Deutsche Borse AG (DBOEY) Q4 2022 Earnings Call Transcript

Deutsche Borse AG (OTCPK:DBOEY) Q4 2022 Earnings Conference Call February 9, 2023 8:00 AM ET

Company Participants

Jan Strecker – Head of IR

Theodor Weimer – Chief Executive Officer

Gregor Pottmeyer – Chief Financial Officer

Conference Call Participants

Haley Tam – Credit Suisse

Andrew Coombs – Citi

Mike Werner – UBS

Benjamin Goy – Deutsche Bank

Tom Mills – Jefferies

Gregory Simpson – BNP Paribas Exane

Bruce Hamilton – Morgan Stanley

Philip Middleton – Bank of America

Johannes Thormann – HSBC

Kyle Voigt – KBW

Enrico Bolzoni – JPMorgan

Ian White – Autonomous Research

Tobias Lukesch – Kepler Cheuvreux

Roland Pfnder – ODDO BHF

Operator

Good afternoon, ladies and gentlemen, and welcome to the Deutsche Borse AG Analyst and Investor Conference Call regarding the Q4 and Full-Year 2022 Results. At this time, all participants have been placed on a listen-only mode. And the floor will be open for your questions following the presentation.

Let me now turn the floor over to Mr. Jan Strecker.

Jan Strecker

Welcome, ladies and gentlemen, and thank you for joining us today to go through our preliminary 2022 results, as well as the outlook for 2023.

With me are Theodor Weimer, Chief Executive Officer; and Gregor Pottmeyer, Chief Financial Officer. Theodor and Gregor will take you through the presentation. And afterwards, we will be happy to take your questions. The link to the presentation material for this call has been sent out via e-mail and they can also be downloaded from the Investor Relations section of our website. As usual, this conference call is recorded and will be available for replay afterwards.

With this, let me now hand over to you, Theodor.

Theodor Weimer

Thank you, Jan. Also welcome from my side, ladies and gentlemen. Let me start the call today with a review of the exceptional development of the year 2022. We did not only significantly overachieve our original guidance for the year, but reached already the targets we have set ourselves for this year and our Compass 2023 strategic plan.

The year turned out to be quite different from what we had initially expected. Our expectation was for continued growth out of own efforts by addressing the secular trends in our industry. So steady steps towards our mid-term goals. At least it was the plan. But reality was different. Initially, it was to market volatility in the context of the terrible war in Ukraine. Throughout the year, we then saw the corresponding implications on European energy markets. And finally, spiking inflation rates have resulted in swift actions by central banks around the globe and significantly increasing interest rates.

In this environment, characterized by uncertainty, we are a trusted and reliable party for our clients to manage and hedge their exposures. This has resulted in, by far, the highest level of cyclical growth we have seen in a long time. Cyclical net revenue growth contributed 14 percentage points out of the overall net revenue growth of 24%. But it was also very encouraging to see the continued secular net revenue growth, which amounted to 7%. This is really the result of the many initiatives to win new clients and market share, as well as introducing new products and services over the last couple of years.

The development in 2022 also underscores the quality of our business portfolio. The strong results are not just driven by single businesses, but by double-digit net revenue growth in almost all business lines. Since the development in 2022 by far exceeded our initial expectations, we revised our initial guidance of around EUR3.8 billion upwards throughout the year and have now also exceeded the last guidance of more than EUR4.1 billion by a clear margin.

The implementation of our Compass 2023 strategic plan has further improved our position and potential for ongoing sustainable growth as you can see on page two of our presentation. Consistent secular net revenue growth with a 6% CAGR, since 2019 has become the key pillar of our growth strategy. And most importantly, we have achieved this in all different kinds of market environments.

We have successfully executed and integrated our M&A initiatives since 2019, and we see further opportunities in the pipeline. This has made M&A a reliable addition to our organic growth aspirations. M&A has helped to strengthen our proposition in Data & Analytics and position us as one of the top three global ESG data providers. This has also led to an increase of the share of recurring revenues to around 60%.

Tokenization and digitization are very important trends for us. And we started to lay the foundation to expand into new asset classes and service offerings with a number of different initiatives. This will be accelerated by the strategic partnership with Google Cloud that we announced today.

In terms of the financial progress of Compass 2023 on page three, it is fair to say that we achieved our financial targets already one year earlier than planned. As you will recall, our target was to grow net revenues and EBITDA at 10% CAGR between 2019 and 2023. But so far, the actual net revenue growth amounted to 14% CAGR and the EBITDA growth to 15% CAGR even.

In terms of the different growth components, stronger-than-expected secular growth compensated to slightly lower contribution from M&A, and cyclicality became a significant tailwind we previously did not expect. As a result, we already achieved the EUR4.3 billion net revenue last year, which we had originally targeted for 2023.

With that, let me hand over to you, Gregor.

Gregor Pottmeyer

Thank you, Theodor. On page four, we show the details of the preliminary results for the full-year. The financial performance throughout the year was very positive with the fourth quarter even being the strongest one from a net revenue perspective. The main drivers for the strong performance shifted somewhat during the year. In the first half, the development was driven more by market volatility, whereas in the second half, we saw increasing benefits from higher interest rates.

