Nasdaq, Inc. (NDAQ) Earnings Call Transcript & Summary

All right. We will go ahead and get started. Thank you for everybody for joining us after lunch. I'm Patrick O'Shaughnessy. I cover capital markets here at Raymond James. Up next, we have Nasdaq. And on their behalf, we have CFO, Michael Ptasznik. He is going to run through some slides, and then we will move into the Q&A from there. So with that, I'll hand over to Michael.

Great. Thanks very much, Patrick. Appreciate you having me. And thank you, everybody, for coming to the presentation. I'm very excited to talk to you today about the Nasdaq story. It's -- some of you, when you think about Nasdaq, you may still think of Nasdaq, the exchange trading and listings business, which, obviously, in these days, there's a lot of trading that is going on. But what I want to talk to you about today is the story that has been developing in Nasdaq since September 2017 as we've been repositioning ourselves. And so that's really what we're going to talk about is that there is a good, strong foundation to our business, how we have been part of our new strategic pivot, repositioning ourselves, focusing more on our information technology and market tech area, while we continue to maintain our good, strong core marketplace listings and trading base; and then focused on our future growth opportunities, how we continue to grow those opportunities out even further; and then with all that cash flow generation, what we plan to do with that from a capital priority standpoint. So we'll walk through these points today. So first, just starting off with this overview slide. You can see what our 4 segments are there on the left-hand side of the screen, and I'll walk through those in just a minute when I give the overview of the business. But importantly, the most important -- or one of the most important numbers on the page is that 75% recurring and subscription business. And so again, a lot of people think about Nasdaq as a transaction-based business. But 75% of our revenue is recurring subscription-type revenue, and I'll explain through the different components of that as I look at the additional slides. But that has been a very important part of the business going -- and will be -- continue to be going forward. In addition, one of the other key numbers I want to point out on this page is the direct revenue exposure to market level beta. So that's about 12%. So again, thinking about the times that we're in, if there were to be a increase or decrease of 10% in market cap, it would affect our revenues around that 1% mark potentially. That's really tied to just 3 aspects of our business. One is our Index business, which we'll talk about within our Information Services side. Our trading and listings business in the Nordics also is somewhat tied to market capitalization. And within those businesses, there are some other offsets and some floors and ceilings, and so the impact isn't that significant. But overall, if you're concerned about a further drop, that it is somewhat limited. And we have proven in the past from a business operation standpoint and given the fact that 75% of the business is recurring subscription, had a very strong recurring revenue and very strong results relative to some other companies and other industries, given the nature and the makeup of our business and something important to point out in the times that we're looking at right now. And then, again, when you're going through this type of cycle and this transition, you have a period where you will see additional volatility and we get the additional benefit of that in the transactional side of the business. So it's a bit of a plus as compared to 2017 when volumes were fairly flat, given where the VIX was. Now in a period like we are, where we're going through this sort of transitory period, activity gets very high, and that drives additional revenue and earnings for the company. So talking about the 4 businesses, and the way we look at it is we have -- we can see on the right-hand side of the slide the foundational segments of the business, which is really the -- what we call our Market Services or the trading aspects of the business and the Corporate Services. So Market Services is made up of our 2 key things. One is the trading of equities, options, fixed income, futures here in the Nordics and in Canada. In addition to that, there's a portion of that revenue that is called trade management services, which is the connectivity, colocation fees that are part of that business. And that is a more, again, stable recurring revenue base, where the other part, the 25% fluctuates, about 11% of that business is a more stable, recurring base because it's based on an annual subscription basis. The next segment is the Corporate Services business, which is our, what we call, our listings and we say C-suite offerings. It's listings -- it's the -- through the annual listing fees that we get from the 4,000 issuers that are listed on our marketplaces. And then we also offer additional services. So we have what we call our governance tools, which is board portals, and advisory services as well as our IR. We have an IR tool targeted towards IROs as well as IR advisory services. And this is an area where in a world with ESG becoming a bigger factor, we've been looking to serve our corporates with additional either advisory or actual technology tools to help them manage the services that they -- that help them manage the issues that they're dealing with from a corporate standpoint. And then turning to the -- what we call our growth segments, which is really, as we look towards the longer-term trends within the industry, things like the explosion of data, the growth of electronification, other aspects of -- that are happening within the industry, the changes that are happening in the asset management industry within passive to active -- active to passive, for example, the growth of private equity, that we looked at the parts of our business that we thought were very much in tune where we had significant strengths and we're able to take advantage of going forward. And that's in our Market Technology and our Information Services business. So Market Technology is probably the business that is the most unique between us and some of the other exchanges, where we're the leading provider of technology to market infrastructure operators or exchanges, clearinghouses, depositories, regulators globally. We provide them with their core trading, matching, clearing technology. We're also