Good afternoon, ladies and gentlemen, and welcome to the Deutsche Börse AG analyst and investor conference call regarding the Q1 2021 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 turn the floor over to Mr. Jan Strecker.
Welcome, ladies and gentlemen, thank you for joining us today to go through our first quarter 2021 results. With me are Theodor Weimer, Chief Executive Officer, and Gregor Pottmeyer, Chief Financial Officer. Theodor and Gregor will take you through the presentation today, and afterwards, we will be happy to take your questions. The presentation materials for this call have been sent out via email and can also be downloaded from the investor relations section of our website. As usual, this conference call will be recorded and is available for replay. Let me now hand over to you, Theodor.
Thank you, Jan. Welcome, ladies and gentlemen. As usual, I will start today's call with my own perspective on the developments in the reporting period Q1. Afterwards, Gregor will present the results in more detail. As we all expected, net revenue in the first quarter declined because of the record activities of last year, beginning of last year, Q1 last year, which were very much driven by the initial COVID-19 outbreak. We were able to mitigate some of those effects with continued secular net revenue growth and an increasing M&A contribution. Due to the cyclical headwinds, we managed the organic operating costs as prudently as possible, and we were successful. The overall operating cost increase in the first quarter on a constant basis was almost entirely driven by consolidation effects and no increase on the consolidation on the CP side.
EBITDA in the first quarter amounted to EUR 521 million, normalizing for the strong swings last year. This was significantly above the average quarterly level in 2020. On February 25, we successfully closed our ISS transaction ahead of schedule. The performance so far is very much in line with our expectations, but the more we engage with ISS since on a day-to-day basis, the bigger the joint opportunities to address the demand for ESG products and services become. Shortly before closing of the ISS transaction, we issued EUR 1 billion bonds transaction in two tranches to partly finance the acquisition. With an average yield of just 0%, they rank at the very top of all historic corporate issues globally. Our strong credit rating clearly also has advantages.
With the first quarter results, we are very well on track to deliver upon our guidance for 2021, and the development is also fully in line with the expected Compass 2023 growth trajectory. Lastly, let me invite all of you and all investors to participate in this year's annual general meeting on May 19th. Against the background of the still ongoing COVID-19 pandemic, we have decided to hold in a virtual format again, but we will try to make it as interactive as possible. The proposed dividend of EUR 3 per share is scheduled to be paid a couple of days after the meeting. With that, let me hand it over to you, Gregor.
Thank you, Theodor. Let me start with the detailed financials in the first quarter on page two of the presentation. Net revenue amounted to EUR 855 million and included, amongst others, the first-time consolidation of ISS, as well as an exceptional item of around EUR 17 million related to a reimbursement of legal fees at Clearstream. The operating cost amounted to EUR 347 million. Since we have now started to only report all-in numbers, the operating costs are not adjusted for exceptional items anymore. As a reference point, what we would consider exceptional in nature in the first quarter is very much in line with the level we saw in the same period last year. The EBITDA includes the result from financial investment of EUR 13 million, which benefited from a positive development of different shareholdings, including, again, Tradegate.
Depreciation amounted to EUR 62 million and includes effects of around EUR 19 million related to purchase price allocation of acquired assets in accordance with IFRS. We decided to start to break out this number to make the relevant non-cash effect of M&A transparent. On this basis, the cash EPS amounted to EUR 1.81, whereas the normal EPS stood at EUR 1.73. Slide three puts the overall Q1 results into perspective with the development since 2019, which is the base case for our Compass 2023 midterm targets. Both in terms of net revenue and EBITDA growth, we are fully in line with the growth trajectory we expect until 2023. If we normalize the exceptionally strong first quarter last year and look at the average quarterly EBITDA in 2020 of around EUR 467 million, the first quarter is fully in line with our growth targets.
