Cboe Global Markets, Inc. (CBOE) Q3 2017 Earnings Report, Transcript and Summary

Good morning, and welcome to the Cboe Global Markets Third Quarter 2017 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I now would like to turn over the conference to Debbie Koopman. VP of Investor Relations. Please go ahead Ma’am.

Good morning and thank you for joining us for our third quarter earnings conference call. On the call today, Ed Tilly, our Chairman and CEO, will discuss the quarter and provide an update on our strategic initiatives. Then, Alan Dean, our Executive Vice President and CFO, will provide an overview of our third-quarter 2017 financial results and Brian Schell, our Deputy CFO, will review the quarterly results in more detail, including an update on certain guidance metrics. Following their comments, we will open the call to Q&A. Also joining us for Q&A will be our President and COO, Chris Concannon and our Chief Strategy Officer, John Deters. In addition, I'd like to point out that this presentation will include the use of several slides. We will be showing the slides and providing commentary on each. A downloadable copy of the slide presentation is available on the Investor Relations portion of our website. During our remarks, we will make some forward-looking statements, which represent our current judgment on what the future may hold, and while we believe these judgments are reasonable, these forward-looking statements are not guarantees of future performance and involve certain assumptions, risks and uncertainties. Actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements. Please refer to our filings with the SEC for a full discussion of the factors that may affect any forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, after this conference call. During the course of the call this morning, we will be referring to non-GAAP measures as defined and reconciled in our earnings materials. We will also refer to non-GAAP adjusted combined results, which are also reconciled in our earnings materials. As you know, we completed our acquisition of Bats Global Markets on February 28, 2017. The combined results present information regarding the combined operations as if the Bats acquisition had closed at the beginning of 2016, in order to provide a supplemental discussion of our results. Now, I'd like to turn the call over to Ed Tilly.

Thank you, Debbie. Good morning and thank you for joining us today. I am pleased to report on a strong third-quarter 2017 at Cboe Global Markets, with adjusted earnings per share of $0.89 on net revenue of $270 million, led by continued growth in our proprietary index products, with record average daily volume in VIX options and futures despite record low volatility. Overall options average daily volume increased 11% in the third quarter compared to the previous year, and our proprietary products continued to outperform the industry. Index options volume increased 26%, driven by a record quarter in VIX options trading and continued strong trading in SPX options, which increased 56% and 12%, respectively. VIX futures trading set an all-time high for a second consecutive quarter, with ADV up 36% compared to the third quarter last year. We saw third-quarter market share in both U.S. and European equities decrease against the prior year’s third quarter, due to ongoing low volatility. Global FX volume was up 13% and our market share was 12.9% for the third quarter, compared to 12.4% a year ago. We are preparing to launch trading of non-deliverable FX forward transactions, NDFs in November. NDFs will trade on Cboe SEF. The Cboe ETF Marketplace continued to grow in the third quarter, with 23 new ETF launches and a record 30 transfers on a single day from iShares, bringing our total ETP listings to 234 at the end of September. Year-to-date through September, we executed 22% of trades and captured 38% of all new listings and 62% of transfers. Our market share of all U.S. ETP listings now stands at 11%. Before recapping the quarter’s key initiatives, I will touch on our new Company name, mission and commitments, which we unveiled on October 17. Our new name blends what many already informally called us, Cboe, with the extended global reach afforded us by the acquisition of Bats. Our mission, powering potential to stay ahead of an evolving marketplace, is fueled by our commitment to relentless product innovation, leading-edge technology, and seamless trading solutions. Let’s take a look at the past quarter through the lens of these three commitments. Our commitment to driving growth through product innovation has never been greater, nor has our ability to bring new innovations to market. Our diversified product line allows us to shape every aspect of the product development cycle and our new asset classes represent new building blocks for innovation. Additionally, we continue to tap the potential of long-standing proprietary products, such as our flagship S&P 500 options franchise. In September, we announced plans to launch options on 10 S&P Select Sector Indices designed to provide market exposure to widely followed U.S. equity sectors represented in the S&P 500. The new options will allow European investors who cannot currently hold options on ETFs due to certain European regulations to target U.S. equity exposure. We will leverage our extended reach in Europe to market Sector options, which we expect to launch by year-end. Our second commitment is to differentiating our Company with leading-edge, state-of-the-art technology. We expect the migration of Cboe exchanges onto Bats proprietary technology to maximize our value proposition for customers and shareholders alike and to form the foundation for our Company’s ongoing growth. Working closely with our customers is key to a seamless migration. In September we held our third conference call to update customers on the progress of our technology migration and their feedback remains positive. The migration of the Cboe Futures Exchange to the Bats platform is progressing well and remains on track for our planned February 25, 2018 launch. The implementation of our new index platform is also on track for the first quarter of 2018. The new platform will serve as the foundation for our growing index business and enables us to better calculate and disseminate data for new and existing indices. We are simultaneously preparing for the migration of C2 Options Exchange to Bats technology, which is planned for May 14, 2018. Preparations are also underway for the migration of the Cboe Options Exchange to the Bats platform. The first step will be migrating SPX options to the Hybrid system, which we are targeting for the second quarter of 2018. On October 23, we successfully launched the EDGX Options Exchange Complex Order Book, designed to be the most efficient and adaptable complex order book in operation. We expect the new functionality to provide immediate benefits to EDGX customers and to form the foundation for all complex orders handled by Cboe Global Markets, once all of the exchanges migrate to Bats technology. In other technology news, last week we announced our acquisition of Silexx, a developer and operator of a multi-asset order and execution management system that caters to institutional customers throughout the U.S. The Silexx platform supports equities, options and futures trading and provides access to roughly 40 global markets, including in Europe and Asia. We are pleased to provide customers with an additional, streamlined channel to industry-leading data, analytics and trade execution tools. Our third commitment is to providing seamless trading solutions through a blend of data, analytics and navigational trading tools coupled with a distinctive emphasis on customer education and collaboration. We view MiFID II, for example, as an opportunity to help customers navigate the changing regulatory environment with value-added products and services. Our foremost goal was to provide our customers with operational readiness ahead of MiFID II with ample time to test their systems. I’m pleased to say we successfully completed our fourth and final software release, and that all exchange functionality needed for MiFID II compliance is now in place. Our Large in Scale block trading platform and our Periodic Auctions offering, a lit book operating auctions throughout the day, were developed in anticipation of the new volume caps under MiFID II, which are expected to limit trading in dark pools. Both were designed to enable investors to find liquidity and trade large quantities of stock with low market impact. Our ability to provide market participants with cutting-edge trading solutions is supported by our ongoing commitment to customer collaboration and education. This commitment is highlighted by Cboe Risk Management Conferences, which are now held annually in the U.S., Europe and Asia. Most recently, we enjoyed record attendance at our sixth annual RMC Europe in September, held just outside London. RMC attendees, who are often early adopters of our new products and services, had the opportunity at RMC Europe to interact with team members who represent new product lines at Cboe, including FX products and European equities. In closing, I would like thank our team for a great third quarter, our first quarter reporting as Cboe Global Markets. It is a credit to the entire team that we are now operating as one bigger, bolder company, just eight months after the close of our deal. Our integration work is not over, but there is an excitement throughout the company in seeing our ongoing efforts come together. Every team member has been integral to the creation of Cboe Global Markets, a truly transformational step in the great history of our company. The collective effort of our team has positioned us to power the potential of our customers and shareholders in the quarters and years to come. With that, I thank you for your time. But before turning this over to Alan for the last time, I would like to thank him for his outstanding contribution to our company. As you know, Alan will be retiring after 38 years of service to Cboe. He has helped successfully guide Cboe through major challenges, including the aftermath of the Market Crash of 1987, our transition from floor to electronic trading, and our journey from a membership organization to a shareholder-based company. He was instrumental in the accomplishment of major milestones, including our successful IPO in the midst of a very challenging financial environment, our transformative deal with Bats and our ascent to an S&P 500 company. More important, in between those major events, Alan lent his guidance, wise counsel and steadfast support to Cboe on a daily basis for the past 38 years. I thank him for his dedication, service and friendship. Over to you, Alan.

