Good day, and welcome to the CME Group First Quarter 2018 Earnings Call. At this time, I'd like to turn the conference over to Mr. John Pietrowicz. Please go ahead, sir.
Good morning, and thank you all for joining us today. I'm going to start with the safe harbor language, and then I'll turn it over to Terry for brief remarks, then we'll open it up for your questions. Other members of our management team will also participate in the Q&A. Statements made on this call and in the slides on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance. They involve risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statement. More detailed information about factors that may affect our performance can be found in our filings with the SEC, which are on our website. Also, on the last page of the earnings release, you will find a reconciliation between GAAP and non-GAAP measures.
With that, I would like to turn the call over to Terry.
Thanks, John. As John said, we want to thank you all for joining us this morning. We appreciate your interest in CME Group. I hope you've had a chance to read through the Q1 earnings commentary document we provided earlier this morning. As you can see, the strength of the quarter was broad-based across products and geographies as a significant number of customers actually turn to CME's markets to manage their risk. Many of the themes that we have spoken about the past few years were clearly on display this quarter. Those include our focus on driving trading volume 24 hours a day, delivering additional innovative futures and options products to meet client needs and drive additional revenue, and remaining efficient on the expense side. The combination of those efforts led to over 50% adjusted net income and diluted earnings per share growth in Q1.
At the end of the first quarter, we were pleased to announce the transaction with the NEX Group. We are working diligently on the timeline we outlined on the analyst call. The NEX shareholder vote has now been set for May 18th. We have begun the process of seeking regulatory approvals, and we continue to expect the transaction to close in the second half of this year. With that short introduction, we'd like to open the call for your questions. We'll start now.
Thank you. If you would like to ask a question, please signal by pressing *1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is *1 to ask a question. We will take our first question from Daniel Fannon of Jefferies.
Thanks. Good morning. I guess the first question's on market data. We saw the sequential decline. You highlighted the decline in audit fees. I guess a little more color on the outlook there. You had the April 1st price increase. Maybe if there's any early signs in terms of attrition. How we should be just thinking about the progression for 2018 for that line item.
John?
Thank you, Dan. Good morning. Market data came in at $95 million this quarter. We had a $1 million reclass from market data to other revenue. Including that reclass, we're running at similar levels as the first three quarters of last year. In Q4, we saw some benefits of bringing the audit function in-house with approximately $6 million of settlements. As we mentioned previously, we expect there to be fluctuations up and down in this line quarter to quarter, depending on the realization of those settlements. We have been building a pipeline that is being worked. We do expect those fluctuations to continue.
Before I turn it over to Bryan to talk a little bit about what he's seeing in the market data business, as you indicated, the big change coming is the real-time market data price increase, which is going from $85 to $105 per screen, which went into effect in April. Real-time market data accounts for the majority of the market data revenue, and since the announcement of the price increases, we've seen a stable level of subscribers. Bryan?
I would just point out that with respect to the audits, the resolution and settlements can be quite protracted. There's a number that are in the hopper right now that we look forward to and hope to resolve in the next quarter. You saw what happened last quarter with the amount of settlements that took place. What's even more imperative to us is the correction of behavior. What we are seeing is a stabilization in the context of what you may have seen in past decline of screen counts. What we are seeing is an improvement in terms of the reporting of real-time screens. That in combination with the $20 adjustment in terms of going from $85 to $105, which took effect April 1st, is something that we'll be watching closely.
With respect to the derived data, you need to keep in mind that some of those contractual arrangements can be quite chunky themselves and can take some time to be able to negotiate those agreements. I would just kind of temper that a little bit in the context of quarter by quarter and how those two areas hit.
Great. Thank you.
Thanks, Dan.
Next we will go to Christopher Allen with Rosenblatt.
Morning, guys.
Morning, Chris.
I was wondering if you could give us some color on the equity and gains in unconsolidated subs, assuming that's related to the S&P joint venture. Wonder if you could maybe help us think about what's been driven by the record activity we saw in the quarter and what's been driven by increased AUM to give us a sense for how we should be thinking about the run rate moving forward.
