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

Hi. Welcome, everybody. This is Ken Worthington. We're doing a fireside chat with Nasdaq and Nasdaq's CEO, Adena Friedman. Before I get started, I wanted to go over a few logistics. First, if you'd like to ask a question, please go to the JPMorgan website, metameeting, to ask questions. I'll try to get to Q&A more quickly if there's more questions. Secondly, JPMorgan is now restricted on Nasdaq as of this morning. So while I cannot ask questions on the Verafin deal, I can relay your questions if you have them, so fire away. So with this, I'd like to introduce Adena Friedman, who became President and CEO of Nasdaq, January 1, 2017. And I actually think you announced it during our conference in late 2016. Adena started at Nasdaq as an intern in 1993. And after a brief stint as CFO of Carlyle, essentially, you've been a lifer at Nasdaq, which I think is very impressive. Adena has been instrumental over the years in developing Nasdaq's acquisition strategy, has led the charge in data, headed up corporate strategy and was Nasdaq's CFO. And as a point of interest, because I know everybody is super interested in this, I actually met Adena in D.C. in the late '90s. I think we just determined it was probably around 1998 when analysts were allowed to travel with bankers, when I was part of Oppenheimer. So Adena, we have a much longer history than probably anybody else had realized. So thank you so much for joining us here today.

I wanted to start talking about Nasdaq. Nasdaq has a reputation of being an exchange. This is a business services conference. Talk about why it makes sense for Nasdaq to really be presenting at a business services conference.

Yes. Sure. Well, first of all, Ken, thanks for having me, and it really is great to be here. And it's fun to kind of relive the history, so thanks for that. In terms of Nasdaq today, Nasdaq today is a global technology company that serves the capital markets. And we do that, of course, in operating our own markets, but we also provide the technology to 130 other markets around the world, and we provide anti-financial crime technology to the banks and brokers community around the world, specifically focused on trade surveillance. And then we also have a scaled Index business and a Data business that serves the investment community. And we have a series of businesses in Corporate Services that help companies navigate the public markets in terms of their investor relations and governance practices. So we have a technology business that generates about $1.5 billion of annual recurring revenue. And of that $1.5 billion, $440 million is SaaS-based revenue. So we are a scaled technology provider. And then we also have this great markets business that allows us to operate in some of the largest markets in the world, here in the U.S. and in Europe as well.

And how has the business evolved under your guidance as CEO? So Nasdaq has undergone a strategic pivot. It's gone through a repositioning. So can you talk a little bit about what you've done, why you've done it, sort of the vision here for the company?

Sure. Yes. So back in 2017, when I became the CEO, we decided to embark on a strategic review of Nasdaq. And we said, "Okay, well, what are -- first of all, what are we really great at as a company?" And we are a technology-first market provider. We're a technology-first provider of index and data and other technology services. What are the trends that we think our customers are going to kind of lean into or face over the next several years, that's going to drive their business and drive their success, and then also -- and their challenges that they will have in their business? And then how do we look at the intersection of what we're really good at, where they see us as a natural provider and that -- lean into the trends that the industries are -- the industry is facing. And we decided on the back of that to really make sure that we are increasing our investment in our Market Technology and our Information Services business and then also actually divesting of some of the businesses in our Corporate Solutions space that really were not a technology-driven service, that were lower margin, lower growth and our clients didn't see us as a natural provider of. So we kind of made some divestitures, and then we made 2 acquisitions that really kind of proved out how we were moving. We acquired eVestment, which is a data analytics company that serves the investment management community. And then we also bought Cinnober, which allowed us to continue to scale our Market Technology business. And then on the back of that, we also really looked at the anti-financial crime space to say, "How could we continue to be a bigger player and a partner to the banks and brokers as they're managing this massive issue of anti-financial crime?" And that has culminated in the acquisition of Verafin today.

And so what has the strategic pivot really done for the financial metrics? The recurring nature of the business, what has this done for the things that the analyst community would be most focused on ROIC, growth, margins? How has that all helped to kind of transform the financial picture as well?

