus a talented team of professionals. And we're always looking for ways where we can strengthen our value proposition.

Our purpose is to make markets better and empower bold ideas and be a part of that living purpose is to strive every day to make the overall client experience better across the enterprise. And this shows up in Capital Formation, where we're building on our non-listing business or beyond listing business, exploring solutions to better serve our almost 3,500 issuers on TSX and TSX Venture as well as the thousands of private companies beyond our immediate ecosystem. Our non-listing business, which includes TSX Trust, generated over $100 million in 2023 and represented over 40% of the total Cap Form revenue in the first 9 months of 2024.

In August, we further expanded our offering with the acquisition of Newsfile, a leading news dissemination and regulatory filing provider. Newsfile provides client companies with an integrated, efficient way to meet certain disclosure requirements, including Newswire distribution and multi-jurisdictional filing solutions. And for those of you who received our press release last night, you will see now that we are also a client. The addition of Newsfile expands our public and private company solutions offering and advances our competitive position in a key growth area.

Newsfile served 2,500 clients globally in 2023 and nearly half that number were private companies. They have a stellar reputation for service excellence, a client-first mindset and a history of innovation plus room to grow. And so I'd like to extend a very warm TMX welcome to our newest team members from iNDEX Research and Newsfile. Now turning now to the results for the first 9 months of 2024; our overall revenue increased 20%, including $101 million from TMX VettaFi and reflecting year-over-year revenue growth from TMX Trayport, Derivatives Trading and Clearing and Equities and Fixed Income Trading and Clearing, with gains partially offset by lower revenue from Capital Formation.

Organic revenue, excluding TMX VettaFi Newsfile increased 8% and diluted earnings per share on an adjusted basis increased 10% for the first 9 months of 2023. Total operating expenses increased compared to the same period last year, reflecting the inclusion of TMX VettaFi expenses, and David will take a closer look at expenses later on with his remarks to follow. Now moving to our business areas; revenue from GSIA increased 43% for the first 9 months of 2023 or 10% excluding TMX VettaFi.

TMX VettaFi's revenue was 18% higher in U.S. dollars compared to the same period last year prior to acquisition. And TMX VettaFi growth has been primarily driven by higher indexing revenue, reflecting organic growth in assets under management, revenue from the 2023 acquisitions of ROBO Global and EQM Indexes and higher revenue related to events, including February's exchange conference. The TMX VettaFi integration is largely complete and the most significant of the remaining projects, combining our New York offices to centralize our TMX U.S. operations is well underway.

Now staying with GSIA; TMX Trayport has been the driving force for enterprise growth in 2024. Revenue increased 20% compared with the first 9 months of last year or 16% in pound sterling, driven by a 25% increase in total licensees, annual price adjustments and higher revenue from data products. The strength of TMX Trayport network continues to grow, serving a vital role in linking participants to execution venues and clearing houses across global energy markets.

We have more than 9,500 licensees or end-user applications and over 26,000 network connections and a participant demand for data analytics to support their strategies continues to grow. Today, TMX Trayport offers clients a suite of adaptive, customized tools, insights and analytic capabilities and data and analytics represents 11% of its overall revenue. Now looking beyond the core, TMX Trayport is pursuing global opportunities to replicate the success of our network and leverage our expertise in new geographies and asset classes, including climate markets and power markets in North America and Japan.

Now I'd like to turn to Capital Formation. Revenue here was 2% lower compared to the first 9 months of 2023, reflecting lower level -- lower revenue from additional listing fees due to prevailing challenging conditions in the marketplace. At Investor Day, we outlined our strategic growth plans for listings and beyond. Our year-to-date performance illustrates that Toronto Stock Exchange and TSX Venture Exchange, are powerful two-tiered growth engine for helping small companies become big success stories is a story that reads IPOs and beyond.

While macro factors continue to negatively impact capital raising conditions and weigh ongoing public activity, our Cap Form team is always focused on building our ecosystem stronger by attracting new cross listings from international markets and seeking out graduate prospects from other Canadian markets. Recent success stories include the TSX listing of West Gold Resources in August. West Gold is an ASX-listed Australian gold producer who joined our ecosystem to gain direct access to North American investors.

The company came to the TMX Market Center in Toronto to take part in our market open ceremony and to mark the occasion, the CEO put it really well when asked why they sought out a listing in Toronto as well as their home market in Australia. And I quote; this is the best of both worlds. Both of these markets love gold and understand it. That's a powerful testament to the reputation our equity markets have earned all around the world and particularly in the resource sector.

We now have more than 225 international companies on TSX and TSX Venture, including 62 foreign-based dual listings. Our competitive edge remains as sharp as ever domestically as well as we work to attract companies that meet our listing standards from other Canadian marketplaces. Recent wins of these include BIGG Digital Assets and International Battery Metals, who graduated to the TSX Venture Exchange in September and October, respectively.

And over the past five years, more than $14 billion in market cap has entered our ecosystem from other Canadian markets. Toronto Stock Exchange's ETF franchise continues to flourish. We've welcomed over 100 new ETFs to the market this year alone, an increase of more than 25% from 2023 and from 25 different providers. On October 1, J. P. Morgan Asset Management, the world's second largest active ETF provider by assets under management, launched its first Canadian ETFs with two new active ETFs listed on TSX.

