TMX Group Ltd

TSX:X

Earnings Call Transcript 2019-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the TMX Group Inc. Q4 2019 Financial Results Conference Call. [Operator Instructions] Please be advised, today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Paul Malcolmson. Thank you. Please go ahead, sir.

[Paul Malcolmson, Director of Investor Relations]

Thank you, Chris, and good morning, everyone. Thank you for joining us this morning for the Fourth Quarter 2019 Conference Call for TMX Group. As you know, we announced our fourth quarter results last evening. A copy of our press release is available on our website, tmx.com under Investor Relations. This morning, we have with us John McKenzie, our Interim Chief Executive Officer and Chief Financial Officer. Following opening remarks, we'll have a question-and-answer session. Before we start, I want to remind you that certain statements we make on the call today may be considered forward-looking. I refer you to the risk factors outlined in today's press release and reports filed by TMX Group with regulatory authorities. Now I'd like to turn the call over to John.

[John McKenzie, Senior VP, Interim CEO & CFO]

Well, thank you, Paul. And good morning, everyone, and thanks for dialing in. As Paul mentioned, we reported results for the fourth quarter and full year 2019 last night. But before we get into the details of the financial results and talk about TMX Group's 2019 performance, I want to take a moment at the outset this morning to outline the organization's key immediate term priorities. With Lou Eccleston's retirement last month, our company is in a period of transition. And while I have no specific update to share with you today from the board in terms of the new CEO search process, I want to emphasize that Lou's departure in no way alters the company's course. TMX's senior management team and all TMX employees are forging ahead in 2020, focused on serving clients across our markets in a way they expect and deserve and on the execution of our growth strategy. Our mandate is simple: Don't miss a step. And I fully expect we'll be successful in meeting that. Now for this morning, I want to focus my comments on the progress we have made during the past 12 months and into the first few weeks of 2020, and setting the stage for TMX's strategy and business plan going forward. Following which, Paul will take you through the 2019 Q4 results in a bit more detail.Now as many of you have noticed, even a quick high-level look at some of the key performance indicators will tell you, market conditions for 2019 presented a significant challenge for the financial services industry and the exchange sector. Uncertainty fueled by macroeconomic and geopolitical factors led to a global slowdown in capital markets activity. And while these factors have had a negative impact on some of our businesses and growth drivers, the work we have done to transform TMX over the last 5 years from a traditional or regional exchange into a global solutions provider has enabled us to deliver value to clients and positive results even during difficult markets.Looking to the future, the balance we have achieved in reshaping the makeup of our business model, a diverse and complementary portfolio of assets with a shift to more recurring revenue sources has strengthened our enterprise for the long term. Recurring revenue compromised 52% of total TMX group revenues in 2019.Now turning to our 2019 results. Overall, revenue in 2019 was down $13.8 million or 2% when compared with 2018 due to softer capital markets activity and particularly, a decrease in financing activity on our equity exchanges and lower activity in our equity and fixed income trading products. Helping to partially offset the decrease was solid revenue growth from Trayport, our London-based network and platform for global wholesale energy markets, and from our core Derivatives business of Montreal Exchange and CDCC. Importantly, TMX's financial performance also continued to reflect the benefits of consistent cost management discipline with overall expenses down 6%. Income from operations increased in 2019 by $13.4 million from 2018 or 4%, while net income was $247.6 million for 2019, down 13% from 2018, and earnings per share was $4.38 on a diluted basis, down 14% from 2018, as these numbers included both impairment charges and gains on sales in the previous period. On an adjusted basis, net income was up 4% and earnings per share grew by 3% from 2018. At all times, but especially in the midst of challenging markets, we must remain focused on executing our cohesive global strategy. And in 2019, we advanced our road map for growth. Our enterprise strategy is centered around TMX's growth champions, the business areas we have identified as having the highest growth potential, Capital Formation, Derivatives and Trayport. Across these growth champions, we are focused on capitalizing on secular trends or longer-term consistent patterns in the marketplace to drive growth, while also looking for targeted opportunities to leverage TMX capabilities into new markets.In Capital Formation, we continue our global expansion efforts, targeting specific regions where our unique ecosystem and sectoral expertise give TMX a competitive edge. The ability of Toronto Stock Exchange and TSX Venture Exchange to serve the company's full spectrum of needs from early-stage to senior issuer and to support each phase of that evolution with a sophisticated investor community separates TMX and Canada's markets from our global peers.In 2019, while 1 or 2 high-profile companies who chose not to go public grabbed the media spotlight, a closer look at TMX's Capital Formation business reveals many more significant wins. TMX continued to build on our track record of enabling growth in the innovation sector, and the S&P/TSX Tech Index was up more than 60% in 2019, outperforming all the major North American indices. Our markets welcomed 40 new innovation companies last year, including high-profile IPOs