The operating cost development during the full-year, you see on page five, has been stronger compared to our initial expectation. But we think this was due to a combination of factors that was very specific to 2022. Firstly, M&A effects contributed 4% to cost growth. They were still mainly driven by the ISS acquisition in 2021. Secondly, the FX effect from the stronger U.S. dollar resulted in a 3% operating cost increase. But at the same time, this FX effect was also beneficial to the net revenue development, particularly in Data & Analytics. This brings us to the more meaningful constant currency organic operating cost growth of 10%.

On the one hand, it was driven by inflationary effects from building operations, general purchasing and higher staff costs. On the other hand, we had to continue to increase the provisions for variable and share-based compensation in light of the favorable financial development and relative share price performance. In addition, we saw higher IT and growth investments, as well as higher travel and marketing costs, compared to the depressed situation in 2021 resulting from the pandemic.

This brings me to the details of the fourth quarter results on page six of the presentation. While the secular growth developed broadly in line with our expectations, cyclical tailwinds remained very strong. The cyclical growth was driven, in particular, by further increasing interest rates and the continued high levels of collaterals in our clearing houses.

The M&A effects, again, had minor impact in the fourth quarter, since they were only driven by some of the smaller, more recent acquisitions. The explanation I just provided on the operating cost development for the full-year, you can generally also be applied to the fourth quarter. While the M&A impact on the operating cost has become smaller, compared to the previous quarters, the impact from the stronger U.S. dollar continued to be quite meaningful.

The constant currency organic operating cost growth again, was mainly driven by inflation. This item also includes the inflation compensation bonus we paid across the group in December, amounting to around EUR20 million. The aim was to bring some of the inflationary pressure forward into 2022.

The EBITDA in the fourth quarter included a negative result from financial investments, which is mainly an FX effect on the valuation of Clarity AI, compared to the third quarter and lower valuation of some of the fintech funds. Depreciation and amortization included one-off effect from smaller software impairments. And the financial result included a positive FX effect.

I’m now turning to the quarterly results of the segments, starting with Data & Analytics on page seven. We continue to see very good organic net revenue growth in the segment. This was mainly driven by the continuing trend towards ESG, which resulted in higher demand for our products and services. Analytics net revenue was stronger, compared to the preceding quarters. But in Q4 ’21, we had much higher point-in-time revenues from new client contracts. The other line, which is mainly the ISS Market Intelligence business, still included some inorganic growth from the acquisition of Discovery Data.

Index includes around EUR20 million relating to a volume-based license fee reimbursement from Eurex. This is a large number because it was applied retrospectively for ‘21 and ‘22. You can see the corresponding volume-related costs in index derivatives net revenue in the Trading & Clearing segment. So it’s almost neutral from the group’s perspective. Most of our direct U.S. dollar exposure is in the Data & Analytics segment, from the ISS and Axioma subsidiaries. But the constant currency net revenue growth in the fourth quarter was still very strong with around 16%.

Let me turn to slide eight, the Trading & Clearing segment. We saw some normalization of market volatility in the fourth quarter. However, hedging needs in asset classes, like fixed income, gas and foreign exchange continue to be high. In financial derivatives at Eurex, the improving equity market condition resulted in some decline of demand for index derivatives. But interest rate derivatives and the OTC clearing continued to perform well. In addition, collateral levels in the clearinghouse continue to be on an elevated level, broadly in line with the third quarter.

In commodities, we achieved another record quarter, because of the increased trading and hedging needs of our clients in gas products and due to the higher margin fees. While the power trading activity has somewhat recovered, compared to the second and third quarter, the high margin requirements are still a burn for our clients. In January this year, we have seen collateral levels coming down quite meaningfully. This should generally be good for volumes, in particular, in power derivatives.

In the cash equity business, we continue to see headwinds from elevated levels of retail participation in 2021 and lower equity market volatility towards the end of last year, but market share levels have started to recover since December. As a result of higher currency volatility, the demand for our FX products continue to be elevated, and we again, achieved a very strong quarter.

In the Fund Services segment on page nine, the continued onboarding of new clients and funds more or less offset the cyclical headwinds from the market performance compared to the very strong equity market at the end of 2021. In addition, we saw the inorganic contribution of the Kneip acquisition, which was closed at the end of March. In the operating expense base of the segment, we saw a few bigger effects in the quarter. They related to the integration of Kneip and the carve-out of the Fund Services business from Clearstream, which will be completed in 2023.

Our Securities Services segment on slide 10, saw a significant acceleration of growth in the fourth quarter. Headwinds from equity market performance and lower retail participation were overcompensated by solid levels of fixed income issuance activity, some effects on assets under custody denominated in U.S. dollar and the collateral management business with a growth of more than 30%. In addition, the net interest income has increased almost ten-fold compared to last year. This was driven by much higher U.S. interest rates and increasing European interest rates. Furthermore, the cash balances have continue to increase compared to the preceding quarters.