And just last week, Capital Group Canada launched its first suite of active ETFs on TSX, including two equity and two fixed income strategies. Now turning to our derivative markets. We continue to see impressive growth here. Trading and clearing revenue, excluding BOX, increased 13% year-over-year. These increases included 6% higher revenue from MX due to 12% higher overall volumes and highlighted by strong activity in interest rate derivatives.

Revenue from CDCC increased 25% as a result of larger repo volumes and overall higher clearing revenues. Some key MX highlights for the first 9 months of 2024 included double-digit year-over-year volume growth in interest rate products, ETF options, single share futures and our 2-, 5- and 10-year Government of Canada bond futures. Overall, interest rates remained strong as of September 30, 23% higher compared to the same date last year -- sorry, overall open interest remains strong.

Revenue from Equities and Fixed Income Trading & Clearing was also up 8%, higher than the first 9 months of 2023, driven by higher volumes on our equity markets and a favorable product mix. Now at the beginning of my remarks this morning, I mentioned the two TMX recent investments, the acquisitions of iNDEX Research and Newsfile with a strategic focus on building our success, looking beyond the scope of our traditional businesses.

I want to bookend my comments this morning with reference to two more initiatives we are working towards set for launch in 2025 in both trading and clearing. Our trading team has been focused on enhancing execution quality for our clients, particularly for the institutional buy side. We launched Alpha-X late last year here in Canada, and we have more than 40 participants now sending orders every week with a couple of large liquidity providers consuming data and working on Alpha-X-specific strategies.

Not surprising, similar client needs exist beyond our borders and actually below Canada's borders in the largest market in the world. And we continue to make excellent progress with our plans to develop a U.S. equity trading initiative aimed at improving execution quality for buy-side clients. The response from participants thus far has been very positive, and we have started to execute our agreements. We are set to launch early in the New Year to ensure industry readiness as we work to complete client testing and secure our regulatory approvals.

And another important initiative on track for 2025 launch is our modernization of the CDS Clearing platform, which includes the replacement of certain legacy systems related to clearing and settlement as well as the entitlement payment systems. Following the successful transition to T+1 in May of this year, the majority of participants resumed testing in the third quarter, and we are near completion, and we expect to go live near the end of Q1 of 2025.

We're grateful for the partnership of our industry stakeholders and helping to advance this complex modernization project. The initiative isn't merely to keep pace with our global peers. It will bring new leading-edge solutions to Canadian marketplaces designed to create efficiencies and competitive advantages for our clients. The new platform will serve as a substantial foundation to upgrade and to help power existing initiatives, including the recent launches of the Canadian Collateral Management Service and SGC notes, both which we launched earlier this year and will facilitate additional global investment in Canada via future projects.

In closing, as always, I'd like to thank the TMX employees all around the world for their continued and outstanding contributions to our success and that steadfast commitment to making markets better and empowering bold ideas. We are working together to build on TMX's proud history to advance on a proven track record of growth and innovation, strategic execution and leadership throughout all market conditions, and I am most excited for what will come next.

With that, let me pass the call over to David. Thank you.

[David Arnold, executive]

[Foreign Language] Thank you, John, and good morning from Montreal. As John mentioned, TMX's performance year-to-date has been excellent, and that continued into the third quarter, underpinned by our powerful and diverse business model. Our revenue in the third quarter was $353.8 million, marking a 23% increase from the previous year fueled by the addition of TMX VettaFi and organic revenue growth of 12% over the same period.

This growth was primarily driven by TMX Trayport as well as notable increases in volumes for trading and clearing across all of our markets for Derivatives, Equities and Fixed Income. While our diluted earnings per share decreased 3%, our adjusted diluted earnings per share increased 17% from Q3 of 2023, reflecting 24% or $30.2 million higher income from operations, partially offset by higher net finance costs. Turning now to our businesses; I will start with the segments that had the largest year-over-year increases.

Revenue in our Global Solutions, Insights and Analytics segment, or GSIA, grew by 41% in the third quarter, reflecting $31.1 million from the inclusion of TMX VettaFi. Excluding TMX VettaFi, revenue grew by 11% over the same period, driven by strong growth from TMX Trayport. Revenue in TMX VettaFi was up 7% in Canadian dollars or 6% in U.S. dollars this quarter compared to the same period last year prior to the acquisition of TMX VettaFi.

The increase continues to be driven by indexing revenue, reflecting organic growth in assets under management and revenue contribution from the 2023 acquisition of EQM Indexes as well as higher analytics revenue, partially offset by lower revenue from digital distribution. TMX VettaFi's assets under management continued to show robust growth, ending the third quarter at USD 37.8 billion, which represents 5% growth sequentially and 15% growth in 2024. Revenue from TMX Trayport increased 22% in Canadian dollars or 16% in pound sterling this quarter, primarily driven by a 27% increase in total licensees.

