Deutsche Boerse AG

XETRA:DB1

Earnings Call Analysis

Deutsche Börse AG Shows Strong Growth Prospects Through 2026

Deutsche Börse AG is confidently pursuing its strategy, targeting a 10% CAGR by 2026, supported by a 7% organic growth outlook. Notably, net revenue growth, excluding treasury results, is expected to rise from 6% to 8% between 2024 and 2026. The company continues to benefit from high interest rates, although it anticipates a shift to cyclical headwinds in 2025. With new U.S. clients boosting Software Solutions at SimCorp, and strong performance in the Commodities business, total net revenue for 2024 is projected at €5.8 billion, with EBITDA between €3.3 billion and €3.4 billion—both aligning with market expectations.

Solid Revenue Growth Amid Market Dynamics

In the first nine months of the year, the company reported a robust 18% net revenue growth, with 11% attributed to consolidating SimCorp. This performance was underpinned by both secular tailwinds and market improvements, especially across the commodities and fund services sectors. The strong revenue growth puts the company on a stable trajectory to meet or exceed market expectations of around EUR 5.8 billion in net revenues for the upcoming year.

Segments Driving Growth

Key contributors included a 16% increase in the commodities business and an 11% rise in fund services, driven by onboarding new clients and the resurgence in private equity markets. Furthermore, the investment management solutions segment saw a 20% growth rate due to strong client acquisitions in its software solutions, particularly from SimCorp. The overall growth is consistent with the company's Horizon 2026 strategy which envisions average annual organic revenue growth of 7%, supplemented by acquisitions like SimCorp.

Controllable Costs and Strategic Focus

Despite the solid top-line progress, operational costs rose by around 3%—primarily due to ongoing integration costs and strategic investments. The company reiterated an organic cost growth outlook aligned with previous years, indicating strong cost management practices. Furthermore, with inflationary pressures easing, expectations suggest costs should stabilize around similar growth rates in the coming years.

Guidance for Future Performance

Looking ahead, the company expects net interest income to exceed EUR 700 million, benefiting from continued activity in the securities and fund services segments. Furthermore, EBITDA is projected to fall within the range of EUR 3.3 billion to EUR 3.4 billion, in line with market forecasts. Importantly, the revenue growth rate excluding treasury results is expected to accelerate from 6% to 8% between 2024 and 2026, indicating a favorable long-term trend.

Market Outlook and Competitive Positioning

The company maintains a positive outlook regarding the fixed-income market, anticipating a EUR 300 million revenue increase by 2026 stemming from enhanced market share and increased activity levels in derivatives trading. Additionally, the increasing volatility and activity in the commodities market suggest continued robust performance. The leadership expresses confidence in its strategic positioning against competitors, particularly in fixed income and commodities, amidst evolving market conditions.

Commitment to Capital Discipline

The management underscored a disciplined approach towards capital allocation and potential acquisitions, vowing to prioritize organic investments alongside opportunistic bolt-on acquisitions. There remains a commitment to shareholder returns through modest dividend increases and a share buyback program intended to enhance shareholder value. This balanced approach to capital deployment aims to sustain growth while managing debt levels effectively.

Conclusion - Prepared for the Future

Overall, the earnings call presented a strong narrative of operational resilience, strategic clarity, and a disciplined commitment to cost control and growth. With a robust outlook for 2024 and beyond, underpinned by strategic execution, the company is poised for sustained performance and long-term value creation. Investors can look forward to a well-structured roadmap towards achieving Horizon 2026 goals with expected annual revenue growth and prudent financial management.

Earnings Call Transcript 2024-Q3

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Deutsche Borse AG Analyst and Investor Conference Call regarding the Q3 2024 results.

[Operator Instructions] Let me now turn the floor over to Mr. Jan Strecker.

[Jan Strecker, executive]

Welcome, ladies and gentlemen, and thank you for joining us today. We would now like to give you an update on our strategy Horizon 2026 and go through our results for the third quarter and the first 9 months of 2024.

With me are Stephan Leithner, Co-CEO; and Gregor Pottmeyer, CFO. Stephan and Gregor will take you through the presentation. And afterwards, we will be happy to take your questions.

The link to the presentation material for this call has been sent out via e-mail and can also be downloaded from the Investor Relations section of our website. As usual, this conference call is recorded and will be available for replay afterwards.

With this, let me now hand over to you, Stephan.

[Stephan Leithner, executive]

Thank you, Jan. Welcome, ladies and gentlemen. It is a pleasure for me to discuss our latest financial figures with you for the first time today in my new role at this call. I'm very much looking forward to this continuation of our ongoing dialogue. Gregor gives you his usual deep dive into our financial results in a minute. But since I became Chairman of the Executive Board, together with Theodor, just at the beginning of the month, I would like to take this opportunity to give you my perspective on our strategy and our financial targets first.

As I do my introductory rounds with all stakeholders, it is very encouraging to receive feedback on such a strong and positive group at Deutsche Borse. The group is seen as the European leader in capital markets infrastructure and a go-to partner for often very strategic and long-term platform decisions. This is true for new product and market developments our clients drive in the trading businesses. And this is true for the platform choices that clients make in the Securities and Fund Services business. This is also true when it comes to innovation partnerships, like D7, our digital central securities depository. And this is, in particular, true that a key brand and ownership synergy exists when we talk about our new growth segment, Investment Management Solutions with SimCorp at the center.

Clients want to work and be associated with Deutsche Borse. Clients like our quality idea of ideas and people, clients and other stakeholders like our reliability and long-term approach. I'm excited to lead such a strong organization. I'm very grateful to Theodor, my fellows and the Executive Board and indeed the whole One Global Team across our organization for having brought Deutsche Borse to such a standing.

Theodor has been and continues to be a great leader for Deutsche Borse. He has taken the group to the next level. He has been a personal mentor and drawn the best out of all of us as a senior team. The transition is going very smoothly, and we are great partners. We will build on his legacies and take it forward.

I'm particularly proud about the depth of bench in both leadership and experts in key areas that we have as Deutsche Borse Group, especially the continuity and the depth of our technical expertise in business and IT is very impressive and unmatched. I've seen it myself in Clearstream, but also in SimCorp, our trading businesses and in particular, in our technology areas. Clients really value our ability to innovate, and this is down to our people.