On slide four, we provide an overview of the three components of net revenue growth in the first quarter, again, compared to the same period in 2019. Consolidation effects resulted in additional EUR 54 million net revenue or a CAGR of 4%. This was mainly driven by the addition of ISS, Axioma and Fondcenter. Secular growth, being the key component of our strategy to increase net revenue, developed as planned and increased by EUR 87 million or a CAGR of 6%. All segments helped to achieve this, with Clearstream, Eurex and ISS being the largest contributors. The cyclical growth contribution was slightly negative at minus EUR 6 million or a CAGR of minus 1%. This was mainly driven by the much lower net interest income at Clearstream. Reported operating costs, shown on page five, totaled EUR 347 million in the first quarter.
The by far biggest driver for the overall increase of 9%, compared to the previous year, were consolidation effects. This was mainly driven by the consolidation of ISS, Quantitative Brokers and Fondcenter. Besides that, we managed the operating costs very prudently, considering the strong cyclical headwinds in the quarter. Inflationary pressure were offset by increase of operating efficiency and variable as well as share-based compensation was broadly flat. Thus, the small organic cost increase resulted from slightly higher investment in growth and technology. I am now turning to the quarterly results of the segments. In all trading and clearing segments, we were faced with high levels of activity in the last year's quarter. Eurex on page six, saw the toughest comparables across the group. The key driver for the decline of net revenue and EBITDA was the weaker performance of index derivatives due to much lower equity market volatility levels.
Most other products were broadly in line with the previous year's quarter. Other net revenue benefited from the consolidation of Quantitative Brokers at the end of last year, which contributed EUR 5 million in the first quarter. In our commodity business, EEX, shown on page seven, we saw a slight decline of net revenue against the strong first quarter last year, especially in power derivatives. It's encouraging to see that the COVID-related headwinds in the second and third quarter last year were only of temporary nature. Let me turn to page eight and the FX business. Even though FX market volatility in the first quarter was significantly lower compared to the same period last year, we saw a relatively stable development of activity. This is because the cyclical decline was partly compensated by business generated with new products and clients.
I'm now turning to page nine in our cash market, Xetra, where we also saw a decline in activity. Despite much lower equity market volatility in the first quarter, cash market volumes also held up quite nicely and were still significantly above the 2019 levels. The result from financial investment in the Xetra segment amounted to EUR 8 million and benefited again from very positive development at Tradegate. In our post-trading segment, Clearstream, shown on page 10, we still saw a significant decline of the net interest income. From the third quarter onwards, comparables will be like for like. In addition, net revenue in Clearstream included an exceptional item of around EUR 17 million related to a reimbursement of legal costs.
Adjusted for the cyclical net interest income and the exceptional item, Clearstream's net revenue increased by around 5%, which is quite a solid level for a stable recurring business. The investment fund service segment, which you'll find on page 11, continued to show an extremely strong performance. On the one hand, this was driven by secular growth based on the continuous onboarding of new clients and funds. On the other hand, the consolidation of the fund distribution business from UBS in the fourth quarter last year added EUR 17 million of net revenue. Given the scalability of the core business and the high margins in the distribution business, the EBITDA increased significantly. Looking at the valuation of assets in current situations in the investment fund services market, we certainly feel that the value of our fund business is not yet fully appreciated.
Slide 12 shows the Qontigo segment, which on the positive side, benefited from ETF and other licensing growth in the first quarter. On the negative side, exchange licenses saw a cyclical decline due to lower level of index derivatives trading activity. Analytics came in slightly below the strong level in the first quarter last year. On slide 13, we show the new reporting segment, Institutional Shareholder Services. Given that we started consolidating ISS only on February 25, financials on this page basically refer to one month of ISS performance only. On the second quarter onwards, we will be showing a more detailed split of net revenue. Almost 80% of net revenue in the ISS segment is driven by stewardship solutions and ESG analytics.
Since we are not adjusting for exceptional items anymore, net revenue and operating costs of ISS included some non-operating items relating to the transaction and integration efforts. Adjusted for those items, the financial performance is fully in line with our expectations. The last page of today's presentation shows our guidance for 2021 in the context of Compass 2023 midterm plan. Despite the headline decline of net revenue in the first quarter, we are fully in line with our guidance for the full year of around EUR 3.5 billion net revenue and around EUR 2.0 billion EBITDA. As mentioned, we are also fully in line with the expected Compass 2023 growth trajectory. This concludes our presentation. Thank you for your attention. We are now looking forward to your questions.