The revenue increase in Q3 also benefited from our annual price adjustments, incremental revenue from data and analytics and other trader products. TMX Trayport ended the third quarter with annual recurring revenue of CAD 234.5 million or GBP 131 million, which represents a 16% growth in average recurring revenue for the quarter on an annualized basis. Turning to TMX Datalinx; revenue in the business grew by 1%, reflecting higher revenue from data feeds, co-location and benchmarking indices, driven by the new Term CORRA benchmark.

In addition, a positive impact from the price adjustments implemented earlier this year and favorable FX impact of CAD 0.4 million due to a stronger U.S. dollar. Somewhat offsetting the growth was lower subscriber and usage-based revenue due to a client-specific reduction in enterprise agreement renewals that occurred in Q2, which we spoke to on our last earnings call. Turning now to our Derivatives Trading and Clearing segment.

Revenue, excluding BOX, grew 23% this quarter, reflecting a 19% increase in the Montreal Exchange, fueled by record volumes in Q3 as well as a 31% increase in CDCC. The increase in CDCC revenue was driven by higher clearing volumes and the impact of pricing changes, which came into effect earlier this year. Revenue from BOX increased 23% in Canadian dollars or 21% in U.S. dollars this quarter, driven by a higher rate per contract, reflecting a favorable product mix as well as a 5% increase in volumes.

In our Equities and Fixed Income Trading and Clearing segment, revenue was up 13% in the quarter, driven by a 22% increase from Equities and Fixed Income Trading and 4% from CDS. The revenue increase in our Equities and Fixed Income Trading business reflected an 11% increase in the overall volumes of securities traded on our equities marketplaces. The strength in equity trading continued this quarter with double-digit growth in both trading volume and value compared to last year.

Trading volumes were up 14% on TSX and 8% on TSX Venture Exchange, partially offset by a 5% decrease in volumes on Alpha Exchange. Our combined equities trading market share for TSX and TSX Venture-listed issues was approximately 64% this quarter, down 2% from Q3 last year, but unchanged sequentially from Q2. On the fixed income trading side, revenue increased from Q3 a year ago, primarily reflecting increased activity in Government of Canada bonds driven by a more active interest rate environment.

The increase in CDS was driven by higher issuer event management fees, higher interest income on short-term deposits, increased exchange-traded volumes and higher revenue from our account transfer online notification service, partially offset by higher rebates. Turning to Capital Formation; revenue in the segment increased 2% in the quarter, reflecting $1.7 million for the inclusion of Newsfile, which was acquired in August.

Excluding Newsfile, revenue in the segment was down slightly compared with Q3 last year, primarily due to lower additional listing fees driven by a decrease in total financing dollars raised on TSX as well as a decrease in the average fee for financings below the maximum fee on TSX Venture Exchange. Sustaining listing fees and initial listing fees remained relatively flat to last year due to lower activity on TSX Venture Exchange, partially offset by increases on TSX. These decreases were partially offset by revenue growth of 5% in TSX Trust, reflecting higher net interest income, dealer services and transfer agency revenue.

Turning to our expenses; on a reported basis, our operating expenses increased by 22% in Q3. This increase was driven by the following items. First, we incurred $28.1 million of additional expenses related to new acquisitions, namely $12.8 million of operating expenses related to TMX VettaFi and Newsfile, $11.8 million related to the amortization of acquired TMX VettaFi intangibles, $1.7 million in acquisition and related expenses for TMX VettaFi, Newsfile and iNDEX Research, $0.9 million of integration costs related to TMX VettaFi and Newsfile as well as $0.9 million for the accrual of deferred contingent payments related to Newsfile.

Second, we incurred $1.7 million of expenses in the third quarter related to our U.S. expansion initiative. And lastly, somewhat offsetting these increases were lower expenses of approximately $5.2 million related to BOX's estimate of expenses for services provided by BOX Exchange due to a true-up in Q3 of last year. Now excluding these items, our operating expenses increased by approximately 7% on a comparable basis, primarily driven by increased employee performance incentive plan costs driven by the increase in our share price and stronger performance in some of our businesses.

More specifically, the main driver for the increase was related to our stock price outperforming the S&P/TSX Composite Index, which determines the multiplier for our performance share units. Excluding the increase in long-term incentive programs due to the TMX stock outperformance versus the S&P/TSX Composite Index, third quarter operating expenses were up 5% compared to last year. Looking at our results sequentially; revenue decreased $13.3 million from the second quarter, reflecting lower revenue from Capital Formation as well as Equities and Fixed Income Trading & Clearing.

The lower Capital Formation revenue was primarily driven by lower additional listings due to fewer transactions and lower dollars raised on our exchanges from Q2 to Q3 as well as lower transfer agency and net interest income revenue in TSX Trust, which are seasonally higher in Q2. Equities trading volumes decreased by 9% compared with the second quarter, which drove revenue decreases in equity trading and CDS.

Now these decreases were partially offset by revenue from our Derivatives Trading business, which benefited by a 2% increase in volumes on the Montreal Exchange, higher BOX revenues driven by higher rate per contract from a more favorable product mix quarter-over-quarter and revenue growth in TMX Trayport, reflecting a 3% increase in Trayport licensees as well as a favorable FX impact from a stronger pound sterling compared to Canadian dollars.