like LightSpeed and [ Dachibo ]. And despite the slower financing environment, we had a number of significant capital raises in the tech sector. Descartes raised $325 million in June and Shopify raised over $900 million in September. December also marked a major secondary financing in the mining sector as well with Katanga Mining raising $7.7 billion through a rights offering. In total, there were a 146 new listings on TSX and TSX Venture in 2019, excluding investment funds, a number that stacks up very well when you look at listing activity around the world. In fact, we added more new listings last year than any other market exchange in North America.TMX Exchange is ranked #2 in the world and new listings for 2019 according to the World Federation of Exchanges. And our strategic push to expand TSX and TSX Ventures footprint in targeted regions and sectors gained momentum in 2019, where again, we ranked #2 in new international listings among our peers for 2019; and #1 in North America. We are consistently asked by analysts and investors to discuss our listing pipeline. The focus is not on just 1 or 2 potential new listings. Our Capital Formation team sees the addressable market in a different, bigger way. There are thousands of companies in all sectors and regions around the world that need what we do to achieve their growth objectives. Our long-term pipeline of over 1,500 companies is vibrant and strong and is built to compete.Now turning to Derivatives. In Derivatives, we are focused on moving to capitalize on the growing demand, particularly on the buy side for Derivatives products in global markets by expanding MX's existing international sales network in foreign markets. We see this as a growth opportunity, and Luc Fortin's team is working closely with our existing clients to increase investor awareness of key Canadian benchmarks and liquidity in MX's signature products. Volume traded during our extended hours now represents approximately 4% of overall volume, and we are on track to extend this into Asia in 2021.On the product front, the performance of the rebooted 5-year government of Canada Bond futures contract or CGF has been a major win for MX. Participants have responded to a new market-maker program designed to develop the midpoint of the Canadian listed yield curve. Since its relaunch in December 2018, average daily volume on the CGF contract more than tripled, and open interest up -- was up almost 200% at year-end. Overall, revenue from MX and CDC (sic) [ CDCC ] was up 3% compared to last year, driven by higher volumes in our signature products as well as higher revenue from repo clearing. Now while overall volumes were up for 2019, MX volumes were down in the fourth quarter when compared to 2018. Paul will take you through the quarterly numbers in a few minutes, but I wanted to point out that despite the slower quarter to finish 2019, open interest remained strong at the end of the year compared with 2018. And that's an important measure to look at in terms of gauging the flow of money into the market. Open interest on December 31, 2019, was up 11% overall from the end of the previous year, including a 20% increase in the futures products. And we are seeing encouraging signs in the Derivatives markets to start 2020 with MX volumes for January, up 14% over the first month of 2019.Moving on now to Trayport. The business continued to deliver strong revenue growth during 2019. Revenue from the core subscriber business, including VisoTech was up 15% in sterling over 2018 with a 7% increase in the average revenue per user. Trayport also took a significant step forward in a strategy to capitalize on secular trends in energy market trends -- sorry, in secular energy market trends, including the shift to cleaner and renewable sources and the evolution of how and where these transactions take place with the globalization and digitization of marketplaces. Brokers using Trayport are a substantial source of liquidity in the versioning global liquid natural gas market. Activity in the signature European and Asian benchmark LNG contracts accessible through Trayport system increased significantly year-over-year, with 2019 volume in the TTF contract up 39% compared with 2018, and the JKM set an all-time high of average daily volume in November. In the spring of 2019, Trayport acquired Vienna-based VisoTech, a leading provider of European short-term energy trading solutions. VisoTech's advanced algorithmic trading capabilities have now been integrated into Joule, Trayport's core trading screen. Trayport also established an entry point to the U.S. energy market with November's agreement with the Nodal Exchange, a Washington, D.C. based derivatives exchange serving commodity markets. U.S. energy contracts will be available on Trayport screens this quarter, and the Joule network has expanded to include Nodal's trading participants. We have made so much progress in the last few years, increasing TMX's global footprint and becoming the TMX we need to be, indispensable to clients and valuable to investors.As announced last night, the TMX Group Board of Directors declared a dividend of $0.66 on each common share outstanding payable on March 13, 2020, to shareholders of record at the close of business on February 28. Our payout ratio was 50%, within the range of our domestic and international peers. The Board also approved a plan to repurchase up to 560,000 common shares or approximately 1% of our common shares outstanding by way of a normal course issuer bid subject to regulatory approval. This decision reflects the high level of confidence we have in our strategy and TMX's ability to deliver solid operating results. Returning capital to shareholders by way of an NCIB will also help to offset the impact of dilution created by the exercise of share options. We are planning to complete our filing with the Toronto Stock Exchange this quarter.Now with that, I will thank you for your attention and look forward to your questions later on, and turn the call back to Paul.