This brings me to our dividend proposal for 2022 on page 11. Our proposal combines an increase of the dividend by 13% to EUR3.60, with a further reduction of the payout ratio. We are planning to reinvest the remaining recurring free cash into the business to support our M&A strategy and thus, further improve our secular and recurring growth components.

With that, let me hand back to you, Theodor, to present our outlook for 2023.

Theodor Weimer

Thank you, Gregor. Despite an extremely strong year 2022, we expect to achieve further growth in 2023 as well. We expect the secular trends, like the move from OTC to on-exchange trend towards passive investing, or higher demand for it’s cheaper [Indiscernible] outsourcing the funds industry to continue to support our organic growth. Our diversified business model and a track record over the years gives us a lot of confidence that we will continue to deliver on the secular side of the equation.

With regard to the potential cyclical development, the net interest income in Security Services is clearly expected to continue to grow quite substantially, but the comparables in Trading & Clearing are generally high, and volume and volatility patterns might be somewhat different this year. Who knows? We continue to expect to complement organic growth with M&A, and the environment has also improved slightly over the last couple of quarters. But at the same time, we are patient when it comes to finding the best solutions with regards to strategic fit and financial terms.

We will manage operating costs effectively, depending on the net revenue development and thus, have some flexibility to offset potential cyclical headwinds. We will continue to invest in new technologies to improve our operating efficiency and tap into new revenue opportunities in the longer-term. We have already set new standards with our multi-cloud strategy that we started a couple of years ago. Already around 35% of our IT operations today are running in the public cloud.

As we announced this morning, we have entered into a 10-year strategic partnership with Google Cloud. Google Cloud will be our preferred partner to enhance and economize our cloud adoption. We are targeting a public cloud exposure of around 70%, 7-0 percent, over time. In addition, we will be launching joint projects to accelerate the development of new and innovative platforms. Examples are the acceleration of the development of our digital securities platform D7, for post-trading and the joint buildup of a completely new digital-as-a-platform for new asset classes. So we’ll cover both the securities part as well as the new asset class part.

Information Technology is at the core of our DNA, and to not only meet, but anticipate customer demand is key for us. But to be very clear, our core infrastructure is state-of-the-art and not affected by the partnership. And our cooperations, especially low latency trading and clearing systems will remain on-premise.

In terms of effective steering, we will maintain an active portfolio management, a great further strategic optionality. One example is the new organizational setup of securities and Fund Services that will be completed this year. Overall, we are targeting net revenue of between EUR4.5 billion and EUR4.7 billion and EBITDA of between EUR2.6 billion and EUR2.8 billion for 2023. Our guidance is mainly based on continued secular growth. The range reflects different potential cyclical scenarios, including market volatility and interest rates against high comparables.

Since we achieved our Compass 2023 goals already last year, we have already kicked off and started working on a new strategic plan. We plan to present our thoughts on the evaluation of our strategy at the Investor Day this year, which is scheduled for June 28. We are looking forward to welcome many of you here in Frankfurt.

This concludes our presentation. We are now looking forward to your questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And first up is Haley Tam from Credit Suisse. Over to you.

Haley Tam

Hello. Thank you very much for taking my question and congratulations on a strong set of results. Can I ask a question about the 2023 revenue and EBITDA guidance you’ve given us? It is very clear that you’ve tried to think about the cyclical scenarios, as well as the secular growth? But could you help us understand the parameters of that guidance. So for example, what assumptions you might have made regarding Clearstream collateral balances for the Fed fund ECB rate pathways and the likelihood of any sharing of net interest income uplift with your users? Thank you very much.

Gregor Pottmeyer

Yes. Thanks, Haley. Obviously, for this question, everybody’s interested in what are the parameters for our guidance, right? So to say it’s quite simple, right? So the midpoint is roughly a 6% increase, so the EUR4.6 billion, compared to 2022. And that’s basically exactly the secular growth component we expect, so that is the very easy answer.

To go into the next level, there will be most probably pluses and minus from a cyclical aspect. So a big plus, obviously, we will see on our NII specifically or Clearstream, obviously. But there are some questions or the potential minus on the Trading & Clearing as we had highest volatility levels in 2022. So with volatility levels of 25 to 30, and so the current level is roughly 20. So obviously, that’s less compared to last year. So most probably that will balance out from our perspective and what we basically include in our guidance.

With regard to the customer cash balances, as you explicitly mentioned that for the NII calculation at Clearstream. So the good thing is that the cash balances did not reduce so far. It’s still in the EUR18 billion level, and that’s obviously good to see. And indeed, in our forecasting, we had assumed that the cash balances would go down a little bit, right? So this did not happen so far. That’s obviously good.

But doing now this forecasting, we still assume with this increased rates, and rates will continue to increase following the Fed announcement and the ECB announcement, right? There will be pressure from a customer perspective to, on the one hand side, potentially reduce the customer cash balances. On the other hand side, to — that we share some of the revenues. Therefore, we did roughly a 20% discount in our calculation.

