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

All right. Good afternoon, everyone. Thanks for joining our virtual fireside chat at the Deutsche Bank Technology Conference. I'm Brian Bedell, and I cover the securities exchanges for DB. And today, we're very excited to have Brad Peterson from Nasdaq with us. Brad currently serves as Executive VP and Chief Technology and Chief Information Officer for Nasdaq. And this dual CTO, CIO role, Brad is responsible for NASDAQ's evolution and innovation as a global technology company. This includes product development, platform engineering and architecture, R&D as well as the adoption and application of emerging technologies that are driving marketplaces forward on a global basis. In addition, Brad and his team oversee market operations and resiliency as well as corporate IT infrastructure and information security. Before Nasdaq, Brad served as CIO for technology services at Charles Schwab and has held leadership positions at other technology firms for that, including eBay. So clearly, a seasoned and a technology veteran, and we're very happy to have you here with us today. Maybe just before we get into the conversation, I'll just quickly touch on our investment thesis on Nasdaq. Would you have a buyer rating on the company? And perhaps more than any exchange, I would say, Nasdaq has -- we think Nasdaq has transformed itself from a company levered mostly to trading volumes and U.S. equities and options into more of a diversified technology solutions company, if you will, over the last decade or so, and now garners is about 60% of its revenue from highly predictable recurring revenue sources. This has enabled management to target a 5% to 7% annual organic revenue growth rate in its nontrading businesses with pretty good precision in hitting or exceeding those targets. And with strong cost discipline, the team has really been able to scale this growth and generate over 200 basis points of operating leverage annually. We see this as this reliable revenue growth profile is being increasingly attractive to investors, and we think the stock P/E will continue to advance from its current 21x on earnings as the company executes on this mission. So before we get into the conversation, I'll just quickly touch on the format. So I'll start the conversation with some questions of my own and leave time for questions from participants. And just quick instructions on that. You can ask a question via the web portal at any time and I can ask it, and I will keep the questions anonymous, of course. So with that long introduction, welcome, Brad, and thanks so much for being with us today.

Thanks for having me.

Pleasure. And maybe just to start out, Brad, maybe can you tell us why you came to Nasdaq initially? And what was the opportunity you saw? And what was your view of how Nasdaq could leverage its technology to be a major disruptor across several traditional businesses?

Sure, sure. Thanks. And I do get reminded that most people do not move from west to east, they move from east to west. So I did, in fact, do that over 7 years ago. I was contacted about this role, and I really knew about Nasdaq as obviously an innovator when it was first introducing in one of the first electronic exchanges and applying technology at its core in a very disruptive manner. But as I became familiar with what Nasdaq can become at the time, and it really had gone global, so it went from being a domestic what everyone knows Nasdaq as the Nasdaq, they changed home to the great tech companies. It had gone global. It had also diversified, like you said. And the assets that were really interesting were the market tech assets as well as in the information and analytics space. And then some SaaS products for serving corporates. So it really, in my mind, as I looked at it, was very much -- and then there were some deep technology expertise in terms of markets, running markets that existed and had been modernized. And when you think about, as a CTO, you want to look at where is the legacy, and I was really pleasantly surprised to see there was no mainframe unlike consumer banks that still we're trying to get out from under this. It had a Linux-based distributed architecture with some very foundational technology that we owned and developed ourselves for that distributed architecture. So I saw it as -- and something that you could really build upon. And there were engineering talent that -- deep engineering talent that had also perfected this machine-to-machine low latency, highly resilient system that as you think about it, most of my experience with retail investors at Charles Schwab or at eBay and PayPal, it was still a human, web to machine. And I think thinking forward, there's a huge opportunity for more and more of our connected devices will be machine-to-machine and require the type of engineering that we've already done with our exchanges. So extrapolating all those things together, I said this is an outstanding and compelling role, enough to like to give up what was clean and good warm weather. But now it's not so clean, but still warm weather out West.

Right. Right. Well, welcome to the East Coast.

Yes.

Maybe just to -- obviously, I mean, Nasdaq has always been, I think, culturally, a strong technology company with -- certainly within those trading businesses relative to peers, frankly. But maybe if we just focus, I think, mostly on the nontrading side for our conversation today. It's certainly the more, I think, interesting areas in terms of longer-term growth potential. And obviously, 3 major segments that we can talk about, Market Technology, Information Services and Corporate Solutions. And maybe if we can dive deeper into those segments and some of the growth opportunities. If I can start with the Market Technology segment, that has been the fastest growth segment as you guys predict that. It continue to be the fastest growth segment, I think, 8% to 11% as your growth target on your revenue growth basis. Maybe if you can describe the technology architecture here? And how you've migrated to a SaaS offering within the Nasdaq framework? And we can go into some more questions on this as well.

