Good afternoon, ladies and gentlemen, and welcome to the Deutsche Börse AG analyst and investor conference call regarding the Q1 2020 results. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions following the presentation. Let me now hand the floor over to Mr. Jan Strecker.
Welcome, ladies and gentlemen, and thank you for joining us today to go through our first quarter 2020 results. With me are Theodor Weimer, Chief Executive Officer, and Gregor Pottmeyer, Chief Financial Officer. Theodor and Gregor will take you, as usual, through the presentation, and after the presentation, we will be happy to take your questions. The presentation materials for this call have been sent out via email yesterday and can also be downloaded from the IR section of our website. As usual, this conference call will be recorded and is available for replay. Let me now hand over to you, Theodor.
Thank you, Jan. Welcome everybody, ladies and gentlemen. Before we enter into the presentation, lead you through the presentation, let me provide with you and share with you some remarks on this unprecedented environment in the first quarter and a summary of the results we have achieved so far. Afterwards, as always, Gregor will present the results in detail and conduct you through the presentation. Clearly, the first quarter was the beginning of a very exceptional time for all of us. The Corona crisis has started to significantly affect both the global economy and the society, and it's the biggest crisis we've experienced for a very long time. The implications of the virus are massive, and in many regions of the world, we have not reached the peak yet. Supply chain issues, lower productivity, and even production stops are resulting in an economic recession.
This was reflected by markets with a collapse of market capitalizations, although it was eased somewhat by unprecedented measures taken by central banks and governments, the famous $12 trillion, which have been developed. As far as Deutsche Börse is concerned, our top priority in these truly exceptional times is the safety of our employees and their families at all locations. Our incident management has been monitoring the situation closely, and we developed a preventive response plan early on to ensure safety for employees as well as continuous full operational readiness. This was important in order to provide orderly and stable markets, especially during the days of extreme volatility. Since this week, we are now slowly trying to go back to normal as far as possible.
This includes a ramp-up of staff at our different locations according to a phased plan, reflecting local approaches and decisions by the respective governments, as well as complying with all physical distancing rules. It is quite clear that this will be a slow and steady process over the next couple of months. Despite all the preparations around the globe to start to lift lockdowns, the macroeconomic implications of COVID-19 will be felt well into the second and third quarter, and some of its true impact probably remains to be seen. We would also expect further market uncertainty over the course of the year and probably elevated levels of volatility. Due to the exceptional levels of volatility during the first quarter, we also achieved an exceptional financial performance. Our net revenue increased by 27% to around EUR 950 million.
While cyclical growth was the main driver, it is also very encouraging to see the continued positive contribution from our secular growth initiatives. Because of the strong top-line growth, higher investments in growth and technology, as well as some additional IT expenses due to the Corona situation, the adjusted operating cost increased by 10% on a constant portfolio basis. As a result, the net profit and earnings per share increased by 33%. There was a lot of uncertainty in the German market a couple of weeks ago, whether annual general meetings could take place during the Corona situation and accordingly, whether dividends could be paid as planned. Fortunately, the German legislator has reacted very quickly and has introduced an emergency law that allows companies to hold AGMs on a fully virtual basis. We will make use of this law and hold our virtual AGM as scheduled on May 19.
The dividend will be paid on the third business day following the AGM. Despite a strong start to the year, our guidance for 2020 of an adjusted net profit of around EUR 1.2 billion remains unchanged. This is mainly because we expect some cyclical headwinds over the course of the year, for instance, a much lower net interest income at Clearstream. For the guidance beyond 2020, we have already started to work intensively on our next midterm plan, the Compass 2023, and we are planning to present it at our Investor Day. Originally scheduled for May 28th, we have now decided to postpone the event into autumn.
While we already have a clear view on our growth opportunities beyond 2020 and believe that the secular growth potential of Deutsche Börse will generally not be affected by the current developments, we believe that the event has much more value for you and for us if we hold it face-to-face. This will hopefully be possible again in the second half of the year. In order to increase the transparency with regards to our most important secular growth opportunities, we decided to streamline the segment reporting. Let me now hand over to you, Gregor, to present the details of the results.