Operating expenses in Q3 were down $4.9 million from Q2, primarily reflecting $3 million of lower integration costs, lower operating expenses related to TMX VettaFi, lower project spend and directors' fees. These decreases were partially offset by $1.4 million of higher acquisition costs related to Newsfile and iNDEX Research. There were also higher employee performance incentive plan costs compared with the second quarter, driven by a stronger share price that I referenced earlier. Turning now to our balance sheet; on the balance sheet front, we completed the strategic acquisition of Newsfile in the third quarter.

We acquired Newsfile for $22.3 million in cash and $4.7 million in deferred consideration with additional contingent payments of $18.6 million over the next three years. For the first 9 months of 2024, revenue and income from operations for Newsfile was $10.1 million and $4.3 million, respectively. Subsequent to the close of the quarter, TMX VettaFi acquired iNDEX Research for USD 25 million in cash and up to USD 6.3 million in contingent consideration. For the first 9 months of 2024, revenue and income from operations for iNDEX Research was USD 3.3 million and USD 1.5 million, respectively.

Now as John mentioned, these acquisitions have not only expanded our product offerings, but also strengthened our operational capabilities, particularly in the areas of news dissemination, regulatory filing and index management in new geographic and asset classes. These transactions were structured to include contingent considerations and payments to reduce transactional risk and align key business leaders for shared success and commitment on growth. Both acquisitions are expected to be accretive to adjusted EPS in 2025.

Our pro forma debt to adjusted EBITDA ratio on September 30 was 3x, down 0.6x from March 31 when we first included our TMX VettaFi acquisition in our results. As of September 30, we also held over $518 million in cash and marketable securities, which is approximately $314 million in excess of the $205 million we target to retain for regulatory and related purposes. So net of excess cash, our leverage was 2.6x, which is 0.6x lower compared to the end of the first quarter.

We remain well on track to deliver on our deleveraging plan to return to our targeted leverage range of 1.5x to 2.5x by the end of 2025, while at the same time, pursuing businesses like Newsfile and iNDEX Research. Lastly, I am pleased to announce that last night our Board approved a quarterly dividend of $0.19 per common share payable on November 29 to shareholders of record as of November 15.

This represents a 46% dividend payout ratio in the third quarter, and our last 12 months payout ratio of 47% remains in the upper half of our target payout ratio of 40% to 50%. Now in conclusion, our Q3 2024 financial performance is a product of our disciplined and strong operational performance, effective execution of our growth strategy and our commitment to delivering value to our shareholders. Our financial performance in this quarter underscores our ability to generate returns and create shareholder value.

I'd now like to turn the call back to Amin for our Q&A period.

[Amin Mousavian, executive]

Thank you, David. Jenny, can you please outline the process for the Q&A session?

[Operator]

[Operator Instructions] Your first question is from Nik Priebe from CIBC Capital Markets.

[Nikolaus Priebe, analyst]

Okay. Seeing as you're sitting in Montreal today, I'll kick this off with a few questions on MX. Average RPC was up sequentially as you guided to. You've also alluded to the prospect of market-making incentives rolling off the 2-year contract and the CORRA product. Just wondering if there's any visibility you can provide on the timing there. And just also wondering if you'd foresee a comparable benefit to the roll-off on the 5-year as well.

[John McKenzie, executive]

Good morning Nik and thanks. That's a great question. And thanks for leading with the Montreal question as we're here with the team. So you're absolutely right in terms of some of the step-up that we're seeing in terms of the RPC. I can't give you specific timing around those roll-offs because, again, those are commercially -- they're commercially sensitive agreements with participants that are working with us, but they are in a reasonable near-term that you're going to start to see that impact. And you're absolutely right in terms of the kind of net impact on the revenue on those products will have similar step-ups to what you saw on that roll-off of the 5 years. So we're looking forward to continued step-up in RPC growth over the next couple of years.

[Nikolaus Priebe, analyst]

Okay, very good. And just on derivatives more broadly, that segment has been a perennial growth engine for an extended multiyear period. I'm just wondering what is it about that market that enables it to sustain a higher rate of growth over time? Like if you look back over the past decade, what have been the key drivers there? Like has it been just natural growth in the demand for hedging instruments, has been better penetration in the retail adviser channel? Like how would you sort of break it down or attribute it?

[John McKenzie, executive]

Well, I would have gone yes, yes and yes. But let me break it down because there is a number of pieces there. So there is natural growth in terms of, as you said, the use of hedging instruments, the use of derivatives by clients. If you look at global growth rates around derivatives -- in other marketplaces, they are very strong. And then the unique piece that allows us to really outperform and outgrow the volumes in terms of the Montreal Exchange is, in some cases, we're catching up to global markets.

We launched our initiative around international trading time zones a number of years ago. That continues to be a driver of growth. The products that have been in that extended time zone regime for the entire time are actually now more in the 8% and 9% of our mix. We've got newer products that are in there now like the CORRA, like the 2-year, like the 5-year that are still only in the 2% to 3% that continue to build because we're getting investor adoption expand over time.

