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

Good morning. Welcome back to Piper Sandler's Global Exchange and Financial Technology Conference. We're well into the exchanges now. It's my pleasure to have Adena Friedman, the CEO of Nasdaq, a veteran of Nasdaq -- CEO for the last 3.5 years. And we were just discussing a number of -- if you take the time from Carlyle on or even your past experience, a true veteran of Nasdaq. But first, welcome, Adena.

Thank you. It's great to be here, Rich.

So I guess the first question is, Nasdaq is actually the top-performing stock during the pandemic -- it's the top-performing exchange stock during the pandemic period. So investors have, I think, positively reacted to some of the -- your strategic pivot and your diversification of revenue. So I guess, could you talk about where we are at maybe in that -- it seems like you've accomplished a lot of what you set out initially. And where do we go from here with this -- an update of where the strategic pivot can move forward? And how the strategy might change? And welcome, Adena.

Yes, Sure. Well, I think that one of the great things about Nasdaq is the resilience of our business model. I think that the diversity of our revenue also really does help create an opportunity for us to weather this type of storm well. I think that in terms of our -- the composition of our revenue, we have about 70-plus percent of our revenue is recurring in nature. And then we have 30% that's trading in nature. And I think that really, we get to take advantage of the volumes that have occurred in our trading business, but we had the resilience of the recurring revenue businesses with a very broad-based of clients as well as diversity of revenue streams coming in across the organization. When I came back to Nasdaq and then took the leadership 3.5 years ago, we really did a deep dive and made sure that we really understood what are we really good at as an exchange company and a technology company. What do our clients expect us to be a partner to them for? So what kinds of services do they see us as the natural provider of? And then where do we make sure that we're leaning in on the trends that we are seeing across the industry? And we embarked on that pivot to make sure that we were concentrating all our corporate solutions, our relationships with our corporate clients around those areas where we -- they focus on their role as a public company or as a well-governed company. So our governance and Investor Relations services really became the focus there. In market technology, we saw actually a broadening of our strategy where we provide a very robust and resilient market technology to other exchanges around the world. But more and more, the broker-dealer community was -- had started relying on us for surveillance. And then there's a lot of execution technology that exists within the broker-dealer space and our technology is highly relevant there. And then we also saw a lot of new markets starting to develop and the ability for us to help change market models with our technology. In the data and analytics and investment management space, we definitely saw trends towards passive, so we continue to grow our index business, but also towards the private markets. We want to make sure we provide great workflow and data analytics to support private equity and the private market space through Nasdaq Private Market and eVestment. And then the eVestment acquisition really put us into a deep relationship with the investment management industry across their competitive landscape and evaluating inflows and outflows within the industry. So we try to make sure we became a more critical and strategic partner to each of the clients that we serve in areas that we are strong. So our technology, our deep market structure understanding and our deep understanding of the overall capital markets, I think, has served us really well. If we think about where to go forward, it's really driving execution against that strategy, continuing to modernize our market technology stack with the Nasdaq Financial Framework, embracing new technology solutions and capabilities like the cloud and machine learning, making sure that we provide deeper insights for our investment management clients with alternative data and other workflow solutions. And then making sure our corporate clients are able to handle the trends that they're facing, notably ESG and other areas where they're having new relationships with their investors. So we do feel like across the non-trading businesses, the next 3 to 5 years the path is relatively clear, and it's really a matter of executing well at this stage.

And like I said, it seemed like investors have reacted positively, especially in these market conditions, to the model with a lot of recurring revenue. But that's -- sort of my next question is, you've seen -- has the Nasdaq -- certainly the diversification side, but even on the electronics side, has that borne out? You've seen the closing of floors. Does that somehow reinforce where you're at on that? Again, small segment of transaction revenue. Did this give you any comfort to know you've been electronic the entire -- fully electronic, but the close, other closes, et cetera, did it reinforce -- what you saw the closing of floors, did it reinforce the Nasdaq trading model?