Well, thanks Ed, I appreciate those kind words and good morning everyone. Before I begin I’d like to thank all of you on the call, analysts, portfolio managers, and shareholders for your support over the years. As CFO of Cboe, one of the reasons I’ve enjoyed my job so much is that I have had the opportunity to interact with so many consummate professionals. It has been a pleasure to work with all of you. Lastly, as I ride off into the sunset, I know that Cboe is in good hands with Ed, Chris and of course with Brian Schell at the financial helm. Now onto the quarter. Before I begin, let me point out that our third quarter 2017 results includes Bats for the entire quarter this year but not the comparable 2016 period. Therefore, the year-over-year variances on a GAAP basis were largely due to the addition of Bats on March 1. To provide an additional review of our business, our third quarter financial review will focus on our non-GAAP adjusted combined results, which present financial results to reflect the Bats transaction as if it had occurred on January 1, 2016. On that basis, we posted another strong quarter, primarily driven by the continued strength of our proprietary index products along with continued growth in non-transaction revenue, against the backdrop of record low market volatility and a decline in U.S. equities trading and relatively flat options trading activity industry-wide in the third quarter 2017, compared with the same period in 2016. I will give a quick snapshot of the quarter and then turn it over to Brian to dive deeper into the quarterly results. Our adjusted combined net revenue was nearly $270 million, up 10% above last year's third quarter. Adjusted operating expenses of $101.9 million were down 2% and the adjusted operating margin increased 440 basis points to 62.2%. Adjusted diluted earnings per share of $0.89 rose 24% over 2016's third quarter. Now I'll turn it over to Brian.