A question, please press nine star on your telephone keypad. We kindly ask all participants to limit their questions to one per person. Please press nine star now to state your question. The first question comes from Benjamin Goy from Deutsche Bank. Over to you.
Hey, good afternoon. Thank you for taking my question. Thank you for providing the cash EPS. I'm just double-checking. For the 2023 target, which is implicitly EUR 8 per share, that is still based on reported EPS or will you move to cash EPS? Maybe in that context, I would assume PPA is going up from next quarter. Maybe you can give a guidance on the run rate and how this might impact depreciation and amortization going forward. Thank you.
Okay, thanks, Benjamin, for that question. In principle, we did not guide for the EUR 8, what you mentioned. What we said is that our earnings per share would increase by 10% on average from 2019 to 2023. That's the guidance what we have, and we give you now some guidance what kind of PPA we have included here. For Q1, basically the number for the full year is in the range of EUR 90 million as a PPA. That you have as your basis for your model. The PPA guidance with regard to PPA, that's only a little bit challenging because it really depends on our M&A success here. Far, the EUR 90 million is the number for that year. Most probably it will increase as we included in our 2023 guidance additional M&A.
We are still missing roughly EUR 200 million net revenues to conclude from an M&A perspective. You should expect that the PPA continues to increase for the next years.
Okay, understood. Implies that also the D&A is moving up slightly from Q1 levels?
Yes, sure.
Cool. Thank you.
Now we're coming to the next question. It comes from Johannes Thormann from HSBC. Over to you.
Good afternoon, everybody. Johannes Thormann, HSBC. First of all, on your EEX segment, you explained that the power and gas volume declines in Europe have been driven by the pandemic. In the U.S., we already saw a recovery in Q1 in the power derivatives business. Do you expect this to happen in the next quarters in Europe as well, or have there been other drivers? Could you elaborate a bit on the volume trends you're expecting? Secondly, a follow-up on M&A, please. Probably two of the biggest players in the funds business are now slightly out of reach for you guys. What are the alternatives, and would you also be willing to do a joint venture in the funds business where you only own 51% in the long term? Thank you.
Yeah. Starting with the first question around EEX. The good thing is that we stabilized or even slightly increased our market share, both in the European power derivatives market and in the U.S. market. In the European power derivatives market, we are still in the range of roughly 40%. That's good to see that we are able to stabilize that. For the next year, we even see a good chance to continue to increase our market share as we have a superior clearing solution here in place, and there's no change from that perspective. In the U.S. market, even good to see that we are slightly above that level. We have 42% market share in the power market in U.S. That's good to see that our entity, Nodal, is winning market shares and is now a well-established partner in the U.S. market.
From a perspective, we see that the structural trends are all in place. Trend to clear solutions, there's a continued trend to renewable energy is a good topic here. We expect that our EEX assets will continue to grow in the comparable size you have seen in the past. Your second question with regard to M&A, Allfunds, MFEX, and so on, at least you were referring to these two, not mentioning them. We have a clear strategy here. We have, as explained, a 50% cost advantage with regard to our Vestima process IT solution here, and we have a long list of customers who are interested to join forces with Deutsche Börse here. We are open whether they purely connect to our platform, whether they want to do an outsourcing, or whether they want to sell businesses.
We have a very long and strong customer pipeline. To see this extraordinary growth, we are able to deliver from organic, but also from an inorganic perspective. You should expect that that kind of growth level will continue in all of these three formats, connectivity, outsourcing, and that they want to sell business to us. In principle, I also do not want to rule out joint venture types. We are open for any format, what is appreciated by the customers.
Oh, got you.
Obviously, it's our target to consolidate the assets, so below 50% is not of interest for Deutsche Börse.
Understood. Thank you.