And then the more liquid the products become, the more other people will come and use them. Now when you add that, the fact that we are also continuing to add products along the curve like the two and the 5 that adds long-term growth rate as well. Those products a couple of years ago had essentially zero trading on exchange.

They're trading on average 60,000 contracts a day each and are still relatively underdeveloped when you compare them either to the [ BAX ] or the new CORRA short-term product or the CGB products, which both trade well over $100,000 a piece so all these things are mutually reinforcing, the investor appetite to actually use these products, the global interest in them. And as you add more products, the ability to provide a range of solutions that go across yield curves and different strategies. So they're mutually reinforcing and gives us a lot of confidence as a trajectory that we can continue for a long period of time.

[Operator]

Your next question is from Etienne Ricard from BMO Capital Markets.

[Etienne Ricard, analyst]

On the back of 150 years, it sounds like a great time to ask questions on the Montreal Exchange. So lots of success, as you've talked about, launching new interest rate products across the yield curve. As you mentioned, these are now -- these have now reached larger scale. Where do you see the next opportunity in terms of introducing new derivative products? In other words, what are the building blocks in order to achieve the high single-digit organic growth for this business?

[John McKenzie, executive]

Yeah, there's a couple of pieces there, which is, first of all, as I mentioned, I do want to reinforce the piece that even the products that we have launched are not at full maturity yet. So you're going to see that be a contributor to growth going forward. There are other additional products that we are working on around them. So in our core futures, that's largely driven by the three month. We are -- we've got 30-day capability.

We've got the additional ability to do different terms. We've historically had other things around credit derivatives we're looking at. We've got the ability to potentially do options on futures as well as we had on the BAXs in the past. So there's a number of different product initiatives the team is working on with clients based on client demand to continue to add products to the curve. The addition of that is also -- we talked a bit in the Analyst Day about post-trade.

And so the inter-option between MX, the CDCC is obviously, there's a big part of what we do in CDCC that's driven by the trading activity on exchange, but it's not limited to that because we actually can do a lot of clearing around OTC products as well. So you are seeing the big step-up in repo clearing activity that was driving the results this year and really the early stage of the new launch of new capabilities. So the first of which was the Secured General Collateral notes. And what's interesting about a product like that is it has multiple points of penetration in terms of using capabilities at TMX.

So not only is it something that becomes a cleared product on CDCC, but it's also utilizing the capabilities in our trust company. So you're going to see more of that where the teams that are on the post-trade side are actually looking to how do we use this capability that we've built and even more so when we launched the -- and land the post-trade modernization program, how do we use all those capabilities to solve more problems for the client community. So you'll see that continued expansion in the traded products, but also an expansion in the cleared products that are on the OTC side or in the funding side.

[Etienne Ricard, analyst]

Okay. Very interesting. And to circle back on VettaFi's acquisition of iNDEX Research. As you look at consolidating this market, what's the complexity of integrating iNDEX businesses with different technologies and maybe different marketing approaches?

[John McKenzie, executive]

Well, the nice thing about this, and we do a lot of that thinking prior to making the transaction. And so first of all, the iNDEX Research team is a really good team. They've built a really nice business. The technology platform used there is actually quite complementary to what we have built within TMX VettaFi so SaaS-based systems designed to be scalable. Where we were looking to continue to build out is though our capabilities are more limited in the European, Middle East, Asia region.

And so while our technology is scalable and SaaS-based, having the operation capability in the time zone to serve the clients there was one of the things that we had a gap. So this -- not only did this index opportunity add to the suite of indices, the suite of products, add to the talent and the team with complementary technology, but it gave us that regional capability as well to serve in the European region, which was something we were looking for to continue the growth expansion. So all those things were looked at as part of our investment thesis. And this very much like the other two we did will be ones that we'll be able to completely integrate into a common shared platform.

[Etienne Ricard, analyst]

I believe a portion of the AUM is fixed income. Are competitive dynamics in fixed income different relative to equities?

[John McKenzie, executive]

I mean competitive dynamics, I'd say the difference in fixed income globally is there are actually fewer providers of the fixed income products, and they tend to be very large operators. This is another space from an asset class standpoint with very high on our priority list to have capabilities in.

So it's a new capability for us. It's certainly something that we want to do more of. If you recall, actually, TMX actually was in fixed income indices many years ago. Those moved to FTSE Russell. And it's definitely a space that we want to continue to explore, not just in the European region, but around the world. So a really good asset class expansion for us.

[Operator]

Your next question is from Aravinda Galappatthige from Canaccord Genuity.

[Aravinda Galappatthige, analyst]

I'll ask the two questions back to back. So both in GSIA; first of all, on VettaFi, obviously, continue to see good AUM numbers, but wanted to dig a little deeper into the revenue trends in Q3. I know that the organic number looked like it was probably in the low to mid-single digits. I wanted to sort of get your thoughts there.