I think it actually, in a way, more exposed the reality of the current market structure in that all markets today really are electronic in nature. And while there are certain markets that might have some floor operations, I think that everyone can now see that the core of the exchange landscape, whether it's U.S. equities or options, futures is really electronic in nature. And I think that the -- while we have, for instance, a small floor for our options business to support floor brokers, that's really to help them really operate their business and provide some ability to manage larger-sized orders. But frankly, when we closed our floor, they were able to pivot and leverage PrecISE and other technologies that we have to manage a large part of their business. And I think the same with other floors where the activity just moved more into the electronic space that already exists. I think that the great thing about Nasdaq is we've always been an electronic market for 49 years. And same with OMX, they were the first electronic options exchange. So I think that we have the greatest history. We understand the market model and what really works in electronic space in an electronic market. We believe that the market model that we have, which is everyone has an equal place at the table, allows for a better competitive environment. And I think that's really borne out in the fact that our time at the inside is much higher. Our liquidity is deeper. And at the end of the day, the volatility on the open and the close is lower. And on for those reasons, we really feel like we're really be able to demonstrate the strengths of our market model in the context of other markets now that we're all operating in an electronic manner. And we definitely have benefited from that.

Understood. And the electronic model, that's part of the equation. Again, it seems like you've been well positioned there. I think what investors are also -- ask a lot about is recurring revenues as well, the organic growth of the non-transaction segment. You -- this pandemic, with the work-at-home environment, you talked or warned that you'd be still be at the low end of your organic growth targets, but still within the -- in the range. So I guess the question is, after I was been able to spend more time, I think, at least from the earnings call, to look at that, can you give investors the insurance -- how these other revenue lines that may be perceived as more labor sales intensive will hold up over the next 12 months or so?

Well, just to be very specific as to kind of what we discussed on the first quarter call is, clearly, we're operating in a fast-moving environment right now. A lot of change. And it's hard -- much harder to predict the world at the moment. And so what we wanted to do on the first quarter call is just give a line of sight into what we were seeing and experiencing, what we could see that could play out as we continued through the year. So that we gave the investors the same insight that we were seeing ourselves. But of course, the world continues to change. So what we said on the first quarter call is we have a long-term -- medium to long-term outlook across our nontrading businesses where we are targeting 5% to 7% annualized growth across those businesses. And over the last couple of years, we've been able to achieve at or above that range in those businesses. But I think that in a year like this one where there's just a lot of changing dynamics and we have a lot of inputs into what drives our businesses, we provided a view that we saw risk to our ability to achieve the low end of the range, which means, of course, we're still expecting growth, but the growth, what we could see trends that were evolving that could drive it to a lower end of the growth range right now. And the reason for that is because we have positives and negatives that are happening in the space. So what drives those? What are the key inputs into our nontrading businesses? One is the index business, and so the inflows, outflows. That have -- has been more resilient than I think anyone would have expected as we were going through March. And so that's an area where you can see that our AUM has actually held up quite well. The second is IPOs. So looking at the IPO environment and that definitely took a big pause during the highly volatile periods. But it's now picking back up and potentially a little faster than we would have expected with -- we have 7 IPOs for this week. And so far so good in terms of how they're performing. So we do feel like there are opportunities there to hopefully rekick in the very robust pipeline that we saw earlier this year. But on the flip side, I think that the risks that we identified on the call, and we continue to see are, of course, on a broader corporate landscape, we have thousands of customers that use our IR and governance solutions across every range of sector and industry. And so of course, there are certain sectors that are very hard hit by the current situation. And we are working closely with them to manage their spend, to manage their expectations of what they can afford right now. And at the same time, work very hard to retain them. So that, obviously, as they recover, we can continue to expand our relationship with them. But that's, I would say, in an area that's got more challenge associated with it. In the investment management space, the big -- other than inflows, outflows, it's also just the overall health of the investment management industry. On the call, we mentioned that we had not yet seen a big effect of what's happening on that industry in terms of decision-making. But of course, we did anticipate that there could be changes in terms of buying behaviors being more prudent in taking on new services or adding new capabilities to support their business. And that, obviously, would end up playing out into some of the services like our alt data and our investment products. And then in market tech, I think that, that's a kind of a -- a lot of gives and takes in that part of the space because the resilience of that business is extremely strong. We provide critical infrastructure technology to support markets all over the world and to support the broker-dealer community with their surveillance capabilities and now execution capabilities. But in terms of new sales, bigger capital allocation decisions from clients. We anticipated that we could see a world where that would take longer to make bigger capital allocation decisions to launch new markets that don't exist yet. It's a more difficult year to do that as well as just to make sure that they are managing to highly critical enhancements versus kind of nice-to-have enhancements in their systems. And all of those things could have a dampening effect on the growth in that business. So we were trying to make sure we gave a line of sight and that, I would say, continues to be the line of sight that we see right now.