My key messages for you today are: First, since Deutsche Borse has developed better than expected in the year-to-date, we have increased and further specified our guidance for 2024. We are now expecting net revenues of around EUR 5.8 billion and EBITDA between EUR 3.3 billion and EUR 3.3 billion and EUR 3.4 billion. This should not be a surprise to you since it is fully in line with current market expectations. The development this year also underscores that we are very well on track for our strategy Horizon 2026.

The second point I really want to emphasize is, the leadership transition from Theodor to myself is well underway. And from the 1st of January next year, I will assume the sole responsibility as the CEO of Deutsche Borse. Over the last couple of years, we have all jointly developed our successful business model and demonstrated the potential that this great company has to offer.

Last year, we presented our Horizon 2026 strategy, under which we are further enhancing our position as a leading global market infrastructure provider. We will continue to build on the key pillars of this strategy and its financial targets for 2026. That's what I want to send as a clear message of continuity and commitment.

The third point, however, is that with the interest rates having peaked this year, we will increasingly focus on net revenues without treasury results as a key steering metric. This will make our underlying operational performance more transparent and set targeted incentives for further growth. For the development of the underlying net revenue, we continue to have ambitious plans and expect, in fact, an acceleration from 2024 to 2026 compared to the last 2 years.

The fourth and key point that I also want to bring back to many investors that have emphasized the importance of proper capital allocation. And therefore, I want to confirm that the new framework we presented last year continues to apply fully. M&A will also continue to be part of our growth and help to realize scale benefits, but we will remain disciplined on M&A, especially until the ongoing integrations in Investment Management Solutions are fully completed. He, however, will be the continuity of our discipline regarding dividend growth and the usage of share buybacks as an additional tool to distribute excess cash.

So around those 4 points, let me turn to the first chart, Page 3 in the presentation. Our strategy Horizon 2026 is built on 4 pillars. These 4 pillars we announced last year, and we will continue on those 4 pillars. Pillar #1 is our strong organic growth journey over the last couple of years that has further significant potential. The secular industry trends that support our strategy are fully intact. These include the futurization and further growing importance of structural risk management, especially now also in the fixed income derivative space.

The trends include the further deepening of existing markets, for instance, as we now see it in a powerful way in the power and gas in our Commodities business, EEX, where new investor types are entering the market.

The next trend is the expansion of the clearing applications under the regulatory changes, a great opportunity for Deutsche Borse Group. Underestimated and not enough talked about is the cost pressures that our clients are under, and therefore, the subsequent trends to outsource. This will benefit many of our platform offerings in businesses not only of the funds or the routing, but also in 360T, in Kneip and many of our data businesses.

And there's a last trend and very importantly, the most prominent direct road that the buy side is playing in many areas of the financial intermediation chain in capital markets is going up and going up. We're well positioned for this as we are now increasingly also a key go-to partner for the buy side. That's very consistent that in addition to emphasizing in general organic growth, our pillar #2 of last year's Horizon '26 strategy is the particular focus to address the buy-side opportunity through the further development of our new Investment Management Solutions segment.

This includes the alignment of ISS and STOXX as well as the integration of SimCorp and Axioma. We are fully on track with the integration and setup of the segment. The synergies are coming through as planned, and we see excellent opportunities for further synergies with the rest of the group. I know it's a topic that is particularly in focus, but let me reemphasize this pillar #2 is very much intact, and we're on track.

The pillar #3 in our strategy last year was our digital leadership aspiration, underpinned by our hyperscaler partnerships that are progressing very well. With now more than 50% of our load in the cloud, we will go to 70% by 2026. Our short-term focus on facilitating the crypto activities for institutional partners in Trading & Clearing and a very unique proposition in Securities and Fund Services.

So we, overall, are very confident to be leading the change in the industry when it comes to digitization. Again, it is essential for us to be a strong partner. Most recently, our key role in all live production tests at the ECB for alternative digital wholesale euro settlements has shown this. With now over 40% of German retail structured products under the issuance of D7, our digital platform, we are far ahead in real, not just test cases compared to others. We think that this will also help to create natural pan-European offerings, and it will drive consolidation to our platforms.

Finally, and I mentioned it earlier, let me come back to the pillar #4 of our strategy. With Horizon 2026, we have committed ourselves to a very disciplined approach towards capital allocation. Let me fully reconfirm this commitment. As we are very cash flow generative, we are fully on track with our deleveraging after last year's acquisition of SimCorp. We will continue to balance the capital deployment according to our framework. Our priority is in internal organic investments and smaller bolt-on capability expanding acquisitions as we have done in the past.

We will also remain very disciplined regarding potential larger acquisitions into 2025 and beyond. We still have to fully complete the integration of our last acquisitions and realize the full potential. But we expect to return to the market sooner or later to further support our core business by M&A when strategically and financially attractive opportunities arise.

We are also carefully waiting our options regarding the minority shareholdings in our ISS STOXX business. We're still firmly on the dual track approach, and no decisions have been made. I'm also very confident, however, that all of this can be combined with capital returns to our shareholders beyond our regular dividends. With the share buyback program this year, we have made use of a tool that I believe we should further build on in the future, especially as our deleveraging is progressing well and faster than originally expected.

So in addition to the confirmation of our strategy, let me also reconfirm our financial outlook until 2026 that you can see on Page 4 of the presentation, with a slightly different perspective that I think is very important as we go forward. For our entire planning period from 2022 until 2026, we have announced a 7% organic net revenue growth outlook on average per annum. Combined with the 3% net revenue growth step-up from the SimCorp acquisition, this gave us the total of a 10% CAGR over the next few years that we have guided towards in the Horizon 2026. We are fully on track to achieving these targets.

While we benefited from rising interest rates during the last 2 years, we will see interest rates turning into a cyclical headwind starting in 2025. But structurally, our treasury result, which includes the net interest income from Securities and Fund Services as well as the margin fees from Trading & Clearing will remain a material contributor and will not decline to the level we have seen in 2022 or before.

Our focus on managing the treasury results will not change, even if it is largely depending on external factors. But for managerial steering and therefore, also for guiding the market, we will focus on net revenues without the treasury result because that is the heart of our organic growth plans. So far, we have achieved a 6% net revenue growth rate without the treasury results. Because of an improved mix towards higher-growth businesses, synergy realization and an acceleration of growth in some areas, we're expecting an increase of the net revenue growth without the treasury results to 8% between 2024 and 2026. And this very much is a sign around the improved quality of our net revenues and earnings outlook.

