Deutsche Boerse AG

XETRA:DB1

Earnings Call Analysis

Company Expects Growth and Dividend Increase

For 2024, the company anticipates net revenue growth to over EUR 5.6 billion and EBITDA to exceed EUR 3.2 billion, with around a 5% organic net revenue growth and contributions from consolidation of SimCorp. Operating costs are expected to rise by about 5%. Despite a one-off effect resulting in a EUR 36 million cost, EBITDA margin adjusted stands at 45%. The company aims to repay commercial paper related to the SimCorp acquisition and improve rating metrics. The dividend payout ratio target is revised to 30%-40% of the annual net profit due to higher earnings and future growth prospects, with a dividend proposal of EUR 3.80 per share.

2023 Financial Performance and 2024 Outlook

The company's net revenue in 2023 reached nearly EUR 5.1 billion, surpassing the initial guidance of EUR 4.5 to 4.7 billion after several upward revisions throughout the year. This growth was primarily driven by a 5% increase in secular growth across analytics, repo, commodities, and foreign exchange (FX) businesses. Furthermore, the company enjoyed a 7% cyclical net revenue growth due to higher interest rates compensating for decreased equity market volatility. The acquisition of SimCorp contributed an unexpected EUR 200 million in net revenue. The robust financial performance led to a proposed dividend of EUR 3.80 per share and a EUR 300 million share buyback program. Looking ahead to 2024, the company anticipates net revenues to exceed EUR 5.6 billion with EBITDA over EUR 3.2 billion, driven by continued secular growth initiatives and the full-year consolidation of SimCorp.

Operating Costs and EBITDA Growth

The company experienced almost flat organic operating costs in Q4 2023 despite higher provisions for compensation tied to strong performance. Organic EBITDA growth was an impressive 17%, showing significant operating leverage compared to the 12% organic net revenue growth. This indicates efficient management of costs relative to revenue expansion.

Sector Performances and Strategic Priorities

The company's ESG business faced pressure from a weakened US dollar and a demand normalization after a surge in 2022, although the Corporate and Governance Solutions business still grew by about 6%, and the ESG analytics climbed close to 10%. In Trading & Clearing, equity-related derivatives faced challenges from market volatility, but financial derivatives and the commodities market exhibited strength. Secular growth drivers were robust within foreign exchange services and custody and settlement services, along with a notable Net Interest Income of EUR 157 million. Plans for 2024 concentrate on leveraging secular growth opportunities, integrating acquisitions successfully, focusing on capital management, and aiming for targeted EBITDA synergies.

Dividend Increase and Shareholder Commitment

Committing to shareholder returns, the company has increased the dividend to EUR 3.80 per share, adjusting the payout ratio target to 30% to 40% of the net profit, and aspires to grow the dividend per share annually. This approach reflects confidence in the company's growth and earnings stability.

2024 Detailed Guidance and Growth Investments

With the consolidation of SimCorp, the 2024 guidance includes a predicted net revenue contribution of EUR 600 million and EBITDA pre-synergies of EUR 200 million from SimCorp. The expectations for 2024 also account for potential slight cyclical headwinds related to a possible decrease in US interest rates. Anticipated organic operating costs should increase by around 5% owing to investments focusing on growth potential, with contingency plans in place if revenue falls short of expectations.

Earnings Call Transcript 2023-Q4

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Deutsche Börse AG analyst and investor conference call regarding the Q4 and full year 2023 preliminary financial 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 to go through our preliminary fourth quarter and full year 2023 results. With me are Theodor Weimer, Chief Executive Officer; and Gregor Pottmeyer, Chief Financial Officer.

Theodor and Gregor will present you -- will take you through the presentation today. And afterwards, we will be happy to take your questions.

The link to the presentation materials 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 will be recorded and is available for replay afterwards.

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

[Theodor Weimer, executive]

Thank you, Jan. Welcome, ladies and gentlemen. Let me start today's call by commenting on the financial performance in 2023 and the outlook for 2024. Afterwards, Gregor will take you through our results in greater detail, as always.

The development in 2023 significantly exceeded our original expectations at the beginning of the year. The net revenue guidance we published 1 year ago was a range of EUR 4.5 billion to EUR 4.7 billion. After 3 revisions of the guidance throughout the year, we have now achieved net revenues of close to EUR 5.1 billion.

The reliable and consistent factor of our net revenue growth continued to be secular growth, which amounted to 5%. Main drivers there are analytics business, continued strong performance in repo, further double-digit growth in commodities on top of a very strong year 2022 as well as new clients in FX.

Besides secular growth, key driver of our organic growth was the strong increase of the net interest income. Despite significantly lower equity market volatility compared to 2022, higher interest rates helped us to achieve an additional 7% cyclical net revenue growth.

Last but not least, the consolidation of SimCorp in the fourth quarter contributed around EUR 200 million net revenue or 5% net revenue growth from M&A for the full year. This was above our expectations because of the high level of new software subscriptions towards the end of last year.

As we have guided for throughout the last year, organic operating cost growth has decelerated from quarter to quarter in 2023. And we even achieved almost flat organic operating cost in the fourth quarter despite higher-than-expected provisions for variable and share-based compensation given the strong development over the year 2023.