Sure. Thanks, Chris. Yeah, we've been very pleased with the performance of the S&P, Dow Jones joint venture. As you know, the S&P JV's revenue consists of assets under management, which is the majority of the revenue, but a significant portion is also based on derivatives trading, specifically here and at Cboe. You've seen our performance in equities this quarter up 47%. That gets paid through a license fee from us to them, and then we then get back 27% of it through the earnings in the JV. Cboe also has had very good activity as well. Again, it's a lot of the dynamics that are positively impacting our business is positively impacting their business. And it's just been a tremendous business model that they have and one that we're very happy to participate in.
Is it roughly about 80/20 AUM to activity? Is that a good ballpark to think about, or?
I think they're reporting their earnings right now, they'll have the most recent.
Got it
The recent breakdown for you there. Again, like I said, it's been a positive with regard to our equity activity, really positive in terms of both the S&P and also Nasdaq Futures has performed also very well.
Great. Thanks, guys.
Thanks.
As a reminder, that is star one if you'd like to ask a question. We will now move to Rich Repetto with Sandler O'Neill.
Yeah. Good morning, Terry. Good morning, John. I guess I'll use a question on this. I don't know whether I'll get an answer, but any updated views on the NEX Group acquisition and the timeline? I know you said the timeline, Terry, but how are you going to keep the dividend, and how long you would extend the leverage out, I guess, or how quickly you would pay down the debt?
Yeah, Rich, I'll take part of that. There's really no new update to the timeline other than what Terry mentioned. We do expect the shareholder vote on May 18th. It's been scheduled. We still plan on closing in the second half of this year. Also, as Terry mentioned, we're working through the regulatory approval process now. No real update on the timeline. In terms of leverage and paying down the debt, really nothing more to update you on than what we put in the Rule 2.7 announcement. Really what we did is we approached our structure to the transaction and our approach over the next couple of years to be balanced in terms of investing in the business, returning capital to shareholders, and paying down the debt.
As you saw, in the Rule 2.7 agreement, our announcement, I should say, we expect to de-lever over the next couple of years down to levels that are similar to where we stand today. That's our objective.
Okay. Thank you.
All right. Thanks, Rich.
Thanks, Rich. Our next question comes from Brian Bedell with Deutsche Bank.
Hi. Good morning, folks.
Good morning, Brian.
Maybe if I could just ask a little bit more detail on how the FX Link is going. I think you guys launched that on March 26th, and I know you're upbeat on FX futures volumes increasing pretty significantly over time with the uncleared margin rule. If you could just go into a little detail about how you see usage on that platform and also, while we're at it, maybe also on the new products of the BTIC and TACO.
Sean?
Sure. This is Sean jumping in. Thank you for those great questions. On March 26th, as folks know, we launched the FX Link. We are very excited about that. We're doing several hundred contracts a day. More important thing I'd say in there is that we got a very good participation from the right set of clients. This is not a couple of prop firms passing it around, but it is end clients who are using the product for the defined purpose. With such a large innovation, I'd say, where you're bringing together the OTC market and the futures market, it is going to take time for volumes to build and for additional participants to fully build automated trading. We're currently seeing primarily, I'd say, point-and-click trading, but we do expect over the coming weeks and months to see a greater number of automated traders.
We know several firms that are building out, in particular end users that are building out their automated trading. If we look at the BTIC, very exciting results this year. Last year, we averaged less than 13,000 contracts a day. This year, we're averaging more than 40,000 contracts a day. We've more than tripled the volume in the BTIC. Great innovation last year. It's got nearly a $3 RPC. Very positive for the RPC for the entire equity complex. Obviously, great innovation. Thanks for asking about TACO. We've got a number of new launches that are coming up over the coming month. On May 7th, we're going to launch SOFR futures. On May 14th, we're going to launch the TACO on the equity indices. On May 21st, we are launching Colombian peso, Chilean peso, and CNY or the renminbi interest rate swap clearing.
We're very excited about the new product launches. In terms of TACO, trade at cash open, it is the opening market equivalent to BTIC, which is Basis Trade at Index Close. It is not as large a market as the close, the opening market a bit smaller. We do expect a similar set of participants with a similar set of efficiencies delivered to them, and we are hearing a lot of excitement around it.
That's good color. Just to butt back on FX, just is that an open architecture platform? I think that's with Citi. I guess can you do that through any bank, or do those folks need to go through the Citi platform?
Citi is the central prime broker, we have now signed up several different prime brokers who are all available. Yeah, most participants now, because of the number of prime brokers that we have, will be able to access the trading. Again, it takes time for people to set up their own systems, in particular on the automated trading side, to take advantage of it. Again, the good news is it takes a long time to build up an ecosystem. The really good news is we've got, again, a very solid and I'd say the right set of end customer participants who are in there doing point-and-click who have said that they're in the process of building their automated trading. It's a very good start.