So therefore, as you can see on Page 6, all segments are expected to contribute to the strong underlying organic growth until 2026. Let me give you my perspective on the key contributors. In our Investment Management Solutions segment, the Software Solutions momentum at SimCorp is fully on track. We are particularly excited to see the growth in new U.S. client names, the momentum of transition to Software as a Service, where we need to remain focused on the efficiency of our implementation. And the third element is the strong synergies from selling Axioma analytics to existing SimCorp clients.

To give you more insight into Software Solutions because that's what I've heard as one of the areas that all of you are very interested in my early conversations, we plan to cover this in a dedicated deep dive session in November. Our ESG and Index business, the second part of the Investment Management Solutions area, ISS STOXX continues to structurally benefit from the need of our clients for more sophisticated solutions, like custom proxy voting policies and a focus on higher quality and institutional grade data in response to the many green washing issues.

At the same time, the business has been faced with headwinds in 2024, resulting in overall growth being behind the original plan just like for many of our data competitors. Specifically, the underperformance this year was heavily driven by our Market Intelligence business, which we have already started to restructure, and we expect the overall ISS STOXX business to continue to be a solid bottom line growth contributor. That's a very important message. It's a fantastic business that has fundamental trends that will, in the long run, make it a distinctive opportunity.

Further, the second segment is in the Trading & Clearing. The key growth drivers, as you know, are the fixed income road map and financial derivatives and our Commodities business. On fixed income, the base momentum is very strong, and you see it in this quarter's figures. We are located in the home of the euro, new instruments like short-term interest rate derivatives profit from this. Just recently, the European Commission has been added as a player in our repo business. It has been a very exciting event. I can tell you, it was a big signal to the wider market.

Still, the fixed income road map with a total of around EUR 300 million uptick in net revenues, as expected, is backloaded to 2026 due to many of the regulatory processes. We appreciate that many of you are looking for a deep understanding of the fixed income road map, and we therefore also plan for a deep dive in November on this topic.

In Commodities, we have made much faster progress compared to our initial expectation, and we are expecting to achieve our 2026 targets already this year. This is mainly driven by secular trends like gaining market share from OTC and as I mentioned earlier, winning new clients. Despite this fantastic development, we are expecting further growth in the Commodities area going forward. This is a true pearl to this fantastic business, has a long way to go.

In our third segment, the Fund Services, the outlook has significantly improved after the difficult years of 2022 and 2023. Key investments made then are now enabling us to return to double-digit growth. In addition to the big partnerships, which we have talked about, HSBC and UBS, there is a broad momentum, especially in our fund execution capabilities. With both Kneip on the data side and FundsDLT on the digital side, we now have a more comprehensive offering than our main peers and those that follow the sector and the public announcements will find this documented again and again.

So last but not least, our Securities Services business with a 7% net revenue growth expectation on average per annum, as you can see on the chart, is certainly beyond what we would have considered possible 5 or 6 years ago. This is driven by the ever-growing amount of debt outstanding globally and the resurgence of fixed income as an investable asset class. The business, and I say this very passionately, is a true pearl in combining growth with profitable and cash flow generation, fantastic business.

So let me finish with 3 concluding remarks before I hand over to Gregor. Firstly, we certainly have very ambitious plans for organic growth. However, these plans are backed up by a strong team and by our excellent track record, both in organic growth and on inorganic add-ons. Just look at what we have achieved in Fund Services or in Commodities over less than a decade, but also how Investment Management Solution is now really coming together.

Second point I want to emphasize is a key element of our outlook is our top line growth momentum. This also supports our scaling. Further, we are strongly committed to disciplined cost management. This year's organic operating cost growth of just around 3% underscores this very well. If necessary, we also have prepared contingency plans that we can activate should we face more headwinds than we just implied from the interest rates. With that, we are also confident to deliver the planned strong bottom line momentum that Horizon '26 has been talking about.

The third element I would like to emphasize is we will remain very diligent in our risk management. Reliability and regulatory compliance are key. We have continued to invest substantially in the reliability, the novelty and the client centricity of our core systems. I am therefore full of confidence and excitement for our outlook from the increased statue of Deutsche Borse, which resulted from a step-up of our client trust across so many of our businesses. It is so rewarding to experience this in my meetings, it results in the underlying business momentum as documented by the developments in 2024 and this momentum, combined with the clarity and continuity of our strategy Horizon 2026 and the smoothness of the leadership transition, lets us all stand firmly behind the accelerated organic growth until 2026 that I outlined. We will just keep moving.

But let me now come back to our very good performance in Q3 and our more specific outlook for the excellent year 2024. Gregor, over to you.

[Gregor Pottmeyer, executive]

Thank you, Stephan. On Page 7, we show the details of the results for the first 9 months of the year. Across all 3 quarters so far this year, we delivered very similar strong net revenue growth rates. The first quarter, it was 16%; in the second quarter, 19% and now in the third quarter, 18%. In total, this resulted in 18% net revenue growth in the first 9 months, of which 11% was driven by the SimCorp consolidation. The remaining 7% were our organic net revenue growth, which is in line with our Horizon 2026 growth expectation. Since interest rates on average were only slightly higher compared to last year and market volatility down because of strong first quarter last year, most of the 7% organic growth was driven by our secular initiatives.

Our Investment Management Solutions segment saw an organic increase of net revenue by 7% in the first 9 months. This was mainly driven by client wins and upselling in Software Solutions, where we achieved 9% organic growth. The Trading & Clearing segment grew net revenue by 7%, with our commodity business being the best-performing part of this segment with 16% net revenue growth. In Fund Services, we started to benefit from a more favorable market environment and increased net revenue by 11%, which is in line with our general growth expectation for this business.

And in our Security Services segment, we achieved 8% net revenue growth in the first 9 months. Even without any material impact from the net interest income anymore, which is a very good result. With this development and the tight management of operating costs, I will explain on the next page of this presentation, we achieved very good operating leverage on an organic basis and double-digit EBITDA growth in line with our expectations.