Sure. Sure. And that is -- part of the role of the CTO is to see the trends and to translate those trends into the architecture and the products that you have. And so we had, in Market Technology -- in the larger portion of market technology, we have mostly or had mostly at the time, enterprise -- traditional enterprise software products. Very comprehensive in terms of pre-trade risk management, trading, post-trade and surveillance. But I would -- actually, let's leave the surveillance out because that comes to the second topic. But in that area, those products, the enterprise software product, it takes a long time for you to upgrade your customers. And you have to -- for them to get your new features and functionality, you have to package enough of them up to compel them to do an upgrade. And so putting that trend of Software-as-a-Service where you -- really one of the biggest benefits is the ability to introduce new features and functionality, you have more control over it and be able to deliver that quicker to your customers as well as the advent of innovation in the cloud and knowing that we wanted to intercept our next-generation of product to be able to offer a cloud-based solution when our customers data center leases were up or their own data centers needed to be modernized. We knew there was going to be an opportunity for us to, first of all, say, it's time to move to the cloud. And second, maybe when you move to the cloud, it's time to enter into a SaaS agreement with us. So I'm happy to report that, that kind of planning and foresight has started to be realized. There was also -- a lot of our larger customers look to us to go first. So it's like, okay, that's a great vision, what are you guys doing? So we're in a unique position that we do own and operate significant number of exchanges in North America and Europe. So we have been leading the way so that we can lower the risk for our customers. And also in a lot of cases, the United States is ahead in terms of cloud adoption and financial services. So that has helped us. I'm happy to report today, we went live with -- in our BX Options internally on our new platform that is ready, cloud-ready, it's called Fusion. And we took the time to look at all the functionality between our North American markets, our European markets, and are able to see about 75% to 80% common functionality. So that is also important to scale and leverage when you can take a platform and the difference in functionality can be done via configuration versus unique code sets, and then you can get incredible reuse out of that platform. So we launched that today in the U.S. in 1 of our 6 markets. And then as part of that, we also redid some of the tools that our market operations team uses, and that is -- those tools are hosted in Amazon. So we were able to work through with the SEC to get that to get that under Reg SCI in the United States. It's the regulations, the SEC holds all exchanges, too. And we also launched the front end for our 3 ISE options markets with an offering, it's called PrecISE. It's front-end in Amazon as well. So we're seeing that as a proof point to be able to communicate with our larger customers. We're doing it ourself. Here's how it's going. And then when they have their -- when their data center contracts are up, they're all actively planning how much of this critical infrastructure can we run in the cloud? Can we -- can you help us talk to the regulators to make them comfortable, get them comfortable with running from the cloud? And we think there's a natural modernization and upgrade cycle that is going to be pretty sizable [ coming ].

Yes. Yes. And I probably should have started off this question with -- talking about your client base. I think people that follow your company obviously understand this well, but for folks that are maybe new to the story. Maybe don't understand what you do for other exchanges, it's sort of funny to think that you're actually running in other exchanges platform, but that obviously was a global business for you after the OMX acquisition. And you've levered that into essentially running the infrastructure for various exchanges globally and then have added the sell-side to that as well. So maybe you could talk just a little bit about that client base on the financial side? And then I want to ask a separate question about the nonfinancial client base, which is a new opportunity for you.

Okay. And you may want to ask the one on surveillance, too, because -- or do you want me to cover that as part of this or do you think...?

You can cover as part of that, yes. Yes, that's fine. You can cover it.

Okay. All right. Yes. So our -- I'll start with the one you first were saying. So what are sometimes referred to as dark pools, we call it our execution platform. We have an offering where we are running that as a fully managed solution. And we have -- we're really competing against the internal build and a lot of the U.S.-based dark pools have said it's time to modernize or it's time to make sure that we're compliant with Reg SCI, should we go above the 4% market share trigger. They need to be fully Reg SCI-compliant. So we offer something that really is equivalent to what we can do for ourselves, and we've had quite a bit of success there. So we're proud of that offering, and that business is growing nicely. Then we also provide for most of the major and the minor, I would say, global exchanges around the world. We'll run almost the full suite of our products from trading to clearing to the risk management to surveillance. And we also have recently won in the United States. So we're a 40% owner of the OCC, clearing behind the equity derivatives. We're modernizing their platform, and it is going straight from legacy technology to the cloud. So that is quite an interesting long-term endeavor where they decided, let's modernize. It's been -- I think it was about 15 years since they did their last modernization. And let's make sure we have that featured-forward architecture. So that will also lend itself to other clearing platforms around the world as they decide to upgrade and go to the cloud clearing. It's a perfect application to be cloud-based. So it's not -- it's easier than trading, it can go there quicker. And then surveillance is -- [ trace ]. We have 3 major offerings in surveillance. It's kind of the front end trade surveillance for brokers. And we have surveillance or the market operators themselves. And then we have that same surveillance for the regulators. So we've become the leading surveillance product offering. And traditionally, trade surveillance was a SaaS-based offering. We have now also introduced our markets surveillance offering as a SaaS and also in the cloud. So we see those -- that solution is completely architecturally consistent with modern cloud architecture.

