Good morning, everyone, and welcome to the Cboe Global Markets Fourth Quarter 2021 Earnings Conference Call. As a reminder, this call is being recorded. At this time, for opening introductions, I would like to turn the call over to Ken Hill, Vice President of Investor Relations.

Good morning. Thank you for joining us for our fourth quarter earnings conference call. On the call today, Ed Tilly, our Chairman, President and CEO, will discuss our performance for the quarter and provide an update for our strategic initiatives. Then Brian Schell, our Executive Vice President, CFO and Treasurer, will provide an overview of our financial results for the quarter as well as an update on our 2022 financial outlook. Following their comments, we will open the call to Q&A. Also joining us for Q&A will be Chris Isaacson, our Chief Operating Officer; and John Deters, our Chief Strategy Officer. I'd like to point out that this presentation will include the use of 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 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 look statements whether as a result of new information, future events or otherwise after this conference call. During the call this morning, we will be referring to non-GAAP measures as defined and reconciled in our earnings material. Now I'd like to turn the call over to Ed.

Thank you, Ken. Good morning, and thanks for joining us today. I hope the year is off to a good start for all of you, and I hope the year ahead sees us turning the page in this global pandemic. I'm pleased to report on a strong fourth quarter and record full year results for Cboe Global Markets. For the year, we grew net revenue 18% to a record $1.5 billion and adjusted diluted EPS grew by 15%. For the quarter, we reported revenue growth across each of our business segments, reflecting strong year-over-year increases in both transaction and recurring non-transaction revenues. Our results were driven by higher volumes across our businesses, coupled with increased demand from our suite of data and access solutions. In our proprietary products, ADV increased by 50% in VIX futures, 10% in VIX options and 47% in SPX options. We also continue to see strong growth in multi-listed options trading with ADV up 21% year-over-year in the fourth quarter. During the quarter, we also announced key planned acquisitions designed to strategically expand our global network, including ARRIS X, which is expected to provide Cboe with spot trading, data, derivatives and clearing capabilities for digital assets through its regulated futures exchange and clearinghouse and Neo Exchange, which is expected to provide us with a significant presence in the Canadian equities market. We also invested as a limited partner in Trading Technologies, a global provider of professional trading software, connectivity and data solutions. The ARRIS X and Neo deals, which I'll touch on or detail later and are subject to regulatory review and other customary closing conditions, are expected to further expand our ecosystem of market infrastructure and tradable products as we continue to build out 1 of the world's largest and most comprehensive derivatives and securities…

As Ed spoke to, fourth quarter was a very strong finish to an exciting and record-setting year at Cboe. Overall adjusted earnings per share were up 41% on a year-over-year basis and 17% sequentially, as both the transaction and nontransaction businesses turned in excellent results. Furthermore, as we look at trends through January, we have seen continued acceleration across our businesses. Quickly looking back at some of the noteworthy takeaways from the fourth quarter, our net revenue increased 27%, matching another quarterly record. Net transaction fees were up 42% and recurring non-transaction revenue was up 21%. Adjusted operating expenses increased 23%. Adjusted EBITDA of $264 million was up 28%. And last, but certainly not least, our adjusted diluted earnings per share was a record $1.70, up 41% compared to last year's quarterly results. Turning to the key drivers by segment. Our press release and the appendix of our slide deck includes information detailing the key metrics from each of our business segments. So I'll just provide summary thoughts. We saw year-over-year growth in all of our segments for the second consecutive quarter. Options delivered exceptional growth of 25%, driven by higher trading volumes in both our proprietary multi-listed options as well as higher revenue per contract, or RPC, and index options. Total auctions ADV was up 23% as we again saw double-digit increases in both index and multi-listed options. RPC moved higher by 9%, given a positive mix shift to index products and a solid increase in our index options RPC, up 5%. And lastly, we continue to benefit from another quarter of double-digit growth in recurring non-transaction revenue, particularly access and capacity fees, which were up 20% as compared to the fourth quarter of 2020. North American Equities net revenue increased 24% year-over-year as industry volumes moved slightly higher,…

Thanks, Brian. In closing, it's an exciting time at Cboe as we continue to execute on our strategy and initiatives, aimed at accelerating growth and value creation as we innovate, integrate and grow. We are extremely proud of the record results we delivered in 2021, and I'm even more excited about the opportunities ahead. The investments we plan to make this year are expected to contribute to our long-term growth in 2022 and beyond. I want to thank the entire Cboe team for their dedication and hard work to continue to put Cboe to new heights. With that, I'll turn it to Ken for instructions on the Q&A portion of the call.