Obviously, we're looking for -- the run rate has been stronger than that. I know you referred to some easing in the digital distribution side of it. Maybe some clarity there. And secondly, on Datalinx, I think you've explained sort of some of the headwinds there on the prior call. But how should we think about sort of the shape of recovery there and maybe some initiatives to sort of rebound that growth towards the rates I know that you want to get to?

[John McKenzie, executive]

Okay. That's good. So here's the deal. I'm going to try to handle all of that. And if I miss some by the end, stay back in the call and make sure that you requeue and I make sure I get all these pieces. So let me start with the VettaFi piece. There's a reason why we talk to both the quarterlies and the full year-to-date. And we talked about in the commentary that the actual year-to-date VettaFi numbers are actually up 18% year-over-year.

One of the pieces that -- and over time, we're going to help you get more predictive around this. While the business is largely recurring revenue based driven by AUM and index piece, call that essentially 80%-ish recurring, that other component that's really driven by things like events or digital distribution deals can be quite a bit lumpier because it's really more driven by clients' decisions around their marketing spend, when they're doing it. So it's less predictable period-by-period, and we can have lumpiness period-by-period.

So we're always going to guide to the long-term on more on an annual basis than a quarter-by-quarter because of those types of trends. So there's nothing in the trends from quarter-to-quarter, as you talked about, that are unexpected for us. The business is performing as we want it to. This is -- you're going to recall, we're targeting double-digit growth for this franchise over the long term. It's delivering in line with that expectation, and we expect that again as we move into next year.

So that's kind of -- and as we do better on this, we'll be able to demonstrate kind of more of how these different products work. The other piece that's going to be always challenging, though, is some of these products are complementary. So the deal that we do on a digital distribution and transaction may be designed to help land a new index and vice versa. And so again, those periods quarter-to-quarter may be lumpy and they're driven by what's going on in the client activity.

So over time, these things will get smoother. We'll be able to give you more disclosure. You'll have more historical periods. But that's why we're trying to guide to look at the full years and not necessarily the period-by-period. Now when it comes to the second question you had around Datalinx, you definitely identified one thing that what has been a headwind. That's why we were telegraphing it in the second quarter. And this was a large global client with a large retail presence that made a strategic change to no longer offer real-time pricing for international markets for their client base.

And that is really the large impact that's actually flown through -- kind of flowed through into the third quarter. It started in the second quarter. It's now fully baked in. So this actually gives you a good jumping off point in terms of the runway because it is a specific client event and not indicative of a trend. Where we look to the trend pieces and when you look kind of beneath the lines in terms of some of the actual components around subscriptions, you take that piece away the subscription strength was actually fairly strong.

And particularly around the derivatives piece, I think we were up another 4 points in subscriptions year-over-year. There is actually a market-based impact as well. For those that have been with us for a long time, when you've got marketplaces that are softer or quieter for a period of time, you can have some contraction around data users. And we've seen that over the last couple of years as equity markets has been softer.

When those markets recover and start to pick up again, you will see firms expand their use of particularly real-time data, both domestically and globally. And that's been the typical trend in any market cycles we've been through in terms of all the time I've been here over the last 24 years. So that's kind of the way to think about it. The step, the headwind in kind of Q2 and into Q3 was a unique client piece that is now largely baked in. Have I covered everything there?

[Aravinda Galappatthige, analyst]

Yes, yes, that's pretty good.

[Operator]

Your next question is from Graham Ryding from TD Securities.

[Graham Ryding, analyst]

Maybe we would start with just the -- recently, the SEC voted to reduce the cap for access fees. I think it's sort of still a proposal, but it looks like it may come through next year. If it does get pushed through, what's the expectation? Does Canada follow suit? And if so, maybe you could just give us some thoughts on what you think the implications would be if that does flow through into Canada?

[John McKenzie, executive]

Yeah, that's a great question. So that's one we've been very active on. And one of the really important things for us is to have very strong relationships with our regulatory partners. So this is something we've been in dialogue in for a while. I'll give you a couple of thoughts on it. First of all, the Canadian marketplace, we've already got actually a different regime around this. So when it comes to the interlisted companies, we actually are aligned with the U.S. market.

We've got the same rate structure as the U.S. market, and it's important to be able to have that competitive dynamic. We actually already have lower access fee caps on the non-interlisted -- so they're actually about half of what they are on the interlisted. So we actually made that move in the Canadian market a number of years ago to tighten that up. So if the whole market goes to that change, it's not going to be a material change for our business.

Now the discussion that we're having industry-wide is twofold. First of all, I'm not 100% certain that this will come to fruition. This has been proposed in the U.S. in the past. It is something that I expect the U.S. exchanges are likely to object to and there are political considerations. So there is an element of we need to wait and see on the ability for this to actually get enacted.

Our dialogue has always been that in terms of the interlisted marketplace, we need to be very competitive with the U.S., which means either that we work [indiscernible] to do the same thing or we also look to see can we deviate to potentially create better liquidity in Canada as a way to draw some more of that order flow north of the border and to improve liquidity here. So those are part of the discussions we're having. And similarly, the discussion around the non-interlisted is that, that's a stand-alone market.