the leading surveillance provider to the sell side with respect to monitoring compliance with their trading activity as well. And then there's some new exciting opportunities that we'll talk about in a couple of slides. So that's the Market Technology business. And then on the Information Services business, we are -- that's really made up of 3 pieces: Market Data, Index and Investment Data & Analytics tools. And those are what we call our higher growth segments that we are continuing to pivot more towards. So as I said, we're working off of a very strong base. You can see revenue has been growing 4%. We have been looking to pivot our business and try to generate additional growth in the business, both organically and through some of the inorganic activities we've taken, which has grown our operating margin by about 300 basis points, and our non-GAAP diluted EPS has grown at 11% CAGR. So this slide is a great depiction of what I talk about when we focus on this pivot as an organization. And again, we have a good, strong core marketplace business, listings and trading. And from that, we are looking to invest and move more of our resources and capital towards the higher growth areas: Market Technology and Information Services. And what we've done since this has really been launched, it was launched in September 2017, you can see here we've invested over $1 billion. And in those new growth areas, we bought some companies externally, but we've also done a bunch of internal investments as well. We maintained our core marketplace by continuing to launch new products and invest in that core, strong cash-generative marketplace business. And then we sold about $0.5 billion worth of assets or more than that in the areas that were either lower margin, lower growth or not as tied strategically to where we saw the future opportunities in the space. And this has been the key part of our strategic pivot where we're moving more towards these higher growth, higher returning areas. And so the early results over the last couple of years has been positive. You can see here we've seen an acceleration in our organic growth, has gone from about 5%. Last couple of years, we've been 8% to 9% in the non-trading segments. We don't predict the trading segment because it is unpredictable, given volatility is very hard to predict. But in the non-trading segments, we target a 5% to 7% growth rate over a 3- to 5-year period, and it's been coming in slightly higher than that. So we've seen excellent results there. We have a 40% increase in the Market Tech revenue, and again, we see that as being a key differentiator and a key opportunity for us. And so that's increased both through organic growth as well as through some investments that we've made. We're nearing 50%, importantly, of our Information Services revenue is coming from the areas of data and analytics as opposed to coming from the core market data, which is one of the slower growth parts of it. But data and analytics is where we see higher growth opportunities, and now it represents about 50% of that business. And as I said earlier, we've seen continued expansion of our margin. So then diving a little bit deeper into each of those business areas. I talked a little bit about this. This is the Market Tech business that's been growing in that 8% to 11%, and we continue to see that as being the target for the next 3 to 5 years. As I said, 3 different parts of the business, and I'll talk a little bit where we see that growth. So number one, in the market infrastructure operators, exchanges, clearinghouses, as I said, the leading platform today where we provide them with the technology. Where we continue to see growth is, number one, a lot of exchanges have come to the realization, unless you're one of the largest exchanges or clearinghouses out there, it doesn't make sense to invest in your own technology. And so the idea there is to look to outsource providers. So our #1 competitor would be in-sourcing. And so we continue to see opportunities to continue to expand our growth within that space and within multiple asset classes. As well, a lot of the exchanges have invested in the trading side of the business, but they haven't put the same level of investment in the clearing and the depository side. And that's where we're seeing some limited growth coming from more recently. Then -- so that's really a land and expand strategy, plus we also continue to see new emerging marketplaces come to market. On the next slide, on the sell side, where this is primarily -- it started off as our surveillance tool that we provide to the sell side. Again, regulatory, technology, compliance continues to be a key driver in the industry. We provide the leading tool for sell side in order to monitor their trading activity, and so it continues to be a good growth driver, and we grow the number of firms. This has probably been the fastest-growing aspect of this part of the business over the last 10 years. And in addition now, what we are looking to do is working with the banks and brokers as they are looking to focus on reducing their cost and improving their margins, and they're outsourcing parts of their business that are less strategic to them while they focus on other things like AI and other client revenue-generating areas. It doesn't make sense for some of these banks and brokers to continue to invest in trading technology, like dark pools or FX trading platforms. And we now -- we have 6 clients in this space, which is -- we just really launched this a couple of years ago, and we're growing the number of Tier 1, Tier 2 banks and brokers who are now using our technology to run some of those transactional platforms for them. And we see this as a brand-new growth area for us. And then the third aspect, this one is the one we get most excited about, but it is definitely the smallest. You can see it's 3%. And it's hard for us to really size this side of the market because this is fairly new. And this idea of taking the capital markets, transactional and surveillance technology, and as more and more commerce is being conducted electronically over some sort of electronic platform, then we think that we -- there's an opportunity to provide our capabilities to some of these new marketplaces. And so some of the areas where we've had some success, we've talked about here is cryptocurrency market, the wagering space. And now recently we just announced that we're going to provide technology to a subsidiary of -- in the travel industry, and that's a new space that