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

All right. Good afternoon, again. Hopefully, everybody is having a great conference so far. Again, this is Jeremy Campbell, the exchanges, brokers and asset managers analyst here at Barclays. Today, it's my pleasure to welcome Michael Ptasznik back to the now Virtual Global Financial Services conference. Michael, I think this is your fourth time attending but the first time virtually. I wish you could -- we could be here live together in person, but maybe next year. It's great to have you in at last.

Thanks very much, Jeremy. Really appreciate being able to have this conversation today.

Great. I just wanted to start off and give you a chance to speak a little bit about Nasdaq's positioning, who you serve today and in what way -- in what ways? Because I think it's evolved quite a bit over time and there might be clients that are newer to the Nasdaq story here. So you guys are really well-known for a couple of things, but you play a broader role than I think many understand.

Yes. So happy to walk through that. When Adena Friedman came on as the CEO in -- beginning of 2017, we went through a strategic review of the business. She really -- how we want to focus it going forward. So while a lot of people know us as the U.S. equities market for listings and trading, which is still a critical key component of who we are as a business overall. We also have other key aspects of the business, our Information Services business and our Market Technology business, which are not as familiar to some people. And what we did is we did -- what we looked at as part of our strategic review is where do we longer-term trends as an organization and where should we focus as a company. And so we saw that -- one of our objective is to generate higher revenue growth and returns to our shareholders. And the way to do that was to focus more of our resources and efforts on that Market Technology and Information Services business, which has been growing at a faster rate. And we saw really great underlying dynamics for those businesses for us to continue to drive even higher revenue growth in those businesses. And so we've been reorienting our business. We still leverage and love that core exchange business, which gives us a lot of brands and capabilities that we then leverage within the Market Tech and Information Services business and that has been the focus. And we are one of the leading providers in market technology for both the exchanges, clearinghouses, et cetera, in the industry. We're the leading provider by far in that space as well as a leading provider of surveillance technology. And then on the Information Services business it's core market data. But importantly, our Index and Investment & Analytics business is now even a greater percentage relative to the market data. So that's a big focus for us going forward.

And I think you guys have done a really great job executing on the pivot. But just I guess, looking back at progress you guys have made so far, is this how you would have envisioned Nasdaq looking?

Yes. So I would say we're really pleased with the initial results for the period. I think like we were in the year 3 here since we've announced that and I would say we've had some good results. We've seen almost a doubling of the revenue growth of our non-trading parts of the business. We have about 500 basis points improvement in our margin so far this year. And so that acceleration of growth and some of the positive results that we've seen from a client standpoint as well, which has been a big focus of what Adena has the whole organization focused on, I think, has been really positive. And so we are pleased that there are results. Obviously, there's a lot of opportunity in front of us, and we still feel we're in the early stages of this new road map, but we're really pleased with the initial results.

And then just for those tuned in, I want to highlight that we do have audience response questions again this year. Should be on the left-hand sidebar, you should have a link for it. Obviously, the first one, you can answer both at your leisure throughout the presentation. The first one around how you're positioned with Nasdaq? Overweight, equal weight, underweight or not involved is probably kind of front of mind here. So please register your votes on that one and we'll come back to it. But Michael, I think -- I wanted to continue around the impact of COVID. It kind of has been a very unique and challenging 2020 backdrop. And something I'm kind of asking a lot of the exchanges today is just you would think that an exchange would be a little more insulated from this whole work-from-home, virtual setup here. But from an operational perspective, how has Nasdaq managed through this environment? Maybe what you've learned so far during the experience? And perhaps, is there any impact you can envision having on operations from here forward when hopefully we lap this thing?

Yes. So I think one of the key things we've learned is that practicing your BCP pays off. And so I think we've done a ton of work across the organization, but I give a lot of credit to our technology team, our risk management teams, all the teams working together and that all of that practice did pay off position that we were able to go. I think we were -- 98% of our employees are working from home at the beginning now, we've got a few more coming back into the office. But -- and so it's really a credit to all the work that they had done planning and preparing for this or for some sort of event like this. And that's been a real positive. I think we've -- there's obviously for us to be able to support our marketplaces and then all of our clients through our market tech and other businesses to be able to go through that has been a real success and a real credit to the team and all the work that they've done, and are prepared for that. I think we've also learned that the importance of paying attention to our employees is really helping them through this type of situation, it has paid off significantly as well. And in that -- when you're in the old environment, we're focused on getting results and focused on our clients. But the focus that we've put on our employees as well has been really positive. And I think that's reaped a bunch of benefits. With respect to looking forward, I think this is -- we're looking at the future of work and how, I think there's a lot of organizations are. I think this gives us some opportunities to think about how we can continue to support our workforce in a more flexible manner and also to look to maybe recruit, whether it's in technology capabilities or others where you don't have to go to certain just centers when -- and have them fit into an office, you've got a broader ability to bring in great technology, talent, a great other business talent from across a broader landscape and be able to continue to enhance our employee base and then serve our customers even better. So we think that there are some real positive opportunities that come out of this. I think it's really unfortunate situation. But we think from a business standpoint, we've learned a lot and I think we're going to get better. And then the last piece I would put is from a client standpoint. I think there's a recognition of the need for more SaaS, more cloud-based type services, and that's what we're doing as an organization, it has been part of our strategic pivot. And so if anything, I think over the long term, we are positioned really well to take advantage of that recognition of the importance of those types of services.