We can choose something to do unique for the Canadian marketplace. So again, we don't think -- see this as a material risk either way, but we want to have good discussions because recognizing that with 3,500 companies, not all of them have the same liquidity as a large blue-chip company and vehicles that are in there that help provide liquidity like market-making regimes or like passive order flow payments through access fees are still important for liquidity. So all of it's on the table, not a material risk, but something that we're going to monitor to make sure that we move in step with the U.S. market, and we don't get out of step.

[Graham Ryding, analyst]

I appreciate the fulsome answer on that. Maybe, David, I'll jump to you on expense growth. Just if you exclude the onetime items, the last couple of quarters, it seems to be trending around 7% year-over-year. Can you give us some context of what you think is a reasonable expectation as we're looking into 2025 for expense growth?

[David Arnold, executive]

Yeah. Thanks, Graham. So let me first unpack the quarter, and then we can talk about 2025. So as I mentioned in my remarks just a little earlier, right, so the 7% is absolutely correct. But then we've seen really strong share price performance at TMX. And we obviously have performance share units that are linked to the performance relative to the composite index. And we've outperformed that significantly. So -- that accounts for another 2 points on that.

And that's kind of why the number is more around 5%. But then what I've also touched on is we've got really strong business performance. And relatively speaking, our incentive comp program numbers would be much higher than last year. So if we adjust for that in the quarter, it's kind of around 3%. So that's kind of the way I, with my team, spend a lot of time with John and the management team looking at kind of the core expense growth.

And then we kind of look at that relative to inflation, right? So inflation in and around the quarter was 2.1%, core expenses after we deal with the performance-related items around 3% so pretty reasonable. As we head into 2025, there are a lot of moving parts. We're busy working on kind of our budgets and our numbers and our strategic plan updates for the Board. And so it's a little early for me to kind of signal that.

But as we've said before, right, we really want to target when you look through the noise, kind of that low single-digit kind of expense growth number, obviously, relative to where inflation is going, right? So if inflation ticks even lower, we want to try and be a little closer to that. If it ticks a little higher, we obviously will track a little closer to that. So stay tuned. I think in Q4, we'll be able to give a little bit more of an indication as to the '25. John, you want to add?

[John McKenzie, executive]

Yeah. The only thing I'll add in is, I mean, we do have a couple of kind of unique items for next year as well. And to David's point, we're going to try to give really good clarity. We've talked about the fact that our post-trade modernization program is scheduled to go live next year. So there's going to be a point in time where the amortization of that finally kicks in. Now that's a noncash item, but that will start to roll through our expenses. At the same time, we're actually going to have some cash expense savings as we sunset and retire the legacy system.

So we're going to try to give you better disclosure and understanding on that. What does it mean from a transition standpoint, onetime costs of actually executing it and then what is the kind of the go forward from there. But the discipline in the organization remains, as David said, we are looking to target that kind of inflationary low single digits. That's the challenge to all of our teams. And looking forward, where do you find opportunities to save to fund new areas for growth at the same time? And that change -- that DNA doesn't change here.

[Operator]

Your next question is from Jaeme Gloyn from National Bank Financial.

[Jaeme Gloyn, analyst]

First question, I guess, for David. Just want to get a sense as to this BOX true-up that occurred in Q3 last year, but maybe not in this year. Like was this quarter the more real number or maybe walk me through some of that -- some of the details around the BOX expenses.

[David Arnold, executive]

Yeah. So I think the short answer to your question, Jaeme, is that this would be a more reflective kind of quarter. Last year in the quarter, there was really a catch-up -- true-up for the first kind of 9 months. So I think that this would be more indicative of the quarter kind of going forward. But the visibility into the exchange kind of SRO expenses is somewhat limited.

So obviously, the management team of the market receive analysis from the SRO indicating expenses and so forth. So it seems to be pretty stable. But to the extent there might be something that pops up in the fourth quarter, then that would be accounted for in the fourth quarter, and I will talk to it. But right now, the third quarter would be very indicative, and we seem to have kind of a smooth glide path.

[Jaeme Gloyn, analyst]

Yeah. Understood. Okay. On the TSX Trust business, just thinking about how we're shaping up for the upcoming quarter, it's safe to assume the sensitivity to rate cuts is similar. And so kind of putting everything on the table in terms of like rate cuts, volumes, Newsfile now included, like we should see flat, maybe down in Trust or that other issuer services line. Is that a fair assessment?

[John McKenzie, executive]

I mean the starting point around the rate impact is, yes, that will have a net impact. The piece that's going to be difficult -- more difficult to predict is twofold because it's not just the rates themselves, it's the balances -- and so while that kind of 25 bps is worth about $2 million per year, the balances have actually been improving.

And one of the pieces, again, when you kind of think about outlook and potential, while the new issue activity, we've talked about new issue and new financing activity continues to be soft across capital markets, we are seeing more, what I'll call, corporate action, M&A activity. There are more potential transactions for TSX Trust to bid on in terms of winning net new business.

So there is potential for new business in the next quarter that I know the team is working hard on, and it's a good pipeline. But all things being equal, if there's kind of the business is the same as this quarter, yeah, you would expect to see some step down from an interest rate standpoint.