Let me now walk you through the operating cost development in the first 9 months of the year on Page 8. The overall operating cost increase was mainly driven by the consolidation of SimCorp. The termination of the agreement between EEX and NASDAQ to acquire the Nordic Power Derivatives business, resulted in exceptional cost of EUR 15 million in the second quarter. The remaining 3% organic cost growth was driven by inflation, higher investments into growth and infrastructure as well as higher share-based compensation. For the full year, we expect an organic operating cost growth similar to this level.

On Page 9, we show the details of the third quarter results. The 9% organic net revenue growth was mainly driven by our secular growth initiatives. Contrary to the last couple of quarters, interest rates were not a cyclical tailwind anymore, but have started to turn into a small headwind. And despite the market volatility peaks we saw in August, the average volatility level was even slightly down in the quarter compared to last year. The operating costs increased only 2% in the quarter. This was, on the one hand, driven by lower exceptional costs compared to last year and some of the SimCorp transaction costs incurred. And on the other hand, inflation, additional investments and higher share-based payment compensation resulted in an increase of operating costs.

I'm now turning to the results of the segment, starting with the Investment Management Solutions segment on Page 10. The segment is split into 2 parts. The first part is Software Solution, which is a combination of SimCorp software business and Axioma's analytics business. SimCorp benefited from contract renewals, new clients and upsells with strong year-over-year growth of 20%. In Analytics, we saw higher point in time net revenue in the third quarter last year. This development at Axioma is also visible in the key performance indicator for this business, the annual recurring revenue. It increased to EUR 551 million, which is 11% more year-over-year.

For SimCorp alone, the ARR growth developed as expected and amounted to 14%. With the seasonal pickup of activity we expect in the fourth quarter, the overall ARR is also expected to recover well into our guidance range of 13% to 18%.

The second part of the segment is a combination of the ISS ESG business and the STOXX Index business. The performance of the ESG business improved further, and we saw a 9% net revenue growth in the quarter. This was, in particular, driven by strong performance in Governance solutions. The headwinds in ISS Market Intelligence business continued in the third quarter as our clients are more cost sensitive in light of the market environment in the asset management industry.

Let me turn to Slide 11, the Trading & Clearing segment. In financial derivatives at Eurex, we saw double-digit growth. In equity-related product, temporary spike of volatility had a positive impact on revenue. But aside from that, the environment for equity-related derivatives was more muted. In fixed income-related products, we continue to see the impact from incentives for building initial liquidity and short-term interest rate derivatives. But those effects were by far overcompensated through revenue growth in fixed income futures and OTC clearing.

In Commodities at EEX, the growth was mainly driven by new record levels of power derivatives trading in Europe. This was the result of significant market share gains from OTC and business from new clients, including quant-driven participants. An increase in net revenue from power spot product was compensated by a decline in margin fees. Our foreign exchange business, 360T, new buy-side clients and faster growth in regions, like the U.S. and Asia Pacific, helped to, by far, compensate the lower volatility we observed since mid-last year.

In the Fund Services segment on Page 12, the market environment continued to improve in the third quarter. While cyclical headwinds from the trends towards passive prevailed, higher equity market levels were supporting the business. Together with the continued onboarding of new clients and funds, we achieved 14% net revenue growth in custody and 37% net revenue growth in settlement. Fund assets under custody in September also reached a new record level of EUR 3.8 trillion. Funds distribution also benefited from new clients and saw a net revenue increase of 19%.

And now turning to our Securities Services segment on Slide 13. Despite the first interest rate cuts in Europe and the U.S., the net interest income increased modestly year-over-year. This is because of an increase of cash balances by 16% to a peak to close to EUR 19 billion in September. Amongst others, the increase related to the volatility in the Chinese market and therefore, you would expect some normalization of cash balances going forward.

Custody and settlement continue to benefit from the ever-increasing amount of global debt outstanding and higher activity in fixed income markets. In addition, custody also benefited from higher equity market levels. As a result, assets under custody reached yet another record level of EUR 15.2 trillion in September and settlement transaction a record level of 8.7 million transactions in July.

On the last page of today's presentation, we show the details of our updated guidance for 2024. Main reasons for the better than initially expected development in 2024 are the strong performance in our Commodities business, EEX, and the higher net interest income in Securities and Fund Services. In Commodities, we saw a step change of activity levels over the last 2 years, which is mainly driven by a significant increase of our market share compared to OTC. We think it's a sustainable development and are expecting further structural growth going forward.

Our net interest income modeling is mainly based on current forward rates. At the beginning of the year, the market expected 5 to 6 rate cuts in the U.S. After we saw the first 50 basis points cut in September, the market currently expects 2 more cuts. Since this is less than originally expected and more back-end loaded, we are expecting a net interest income across Securities and Fund Services that is solidly above the EUR 700 million level we saw last year. As a result, we are now expecting net revenue to amount to around EUR 5.8 billion, which is in line with the current market expectations.

As mentioned before, for the full year, we expect an organic operating cost growth similar to the 3% level in the first 9 months of the year. Therefore, the EBITDA is now expected to amount to a range of EUR 3.3 billion to EUR 3.4 billion, which is also in line with market expectations. This concludes our presentation.

We are now looking forward to your questions.

[Operator]

[Operator Instructions] And the first question comes from Benjamin Goy, Deutsche Bank.

[Benjamin Goy, analyst]

One question to follow up on your comments on M&A. Being a bit more cautious for now, in particular, on larger deals given the ongoing integration, I was wondering, does it also apply to ISS STOXX because ISS has done several bolt-ons in the past, but this has slowed down. And I think we see a pretty -- it reads like pretty small deals they have done only. Are you looking to take advantage of maybe lower valuations here? Is there anything interesting on the Horizon? And what can we expect? And in that light, maybe also update us on the net debt EBITDA?

[Stephan Leithner, executive]

Thank you very much for the question. It's very much appreciated, Benjamin. Let me kick it off on the M&A side, you asked about ISS STOXX and their bolt-on model. In fairness, I mean, the approach that I outlined around the discipline applies to everybody across the group. At the same time, a number of the bolt-ons and some of the power of ISS STOXX is not driven by sizes that make it to any radar screen that exists. So just in that context, we have done 2 bolt-on acquisitions over the summer, one called Celsia, a tool that I would actually recommend to everybody on this call since you're investors. It's really around a tracking and accounting tool with respect to ESG data, which, as you know, is one of the complexities. And the second, very complementary is a content component that supports that first acquisition.