The organic EBITDA growth amounted to 17% and thus showed strong operating leverage compared to a 12% organic net revenue growth.

In line with the new capital management framework that we disclosed at the Investor Day in November, we are proposing a dividend of EUR 3.80 per share for 2023, which is a payout of around 40%. We also complemented the dividend with a EUR 300 million share buyback program, as you're aware, which has commenced at the beginning of the year. So total shareholder distribution will -- this year will amount to around EUR 1 billion.

This brings me to our outlook and guidance for 2024 on Page 2 of the presentation. For 2024, we expect our net revenue to grow to more than EUR 5.6 billion and EBITDA to increase to more than EUR 3.2 billion.

Our underlying assumptions are straightforward. We plan with around 5% organic net revenue growth, which is almost entirely driven by our secular growth initiatives. Regarding our cyclical exposure, we currently expect that a potential small decline of the net interest income is broadly compensated by slightly higher market volatility. The rest of the net revenue growth will be driven by the consolidation of SimCorp.

Therefore, our key strategic priorities for the year 2024 are very straightforward. First, to support continued secular growth. One of the key initiatives is our Eurex fixed income road map, which also helps to leverage the momentum in the market. Road map includes the further expansion of the Eurex Repot offering from a product and client perspective, growing outstandings and market share in euro-denominated OTC clearing as well as our move in the short-term interest rate derivatives, which already shows good traction in Euribor and EURO STOXX products.

In addition, we see the greatest opportunities to win new clients, launch new products and further expand our market share in our Commodities, foreign exchange and Funds businesses.

Second, to make the new IMS segment a success, this requires completion of the SimCorp and Axioma as well as the ISS and STOXX integrations, which are running ahead of schedule. But at the same time, it is of paramount importance to not lose any momentum in pursuing all the organic growth opportunities for both businesses and to achieve the targeted EBITDA synergies.

We are fully on track with regards to synergy delivery. And as we said at the Investor Day, we see additional opportunities between SimCorp and the rest of the group. Client feedback also continues to be highly positive with respect to our ownership of SimCorp and the SimCorp and Axioma combination.

Third, to apply our new capital management framework, focus will be on deleveraging by completely redeeming the commercial paper we issued for the SimCorp acquisition and improving the rating metrics in line with AA- rating for the group. As mentioned before, focus will also be to complete the current share buyback program under which we already acquired shares worth around half of the targeted EUR 300 million.

All in all, after the record year 2022, we saw another very strong year for us in 2023, which was fueled by the net interest income tailwinds that, by far, overcompensated lower levels of volatility. While cyclical NII tailwinds are currently expected to fade in 2024, we see further good growth ahead of us. This will be driven by the secular growth efforts across the group and the consolidation of SimCorp.

With that, let me hand it over to you, Gregor.

[Gregor Pottmeyer, executive]

Thank you, Theodor. On Page 3, we show the details of the results for the full year. The financial performance throughout 2023 was very positive. Besides the consistent secular growth, the cyclical drivers for the strong performance shifted somewhat during the period.

In the first quarter, the development was partly driven by elevated market volatility, while during the rest of the year, we saw the full benefit from higher interest rates in our net interest income. The previous year included around EUR 62 million of exceptional net revenue. So the actual net revenue growth was somewhat above the 17%.

I will comment on the operating cost development on the next page. But adjusted for exceptional costs in relation to the creation of the new Investment Management Solutions segment, we saw good operating leverage with the EBITDA and cash EPS growing by around 20% and the EBITDA margin standing at [ 60% ].

Before I move on to the fourth quarter results, let me walk you through the operating cost development in 2023 on Page 4. The operating costs overall increased by 16%, which includes the consolidation of SimCorp that added around EUR 111 million in Q4 and exceptional costs of around EUR 79 million, which are mainly the cost to achieve the IMS synergies.

The remaining 5% organic cost growth was driven by a couple of effects. Slightly less than half of the cost growth is driven by inflationary effects from building operation, general purchasing and higher staff costs. The rest is a function of higher investments into growth and infrastructure as well as an increase in FTE to support the growth ambition of our organization.

This brings me to the details of the fourth quarter results on Page 5 of the presentation. While the secular growth developed in line with our expectations, the benefit from higher interest rates declined significantly compared to previous quarters because of the higher comparables in the fourth quarter 2022. The interest rate benefit was also largely offset by a decline of equity market quality resulting in almost flat cyclical growth.

The SimCorp consolidation added EUR 198 million net revenue in the fourth quarter. This was above the expectation we communicated with the release of the third quarter results because of a better-than-expected client uptake.

The operating costs in the fourth quarter include around EUR 36 million exceptional costs related to the creation of the new Investment Management Solutions segment, mainly to achieve the cost synergies.

The organic operating cost growth, excluding the exceptional costs, amounted to only 1% despite higher-than-expected variable and share-based compensation.

Adjusted for the exceptional cost, the EBITDA increased 29% and cash EPS by 22% in the fourth quarter.