Understood. I think just the fact that you're -- within the range, I think, what you call, [ called run ] by some assurance to investors. I guess I hate to ask this question, but I know you get asked a lot. But on market data, and we had a regulatory market structure [ plan ]. I know it's a small portion of your revenue. But it also talks about sort of a push-pull relationship with the -- it seems like that -- not you, but the exchanges have with the regulator, with the SEC right now. So I guess, any updates? They did come up with their governance changes and they're working through the other Reg NMS proposals. Your overall view and just comments on the impact to NASDAQ? And your feelings about it?

Well, I think that we've been pretty overt in our feelings about the proposals, both market data governance proposal as well as the broader, what we call, Reg NMS 2.0 proposal. If I focus on that one because that obviously has much bigger implications on the overall market structure of the U.S. equities markets, there are -- obviously, there's a whole range of things in there. And the concerns that we have, the broadest concern we have is, I think that we were able to prove out in the crisis moments that our markets are very robust and work quite well. They provided constant price transparency and access to markets. The performance and resilience of the markets and the securities information processors, the speed at which data was available as well as the speed at which executions were available or really, I think, tremendous across all of us. I mean it's not just Nasdaq. I think the whole system worked really well. And so I think [ Chris Isaacson ] said it well yesterday, which is for the SEC to consider doing open heart surgery on a healthy patient seems like complete overkill and doesn't really make sense to us. And when we think about the components of that proposal, they're focused on eliminating the National Best Bid and Offer by creating multiple National Best Bid and Offers, which means then you don't even know what marker you're really using to measure best execution. It creates a lot of more complexity in terms of the need for firms to ingest different data and to manage that best execution framework. I think it also creates the potential and actually the reality of locked and crossed quotes throughout the day in probably the most actively traded and largest companies in the world. And that, obviously, it creates a lot of investor confusion because of the fact that you don't have order protection against odd locks that will inevitably show up in the feeds and be in the markets. And then on top of that, you're basically taking a competitive environment for proprietary data and turning it into a regulated monopoly. Which, I think, in general, has just never proven out to be a good approach. It eliminates choice for investors. And it makes it so that in the end, while they think they might be able to do something on a -- they haven't really defined the pricing mechanisms for that data. So that where they think they might be able to get a more -- I would say, a more affordable option, if anything, by aggregating it all and forcing people to buy it, I think it actually could make market data more expensive. So I do think that it eliminates choice. It eliminates as much of an incentive for us to innovate. And it makes it so that the markets are more confusing, less clear and harder to manage. So our -- we made those points very clear in our comments, and we will continue to engage with the SEC on this. Now this type of proposal, as we've talked about, takes a long time. Now there are, oftentimes, with a 600-page proposal, you're going to get a list of a lot of comments. The SEC is required to respond to all of those comments with -- and respond to the data and analytics that are provided associated with those comments. If they choose to change their proposal, they have to repropose it. That then opens a new comment period. And then oftentimes, they'll do hearings and roundtables to get the dialogue going on their specific proposals before they even make a decision. And of course, then they have to have the decision to be extremely well supported with economic data. So it's a long process, and we'll see how it goes. But we've made our comments known, and we'll see how it plays out going forward.