Thank you. At this point, we will be happy to take your questions. [Operator Instructions] And my first question comes from Rich Repetto with Piper Sandler.

Good morning, Ed, good morning, Brian. And I guess there's plenty of, what you call it, interesting strategic question, but I'll -- to start off, I'll stick with expenses here. And first, I'm trying to understand the conservatism because you're well below what was implied for the fourth quarter. And then on expense question, I guess, as we look forward, it looks like you're going to invest $70 million to $80 million, half of that in Neo, half of that in other. You gave some revenue impact on Neo and ARRIS. But what about the revenue impact on the other roughly $35 million of investments you're making in 2022?

Sure. Thanks, Rich. A couple of things there. As far as the conservative kind of comments on the expense guide overall, what makes the difference, say, '21 versus '22, the '21 guide, as we look back on it is being conservative is obviously not new to the organization. We will make sure we lay out there the expectations what we think we're going to need as far as the investment to execute, particularly to deliver the top line and the bottom line results. Last year was a lot of growth, highly reliant on a lot of incremental headcount resources and some other investments along the way that, frankly, were never in doubt as far as making those high conviction investments. It just took a little longer to get them in place than what was originally anticipated. So the timing is more what drove the amount of investment that was recorded in '21 versus where that effort was and the total where we think the run rate is, and you're seeing a little bit of that bleed into '22. And so as we look at what's different or unique about '22, is it more or less conservative than '21? We're obviously going to put forth what we think is a very achievable plan as far as what we think it will take for investment. But at this point is a little bit more mixed. It still has a -- reflects incremental people to help deliver some of the initiatives that we're looking about. We could talk more and more about those. It has some incremental marketing delivered from some of the initiatives that we're talking about with respect to our growth initiatives around D&A and the derivatives. And you heard about the recent launches of what we're doing around Nannos and…

Okay. Sorry about the cheese for the [indiscernible] guys.

Wow. You can't help them sell that.

Rich, that was a little low, but we're thankful for a good season.

The next question comes from Ken Worthington with JPMorgan.

We've seen a real surge in engagement from retail over the last 2 years, driven by some combination of maybe COVID commission, zero commissions, market appreciation. I'm sure there's a dozen other things. As you look at Cboe's great 2021 results, what portion of the success you had last year would you actually attribute to the retail effect? So you've got a ton of initiatives. There's a lot of things driving your good results, but really focusing on this retail effect. And given the tech mean sell-off and greater leverage of brokers like Robin Hood, how do you think about this durability of retail engagement? Is it something because options are used to not only speculate but hedge, it's going to be really durable? Or do you think there's some fragility to what we've seen?

So thank you. To start, Ken, and I'll ask Brian to clean up with kind of the percentage of how that's contributed. It's a little opaque in the derivatives world due to kind of a lack of clarity at OCC. But let me frame it a little higher level. We do see this as being able to continue. And because our core has always been an education piece, and once you introduce a retail trader who is used to a pretty simple P&L scheme, right? The longer you're short, the payout's 45-degree angle, you've got to be right or you're wrong. And options -- the versatility at options allows you to customize that payout scheme, customize the risk parameters and exposure and still have the exposure in a given underlying individual stock, the broader market. So our education really focuses on the versatility for retail. Once you teach that, you create a long-term investor. And that's what we're all about and why we think there's some runway here more broadly on retail. So then we look at, we're in the access business. So how do we extend that exposure to uniquely for Cboe? The product set alone is terrific, right? So you start at individual equity exposure, but much many retail want broad U.S. exposure. And we look at our notional size of our most successful contracts with the S&P 500. It's quite expensive notionally for exposure for retail. So we're launching Nanos. Very, very simple, one multiplier concept. If you look at the average notional value of option exposure in the S&P 500, roughly $5,000. Nanos, the premium double $5. That's an incredible way to learn the power and the tools of options trading. We love that. So that's the concept behind that. It will make it simple, make it easy, make it accessible. So then we look at what's the fastest-growing portion of our S&P 500 complex. Well weekly, it's super short dated and low premium. So when they had Tuesdays and Thursdays, another opportunity to be able to be more precised and answer the demand coming from really short-dated exposure. So add Tuesday and Thursday. So all of that to build and the continuation of what we've seen in the last 2 years of the growth in retail, we want to be part of the story, open up access and teach. So Brian, over to you or Chris, for a little bit more color on how we saw that breakdown.