I'm now turning to the results of the segments, starting with the new Investment Management Solutions segment on Page 6. The segment is split into 2 parts. The first part is software solutions, which is the combination of SimCorp's software business and Axioma's analytics business. Both businesses performed very well in the fourth quarter, benefiting from new clients and renewals of existing clients. The annual recurring revenue for software solutions increased at a rate of 14% and is thus in line with our expectation. Once the revenue synergies are kicking in, the ARR is expected to further increase.

The second part of the segment is a combination of the ISS ESG business and the STOXX index business. The index business, we had a one-off effect in net revenues last year. Adjusted for this effect, the index net revenue increased 10%, which was also driven by market valuations.

The ESG business saw some headwinds. First, the U.S. dollar depreciated around 5% versus the euro in the fourth quarter. Second, because of a catch-up effect in the demand for ESG products in 2022, we have seen particularly high comparables at ISS in 2023.

Third, the challenging market environment with clients being cost sensitive in light of capital markets volatility and the net flows. But constant currency, the Corporate and Governance Solutions business grew around 6% in 2023, and the ESG analytics business close to 10%. This is a good overall client retention rate of more than 90%.

We are firmly convinced that investor demand and regulation as well as rising complexity in performance and reporting requirements will continue to drive the need for trusted and comprehensive ESG data solutions.

The EBITDA in this segment was affected by the exceptional cost of EUR 36 million. Adjusted for this effect, the segmental EBITDA margin stood at 45%, but this includes a seasonally higher EBITDA contribution of SimCorp.

Let me turn to Slide 7, the Trading & Clearing segment. In financial derivatives at Eurex, we saw headwinds from lower market volatility. In December, the [ restocks ] reached a level that were seen -- that was last in 2017 and 2018. This put some pressure on equity-related derivatives, which grew mainly due to product innovation.

In fixed income-related products, on the other hand, we saw good growth in the derivatives and the repo business. This was driven by the speculation around further interest rate development. This momentum continued into the new year with volumes in January being the strongest we have ever seen in the first month of the year.

In Commodity at EEX, markets continued to recover from the energy crisis. Volatility has declined and prices across markets have seen a healthy development. This translated into a strong upward trend in trading of power products, which suffered under the uncertainty in 2022.

Net revenue in power derivatives in the EU and U.S. increased 84% in the fourth quarter to a new record level. [indiscernible] Gaining market share from OTC. This trend continued in January with volumes in power spot and derivatives being on all-time high.

Now our foreign exchange business, 360T. New buy-side clients and faster growth in regions like the U.S. and Asia Pacific helped to offset the lower volatility we observed since mid of last year.

In the Fund Services segment on Page 8, the continued onboarding of new clients and funds helped us to offset the ongoing cyclical headwinds and developed better than the market. Cyclical headwinds continued to mainly arise from the trend away from active equity funds into passive and fixed income.

Adjusted for the shift effects between the segment and the small one-off net revenue impact in Q4 2022, the net revenue in the segment increased around 14%, which is a very good result in light of the market environment.

Our Securities Services segment on Slide 9 saw continued strong performance in the fourth quarter. Main driver was net interest income, which amounted to EUR 157 million. This excludes the EUR 15 million net interest income that are reported in the Fund Services segment. The NII also excludes EUR 13 million interest on blocked accounts we decided to segregate retrospectively for 2023 for precautionary reasons. But also custody and settlement showed good growth levels, benefiting from the ever-increasing amount of debt outstanding globally and higher activity in fixed income markets.

This brings me to Page 10 of the presentation, it's our proposal for the dividend for 2023. To reflect increased earnings and the strong growth outlook, we adjusted our dividend payout ratio target to 30% to 40% of the annual net profit. As you can see on this slide, this is pretty consistent with the trajectory we started to take a couple of years ago.

In addition, we introduced a commitment to grow the dividend per share each year. Proposal for the dividend, which is going to be paid after our Annual Shareholder Meeting on 14th of May is EUR 3.80 per share.

On the last page of today's presentation, we show the details of our guidance for 2024. In addition to the organic growth, which is largely based on secular growth opportunities, the consolidation of SimCorp will make a significant contribution. As we guided previously, we expect net revenue of around EUR 600 million and EBITDA pre-synergies of around EUR 200 million for SimCorp in 2024 and are well underway to achieve those targets.

In terms of cyclicality, we currently expect slight cyclical headwinds from a potential small decline of interest rates in the U.S. at some point throughout the year. Stable interest rates and/or higher market volatility would be an upside to our expectations.

Mainly due to investments into our growth portfolio, we expect a further increase of organic operating cost of around 5% in 2024. In case net revenue should develop meaningfully below our expectations, we have cost contingency plans in place.

This concludes our presentation. We are now looking forward to your questions.

[Operator]

[Operator Instructions] And the first question comes from Arnaud Giblat from BNP Paribas.

[Arnaud Giblat, analyst]

I've got a question on EEX, if that's right. Could I -- you mentioned during your prepared remarks that you were taking market share that's been going on for some time. I'm just wondering if you could flesh that out a bit more in terms of putting a few years of market shares for us country per country, that would be helpful. And I think in Germany, last time you said at the Capital Markets Day, you were at around the 50% mark. Where can that go to? But if you could expand a bit more on the country by country, I think that would be quite interesting for us.