Yes. Very interesting. And then maybe talking about the nonfinancial client base. This is for a financial company that's always focused on serving financial clients. You're leveraging your technology to operate, I guess, marketplaces that are -- for clients that are not financial. Maybe if you can just talk about how you're leveraging that technology? What types of clients you're working on for that? And I guess that addressable market, is it possible that could be even a larger addressable market than the financial side?

It is. And it kind of reminds me a little bit of when I was at eBay and PayPal. So eBay was the big application and some of the folks from PayPal were saying, "You know what, off eBay is going to be bigger." And it turned out it was bigger for PayPal, eBay was the killer app to get it introduced and get it into our lives. But when PayPal moved to be just the payment mark online, that really accelerated growth. I think there's a similar opportunity, although it's -- I don't want to oversell this one. So it's early stages from a technologist, I'm incredibly excited about this one. But it -- here's how I would explain it. All the dynamics of a marketplace, when you think about the things we buy in our everyday life, if it's statically priced and yet it has some amount of scarcity, you ask yourself, why hasn't it been dynamically priced? Why is it statically priced? And it's probably because it's just the technology wasn't there. And it was just done that way. Well, if a market mechanism can improve the allocation of that resource, if it's scarce, we believe there's an opportunity for us to apply the technology that we perfected in the financial markets. So we're seeing, certainly with COVID, and with the trials that are going on, there's probably a marketplace opportunity there or if we had someone lined up, that would be a logical one. There is some work we're doing on health data exchange. So it's a longer term. It wasn't specific to COVID, but we've had that going for quite a while. And they're going to use our technology for potentially this notion of how do you -- if you're an individual, how do you advantage progress with maintaining privacy and making sure that your data can be used in the right trials. So it's a pretty exciting opportunity there. The other is sports. So you've read we've had some success already with our options technology in horse racing in Hong Kong Jockey Club, in Australia and in Sweden. And that's just thinking creatively about what is really going on in this options technology, how can you apply it to things like horseracing, where there is a -- it's something like an option, you buy it, it either finishes in the money or not, at the end. So someone was very clever to come up with that analog. And then we have the football index, which is not betting on outcomes of games, but it's really betting on the -- almost like investing in the athlete themselves. So you can see as we have -- fantasy football is really about creating something on top of the real sporting event. You had sports betting, which is outcome-based on specific gains. We think there's another level of interest and engagement for sports. And of course, sports has taken a little bit of a back seat or -- because of COVID, it slowed that down, but we're still long-term excited about that type of opportunity. So we built a platform. The last thing I'll say there is we -- it's different than a trading day where you have a session. So some of these services are going to run continuously. You don't have the concept of a beginning of day, end of day. So we took our technology, and we call it the Universal Market Service. And we have made it so you can have longer-term trading days whether it's something that goes on 7/24 or something that goes on for a week, and it's configurable that way. And that has also, in partnership, we're putting that in the major cloud providers. So the notion is, think -- if you're familiar with Twilio, that has really done that with telecom, all the Uber and Lyft and Airbnb pretty much hit in API to get SMS and telephone service, we're thinking about a market in the cloud that you can hit our API, and you can get the benefits of price discovery, fairness, surveillance. And run a market, professional market, without having to invent all those things. And traditionally, startups had invented those things and they don't always go well. And certainly, the crypto markets missed a lot of the common things like surveillance and integrity and fairness. They made all those mistakes that we've kind of perfected in financial services over many years. So we see bringing some value to that in terms of structure, and then certainly extending our solutions for nonfinancial markets where they make sense and improve the outcome.

Yes. And you said, obviously, this is -- it's early days. But if we think -- if we were to say, fast forward, I don't know, 5 years from now. Given sort of the potential in a variety of different markets in a larger addressable market, do you think we would be talking about potential revenues that could almost approach where you are currently in the market technology segment, maybe that's -- maybe it's a little aggressive? But just to get a sense of that take up, I guess.