CME Group Inc. (NASDAQ:CME) Q4 2023 Earnings Call Transcript
CME Group Inc. (NASDAQ:CME) Q4 2023 Earnings Call Transcript February 14, 2024
CME Group Inc. beats earnings expectations. Reported EPS is $2.37, expectations were $2.27. CME Group Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the CME Group Fourth Quarter and Year End 2023 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Adam Minick. Please go ahead.
Adam Minick: Good morning, and I hope you are all doing well today. We released our executive commentary earlier today, which provides extensive details on the fourth quarter and full year of 2023 which we will be discussing on this call. I will start with the safe harbor language, then I'll turn it over to Terry. Statements made on this call and in the other reference documents 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. Detailed information about factors that may affect our performance can be found in the filings with the SEC, which are on our website.
Lastly, on the final page of the earnings release, you will see a reconciliation between GAAP and non-GAAP measures. With that, I’ll turn the call over to Terry.
Terry Duffy: Thank you, Adam. And as Adam said, thank you all for joining us this morning. I’m going start by giving a little color on the broader environment. Following that, Lynne will provide an overview of our financial results and our 2024 guidance. In addition to Lynne, we have other members of our management team here to answer questions after the prepared remarks. 2023 was the best year in CME Group's history with a record average daily volume of 24.4 million contracts, up 5% from 2022. This growth was led by records in both agriculture and interest rate products, which for the year were up 17% and 16%, respectively. Options average daily volume across all asset classes also set a record with ADV of 5.1 million contracts, up 23% versus last year.
Lastly, our non-US average daily volume increased to a record 6.8 million contracts. Last year, I referred to 2023 as a new age of uncertainty. And that uncertainty extended throughout the year. We experienced continued inflation, rising cost of capital, increasing geopolitical tensions and shifting perceptions around the Fed's interest rate policy. All of these factors contributed to our customers' growing need for risk management, capital efficiencies and demand for our products. Following the very strong performance of our business in 2022 and 2023, we have seen the speculation that our interest rate business could face headwinds based on the expectation that the Fed will start to lower interest rates this year. In my 40-plus years in the industry, I've observed that regardless of whether rates are going up or down, our volumes are typically higher during periods when the change of rates is uncertain as is the case today.
I've never seen such a disparity in opinions on what the Fed may or may not do, and I believe that is a tailwind for CME Group and our rates products. I mentioned earlier that our interest rate volume was up 16% in 2023 with four Fed rate hikes during the first half of the year, building off record volume levels of 2022. In contrast to the view that a rising rate environment is optimal for our interest rate complex, our volume actually grew and accelerated since the Fed stopped raising rates in July of last year. In the six months from August of ‘23 through January of ‘24, our rates volume is up 24% year-over-year. I would also like to comment on the dynamics in the crude oil marketplace. Following the Russian/Ukraine war and other geopolitical factors that influenced the price of energy, WTI or West Texas Intermediate has become even more relevant to our customers in Europe and Asia and cemented its position as a primary reference price for crude oil globally.
As the primary market for WTI trading, we continue to generate growth and expanded end user client participation through developing and investing in new contracts such as CME Group's Argus Gulf Coast contract. In a very short period of time, these contracts have generated significant commercial participation with current open interest over 500,000 contracts. As indicated by the open interest, it's clear that the commercial participants prefer CME Group's Argus Gulf Coast contract. We continue to remain focused on the growth of these contracts along with creating capital and technological efficiencies in the entire suite of CME Group's energy complex. This anchors CME Group as the global leader in West Texas Intermediate. Moving into 2024, we continue to see a wide range of views as it relates to the health of the global economy, whether it's inflation, unemployment or monetary policy.
Also, there are ongoing geopolitical tensions and supply chain disruptions continuing in certain parts of the world. Additionally, we're approaching political elections in over 60 countries this year. The uncertainty of those elections and the policies that could come from that are basically unknown to all, which only leads to market participants continue to manage risk. All that being said, 2024 is still very much the age of uncertainty and our products remain critical risk management tools for our clients. We have seen this reflected in our strong start to 2024, where we delivered our highest January average daily volume in our history of 25.2 million, which is up 16% relative to last year. With that being said, I'm going to turn the call over to Lynne and we look forward to taking your questions.
Lynne Fitzpatrick: Thanks, Terry. In addition to the volume records Terry discussed, we delivered record financial results in 2023. Our revenue of $5.6 billion grew 11% compared to 2022. Our annual adjusted expenses, excluding license fees, were approximately $1.526 billion including $56 million related to our cloud migration. In aggregate, our adjusted operating expenses were $9 million below our annual guidance. Our adjusted operating margins for the year expanded to 66.9%, up over 200 basis points from 2022. We delivered $3.4 billion in adjusted net income, resulting in 17% earnings per share growth for the year. During the fourth quarter, CME Group generated more than $1.4 billion in revenue, a 19% increase from Q4 2022 with average daily volume up 17%.
Market data revenue grew 9% from last year to $167 million. Expenses were very carefully managed and on an adjusted basis, were $490 million for the quarter and $393 million, excluding license fees and $16 million in cloud migration costs. CME Group had an adjusted effective tax rate of 21.7%, which resulted in adjusted net income of $865 million. Our adjusted EPS was $2.37, up 23% from the fourth quarter last year, and represented our tenth consecutive quarter of double digits earnings growth. Capital expenditures for the fourth quarter were approximately $23 million and cash at the end of the year was $3.1 billion. CME Group declared over $3.5 billion of dividends during 2023, including the annual variable dividend of $1.9 billion which was paid in January.
Turning to 2024 guidance, we expect total adjusted operating expenses, excluding license fees but including cloud migration expenses, to be approximately $1.585 billion. Total capital expenditures net of leasehold improvement allowances are expected to be approximately $85 million, and the adjusted effective tax rate should come in between 23% and 24%. Finally, in November, we announced transaction fee adjustments, which became effective February 1st. Assuming similar trading patterns as 2023, the fee adjustments would increase futures and options transaction revenue approximately 1.5% to 2%. Taken in aggregate with the fee changes for market data and non-cash collateral which took effect January 1st, the fee adjustments would increase total revenue by approximately 2.5% to 3% on similar activity to 2023.
In summary, we are very proud of the results we were able to deliver as a firm this year, driving 11% revenue growth and 17% adjusted earnings growth from our previous record year of 2022. We'd now like to open up the call for your questions. Thank you.
Operator: [Operator Instructions] Our first question is coming from the line of Dan Fannon with Jefferies. Please go ahead.
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