And a quick follow-up, if that's okay. We saw some strong pricing at EEX. I mean, the revenue per contract was higher than expected in gas. Is that sustainable?

[Gregor Pottmeyer, executive]

Yes. Thanks, Arnaud, for the question around our Commodity business. So EEX obviously strongly performed in 2022 with a growth of 39%, and again, last year of 19%. So it's unbelievably strong.

What is the reason for that strong increase over 2 years now? The first is the increase of market share and the second is that there's a new client customer group, the algo trader.

So starting with the first one with the market share. Market share in the European derivatives market is now 68%. So that's remarkably higher than the market share we have seen in previous years. And if you do the split up in the different countries, so in the main countries like Germany, Italy, Spain, et cetera, we have market shares of around 90%. The only market where we currently do not have that kind of market share is in Nordic markets. As you are aware, as we are here in the process to acquire Nasdaq Commodities Nordic, here we have currently a market share of 8%. So these are basically the explanation around the market share.

With regard to the algo trader, so that's a new client group what we currently see here in that market. So that means by -- coming into new client groups, the market gets bigger, right, so and therefore, that's obviously good to see that we have a good chance to continue to grow here. And so far in January and February, the first days, we have seen that, that continues to happen.

[Theodor Weimer, executive]

And if I may add, Gregor, to your question on our deals. You may raise the question why are we attracting new target groups like algo traders or high-frequency traders? The reason is very clear, right? And it's always how we develop business. We create businesses, right, and then they grow up and then we have enough market liquidity. And this, as such, right, this is such that the liquidity pool attracts new groups of potential new clients.

This is what happens. We are making now so much revenues, right, that is attractive for these client groups to enter into this business, right? That's a direct exposure of our strong growth rate.

[Jan Strecker, executive]

And the second part, I think, was just quickly on the margins in EEX gas business, right? So I think compared to the third quarter, there is a little bit of a step-up. But if you compare this to the rest of 2023, I think it's only a modest increase. And as always, this is typically a result of the product mix. So spot versus derivatives, in particular, because spot typically is higher priced than derivatives.

[Theodor Weimer, executive]

And on the U.S. side, right, we have made remarkable progress also in market share gains against ICE.

[Operator]

The next question comes from Michael Werner from UBS.

[Michael Werner, analyst]

Just one question from me. Looking at SimCorp, I think you provided the Q4 cost of around EUR 111 million. How should we think about that? Was there any one-offs in that? Is this one where Q4, we tend to see a little bit more cost? I think the implicit guidance that you're providing for in 2024 is closer to around EUR 400 million. So I was just wondering how to square those two.

[Gregor Pottmeyer, executive]

Mike, thank you for the question. And obviously, the SimCorp development in Q4 was very strong from a revenue perspective. So it's EUR 198 million. And you see here that the Q4 is typically a very -- is by far, the most important quarter, even December, the most important month in the software business.

So to give you some guidance with regard to the seasonality is that the overall pro forma net revenue for SimCorp would be EUR 544 million. So here, you see that the EUR 198 million are 35-plus percentage with regard to Q4 compared to the other quarters.

And the same is basically also true for the cost here, the EUR 111 million, there are some EUR 9 million extraordinary cost from their restructuring program. They are still finishing that. So basically, you can exclude that because their own cost-saving program is now done. And so it fits better into the EUR 400 million overall guidance. But there's also some seasonality for the cost as you acquire a new client, so usually there are additional costs related to that.

So overall, we keep our guidance where we say it's EUR 600 million net revenue for FY 2024. It's a EUR 200 million EBITDA, again, pre-synergies. So synergies are on top of that. And we are very confident that we achieved a [ 60% ] run rate of the EUR 90 million in 2024. But this relates not everything to SimCorp, but also to ISS STOXX.

[Operator]

The next question comes from Bruce Hamilton from Morgan Stanley.

[Bruce Hamilton, analyst]

I guess another one on SimCorp. Clearly, a strong Q4. And looking forward, also your commentary clearly quite [indiscernible]. If I look at the annual recurring revenues of EUR 519 million and compare that to the EUR 600 million revenue guide, I'm just trying to get a sense of how much is the normal sort of nonrecurring amount. Is it sort of 20%? Is it more than that? Just to see how kind of conservative you might be.

And then in terms of the success with new clients, which drove that Q4 strength, can you give us some sense of the any sort of geographical mix that you're seeing in terms of client wins?

[Gregor Pottmeyer, executive]

Yes. Thank you. I'll start with the second part with the new clients. So in 2023, I do not comment now specifically on Q4, though I give you the 2023 numbers. So we acquired 13 new clients and 5 out of these were U.S. clients. And we converted 10 clients into the SaaS world. And in this conversion, though there was even 1 Tier 1 U.S. bank and 1 very large European insurance company.

So overall, this gives you some indication that we were very successful in 2023 with the SaaS conversion and also with winning new clients. And we expect that this will continue to happen in 2024, and it's our baseline assumption for our more than 10% growth, why I gave you the EUR 454 million net revenue as a pro forma number for 2023.