Operator

So now we’re coming to the next questionnaire, who is Andrew Coombs from Citi.

Andrew Coombs

Good morning. Thank you for that. If I turn to Eurex, interested in your thoughts on the benefits from the recent repricing initiatives you’ve done from the 1st of January. I can see some of the pricing on the stock that’s being on the future contracts. And in CME, in their recent results, they’re talking about a 4% to 5% increase in aggregate. So anything you can say on pricing and what the implications are for Eurex revenues this year? Thank you.

Gregor Pottmeyer

Yes. Thanks, Andrew. Obviously, you are perfectly right. And it’s public knowledge, obviously, that we increased pricing at our Eurex product, beginning from January 1. So the impact on the Eurex revenue is roughly 3%, right? So that’s obviously much more what we usually do. So our guidance overall is roughly some 1% price increase in average for Deutsche Borse group level, right?

So — and now this Eurex increase is quite close to the 1% on group level. But we use, obviously, the timing and the high inflation from 2022. And obviously, it does not disappear in 2023. So it was reasonable for us to do a little bit more, compared to things we did in the past but we do it always with market consultation. And so far, this price increase was accepted by market participants.

Andrew Coombs

Thank you.

Operator

Next up is Mike Werner from UBS.

Mike Werner

Thank you very much for the opportunity to ask question. Just talking about the potential for M&A. Theodor, I think you mentioned in a couple, three or four months ago that from an M&A perspective, you were telling your team that you’re going to hold off on doing new M&A. You thought prices, I think, were set to fall further. The bid ask spread, probably too narrow. I’m just wondering how you’re thinking about M&A at the time right now? How does that bid-ask spread come in? And do you see a lot of opportunities? Are you getting a lot of incomings from potential targets? Thank you.

Theodor Weimer

Thank you, Mike, for the question. Substantially, our stance hasn’t changed dramatically to the last time we saw and the public multiples were coming down on the private side — private capital side. We see lots of interest to talk, because people still believe they can sell off their assets at a very high multiple. And of course, people need to understand that the weighted average cost of capital has significantly increase. And therefore, we all play this in the discussions.

But to be very clear, we see continued inbound calls. We have certain criteria, which we need to fulfill, right? And we are also very, very careful, right, to look into the potential acquisition targets from a very balanced point of view, strategically and financially balanced. What do I mean by this? It’s very clear, our margin perfectly, EBITDA margin, which is fortunately extremely high, and we will continue to keep high margins, right? That is actually a promise on our side.

On the other side, we want to grow. If you want to grow, you can grow organically or you can inorganically, leaving aside a cyclical part, right? And therefore, if you want to grow, and organically, if you want to go into deals, what we are potentially ready to do, then you have to take into consideration that whenever you do a deal, it will be per se and [Indiscernible] margin dilutive, right, margin dilutive, which is a big hurdle we have to overcome. So that is more expensive. Equity is anyway is expensive, right? And then you’ve got the margin dilution.

Therefore, we are very careful, right, how to deal with such situations. And as I said this morning during the press conference of the presentation of the full-year numbers, for me, as soon as we are getting into larger deals or potentially larger deals, right, since the effect is so big on the financials, I need to get into — we need to get into situations where the synergy potential is pretty high, right? That is how we approach the situation.

And last but not least, right? We are completely agnostic, right? Don’t get us wrong, right? We think we can go for M&A, but we are not desperate, right? And if we compare at the end of the day, right, M&A deals towards other alternatives, right, and there’s a full spectrum, M&A on the one hand side, the other hand side is, I would say, share buybacks, right? So we take it completely agnostic. We want to do the best for the investors. That’s our determination.

Mike Werner

And just a quick follow-up, if you don’t mind. Your weighted average cost of capital internally, what is it for you guys now? And how does that compare to, let’s say, back in 2021?

Gregor Pottmeyer

Yes, Mike, obviously, our WACC increased as it increased for the whole industry due to the increase. And it depends, obviously, the WACC we take, when we do for M&A, depends in which business we invest in which region, in which maturity level, right? So it’s different overall. On group level, our WACC is roughly 7%.

Mike Werner

Thank you.

Operator

The next question comes from Benjamin Goy from Deutsche Bank.

Benjamin Goy

Yes, hi. Good afternoon. One question on ISS, please. I was wondering on the number of covered corporates, what are the plans for ’23 and how this could impact the client acquisition going forward? Thank you.

Theodor Weimer

We didn’t quite catch it. So you mean the number of clients at ISS

Benjamin Goy

I noted the number of covered corporate. So will you have a…

Gregor Pottmeyer

I understand. Okay. Now, I got it. Sorry, Benjamin. Yes, we make good progress, right? So the number increased from roughly 7,000 to 7,800, right, as we hired 100 analyst research guys in Manila. And so far, we made good progress, but we are still not there where we want to be, right? So we still need, let’s say, another 800 to cover the full spectrum, what is needed, right? And therefore, we are still working on this topic in ‘23 as a high priority for us. The latest, end of 2023, we have all the capabilities at our hands so that we cover our customer needs. And then we have much better opportunities to increase our market share here.