Great. Thanks for the color.
We will now move to Christian Bolu with Bernstein.
Good morning, Terrence A. Duffy. Good morning, John W. Pietrowicz.
Morning, Christian Bolu.
Hey. Curious on the SOFR contract you spoke about just a minute ago. I guess it sounds like there's significant customer appetite for the contract you'll be launching in May. I guess longer term, curious how that informs your view about the long-term viability of LIBOR and LIBOR-based contracts.
Sure. This is Sean Tully jumping in. We are excited about the SOFR launch. In terms of designing the contracts, we met face-to-face with more than 100 clients, working with our sales team and our research team in order to design the contracts. The marketplace is very excited about the launch. In recent weeks, 80% of the calls actually in regards to SOFR are incoming from customers asking about it. It also gives us a big opportunity to engage with clients very closely on our interest rate products. Actually, in terms of that, CME Group is the natural home for the product. We are always looking at delivering efficiencies to the marketplace, efficiencies to our customers. Because we're offering inter-commodity spreads between our Fed Funds futures and our Eurodollar futures and the new SOFR futures, we will be the single most efficient place to execute those future contracts.
In addition to that, on the clearing side, because we have huge open interest in Eurodollar futures and Fed Funds futures as well as Treasury futures, you're going to see the greatest possible benefits in terms of margin and capital efficiencies. In terms of the uptake, I think that's highly uncertain. I think there's, as we know, hundreds of trillions of dollars' worth of derivatives and securities in open interest in LIBOR. Several trillion, I think the last estimate from the Alternative Reference Rates Committee was on the order of $9 trillion worth of securities in particular, and a very large portion of those go out in terms of maturity for many years. I don't personally see LIBOR going away anytime soon. I think it will remain extremely healthy, and that's what we're seeing in the marketplace.
I think SOFR will create new complementary opportunities for trading the basis or the risk between the two. I see SOFR as really a new opportunity for us in addition to the existing products. Another thing I'd like to mention is our Eurodollar complex continues to see recently record open interest, record volumes. We see greater excitement in our Eurodollar futures and options than ever before. I don't see LIBOR going away anytime soon.
Awesome. Great answers as always. Thank you.
Thanks, Christian.
Once again, that is star one for telephone questions at this time. We will now go to Patrick O'Shaughnessy with Raymond James.
Hey, good morning, guys.
Good morning, Patrick.
I'm curious to hear your observations on the launch and the early trading of that new Shanghai crude oil contract, and to what extent you would view that to be a competitive alternative to WTI.
Hey, Patrick, it's Derek Sammann. Yeah, we've been watching both the development of that market over the last four or five years. They had some launch dates they pushed over the last three years. We look at regional benchmarks as highly complementary to global benchmarks. The story you've been hearing us tell over the last couple of years is the rise of WTI as a global waterborne benchmark, and I think if you look at the results of our WTI franchise over the last three years, whether it's in terms of the outpaced performance of WTI versus Brent or the now surpassed levels of WTI versus Brent, you can see that the world is demanding, and international participation has proven that out to be the case.
When we look at regional benchmarks like the Chinese product launch, we're actually very encouraged by the opportunity for a broader set of domestic Chinese participants to be trading a regional benchmark. What we are seeing and expecting is the bulk of that business that trades on that Chinese physical benchmark gets hedged out back into either Brent, WTI, or more likely, DME's Oman sour crude contract, which is a product launch of the Dubai Mercantile Exchange, which we are majority owner of. We think the positive correlation between the regional benchmarks in the energy oil market likely provides a series of tradable regional benchmarks against the global WTI benchmark. Results year to date so far in our Asian energy business is proving to be at record levels.
Our Asian energy volume was up 43% in Q1, that's really pacing the developments and growth of our energy business complex globally. We see it as a positive. We've seen that between DME and WTI, we will see that contract evolve and likely connecting this to the global market over time.
All right. Thanks.
With no further questions, I'd like to turn the call back over to management for any additional or closing remarks.
Well, we want to thank you all very much for joining us this morning, and we look forward to talking to you at the next quarter. Thank you very much.
That does conclude our call for today. Thank you for your participation. You may now disconnect.