Yes. So if we look at the -- what we call the nontrading businesses. So about 73% of our revenue comes from recurring and reoccurring revenue that's not trading related. And then when we look at -- we have 3 business segments. We have our, what we call, Investment Intelligence segment, which is our Information business. We have a Market Technology business. And we have our Corporate Platforms business, which are all of these services offered to companies around the world. And together, they represent a very large portion of our company today. So -- but what we really focused on was, how can we catalyze more growth in those segments? They are recurring in nature, so it's really a matter of us leaning in to make sure we can power the growth of those businesses. And over the last 3 years, the growth in those businesses has doubled from the prior 3 years. So we were growing at about a 4% rate leading up to 2018. And then for '18, '19 and '20, we've really been growing at about an 8% rate. So we've been able to double the growth rate. We've been able to improve our margins in that process as well on an organic basis, bringing our -- margins of the company up around 500 basis points. And then we also have gotten to an 11% return on invested capital for Nasdaq up from about 8% when this all began. So we are really showing that by leaning into these areas, investing in them with the next-generation technology and growing the businesses in those spaces, I think we can -- we're improving the metrics of the company, while also becoming a much bigger and better partner to our clients.

The 8% growth, is that organic growth? Or is that total growth?

That was organic growth. That's organic growth over the year.

Okay. And then as we think about the growth outlook, the business segment seems to be growing faster than I think many of us expected and even faster than some of the long-term guidance that you have presented over time. To what extent is Nasdaq over-earning right now? Maybe we're just in a good part of the cycle? Or to what extent is the faster growth that we've been seeing here, really part of the new normal for Nasdaq?

Yes. I mean I would say that we really have been able to lean into a lot of long-term trends within the industry. And then we have a couple of parts of our business that also get to benefit from the environment that we're in from a trading perspective. So I think that if you were to look at the trading business, that's a business that we don't try to provide long-term targets -- growth targets for because it is -- it's less predictable, but we have had an outstanding growth here, on the back of, I would say, a good -- I would say a good environment has turned into a great environment within the trading businesses. And that's an area where I would -- it's really less certain as to exactly how that business will continue to develop next year, but we are exiting the year continued with elevated volumes on the back of increased participation, both from institutions and retail and we also are positioning ourselves very well competitively to be able to continue to drive growth into that business in more -- in a different volume environment. I think in terms of the other parts of our business, it really is largely a matter of leaning into long-term trends. There are companies out there really seeking more and more data to support their decision-making, and that plays into the trends on market data. In our Analytics business within Information Services, we have an index franchise that had -- just has really leaned into the long-term trends around tech and all of the businesses that, frankly, are associated with Nasdaq. But also trends -- we have certain thematic indices that really have been quite popular, and they continue to draw a lot of assets into them. And then in our Market Technology business, we continue to grow our business and expand our Surveillance business as well as our role as a Market Technology provider to the industry. So those are all leaning into long-term trends where our growth is just on the back of great work by the team, and then we have this bolstering effect from the benefit of the trading environment this year.

So I wanted to dig into maybe each of your business segments a bit more. So maybe starting with Market Technology. Market Technology, there's sort of something special about Market Technology. Why is this sort of a differentiated business? And maybe talk a little bit more into the factors that's really driving the impressive growth in that area.