The next question comes from Bruce Hamilton from Morgan Stanley. The floor is yours.
Hi there. Good afternoon, guys. Thanks for the presentation. Just two quick ones. Obviously, there's a lot of good going on, but in Qontigo, I guess the Axioma business still feels like it's not showing very much growth at all. Is there something that needs fixing there, or how would you view that business's progress since you've acquired it? Secondly, I guess the weaker volumes were pretty expected, but I guess revenue margins also look to be under pressure across index, across rates, and single stock options. The revenues are weaker than the volumes. Is that simply mix effects, or is there anything else going on? Thank you.
The second question, easy answer. Yes, it's product mix. No change here. First question around Qontigo, Axioma. Yes, there is still some negative impact out of the COVID-19 situation in the U.S. market. Q1 2021 was a very strong quarter, also in our risk analytics area at Axioma. That the comparison is quite tough here. In principle, it's our clear understanding that all the secular growth drivers like trend from active to passive investment, increased demand of buy side to superior risk management analytics solution, ESG, et cetera, they are all intact. Our basic understanding is independent from potentially quarterly developments and comparison topics that we are able to show double-digit top-line growth in Axioma in STOXX and also in Qontigo overall.
That is our expectation also for the next year, and that's included in our Compass 2023 strategy and no reasons to see a change here.
Thank you.
The next question is coming from Tobias Lukesch from Kepler Cheuvreux.
Yes, good afternoon, thank you for the presentation. Quickly on regulation and Brexit, is there any update, anything that potentially looks a bit more positive with regards to Deutsche Börse's business case? Potentially secondly on the April volumes. We just discussed the slight change in product mix, so volumes, revenues were not that correlated as before. How was April looking like, and especially also with regards to EEX 360T business and so on? Thank you.
Starting with the first question around Brexit. The main topic for Brexit is for Deutsche Börse, basically the topic around our Euro clearing activity. That's basically an upside potential, obviously. I think you are aware of the discussion that European regulators and politician force banks to do the Euro businesses in the EU, not in London anymore. Our view here is that we are really focused on a market-led solution here. We are in intensive dialogue with all our customers to fulfill all the regulatory requirements. Therefore, we have a very good dialogue. We have now more than 500 customers onboarded, not all of these. Roughly 50% is accessed, so the other 50% is clearly connected. Still a very good chance for us to win additional business.
Therefore, that should have a positive dimension for Deutsche Börse this year. With regard to the April volumes, I think you are aware, as we publish these numbers, and made it available even on a daily basis. In Eurex, specifically in the equity index space, there's still low volatility. Between 15, 16 are the volatility levels, so it's very low. Therefore, equity index product is clearly in April below previous year level. On the other hand side, on the fixed income side, we see some positive elements, as there is a discussion around re-inflation and market participants consider to do some hedging here. For EEX and 360T, I think we should start to show here growth, as the comps we have seen in Q1 are in Q2, not on that high level. We expect to see here for EEX and 360T growth.
Thank you very much.
The next question comes from Kyle Voigt from KBW. Over to you.
Hi, thanks for taking my question. I think the Tradegate business, the retail business continues to grow quite nicely in the equity investments line. I think you have a 20% stake there. Just given that the value of that stake has likely increased significantly, just wondering whether you consider monetizing that at some point, or whether that's a strategic stake for your core business.
Obviously, we are also happy to see that kind of development, indeed, Tradegate already more than doubled their volumes, and it looks like that in 2021, it continues to be very successful here. Obviously that Tradegate is in opposite to our platforms focusing on the retail business. We have now seen a big uptick in the retail business. We are also currently considering how can we benefit from that kind of development. We are in the process to think about how do we want to position ourselves also in the retail business. Decisions are not done, and also no intention to monetize our stake at Tradegate.
Just to follow up on that a little bit. Is that mostly you're thinking about how you can launch new retail-oriented products within Eurex, or is there something else there that we should be thinking about?
