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

Good morning, everyone, and welcome to LSEG's first quarter update. I'm here with David and Anna. Anna will make some brief opening remarks on Q1, and then we'll open up to questions on the conference call line. And with that, let me hand over to Anna.

Thanks, Peregrine, and good morning. The strong momentum and broad-based growth we delivered last year continued into the first quarter. As I run through the business, I'll mainly be talking constant currency growth as it gives you the best insight into our performance. Total income grew 7.5% or 8%, excluding the impact of the Russia-Ukraine conflict, and this is the last quarter we'll see an impact from the complete. All 3 divisions grew well. Data & Analytics was up 7.1%. And as you heard me say at the full year, we're continuing to strengthen our offering through a combination of better execution, a greater focus on customers and targeted investment in our products and services. As you know, we've been seeing the benefits of stronger sales and better retention for the last couple of years. We're now seeing price as a further benefit with the improvements to our offering, supporting a higher annual price increase. We're also making great progress in our partnership with Microsoft. Joint teams are up and running on product development and working towards the introduction of the first product next year. All 5 businesses in our Data and Analytics division performed well in the quarter. In Trading and Banking, revenues grew 4.7% or 6.1%, excluding the impact of the Russia-Ukraine conflict. Both Trading and Banking accelerated, supported by further improvements in retention, the benefit from this year's pricing and growth from the TORA acquisition. Enterprise Data was up 7.9%, with strong underlying growth enhanced by the Main Street acquisition. Our PRS business continues to see good growth, including revenue synergies from the linkage with FTSE Russell. Subscription revenues in Investment Solutions continued to accelerate. Benchmark rates, indices and analytics were up 14%, with strong demand for our flagship equity products. We saw a decline in asset-based revenues as a result of lower market levels. Customer & Third-Party Risk was up 19%, driven by strong growth in our World-Check business and wealth was up 7.2%, reflecting good demand for data feeds and other digital solutions needed by wealth managers. Turning to ASP. We made further progress, ending the quarter with growth of 7.6%, almost 1.5% higher than at the end of last year. Most of this increase was driven by the change to our pricing that took effect on the 1st of January, that there was a further benefit from improved sales and retention. You've seen us accelerate ASP growth fairly consistently over the last 8 quarters, taking it from 3% of acquisition to 7.6% today. We believe we can sustain ASV growth broadly in this range for the rest of the year, though we have no lack of ambition and will continue to work to drive it higher over time. And finally, last week, we announced that Satvinder Singh will be our new Global Head for Data and Analytics. He brings tremendous experience across data and capital markets and will play an important role in driving further change and growth in our business. We're really looking forward to having him join in July. Our capital markets business performed well against a strong prior year, growing 2.5%. Revenues in our equity business were down 12%, outperforming a steep decline in trading volumes. In FX, the performance of our FX Matching business is improving with another quarter of growth. Activity on FX still was behind last year's record quarter. So taking the 2 together, FX revenues were broadly flat. The largest driver of growth in capital markets was Tradeweb, which continues to innovate and drive the electronification of trading. [indiscernible] continued to be strong, particularly during the volatility in March, but fee rates were down slightly as investors focus on shorter-duration instruments. Our Post Trade business had a very strong start to the year, up 17%. SwapClear saw record volumes as customers reacted to market volatility by repositioning portfolios and hedging rule. Activity related to reference rate reform added a further GBP 8 million of revenues in the quarter. Other OTC clearing activities saw good growth, too, particularly our FX clearing business, where auction volumes more than doubled in the quarter. Growth in our OTC businesses drove cash collateral to record levels. This was the primary driver of the 21% growth in net treasury income. At the end of March, we completed the acquisition of Acadia, an important step towards a complete post-trade solution for both cleared and uncleared products. So in summary, our business continues to grow rapidly, supported by strong demand for data, our improving customer proposition and from the trust that customers are putting in us to manage their risk. Our strategy continues to deliver. And the volatile market backdrop in the first quarter highlighted the unique strengths of our business model. In particular, the visibility and stability provided by our subscription revenues, combined with the benefit of our diversified range of transaction revenues. We're confident in our prospects for the rest of the year and are on track to deliver on our guidance. And we continue to invest for long-term growth, both with Microsoft and across our own products and platforms. And with that, I'll pass you back to Peregrine for questions.

Thank you, Anna. Operator, please, could you open the lines now for questions.

[Operator Instructions] The first question we have is from Bruce Hamilton from Morgan Stanley.