Thank you, Alan. And let me say that I am honored to succeed you and thank you for our partnership over these past 12 months. I look forward to continuing to work with the investor/analyst community as well as with the Cboe team as we further our efforts to create long-term value for all of our stakeholders and strive to capitalize upon the significant opportunities that lie ahead of us, as demonstrated by our results reported today. Now let’s review the quarter in more detail. Starting with net revenue, the key growth driver during the quarter was net transaction fees and to a lesser extent in other revenue, market data revenue and exchange services and other fees. These increases were offset somewhat by higher royalty fees and lower regulatory fees. The decrease in regulatory fees primarily reflects lower regulatory costs we are incurring, resulting in a reduction in the fees we record to cover some of these costs. We've seen this line item steadily decline this year and believe the third quarter regulatory fees represent a good run rate to use for building expectations going forward. Looking at the revenue contribution by business segment, we achieved higher revenue across each business segment, except U.S. Equities, with options and futures contributing the largest revenue increases. In our options segment, net revenue of $130.7 million was up $11.5 million, or 10%, compared with last year's adjusted combined net revenue for the third quarter. The increase was primarily driven by higher revenue from net transaction fees, offset somewhat by an increase in royalty fees. Net transaction fees for options were up $13.8 million or 15% in the third quarter, with higher revenue from index options as well as multiply-listed options. Net transaction fees from our higher-RPC index options of $87 million were up $12.9 million or 17%. This reflects a 26% increase in ADV, led by 12% in SPX options and 56% in VIX options, offset somewhat by a 5% decrease in index options RPC, primarily due to a mix shift and higher volume discounts. Total market share for Cboe's U.S. options exchanges was 41.7% for the quarter, up 2.3 percentage points compared to our combined market share in the third quarter of 2016. The higher market share contributed to growth in market data revenue, with increases in revenue from both industry and proprietary market data. Moving to Futures, our fastest growing and highest RPC business segment posted record ADV for the second consecutive quarter. Net revenue of $38.9 million was 37% above last year's comparable quarter. This increase was driven by a 36% increase in futures ADV and a 3% increase in RPC. The RPC increase primarily reflects the impact of fee changes implemented in January of this year. Looking at Cboe’s organic growth, which excludes the legacy Bats revenue contribution, we saw strong organic growth of 15% for the quarter, primarily due to our proprietary products, particularly VIX futures and VIX options. On a combined basis, proprietary products accounted for 69% of net transaction fees this year compared to 64% last year. Turning to U.S. Equities, net revenue was down slightly, primarily driven by lower net transaction fees, which were nearly offset by growth in non-transaction revenue. The results reflect an 8% decline in market volumes and a 1.6 percentage point decrease in market share, with net capture unchanged. We witnessed another quarter of low volatility, which typically results in lower overall equities volumes and a higher percentage of that volume traded off-exchange. As noted previously, continued growth in non-transaction revenue nearly offset the shortfall in net transaction fees, with solid growth in exchange services and other fees and proprietary market data fees. We continue to see positive customer response to our proprietary market data offerings, which had revenue growth of 41% in the quarter, with approximately 20% of the growth coming from new customers or additional sales to existing customers and the remainder from pricing changes. We are encouraged by the market response to our market data offerings and look forward to further expanding our customer base. Market volumes for European equities were up 3% in the quarter. Net revenue for European equities increased 16% on both a dollar and local currency basis versus last year's third quarter, reflecting growth in net transaction fees and non-transaction revenue. The increase in net transaction fees primarily resulted from an 8% increase in net capture, offset somewhat by a 1.9 percentage point decline in market share. Net revenue for Global FX rose 9% to $11.3 million. This increase was driven by higher transaction fees, reflecting a 13% increase in average daily notional value traded on the Cboe FX platform, offset somewhat by a 3% decline in the net capture. And our market share increased 50 basis points to 12.9%. Turning to expenses, this next slide details total adjusted operating expenses of $101.9 million for the quarter, down $1.5 million or 2% compared to last year's adjusted combined expenses for the third quarter. Looking at the detail, the favorable variances are driven by reductions in compensation and benefits, professional fees and outside services, and depreciation and amortization. The declines primarily reflect the realization of synergies, which resulted in a reduction in staffing and lower expenses for legal services, consulting fees, audit fees and other corporate-wide overhead. In the third quarter, we realized $7.6 million of expense synergies, primarily seen in comp and benefits and professional fees and outside services. Our realization of synergies is running ahead of plan and as a result we now expect to end the year with approximately $30 million in GAAP run-rate synergies for 2017. However, at this time we believe we have just pulled forward some of the savings. As a result, we are not changing our forecast of synergies to be realized in the long-term. We look forward to providing you with further updates as our integration progresses. Looking at our expense guidance for the full year 2017, we now expect adjusted operating expenses to be in the range of $413 million to $415 million, reflecting a reduction from our original range of $415 million to $423 million. Moving to income taxes, our effective tax rate on adjusted earnings for the third quarter was 36.2%, within the guidance range of 35.5% to 37.5% we provided on our last call. This excludes a one-time charge of $7.4 million recognized in the third quarter to re-measure our deferred tax positions, as well as other non-GAAP adjustments. We now expect the effective tax rate on GAAP earnings for the year to be in the range of 37.5% to 38.5% compared with prior guidance of 37% to 39%. The effective tax rate on adjusted combined earnings is expected to be in the range of 36% to 37% for the full year and a range of 37% to 38% for the fourth quarter. The tax rate guidance incorporates the impact of the corporate income tax law changes enacted in Illinois in early July. Looking out to 2018, and assuming no significant changes to the federal income tax code, we expect the effective tax rate to increase compared with 2017, reflecting the full year impact of the Illinois tax rate changes. In addition, we now expect capital expenditures for the year to be in a range of $49 million to $53 million versus our previous guidance of $55 million to $60 million, reflecting better visibility on our project costs and timing as we enter the fourth quarter. We also reaffirmed our guidance for depreciation and amortization. Turning to capital allocation, we continue to focus on allocating capital in the most efficient manner to create long-term shareholder value. As such, we prioritize capital by investing in the growth of our business, returning capital through dividends and utilizing excess cash to pay down our debt as quickly as possible. Our quarterly results once again generated strong cash flows, which enabled us to reduce our debt by an additional $100 million and payout dividends of $30.6 million, while still ending the third quarter with adjusted cash and investments of $127 million. Our debt to EBITDA ratio based on trailing 12 months adjusted combined EBITDA at quarter-end was 1.9 times, down 0.2 turns from the second quarter and roughly a 0.5 turn since the end of the first quarter. And, while we don’t have a specific leverage ratio target we are currently managing to, we will look to continue to de-lever to enhance our balance sheet flexibility. While we did not make any share repurchases in the third quarter, we remain open to allocating capital to make opportunistic share repurchases, depending on the circumstances. To summarize, during the third quarter we built on the strong momentum we have experienced throughout the year, and continued to demonstrate our focus on and the strength of our proprietary index products, generating strong organic growth; diversifying and stabilizing our revenue streams with a growing base of non-transaction revenue; disciplined expense management; leveraging the scale of our business model, producing higher profitability margins; an integration plan on track, with improved cost synergy realization; and ongoing focus on capital allocation by reducing debt while continuing to return capital to shareholders though quarterly dividends. In closing, we are uniquely positioned with solid market fundamentals and exciting innovative products and services in our pipeline, which we believe will power our potential to serve the needs of our customers and build shareholder value. With that, we thank you for your time this morning. I will turn it back over to Debbie for instructions on the Q&A portion of the call.