[Paul Malcolmson, Director of Investor Relations]

Thanks, John. Given that John covered the full year results, I'll focus my comments on the fourth quarter. Diluted earnings per share in Q4 was $0.84, down from $1.24 last year, reflecting a noncash impairment charge of $0.32 per share relating to Shorcan in Q4. Adjusted diluted EPS was in line with Q4 of last year at $1.31. Revenue was $202.8 million in the fourth quarter, down 4% from Q4 of '18, mainly due to decreases in revenue from Capital Formation, Equities and Fixed Income Trading, Derivatives Trading and Clearing as well as other revenue. These were somewhat offset by increases in Trayport and CDS revenue. Lower revenue was largely offset by reduced operating expenses.Now turning to specific business areas. Capital Formation revenue declined by 6% compared with Q4 of '18. The decrease was mainly driven by the decline in additional listing fee revenue on TSX Venture Exchange due to a lower number of financings as well as lower dollars raised. In addition, the number of transactions billed on Toronto Stock Exchange declined by 2% from last year. Revenue from sustaining listing fees was also down as was the case in prior quarters for 2019. Revenue from Equities and Fixed Income Trading was down 21% in Q4 '19 compared with Q4 of last year, reflecting a 25% decrease in overall volumes on all of our equity exchanges, partially offset by the impact of a favorable product mix. In looking at the comparative periods, it's important to keep in mind that the fourth quarter of 2018 was an especially high volatility and high-volume quarter for equity trading. In addition, there was a decrease in Fixed Income Trading revenue in Q4 of '19, largely due to decreased activity in Government of Canada bonds. Revenue from Derivatives Trading and Clearing decreased 5% from Q4 of '18, driven by a 7% reduction in revenue from MX and CDCC. MX volumes were down 9%, and the impact was partially offset by an increase in revenue from repo clearing in Q4 of '19 compared to last year. Helping to partially offset these decreases in revenue during the fourth quarter, we continued to see strong performances from both Trayport and CDS. Revenue from Trayport's core subscriber business, which includes VisoTech, was up 13% over Q4 of '18. The number of trader subscribers grew by 10%, and total traders grew by 7% over the same quarter last year. The key average revenue per user metric or ARPU for the core subscriber business was up 6% in Q4 of '19 over last year. CDS revenue increased by 8%, reflecting revisions to the fee schedule for issuer services and increased international revenue.In addition, certain recoverable costs related to CDS' clearing operation previously netted, are now included in both CDS revenue and in selling, general and administrative expenses. The amounts reclassified to CDS revenue were $5.3 million in Q4 of '19 and $3.6 million in Q4 of '18, both of these represented annual amounts.Turning to operating expenses. Overall costs were down 7% or almost $8 million compared with Q4 of '18. The decrease in cost was largely related to short- and long-term employee performance incentive plan costs of $4.5 million and $2.7 million, respectively. The long-term employee performance incentive plan costs increased by approximately $1.3 million due to the appreciation in our share price and were more than offset by the reversal of an accrual of approximately $4 million relating to long-term employee performance incentives that were forfeited as we discussed in our press release last night.As mentioned, in offsetting this decrease, recoverable costs related to CDS are now included in SG&A. The year-over-year increase was $1.7 million. Overall, income from operations was essentially unchanged from Q4 of last year.Now just looking at our results on a sequential basis. Income from operations increased from Q3 to Q4 due to the higher revenue, which was partially offset by higher operating cost. Revenue in Q4 '19 was up $6.5 million or 3% from Q3, reflecting increases in both CDS and GSIA revenue. This was mainly driven by recoverable costs of $5.3 million related to CDS, which are now included in the CDS revenue line. The increases were partially offset by decreases in Capital Formation and Equities and Fixed Income Trading and Clearing.Operating expenses increased from Q3 to Q4 of '19 by $1.6 million. Again, this is driven by the reclass of the $5.3 million of CDS costs to SG&A. There was also an increase in operating costs relating to SG&A expenses, including project spending and fees and also an increase relating to staffing cost. The increases were largely offset by a decrease in short- and long-term employee performance incentive plan costs of approximately $2.3 million and $8 million, respectively. The latter cost decreased by about $4 million due to the decrease in our share price between Q3 and Q4 as well as the reversal of the accrual of approximately $4 million relating to the long-term comp -- or incentives that were forfeited, as I mentioned a moment ago.Net income in Q4 '19 was down 23% sequentially, largely driven by the impairment charge of $18 million in Q4 related to Shorcan. Based on current assumptions, we determined that the fair value for Shorcan was below carrying value and therefore, took the impairment charge. On an adjusted basis, our diluted earnings per share for Q4 was up 5% from Q3. The increase was mainly due to the increased revenue, partially offset by slightly higher operating expenses.Now turning to CapEx for a moment. We want to give you a brief update on the modernization of our clearing platforms, specifically on Phase 2 relating to CDS. So to recap, we spent $22.5 million up to the end of 2018 and $21.3 million in 2019 related to this Phase 2. Overall, we expect to incur between $95 million and $105 million in CapEx over the entire project. We plan to complete this project by the end of 2021, and we'll continue to provide updates on estimates for CapEx and timing as this project progresses.Last December, CDS filed a proposal to make 2 changes to the existing fee model. The first and most significant change is the proposal to modify its fee model by eliminating the rebates that are paid annually to participants. The second change is the elimination of network connectivity fees currently paid by participants. The elimination of rebates is being proposed to ensure that we can make the significant investment that I just mentioned to modernize CDS technology and to have adequate funding for ongoing future technology upgrades. CDS is proposing to permanently eliminate the 50-50 rebate on core CDS services and the additional fixed rebate of $4 million annually. The total rebates were about $10 million in 2019.CDS also proposes to eliminate port and network connectivity fees. In 2019, participants paid $1.5 million in port fees and $1.7 million in network fees. The proposed fee changes will impact participants differently. But all changes are considered as a package, about 1/3 of participants, so those paying less than $1 million in annual CDS core fees will have an overall decrease in their CDS billings. And heavier users of core services, so those paying over $1 million, will have an overall increase in fees. All these proposals are subject to regulatory approval.Now just to comment on the balance sheet. We reduced our debt by about $80 million from the end of 2018 to the end of 2019. Our debt-to-adjusted EBITDA ratio was 2.1 at the end of 2019, down from 2.4x at the end of 2018. We also held almost $230 million of cash and marketable securities at the end of the year, about $45 million in excess of the $185 million we target to retain for regulatory and credit facility purposes.Now I'd like to turn the call back to Chris to outline the process for the Q&A session.

[Operator]

[Operator Instructions] Your first question comes from Melinda Roy of Deutsche Bank.

[Melinda Anjali Roy, Research Analyst]

Maybe just starting with Trayport. So we saw a strong increase in the number of subscribers on a sequential basis, but it seemed like the revenue kind of lagged after the subscriber growth. So just want to know if this was more of a timing issue or something else going on?