With regard to the quality, customers are very satisfied, are happy with our ratings. They are even better, the quality, compared to our competitors. And so, if you have catched-up here on the number of corporate rating, I think we are very well positioned to gain additional market share.

Benjamin Goy

Thank you.

Operator

The next question comes from Tom Mills from Jefferies.

Tom Mills

Hi, good afternoon. I had a quick question on your Fund Services business. Obviously, you alluded to the sort of step down in profitability that you saw in 4Q. Could you say perhaps how you might expect that profitability to be impacted throughout ‘23 as you go through the remainder of the carve-out of that business? And will it take the whole sort of 12 months, do you think, to be done? And if you wanted to do M&A in this space, would it sort of require completion of that carve-out before you kind of consider doing it?

Gregor Pottmeyer

Yes, Tom. Good question with regard to our Fund Services business. And it’s obviously that the profitability decreased in 2022, but there are good reason for that. So first, you are aware that we carve out basically the business out of the Clearstream overall organization, due to the fact that clients are different, processes are different, systems are different. So it makes us more focused and more agile.

Secondly, we’ve got now a new banking license, right, for that kind of business to increase our product and offer spectrum. So that is obviously an important thing. Then thirdly, we are in the process to build up a new banking account system here. So having this banking license, also having a proper contract management system here in place. So that’s the reason why 2022 and 2023 is elevated from a cost perspective.

In addition, we acquired the Funds Data business or the Kneip business, what was not really profitable so far. So we do also here some restructuring and reorganization. And this will take also a little bit time. So overall, I expect 2023 also due to our project work that the cost will be on an increased level.

But from a top line perspective, we are quite confident that we will come back to double-digit growth or even mid-teens growth in 2023 due to our strong pipeline, what we acquired and with all the signed contracts. So we really expect coming back in 2023 with double-digit growth here in our Fund Services business. And overall, the targeted EBITDA margin, including all costs will be in the range of 55%.

Tom Mills

And just on the M&A point there, does the sort of restructuring work over the course of ‘23 prevent you from doing additional M&A?

Theodor Weimer

Thank you, Tom, for the question, right? And it’s good that you’re insisting here. So from a CEO point of view, the following, right? Generally speaking, the carve-out process will not limit our ability, right? We are so far progressed that we could move ahead, right, with partnering. The idea of carving out the ISS business and the Clearstream business was, at the end of the day, to enhance our ability for strategic partnerships, right?

And it is, at the end of the day, an optionality for us to do something. An optionality does not necessarily mean that we take — that we go for the option, to be very clear. This has — we have many others — many other dimensions, which we needed to balance. It’s a strategic balance. It’s a financial capability. It’s the other side as always. It’s a strategic fit. It’s the financial fit. And so for that, I don’t want to go too much in detail.

But I think at the end of the day, a key driver for this year or in this company is great optionality, don’t let yourself — don’t get into a situation that you feel pushed to do an M&A deal. That’s always the worst thing, what can happen. And therefore, we take this very calm. And we have — and that’s a good position. We have many optionalities on the table, right, be it strategically, be it financially, right? And at the end of the day, that is what we are doing here, and that is what we can share with you.

Tom Mills

Thanks very much, Theodor and Gregor.

Operator

Next up is Gregory Simpson from BNP Paribas Exane.

Gregory Simpson

Hi, thank you for taking my questions. And just would like to ask about the margin fees of Eurex and EEX, which has seen a lot of growth in 2022 due to cash flow levels. Can you help frame where collateral levels are right now versus peak? What could be sustainable levels? And linked to that, is there any feedback you’re hearing from participants in the EEX now energy prices have fallen? Do you think volumes can kind of grow from here as people going to come back? Any color would be great.

Gregor Pottmeyer

Yes. Thanks, Gregory. So starting with EEX. So obviously, in 2022, we have seen highest volatility, so price increases of 10 times and even more. And as a result, we asked for high margins, right? So before the crisis, we had some EUR5 billion margins in our clearinghouse. And in peak times, we had even above EUR100 billion. So on average, it was roughly EUR50 billion in 2022. And now in January, it comes back to a level of a little bit above EUR20 billion. So that’s the EUR20 billion we also assume as our base case assumption for us for the full year 2023.

With regard to Eurex here, we have also seen increased volatility and increased margins, but there are different reasons for this increased margins. It’s not just pure volatility. It’s also due to our secular growth, specifically in our interest rate for business. So therefore, we do not expect that the margins will materially go down. I would assume a little bit go down, but not as significantly as — at EEX.

Gregory Simpson

Thank you. Maybe just a quick follow-up, if that’s okay. What’s the amount of assets under administration on the fund distribution business? I think it was less about EUR400 billion. What are we today? And also the timing of the large client win, HSBC? Thank you.

Gregor Pottmeyer

So the assets under management in our funds business is around EUR400 billion.

Gregory Simpson

And in HSBC that is imminent or…

Gregor Pottmeyer

This will obviously increase with that level when it’s finalized. So it’s not included in that number. It will increase.