Thank you, Theodor. Let me start with the group financials in the first quarter on page two of the presentation. While the net revenue growth clearly was driven by the strong increase of market volatility, it is very encouraging to see the continued solid secular net revenue growth. Eurex was the biggest contributor, with additional net revenue from product innovation, pricing, and growth of OTC clearing. The other growth areas of the group also contributed mid-single digit to even double-digit secular net revenue growth rates. Operating costs amounted to EUR 291 million. They are adjusted for around EUR 27 million exceptional items, which are quite evenly split into restructuring, litigation, and M&A. Adjusted for the consolidation of mainly Axioma, the operating costs increased by 10%. With this, the net profit and the EPS increased by 33% on an adjusted basis, which is clearly an exceptional development.
Before I take you through the development of the different business segments, I would like to explain two changes to the segment reporting we introduced in the first quarter on page three of the presentation. We decided to streamline the segment reporting to increase the focus on the segments with the greatest secular growth opportunities. The first change is the allocation of cash and derivatives data to the respective trading segments, and thus the elimination of the data segment. Our trading platforms are the source of the data, and the data is a very important trigger for trading decisions, though they're a natural fit. This does not mean that we don't see any growth opportunity in data. The platform for growth in advanced data and analytics is now the new Qontigo segment, where we combined Axioma and STOXX last year.
The second change is the reallocation of the global securities financing segment into the Clearstream segment. The assets that we are safekeeping on behalf of our clients are serving as lendable securities and collaterals, so there's also a natural fit. Furthermore, we generally see some secular growth potential for collateral management services because of increased regulatory requirements. The central bank's monetary policies are reducing the demand for the time being. The slide also summarizes the secular growth drivers for the remaining seven segments. Generally, we regard market share gains, new product or asset class introductions, growing our client network, and pricing changes as secular drivers. This is because they can be directly influenced by the management team. We are firmly convinced that we can benefit from those drivers, irrespectively of the macroeconomic environment and cyclicality.
The current situation might result in a brief delay in one or the other area as it forces our clients to reprioritize their activities while the crisis lasts. Generally, we feel that our model of operating efficient markets and providing effective risk management has been further strengthened by the crisis. I'm now turning to the quarterly results of the segments, starting with Eurex on page four. As expected, the increased market volatility, with the volatility STOXX peaking above 80, resulted in substantial growth of index derivatives. Despite the continued negative interest rate environment in Europe, we also saw additional demand for our interest rate derivatives because of some volatility of the government bond yields and spreads in Europe. Volumes in single equity derivatives declined, primarily because of a preference for the highly liquid index derivatives in times of high volatility.
This decline was compensated by an increase of the revenues per contract due to more positive product mix. OTC clearing volumes and net revenue increased broadly in line with our expectations, and we have made further progress in terms of overall market share and buy-side adoption. The margin fees also benefited from the increased volatility as margin levels in March broadly doubled. The new line item, Eurex data, relates to the sale of derivatives market data, including real-time and historic data, and amounted to EUR 15 million in the first quarter. This should be a pretty steady number going forward. Our commodities business, EEX, also saw some cyclical tailwinds from the development in the first quarter, but far less compared to Eurex and Clearstream. Power derivatives continue to be the most important net revenue growth driver, primarily because of growth and market share gains in Europe.
Also, Nodal in the U.S. continued to perform very well. March was the 20th consecutive month of volume growth. This led to an increase of market share in open interest of U.S. power futures to almost 50%. On the gas market, we also saw a strong development, particularly in Dutch TTF products, but gas net revenue increased only slightly because of the product mix and some rebate schemes. Let me turn to page six and the FX business. 360T also benefited from elevated levels of FX volatility in the first quarter. In March, we saw the best trading day ever of our combined FX offering, including a substantial share of business from the newly introduced FX futures on Eurex. The secular component of net revenue growth was even bigger.
It was mainly driven by attracting new clients, in particular in the U.S., and higher incremental demand for our swap and forward offerings. On our cash market, Clearstream, we also saw a significant increase of activity with around 60% volume and net revenue growth in trading and clearing. Volatility obviously was an important factor, but there was also a sizable secular contribution from a further increase of market share. The market share in debt securities increased by five percentage points year-over-year to 74%. The declines of the newly introduced Clearstream data and the other line items are mainly due to the one-off effect from the termination of a contract with a partner exchange in the first quarter last year. In our post-trading segment, clearing, we saw solid growth of custody volumes with the decline of equity markets being overcompensated by growth of outstanding and fixed income.