[John McKenzie, Senior VP, Interim CEO & CFO]

Yes. You've indicated the right answer there, which is, this is more of a timing issue in terms of when we sign up new contracts, the period in terms of where we start to recognize revenue from them. And there's also a sequential piece between Q3 and Q4 that some of the new clients that we brought on, particularly with things like VisoTech, that would have had larger onetime revenues associated with them that don't reflect into the revenue stream going forward. So it's a combination of those things, both in terms of new contracts with new clients, but not seeing the revenue flow through yet, and that's just a timing piece and also some onetimes.

[Melinda Anjali Roy, Research Analyst]

Okay. Great. And then just a quick follow-up on that. Could you give us an update on the initial reception of VisoTech after the recent integration of the Joule platform? And then maybe how soon do you think you can leverage some of VisoTech's algorithm trading strategies into other asset classes?

[John McKenzie, Senior VP, Interim CEO & CFO]

So I'm actually happy to be able to say that within the last number of weeks, we've seen net new contracts with existing Trayport participants that now have VisoTech as an application included in them, so that will be both an enhanced service to those clients, part of the integrated offering and an enhance value in terms of the contract value from a Trayport standpoint. So we are seeing that already. I've seen 2 new contracts that the team was able to celebrate just this month. With respect to the next question around using it with other asset classes. Focus right now is using it and deploying it with the Trayport customer base. We are going to have a broader look in terms of how we use those analytic capabilities throughout all of TMX, but that is a longer-term piece. And the focus right now, again, is around integration and selling to Trayport clients.

[Operator]

Your next question comes from Nik Priebe of BMO Capital Markets.

[Nikolaus Priebe, Analyst]

I just wanted to start with a question on the leverage ratio. I think as Paul alluded to in your comments, you continued to use excess cash flow to repay debt throughout 2019. With the leverage ratio now 2.1% and declining, have you started to, sort of, engage in a discussion on other forms of capital return, like buybacks or moving the goalposts on the payout ratio? Or are you just comfortable continuing to delever as long as the cash flow profile supports it?

[John McKenzie, Senior VP, Interim CEO & CFO]

Yes. I mean, Nik, it's fair to say that we have active conversations on all those components. I will point you to the one piece that we did take through the Board this month which was to put an NCIB in place. I recognize from a use of cash standpoint, it's not a large NCIB, but an issuer bid of 1% at current share prices, would use approximately $70 million of cash as exercise. And how much additional cash comes in through the exercise of options will impact the net amount of what we see in the books. But the focus really is continuing to see where can we invest to expand the business and accelerate the strategy. So the -- while we are at the lower end of the leverage ratio now, our team has been active in a number of areas in terms of looking at potential investments to accelerate the business. The challenge being in the marketplace today is some of the valuations we see are very high for assets that may not make sense. And so we are keeping a disciplined approach to it. But expect us to continue to look for opportunities to use that cash generation to find ways to accelerate the strategy. With respect to the other part of your question, we are going to continue to look at ways to enhance shareholder value. So the launch of the NCIB this time was one of those pieces, and we will continue to look at both dividend payout ratios, both on our own and how we compare to a peer group going forward.

[Nikolaus Priebe, Analyst]

Okay. Okay. Got it. And then just one other one for me. I just wanted to ask about what factors triggered the write-down of Shorcan in the fourth quarter. I was just wondering if you could give us a little bit of color on that. I don't know if trading volumes have been trending lower, hard to assess from the public disclosure. So I thought I'd just ask you directly.

[John McKenzie, Senior VP, Interim CEO & CFO]

Yes, that's a great question, Nik. And I'm going to take you back a number of years to give you the full answer on it, which is you've got to go all the way back to actually the Maple transaction in 2012, which -- with that transaction, all of the assets that were part of the TMX franchise at the time were written up to the market value of that deal at $50 a share. Every year, we do relook at that mix of assets and look at our strategy and see if the growth forecasts continue to support the asset positions and the balances that we have on our balance sheet. And Shorcan, while Shorcan is a really important piece of business. It provides a really critical client service in the fixed income space. It is one of more traditional marketplace. And what we saw in our strategy and where our focus for growth is going forward is we didn't see the long-term growth in that business that would support the valuation that were carried on the balance sheet. Where we really see the growth is on the comparable futures products. And as we saw in the discussion around MX, the strength that you're seeing on the 5-year, the potential that we have to launch the 2-year this year and continue to expand the yield curve products, that's where we see the long-term growth around the fixed income products and less so in the cash-based products on the Shorcan side. So it's really about reflecting it being more of a traditional cash-based marketplace and not one of the growth champions as we talked about in the call.

[Operator]

Your next question comes from Jeremy Campbell of Barclays.

[Jeremy Edward Campbell, Lead Analyst]

John, from what we've seen in the U.S. market, a fully robust rate derivative curve enables greater trading -- ability for trading the curve as well as let big financial institutions hedge more granularly. So I guess, now that you've had some success in kind of relaunching the 5-year with a lot of OI growth over the past year or so. Can you give us a sense of your appetite for and maybe the potential timing of further filling out that rate derivative curve with perhaps a 2-year and a 7-year contract?

[John McKenzie, Senior VP, Interim CEO & CFO]

Yes. Just in terms of my comment, I was just talking with Nik, the real focus on the next launch is the 2-year. So we're strong in the short-term in the 30-day, the 5-year is picking up steam, and the 10-year is strong. Now the 5-year, there's still a lot of room to grow in the 5-year as it goes. When you compare it to what we trade in the 10-year today in terms of average daily volume, 10-year is trading 125,000 plus transactions a day. And so while we're getting a lot of strength in the 5-year, there's still a multiple-fold increase that we can see in that from the yield curve. But the next product launch is the 2-year. I don't have the specific timing for you today, but we'll follow-up on that and come back to you on it.