Gregory Simpson

Thank you.

Operator

Next up is Bruce Hamilton from Morgan Stanley.

Bruce Hamilton

Hi, good afternoon and thank you for taking my questions, answer the presentation. Just going back to M&A. I mean, obviously, you’re in quite a good position. Just to check, I think your net debt to EBITDA now is in the low 1s, around 1.2 or 1.3, if you could just confirm. And if you could remind us, I think when you consider deals and what the credit rating will sort of give flexibility for that would allow you to go to say sort of 2.5 times. I’m just trying to understand what the existing sort of flexibility is to do deals because it seems like there’s quite a lot?

And then in terms of the, I guess, within your strategic growth priorities and given what’s happened to pricing, is there any particular area that’s kind of looking more interesting as you sit here today, be it data, Fund Services, post trade or trading? Anything in terms of perhaps the skew of what’s coming across in terms of incoming that might be interesting? Thanks.

Theodor Weimer

So Bruce, thanks for your question. Starting with the first one. So indeed, our rating relevant KPIs net debt to EBITDA, decreased to 1.2. And I think you are aware that the threshold for AA rating is 1.75. So if you do the math, it’s more than EUR1 billion, obviously, flexibility here.

But I would like to comment a little bit more general on our financial flexibility. So for an M&A transaction, so the funding, the refinancing is not a limitation for Deutsche Borse. The reason for that is, okay, of course, today, we have some even more flexibility. Then our cash generation is very, very big and very quickly. Obviously, in 2022, we have some cash flow of more than EUR2 billion, right? So that’s obviously big number. And here, you can see the financial power we can create out of our increased cash flow over time.

Then from an M&A perspective, we are also very open, how does the performance look like. So if we bring in an asset, so we don’t have to pay additional money or to increase our debt or equity level. So we are very flexible with regard to that format, and we have already done such deals. And obviously, we have also some equity authorization from our AGM. And in my discussion with investors, they tell us if there’s a good asset with good quality and if it’s financially attractive and then we are also flexible to support you with additional equity. And therefore, that’s in basically our summary that funding is not a limited factor in — for an M&A deal.

Secondly, or the other way around from going from the liability side to the asset side. So where do we want to invest? So our priorities are basically unchanged. So priority number one is our Data & Analytics business, where we have seen big investments over the last three to five years. This Axioma, this ISS and so on just to tell the most prominent one. And so, we are still missing some capabilities here, and we are very open to do deals in that area, again, when it makes financial leasing, when it makes from a strategic perspective and sense.

The second area where you have seen M&A transaction from us, and we potentially will continue to see is in the investment Fund Services business where the customer is always the choice to connect to our platform, to outsource or even to sell the business, right? And we are very flexible with all of these three formats. And this customer decides to sell the business for us, and then we show this as an M&A transaction. And so, Fund Services is really continue to be of high interest for Deutsche Borse.

Bruce Hamilton

Great. Thank you very much.

Operator

The next question comes from Philip Middleton from the Bank of America.

Philip Middleton

Hey, good afternoon and thank you for that call. You’ve talked a little bit about inflation in respect to Eurex. But I wondered, could you talk us through how you see pricing moving in the rest of your portfolio, including obviously the data businesses and beyond. What — how much inflation can you pass through apart from the Eurex segment, please?

Gregor Pottmeyer

Yes. Thanks, Philip. Obviously, we do that in all of our business segments, right? If you see that high inflation of 8% to 10%, basically now not just for 12-months, most probably even for a longer time horizon then is natural as all the pricing increases around us that we also increase our pricing here. And basically, we did some price increases in all our business segments across the board here. And it’s not always a direct price increase, so increasing some fees. It’s also some volume rebates where you do some optimization and so on. So overall, it’s again, it’s more than 1% and price increase in closer to 2%.

But looking forward, right, normalization, our general target is not to focus on price increase. Obviously, our focus is to get additional liquidity and to increase our market share. So that’s by far our most important intention. And these are just temporary effects what we use as we see high inflation last year and most probably also this year.

Philip Middleton

Okay, thank you very much.

Operator

The next question comes from Johannes Thormann from HSBC.

Johannes Thormann

Good afternoon, everybody. [Indiscernible] First of all, a follow-up question on the NII sharing with customers. We are now at a level which you previously did not ever expect to see and then probably where you would also think that customers would be unhappy about it. How much revenue sharing do we — or should we put into our models from the next rate hikes? Should we expect that the customer gets all of the rate increases? 50%? What’s your gut feeling?

And then my question is mainly on the OTC clearing now. Could you — because this is getting hidden in the fixed income derivatives business. Can you elaborate a bit more on progress on market share and especially the revenue generation in that business? And then what’s your view on June 2025 when — how do you expect the commission to decide. To prolong or to cut the clearing agreement?