we're focused on. And it's -- we find this as a very interesting new opportunity space for us to apply our technology into new growing areas. Next, our Information Services business. And this business, you can see, as I said earlier, about half of it is coming from Market Data and the rest is coming from Investment Data & Analytics and the Index business. The Market Data represents the core market data that comes off of our exchanges here, Canada and in the Nordics. And that -- the target for that business is in the low- to mid-single-digits for that business. Where we look to see growth there -- and there's a lot of focus on Market Data in the industry. Where we're looking to see growth is really on geographic expansion, so within Asia and other geographies, continuing to sell the data products that we have as well as potential in new products as opposed to looking at pricing. We're looking at new products and new geographies as the growth for that. Where we see even more focus and more excitement is in the 2 other parts of the business. On the Index side, there is a secular trend with the active to passive shift. We've seen growth in AUM over time. That has continued to grow. Plus we've continued to build out new products with our ETF partners. And that's really the way we approach these businesses that we provide them with the indices and we work with our partners to create new investable products in the industry. In addition to that, as you can see, over 40% of our AUM is tied to smart beta products. So it's not the more standardized products. It's a little bit more differentiated. And we also have some futures products that we work with our partners at the CME, for example, the NASDAQ 100, and that creates some additional revenue in this space. And then Investment Data & Analytics business, where we see continued growth, there is really the explosion of data and the usage of information. So one tool that some of you in this room may use is we bought a company called eVestment that really does help asset managers, asset owners work together to be able to share their information, win mandates, analyze their data in ways that can help them adjust, manage and market their portfolios to the investment owners and the investment industry. And in addition to that, we also have a small firm we've bought called Quandl that's focused in the alternative data space. And again, as more firms are looking for ways of generating alpha on the active side, then that's a new way of us providing that type of data to those firms. And so we're excited about the opportunities in that space. So next, just to bring together what we -- the foundational marketplaces. On the left-hand side, you can see our Corporate Services business. Over 4,000 listed companies using our Corporate Solution. We have people using our Corporate Solutions tools as well as, obviously, the core listings business, a very stable, steady recurring business. We've been very successful in the U.S. with a 78% win rate of IPOs in 2019, including a majority of the largest IPOs as well last year. And so we continue to be very effective in that space. And then on the Market Services side, really, that is continuing to run the underlying businesses that we have in the core transactional side of the business, again, very generative cash flow businesses. So bringing it all together, what do we think about for objectives. So I talked about this 5% to 7%, that's for the non-trading segments. We're looking to target 5% to 7% over the 3 to 5 year. That would be the CAGR for those businesses. In addition to that, we want to manage our cost base around the 3% range. In years in which the revenue and growth could be higher, that number could fluctuate somewhat up. And in years where they're lower, like last year, while the revenues were still slightly above that 5% to 7% range, the overall growth rate was around 2%. So we try to manage within that range. Return on invested capital is greater than 10%. That target that we have set for ourselves, that's for new investments, both organic or inorganic, and that's over a 3- to 5-year period. We heard feedback from investors about just how important this metric was. The EPS accretion is in today's world of low -- very low interest rates that we continue to want to see good returns on investments, and we're very focused on that. So we have set that as a target for our investments. And then we think, when you add that all together, we can achieve our double-digit TSR, which is really the ultimate objective of what we're trying to return to shareholders. Then from a capital plan and capital priority standpoint, I think Nasdaq used to be more opportunistic about this. But we wanted to be really clear with our investors with respect to how we think about our capital. So number one, our most important use of our capital is to invest it effectively in either organic, which is our highest priority, or inorganic initiatives that continue to grow the business and deliver shareholder value. And with that 10% target rate, that's what we have -- that is what we're targeting as part of that. In addition, we've set a payout ratio -- not a payout ratio, sorry, we set a dividend policy which is to grow our dividends as earnings and cash flow grow. That's been in the high 30s range. It's roughly where it's been. And as our earnings and cash flow grow, we have been growing that as well. In addition, on a buyback standpoint, we use our buybacks to offset any dilution from our equity programs, and that has been a consistent use of the buyback program. And then we also want to maintain our investment-grade status. And so we are now in that range. We're sitting at around at 2.6, 2.5x debt-to-EBITDA ratio, which is consistent with that status. And we'll -- if it makes sense for us to use leverage as part of something that's going to grow the business and achieve good shareholder returns, we'll do so. But ultimately, we want to maintain that investment-grade status. So then really just wrapping it up, as you can see, very strong foundation of the business. We are pivoting towards higher growth, higher returning businesses. Overall, we see lots of great exciting opportunities across all our business. But specifically, Information Services and Market Technology are the ones that I'm most excited about. And then with the great cash flow that we generate as an organization, we think we have great opportunities to use that capital to continue to return to shareholders or drive the business even further.

