London Stock Exchange Group plc (LSEG) Earnings Call Transcript & Summary

Good morning, and welcome to the London Stock Exchange Group Third Quarter update hosted by David Schwimmer, CEO; and Anna Manz, CFO. Anna will make some brief introductory remarks about our performance, and we'll then open up to Q&A. [Operator Instructions] And with that, let me hand over to Anna.

Thank you, and good morning. Let me start by welcoming Peregrine, our new Head of Investor Relations on his first set of results. He brings a breadth of experience to our team. And I know he's really looking forward to meeting all of you if he hasn't already. It's been another quarter of strong performance and broad-based growth. We're making good progress to achieve our targets, and there's no change to any of our guidance. Our strategy is working, and the consistency of delivery in recent quarters demonstrates the strength of our business model. We're generating quality recurring revenues from a range of services that are valued by our customers. As Peregrine said, I'm going to pick out some of the highlights. And then we'll get straight into your questions. So firstly, on growth. It's a strong and consistent story, with constant currency income up 7% once we've adjusted for the impact of the Russia-Ukraine conflict, exactly in line with what we achieved in the first half. Although the makeup of that growth was slightly different, and this talks to the strength of our business model across market conditions. Again, excluding the Russia-Ukraine impact, Data & Analytics grew 5.4%. In Trading & Banking, we delivered our third consecutive quarter of positive underlying growth, reflecting the progress that we've made in understanding our customers and servicing them better. Workspace rollout continues well. And in the quarter, Workspace for FX moved from beta test into full rollout. Our enterprise data business continues to deliver strong growth. We recently became the first international vendor of real-time data for the Beijing Stock Exchange. And it's this breadth of data that underpins our leading position in real time. We continue to gain share in pricing and reference services too, in part by leveraging the combination with FTSE Russell. We've maintained good growth in our Investment Solutions business. Adjusting for the onetime impact last year, index subscriptions grew at the same high single-digit growth rate seen in recent quarters. Our asset-based revenues were broadly flat despite a 14% market decline in asset values. Success here is built on innovation, and that continued in the third quarter with the launch of a fixed income version of the Russell 3000 Index, the world's first bond index to mirror an equity benchmark. We also continue to innovate in ESG. And we're on track to launch over 100 new ESG index products this year. As you know, revenue in Data & Analytics is not just about growth. It's about quality and visibility, too. We're making great progress on ASV, with underlying growth accelerating to 5.8%, a further improvement in the quarter and up nearly 3 percentage points from the time of acquisition. This acceleration has been driven by the investments we're making to improve our product offerings with stronger sales and better retention. We're executing better across the board, focusing on what data our customers need and how they want to consume it, then ensuring we do it in a streamlined, resilient and efficient way. There's still a lot of opportunity here. Moving to Capital Markets. This grew 9% in Q3, a slight slowdown from the first half, reflecting lower market activity in the quarter. The largest driver was Tradeweb, which saw another quarter of double-digit growth driven by market share gains and the electronification of the fixed income markets you've heard me talk about before. Elsewhere, we continue to drive change and innovate. In Q3, we moved our equity market surveillance tools to the cloud. And just last week, the LSE launched its Voluntary Carbon Market, which will help projects that mitigate climate change to access capital. In Post Trade, we saw growing demand in the quarter as we help customers manage their risk in an uncertain market environment. Our platform continues to attract new users, adding our first clearing member from Singapore in the quarter. Cash collateral at LCH reached an all-time high in September, driving net treasury income up 31%. Let's turn briefly to the Refinitiv integration, where we remain firmly on track to meet our synergy targets. To give you a flavor, we've launched 16 synergy-related products in the quarter, including new fixed income analytics in enterprise data and rolling out new index tools via our desktop products. We've consolidated our offices in Singapore and Hong Kong, taking the number of properties exited since completion to 33. And we're on target to migrate or decommission over 250 applications in 2022, more than 25% ahead of our original target. Turning to capital allocation. We continue to be active. We're investing organically, making good progress on initiatives such as our FX Matching platform, with customers now able to build API connectivity. On M&A, the acquisition of TORA in the third quarter adds execution and order management capability to meet the demand from our trading users. And competition authorities have provisionally cleared our acquisition of the Quantile capital optimization business, which we expect to close shortly. And finally, we've recently completed the first tranche of the GBP 750 million share buyback, with a next tranche due to start in December. So to pull all of that together, our strong Q3 performance is the result of sustained execution of our longer-term strategy. We're making progress on all fronts, and at the same time, there's still more we can and will do. We continue to invest, and we remain well positioned for further growth with no change to our guidance or targets, a reflection of the strength of our business model across market conditions. Before we finish, I want to take a moment to recognize Paul Froud, who will be leaving LSEG after 20 years as our Head of Investor Relations. In that time, the group has seen its market cap grow from GBP 1 billion to almost GBP 40 billion. And Paul has weathered everything that, that journey has entailed. He's a consumer professional, and all of you on this call will have benefited from his vast knowledge. On a personal note, Paul, I've really enjoyed and valued your friendship and your dry sense of humor, and we're all going to miss you. And with that, David and I are happy to take your questions. Back to Peregrine.