So the EUR 600 million is a pre-synergies number. It's even that, on a standalone basis, is a more than 10% increase what we do expect here. And that is in consistency with the ARR of 14%. And do not forget, this 14% and also the net revenue includes now both at SimCorp and Axioma. So it's not just a SimCorp-only related number.

[Operator]

Next up is Ian White from Autonomous Research.

[Ian White, analyst]

Just 1 question, please, on NII. I was just surprised to see the step down there sequentially from 3Q into 4Q. I'm looking at NII across some services. Securities Services basically all of the indicators sort of pointing in the opposite direction in terms of cash balances and short-term interest rates. Can you just provide a bit more color about what are some of the moving parts there in terms of what's happened in the fourth quarter?

[Gregor Pottmeyer, executive]

Yes. So in general, there was a slight decline also from a cash balance perspective, so not specifically Q3 and Q4. But overall, in 2023, so we started at EUR 18 billion to EUR 19 billion on cash balances. And now in Q4, we was at EUR 16 billion cash balances. And currently, we continue to have that kind of level. So one effect is if you do the quarter-to-quarter analysis, that we have slightly reduced cash balances. So that's number one.

Specifically in Q4, I think we communicated that in the paper, there was a special effect of EUR 13 million, where we segregated NII from the sanctioned deposits of financial institution or [ broader sprawling ] of clients who had Russian underlying. So even it's currently from a legal perspective not clear whether we can keep it or not, as we are cautious guys, as you know, we provisioned basically already now this EUR 13 million. And this was not just only for Q4, it was the catch-up for the full year. So that's the reason why most probably you missed that EUR 13 million in Q4.

[Operator]

And the next question comes from Enrico Bolzoni from JPMorgan.

[Enrico Bolzoni, analyst]

One on the fixed income and the road map there. You mentioned that you saw a very strong start to the year. I just wanted to ask if you could expand a bit. I know you plan to launch some products there and also to expand your market share. Can you just give us a sense of whether the strong start to the year was driven by some of these initiatives or it was more driven by macro tailwinds that we're seeing now?

And finally, going forward, can you remind us what would be the main macro driver of a strong performance there? Is it volatility? Is it the steepening of the curve? Is it the level of interest rates? Any color would be helpful.

[Gregor Pottmeyer, executive]

Yes. You're right. So in January, we had an all-time high record development here. It was in the range of EUR 3.5 million in fixed income contracts per day. So when we had this low level of interest rate, it was below EUR 2 million, right? So it's an increase of 75%. So we are basically back on the level we have even seen before the financial crisis 2008 with the Lehman crisis. So we are now back on that level.

And so far, referring to our general strategy because January is now -- I would not bet on 1 month, right? So in principle, we say we want to achieve a EUR 300 million additional net revenues out of our fixed income road map. So having currently roughly EUR 500 million net revenues in fixed income should increase of more than EUR 800 million in 2026. So that's our principal guidance.

And the main reason -- the main factors for this is secular -- from a secular perspective. So the first one is that we are very confident to increase our market share and our volumes in OTC clearing. So currently, as you are aware, we have a 20% market share and we have roughly EUR 100 million net revenue out of that. So here, this is all the development even on EMEA's 3.0, what was published yesterday. So we have high confidence level that this will significantly increase over the next 3 years. So we are -- continue to be very successful.

Secondly, we introduced a new product on the short-term side, so the STIR and the €STR, that is now introduced into the market. And we are also here confident to achieve higher double-digit million euro a month over the next 3 years, what is also purely from a secular perspective.

Thirdly, our repo business, we see here now a structural shift as the central bank policy now changed. So the repo market is now open. And so far, last year, it was a 70%-plus increase in the repo market and this will obviously not disappear as long we have a normal interest rate situation. That's why we are convinced that the repo business will continue to happen.

And lastly, now from a cyclical perspective, so obviously, we are in a perfect scenario currently as there is high uncertainty from an interest rate development. So market rates tell us currently 5 to 6 rate cuts for Fed and ECB until year-end. My belief is won't be as many or at least not as early as currently foreseen, but I do not have a crystal ball. But some market participants speculate it could happen earlier. Some speculated it could happen later. Some speculate the next is a 50% rate cut, the others a 25% rate cut. So there are different expectations in the market. And obviously, that gives also for our fixed income business high cyclical tailwind.

[Operator]

And the next question comes from Andrew Coombs from Citi.

[Andrew Coombs, analyst]

If I could ask a broad-based question on seasonality, both in terms of SimCorp revenues but also the overall group cost base. If I look at SimCorp, EUR 198 million of revenues in Q4 and I think you said EUR 544 million for the full year. So a steady 6% and the revenue recognition being in the fourth quarter. You're also still guiding for EUR 600 million for full year '24 versus that EUR 198 million in Q4 alone. So given this predominant subscription-based business, why is there so much seasonality in the Q4?

And then more broadly on the cost base. I think even if you adjust for the SimCorp acquisition, you recognized about 30% of OpEx in Q4. I know that's not abnormal. It's pretty similar in 4Q '22. But why is it that so much of your cost base is back end-loaded every single year?