Okay. Great. Thank you, Michael.

So maybe to kick off the Q&A, just a question about how you guys internally think about the business and what is Nasdaq? I think 5 or 10 years ago, we all said, hey, Nasdaq is an exchange. I think today, it's a technology and data company that also manages exchanges, at least that's how I view it. Is that kind of how you guys would internally view it as well?

Yes, I think so. And that really came out of the strategic review that we did internally, which is as we did this soul-searching and took a look at what the world is like, but we also looked internally and said, what is driving our business, the key differentiator of us as Nasdaq, and it goes through both from the companies that originally originated on Nasdaq as being tech companies, and that was sort of in the birth of Nasdaq. But it's also the core of who we are and the fact that we sell technology to those over 100 exchanges, clearinghouses, to the banks and brokers, that technology really runs through who we are as an organization. We also see that as being one of the key differentiators and one of the key winning advantages that we can provide in the industry. And so the way we think about it is that we apply technology into different aspects of the business, and so it's either to sell technology directly to help solve our client solutions or to run our marketplaces and deliver those great fantastic marketplaces as well. We are, by no means, and we have to be really clear with our employees and our shareholders and our clients, walking way off on an exchange business, that is the core of who we are. But the way we think about it is how can we use technology to deliver great exchanges and great clients and great products and services to our clients.

Got it. And then as we dig deeper in technology, I think how you monetize it, at least in your Market Technology segment has changed a little bit, too, where it used to be kind of onetime revenue items. And now you have -- I think it's about 75% of your segment revenue comes from annualized recurring revenue. What did that 75% number look like maybe 5 years ago? And then how does that change how you manage the business?