[Jeremy Edward Campbell, Lead Analyst]

Great. And then maybe just a little bit on Trayport, too. I know you've gotten that toehold in the U.S. market with the Nodal partnership that you guys announced last time around. But just kind of wondering if you can help us kind of think through what the optionality is of geographic expansion on the Trayport platform outside of the core European market?

[Paul Malcolmson, Director of Investor Relations]

Yes. So Nodal that we announced last quarter is progressing well. It's a matter on that and anything else that's fairly early stages is attracting the customers, specifically, the brokers. But anything like that, where the product has a very, very fragmented market, Trayport can bring a lot of value just in bringing the buyers and sellers together and showing the prices all on one place, which is on the Joule screen.

[Operator]

Your next question comes from Jaeme Gloyn of National Bank.

[Jaeme Gloyn, Analyst]

First question is related to TSX Trust. And I guess, within the other issuer services line item, there's a decline looking at 2019 versus 2018. This is a business that you're targeting for above mid-single-digit growth. I'm just wondering if you can give us a little bit more color about what happened in 2019. And why this is going to change favorably in 2020?

[John McKenzie, Senior VP, Interim CEO & CFO]

Yes, I'm happy to. And I -- let me start with the macro trends that we were working through, and Paul is going to back me up with some more of the detailed points later on. What you actually saw in Trust was exactly the same impact that impacted the overall Capital Formation business, which is, there's a portion of the Trust business that is recurring run rate business in terms of the agreements with clients, for transfer agent service fee, but there is a piece that also is acting and supporting those companies in corporate transactions, so M&A transactions, new financings, IPOs, those types of things, new offerings. And that's an area where very much like Capital Formation because of the substantial downtick in terms of financing activity and related M&A transactions, those transaction-based activities just didn't happen in the Trust business the same way they did in 2018. When you actually look at the client base, in terms of the market share of transfer agent clients under Trust, and we actually expanded it throughout the year. So net wins in terms of new client adds. And Paul, correct me if I have my numbers wrong, but I believe, growing to 23% in terms of total market share. Our win rates on new clients, that is new clients that are going IPO in terms of who they choose for a transfer agent was in the 70-plus percent range. So really strong activity measures in terms of continues to reinforce that we believe this is a long-term double-digit growth business, but with a short-term impact because that transaction activity wasn't there. The other element that's different in Trust for other parts of our franchise around transaction activity is we actually generate income from net income spreads from the cash that we hold on behalf of those clients. So those cash positions during the year were down substantially, again, related to less activity. As we continue to build the client base going forward and we see a return in those activity drivers and more cash balances that come in, I would expect all those revenue numbers to grow in the new year.

[Paul Malcolmson, Director of Investor Relations]

And just to add about 50% to 60% of that Trust business is recurring revenue. So similar to our own business, you still have that kind of 40%, 45% component that's going to be dependent on the market activity that John described.

[Jaeme Gloyn, Analyst]

In terms of the compensation and benefits, it was highlighted that a decrease in short-term employee performance incentive plan costs of -- was $4.5 million. I'm just wondering if you can describe what were the biggest drivers of a reduction in short-term employee performance incentive comp.

[John McKenzie, Senior VP, Interim CEO & CFO]

One of the things we've talked to many investors around is ensuring that our performance plans and how we pay employees are consistent with the direction that we give to shareholders. So if you go back to the long-term guidance that we talked to, Jaeme, around mid-singles on revenue, double digits on earnings, those are the same targets, although in terms of the details of our budget that are built into our short-term incentive plan. So while we had a positive year on a lot of the metrics on moving the business forward, with the revenue not hitting that mid-singles that directly impacted what was the formation of our incentive pool for our employees. There will be a lot more disclosure on this. Actually, when we get to the management information circular that comes out in, I believe, March, April, where we actually show the details of the scorecard metrics in terms of operating income and revenue, what the targets were and how we performed against them. But that's the basic pieces. That revenue growth in 2019 wasn't where we wanted to be in year. We still have the same expectation in the long term, but that's what's driving that impact in the short term.

[Jaeme Gloyn, Analyst]

Okay. Great. That makes sense. In the CDS, even excluding that $5.3 million accounting change impacts, the revenues increased pretty solidly. One of the explanations was due to increased international sources. Can you explain what's going on in CDS that's driving that huge increase? And that's ex the accounting change.

[John McKenzie, Senior VP, Interim CEO & CFO]

Yes. So the two additional things that were driving revenue increases. There is still some flow-through from pricing that we took a number of years ago around issuer fees, that's now really fully in at the end of '19. But you also picked up on the other interesting pieces. One of the interesting services that CDS provides, and that's unique to CDS that other clearing houses in the world don't provide is access to the U.S. market. So it allows participants in Canada to directly act as DTCC and move positions back and forth, trade U.S. securities seamlessly between the Canadian and U.S. clearinghouses. The pricing model for that is to charge a premium on the U.S. fees, we charge a premium related to that service itself, but also provisioning the liquidity arrangements and the risk management function that goes around that. And what you saw in '19 is just substantially increase in the demand or usage of those products in terms of cross-border transaction by both Canadian and U.S. clients in accessing each other's marketplaces.

[Operator]

Your next question comes from Paul Holden of CIBC.

[Paul David Holden]

So one quick one regarding the CEO transition because it's obviously an important topic. I mean, can you at least give us a sense of expected timing around a decision?