I think one of the things that really struck us was the difference in tone and commentary between the 1Q call and the 2Q call, especially around the outlook for these nontransactional businesses. To refresh the audience, on the first quarter earnings call, I think Adena had mentioned risk of hitting the low end of the medium-term guidance for this year but seemed to really turn around here on the second quarter call. So I know you guys had mentioned some things getting delayed from a work-from-home and maybe there was a bit of a catch-up. But could you provide any more kind of color on how the outlook changed so dramatically in a 3-month window? And how maybe it dovetails with what you're just talking about?

Yes. I would think the change was not, I'd say, dramatic. I think there was definitely -- if you look at April, just -- we're just coming off of the depths of the low there. And so when we look at -- we looked at overall the business, the Index is still down, we weren't doing any listings at that point in time. And so from that standpoint, I think there was -- really, everybody is assessing situation and the world kind of stopped for a little bit there. And so that was really the -- what we were reflecting on in Q1, with very limited information. We have maybe 3 or 4 weeks of experience there. I think as we -- and the whole world moved through the next quarter, it really showed the value and the resiliency of the business that we have. And the diversification of the business that we have. And so I think we were all surprised to see just how fast the indices all rebounded, not just ours, but all the marketplaces. And so from that standpoint, it took a little bit of pressure off of the asset management industry, which is 1 of our 3 client bases. To the listing standpoint, we started to see listings coming back despite the fact that there is volatility in that. There was a special tech and biotech coming to the market, which makes sense. But again, in other types of volatility, we hadn't necessarily seen that. So there were parts of our business that were coming back faster than I think you would have expected. And people adapted to this working from home quicker. So that was some of the tonal change that we saw between Q1 and Q2. There are still parts of the business, which I think we've highlighted in the market tech side and in some of our analytics products, where, again, we are seeing some level of deferral or slowdowns of decision-making and there still has an impact. And we talked about that last quarter that there are still parts of the business where there may be some headwinds as we work our way through COVID. But as I said earlier, as we look to the longer-term of 3 to 5 years, we see that there's nothing that we'll be going through right now that should, in any systemic way, affect those businesses and if anything, could end up in an improvement. So I think that kind of disclaims the differences between the periods.

Got it. And so I just wanted to pivot to market tech now. But I think in that same vein, I think you just mentioned, I just want to confirm I heard it correctly but the any kind of pickup, I guess, and kind of attraction around the market tech sleeve, but it seems a little bit more transitory with potential for actually opening up a bigger long term improvement. Did I get that right?

Yes. I think what we said is that if you think about the -- our clients, whether it be the exchanges, clearinghouses or the banks and brokers, when they're -- from their standpoint of where they're putting their efforts and implementation of technology projects when COVID hits, they're obviously going to be focused very much on managing their workforce, the projects they have in front of them. So it really, to some degree, elongates either the sales cycle or the implementation cycle or programs that we had planned with some of them and have been working towards because they've had to change some of their priorities. In some cases, you got to take a little bit of a different tack on these things. And so again, last quarter, we did talk about that some of the new order intake levels, some of the initiatives are somewhat impacted. And then in our new markets business, again, funding for some of those projects may be taking a little bit of time. But, again, we see that as being a shorter-term time frame, not putting sort of an end date on it, but that's some of the headwinds you see in the short term. But longer term, again, moving towards more outsourced technology, SaaS-based, cloud-based technology, which is what we can provide, I think we see that as being a real solution that more companies will be looking forward over the longer term.

Got it. And I think that kind of is -- kind of aligns with some of the interesting kind of common things we've had where maybe some more delays with new relationships and new types of markets because virtually, it's hard to kind of get that all on the same page versus maybe your existing deeper customer base is more able to ramp things up once the belt-tightening kind of loosens up a little bit. Is that kind of what you're seeing in these nonfinancial markets?

Well, I'd say -- there's a little bit of that, but I would say if you think about our core customer base, they've been doing incredibly well through this period. And so the exchanges have obviously been trading a lot, the banks and brokers, there's been a lot of activity. So these are very strong resilient businesses who know us, and we'll continue to be able to sell products to and implement on time frames and we're working with them on that. Again, some of the time frames may be elongated. But when you're looking at new marketplaces who are coming to market and are trying to get funding for a start-up or some [ short over ] to that next level. That's where those -- that may take a little bit longer. And those businesses don't necessarily have the funding to launch or so. That being said, we launched our marketplace services platform last quarter. I think just last quarter, we talked a little bit about it on the call. We have a new commercial real estate market who's launching on that platform. And so we do believe that, that business will continue. But, again, it may take longer than it originally anticipated.