Yes. And well, I can't give you the exact number, but I can tell you that it was definitely lower. And the idea being that what originated as the Market Tech business was bespoke solutions that we would establish for each individual marketplace. So the Hong Kong Exchange, Singapore, all the other exchanges that were out there, we would do specific installations out there one-off, on-prem. And we recognized -- and this goes back sort of 2015, '16, when we came to the recognition that the business overall was changing. And if you look at every other industry out there, the Workdays and the Salesforces and all the other industries, that there was this change to be more of a SaaS-based business, eventually, in the cloud. And I think a lot more things would definitely be moving into the cloud over time, although not necessarily everything, but either a hosted solution or in cloud and more SaaS-based going forward. In the end, we recognize that the same investment and approach should be taken in our industry as well. And part of the evidence of that was our surveillance business, which is already a SaaS-based business that we provide. And so recognizing that, that business has greater scalability and growth flexibility, it's easier for the clients to manage. But the idea was that we needed to invest in our business, which is what we've been doing in '17, '18 and '19, to build out this more of a scalable, SaaS-like platform. So it will take time because these are long-term contracts that we have with exchanges. These are sort of 5-year type contracts that we would have with these clients. But over time, the idea is that move more and more clients to a SaaS-based type platform. And that 75% should continue to grow, so that not necessarily all of it will become 100% SaaS, but will continue to move higher and definitely higher than where we've been historically.

And you talked about how 3% of your Market Technology revenue comes from applications to nonfinancial markets. And you also said, hey, it's really tough to size because it's very -- you're kind of creating it as you go along here. How do you get confidence that the money that you're investing into these initiatives has a good ROIC that's going to hit that 10% threshold for your internal investments?

Actually, that's a great question. One of the best things about this is when I talk about that core technology stack that we're using for exchanges, the big thing about that is that same core technology stack can be used for these new marketplaces as well. So while we're making this investment into our core technology platform, which is really saying it has common communication links and protocols and then it has these micro services that you would add on top, the nice thing about that is the build-out of the core underlying infrastructure of that is applicable to both of these different marketplaces. And so when you're going to go put on a new market, you've already built matching technology. It doesn't matter whether you're matching equities or whether you're matching travel industry products, you've kind of already built at the core. Obviously, there's going to be some level of customization or configuration for different marketplaces. But the investment is much more scalable, and that's what's really exciting about the approach that we're taking is that we don't have to go out and build something de novo for each individual market. And that's where we really see the advantages, which is how we're able to achieve the returns. Where we're conscious of where we're spending the money is around the sales and the build-out and the business development of that. And we're trying to be very focused on that and trying to identify verticals where we can see additional opportunities in the space. And some of this is a little bit of build as we go, but we definitely see that there's opportunity there.

Got it. And then pivoting now to data or Information Services as that segment is called. About half of the revenue in that segment is exchange data, and it seems like there's some structural headwinds to that right now. The SEC just has their new proposal that was out on reengineering how U.S. equities market data is distributed. There's obviously been some constraints placed off of your -- or placed on your pricing power in data and the connectivity. So how do you -- what sort of risk, I suppose, you see to those existing revenue streams? And then how do you look to offset maybe where some of those risks might be?

Okay. So just, first, maybe a comment on the SEC proposal. As they said, they described it as a market data proposal. But to be clear for those who follow the industry, the way we see it is more of a market structure proposal, that it goes to some of the fundamental tenants that have been an element of the marketplace since 2007, which is when Reg NMS, which is originally set sort of the current structure for the way the equity markets work, was implemented. I think it started in 2004 and then eventually fully implemented 2007, which shows you how long some of these changes can take. But we've been operating under that model for 13 years now, which is that there's one best price in the industry. And some of the proposals that they take would change the way that whole pricing and the way the whole market structure will work around that. And so we think it's a fundamental significant change to the industry, which is going to take -- should take a lot of work, a lot of time in order to really identify how things are going to change there. And I mean they asked 300 questions as part of the proposal. So hopefully, it will take a lot of time to consider what those changes are. So that all said, given the fact that there's -- we think that there's a lot of unanswered questions, plus a lot of debate that needs to happen as part of that and there is some information that wasn't included in the proposal that would be needed with respect to how pricing would happen, right now, it's hard for us to make any comment with respect to what would happen with respect to that part of the -- of our Information Services and the Market Data part, what would actually occur at that point right now. So at this point, we haven't made any changes to any of our targets as part of that. As I said earlier, where we -- our focus is more on growing the business internationally, growing the business through new products and then really focused on the other aspects of the Information Services segment, growing out the index and the analytics businesses.