We have a couple of written questions through already, so we'll take those first. The first one is around growth. How confident are you in your ability to continue to grow in the current environment? And should we expect to see a slowdown in some areas given some customer pressures?

Thanks, Peregrine. And before I jump in on the question, I also just want to make a comment on Paul Froud. Great appreciation for his 20 years of work, service with LSEG. I've personally enjoyed working with him. And Paul, we wish you all the best. So thank you. So Peregrine, to your question, we're really very well positioned for an environment like this. And you can see that in the strong performance that we are talking about this morning. As we've talked about before, our business model is very well diversified across asset classes, across products, customers, geographies, currencies. We do have about 70% recurring revenue across the business. And then the 30% or so of the business that is transactional tends to benefit from the volatility and the uncertainty in an environment like this, whether we see that in LCH, Tradeweb, our FX business. So another point I should just touch on is that times like this with the volatility, the uncertainty in the market highlight the value of our products and our solutions to our customers. So it's also worth mentioning that while this market is very, very difficult for some, some of our customers are also seeing actual benefits in this environment, such as the banks that are seeing the higher interest spreads. So I'll just finish by pointing you to our ASV growth, which has risen 40 basis points or so this quarter. It is now at 5.8%, really shows the continuing growth momentum in our business.

Great. Thank you. Another written question on pricing. Given the moves that some of your competitors have made, can you give us some indication of your plans for price increases in D&A next year?

Anna, do you want to take that one?

Sure. So we take price on the biggest chunk of our business, which is the subscription business in Data & Analytics on January 1 every year. And our approach there is it's not a blanket increase because we've got different customers on slightly different terms and different products we treat in different ways. When we take price, we take price in the context of our medium-term customer relationships. So it's really important that we're consistently growing those relationships. Historically, our price increase has been about 2%. And this year, in the context of both inflation but also the significant investment that we've put in to improve our products over the last couple of years, we expect to take a little bit more than we've taken previously. And I would say, just going back to that ASV point that David just made, I think we're really well placed in that we've made significant investment in our products and in our customer relationships over the last 18 months since close, and you really see that showing up in our strong ASV performance. So we're going into this price increase cycle well placed.

Thank you. We currently have no more written questions. So I'd like to hand over to the operator for questions over the phone, please.

[Operator Instructions] We will take our first question from Michael Werner of UBS.

On the -- in your Data & Analytics division, can you explain the increase in the cost of sales? I think on a constant currency basis, it was around 9%, about twice what we saw in terms of revenue. So I was just wondering if there's anything one-off in there, if there's anything related to acquisitions. And then secondly, just to kind of get a little bit more color about the pricing, can you just -- you provided some information about average pricing in Data & Analytics as a whole. Can you maybe focus that within the Trading & Business Solutions business in terms of what you expect in terms of price increases next year? And ultimately, when should we expect -- or how do you expect that to flow through the P&L on the revenue side? Is this something that, on Jan 1, we should expect higher pricing to start coming through? Or is this something that gets staggered throughout the year?

Thanks, Michael. Anna, you want to take this?

Yes, sure. So on the D&A cost of sales, one of the big impact that's coming through that you're observing is the impact of the M&A, which has about 150 bps. That's a bit more impact. Beyond that, we've got various other moving pieces in there that -- but nothing specifically one-off in nature, a little bit lumpy as we see our cost of sales come through, but that's how I think about it, nothing unusual, concerning. With respect to pricing, we take pricing across the whole subs business on January 1, and that includes Trading & Banking. So you should see that start to flow through from the beginning of the year. In terms of the amount of price increase, the comments I've made about our subs as a whole also applied to Trading & Banking. So historically, we've taken, on a realized basis, about 2%. We'll be seeing, as I say, a little bit more in 2023. And you'll see that flow through the ASV metric as at the end of the -- the ASV metric reflects the combination of pricing, gross sales and retention.

The next question is from Philip Middleton of Bank of America.

And first of all, as one of the few people here who's been around longer than Paul, I would also like to thank him for his time. Now second -- it's true. Secondly, I know this is a revenue update -- a revenue-focused update. But you have talked about your guidance. And obviously, inflation is a valid topic at the moment. So could you say a little bit more about how you're thinking about cost inflation and how you may -- how that may manifest over the next few years as you roll through your integration process?

Sure. Philip, thank you. I'll turn it over to Anna in a second, but it is just worth pointing out that in an inflationary environment like this, we actually see benefits across a number of different parts of the business. And so I touched on that a minute or 2 ago in terms of some of the uncertainty driven by the inflationary environment. We're certainly seeing the benefits of that in the trading businesses, particularly around interest rate swaps, particularly around some of the government bonds and then, of course, also in FX. So some positive elements to an environment like this for us. But Anna, over to you.