First one, I mean, obviously, a good continued improvement in ASP, and you gave comments about how you expect that, that should run at around these levels through the rest of this year. I guess some of your competitors have talked about elongated sales cycles and pressure on end clients driving some moderation in growth. But obviously, it doesn't sound like you're seeing that. But how should we think about growth and those pressures as we look to cost out perhaps into next year? And then secondly, on the Index subscription growth, obviously, 14% above some of your peers. Any particular color on growth drivers that are you taking market share in ESG? Is it driven by demand for thematical or something else? Is there any color on what's driving that very strong growth?

Bruce, I will touch on your first question, and Anna, if you want to touch on the subscription growth. We are -- we're seeing good performance across the business. And the short answer to your question is no, we're not seeing the kind of slowdown that you are referring to with some of the other players out there. We continue to focus on the key areas of our business. We continue to invest in our product, invest in our customer relationships. And as you can see from the ASP metrics, we are making very good progress. So we're pleased with that, and we're, at this point, not seeing any such slowdown in sight.

And, so, I just to pick up your question on the Index business. Yes, we grew 14% in the quarter. So strong demand for our products. We probably benefited by a couple of percentage points to catch up revenue. But even that aside, very strong demand and strong demand is very much across the board. There's not one theme I would point to. It's predominantly around our flagship equity products, but we've got really good momentum in that business, and it continues.

Next question we have is from Tom Mills from Jefferies.

Just a follow-up on ASV side. I think you said the vast majority of price on the 1st of January, but could you just remind us sort of how much additional you take throughout the balance of the year and any other sort of dynamics on the ASV side that we might want to think about sequentially, obviously. I take your point, given the size of the step-up that we've seen in 1Q that's stable from here would still be very strong. And then just on the Trading and Banking sides, I guess the progress of that looks very good. Could you perhaps just talk us through some of the dynamics that you're seeing there as well, please, and the kind of conversations you're having, that will be very helpful.

Sure. You want to take the first question on the trading mix.

Sure. So we take the vast majority of our price increase on the 1st of January. And I really think about it that way. Previously, that business has taken a roughly 2% price increase, price yield and this year, we've taken a little bit more. So about 1 point of, little bit over 1 point of our ASV acceleration between the end of December and the end of March came from price. So we would have taken a little bit over 3% price yield. Really pleased with that in an environment where some of our competitors have had price pushback. I feel that the investment that we have been making in our products and services, the improvements our customers are seeing is creating a very sound platform for us to increase our prices. We've also seen both improved gross sales and improved retention in the quarter as well. And again, that is on the back of the investments that we're making in our products. We're not stopping improving our product. I guess what we're cautioning is that the rate of increase we've seen over the last couple of years from 3.3% to 7.6%. We won't continue at that rate of improvement, but we are absolutely working to continue to deliver against our customer needs because I would expect to continue to see improved retention and grow sales. And with time, actually, those investments will also support greater pricing power.

And a lot of what Anna just talked through more generally for [indiscernible] applies to Trading and Banking. And it's a very consistent story with what we have been talking about for the last few quarters and what we were talking about at the full year. We continue to invest in the product. We continue to invest and focus on the customer relationships. We are seeing improved retention. The pricing dynamics Anna just touched on and that applies in Trading and Banking as well. The rollout of Workspace continues to go well. We have the benefits of the acquisition of TORA and that is also going well. So really consistent story with what we were talking about at the full year, and we're pleased with the performance, and we continue to focus on Trading and Banking as well as the other segments.

[Operator Instructions] The next question we have is from Greg Simpson from BNP Paribas.

Firstly, could I just ask if you can share some thoughts on AI and the potential implications for LSEG? Is there anything you're actively exploring? Does the partnership with Microsoft allow you to leverage their expertise there? That would be the first question. And then the second one is would the UBS Credit Suisse deal closing they announced this quarter. What is the kind of level of client concentration at LSEG? And what is your experience when you kind of get these kind of mergers between firms? Is it kind of like a 1 plus 1 equals to 2 or less than 2, just some color, that would be great.

Sure. Thanks, Greg. So first, on AI, it is very much a part of our world now. And I would say that collectively, you asked specifically about Microsoft. We are working closely with Microsoft on product development in a number of areas, and the capabilities that they bring to the table in terms of AI is part of that development. So we shared the demo with you all at the full year results, and there are some examples of the kind of AI functionality in there, I must say. That was just a couple of months ago and things are moving on -- moving on quickly in terms of the progress being made, in terms of, I'll call it, just the potential of this technology. So we're pretty excited about that as is Microsoft and really pleased to be working with them on it. But I would also say there's more to it than the partnership with Microsoft, and we are looking at how we can embed that technology in other parts of our business and improve efficiency in areas like customer service, responding to customer queries, et cetera. So again, pretty interesting, pretty exciting in terms of the potential, and we're doing it in a number of different areas of our business, including in the partnership -- we're implementing it in a number of different areas of the business, including the partnership with Microsoft. On your question around Credit Suisse and you guess this is a very diversified business. We are diversified by product, by geography and yes, by customer. I believe that we have put out in the past that our top 250 customers or so is about 50% of the revenues. So that gives you a little bit of a sense of the client concentration. And I don't expect we'll see any impact this year from the consolidation of Credit Suisse. We may see a very, very modest impact in '24 or '25 just as EBS works through that. So of course, we never like to see situations like that in terms of our customers. But in terms of impact on us, nothing this year and very, very modest in the future.