Yes. I mean it appears there's a possibility to get out a lot of complexity to the market if it resembles what are the proposed rules and all. But we'll see. It is a long process, as you said. We just have -- I've got a few minutes here. But the listings business, I know it's important to Nasdaq. You modified your -- or I think did propose some changes for -- would you call it emerging market listings. But could you go through what the purpose of that was? And it seemed like it was done at the same time as Congress was sort of reviewing the same issue. So a little bit about where Nasdaq stands on listings in this sort of area that's being scrutinized right now?

Yes, I mean, in general, our listings business remains extremely robust. And it's interesting because it has -- we've seen a lot of companies looking to tap the public markets right now. And I think that's really a testament to the resilience of the markets, just despite a lot of challenge around us right at the moment. And yet, we also want to make sure that at every time, if we see a concern in the way that we are managing new companies into the market that we address those concerns. In this particular case, we made some changes to company list that are listing from what we call restricted markets. Those markets where we have more limited access to disclosures. And then, of course, with the SEC's comments in their upcoming roundtable, they've identified a concern with the oversight of the audit firms related to those restricted markets. So what we did is we basically increased the minimum offer size to $25 million. We also placed a requirement that the management team, the Board or a consultant to the management team should have public -- U.S. public company experience. So they really understand the markets they're entering and how they want to manage their investors in new markets. And then also looking at the quality of the accounting firms. So we do rely on the SEC to oversee the accounting firms and to manage and oversee the quality of the audits through the PCAOB oversight. But we also have a chance to get -- provide interpretation to make sure that the audit firms that are being chosen by these companies have a quality standard that we're looking for. So those are the things that we did in our recent rule filing. I think that the broader issue, though, is this issue of disclosure and PCAOB oversight of the audit firms. And I think that's an issue for the SEC to address. And they are going to be holding some roundtables to understand the challenges there and what we can do about it. And that obviously corresponds also with the Congressional action that was taken.

Got it. Got it. To wrap up here, we have a few minutes, and this would be the conclusion -- the last question. I've known you for a while. I knew you before departure and then the return. You've held a number of different positions at Nasdaq. So you know the company, it's in your blood, so to speak. So I guess if you could wave a wand, you've done the strategic pivot, you've updated us on that. But what would Nasdaq be like, what would it look like in 3 to 5 years from now? Again, you've got it headed down a path, but if you get it all mostly right, what would it look like?

I think that we will be a global technology company that serves as a critical strategic adviser and provider to all segments of the capital markets, the markets themselves, the broker-dealers and their needs to access and manage their own execution capabilities. The investors, in terms of making them smarter and more resilient as investors in the markets as well as with our corporate clients and managing the complexities of navigating the public markets. I think that our technology solutions are geared towards that role, it's just a matter of continuing to expand that. And then bringing the best of technology, whether it's machine learning, into our surveillance capabilities or into alpha generating signals or whether it's also the cloud technology in terms of moving markets into the cloud and enabling us to take advantage of that scalability on demand capabilities that the cloud provides. We do think that we have a role to play in modernizing markets, bringing them forward and making those interactions with the markets more streamlined as well as more successful for all of our clients. So that's where we hope to be in 3 to 5 years.

Thank you. That's a great wrap. We'll certainly be watching. And this isn't your old Nasdaq of 10 years ago, for sure. So congrats, Adena, on the accomplishments. Where you've -- with the strategic pivot and where you brought the Nasdaq thus far. So with that, thank you again.

Thank you.

With that, we'll wrap up. Our next session will be in five minutes with ICE, and we hope everybody will tune in. And thank you again, Adena. I appreciate your time and participation.

Thank you very much, Rich.