Got it. And then, I guess, let's just take a quick step back here and -- for the audience in Market Technology. Can you just help frame some of the competitive dynamics? Who are your competitors? It's always pretty easy to name who your traditional exchange competitors are but, I guess, the Market Tech client wins perspective, who are you facing up against in this type of market?

Yes. So in the Market Tech segment, I would say, we have one key competitor and that is in-house bill. And that applies both to the exchanges, look to the banks and brokers, to the new marketplaces that people are developing this technology on their own. What we see that we bring to the table by being that leading provider, both in the Market Technology segment as well as in the Surveillance segment. That's where we, by being able to provide an outsourced solution provider and having firms not necessarily build the things themselves. So for example, our new banks and brokers initiatives where we're selling dark pools or single dealer platforms to banks and brokers instead of them having to develop technology around a very limited offering that they're going to provide. They can outsource those dealer platforms to us since we're already building exchanges and building these matching capabilities as well as the regulatory elements around that. They can outsource that and they can focus their efforts on client acquisition and the other things that the banks are looking towards digitization, et cetera. And that they can use a third-party provider. So that's when I say the one key competitor is really people have built a lot of these things themselves. And now we think we have the opportunity to be that third-party outsourced provider who can just take that off of their hands for them.

And you had alluded to outsourcing a little bit earlier, but I guess in this great new world here where tech gets stability and just operating capabilities is of paramount importance here. Has that -- forget about like orders for a moment here, has engagement actually increased with clients that have proprietary systems that you're pushing up against, given everything that's happened so far this year?

Yes. I think we've had some really good engagement on a number of fronts, both within the core business. Also on the regulatory side, last quarter, we talked about a number of new sales in our SaaS business, and a number of those were in our surveillance business, which is part of regtech. And with the regulators and the focus of people working from home but wanting to ensure that there are other controls in place. And again, that creates an opportunity to engage in some of those conversations with clients about the fact that we can provide surveillance capabilities so that they can meet their regulatory requirements and we can be a solution to them as they're under increasing regulatory pressure to do so.

Got it. And the past kind of year plus or so, you've added some really interesting new disclosures to your reporting style. I think one of which was annualized recurring revenue. And so just in case something down then is more of a traditional financials investor not familiar with this metric. Can you talk a little bit about why you added it and kind of what it means for Nasdaq?

Yes. So ARR, which is the revenue that we received, which -- through the licenses or support agreements that is recurring on a regular basis. As opposed to that revenue, which would be either a change request or an initial installation upfront fee, that annualized recurring revenue, we think, is an important as we -- as again, as we've been migrating more towards a SaaS business. So before the business used to be these bespoke installations at each of the individual exchanges, and now we're moving to more of a consistent platform with our NFS platform, which is sort of one more technology stack. And we're focusing more of our revenue on recurring subscription, license type revenue. And so when -- as investors think about this as more of a SaaS model, we're looking at more of those SaaS-type metric, which is around customer acquisition, recurring revenue, et cetera. And so that has been an important metric as we change the way we think about our business from being an implementation business to one as a recurring revenue base and that has been a focus for us. So I think it's an important metric for us to measure our business and we'll continue to add metrics over time.

And I think it's about 70%, 80% of your Market Tech revenue right now. Maybe just highlight what's the other 20-ish percent? And could this ever get to 100%?

Yes. I don't think we'll ever get to 100% but the 70% to 80% really does reflect those change requests. So if somebody comes and asks us to do some specific augmentation or some additional add-ons to what we're providing to them that would be a onetime change request or the implementation we're first building out certain aspects of some new capability. That would be that or as the license fees. And so that will fluctuate. We have some seasonality. Fourth quarter, we typically see higher levels of that. And so we see a drop in the recurring as a percentage of the total. How we're looking at it is we need to look at the recurring revenue and ensure that, that continues to climb over time. So it's a measure of the recurring nature of that business as it grows over time. I don't think we're going to see 100% because there will always be -- whether it's consulting, we have some consulting revenue when we do specific request. So there's always going to be some element. But a measure of our success of converting our client base will be to see that percentage growth.

What's like the growth algorithm for that? And then I think one of the paramount statistics for any more SaaS-based company is things like retention in the business. If you have any kind of view on that, that would be helpful?

Yes. So we're very fortunate to have very high retention in our Market Tech business, definitely reflecting the core part of the market infrastructure operators. Those are long 5 to 7-year type contracts that recur on a regular basis. We work very hard to serve those clients well and meet their demands. So unless there is a consolidation of exchanges or something like that, we typically maintain a very high retention on that aspect of the business. And then on the surveillance side, again, it's the same thing. Because once we're in there and we're working with the clients, we have a very high retention on the surveillance part of the business as well. And so definitely very good positive retention rates that we have in there. And yes, and I think that's a big focus for us.