Looking at the debt financing needs of corporates and the low interest rates around the globe, this development should continue in the foreseeable future. Settlement activity clearly was driven by the cyclical increase of trading activity in the fixed income market. The revenue per custody and settlement activity improved in the first quarter, but some of this is one-off in nature. Despite falling interest rates, the net interest income was almost on previous year's levels. This is the result of a significant increase of cash balances due to the much higher security settlement activity. Since the cash balances have already normalized and we are now faced with very low or even negative rates globally, we would expect a substantial decline of the net interest income going forward.
Some of the effects will be mitigated by the introduction of a cash handling fee for USD balances of 30 basis points, and the increase of the cash handling fee for EUR balances from 20 to 30 basis points. From now on, we are expecting net interest income levels of around EUR 15 million-EUR 20 million per quarter. The Investment Fund Service segment, you find on page nine, showed a very strong increase of business activity and net revenue. Approximately half of the growth was driven by cyclicality and half by structural factors like onboarding of new clients and funds. Furthermore, the acquisition of Osmak in the third quarter last year added around EUR 2 million of net revenue. Slide 10 shows the new Qontigo segment, which consists of the Axioma Analytics business we started to consolidate in September last year, and the STOXX index business of Deutsche Börse.
The around EUR 21 million of analytics net revenue in the first quarter is slightly above our expectation, but due to revenue recognition under IFRS 15, the quarterly numbers can be somewhat volatile. ETF license net revenues were somewhat under pressure from lower market levels and outflows out of European products. This was by far overcompensated by growth of the exchange and other licensed net revenue. On slide 11, we provide you with an overview of the three components of net revenue growth in the first quarter. Consolidation effects resulted in net revenue of 3% or EUR 20 million. This was mainly driven by the inclusion of Axioma in September last year. In terms of methodology, the growth of Axioma compared to the first quarter 2019 was not included as a consolidation effect, but as a secular net revenue growth.
Secular growth, being the key component of our strategy to increase net revenue, has developed as planned and increased by 8% or EUR 60 million. There was a positive contribution by all segments, with Eurex being the biggest absolute contributor and 360T showing the highest secular growth rate. As expected, cyclical growth was overall the biggest driver, with an increase of net revenue of 16% or EUR 114 million. Around 2/3 of that were contributed by the Eurex segment, in particular by index derivatives. Adjusted operating costs shown on page 12 total is EUR 291 million in the first quarter. Operating cost of around 7% was due to consolidation effects from M&A activity, primarily Axioma. Investments increased by 10% or EUR 35 million.
This is primarily driven by the planned investment in growth and technology, an increase in personnel to support growth, and costs to implement regulatory requirements like CSDR, for instance. Furthermore, the exceptional situation in the first quarter also required some extra spending on IT operations and security. Net inflation was flat as inflationary pressure in staff and other operating expenses was offset by savings from structural performance improvement programs. This brings me to page 13 with some additional information on our AGM and the dividend proposal.
As Theodor already mentioned, our AGM will be taking place as scheduled on May 19th. Against the background of the ongoing global COVID-19 pandemic it was decided after careful consideration of all aspects to hold a virtual event without personal participation of our shareholders. With the virtual AGM, we make use of an option that the German legislature introduced recently in view of the COVID-19 pandemic.
Thus, we can ensure that all resolutions, including on the appropriation of surplus, can be taken as scheduled. The dividend will then be paid as scheduled on the third business day following the AGM. The rest of the AGM agenda consists mainly of housekeeping items. We would very much appreciate it if you could all cast your vote through the Online-Service channel. If you have any questions, please do not hesitate to contact our IR team. With the last page of today's presentation, we would like to reiterate the outlook for 2020. We continue to expect at least 5% growth of secular net revenues in 2020. This will mainly be driven by further progress in the OTC clearing business, new Eurex products, the commodities activities of EEX, the expansion of foreign exchange trading and clearing services, growth in investment fund services, as well as our index and analytics business, Qontigo.
On the net profit, we continue to expect growth to a level of around EUR 1.20 billion, despite the strong first quarter. This is mainly due to the cyclical headwind we will be faced with at clearing, because of a much lower net interest income from now on. This concludes our presentation. Thank you for your attention. We are now looking forward to your questions.
Thank you very much. Ladies and gentlemen, if you would like to ask a question, please press nine and star on your telephone keypad. We kindly ask all participants to limit their questions to one per person. Please press nine and star to state your question. The first question comes from Benjamin Goy from Deutsche Bank. Over to you.