So the bolt-ons in that range that are well below EUR 10 million type sizes is something where we complement and continue to complement. So that momentum is very much intact. But I go back to the bigger picture on discipline, we are very adamant about.

[Gregor Pottmeyer, executive]

Yes. With regard to net debt to EBITDA and the rating stuff. So far, it's -- our cash flow is very strong. We expect to have some EUR 2.5 billion cash flow in 2024. Our surplus cash will increase to more than EUR 900 million at the end of the year. It will continue to be roughly EUR 2 billion at the end of 2025. So we have financial flexibility, as you see here. And from a rating perspective so -- at year-end, we are above the threshold. So we will be above the 40% threshold on FFO net debt and significantly below the 2.5 for the AA- rating. So far, we have enough financial flexibility.

[Operator]

The next question comes from Arnaud Giblat, BNP Paribas Exane.

[Arnaud Giblat, analyst]

I was just wondering if you could look at -- zoom in a bit on the trading business at Eurex. We've got -- Euronext have announced a range of new offerings in single name derivatives and in rates talking up the potential to compete. I'm just wondering how you see this competitive threat, especially in the context of you looking to benefit from shift towards short-term interest rates?

[Stephan Leithner, executive]

Thank you very much for the question there. Let me kick it off. I do believe we have a very, very strong market position. That really covers the full breadth of products and range also the areas that you alluded to, we feel very confident around that is the minimum to say. At the same time, we continue to innovate. I mean, there are new areas. As you rightly alluded, however, the main focus and the momentum in the market right now is really not around some of the equity areas. It is really very much on the fixed income side, and that's where we have a very strong position, and we feel that continues to enhance as we add products.

[Operator]

And the next question comes from Michael Werner, UBS.

[Michael Werner, analyst]

For the presentation and for the deep dive into the Horizon strategy. I think you're guiding for about 3% organic cost growth this year. As the inflationary pressures ease, how should we think about cost growth for '25 and '26? Is there going to -- do you need to do much incremental spend to capture some of these revenue initiatives? Or is the kind of the infrastructure and the scale kind of there?

[Gregor Pottmeyer, executive]

Yes, Mike, thanks for the cost question. So yes, we -- our target is to achieve that one of roughly 3% organic cost growth for this year. For next year, indeed, the inflationary pressure is less than compared to the last 2 years that obviously will help. And as we all know, we will see some pressure from declining rates so far. Therefore, we are ready to have some measures that we are able to have, on the one hand side, enough investments in our technology, in our products and in our markets. And on the other hand side, that we have also some cost saving opportunities to get additional financial flexibility.

So overall, we all know that this year, we have also roughly some EUR 50 million one-offs out of our integration of SimCorp and Axioma and also with regard to ISS STOXX. So that's the number. And obviously, that will disappear next year. And therefore, our expectation is that we will below the 5% cost growth next year as we don't have that kind of EUR 50 million anymore. And so therefore, it should be in the same range as we have seen this year.

And then for 2026, I think we have to look at that what about the interest rate development, what about our secular growth initiatives? In principle, as we guided before, for more than 5% secular growth, we need up to 5% cost increase, and that would be, from my perspective, a reasonable assumption also for 2026.

[Operator]

The next question comes from Bruce Hamilton, Morgan Stanley.

[Bruce Hamilton, analyst]

Thanks for the slides. Just on the IMS business, I guess, I know it can be lumpy, but trying to understand that your revenues missed sell-side expectations by about 15%. Obviously, we could do with improving our sort of modeling. And then ex-ing out the one-off that was double digit, I guess it would be a 20% miss. So I'm just trying to square that with it all being on track, particularly given that the SaaS revenues, which I think should be fairly predictable and recurring, those also dropped 15% Q-on-Q. So can I just understand that?

And then thinking about that translated into your reiterated 2026 revenue target despite NII being lower, why you have so much confidence in the reacceleration? And if it's non-NII, presumably, that carries higher costs. So with the EBITDA outcome be the same as you expected in your initial plan? Or would that be a bit lower because the revenue source is not NII, it's going to be more other revenues?

[Gregor Pottmeyer, executive]

Well, Bruce, let me start and then, obviously, Stephan will give his perception. So first of all, there is no miss in the Investment Management Solution revenues. Yes, we have seen the consensus and compared to the consensus. But our view is it's according to plan, specifically the SimCorp development right with the 20% growth, it's according to plan. We continue to expect EUR 600 million for SimCorp this year. And we always told you there's a seasonality and there's a very strong seasonality. The most important months is December, even Q4, but it's even December, right? And at the end of the day, we will see what is our December performance, and then we can finally confirm that, that's why we say it's not a miss. And we see a strong pipeline with regard to our clients.

And we will finally see what contracts can be signed and which not. And is it an on-premise contract? Or is it Software-as-a-Services contract? So far, no change in our view. We are rightly on track to deliver here. And that's why we also have a high comfort level that we achieved our SimCorp, Axioma targets for the next 2 years, right? So no change with regard to that. Where we are behind plan is the ISS STOXX business, but there's nothing new compared to what we have seen in the first half year. But here, we have also a higher confidence level that from 2025 and 2026, we will see clearly higher growth rates than we see in 2024.

With regard to 2026, so from a -- yes, we guide overall for Deutsche Borse Group 8% organic cost growth, and it's higher compared to the 6% organic net revenue growth in the last 2 years. And it's according to our plan, this higher growth expectation in the second half of the Horizon path because we always said fixed income road map is back-end loaded, right? And therefore, that is one of the big reasons why we say we are confident that we have higher revenue growth in the second part of the Horizon path. And therefore, that's our confidence level that overall, we will achieve our Horizon targets 2026.

And indeed, you are right, our NII expectation is lower. So we -- in our Investor Day last year, we said, for the Clearstream business, it's roughly EUR 500 million. Now we tell you it's from our perspective, EUR 400 million to EUR 450 million. And this, let's say, EUR 75 million less in the midpoint will be compensated, specifically in the Trading & Clearing area, where we already achieved in the Commodity business our target, and therefore, we will overachieve our target here because also in the Commodity business, we continue to expect high single-digit growth even on this higher level what we have seen this year. So that's just from a number perspective our view here. And then maybe Stephan from a business perspective.