Yes. So I think there are a few things. First is the core business has 2 key components. One is our core technology like trading, clearing and settlement technology we offer to exchanges around the world. We've been able to continue to expand our relationships with our exchange clients and grow our clientele over the last several years, and that supported really nice growth in that business. And we've been investing in our next-generation trading and we say -- what we call trade life cycle platform called Nasdaq Financial Framework. So we're now actually able to bring our clients onto a more modern technology stack. We're able to deliver that as a cloud-based service to those who want it that way. And we have a way of basically becoming more efficient internally and being able to provide a very modern approach to trading for our customers over the years ahead. So I think our investors are seeing really nice growth in client acquisition, but also the investments we've been making over the last several years are starting to pay off in terms of showing that we can move our clients to a more modern tech stack and over time, deliver more margin on our customers. And then we also have the Surveillance business, which is a SaaS business serving over 170 broker-dealers as well as exchanges and regulators. But that -- in the broker-dealer space, it's SaaS-delivered. It's been a really nice grower for us consistently over many years. And it allows us to also show that there's margin capability in that business that allows us to say, "Okay, how can we draw the entire Market Tech business and continue to drive our margins up as we become more SaaS enabled?" So we're on a journey there that I think is delivering top line growth and over time, we'll continue to enhance our bottom line. And then with the acquisition of Verafin today, we now are really leaning in even further into anti-financial crime with another incredibly top-quality SaaS business. Let me just spend a couple of minutes, I know you can't ask questions, but I can talk a little bit about Verafin. So it is -- if we provide the marquee product for surveillance, which means looking at market manipulation and insider trading and other trading anomalies, what Verafin is, is a marquee provider of fraud detection and investigations and money laundering detection investigations. So they provide, to 2,000 banks in North America, a comprehensive solution around AML and fraud detection. And they do it all in a SaaS format. They have a 98% client retention. They have a 30% growth rate. They have 25% EBITDA margin. And they have -- just 97% of their revenue is recurring, so -- recurring contracted revenue. So it's just a top-notch SaaS business, supporting one of the biggest problems in the industry. When we look at money laundering, it's about a $2 trillion problem, and banks are spending $42 billion trying to solve that problem. And so -- and of that $42 billion, about $12 billion is going into tech. So when we look at what Verafin does and what we do together, we have an enormous opportunity to go in and become a full-service provider to the banks and brokers around the world and really solving financial crime. And so this, to us, is just a perfect opportunity for less to lean in even further into Market Tech and to become that partner that our banks and brokers are looking for us to be. And so it is -- as you said, it's a special business because it's leaning into all the long-term trends that the industry is facing.

And then if I think about sort of the Investment Intelligence business, so in part, Nasdaq is servicing the asset management sector in really a variety of ways. And in some sense, the traditional asset management sector has been struggling. Not all of it is, but some of it is. So what are the services you're providing to the traditional sort of active management business? Maybe talk about where you're servicing the passive market and then sort of the next step, where are the opportunities in the alternative asset management business. And given your time at Carlyle, you seem to be maybe better than many on being able to attack that alternative bucket as well.

Yes. So if we think about the Investment Intelligence business, it's comprised of 3 subsegments. We have our Market Data business, which is all the data that flows off of our exchanges and the way we sell that globally to hundreds of millions of investors. And then we also have our Index business that certainly is playing into the passive trends in the traditional asset management space where we have thematic indices and benchmark indices that really -- are really leaning into some great trends there. And then we have our Analytics business, which is really our eVestment acquisition coupled with Solovis and Quandl. So what that really is doing is providing deeper analytics and workflows to support the traditional asset managers in terms of being -- using data to make smarter investment decisions through Quandl, using data to make smarter competitive decisions through eVestment. And then managing -- using the data and analytics capabilities of Solovis to manage the portfolio. Once you have a portfolio to look at portfolio concentration and portfolio risk and other things that are important to understanding the portfolio more deeply. So we have a really nice scaled business there. And yet the traditional asset managers -- it's a growth business within traditional asset managers. But a really great opportunity is to carry all of those analytical capabilities and portfolio management capabilities into the alternative asset management space as well. Solovis is already really for bridging that gap. So for LPs, with your limited partners and large asset owners, they already provide a comprehensive solution. So of portfolio management across both the public investments and the private investments they have. And with eVestment, the idea of being able to go out and explain your asset management strategies and your performance to asset owners to try to get them to draw you into your fund, they will -- that -- eVestment is able to do that now for both public investments and private investments. So it allows us -- that they bridged over to private equity as well. And so we now have this kind of really comprehensive suite of services serving the traditional asset managers, but also alternative asset managers in managing their portfolios, but also trying to try to find that next investor.