Gregor Pottmeyer

Yes. Thanks, Johannes. With regard to the NII topic, I think, I covered that already, but we’ll repeat it. So there’s open — so you can do some technical calculation, right? So starting with the EUR18 billion customer cash balances, 50% is U.S. dollar, 35% is euro, 15% other currencies. So far, we did not lose any of these customer cash balances that even slightly increased. But nevertheless, as the rate starts to continue to increase, so it’s a question whether these customer cash balances go down? And secondly, whether there is additional pressure with regard to revenue sharing?

So far, we do not share revenues, right? And so far, the balances did not decrease. So far, so good. But you have to consider this increased pressure. And therefore, we calculated in our base case scenario, some 20% discount to the technical numbers you could calculate. And how it develops and how it contributes with regard to reduced cash balances or revenue share, we do not know. It’s just a 20% discount roughly. So that would be our best guess today. So that’s the first question.

The second question around the euro clearing. So far, we made the progress as expected. So we have EUR31 trillion notional outstanding volume that translates in a market share of roughly 20%. The net revenue, we got from the OTC clearing space was in 2022 more than EUR90 million. So we guided some five years ago, EUR50 million to EUR70 million, and we achieved the EUR60 million, the midpoint in ‘21. But in 2022, increased more than 50%, more than EUR90 million. And we are quite confident that we will continue to significantly grow that kind of business.

Yes, there was a delay of the regulation by three years, unfortunately, from June 2022 to June 2025. But on the other hand side, we see clear direction from EU commission and also from ECB, so that they really expect that the euro clearing will be increasingly managed within the Eurozone office in the EU. And therefore, currently in this draft legislation, we talk about an active account, right? That it’s not accepted anymore, but they just build the connectivity to the platform so that they really use it.

And currently, out of our 600 customers that are onboarded at Eurex clearing, roughly 300 or 50% is inactive. And if you see here now some movements also pushed by some expectations from EU commission and ECB, that would obviously significantly help us. On top, we did this kind of activation program for some incentivation, we decided to introduce that. So there’s an additional incentive for market participants to join our platform. So overall, we are quite confident that you will see continued growth already this year but also in ‘24 and ‘25.

Johannes Thormann

Thank you.

Operator

Next up is Kyle Voigt from KBW.

Kyle Voigt

Hi, thank you for taking my question. With respect to the cloud partnership you announced today, can you just talk about the key revenue opportunities that you see coming from this partnership? You noted that, at a minimum, this could significantly help your data distribution?

And then how quickly do you think we — that you would be in a position to launch new products as a result of the cloud migration? Should we be thinking about that as an opportunity in year one or year two of that cloud partnership? Or even further out than that?

Theodor Weimer

I’ll take this one, Kyle. Firstly, we have entered into this partnership with a clear path to develop the digital asset platform, right? And therefore, the new asset losses need to emerge. And as a CEO and as ExCo, we have the obligation, right, to stay ahead of the curve because we are the leading European capital market infrastructure provider, right? And I think it’s our obligation to be ahead of the curve. Something is cooking out there. You see in the United States, lots of new asset classes are coming. You see, especially on the real estate side, trading and so forth, right? So it’s pretty clear this is more than just noise at the far horizon.

When this will emerge and how it will emerge, nobody knows. The old rule is you overestimated the effect for the first 12-months, right? You underestimate the effect for the first five years, right? That’s where we stand. So we go into this partnership with Google Cloud, we will develop this IT digitized based as a platform, right? And then, right, it is — yes, if you have the opportunity, if there is the supply there, if the product — if the IT capability is there, then this will create demand, right? That it will create demand, right? So we are working on the product offering, and this will ultimately translate in business, right?

We have not yet factored in anything for the year 2023. You will hear a little bit more about this and our plans during the Capital Market Day and the strategy, but we affected in nothing, simply nothing, right? Of course, right, taking at the end of the day, we get software development capacities, we get all the access to the Google Cloud people, right? So we are here. We will set up a new asset platform, both for the new asset classes, and we’ll accelerate our already existing D7 platform, right?

And what we are currently making out of D7 is a negligible number in the overall context of what we are doing. This is an investment. And we didn’t go out to the investors to ask for a 3 digit million of investment, right? We went out and asked, right, how — what can we do? How can we partner with somebody? That’s how you have to perceive this situation.

Kyle Voigt

Thank you.

Operator

The next question comes from Enrico Bolzoni from JPMorgan.

Enrico Bolzoni

Hi, thank you. Just a follow-up on M&A. I just wanted to know if you would consider, if an opportunity arises, also more transformational deals rather than just maybe bolt-on deals? I’m thinking, especially in the Fund Services business or general in the non, let’s say, traditional exchange part of the business. Thank you.

Theodor Weimer

Thank you, Enrico, for this question, right? And my apologies for not laying out our full M&A strategy here. I think that is not appropriate. But one thing is for sure, right? We do not start, we do not exclude any kind of deals per se, right? Given the situation we are in, right, given the financial constraints we are having in terms of dilution of EPS, right? There’s only very few transformation leads out there, which are striking to us, right?