Yeah. Product is one, what can could be offered to the retail customers. There are obviously opportunities also for Deutsche Börse, as you see that Tradegate is very successful here. We are open from that perspective, what can be offered to the markets for retail customers and of retail products.
Understood. The other thing I wanted to touch on was really just cryptocurrency, that the industry continues to grow strongly. I think you listed some exchange traded notes that are crypto related. If we take a step back and look at blockchain tech more holistically, I guess there is a potential use case for settlement in kind of regulated infrastructure. I'm just curious if you've considered this in context of the Clearstream business. I think you've made some investments there and have been doing interesting stuff there. I'm just curious on what the developments have been, with using blockchain technology in kind of either the settlement infrastructure that you own, or in the business at large. Thank you.
Obviously, blockchain is an interesting technology for us. So far we made really good progress with regard to our use case at Clearstream and the use cases around collateral management. There's a high demand in the market. Basically all of the big players, all the global ones, and all the regional ones, connect to our platforms or even have some shareholdings in our platform with HQLA, high-quality liquid assets, which is a legal entity and which is Luxembourg-based. Together with our technology provider, R3, we developed here a solution, and that's now live. So far, we will see in 2021 how strong is support. The demand is very strong. It's of high interest to digitize all your collaterals so that you can mobilize all your collaterals on a global basis, and to allocate it to a transaction.
Sometimes you need low quality of collateral, sometimes high quality. If you have everything digitized, if you have it tokenized, then it's obviously a very efficient process for the market participants and also for us as Clearstream, as a service provider. The same is also true from a collateral management perspective in our clearing house. In this area, and if we see that that is successful, what is our expectation that it will be successful, then we could consider also in the second step to use that kind of blockchain technology in our settlement processes. Settlement process today is T+2, so you have 48 hours time. That is from a technology perspective, it could be also interesting for us to introduce blockchain into settlement activity.
What is also, just to say, very clear, for the next years, we don't see a use case in the trading and clearing space because here we don't talk about hours, here we talk about seconds, microseconds, even nanoseconds. Therefore, the blockchain technology where blockchain will be replaced every 10 minutes is not able to deliver on that side. For trading and clearing, so for the next years, we are not optimistic here, but for collateral management and potentially also settlement, we see a good chance to use that kind of technology.
In addition to what you have said, Gregor, allow me to add the following, Kyle. We truly believe that the tokenization of asset classes will become a very valid and a very interesting asset class expansion, which we want to tap. Point number one. Point number two, it is necessary that we do more than one use cases and more than one investment in this area. He was referring to HQLAx, on the high-value collateralized side. From a technological perspective, we do many other use cases. A very famous one is the so-called BLOCKBASTER use case. It's a use case together with large banks and the German Bundesbank, Deutsche Bundesbank. We think it's not only for crypto, a topic, it's also a topic for the digital euro.
You need to understand that all cryptocurrency or crypto assets are assets based within a circle of computers, and you use the blockchain. The trick is you need to be in a position that you can create an exchange between a blockchain-based circle and get it out in the normal payment systems. That's the background where we have done a very successful BLOCKBASTER project with Deutsche Bundesbank, and we have demonstrated a life that you can get a trigger solution out of the crypto space, out of the blockchain space, into the normal payment and settlement space. That's what we have done on the bond side very successfully, which was a big effort and a big success over the last couple of weeks. You should expect more to come in this area.
Thank you very much.
The next question comes from Gurjit Kambo from JP Morgan. Over to you.
Hi. Good afternoon. Thanks for the presentation. Just a couple of questions. Firstly, in terms of the sort of headroom that you have for M&A, could you just give us an indication of how we should think about that? I'm thinking about headroom from cash and debt rather than equity at this point. Secondly, in relation, obviously, strong revenue growth in the settlement business, which obviously was driven by higher settlement transactions. Just I'm trying to understand what's driven that sort of 26% growth in settlement transactions.