[Gregor Pottmeyer, executive]

Okay. Thanks, Andrew. So overall, this started with the second question of the cost and the adjustment here. So it's part of our general guidance where we said with regard to the extraordinary costs. So we said we need a cost to achieve of EUR 100 million. We said it's EUR 50 million in 2023 and EUR 50 million in 2024. Now the number in 2023 was slightly higher at EUR 56 million. So that was a full number for the year. And for Q4, it was EUR 36 million.

On top of this EUR 100 million cost to achieve, we said it's EUR 22 million transaction costs for the bankers and the lawyers and so on we hired. So that adds up to the EUR 78 million, EUR 79 million extraordinary costs in the full year.

So if you now model that, again, you have to include some roughly EUR 50 million cost to achieve in 2024. Though that will basically not disappear in 2024, but it will disappear in 2025, obviously. So then you should see a significant cost decrease. So that's the way how we look at it.

From the other question around -- again, around the net revenue, how fit all this number together. So there are certain assumptions with regard to which kind of clients we win over the next 12 months in this year. So is it basically a SaaS conversion, is it an on-premise solution? That triggers also the GAAP revenue reporting. So what is the point-in-time revenue? What is an overtime revenue?

Currently, we are in the range of 30% point-in-time revenue and 70% is overtime revenue. So from a GAAP revenue perspective, it's a little bit tricky to exactly forecast the right numbers here because at the end of the day we do not finally know how the client will decide whether he wants to fully outsource or whether he wants to keep the IP rights and use on-premise solution and so on.

Therefore, we say the ARR number or the annual recurring revenue number is a more stable number, but is more cash flow-oriented, right? And therefore, in a software business, that is usually the better number to steer that kind of business.

So here, we say it's -- currently, it's a 14% ARR growth case. As we guided in our Investor Day presentation, where we said it's 13% to 18% and with the synergies on top, we will generate also additional ARR. So that's what we are focused on. And again, the GAAP revenue number has some assumptions where we will finally see how clients will make a decision.

[Operator]

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

[Hubert Lam, analyst]

I've got 3 questions. Firstly, on the NII from the loss of the -- EUR 30 million revenues you lost from the segregated account. Is this something we should expect in the future? So should we deduct EUR 30 million from our NII calculation on a recurring basis? That's the first question.

On the second question, again, is relates to NII. In your guidance for revenues for 2024 of more than EUR 5.6 billion, you said you assumed some cyclical headwinds including some rate cuts. Can you let us know how much rate cuts you are expecting in your base case and your budgeting and also what NII is included in your forecast?

And lastly, I think you alluded to it around the European Commission yesterday putting out new rules regarding clearing services to make it more attractive in the EU. Can you talk a bit more about what makes you more confident that you can get some -- increase your share and how you can benefit from this?

[Gregor Pottmeyer, executive]

Okay. Starting with the NII question, the first 2 questions. So in principle, our guidance for the full year is as follows: so for 2023, we had roughly EUR 702 million NII. So adding up both for Fund Service business and Securities Service business. You are aware that we guided for 2026 some EUR 500 million around that. So -- and 2024 is obviously now the glide path between that number from 2023 to 2026.

So in principle, assuming that we have stable customer cash balances of around EUR 16 billion, in our forecast or what we include now in the guidance is that we take this 5 to 6 rate cuts, what is currently in the market, for U.S. dollar and for the euro and if you do that math then our NII is roughly 10% lower in 2024 compared to 2023.

And in this guidance, it's also included these sanctions or blocked accounts what was part of 2023. And not forget now we highlight this EUR 13 million on the blocked account on this Russian underlying. But there are obviously other blocked accounts like the Iran-Peterson case, where we do basically the same where we also provisioned interest rates.

So -- but that is one on the vertical perspective, 2023 will be the same in 2024. So no change with regard to that.

Your third question on the European Commission. Theodor?

[Theodor Weimer, executive]

I'm going to take this one, Hubert. As you are fully aware, Deutsche Börse in Europe we are advocating for a market-driven solution on the euro clearing solution for years. Our Eurex Clearing partnership program is a big success. We have achieved roughly 20 percentage point market share. And the outstanding volume on OTC interest rate derivatives amounts roughly to EUR 34 trillion, right? That is really, really impressive, I think.

And you have probably seen what happened yesterday in Brussels on the EU Commission side, where we had the preliminary resolution on the EMEA 3.0 regulation. And basically, what happened, right, it looks like that they have a common denominator compromise, which is actually quite okay for us.

Basically, we are saying, right, we have promoted the active accounts, right, in the European Union of the 27 and we basically said, on our side, we want that all our participants start in activating their accounts, right? And this is now differentiated by the sizes and the types of clients, right?

And the other side, those who are against such a forced transition, they've argued we would love to get more time. They tried to postpone it in the year 2025 and likely even thereafter. And I think now at the end of the day, the EU Commission made this preliminary decision and basically said we force the clients by sizes and so forth to activate the accounts, and this is probably a good compromise. So far so good.