Yes. So on the -- I think we'll break it down a little bit by asset class, because I think you see the ebbs and flows. And again, to Ed's earlier points, the opaqueness. So the percentages aren't going to be as precised as we frankly would like as well. But as far as starting with the North American equities franchise, we saw a lot of that lean stock trading, obviously, very retail focus and as strong as even the January numbers as far as overall market volumes of, call it, 12 billion shares. If you recall, January of last year was almost 16 billion ADV. And so we know that was driving mode. But as you look at those retail percentages in the U.S. equities market, you start saw trailing down as we got deeper into the year, such that the third quarter was lower in fourth quarter. I think it was significant lower than where it was in the first quarter. So it was a nice contributor, but I think it's come back to a -- I would say, more a sustainable level, but I'm not sure it's going to going to go anywhere. So was it a nice contributor? Yes, but it wasn't the majority. I would say it was a stronger contributor within the options, as Ed talked, about the various exposures looking for (inaudible) patterns. They've always been a big presence in the multi-list. And now what they're looking for, for a broader community as far as investment alternatives. So we actually are more optimistic that the percentage could grow in our derivatives complex with the retail and the retail channel. So I know we didn't give you a specific percentage. It was solid. We expect to see continued growth in it. We're going to continue to look for to growing that with our retail efforts and with the new product launches, I kind of leave it there. Chris, I don't know if you have anything to add?

Just a couple of items. Just in January, we've seen incredibly strong volumes a couple of days, all-time records OCC volume with strong retail engagement. As Ed and Brian mentioned in their comments, we're really excited about those 4 retail brokers, and hopefully more that are ready to go day 1 with Nano. So while it drove a lot of growth in 2021, we do see that enduring through '22 and hopefully beyond.

And the next question comes from Alex Kramm with UBS. Please go ahead.

I hate to ask a volume and trade environment question on the proprietary products, but it seems like the market environment has changed significantly year-to-date. So maybe it does make sense. I mean, rates are moving higher, much more divergence in asset classes and markets, et cetera. So just wondering if you can talk about what is different -- what you're seeing from customers, strategies, et cetera. And I want you, in particular, to contrast what we've seen over the last few years because I think all of us, we got used to this low vol environment where sometimes you got these spurts of volatility, and then it actually seems like volumes went up and then they actually kind of went down a lot, and it got quiet again. So I know you don't have a crystal ball, but just wondering if what you're seeing out there just maybe seems more sustainable, what you would point to? And is this something that we should get more excited about from a cyclical perspective?

Alex, great question. I'll kick it off. And we share the excitement, weekly does appear from an institutional perspective, much more sustainable than we've seen, as you referenced, the spikes and then the ebb and flow around spikes. But the uncertainty out there that's been driving this of late for institutions now really Russia tension, oil prices, continued supply chain challenges. And then the big one, right, the expectations on rate moves, all impact a portfolio differently. And actually, the value of the components of that portfolio are influenced by all that uncertainty. We see that in both the SPX and VIX and uniquely, as we talked about the rotation in the past. What's different this time, if you look at the second derivative VIX, there's an 8% move yesterday. That is an incredible punch for a relatively inexpensive contract, both the futures level and the options associated with it. And that's not gone unrecognized. 8% move, and then you look at today and maybe there's some follow-through even pre-trade, the market was up, the market is down. That is an amazing tool relatively inexpensive that really takes advantage of these 50-plus point S&P 500 moves. And then in the same week, as you see these moves early in the week, the SPX 1 month at the money vol comes crashing down. Really incredible. So SPX looks cheap in implied volatility compared to what's been realized. So it really is an amazing opportunity in our product set that these products actually deliver. And you're seeing that engagement. It's now -- it's been month-over-month, January really keeping up with December or fourth quarter is truly amazing. Actually surpassing fourth quarter is terrific. So that's the difference, and those risk factors are out there, and there's still uncertainty. So no reason why this isn't going to continue for a bit.

And the next question comes from Brian Bedell with Deutsche Bank. Please go ahead.

I appreciate all the granular guidance, Brian. Maybe if you could just talk a little bit about the growth path on D&A? Obviously, you did very well in '21. You're heading in with better momentum relative to that 7% to 10%. Given how we're seeing that volume environment performed pretty well in customer traction, especially in retail, back pretty well, what would you say would be some upside potential drivers to the high end of that 7% to 10% range just for this year? I know you obviously don't want to redo the guidance or anything like that, but just thinking about some -- what would continue that momentum? And then also, just a secondary question, if you could talk about any upside from revenue contribution from the European derivatives effort now that we are seeing that volume increase in January? Just sort of time line to get to that $25 million annual revenue number, I think you have for a couple of years out in euro derivative?