Yeah. Thanks, Gurjit, for the question. With regard to headroom M&A, just to remind all of us, it's EUR 1.5 billion what we have available until end of this year. Again, we are able to do M&A on that cash debt level. You are aware that on top we have the AGM authorization to increase also our equity. Thirdly, in that context, I would like to mention we could also consider to do joint venture or that we bring in some assets where we would not need cash, as we did with the Axioma transaction, where we hadn't to pay anything, where we brought in our stock index business with EUR 2.6 billion and included basically GIC or our PE partner who at the end of the day, paid for that.
We have different formats and enough opportunities to continue to do M&A, so I can just confirm that. With regard to your second question on Clearstream increased settlement activity, the main reason for that increased settlement activity is the retail area, where we see an increased activity. We also talked about it just a minute ago, in our cash equity business, that there's increased retail activity, and that's obviously good. We see that also from a Germany perspective, where the equity culture was not as exciting compared to other countries. We see here that retail customers are interested to together with some new neo-brokers to do activity here. We benefit also from that trend here in the settlement area at Clearstream.
Thank you.
Now we're coming to the next questioner. It is Michael Werner from UBS. Over to you.
Thank you very much. Two quick questions, please. First, on the over-the-counter clearing business. We saw a little bit of a slowdown in revenue growth. This is the weakest, I think, quarter in the past four. I was just wondering if there's any one-offs or anything to explain that. Second, my understanding is that Open Access comes online on July 1st of this year. If that's the case, how do you expect, or how do you think that will impact your exchange traded derivative business? Thank you.
Thanks, Michael, for the question. As I also referred to the Brexit question from Tobias some questions ago. The main driver here is around Brexit, right? So far, this Open Access topic, it's a challenge for regulators to judge on that topic as at first, what is a political agreement? If politicians would agree to define the rules on how to do business together, then obviously it would be much easier for regulators to think about Open Access. As long there is no clarity, it's obviously not so easy to decide upon this Open Access rule. So far from our perspective, it's still open what happens here. We see a tendency, as I mentioned earlier, that European regulators and politician would like to see the European business as handled within Europe. That obviously would play in our hands.
Our focus is, again, it doesn't make sense if they are forced to do it, or it would be much better if they do that on a voluntary basis because they are convinced that they get a good solution here. I think we have a lot of reasons to think so in that way. With regard to the revenue development compared to previous year, we are very much interested to increase our liquidity. It's good to see that our market share is 20%, it continues to increase. All our effort is to convince market participants to join our platform. I talked about still 250 customers are not active. They are connected, but they are not that active on our platform. That's why we also give some incentives to move to our platform.
That's due to that kind of incentivation. That's the reason that you see not the same increase in our revenue basis from that compared to our volumes.
Thank you, Gregor.
The next question comes from Andrew Coombs from Citigroup. Over to you.
Yeah. Good afternoon. If I could just follow up on one of the previous questions, notably on the settlement activity. Clearly strong. The revenue per transaction also elevated, and I think you alluded to the fact that that was predominantly because of the spike in the retail client base. Would it be fair to look at Tradegate as a proxy for also the settlement activity that's coming through at that higher margin? Can you give us an idea roughly of how the margin would spread between your standard client base and that retail segment for the settlement revenues? Thank you.
Yeah, Andrew, that's only partly the case because Tradegate has also there's a brokerage component. They're making markets. They're taking the spread in order to generate revenues and profits. That's a little bit of a different model, and it also develops nicely because they've taken market share, so another component. Generally, if retail trading activity, especially in foreign products or U.S. tech STOXX, for instance, is growing, then Clearstream is benefiting because also those foreign equity transactions originating in Germany are processed through our Clearstream system. That's definitely a good driver here.
Okay. I guess worded another way, if I look at your Clearstream banking fee schedules, it doesn't look like there's been any material changes of late. If the pick-up there is entirely due to the volume mix, is that fair?
No, not entirely just to volume, but foreign equity transactions are typically higher priced compared to domestic transactions. There is a fee differential, which is why we saw this over proportional growth in the revenue versus the volume. A more favorable product mix.
Sounds good. Thank you.
All right. This concludes our call today. Thank you very much for your participation, and have a good day.
Thank you.