How strong is Euronext’s expense buffer?

Revenue above the expense base

Euronext’s third-quarter results give me a starting point of 165 per cent. Revenue unrelated to trading volumes covers that proportion of underlying operating expenses excluding depreciation and amortisation, compared with 162 per cent a year earlier. The company has a layer of revenue exceeding this expense base before trading activity supplies its additional contribution. For a shareholder, the economic value of that layer lies in its ability to support earnings through quieter markets. I read 165 per cent as a relationship between the company’s defined revenue and expense measures; it is not a cash flow ratio.^[1]

The protection has strengthened even as its share of revenue declined. Non-volume businesses supplied 55 per cent of revenue and income, down from 60 per cent, while their expense coverage increased. Total revenue and income grew 24.9 per cent to 547.4 million euros, and underlying operating expenses increased 13.5 per cent to 183.3 million euros. I interpret this as faster trading growth reducing the recurring businesses’ weight while the company’s expense coverage improves. An alternative explanation is a changed business perimeter following acquisition. That makes the comparable growth figures relevant to the earnings assessment.^[1]

The changing composition of growth

The addition of Athens contributes to the gap between reported and comparable growth. Revenue increased 17.6 per cent on a like-for-like basis at constant currencies. Adjusted EBITDA rose 31.6 per cent to 364.2 million euros, while its margin increased from 63.2 per cent to 66.5 per cent. Acquired growth alone is therefore an incomplete explanation: comparable revenue growth remained substantial. I would nevertheless compare revenue and expense growth on the same perimeter before treating the acquisition contribution as a lasting efficiency gain.^[1]

The revenue mix makes that distinction economically useful. Fixed income, currencies and commodities revenue increased 48.1 per cent to 121.3 million euros, while equity markets revenue rose 33 per cent to 124.6 million euros. Treating a quarter like this as a fixed annual trading baseline would make the model appear less sensitive than it is. I assess the recurring businesses’ expense support separately from the additional earnings supplied by trading. An alternative is that growth may reflect more lasting customer gains; the quarterly figures do not establish the durability of that contribution.^[1]

A single-assumption sensitivity

A single assumption gives the sensitivity a boundary. Holding underlying operating expenses constant, the relevant revenue would have to decline approximately 39.4 per cent for coverage to fall from 165 per cent to 100 per cent: 1 minus 100 divided by 165. This is a calculation of the disclosed buffer, not a revenue forecast or the point at which every corporate cost is covered. Depreciation, financing, tax and capital expenditure sit outside this narrow expense measure. If expenses rise, the protection against the same revenue decline becomes smaller.^[1]

Management lowered annual underlying expense guidance from 770 million euros to 760 million euros and announced a share repurchase of up to 350 million euros. Net debt to EBITDA stood at 1.1 times. For capital allocation, the relationship I would examine in the next comparable period is expense coverage alongside like-for-like expense growth. The size of the buyback cannot substitute for that relationship. If recurring revenue grows faster than expenses, additional trading earnings become easier to preserve; if the relationship reverses, trading revenue must carry a larger expense base.^[1]