Thanks, Brian. At this point, we would be happy to take questions. We ask that you please limit your questions to one per person to allow time to get to everyone. Feel free to get back in the queue, and if time permits, we will take a second question. Operator?

Yes, thank you. [Operator Instructions] And the first question comes from Rich Repetto with Sandler O'Neill.

Yes, good morning, guys. First I just want to congratulate Alan, the maestro of expenses. I think it's only fitting that he announces his retirement when you beats us on expenses, you will lower the 4Q guidance, increase the synergies, but you still keep the target synergies the same for the outlook.

Rich, I kicked him out of the room. He’s not in here.

I’ve never enjoyed being manipulated more. It’s been consistent. Any way, my question, I was going to ask Chris about market data, but I'm going to stick to the expenses with Alan here. So how do we get our expenses when – I think there's still another $5 million of synergies if you take the run rate for 3Q and I think you come up with about $25 million if you stayed at that synergy level. And at the same level, and you’d come out still at the low end of guidance and you expect to take $5 million out. So just one last time could you explain why the expense guidance is what it is for 4Q?

Rich, we have a new maestro of expenses, Brian. So I’ll let Brian handle that question.

Hi, Rich. So, I mean, a couple of things are going on. We know we have some seasonal expenses that are going to increase in the fourth quarter that reflects – that’s reflected in that full guidance for the year. So we’ve seen the run rate, we’ve seen more the changes obviously, loaded earlier than what we expect in the fourth quarter, as far as any rate of change. So we still feel very comfortable with that range, we think it's perfectly conservative around the range that we've guided to. So, like I said, the real driver there where you might see that a little bit different than where you're headed, as far as where you made a model of that is we do expect an uptick in fourth quarter this year than maybe what you have modeled.

Got it. Thank you. You’ve been trained well, Brian. Thank you.

Thank you. And the next question comes from Jeremy Campbell with Barclays.

Hey, thanks. I just wanted to touch a little bit more on the capital deployment side. I mean, you guys are now down below two turns of EBITDA. And I know you guys mentioned you don't really have a target that you're guiding to here. But can you just think about, okay, aside from reinvesting organically in the business and the dividend that you're currently paying out, how you’re thinking about prioritizing those – that kind of excess capital and free cash flow going forward?

Yes. So this is a conversation we have quarterly with our board. We review our projecting cash flows, we look at where we're going to end up on the various ratios, we look at any potential dividends, the share repurchase opportunity, so all those items that we – that are available to us and the tools that we can use to help continue to deploy capital effectively. We still continue to look at achieving that longer-term goal, where I’d say, maybe even a shorter-term goal of continuing to restore increased balance sheet flexibility. And as we look through the predictability of where we are, what does that generate, there are definite benefits to continue to allocate the capital the way we've done in the past and again, there shouldn't be any surprise if we continue to focus on delevering again, enhancing the balance sheet flexibility, reducing our interest expense and at some point, potentially getting an upgrade on some of the rating agencies if that continues to turn positive from their perspective, again, no guarantees there. So that's how we've continued to think about it. It’s pretty consistent quarter-over-quarter.

Great. Thank you.

Thank you. And the next question comes from Michael Carrier with Bank of America.

Thanks, guys. Maybe one question, just on the regulatory side. So we got the treasury support on the capital markets, there were some focus on market data. But on the flipside, there were some easing potentially on capital ratios for like the dealers and recently you’ve seen some of the market makers impact back way from options. So I guess when you look at all the points in there, just any change in terms of your opportunity on market data or in terms of the users of the market, going forward, if some of these recommendations are put in place?