[Stephan Leithner, executive]

Thank you very much, Gregor. I'm very much here, and let me just pick up on your first question, which Theodor -- which Gregor has sort of answered well in the context of the numbers. But from a seasonality pattern, what we see is with SimCorp up 20% in Q3 and ISS STOXX now back to a 9% growth in Q3 that's -- in the ESG side, that's a very good performance and an important part. So I do believe, more importantly, if I look at the underlying momentum, then we have 13 new clients that we added in Q3 on the software side. That's in line very much with the earlier quarters. So that's intact.

If I look at the franchise names behind that and see Texas Teachers, which was announced in early September, I mean, that just shows you what quality of names is really turning to SimCorp in their front-to-back one SimCorp proposition that we have talked about. So I truly believe in that momentum, we will need, and that's what we need to take on. We need to continue to be transparent and educate around the seasonality pattern, and that will certainly improve the consensus point.

On 2026, let me just on the acceleration, and we clearly spent quite some time on that. Let me add again from a qualitative perspective and Gregor mentioned around the fixed income road map, that certainly was always something that was more back-end loaded. But what we really see is that the investments we have made, and I alluded to earlier, the broadening of our offering that we did on the fund side, for example, I mean, this really continues to accelerate and broaden the opportunities, just like the revenue synergies on the SimCorp transaction, are now building with Axioma. But that means, again, in the years to come, there will be additional fuel.

And last but not least, let's not leave commodities off the hook. I mean they have just shown a fantastic story. We've already achieved the 2026 plan this year. Now this will continue to grow. And it's not only about adding new clients, but what I find so exciting about this business is that the changing structure in the European gas and power markets are really supporting. I mean there's a fragmentation happening in production that is unbelievable down to every solar panel on every roof will in future need to think around managing risks and revenue streams. So there is an inherent extension. It is exactly the pattern that we have seen in many of the other markets, that we have seen in 360T that we discussed with you when we talked about the funds business. So on commodities, especially gas and power, this has a long way to go. So in that sense, I feel very comfortable about the 2026 outlook we have here.

[Operator]

And the next question comes from Hubert Lam, Bank of America.

[Hubert Lam, analyst]

I just want to delve a little bit deeper on the ESG and Index business. So it grew 4% in the quarter. So good ESG numbers. But Index is weaker at 4%. Can you just explain as to why it's been quite subdued over the last couple of quarters? And also on the Market Intelligence, which you admitted, is having a tough time, but I think Stephan, you alluded that you're currently looking at possibly restructuring the business. So just wondering what are you doing there to improve that line? Or are you just waiting for a client spending to come back?

[Stephan Leithner, executive]

Thank you very much, Hubert. It's a good question and very appropriate deep dive on those 2 points. I think the first one is, in particular, as you allude to with the Market Intelligence part, so that continues to pull us down. And in fairness, Q3 has not been good in Market Intelligence. So what we have seen is downward trend and competitive pressure simply. I mean there are some of the services which have commoditized and that's what we continue to see. But at the same time, we are improving on the product offering. We've also seen in Q3, in fairness, on the Index side that the impact of the low volatility environment on the equity is clearly feeding through into our index business, which, as you know, STOXX has a unique sort of linkage and proposition around the derivatives much more than anybody else. But again, it's also an exposure.

On Market Intelligence, the focus is besides the retailoring and targeting of the product range. It's very much also a fundamental bottom line focus. So we have really gone into a restructuring when it comes to efficiency and productivity, and that's progressing very well. So it's important, this is a solid bottom line contributor. This is a high margin, a positive business by any standard. And therefore, the bottom line contribution is what we need to look at, and we will focus on going forward when we talk about Market Intelligence. So I hope that helps.

[Operator]

And the next question comes from Enrico Bolzoni, JPMorgan.

[Enrico Bolzoni, analyst]

On IMS, I just wonder if you can provide some additional color -- can you hear me okay?

[Stephan Leithner, executive]

Not quite that loud, but okay-ish.

[Enrico Bolzoni, analyst]

Hello?

[Stephan Leithner, executive]

Go ahead with your question, Enrico.

[Enrico Bolzoni, analyst]

Let me see if I can try again. I wanted to ask you on IMS. If you can provide some color in terms of the new clients, you're winning, you mentioned the Texas pensions as one of those. What are the drivers of success? Is the product itself that is differentiating versus some of the other players or its pricing? So you come -- you're addressing your clients with very good pricing. And if that is the case, should we expect some sort of pickup in outer years as maybe, I don't know, clients start to pay a bit more? And related to that, in 2Q, you mentioned that the ARR growth in North America has been 27% in the first half of the year. Can you give us an update at the end of the third quarter?

[Gregor Pottmeyer, executive]

Yes, I can start. Obviously, with the annual recurring revenue, yes, in Q3, it was a lower growth rate. Again, it was caused in the development of Axioma. So SimCorp is exactly delivering its 14% ARR growth. And if I do the split up over the region, so they're taking now including Axioma, so 11%. So great to see that Americas growth by 21%. So our focus, where we always said, in Americas, we want to grow the far overproportional development here. The next strongest region is APAC with some 14% and then EMEA with some 9% and Axioma is roughly some 3%.

So -- but overall, this number will change with a strong Q4, but we always see, and that's why we said we will come back to the original guidance, where we said it's 13% to 18%. So high confidence level that we come back overall with the new clients, and we will win in Q4 due to our strong pipeline.

And from a win perspective, the good thing is, it's -- the far majority are Software-as-a-Services contract, right? So that's exactly our target. That's why you also see that our SaaS revenue. So if IMS grew by 11% in Q3, SaaS revenue has doubled the size, so 24%, right? So here, we are exactly on track with our SaaS conversion. And basically, all the clients in Americas and the far majority in Europe favor the preferred the Software-as-a-Service solution. And that's so important for us as the Software-as-a-Services contract because then it's completely outsourced to Deutsche Borse. And we have basically 2x of revenue opportunities per client as our value chain is much higher.

[Stephan Leithner, executive]

And if I build on what Gregor is saying then, also to your question, what are we competing on? I think also in the U.S., we are seeing the take-up of the broader services, not just the Software-as-a-Service. So the IT operational services, but also clearly to the technology supported, and that's very important, that's our focus, technology supported transaction services as well as, at the same time, data services. So that's very much picked up on.