And if you simply look into what we’ve done, this string of pearls, how we are doing our strategy piece by piece, right? We can do larger deals, but it also depends on what is the definition of a transformational deal, right? One thing is for sure, I’m not out there and talking about, can I do a type of a merger of equals, whatever, yes, you have in your mind stuff. That is not what we are doing.

Enrico Bolzoni

Thanks.

Operator

And now we have Ian White from Autonomous Research on the line.

Ian White

Hi, thanks for taking the presentation. Just a few short follow-ups for me, please, if that’s okay? First up, can you just share any CapEx expectations for us for 2023, please?

And secondly, maybe just if I could ask a bit more detail around the thinking in relation to the Google agreement. It sounds, like you’re not considering, at this stage, migrating your sort of core trading technology to the cloud. And I think some of your global peers are sort of going down that route. Could you just explain your thinking around that? Is that something that you might consider in the future? Or is it completely off the table, please?

And just finally, on Axioma. Can you just explain, kind of, the outlook for that business place? I think growth has been a bit weaker in that side of the Data & Analytics business this year. Is there kind of some change you can make on the sales side or a more attractive pipeline for 2023, please? Thank you.

Gregor Pottmeyer

Yes. So I’ll start with the CapEx question, 2023. So it’s roughly EUR300 million. With regard to the Axioma outlook, we think in 2023, we have a reasonable chance to come back to higher growth rates. Whether it’s double digit, we will see, but the pipeline so far looks quite promising.

Theodor Weimer

On the Google agreement, Ian, the following. Firstly, we have coinvented with some others if I may say so, the electronification of the trading systems, right? And we have been a protagonist there. Later on, we have been a protagonist with the futurization, which is the derivative part and where we are now having a top three position at least, right, at least. And now we see, right, the next S-curve, right, if I may use this term, the next S-curve is the new asset class digitization, right? And therefore, it’s very clear that is what we are going for.

We will not touch the low latency situation on trading guide, why should we? We are good. We are — quite frankly, we are top, whatever we are. At least we are ahead of the bunch, right, should I include this into this context. Others have different strategies. Others have different starting positions. Others have different business models, right? I do not care too much about others. I care about what is best fit for us, right, on this side. And we are completely convinced that this innovation part of it together with the data strategy that is the best fit for us.

Ian White

Okay. Thanks very much.

Operator

And the next question comes from Tobias Lukesch from Kepler Cheuvreux.

Tobias Lukesch

Yes, good afternoon. Thanks for taking my question. Finally, coming to cost. I was wondering, if I take your cost base this year, and you said you were quite successful actually preempting some of the costs in ‘23 already in ‘22 also inflation-linked, you potentially have — will not have such a high compensation effect maybe in 2023. I was wondering if we go with the secular growth and apply kind of 6% cost growth, if you agree to come out in, let’s say, 1.85 space?

And then in the second step, I was wondering how much of OpEx? You mentioned additional spending in the fund service space, like this year — well ‘22. How much this would potentially add? And potentially also some further investments in the technology you mentioned. So is this something which is potentially significantly above spending we have seen in earlier years? Or would you think this is more or less in line? Thank you.

Gregor Pottmeyer

Yes, Tobias. As you can derive from our guidance, right? So our guidance on the cost base is roughly EUR1.9 billion, right? So just subtracting net revenues and EBITDA, okay? There are some financial results in between but, let’s say, the EUR1.9 billion, and that’s a 4% cost increase, or 4% to 5%. And so, our message is that in 2023, we will come back to the guidance we always gave. So for roughly 5% plus secular growth, we need roughly some up to 5% cost increase, and that’s exactly what is included in our guidance. And so far, we are quite confident that we are able to achieve this target.

And the 17% cost increase you have seen for 2022, there were really some specific effects related to year 2022. I don’t want to repeat all of the reasons. And the majority or a bulk of that will disappear in 2023. So that gives us also the chance, and I gave already the number of CapEx, roughly EUR300 million that we can do reasonable investments to continue to grow with our business.

Tobias Lukesch

Yes. Thanks, Gregor. However, if I calculate basically on, let’s say, a bit of a clean cost base that you see get to 8%. And I was just wondering if you this time, like potentially are a bit more vigilant on the cost side. But I understand you that a kind of EUR1.9 billion figure is something you have in focus, and it will be kind of — sure on that. Thank you.

Gregor Pottmeyer

That’s exactly.

Operator

And the last question comes from Roland Pfnder from ODDO BHF.

Roland Pfnder

Yes, thank you for taking my question. I just have one last one. Could you elaborate a little bit on your cash equities business and the market share development here, what you see will change? Thank you.

Gregor Pottmeyer

Yes. Obviously, we were not really happy about the development in 2022 as we lost some market share here. I think, I shared that it’s below the 60%. And obviously, we have already reacted with the liquidity program. There’s not big expenses, and market share already increased back to more than 60%. I think we are able to manage that situation and we will see better market share development in 2023.

Roland Pfnder

Thank you.

Jan Strecker

All right. Thanks a lot for your participation today. There are no further questions, and we would like to close the call today. Thank you.

Theodor Weimer

Thank you, guys.