So this is Chris Concannon, I’ll take that one. First of all, there's been several treasury reports, all – we view as favorable many of which have been some of the opinions that we’ve voiced over the years when it comes to regulation and market structures. So we view the treasury reports as quite favorable when you look at them across the board. One in particular is about, as you mentioned capital and bank capital that impacts our market makers and how they clear their trade. So we see that trend is being largely favorable for market makers in our market and in the SPX in particular. But that trend will continue, obviously, it's only a treasury report, action has come from the various regulatory agencies. On market data, we think we're well-positioned. Our organic growth suggests that we're well-positioned because we are coming at the market with a much lower alternative. And so we're viewed by clients as having a lower cost of market data and that's one of the reasons why we're reflecting growth in our market data revenue and in our market data opportunity, that opportunity is not just here in the U.S, but it's also a global opportunity as investors around the planet both in Asia and Europe are looking at U.S. market data and trying to find solutions that are less costly. So we feel like in light of the treasury report, we're well-positioned to talk about market data costs.

Okay, thanks a lot.

Thank you. And the next question comes from Alex Blostein with Goldman Sachs.

Hey, good morning, guys.

Good morning.

So wanted to follow-up on the kind of the revenue discussion, you guys highlighted earlier from migration of Cboe products into Bats' technology platform over the next couple of quarters here. So I guess, sounds like Q1, we're going to see CFE and VIX Index products and then SPX later on in the second quarter. Now that the company has been combined for a couple of quarters, you’re spending more time with our customers, any idea in terms of what kind of revenue opportunities that could create incrementally, and it’s obviously a pretty robust backdrop that you've seen so far this year?

Yes, let me just – actually, before I turn it over to Brian and Chris to add some color, want to be really clear, the SPX is actually moving to hybrid, not a true migration onto new technology. But you are right, that CFE and the C2 are migrating early 2018 to Bats technology. So just a point of clarification, so your expectation is in line with what we're going to roll out. As far as the opportunities, and I will ask the table to join me, really what we've always targeted and from a users perspective, the greatest benefit moving to Bats technology will be really on the future side. So just – if you recall, over the past quarters and actually years now, we’ve recognized some of the shortcomings of the current technology primarily when we look at that from a futures trader’s perspective, we have a wonderful platform that was really built by experts in matching quotes that is an options exchange perspective and the needs of massive amounts of quotes in processing those. What Chris Isaacson and his team has been able to completely redo is that was with the expertise of someone that's used to processing massive amounts of orders and quotes. So the benefit to the futures exchange will be the greatest we think, and that is leapfrogging a global standard or expectation on what you should be able to interact with on our VIX futures for sure. So biggest benefit, we think our futures looking forward to the C2 migration and then, the quarter after SPX moving onto hybrid. So happy to add more color, and I think Chris has got some. And then, if there was a follow-up to that, happy to get into it.

Yes. And I'll only add that the, I view the integration as already started technically. We launched the EDGX complex order book on October 23. And that's an investment in the future of our complex series that will be rolled out in C2 as well as the C1. So as you think about it, we started the migration in October. We also have an index product migration that we announced, CFE is in February followed by C2 in May, and then, obviously, the SPX moving to hybrid is all part of the migration to a new platform. So we're underway. We've already seen success in the migration, the launch of the complex order book on EDGX and so it's off to a very good start.

Great. Thanks a lot.

Thank you. And the next question comes from Ken Worthington with JPMorgan.

Okay. Thank you taking the question. This is totally a follow-up to Alex's question. I believe you're in beta testing in some of the new technologies. So I believe that there's already clients sort of using the new CFE technology. It could be totally wrong, but I believe that was the case. What are you seeing from – if I'm right, what are you seeing from those customers thus far? And I guess, what I'm particularly interested and maybe others are as well is, are we seeing the pace of trading impacted by those clients who are I guess, in early versions of the new technology or are there any other takeaways? Thanks.

Thanks, Ken. Really, it's very early days in our clients touching the new platform. We're really testing the APIs and making sure messages and interactions between our platforms and their platforms are correct. There's nothing you can learn in those days because we don't have all clients on in trading. Obviously, where our QA department is pounding way on the system and testing it to the standards that we require, but it's just too early to look at the client behavior on a test platform to predict any outcomes. But our original prediction as Ed alluded to is having new a platform for CFE is positive not only for our clients, but the outcome in the market, typically with the new platform you have more positive results from those clients that are enjoying higher throughput.

Okay. Great. Thank you.

Thank you. And the next question comes from Kyle Voigt with KBW.

Hi, good morning. So just a follow-up on the synergies, less than one year into the integration you're going to hit $30 million of synergies versus the three-year target of $50 million. When I go back to the original acquisition slide deck from last year, I think well over 60% of the synergies you outlined were IT-related. I think only $18 million were non-IT-related. And just from your prepared remarks, it sounds like most of the synergies you've realized so far have been in comp and corporate overhead. So am I right in thinking that most of the IT-related synergies still remain and typically take a little bit longer to realize? And how do I reconcile that big part of the IT synergies yet to come with, I guess, you maintaining the long-term synergy targets?