Then it truly is the distinctive core sort of the IBOR strength, and therefore, coming at it from a comprehensive front-to-back perspective on the basis of a single truth that is the proposition that really is picking up clients. From all we can see, it's not on the price side, we are competing. It's not -- I mean, clearly, this is a competitive market, but it's not a price-based competition that we are seeing.

[Operator]

And the next question comes from Andrew Coombs, Citi.

[Andrew Coombs, analyst]

If I could have a follow-up on IMS and then a broader question on the divisional targets and perhaps can ask as well. So firstly on IMS, talked a lot about the top line, but just in terms of the cost to achieve EUR 28 million year-to-date, you're still guiding for EUR 50 million for the full year. So are you expecting a big step-up in Q4? Is it a case the EUR 50 million is now overly prudent? That would be the first question.

The second much broader question. If I look at Slide 5 and the divisional targets growth CAGRs that you now provide, it's obviously on a slightly different base. So I can try and make adjustments for REGIS-TR, I could try to make adjustments for margin fees for the NII across the divisions. But would be great if you could just provide what you think the 2022 revenue basis on this new format, to which we should then be observing these revenue CAGR targets? And then the ask attached to that is you used to obviously provide margin fees. You've since discontinued that disclosure. So it would be really helpful if you could add it back if that's going to be adjusted for in your targets?

[Stephan Leithner, executive]

Yes. Andrew, thanks for the question, fully understood what are the challenges from your perspective. And so with regard to the adjustments for 2022, there are just 2 adjustments. But what we are doing first is when we talk about organic growth, so then we have to define the constant portfolio for 2022. And therefore, we take the SimCorp revenues what we acquired from year 2022 and define that as a starting point for 2022. So that's for the constant portfolio basis where we say it's 7% on an organic growth base. And it's 10%, if I do not that kind of adjustments for SimCorp. So then it's 3% M&A consolidation impact and 7% is organic growth. So that's the first element.

And the second element is for 2022, and we described it already a year ago, but just to repeat it, it's some EUR 50 million we adjusted for REGIS-TR as there's a one-off sale as we sold that kind of business in 2022. And therefore, it would be for our Securities Service business, not a fair starting point and that's why we adjusted that for this organic basis. So these are the only 2 things what we adjusted. And again, we described it very clearly also a year ago in our Investor Day presentation. So I just want to repeat that. So that's the first.

The second one, your concrete question, the cost to achieve of EUR 28 million on a cumulative basis for our IMS integration. Yes, we guide some EUR 50 million for the full year. My expectation is that we are slightly below that level. But there are still something to do and therefore, are still investments in infrastructure and so on. So -- but most probably, we will be below -- a little bit below this EUR 50 million.

[Gregor Pottmeyer, executive]

Let me just chip in on this, in the spirit of synergy-wise, also cost synergy-wise, we are very much on track. So the numbers that we talked about, the EUR 90 million in total, of which run rate base we will have 60% this year, is very much basically in the back as we leave Q3. So this is more in preparing and working down the list that will also deliver them into next year and what we still do around cost to achieve.

[Andrew Coombs, analyst]

Just one quick follow-up on REGIS-TR. I know the EUR 50 million gain was booked in 1Q '22. Presumably, there were some revenues in that quarter. I think you used to do EUR 25 million a year from that. So do we need to adjust for that? Or is that not included in that base? It's just the EUR 50 million you've adjusted for?

[Gregor Pottmeyer, executive]

No, it's adjusted EUR 50 million for the full year 2022. So that's what we're doing. And from a quarterly basis, there's no need to adjust anything. It's just for the full year as a starting point for 2022. But it was the first quarter, but it doesn't matter because we do not refer on quarterly development in 2022.

[Operator]

The next question is from Jochen Schmitt, Metzler.

[Jochen Schmitt, analyst]

One question. Annual recurring revenue in Software Solutions within your ARR growth target of 13% to 18% outlined at the Investor Day, what was the growth rate of SimCorp included in this figure? I just want to compare the 14%, which you posted for SimCorp on a stand-alone basis in Q3 to your corresponding target? That's my question.

[Gregor Pottmeyer, executive]

It was 14%.

[Jochen Schmitt, analyst]

In Q3?

[Gregor Pottmeyer, executive]

Yes. Also in the original plan, it was 14%.

[Jochen Schmitt, analyst]

So pretty much in the middle of the 13% to 18% range.

[Gregor Pottmeyer, executive]

Exactly. So that 13% to 18%, right? And the number on SimCorp standalone is 14%, as Stephan said.

[Operator]

The next question is from Ian White, Autonomous Research.

[Ian White, analyst]

Maybe I can just follow up on Trading & Clearing, please. Just within EEX, I wondered if there are any specific KPIs that you would highlight to explain your view of an improved medium-term or 2026 growth outlook here rather than the strength we've seen this year, maybe being a pull forwards of growth that you might have achieved by 2026 in any case. I'm wondering if you've got details around share of revenue that's come from clients onboarded in the last couple of years or from quant funds or some of these other things that you've talked about as drivers if there are any quantification we might have around that?

And also, if I could, I just wondered if I could ask about the competition in the €STR contract. You've obviously been doing very well on the volume side. But I think it looks like one of the U.S. competitors is starting to take a stronger lead in terms of the level of open interest or the risk pool on €STR. And in that context, I guess, sort of what makes you confident that you can ultimately become the main venue for €STR, please? Some more thoughts about that would be interesting.

[Gregor Pottmeyer, executive]

Yes. So starting with your EEX question. So as we said, we expect high single-digit growth also for the next 2 years. And the reason for that is so basically 2 things. So on the one hand side, there is still some room for improvement in the market share development. Yes, for the more developed markets, I think we have now more than 90% market shares, but specifically in the Scandinavian market, there is some opportunity where we can win market shares, and that's our focus to achieve that.

The more important reason for our confidence level to have this continued growth is that the quant level is currently -- sorry, it was 18 months ago, it was 0, and now it's in the range of 15%. And this quant level, from a trader perspective, we expect continue to grow, right? So on Eurex side, we have 30% plus of this quants, and we expect that there will be a significant increase from today's level of 15%.