Yes. Hi, good afternoon. One question on staff costs. I think it was on a clean basis, 17% up, of course, Qontigo played a role. Actually, more interested in the other segments, and here the structural growth segments mostly with double-digit growth, but in particular where you have a trading component, whether it's Eurex, EEX and 360T. Maybe you can give us a bit more color on what was, or what is investment that should drive secular growth going forward, and what was investment to cover some peaks in trading volumes and of course, in quite an extraordinary situation with Corona. Thank you.
Yeah. Thank you, Benjamin. Overall, you have seen in the first quarter a 17% cost increase, 7% was out of that was consolidation effects, especially Axioma. In 10% is our constant portfolio cost increase. There were some exceptional components in it. One was, and I alluded to that in my speech, additional cost due to the Corona crisis. We had to invest more in IT, in IT security, et cetera. Secondly, there was some front-loading of costs, what we have not done in Q1 last year. Overall, this 10% cost increase on a constant portfolio basis is not the new run rate for the next quarter. We expect that increase will go down over the next quarter and the biggest decrease you will see in Q4 this year.
Perfect. Thank you.
Now coming to the next question, it comes from Johannes Thormann from HSBC. Mr. Thormann, the floor is yours.
Good afternoon, everybody. Sorry, I was on mute. Just a question, first of all, on your deal with UBS. Is there any delay, or do you still expect this to be concluded in Q4 this year? Secondly, on the negative income from associates, do you expect that this can be compensated in the next quarters, or is this rather a terminal loss on those investments? Thank you.
Johannes, UBS, no, we think there's no delay. We are confident to deliver on closing the deal in the second half year 2020. With regard to the negative impact on associate or strategic investments. That is due to the fact that we have seen that market levels come down, so we had to do some IFRS adjustments here. When the market levels will come back to normal, then you should see that it comes back on the level you have seen earlier.
Okay, thank you.
The next question comes from Mike Werner from UBS.
Thank you. I guess, in the prepared remarks, Theodor, you noted that you're still quite confident in the 5% secular revenue growth opportunities for Deutsche Börse. I guess my question revolves around the fact that a core part of your client base, which is the asset management industry, has certainly suffered some headwinds. There's certainly an expectation that consolidation may take up, which could potentially reduce that addressable market for you guys. I'm just wondering, in that environment, do you remain confident about the 5% secular revenue growth? Ultimately, why would you remain confident on that? Thank you.
You have seen our secular growth rate was 8% in the first quarter. We are really confident to continue to achieve at least 5% secular growth. You said, "Why are you confident?" We continue to see good progress, for instance, our OTC clearing initiative. We will deliver EUR 50 million or even above this year. Last year it was EUR 40 million. That is a clear secular growth driver. We see continued progress with our MSCI derivatives. We just recently launched new products. We are really confident to see here a good secular growth. Total return futures, strong demand in our customer pipeline. We are confident that we will also see further growth here. Buy-in agent , just a new product what we recently got as the first one in Europe, a license to do with this buy-in agent service.
For failed settlement of a transaction that will start February next year. We increased that by 30 people now on, and they are onboarded, and we expect really a nice double-digit net revenue growth out of that. Just to give you some examples where we are confident to see secular growth on Eurex side. The same on investment fund service. Continued increase to use our much more efficient platform, Vestima, in our mutual fund business, our hedge fund business. Continued growth here. Qontigo, you see trend to purchase investment, secular growth. We will benefit combining STOXX and Axioma, having more buy side access, double-digit growth here. That is also continue. I see also some initiatives have some delay, and that's right. If you say that currently maybe there are some other priorities in the banks or as asset managers.
We still are convinced that the far majority of our initiatives will continue and will show progress, and therefore are quite confident to deliver further on this 5% secular growth.
Thank you very much, Gregor. Appreciate it.
The next question comes from Arnaud Giblat from Exane.
Good afternoon. I've got just a couple of very quick follow-ups. Could you disclose the EUR million contribution from new products in FX? Secondly, I think at the time when you closed Axioma, you said that Axioma was loss-making, and it looks like it's making about EUR 3 million of profits. Could you maybe help us think through what's happened since you've Is this a case where you've just accelerated the revenue growth and keep the cost flat, or has there been some optimization done on the cost base there? Thank you.