So I think that's pretty consistent. So couple of things that’s happened as far as when we pull some of that forward is some of the expectation we had built out – we’ll talk about the non-IT synergies. We've actually hit close to that target where we thought we would hit. Longer range for the non-IT is just that we were actually able to realize them much sooner in 2017 whereas we thought they were going to be more extended into 2018. So we've almost exactly nailed that number and have pulled that forward. Consistent with everything we've done with I think to your question in a way, you've kind of answered it already, is that we've continued to kind of lay out how do we talk about the synergies that we’ve realized, and that’s going well, we're seeing the stronger numbers and yet not changing that further out guidance is. The big bulk of those numbers are going to continued to be associated with that final technology migration than when happens with that third platform. Because a lot of parallel process continue to be maintained and so those people are still here although systems are being run in parallel. So it's not just the comp cost, you have the connection cost, you have all the power and everything going along with it. So those costs are continuing to maintain and so that will not fall off until that certain platforms continues to come off. The other thing is – the other reason why we have that is that when we actually have the migration occur for example, when CFE actually happens and when C2 actually happens, that will continue to reinforce or alter that, we'll call it a three-year, five-year number back to the original slide that we put out. And so kind of the follow-up question, I may ask or provide insight to is, when do we think we’ll have insight to, when that number may change or not. I think we need to get further along into the platform migration with CFE, with C2 and then, we've finalized the requirements and everything that's going to be built into what C1 is going to actually take and that's when you would look for an update from us.

Thanks, Brian.

Thank you and the next question comes from Brian Bedell with Deutsche Bank.

Great, thanks very much. Good morning. Maybe just to catch on to that team and maybe a different angle. As we think about pricing, as you migrate the CFE and C2 platform over, I don’t know if you can share with us any type of targets for, first of all, like improvement in market share, within the options business, from adding the complex order book and kind of over what timeframe I get. But I guess, the broader question I’d want to focus on is, how do you think about pricing as a strategy? Is that going to be married with the conversion, I guess, what I'm asking is, is there the potential to reduce pricing as a competitive weapon to gain market share in 2018 across the options platform?

So it’s Chris. I’ll take that. I think the first focus is, when we think about the migration of the platform, it's really perfecting the micro market structure of the platform that we're delivering. Today, there's functionality that we would like to give our clients on their current platforms and we're waiting for the migration to install that functionality. We do think that functionality is a net benefit for clients, a functionality that clients have asked for around the Complex Order Book, around auctions, around order types. So we're trying to satisfy our client demand with the migration itself to make sure we have everything wrapped into that migration. That is a net positive for client trading on the platform. So we think about our opportunity to grow market share on the Options platform in the multi-list segment of our business. The platform migration does help us provide tools and functionality that is in demand by our clients and improves our current functionality. So that's the way we think about it. Obviously, I won't comment on pricing in 2018 and how we view pricing in 2018. It's too early to say.

Okay.

Let me just follow-up, Chris to your point, the technology change won’t be driving pricing, answers to competitive pressures, we've always been responsive to that. So the technology migration will not be the driver behind pricing. It will be the competitive environment and looking product by product, order type by order type and functionality by functionality and what we can, so we will be looking at that holistically across all the asset classes, but not technology driven.

Great, that is very clear thank you.

Thank you and the next question comes from Vincent Hung with Autonomous.

Hi, can you talk about the success that you've had in growing the SPX options contract this year, specifically around what the week lease has done to enhance this, and the more – further innovation you are planning there.

Yes. I think we can talk just in general the index complex, and if you look at this quarter, it resembles very much the report that we gave last quarter. And that's proprietary complexes outpaced the entire industry and growth and you’ve pointed out one of the greatest highlights and that is in the SPX Weekly contract. I think what it really – if we look at the end user's perspective and what we learned quite honestly, every day talking to our customers and in particular at various RMC conferences around the globe, is the confidence that investors have in the short-term. Their perception of risk in the very short-term, their very comfortable making strategy and hedging and taking positions in the short-term, that's reflected in our SPX Weekly's growth. The user group who is trading in the SPX Weekly's, very active retail, very active hedge fund, but the theme is the comfort in the short-term. The third Friday in the many months that the open outcry SPX contract, if we look at that volume, that's still high institutional base. But boy, people are just aren't that confident, if you look out over time. That is reflected in the insight that we give you. If you just look at our website, you look at the VIX term structure that is the price of the futures over time that is still much higher VIX level out in the back months than the front months that shows up in trading in the short-term primarily in the SPX Weekly contract.

Thanks.

Thank you and the next question comes from Chris Harris with Wells Fargo.

Thanks. Can you guys provide a little bit more color on the new index platform you planned to launch in the first quarter of next year? I guess, specifically, what is it and what are your expectations?

Sure Chris, this is John Deters. The new index platform really starts life as a stand-alone piece of technology. Today, it has been coupled, pretty closely with our matching edge in technology, which is not a construct that allows for quick and fast upgrades enhancements to the system. So Stage 1, we remove it from its coupling, with the matching edge in technology. And then, Stage 2 and onwards, is we will really be an effort to just constantly include our platform and make it better, mold it to our specifications, which if you think about what we do well in the index business, it's more complex indexes, really cutting-edge stuff, typically involving derivatives positions, weather they are futures or options. So we're chasing really the highest and most complex proprietary type indexed products this index technology will be build to suit that objective.

I think John, your key is taking that technology out of the matching hedge and that's the first step, that's going to happen in the first quarter and then, we'll grow the business from there.

That is right.

Thank you.

Thank you and the next question comes from Ben Herbert with Citi.

Hi, good morning. Thanks for taking the question. Just like to follow up on the market share discussion and anything specifically you might be seeing into 2018 in Europe related to MiFID?