[John McKenzie, Senior VP, Interim CEO & CFO]

I mean, no one would like that better than I would. With the -- what I'd like to -- I'll give you the more context because the CEO transition is not something that was started just now. It was always expected that Lou would be retiring at the end of 2020. I think if you read between the lines in terms of his contract details that went in the circular last year, you can see how the Board structured that extension with Lou. So the board was already actively engaged in a process in '19 to prepare for CEO succession and transition in 2020. And in terms of search firms in place, development programs for internal candidates, et cetera, et cetera. And so when we hit the ground in 2020, it really was activating a plan that was already in place. The direction that they provided publicly is the right direction, which is the board is looking at both external and internal candidates. And given that the process was really already underway, I think that can give you an indication of expectation around timing. Unfortunately, I can't be more definitive than that.

[Paul David Holden]

Okay. That's fair. That's fine. In terms of the CDS, the change in accounting, can you give us a sense of the nature of those recoverable expenses that are now being included in revenue? And really, I'm asking sort of help me think through how I can model it going forward? Is it a relatively stable number, is it transaction-based, both types of things?

[John McKenzie, Senior VP, Interim CEO & CFO]

Yes. It's a relatively stable number. That's why Paul indicated the numbers that in Q4 are annual basis. The nature of those costs are fees that we charge to participants to pass-through the cost of liquidity lines that we've put in place to support the products. These are liquidity lines that we put in place really as it relates to the emerging PFMI principles around cover 1 liquidity, ensuring that we have enough liquidity, if there's any failure in the marketplace. We put substantial new lines in. The cost of those lines are charged back to the participants based on how much risk they bring in to the platform, but they are largely steady state year-after-year. There shouldn't be material changes between them. When we initially put them in place, we've treated it as a pure pass-through. And then on upon reflection in terms of the accounting you'll get at the end of the year, this was something that made sense to be on the actual income statement, both from a revenue and expense standpoint as opposed to just being off-income statement.

[Paul David Holden]

Okay. And then as you think about capital budgeting for 2020 -- I'm sure you've done more than I think, you probably have the plan in place, but what are the major areas of investment for 2020? Whether that's sort of -- whether it's a capitalized expense or just as incurred expense, but what are the major areas of investment?

[John McKenzie, Senior VP, Interim CEO & CFO]

From a capital budget standpoint, in terms of the existing business and the organic strategy, it really is the run rate CapEx that we've guided you to in the past, kind of the $20 million to $30 million in terms of run rate Capex, and the only material piece outside of that is the continued investment in the post-trade modernization initiative, as Paul talked to. So we have given you -- I know we've been promising it for quarters, but giving you more disclosure now in terms of what that actually looks like. The -- and the pieces that are new in there in terms of the proposal we put in the regulatories in terms of how to fund it on a long-term basis.

[Paul David Holden]

Okay. But if I think about that $20 million to $30 million, so that's just sort of sustaining Capex, I think, more about growth-related investments. And again, whether it's capitalized or just expensed, what do you view as your major areas of investment?

[John McKenzie, Senior VP, Interim CEO & CFO]

That actually includes sustaining- and growth-related investments. So a couple of highlights in terms of the things that you're seeing in there, both in last year and this year is we've done substantial internal development around analytics products for Trayport that we expect to be live on in 2020. And we expect in the 2020, we'll be putting some investment into our co-location facilities, so we can expand that for clients, which will be an enhanced revenue opportunity and also an enhanced service offering for clients. But it all still fits within that bucket of guidance, kind of $20 million to $30 million.

[Paul David Holden]

Okay, good. And then final one for me. Looks like you may have a new competitor coming in the Derivatives market in 2020. Any kind of initial thoughts or comments around that? How you're prepared for competition in that segment?

[John McKenzie, Senior VP, Interim CEO & CFO]

Our position is consistent as in the past, we welcome all competition in the marketplace, it only serves to make sure that we are sharper in terms of the products and services we provide. And our focus is going to be continue to execute on our derivatives growth strategy, incremental products, incremental operating hours in different regions and selling to more clients out there. So no change in strategy. We'll just continue to push it ahead.

[Operator]

Your next question comes from Geoff Kwan of RBC Capital Markets.

[Geoffrey Kwan, Analyst]

Just wanted to go back to the CDS, CDCC modernization. With the increased kind of price tag of implementing it. Can you just remind me -- I mean, it's -- you guys have alluded to, I guess, that there was going to be probably a higher cost to it. But just in terms of what's necessarily driving it, is there going to be any sort of incremental savings? And how to kind of think about what the payback periods on that investment is going to be?

[John McKenzie, Senior VP, Interim CEO & CFO]

Yes, that's a -- Geoff, that's a great question. And it was -- if you remember, some of the indicators that we were trying to give throughout '19 was that the CapEx spend, the general -- the run rate spend was indicative of what we would expect over the life of the project, and that's largely consistent with the guidance we're giving you in terms of the total CapEx expectations. The real driver in terms of, kind of, what's different from when we initially launched the product or the project was the level of complexity of customization in the Canadian market, the intricacy of making sure that we met the client needs in a way that was as seamless as possible and the time it takes to do that. So in terms of really developing the right set of requirements and making the appropriate modifications to the product to do that. So when we look at the CapEx spend, it really is a factor of time. It is largely licensing and software development as opposed to heavy Capex. This isn't a heavy capital platform that we're building. Doesn't have any material change on the guidance we've given in the past around savings. There is a component of our run rate, which is the operating cost of supporting this project, which will also -- we'll look to wind down at the end of the project, but we'll give more guidance on that further into the curve. But the piece that we reflected on when we had more visibility to what it was going to take to initiate this for the marketplace, the level of complexity and the requirements work where we needed and the amount then of what that spend would be because of the expanded time frame, it was the right time for us to go back and say, what are the economics of the CDS business? How do we make sure that as the enterprise, we're getting the right return for the investments we're making in it? And that's why we've made the proposal to modify the fee schedule to take the rebates off and to give some breaks on connectivity fees to participants at the same time. It's all around ensuring that CDS is getting the right returns for the substantial investment we put into it.