Yeah, Arnaud. Thanks for the two questions. FX is obviously a very strong asset. There's a highest growth rate here, and there are basically the two components. The one is our GTX business in the U.S., and the majority of the business here is more cyclical-driven. The increase here in the U.S. market, we benefit also from cyclicality. In our 360T core business, the far majority is secular growth. That's now, I don't know how many quarters we have now shown a double-digit growth or even more than 20%. That's really in the right shape now. We are able to gain additional market share to acquire new customers, and we expect that this growth will continue over the next quarters and even years. With regard to Axioma, obviously with, what was it? EUR 21 million we achieve revenue.
We are clearly above and strongly above the level of last year. That's good to see. Yes, you are right. Axioma turned now. So far, the EBITDA is very negative. That's now positive. It's also our intention to further scale it up, right? That we see this revenue growth and still unchanged our view, we should have the potential to grow here by 20% on a yearly basis. That you also increase the scalability of that kind of business, and that we continue to increase our earnings at Axioma.
Thank you.
The next question comes from Ian White from Autonomous Research.
Hi. Good afternoon. Thanks for the presentation. Thanks for taking my question. Just a follow-up on EEX, please. Could you give us the market share in European power derivatives for the first quarter? Maybe could I ask your views, please, on what do you think is the upper bound of market share that you could achieve in that market? I'm wondering if there are some products that you would always expect to see trade OTC, for example. Just interested to get a sense of the long-term growth trajectory from here, please. Thank you.
Yeah, Ian. The market share in the European power derivatives market is close to 40%, a little bit below that level. Six, seven years ago, we started roughly from 10%. You have seen a continuous demand increase here on our product, and we were able to gain market share from the brokers, from the OTC. We expect for the next years that we will continue to increase our market share. The reason for that is that we have a superior clearing risk management solution and make sure physical delivery. These are the ingredients where customers strongly support our platform. Whether there's upper bound or not, I do not know. There's no reason to believe why this market share of now close to 40% should continue to increase, whether it's 50%, 60% or whatever percentage.
We see a good opportunity to further increase our market shares here.
That's helpful. Thank you.
The next question comes from Martin Price from Jefferies.
Good afternoon. Just a quick question on Clearstream. It looks like the revenue yield on assets under custody increased quite a bit in the first quarter. I was just wondering if you could provide some more detail on what was behind that and potential level of sustainability. Maybe just a quick follow-up question on the buy-in agent service you referred to earlier, Gregor. I was just wondering if you could provide detail on how you're planning to manage any potential counterparty risk if you're effectively stepping in to buy securities on behalf of a market participant who's failing to deliver. Thank you.
Yeah. With regard to Clearstream, obviously, there were two big drivers. The one is the increased settlement activities, what increased by roughly 60%. As a consequence, our cash balances even doubled in the days with the highest activities. Both of that leads that we have also some nice cyclical tailwind here. From a secular perspective, to give you some guidance, what is now sustainable here, we say more than 50% of that increase is secular-driven. In the custody it's even a little bit higher. We say it's roughly two-third out of that is sustainable. To give another example, the settlement activities that we do not see as sustainable in the other items where we have some connectivity, some repricing. There's roughly 2/3 is sustainable.
On the cash balances side, we introduced this 30 basis points as a collateral fee for U.S. dollar cash balances, and we increased for EUR balances from 20 to 30 basis points. This we consider also as sustainable. That's basically roughly. The mix on IFS, we also said it's roughly 50% what is sustainable. That should give you some guidance how we see the development of Clearstream over the next quarters. The second question, CCP risk management. Obviously, we were very proud that our risk model at the CCP worked as designed. It was ex-ante predictable, and that's really key for our customers that they exactly know and that they can calculate, depending on the product, what kind of margin they have to install at Eurex Clearing. We got really excellent feedback from the customers that we have that kind of prediction ex-ante.
With regard to the price situation, we have also a clear rule book that we stick to and that is also appreciated. Any haircut we do on certain sovereign bonds is transparent, and there are no big surprises. Overall, we see really great feedback from our customers that our clearing and risk models work as designed and are predictable.
That's helpful. Thanks, Gregor. Just on the buy-in agent services, the question was really around whether you think that also presents new counterparty risk. I don't know if there's anything you can say on that.
With regard to the buy-in agent model, we have really a risk-averse model. We do not take risk here. We are here a provider of that kind of services where we have great access to our network, where we can help our market participants to find additional partners they do not find by themselves. We act here as an agent here, and it's not our understanding that we will take securities here and have our own exposure on our own books.
Understood. That's very helpful. Thank you, Gregor.
All right. That was the last question. We very much appreciate your participation, and have a good day. Thank you.