Well I think Chris and I can take that, it is share and sign through MiFID and the launch, I was just in our office in London and all of the buzz both from our board members perspective and made a number of office visits. It's really still a lot of uncertainty and really, where is volume going to show up. And I think what Mark Hemsley and the team have done is offered a solution and in the prepared remarks, I mentioned Large In Scale and periodic options are really trying to accommodate a low market impact, and accommodating larger trades that would otherwise have been dark. As for share region by region, Chris, I think you can add some color. We enjoyed the number two spot and our various, across Europe. There is room between number two and number one, but I think right now from a customers perspective, it's MiFID to readiness, it is with the team in London is preparing for? But Chris, as far as share, do you want to add some color.

Sure, I mean really our strategy in 2017 was MiFID readiness for the clients. We wanted to be ready early, provide products and solutions that help them comply with MiFID II. And put it in their hands before MiFID II’s start date in January. The team in London has accomplished all of that, we've delivered everything – all the commitments to our clients on MiFID II readiness. We have a final release just recently and a larger release over the summer. As Ed mentioned, Large In Scale, periodic auctions and now certain benefits for quoting for systematic internalisers. Those are all things that MiFID II requires for clients to interact on our platform. So, I feel good about the focus that the team has had on providing product to clients, way before MiFID goes live. And we don't think about market share in those terms post MiFID, we're thinking about products and solutions to deal with some of the challenges that our clients are facing with MiFID II.

Great, thank you.

Thank you and the next question comes from Dan Fannon with Jefferies.

Thanks good morning. Wanted to just follow-up on just M&A in general

Dan you are cut out.

Sorry, can you hear me.

Now we can.

Yeah, now we can, try again.

Yeah, if you could just kind of talk about the strategy in general, you obviously announced a small acquisition a few weeks ago, discuss that a little bit. And then, maybe think and then, maybe think a little bit more about maybe the backlog, how you should we think about M&A going forward, as priority for you guys?

Before I can turn it over to John Deters to get into the weeds on Silexx but really the M&A strategy hasn’t changed from the road show that Alan led us through in 2010. This is really keeping a very flexible balance sheet, growing the proprietary complex is at the heart of what we look at. Now with our broader asset class, we'll be looking across the asset classes on how we grow both share in our presence in different regions. So if there is an opportunity, we'll first look to Chris Isaacson for a build solution. If we think time-to-market is a higher priority, we will look at smaller bolt-on transactions that legacy Cboe has done in the past. So really, you should expect us to proceed as we've done and as we've recently announced the Silexx deal. Don't expect us in large-scale M&A in the short-term. We will always keep our eye out over time on how to grow this business, but it's really business as usual here as far as M&A. Think bolt-on, we will be growing our various asset classes, but focused no the proprietary index complex, John will get into Silexx right now and large-scale M&A, we're in a big integration and system migration, and that's got the attention across the entire organization, across all of our offices. And that's the Number 1 priority. But John want to add little color on Silexx?

Yeah, thanks Ed. This is John Deters. So I think Ed framed it right. Silexx is almost a perfect example of how you might think about bolt-on – kind of run rate bolt-on, M&A deals we might do going forward. Really a prime example of how we can create either by building internally or by acquiring new tools and new platforms for our users to engage with our products and services. So we acquired Silexx as a channel to reach end users directly with our products and services. And really this is a – call it the last mile to the end user that we will be owning for the first time. And it's important to recognize about Silexx, really is a broker-neutral platform, so we're reaching that end user in partnership with our key broker participants in our marketplaces. The platform is fully ready to go with global exchange connectivity over 40 markets globally and multi-asset class capabilities. So it's a very high utility platform for the end user and while it's not material from a financial point of view because it is a very young technology, we think just because of its use we'll be able to sort of mold it, it will evolve with our business and we'll be able to really shape the platforms so that its kind of an ideal channel for our products globally.

Thank you.

Thank you. And the next question is a follow-up from Jeremy Campbell with Barclays.

Hey, thanks for the follow-up. Just want to touch on new product development. I know, last quarter, you announced that Cboe and Gemini were partnering to develop futures on bitcoin. I know it's still in the potential product phase in still developmental, but the asset class itself seems kind of nascent here with lot of white space, but recently a large competitor of yours announced that they're pursuing a bitcoin futures product as well. So can you just maybe give us an update on where you are in the approvals timeline? And how you think about the competitive dynamic there? Is it really like a first-to-market type of thing, pricing, or does the Cboe product may be have some advantage versus other ones?

Our products always have the advantage. No, I think what you recognize is the way we look at crypto in general, you're right, pretty small if you look at all of the digital currencies across the globe. This is not a very big market yet. But we have recognized this sort of captures the attention of a lot of our end users, and giving them exposure in our lit market that's regulated by a U.S. regulator with key to our development of our product that we are comfortable listening on the CFE, our futures exchange. So I think not surprising as CME recognizes the same benefits of offering a transparent market. Now we’ve taken a different approach into the development, ours is really designed with a hedger in mind, a true trader and we used the model that we have for VIX Futures and Options. So the difference is the ability for our trader, who's trading on CFE, our futures exchange, the ability to replicate a position on Gemini. In that, at these settlement price on Gemini is accursed by the result of actual trades and we will settle our futures to the actual trade resulting on Gemini after their auction. Our competitor is taking the approach of an index, which is a value over time across four different indices. So from a hedger's perspective, very, very difficult for that price to converge as a moment in time at various trades across number of exchanges, so we really like opening up that playbook to the successful VIX launch from a hedger's perspective, really making this easy for our traders to hedge and we think what we know that is the difference. And I want to be really clear while our first contract with Gemini is bitcoin. We're really agnostic to the ultimate crypto currency that may survive so whether that's ether or bitcoin, it will be interesting. But we are not in that fight. We know right now there are customers looking for exposure in bitcoin. So Chris, you want to add something?