[Jaeme Gloyn, analyst]

Okay, great. And just sneak one more in on the equity trading side of the equation here -- revenue per trade or revenue per contract, looking a little stronger in this quarter than we've seen in recent quarters. How much is fixed income trading activity? It's hard to separate the two, but how much is fixed income trading activity driving that increased revenue versus maybe some pricing initiatives or other factors?

[David Arnold, executive]

It's a good question, Jaeme. So we don't really get into that level of granularity. So I'm going to disappoint you there. But I am going to indicate to you that you are correct, right? One of the things that has definitely helped is fixed income activity given the kind of rate complex movements has been very robust. And so that is absolutely contributing to the kind of growth that you see there.

[Operator]

Your next question is from Ben Budish from Barclays.

[Benjamin Budish, analyst]

I wanted to check on VettaFi first. You mentioned earlier that some of the revenue bids can be a little bit more lumpy than expected. And I know you tend not to give specific guidance, but just thinking about the USD 100 million target for the year. And anything you could point to for Q4 to help us think about how achievable that is? Clearly, there's the AUM piece that we can kind of track that you indicated you'd be giving some more color on helping them make a little bit more predictable. But just thinking about how Q4 should shake up in the context of your prior expectations.

[John McKenzie, executive]

I mean, again, in the absence of providing forward guidance on one quarter, and I want to be careful how I answer the question. This is an area where we continue to have strength. We've got confidence in the business. We've got a lot of things that are actually working in our favor in terms of doing that. I cannot give you an absolute indication of where we're going to land in Q4, but that the target has continued to be what the team is working towards.

[Benjamin Budish, analyst]

Understood. And then maybe one more just on some of the new M&A Newsfile and iNDEX Research. You've given some helpful disclosures on what the year-to-date contribution would have been from a revenue and I think operating profit perspective. But could you maybe talk about like the historical growth profile, what that's looked like over the last few years? And then how you're thinking about either cross-selling or what TMX can do to sort of accelerate growth or how you think about embedding them into the business that'd be Newsfile and iNDEX Research?

[John McKenzie, executive]

Yeah, it's a great question, and you actually got right to the heart of our -- what I'll call our strategic thesis on both of these. Both of these organizations led by really strong teams have been double-digit growers. We expect them to continue to be and ones that can grow at rates above the rest of the franchises they're coming in because they're also coming off of small bases, and there's a lot of scale potential for what we can do with them.

So when it comes to Newsfile, when we laid out the strategy around Investor Day, it's really part of that strategy of how do we provide that deeper service level to public issuers and future public issuers that are private today that have common needs around what it means to do to be in the capital raising community. Newsfile fits in squarely within that. They're very innovative. It's got good technology capability. It's scalable to give that extra service to an issuer in terms of distributions.

And now as you can see, there are two pieces in terms of how we scale that up as part of the TMX franchise, and it's integrated now in, in terms of our other issuer services and our Capital Formation team. We've got the ability to actually to help and upsell and cross-sell to clients that Newsfile wasn't getting to before. The clients tend to be tilted more to the smaller size. We've got the relationships with the more senior issuers that we can help penetrate. As I said, we're now also a client.

And so we're kind of that reference client to see how easy it is to utilize this service and to use it in an efficient way. It also allows us to kind of promote and cross-sell it with other services like Trust, like our employee plan management tool, things like that. So the more we build out a complementary suite of products, the more we can go to both issuers and private companies with a set of services that meet multiple needs in a way that competitors can't.

And we've got that primary relationship as the listed market at the same time that gives us kind of more insight into what those needs are and also who is coming. And so that's the Newsfile piece. I think there's going to be potentially some interesting crossovers between even Newsfile and VettaFi when we think about distribution capabilities. VettaFi is, as you know, is very strong on the digital distribution and the reach out to the investor community. When we have the addition of the Newsfile tools in terms of distribution tools, those are potential things that could be complementary even between two of our newer businesses at the same time.

And then similarly, on iNDEX Research, some of my comments earlier on, A, new asset classes, new capabilities, indices that are based in different geographies as well in terms of both regional and global indices that can then also be sold in different geographies to get those same representation, cross-selling capability, both in North America and globally and really the operational capability, which I mentioned earlier, which is really important as we expand more in the European, Middle East and Asian region to have that on-the-ground capability to operate in the time zone of the clients because sometimes you need to address a client issue, concern, sales opportunity, it gives us the ability to do that so very excited to bring both these teams into the organization.

They're both kind of pretty lean and efficient teams, and we were able to do transactions that were good value for both them and for the investors in TMX. And with some nice, as David mentioned, components that are tied to keeping leaders in the business and committing to our shared success together. So we couldn't be happier with how these two things came together.

[Operator]

There are no further questions at this time. Please proceed.

[Amin Mousavian, executive]

Thank you, everyone, for joining our call today. If you have any further questions, the contact information for Investor Relations as well as media is in our press release, and we'll be more than happy to get back to you. I wish you all a happy Halloween and until next time, goodbye.

[Operator]

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.