Sure. I'll take that. Thanks for the comments, Brian. On the revenue for D&A, I think it's helpful if you look at broadly the 3 main components of how we think about the D&A number. Again, we're coming off of a 2021 year of about $427 million from $21 million of that kind of that group of revenues. And so as we look at each of those components, still the largest component is still that market data and access, right? That's the bulk of that number. And to get any movement on the growth rate, that's where we're -- just mathematically, we're going to have to see some real growth there. I think that's where the upside is going to have to come. But -- and that's going to be a big part of the growth, again, going forward because if its sheer size. So I would say what would be potential upside there is we have a pretty good pipeline right now in market data sales. I think we continue to see nice traction in the U.S. I think the upside will be our incremental traction internationally from -- with our APAC entry, with what we're doing with the Cboe team there and then the incremental international clients there selling the U.S. data and then the local data as well. So I'd say there's -- if there's going to be upside, it would likely have to show there. And then on the -- the second part of that is when we think about our risk and market analytics. Again, we're expecting a nice strong growth rate out of there as well, but that's likely going to -- we think where that opportunity, that's probably EMEA is where we see incremental benefit possibly out of there. And then on that…

And the next question comes from Alex Bolstein with Goldman Sachs. Please go ahead.

So I was hoping we could spend a minute on sort of like your medium-term expense growth philosophy and sort of the growth algorithm. So the 2022 guidance (inaudible) helpful. You previewed some of that at the end of the year. So the decline in margins is probably not that surprising. But how long do you expect sort of the elevated pace of incremental investments to last it essentially double what your core sort of expense growth is in 2022? So is it just a '22 thing or spillover, not asking you for '23 guidance, obviously, just yet. But just trying to understand when we should expect Cboe to return to sort of positive operating leverage on the comp?

Thanks, Alex. But I think I did hear you asked for '23 guidance. But I think it's a very appropriate question as we think about it. And as we look out to '23, you're right, we're not ready to say it's going to be x to x type of range. But as we look forward from what we know today, in the environment where our growth objectives are, we do expect a more moderated expense growth rate in '23 versus what you've seen in '21 and '22. I get independent of the run rates around acquisitions. So if we look at kind of what that core kind of, I'll call it, that more normalized there. So as you think about -- and how do we get that thought process, as you think about '21 and '22 is our investment in our core, our investment in our infrastructure, our investment in the revenue growth initiatives to facilitate and enable that growth. That's what we'll continue to do. And we'll continue to get those as we look into '22 is -- and continue to highlight those return on investment items, right? We've talked about and one of the first questions that we start talking about is of those various initiatives, how are they doing? Can you build a case study for us of why should your investors have confidence around your investments and what you're doing? So we will continue to try and provide as much visibility as we can around how they're performing, what the return looks like and then make adjustments as appropriate. So we're not going to shy away from seeing an opportunity investing in it if we think it is really, like I said, a high conviction, high margin type of opportunity, particularly around data, particularly around the derivatives. And again, we've talked about our excitement around bringing on a digital capability as well. So that is what we're looking towards. So it's a moderated level in '23 without giving you any specific percentage range.

And the next question comes from Owen Lau with Oppenheimer. Please go ahead.

So for ARIS X, could you please give us an update on your initial thought process about adding new products? And how does the current digital assets trading environment like the Bitcoin price impact your thought process? And then finally, on the $36 million to $42 million additional expense assumption for ARIS X and Neo, could you please also talk about, kind of like on paper, when do you expect Cboe to close these two deals, just in your math in your assumptions? What are the key assumptions baked into this range?

Yes, I'll take that question. Thanks for the question. On ARIS X, we're moving toward close working through the state and federal approvals. And as we said, we hope to close that here in the first half of this year given previous guidance. Maybe bit earlier than we expected, but working well through that with the ErisX team. Regarding new products, we -- there is a new listing process that ErisX has put together that's very well thought through, and we're looking at new products based on customer demand, understanding that we will need to add new products within the confines of those rules as we grow the business. We're very excited about ErisX, as Ed mentioned in his comments, because it gives us that spot data derivatives and clearing platform in a trusted marketplace that we think is where the market needs to go, and we want to help define that together. So very excited about ErisX going forward and close in transaction here in the first half. I want to make sure I answered all your questions. Was there another segment of your question that I missed?

Just the key -- like key assumptions baked into that range, like $36 million to $42 million. Are you assuming like at the beginning of the second quarter or at the end of the second quarter? I just want to make sure we model this correctly.

Brian, do you want to take that one?