And this whole topic needs to get put into an overall context, right? We are now in the base in the range of EUR 5.1 billion overall revenues. The contributions from the OTC clearing are in the range of close to EUR 100 million. Now we'll continue further grow significantly, right, and this will become a 3-digit number next year.

So this is now -- the train has left the station, guys, right? There's no way back. And we are pretty confident that we could continue with this product going forward under the leadership of Erik Miller, our CEO of the Eurex Clearing side.

[Operator]

The next question comes from Roland Pfänder from ODDO BHF.

[Roland Pfänder, analyst]

Two questions from my side. Firstly, could you comment on your pricing power? Are you able or willing to set higher pricing points on products in your spectrum? Or do you see pricing pressure on some business pockets? It would be interesting to know.

Secondly, coming to your outlook. You alluded to the fact that a higher volatility or volatility pickup could be an add-on to your guidance, but which volatility level did you bake into your outlook? The current very low one or an average one, that would be also of interest.

[Gregor Pottmeyer, executive]

Yes. Thank you, Roland. And so the pricing power, there's our consistent answer to that question without going in the details around any specific product. So overall, we bake in roughly a 1% net revenue increase out of price increases. And so it's roughly EUR 50 million what we include basically in our base case assumption. Yes.

Next topic, outlook 2024, what is the volatility level. That's why we guide not a precise number, right? We say it's more than EUR 5.6 billion and more than EUR 5.6 billion could be EUR 5.7 billion, could be EUR 5.8 billion or could be something like that. And that really depends on what is the volatility level.

Currently, we see on the fixed income, right, a much higher level what we have assumed in our plan. On the other hand side, we see on the equity index level a lower level, what we have seen. So currently, equity -- index equity is 13% to 15%, the volatility level. So last year, we had 18%; and the year before, we had 28%. Here, you see this big chunks, right? And therefore, it's not easy to guide all of these things.

Therefore, in principle, if there are higher volatility, obviously, we could be easily above that kind of guidance. And as always, we guide conservative.

[Operator]

Next up is Alberto Nigro from Mediobanca.

[Alberto Nigro, analyst]

Yes. A quick one on SimCorp integration. You mentioned that you are on track to achieve the EUR 54 million synergies. But can you give us more color which kind of synergy we'll see this year, mainly efficiency synergies or revenue uplift?

And then if you can tell us your leverage ratio at the end of 2023 in terms of net debt/EBITDA.

[Gregor Pottmeyer, executive]

Yes. Starting with the second, so the leverage. So the good thing is that with regard to the net debt/EBITDA, we are already below the threshold -- the new threshold. So the threshold is for AA- rated company agreed with S&P, that it's below 2.25x net debt/EBITDA and we are at 2.18, right? So we are slightly below that level.

With regard to the other KPI, funds from operation and net debt, here, we are below that ratio. So it's 40 for AA- and we are currently at 36.

So for both key KPIs, we expect to be in line end of 2024. And that's why we are also focused in 2024 on reducing our debt level. And we will reduce our debt levels, specifically in the commercial paper, and most probably end of Q1, we will have no commercial paper anymore.

And we can realize that because we have a very strong operating cash flow, right? We generated an operating cash flow of EUR 2.5 billion in 2023, right? And most probably, it will be, let's say, 10% higher operating cash flow in 2024 as our EBITDA number also will increase by more than 10%.

So from this, we have just to deduct our CapEx. So the, let's say, EUR 350 million for 2024, and you have a big number, above EUR 2 billion, what we can invest. And therefore, we have -- give you a clear guidance with regard to our capital allocation policy, how we want to do that.

Your second question with regard to the synergies of SimCorp. So we are right on track to deliver our synergies. Overall, it's EUR 90 million synergies, what we want to achieve until 2026. And this EUR 90 million, we want to achieve 60% out of that. So it means EUR 54 million as a run rate synergies already in 2024.

The EUR 90 million split in cost and revenues is EUR 55 million are cost and EUR 35 million are net revenues. And for both, we want to achieve close to the 60%.

With regard to the cost synergies, so EUR 55 million times 60% is something above EUR 30 million. We are quite optimistic. So the far majority we have already booked in, but there is still a way to go, but we are very confident to achieve that level.

With regard to the net revenue synergies, we still have to work on the topic, but we have many good ideas to realize also our targets here.

[Operator]

The next question comes from Tom Mills from Jefferies.

[Thomas Mills, analyst]

I appreciate it's early days, but have you had any early success in terms of cross-selling between Axioma and SimCorp client bases? Or at least have you had any indications that what you're doing kind of changes the calculus in decisions for which provider to go with?

And then a second question. In terms of new client wins, you obviously pulled in 13 at SimCorp last year, which feels like a decent haul. Is that a good ballpark expectation for 2024 as well or could you do better than that? Can you go after larger-sized clients? A little bit of color around that would be helpful, please.

[Gregor Pottmeyer, executive]

Yes. Starting with your second question, I think that's also a good guidance for 2024, what we expect that. So it was not some extraordinary. So overall, we have currently 300 clients. So increasing every year by, let's say, 1 per month, I think, is a good number. But it won't happen once a month, right? So maybe it's 8 in December, right? So that's usually even more, right?