Sure. I'm encouraged by the recent announcement. It certainly does validate, what I’ll say it validates a crypto currency, in the future of crypto currency. It's not suggesting what crypto currency is going to be the winner and the loser. But overall, the crypto currency space is the space that I think we believe in and certainly our competitor across town believes in as well. And I'm just encouraged by that validation. I think it's also important to point out that with regulated futures of our certain asset class like a bitcoin, you do have an opportunity to introduce ETF. And over time, we do envision ETFs coming to market once the regulated futures market is dealt and liquid so we do think the opportunity, we're encouraged by everyone's focus on this space. It is a small space as you mentioned. We're talking about bitcoin trading close to $2 billion a day. That's a relatively midsize stock listed on one of our equity markets. So encouraged overall by the space and encouraged how people are thinking about the crypto currency space and the future of that space.

I think your other question was where are we on the approval process. It's very difficult for us to gauge where the regulator, when the regular will make a decision. We think again with our partners, Gemini that we've been able to answer all of the questions coming from CFTC, but we wouldn't speculate on a date. We are operational-ready and we will keep you up-to-date on the approval process as we learn as that unfolds.

Great, thanks a lot.

Sure.

Thank you. And the next question is a follow-up from Michael Carrier of Bank of America.

Thanks guys. This is for just Alan and Brian. So just on the taxes, you mentioned the Illinois tax. I think you indicated for next year, higher. Just any sizing of that and then, on the flip side, I know it's early. But if we do get some tax reform maybe just that potential as like an offset, if you guys, there's some positive there. And then just on the bitcoin conversation, when you guys look at the different products that you have whether it's on futures and options, are there – I'm just trying to understand sort of the opportunity versus the risk when maybe the underlying is not yet regulated, meaning understanding that you might have the regulation by the CFTC or the SEC on the actual contract. But just trying to understand that new lines versus the underlying asset?

Why don’t we let Brian and Alan have their answer and then Chris and I can get back to bitcoin.

So on the Illinois question specifically, we know that the reg was passed it was effective kind of halfway through the year. And we saw kind of the incremental impact it had on 2017. We're still going to work through – I'm not going to give you guidance right now on the 2018 impact quite yet. There's still some interchange, we want to see what happens with how the state code reflects kind of within the overall income statement. So but we will flag that for you as we kind of issue our own broader guidance for 2018. Likely on the next time we get together. As far as the – what's been proposed as far as kind of the federal changes, clearly, a big benefit to someone in Cboe's position where we pay at the top end of the bracket, it's primarily U.S. earnings. So we're paying that full 35%. There's positive and negatives in there, but largely it's going to be much more positive to us both on an effective tax rate basis and a cash basis for what we'll ultimately pay in taxes. I think it's probably still early to kind of speculate right now because of the ebbs and flows and what’s likely to change from what's been proposed to what may or may not end up happening. So we view it largely positive, a reduction to corporate rate would be a big benefit if it stands in its current form. Both on an effective tax rate basis as well as from a cash basis and stay tuned but again, we’d be – obviously, a very strong component of that going through the way it looks right now from an impact to our bottom line.

So let's get to the bitcoin, I think it really, your question is why would we choose Gemini as opposed to any of the other crypto exchanges around the globe and it really – we found a partner, who is looking for the same transparency regulation and oversight as a listed exchange would. So Chris, you want to describe the structure of Gemini and what's really attractive and then, I can add the color from our futures exchange and CFE regulation and our ability to look through the transactions on Gemini. And then ultimately the transactions on our futures exchange.

Sure. Really first, one of the things that attracted us to our partnership with Gemini was the embracement of regulation. They chose to be regulated by the New York State Banking authority that was not required, but they chose it and welcomed it. So you have a regulated entity in terms of how it is a custodian of bitcoin, how it manages its market and I think about it from a regulated standpoint, when you look at the overall bitcoin market, the CFTC has determined it as a commodity so they did come to a conclusion that is a commodity. Have you look out the world of commodities, there are many commodities that their underlying markets are unregulated. And now what a derivative of exchange does as it brings the regulated market to the professionals and provides an opportunity for hedging and taking positions around their views of that commodity market. And that's really what we're doing here, what's unique is we found a partner in Gemini that embraced that regulation. So the underlying markets in Gemini is what I'll call semi-regulated because the participants do need to join Gemini, we know who they are, they're largely professional users and we're able to regulate our market as a result of that embracement of regulation.

Okay, thanks a lot.

Thank you. And that was the last question. I would like to return the call to Debbie Koopman for any closing comments.

Thank you. This completes our call this morning. We appreciate your time and continued interest in Cboe Global Markets. Thank you.