Sure. So absolutely, we have effectively reiterated everything we said at the half year today. So I remain very confident of our 5% to 7% revenue growth target. And I remain very confident that we will exit 2023 with an EBITDA margin of greater than 50%. So specifically with respect to cost, our guidance for 2022 was low single-digit organic cost growth. And we are in good shape on that and are reiterating that. And we're confident to do that because we are well practiced at looking for efficiencies in our cost base and driving synergies. And whilst we are continuing to invest in all the areas we've already described to you in line with plan, we can manage the overarching situation to be confident of that low single-digit growth. I haven't been specific about 2023 just because it's a little bit too early beyond saying that we're very confident of delivery of that margin target. And through a combination of price and cost, we know where we'll end up. Exactly what the moving parts are at this point in time, I'm not going to get into.

The next one is from Arnaud Giblat of BNPP Exane.

I have 2 questions, please. Firstly, could you talk about the NTI? I mean that's benefited by a significant increase in collateral. I'm just wondering with volatility continuing, perhaps the high levels of the collateral are likely to stay for a few quarters. But where do you see that settling out in the longer term? My second question is related to capital allocation. I was wondering if you could share any further thoughts in terms of the possibility of a directed buyback next year and what the timing could be around that.

Thanks, Arnaud. Anna, you want to touch on NTI, and then I'll talk about direct buyback possibilities.

Sure. I'm smiling as I touched on NTI because I realize that every time I say that NTI will probably decline in the subsequent quarter, I've been wrong so far because market volatility has continued to be unexpectedly high. So what I would say around NTI was a really big caveat that I don't have a crystal ball. Q3 has been a record level of volatility and, therefore, cash collateral, which has driven the very high NTI numbers that you see. Will that continue? It's likely to come down. Exactly how fast and when, I'm not sure. And certainly, we have started Q4 continuing with high levels of cash collateral. So that's a long way of me saying Q3 was more volatile than the first half. Will we see that level of volatility in the next quarter? I'm not sure, but I should think you'd be fairly safe at the level of volatilities we saw in the first half. And just to remind you what drives cash -- drives NTI, predominantly, it's the quantum of cash collateral that's the driver because a big chunk of our NTI is fee-based rather than margin-based, which is slightly different from some of our competitors there.

And Arnaud, to your question on directed buyback. So this is an available tool in the toolkit in the world of U.K. PLCs. But one point that we have touched on before, in order to make use of it, we would need shareholder authorization. And so -- and we have not asked for that in the past. So you should not be surprised to see us asking for that as part of our AGM process in the spring. So hopefully, that answers your question.

Great. If I may have a quick follow-up. Yes, just on NTI, it's fee-based. With rates going up and clients generally paying higher net interest margins in other markets or companies, I'm just wondering if there's perhaps an opportunity here for some pricing increase.

We're certainly aware of the different business models at some of our competitors. I would say that we have a medium-term, very -- I'll say, a medium-term perspective with respect to our customer relationships, and we value those relationships. So as Anna mentioned, there's a lot of thoughtful work going on in terms of what the right pricing is going forward, but nothing to comment on around that specifically right now.

The next question is from Haley Tam of Crédit Suisse.

If I can ask a couple of, I suppose, follow-ups really. Firstly, congratulations on the continued improvement in the ASV growth. Given the comments you've made about a little bit more price increase this year and the continued rollout of synergy-related products, should we expect this rate of improvement to accelerate in 2023? And do you actually have a specific target ASV growth rate in mind? And then the second question actually on Tradeweb. Are you able to give us a simple split of maybe the 9-month revenue growth, which has come from market share and electronification so you can get a handle on what that might be, excluding any volatility related benefits?

Thank you. Do you want to touch on the first question, and then I'll -- I'm happy to take the -- I'm happy not to answer the Tradeweb question if I can.

Sure. So on ASV, I'm not going to give you a target, I'm afraid. But what I would say is this: as we've said looking forward to 2023, we expect our pricing to be a little bit higher than the levels we've taken previously. And that will flow through to ASV and fairly immediately because, of course, that will be reflected in our book business as of the 1st of January. Now otherwise, what you're going to see us do is more of the same. So in the subs -- subscription revenue business, it's about consistently improving our customer relationships and our product offering to be consistently selling more and retaining our customers better. And you've seen that very steady trajectory quarter-on-quarter. You'll see continued improvement, maybe not quite as fast as we've delivered in the early period because we kind of tackle some of the low-hanging fruit, but you should continue to see that quarter-on-quarter focus on continuing to drive those customer relationships.

Thanks, Anna. And then on the Tradeweb question, nothing that we're in a position to say about market share gains relative to continuing electronification of the sector. I'll refer you to the Tradeweb team's own disclosure and feel free to raise any questions like that with them. What I would say is that we're very pleased with how the Tradeweb business continues to perform, very strong underlying dynamics there and also pleased to see how the executive team there is developing further a very smooth transition from Lee to Billy, Tom Pluta coming in there. Sara doing a great job. So very happy with Tradeweb on a go-forward basis.

The next one is from Ian White of Autonomous Research.