So that -- these are the 2 elements, where we expect continued growth. And obviously, from a secular perspective, also Stephan mentioned it already, so more renewable energy, right? So we have more than 50% renewable energy in just in Germany as an example. And therefore, will continue to happen. And there'll be more volatility, and so that's another growth driver for that -- for this kind of level of renewable energies.

Your second question around our fixed income road map and here specifically to the development in €STR and in STIR. So far, we have some 60% market share in the €STR range from a trading perspective. That's obviously a very, very strong number, where we are proud of. But obviously, there is competition, as you mentioned, with our U.S. competitors. But our conviction is that we will really strongly benefit from that development because we -- our target is to be the home of the euro curve, right? And we can offer cross-margin efficiencies across all products.

So we take our point bubble charts. We take our repo business. We take our OTC clearing business. We can combine that with the STIR, with €STR products and obviously then also in the Euribor contract, where we have also an offer here. And that kind of gross margin is of high benefit for our clients. So that's why we think we are very well positioned. We are very close to the market and therefore, good confidence level that we achieved also in this short-term interest rate dimension, significant double-digit million euros over the next 2 years, at least that is our expectation. And we also think because it was not mentioned so far that EMEA 3.0 with this kind of active account topic will certainly give us tailwind for our OTC clearing initiatives, but also for this €STR and STIR initiative.

And maybe you have heard about it that yesterday, the EU Parliament approved EMEA 3.0. And so that ESMA is now -- and it was a prerequisite for ESMA now to start the market consultation on their active account view and as we all know, active account is an important topic for us, and it would be really great if this would be finalized until the end, at least that's our expectation here and then market participants have to be compliant beginning from January next year.

So it's very short-term oriented and still don't forget, just 30% of the existing clearing members at Eurex are active. So out of the 600, let's say, some 200 are active, some 400 are not active at all, right? And there will be another 300 to 400 clients. So -- but also have to fulfill that kind of clearing obligation over the next years. So there's plenty of opportunities of growth. That's why you see that our comfort level, delivering our fixed income road map has continued to be high.

[Stephan Leithner, executive]

Just build on the detail -- if I just build on that in one big picture comment back, the entire talk around the Capital Markets Union on these topics, just means that the opinion, the firmness behind is really hardening and confirming what is our basic proposition. And I think that's very important to keep in mind. This is a structural trend that is confirming itself or that's what all the talk around Draghi report and others is that one needs a European's infrastructure that can really also work on the basis of the autonomy and the safety that the system needs, all in our direction.

[Operator]

At the moment, the last question comes from Tobias Lukesch, Kepler Cheuvreux.

[Tobias Lukesch, analyst]

Actually touching again on the subject we just discussed on the T&C segment with the 8% organic net revenue CAGR. And just this kind of regulatory environment, we are talking in the OTC impact. So in general, with your last Investor Day, you guided for that kind of EUR 300 million fixed income growth from '22 to '26. So could you share maybe the kind of OTC clearing revenue contribution that you're now expecting for '24, '26? And potentially, how much of an upside would there be potentially given the fact you just outlined?

And maybe you can share also the kind of volatility level assumptions you put on for the derivatives, the financial derivatives trading basically? And in terms of the fixed income side, is there a kind of sweet spot in terms of where interest levels are or the steepness of the curve? Or do you think that growth comes irrespective of the interest rate environment?

[Stephan Leithner, executive]

Yes. So thanks for the Trading & Clearing question again here. So again, high confidence level that we achieved our EUR 300 million additional net revenues on the fixed income side. So there are basically 4 components. So the first is higher volatility level. And that's always today as we have for record levels on our fixed income products here. And the good thing is, it does not depend on the fact whether rates increase or decrease, it works in both directions. So it depends now what kind of expectations you have. And if one in some investors have the expectation, the next rate cut is 50 basis points and others expected 25 basis points or some say it's nothing or it will happen 3 months later. So that kind of uncertainty in the market is the perfect environment.

And over the last 3 years, we climbed up now to the highest interest rate level. And now for the next 3 years, we will go down. Therefore, you will -- our conviction is there will be continued high volatility for our fixed income products, and that's obviously positive. So that's obviously the first element to achieve that kind of EUR 300 million.

The second element is the repo business, where we have seen elevated activity here. And therefore, that's the next contributor. The third element is the OTC clearing initiative. We're already elaborated that this active account topic will come now in 2025 and you have to be compliant from a market participant point of view already starting in January '25. So -- and as I said, just 30% of our clients are active. So if the other 70% has the same activity level, obviously, we would triple our level, right? So -- and I don't guide now that we will triple it. But nevertheless, it just shows you that the potential what this kind of active account would achieve.

So OTC clearing is a third element of our fixed income road map. And the fourth element I already elaborated is our short-term interest rate initiatives where we started to get now in this €STR range, 60% market share from a trading perspective. Yes, it's a lower part, but we expect also to get market shares in the Euribor contract on a double-digit million euro amount. So adding up these 4 elements. So that will lead to the EUR 300 million.

And finally, on the volatility on the equity, equity index part for the next 2 years, here's our expectation that volatility should be slightly higher compared to the lower levels we have seen this year. So in that Trading & Clearing at 8%. So there is a small element also from getting a little bit tailwind on the equity index side.

[Jan Strecker, executive]

And reflecting -- as Stephan has said, reflecting really the questions today, I think the 2 business deep dives we are planning for the 26th of November at 2:00 p.m. CET. So on the one hand, financial derivatives, the fixed income road map and then on the other hand, Software Solutions, so SimCorp and Axioma, I think, is then also a good event, a good point in time to further dive deep into those questions.

So we have no further questions in the pipeline. I'll hand over for Stephan for closing remarks.

[Stephan Leithner, executive]

Thank you very much, Jan. I mean you have all heard and felt the passion that Gregor, for example, in the last question brought through and the power of the trends that we see. So let me just, in summary, reiterate, obviously, my own excitement about the opportunities and the start of the work that happened only a few weeks ago. But I truly believe that if we look at the results and the underlying business momentum is documented by the developments in 2024. And this momentum, combined with the clarity and continuity of our strategy horizon 2026 and the smoothness of the leadership transition, lets us really look in a higher quality of what is that outlook.

Some of you have commented around the improved earnings quality, and that's what I truly see when we now look at 2026. So we are very confident. We are very energized as we look forward, and we really appreciate the time you have taken and look forward to continue the dialogue. Thank you very much for joining us today.