[Geoffrey Kwan, Analyst]

But I guess, would it be fair to say then, since the expected savings isn't changing that these modernization is kind of required in the bigger picture of trying to move this business forward. But because of the increased costs that, again, whether or not from a return perspective or payback period, not as quick as what was initially contemplated?

[John McKenzie, Senior VP, Interim CEO & CFO]

Yes, but you've got to look at it in context of the proposals for changing the revenue model at the same time, not just the savings piece. So those are all part of the -- I mean, how the project pays back and how you fund future technology as well.

[Geoffrey Kwan, Analyst]

Okay. So in terms of the fee model may change going forward as a result of what you're trying to accomplish. Is that the way to...

[John McKenzie, Senior VP, Interim CEO & CFO]

Exactly. And it's for all of us to remember that the service that CDS provides to the Canadian capital market is a critical service. It's a systemically important risk system and it has to be available and modernized for the entire industry. So it is a must do type of initiative. And the combination of the savings we expect to get from moving onto more efficient hardware, more efficient platform, plus the modifications we're looking to make around the fee model, that's the -- those are the 2 components that provide the appropriate return around the investment.

[Geoffrey Kwan, Analyst]

Got it. Okay. And just one last question, small one, was just going back to the Shorcan impairment. The $18 million, are you going to say like roughly ballpark, how much of that -- of the gross asset value, the write-down represented?

[John McKenzie, Senior VP, Interim CEO & CFO]

Not exactly, but it's -- look at it being about less than half. Yes. And then just in Canada, we actually continue to carry it at a higher value than what we originally acquired it for.

[Operator]

Your next question comes from Graham Ryding of TD Securities.

[Graham Ryding, Research Analyst of Financial Services]

Maybe I could start with Trayport. Just to be clear, the revenue per subscriber number dropped quarter-over-quarter. Is that because of bringing on the Nodal Exchange and those subscribers?

[Paul Malcolmson, Director of Investor Relations]

No, that wasn't related to Nodal, Graham, no.

[Graham Ryding, Research Analyst of Financial Services]

So what -- can you give any color on what was driving the drop in revenue per subscriber?

[Paul Malcolmson, Director of Investor Relations]

Yes. So I think John was alluding to that earlier when we were just talking about the change from Q3 to Q4. So really the 2 factors, some of the longer-dated contracts, where -- particularly enterprise agreements where you'll see an increase -- substantial increase in the number of subscribers. The revenue from those may not start to materialize immediately in quarter. And the second factor was just that we had more lumpiness in Q3 and some non-subscriber revenue that wasn't there in Q4. So that -- those are really the 2 items that accounted for the decrease in sterling terms from Q3 to Q4. You'll see when you -- in Canadian dollar terms, we're actually still up in Trayport from Q3 to Q4.

[Graham Ryding, Research Analyst of Financial Services]

Okay. And the lumpiness is around VisoTech. Is that correct?

[Paul Malcolmson, Director of Investor Relations]

That would have been part of it. Example, the algo trading capabilities.

[Graham Ryding, Research Analyst of Financial Services]

Okay. That helps. What about organic growth for Trayport, after you adjust for VisoTech and also the divestiture of Contigo, if I'm saying it right, just in constant currency, what was the organic growth to Trayport?

[Paul Malcolmson, Director of Investor Relations]

Right. So Contigo, that was sold in November of last year. VisoTech came in, in May of this year. I think in our release, we did talk about what it was on a normalized -- it wasn't a significant change item to the organic growth rate.

[Graham Ryding, Research Analyst of Financial Services]

Well, I think you disclosed 13% growth, including VisoTech. What was the growth if you took that out?

[John McKenzie, Senior VP, Interim CEO & CFO]

Let us come back, Graham [indiscernible]

[Paul Malcolmson, Director of Investor Relations]

We have it for all of GSI, Graham. I don't think we broke it out just for Trayport and VisoTech.

[Graham Ryding, Research Analyst of Financial Services]

Okay. I'll follow-up with you on that one.

[John McKenzie, Senior VP, Interim CEO & CFO]

Yes, we'll do it later.

[Graham Ryding, Research Analyst of Financial Services]

Okay. And then just the timing around the CDS proposal for the increased fees. It sounds like you've got a decent argument of why you should get these higher fees. But do you have any idea around potential timing of this proposal?

[John McKenzie, Senior VP, Interim CEO & CFO]

We -- it'll take as long as it takes. I hate to be a bit glib about it, but these are -- the regulatory process around a material business arrangement like this is complicated. The material we gave you -- and we can actually point you to the actual public commentary document. We actually took it to market in December because it's a regulated entity from a fee standpoint. A change like this goes through a public commentary period for regulatory review. That period ends on the 18th of February. At which point, it'll start the process in terms of the regulatory review, any thoughts around anything we might need to do or the timing that comes out of it. So I can't give you a guidance or indication of timing yet, only that we've been in active discussion with the multiple regulators on this for probably the last 6 months in terms of -- this was our intention in terms of the right way to fund technology going forward, and we are in the process. So that is why that we were kind of silent on timing because we need to work through that program with the regulators and the clients.