I'll pause here and see if there's any questions out in the room. All right, been quiet all day. So I'll keep going here then. So turning to Market Services, your transaction side of the business model. As you said in your presentation, it's really difficult to kind of prognosticate where volumes are going to turn out. Are there pockets where you say, hey, maybe there is some structural growth in this asset class or that. U.S. options volume has been really, really strong year-to-date. Maybe some of that's due to some of the pricing changes from retail brokers. But as you look at your trading businesses, where are specific sources of optimism for you guys kind of in terms of the long term, not necessarily what's going to happen next month or next week?

Yes. It's a great question. And I would say for a long time, both equities and options were growing a few -- I've been in this industry a long time, and it was every year, everything was going up 10% fairly easily. And obviously, that hasn't been the case for the last number of years. Where we do continue to see that there may be opportunity for secular growth is, as you mentioned, in the options industry. Number one, any time you make something free, it has the opportunity to continue to spur on additional usage of that. I think some of the technological advancements and just the fact that you can trade on your phone very easily, the more it becomes easier for people to trade on a mobile basis with the click of a button, it will make that as another aspect of that. And it really goes to the penetration of retail, which has continued over a long period of time, but it takes a long time to educate and penetrate retail. And I don't have the specific stats. But clearly, there's not as many people who trade options as trade equities. And so as a continued education, which a lot of the firms have significant efforts in and continuing that education to get retail more on the platforms, as the technology becomes easier for them, as the cost of execution drop, then that does create the opportunity. And then there's also the last factor, which is new products. There's always the potential for the creation of new interesting types of products that can be created going forward in the new environment.

And then maybe a question to finish up here on M&A. So in 2019, you made a bid for Oslo Børs. You did not win the entity. How are you thinking about M&A, both in terms of just the opportunity within the exchange space in consolidating deals versus adding new capabilities to Nasdaq's suite of what it can currently do?

Yes. So the way we typically look at M&A is, first of all, I should say, our #1 focus is on organic growth. That's where we're spending the majority of our time and energy. On the M&A front, we do look at, are there opportunities to grow our business inorganically? Are there additional capabilities and ways of us growing out within the spaces that we are focused and already serving our clients with additional adjacencies that we can help them solve additional needs and grow at these places of the business where we're seeing success? So the focus for us is definitely on the Information Services and Market Technology sides of the business. And we are very much focused on, are there additional opportunities? For example, last year, we bought a company called Cinnober, which was very much in our Market Tech space that helps grow that business by 40%. That was part of it. In addition to that, the eVestment acquisition and some other areas within that space. So how can we serve either the buy side or continue to serve the investment community in ways by building out the capabilities that we have? So that would be our #1 focus area. When it comes to the exchange space, we would never -- we wouldn't say no. Oslo Børs was an example of that, that if something made sense to us with respect to serving our clients' needs in a way where we can execute a transaction and really get synergies and put everything on the same platform, we look at that almost more of a financial transaction than a strategic transaction. And so if we can get great synergies out in a short period of time and get a fairly quick return on that type of investment and serve our clients in better ways by making their lives easier, being able to connect to one platform and technologies, then we would look to do that. But I would say the primary focus is much more on the Information Services and technology side.

All right. Terrific. With that, we will wrap it up. Thank you very much, Michael, and there's going to be a breakout session downstairs.

Thank you.