So that's -- really, it depends on Q4 and even on December. So therefore, you see always this strong pickup in Q4, where you have much higher net revenues. But nevertheless, if you have this comparison over the quarter, then we have to explain, and Q1 last year was also a very strong quarter where we had some nice wins.

And then it depends from a GAAP revenue perspective, what kind of contract is it? Is it point-in-time revenue? Is it overtime revenue? So the GAAP reporting is a little bit tricky. So it means a lot of explanation how the customer and client portfolio consist of and what new clients we did win or where do we do some upscaling with this existing client. So again, the ARR number is a better and easier number to steer that kind of business.

With regard to the cross-selling, yes, of course, Axioma-SimCorp is by far the most attractive combination that we can achieve cost synergies and revenue synergies. And you are referring to, obviously, revenue synergies and cross-selling. I do not exactly know how much of this in SaaS conversion. But I know that there were 2 or 3 already where we offered this combination of front office and middle and back office.

So already, we are not just in discussion, also with some signed contracts where we could already show that a client wants to have one solution, an integrated solution from one middle to back office. So that's very promising and therefore we are very optimistic.

So on the one hand side, cross-selling between clients, but also cross-selling between the -- from a regional perspective. So using the Axioma clients, they mostly are located in the U.S. market. So bringing in our SimCorp colleagues. And the other way around SimCorp is strong in Europe and bringing here our Axioma colleagues in.

So that looks very promising, and we are very optimistic that we have much fun here via cross-selling and upselling to existing clients.

[Theodor Weimer, executive]

If I may add, Gregor, on the SimCorp-Axioma revenue cross-selling, I have it in front of me. We have -- in 2023, we won both a major European pension fund as a combined SimCorp-Axioma client, a big one; and a global asset manager headquartered in Europe, which had been a SimCorp client who also signed up now for the Axioma offering. So the start looks at least promising.

[Operator]

And a follow-up question comes from Bruce Hamilton from Morgan Stanley.

[Bruce Hamilton, analyst]

Yes, actually, my question has been asked. It was about the change in the OTC clearing rules, which I think you've addressed.

[Operator]

And then the next question comes from Enrico Bolzoni from JPMorgan.

[Enrico Bolzoni, analyst]

I just wanted to ask, the other revenue line within the EEX segment was very strong and you clearly had a record quarter in terms of volumes for both power and gas. In the past, you were mentioning that typically when you have clearly very high collateral levels, usually this depress a bit the trading of power. This is what happened, I think, towards the end of 2022.

Now instead, these 2 lines seem to be positive correlated. So there was, I suppose, a very strong print from the collateral levels. But at the same time, a very high activity and very high volumes.

Can you just provide a bit of color if this is actually the case or if there are other elements that we should be aware of so when it comes to modeling for 2024?

[Gregor Pottmeyer, executive]

Yes, Enrico. So the other line item at EEX is mainly from our NII, so our collateral management business. And there are 2 different elements of NII. So the one is at the ECC, our clearing house for Europe, where we have basically the cash as a main contributor here in the margins. And obviously, this went significantly down from average, I think it was some EUR 50 billion to now EUR 12 billion, EUR 13 billion. And therefore, there's a big reduction in the NII within the ECC.

On the other hand side, in the Nodal clearing house, here, we have a different concept. We do not get certain basis points on the margin. So we can keep here on the cash collateral we have and that's in the amount of EUR 1.5 billion, something like that. Here, we get the full interest rate. So basically, the 5%, but we share something with the client, what is agreed upon.

So here due to the strong increase in the rates in 2023, so there was a strong increase in the Nodal NII. And this basically compensated the reduction in the European clearinghouse. And overall, it was quite stable, the NII.

[Jan Strecker, executive]

That was actually a small decline. So Q4 '22 really was the peak with EUR 40 million. And Q4 '23, it was EUR 33 million. So around EUR 7 million less.

[Operator]

And our next question comes from [indiscernible] from [ Liset Bank ].

[Unknown Analyst]

I have one clarification and one question, please. So starting with the clarification, so SimCorp achieved a strong outperformance in terms of the net revenue contribution in the last quarter of 2023. Could you maybe also call out the EBITDA contribution? So the guide was there for EUR 85 million, just to have this as well?

And then my question, you mentioned the new hires. Could you give some color on the sort of roles where you have been hiring?

[Gregor Pottmeyer, executive]

So with regard to the SimCorp question, I think we provided you all the ingredients. As you have seen in the consolidation slide that EUR 111 million SimCorp costs, so you can deduct that from the EUR 198 million and then you have the number.

With regard to the new hires. This is mainly in our Investment Management Solutions business, so the far majority. And the far majority where we hire are in this low-cost locations. That's obviously Manila in Philippines or in Mumbai in India. So the far, far majority is in this low-cost locations. And for instance, in Manila, so it's a research analyst, what we hire here for, let's say, USD 20,000 or even less to cover the [ 8,000 ] ratings what we already want to do and offer to our clients. So very few hires all in our high-cost locations and in our core businesses.

[Jan Strecker, executive]

All right. There are no further questions on the line. And therefore, we would like to conclude today's call. Thank you very much for your participation, and have a good day.