And maybe just a quick follow-up in post trade. I'm just conscious that March did see very high interest rate volatility but there's maybe pull back a bit since -- is there any kind of color on net interest -- net treasury income, the kind of run rate into the rest of the year? Where those kind of record cash balances are sustainable?

Yes. It's funny. I've said on this call too many times that we're at record levels of cash balances and that they should reduce from here. And actually, they stay steady stubbornly high. As we've entered April, actually a level of cash balance has remained high. It started to come down a little bit in the last few days. But it's a difficult one to call. If we continue to see a reduction in the level of volatility, we would expect it to trend downwards.

The next question we have is from Russell Koch from Redburn.

I wondered if you could talk through the strong growth in the Customer & Third-Party Risk business in the quarter. Interested to see if that is structural or cyclical. I wondered if this is an area you may be looking to grow the product offering either organically or inorganically given the sizable TAM opportunity and your strong competitive position?

Sure. Yes, Customer & Third-Party Risk had a really strong quarter, growing 19%. Now it has benefited from some M&A activity in there with the acquisition of GDC. And so the organic growth is 13%, but still very strong. That's predominantly coming from our newer customer business World-Check, where there's very strong demand and it's ongoing demand. It's not specific to a point in time or an event. It's an underlying business growth. And it's an area we have been investing. I mean you saw us announce the acquisition of GDC in the second half of last year because it's a very interesting market.

Yes. [indiscernible] year before. This is an area where, as you mentioned, there's a significant TAM. We've seen attractive growth in the area, and we like this business a lot.

Maybe just a short follow-up, correct me if I missed it. But have you -- I think you reduced the disclosure on a divisional cost of sales basis. So could you give us the numbers on cost of sales at the divisional level? And just your thoughts on the costs for the rest of the year, please?

Yes. We have reduced the disclosure on the cost of sales number because we didn't think that, that level of detail is particularly valuable. So I'm not going to give you the breakdown by division. The driver of cost of sales in the quarter is the strength that you see in the Post Trade business. where, as you know, we have a profit share with banks that runs through the cost of sales line. And so that strength that you've seen both in OTC, open SwapClear, but also on the NTI line, is what's driving the cost of sales in the quarter.

Just your thoughts on cost for the rest of the year?

Well, I think the underlying run rate is no different than what we've seen before. The thing that is moving cost of sales here is business mix. And we've seen a very strong quarter in Post Trade because of the market volatility levels, and we also have the benefit of the reference rate reform. So I think the way to think about cost of sales is the underlying is consistent, but you need to think about the business mix. And if we continue to see strength in Post Trade, the cost of sales number will be higher.

[Operator Instructions] The next question we have is from Ben Bathurst from RBC.

There was some high-profile annual data analytics industry data published last week. I just wondered if you had a chance to benchmark Refinitiv using that or any other information recently? And if there have been any kind of key takeaways in terms of changes in your overall market share of late, but also interested to hear your views on the overall baseline I think market is growing at the sort of rate that you'd have expected when announcing this deal initially?

I'm not sure exactly what you're referring to from last week, but we are very pleased with the performance of this business. I don't think we've changed our view of the TAM. And I don't know if there's anything you want to say about the broader growth rate in the industry, but we, as you can see from our results today, are making good progress across the different segments of the business seeing strong growth. We talked already about Trading and Banking. Enterprise Data is doing well. Wells doing well. We've already talked about Customer & Third-Party risk, and we've talked about the benchmarking Index business. So we feel we're doing very well and pleased with the performance of the business.

Yes. My one comment on the marketplace. I'd say -- as we said today, it's very much as we would have expected the acquisition. The only thing that has changed slightly is we're in a more inflationary environment. And so pricing has increased across the board. But the fundamental drivers are similar. We may see some acceleration as AI is used more, but that is as yet hard to predict.

[Operator Instructions] We'll pause a moment to see if we have any further questions. At this stage, there are no further questions. I will now hand the presentation back to Peregrine Riviere, Group Head of Investor Relations. Please go ahead, sir.

Thanks, everyone, for joining the call. I know you've had a very busy morning, and we look forward to catching up with many of you over the next few weeks. Have a good day.