Yes. I would say kind of the combination of the 2. It is certainly won't be -- it could be as early as March. But like I said, that could -- and it could be, like I said, into the second quarter as well. So that's why there's a range because we're talking about 2 transactions that we're trying to get, again, a regulatory approval around and multiple regulatory closing conditions. So I guess first half is better, is kind of as close as we are right now. It's highest scenario said is that they're both closed before the start of the second half of the year. So like I said, it could fall at the end of the first quarter. And it's -- again, we'll update, obviously, when -- update the expense guidance when we do have a firm close date and provide that further projection. But for now, unfortunately, we're still reliant on the regulatory approval process, which, again, is not as transparent, not negatively just sometimes they move around pace. John, I think you may have [indiscernible]

This is John. Just on the -- you had a question, I think, in there about how the price of Bitcoin impacts our views to the opportunity. And I just want to drive home. We've seen this before. We've been in the digital asset space going back well prior to our ErisX agreement. And we have a lot of confidence in this space. It's early innings, and we know that because we're out there talking to partners and clients as we speak. We've gotten a really good, strong early jump on those conversations, enthusiasm and the investment that's going on across the ecosystem is as strong as ever. And so we're very optimistic about the opportunity. It also highlights to Chris' point about the product set in ErisX. It highlights the value that we'll be bringing to the market in terms of derivatives products and the ability to hedge some of these price movements going forward. So we're optimistic, and we see great value in the product set.

And the next question comes from Kyle Voigt with KBW. Please go ahead.

Maybe a question on capital management. The second straight quarter, with no buybacks. Just wondering if we should expect those repurchases to remain paused ahead of this -- the ErisX and any deal close? And then just thinking about your capital priorities, your leverage ratio is pretty modest and it's been declining with the EBITDA growth. So I'm just trying to get a better sense of kind of how those -- how buybacks are returning to buybacks ranks versus maybe additional M&A given the current M&A environment you're currently seeing?

Sure. So as far as -- I don't want to give a prediction as far as timing of share buyback. Again, we have -- we're very clear that as we want to make sure that, that balance sheet and the leverage ratio, it will spike upon the close of these transactions. Spike up. And -- but a comfortable range or so high investment grade. We still feel good about that. But I think what the pause has put us in a really good shape from a flexibility standpoint to actually allow us to reengage in a share buyback and a much more meaningful way on a go-forward basis. So that little bit of a pause again gives us that flexibility. So I can't predict timing of when we would see that, but we do have expectations that we will return capital to shareholders through a share buyback in 2023. But again, I don't want to predict timing on that. And as far as priority goes, we've always said it's in our capital allocation thought process, and we think it's important to return that excess cash. But I'll tell you, we are very focused on it. And again, this is ultimately with the goal of achieving long-term shareholder value and that highest value that we can. We are very, very focused on growing the enterprise and growing the revenue and earnings capability of this organization. And sometimes when we see those M&A opportunities show up that we think does that, we will invest to grow. And if there's excess after that, we will then deploy it into a share repurchase program.

And the next question comes from Michael Cyprys with Morgan Stanley. Please go ahead.

I just wanted to circle back to the cloud data offering. I was hoping you might be able to elaborate a bit more on that offering and the economics and vision that you have for that? And just more broadly on cloud, I was hoping you might be able to remind us of which of your markets and offerings are on the cloud today. And how do you think about the opportunity for migrating your markets to cloud over time? Maybe talk about some of the pros and cons there? And what might make the most sense to move sooner versus later?

Great question. There's been a lot of -- this is Chris. There's been a lot of talk about this, but first on the cloud data opportunity. We have our initial customers. We launched November 1. As we mentioned during our Investor Day, we're really excited about the the number of customers that we already have. And these are largely new customers we didn't have before that need this new access method. The current data sets we have are U.S. equities and futures and indices data, as I mentioned previously, we'll be adding other data sets from Europe from other analytics data and then eventually APAC. So all of our markets around the world. The data -- they can collect this data in the U.S. and Europe as well as an APAC today over the AWS cloud. And then as we think beyond the data opportunity, the cloud is ready today for data and it's ready for non-latency-sensitive applications such as clearing and other more back-office things. But as you think about microseconds, nanoseconds and multicast and things like that, the cloud still has some room to grow and there's a lot of effort going in from cloud providers. And we are also working on things like that, but the cloud needs to be ready for what our customers are demanding. So I know there's other exchanges that are working on this, and we're evaluating it. Part of our ethos is we are customer-driven. We're client driven. So as our customers if and when they say they want us to move there, we will be ready to do so. But right now, the data -- the opportunity in the cloud is primarily around data and clearing, and we'll look at matching in due course.

And as that was the last question, I would like to return the floor to management for any closing comments.

Great. So this completes our call for this morning. We appreciate all the interest and questions on the call today. If you have any follow-ups, please feel free to reach out. Thank you again.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.+