Results of operations
Report on expected developments – future development of results of operations
Given its diversified business model and multiple sources of revenue, Deutsche Börse Group continues to consider itself very well positioned and expects to see a positive trend in its results of operations over the medium and long term. This expectation is based on, among other things, the growth opportunities that the company intends to exploit over the same period. The Group expects net revenue to increase further in the forecast period. This assumption is based on two main factors. Firstly, a further slight increase in economic growth could improve investor confidence, and motivate US investors to return to European markets. Against the background of the UK’s exit from the EU, the general elections to be held in a series of European countries, and the development of US policies, we anticipate elevated stock market volatility in 2017, at least temporarily. Both of these factors, i.e. returning US investors and elevated equity market volatility, would have positive effects on trading volumes in equities and equity index derivatives. Moreover, market speculation on interest rate developments in the US and Europe may boost trading activity in interest rate derivatives at Eurex derivatives exchange – whilst higher, or increasing US interest rates could lead to a further increase in net interest income from the banking business in 2017. Secondly, the Group expects a further increase of the contribution from its structural growth initiatives as well as from new growth opportunities being explored within the scope of its “Accelerate” growth programme launched in 2015 (for details, please refer to the report on opportunities).
Depending on developments in the operating environment, the impact of both cyclical and structural growth drivers and the success of new products and functionalities, Deutsche Börse Group expects net revenue to increase by approximately 5 per cent to 10 per cent during the forecast period. Net revenue growth expected during the forecast period is based on net revenue of around €2,389 million achieved in 2016.
Even if, contrary to expectations, the operating environment turns out to be worse than described above, and clients were to scale back their business activities, particularly in the Group’s business divisions which depend upon trading, Deutsche Börse Group believes it is in a position to continue to do business profitably thanks to its successful business model and its cost discipline.
Within the scope of its “Accelerate” growth strategy, in 2015 Deutsche Börse Group introduced principles for managing operating costs. The core element of these principles is to ensure the scalability of the Group’s business model. To this end, the Group continuously manages operating costs adjusted for non-recurring effects relative to the development of net revenue. Accordingly, the lower end of the net revenue growth range during the forecast period and the following years, of approximately 5 per cent, would imply stable operating costs compared to the previous year. If net revenue reaches the upper end of the growth range, at around 10 per cent, operating costs would be permitted to rise by up to 5 per cent per annum during the period under review and the following years – for instance, for the purpose of increasing investment in growth initiatives. Operating costs expected during the forecast period are based on adjusted operating costs of €1,174.2 million in 2016.
Essentially, the Group achieves the necessary flexibility in managing operating costs through two different initiatives designed to enhance operating efficiency. Firstly, the Group has implemented a continuous process to improve operating efficiency by focusing even more on client needs in order to further enhance quality and efficiency of the services offered. At the same time, Group-internal processes are simplified, generating costs savings. Secondly, the Group resolved a series of structural cost reduction measures during the reporting period, and has already commenced implementation. For instance, we started to reduce the number of external service providers. This included the shift of tasks from external to internal staff, or the hiring of external service providers as internal staff. As at the publication date of this combined management report, the company expects that operating costs will be affected by non-recurring effects of some €80 million. The majority of these is due to mergers and acquistions (excluding performance-related components) but also due to efficiency measures and costs incurred in connection with criminal proceedings against Clearstream Banking S.A. in the US.
Given the expected increase in net revenue of approximately 5 to 10 per cent, with operating costs rising by between 0 and 5 per cent as a result, the Group anticipates a growth rate of between approximately 10 and 15 per cent (excluding non-recurring effects) for net profit for the period attributable to Deutsche Börse AG shareholders during the forecast period. This assumption is based on an adjusted figure of €810.8 million for 2016.
With regard to the cyclical environment and structural growth initiatives, Deutsche Börse AG’s expected business development is based on the same factors that influence the expected business development of Deutsche Börse Group as a whole. These are described in this report on expected developments. For 2017, the company expects sales revenue to be above the 2016 level (2016: €1,300.2 million) and to rise by approximately 5 to 10 per cent depending on how the factors described above develop.
Given the expected increase in sales revenue of approximately 5 to 10 per cent, with operating costs rising by between 0 and 5 per cent as a result, the Group anticipates a growth rate of between approximately 10 and 15 per cent (excluding non-recurring effects) for adjusted net profit for the period attributable to Deutsche Börse AG shareholders (2016: €553.2 million) for the forecast period.
Changes in pricing models
Deutsche Börse anticipates sustained price pressure in some of its business areas during the forecast period. The company’s objective is to cushion this price pressure by continually improving its products and services and by offering selective incentives for price-elastic business.
Over the long term, the average net revenue per unit (e.g. trading or clearing fees per transaction, or fees for custody services) is expected to decline slightly in all areas of the Group. This is a result of laddered pricing models that lead to a decline in income per unit as customers’ business activities increase.