[Graham Ryding, Research Analyst of Financial Services]

Okay. Got it. Understood. And then on that same topic, just on the regulatory front. So the CSA just recently came out with the -- they're moving forward with the trading fee rebate pilot study. I guess, coming from your perspective, is there a concern that if this -- if rebates do get prohibited, is that going to potentially impact your equity trading volumes? Could those decline? And then if so, how much revenue -- what's the percentage of your revenue that's potentially exposed to this regulatory change?

[John McKenzie, Senior VP, Interim CEO & CFO]

So a couple of things that I will comment on there. First of all, the -- what the CSA approved was going ahead with the pilot if the U.S. goes ahead, which is one of the pieces that we push forward that there's no reason why you would do that pilot in Canada. We also believe in terms of the feedback we've provided is that there was no reason why they should do it at all when you can actually observe the impact of the U.S. study rather than potentially putting at risk any liquidity in the Canadian marketplace. So that being said -- and we've got a commentary out in the public domain in terms of our views on it. The -- we are already showing lower rebates than the U.S. market as it is. So we separated a number a couple of years ago, the rebates that are provided for non-interlisted companies versus the ones that are interlisted. The interlisted ones have similar model as to what you have in the U.S. But on the non-interlisteds, we were already moving in a process of -- we were bringing those rebates down over time. And we think that's the right way to do it as you move these things over time as rather than making one large-scale change. Our concern with the pilot is what the pilot ends up doing is, it ends up putting different public companies in different buckets. So 2 public companies in the same sector could have different fee arrangements around them, which could impact their liquidity. And we don't think it's appropriate to advantage or disadvantage certain companies based on what is a fee pilot with questionable necessity. So that's our view on the pilot. In terms of the revenue side, as you know, equity trading continues to be the smallest component of our revenue, less than 9%. And this actually primarily effects active trading. We don't think that a change like this, if it actually came to pass to move the rebates, would materially impact our economics in any way.

[Graham Ryding, Research Analyst of Financial Services]

Okay. And then would CDS be impacted if your equity volumes are impacted, do CDS revenue get impacted as well?

[John McKenzie, Senior VP, Interim CEO & CFO]

There is a component of CDS revenue that is clearing fees, but it is the smallest piece of the CDS revenue bucket. The bulk of CDS revenue deals more with the clearing of larger OTC transactions and custody fees and entitlements and corporate action.

[Paul Malcolmson, Director of Investor Relations]

And Graham, just to come back to you on Trayport. So organic revenue growth was 9% for Q4 and 12% for full year 2019.

[Operator]

[Operator Instructions] The next question comes from James Gloyn (sic) [ Jaeme Gloyn ] of National Bank.

[Jaeme Gloyn, Analyst]

I just wanted to come back on GSIA revenue growth. There were some price changes implemented in H2 2019. Can you explain what those price changes were? And is this something that we should expect on an annual basis? Or is this a onetime thing?

[Paul Malcolmson, Director of Investor Relations]

I think what -- maybe you're thinking of, Graham (sic) [ Jaeme ], we talked about some of the initiatives around enterprise deals as an example. That would have been relatively small in terms of the impact on 2019. There would have been some price increases or changes around index products as well, but relatively small impact in terms of last year.

[Jaeme Gloyn, Analyst]

Okay. And then also on that -- in that segment -- and this is excluding Trayport, of course. Higher revenues from recoveries related to underreported usage, real-time quotes, co-location benchmarks and indices. Any of those drivers unseasonably high? And if so, why?

[Paul Malcolmson, Director of Investor Relations]

No, I wouldn't say so, no. And we are moving more away from doing these regular audits of customers. So I would say probably, over time, you're going to see less noise around that in the GSIA line as well.

[John McKenzie, Senior VP, Interim CEO & CFO]

The other piece I'll indicate -- I indicated a little bit when we talked about potential capital spend for this year. Our intention is to expand that co-location facility. So our co-location facility has capacity for 200 racks. It's completely sold out. We've got client demand for more. So we are working on a strategy of expanding it roughly 25%. It should take us the most this year to build that out. But then we expect to be selling that in the back half of the year.

[Operator]

And your next question comes from Graham Ryding of TD Securities.

[Graham Ryding, Research Analyst of Financial Services]

Just a quick follow-up on the Capital Formation side. Sustaining fees for 2020 -- if you've provided some guidance there, sorry, I missed it, but do you have an outlook for how that's going to trend?

[Paul Malcolmson, Director of Investor Relations]

Yes. For sustaining fees, we talked about a little bit last night. So it would be less than $1 million on the Toronto Stock Exchange and relatively flat for Venture for this year.

[Graham Ryding, Research Analyst of Financial Services]

Now that sounds low. Is that just because there's a large portion of your TSX-listed issuers that are at the max fee already?

[John McKenzie, Senior VP, Interim CEO & CFO]

Yes, there's a couple of factors like that. So you're absolutely right. There's a mix factor in there, which is a large portion that are at the max. A lot of new issuers beyond the corporates in 2019 that were ETFs. ETFs play at a much smaller fee. So you're not seeing that same mix impact. And given the -- just the simple challenges in the 2019 market, I think we had about 16 fewer corporates in terms of fewer listings year-over-year, and some of them were large ones, like WestJet taken private, that's at the max, things like that. So it's a mix impact and a slightly smaller issuer base on the senior market.

[Operator]

There are no further questions at this time. I will now return the call to Mr. Malcolmson.

[Paul Malcolmson, Director of Investor Relations]

Thanks, Chris, and thank you, everyone, for listening today. The contact information for media as well as Investor Relations is in today's press release, and we'd be happy to take further questions. Again, thank you for joining us, and have a great day.

[Operator]

This concludes today's conference call. You may now disconnect.