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

Right. This is actually a really nice segue into the next line of questions that I have for you, which is really kind of around the next segment for Nasdaq, which is kind of the corporate platform. And I guess, Nasdaq corporates platform is mostly known for your listings franchise, which is obviously very strong and continues to benefit from significant issuance momentum that we've seen recently, including the most recent dynamics in the stock market. And that's a great and a pretty powerful growth driver for the business overall. The 2 sort of themes within them, that I was hoping to focus on are ESG and private markets. And you kind of alluded to some of the dynamics between private markets and your Analytics business and the corporate platform, so we'll go back in a second. But I guess maybe first starting with ESG, it's clearly become a much more important theme for corporates around the world. Really in the U.S., I feel like it's just playing catch-up to maybe where Europe has been. But talk just a little bit about what Nasdaq's ESG-related offering looks like today, what's the sort of the revenue contribution to the firm as a whole, these could be many different things or kind of how do you think about it holistically? And how do you ultimately capitalize on this theme?

Yes, sure. Well, I agree you, by the way, that the U.S. is doing a fast, fast catch-up to Europe. Europe has been -- this has become a mature part of the investment thesis for many years, and we are fortunate because we own and operate many of the Nordic exchanges. So we've kind of played a part of that transition for several years in the Nordics. And that has given us, I think a leg up in being able to help the U.S.-based clients start to navigate the space as well. So we, in the Nordics, have a green bond market. We also provide for -- we basically collect information from corporates to provide them to the asset managers related to ESG. But in the U.S., what we've done is we've built out a whole suite of solutions really geared towards the corporate client. And a lot of the players in the space really gear themselves towards the asset manager's clientele, like the rating agencies and other groups that are trading metrics. But the corporates are having to navigate through this very fast-evolving space, and it's all these different rating agencies that are coming up, and they're having to get their programs together and understand it and then report it. So we have an advisory service that advises clients on how to develop their ESG program, how do they want to communicate it, making sure that they're getting the metrics they need that will resonate with the rating agencies, helping them understand and unpack their scores and then engaging with the rating agencies to make sure everything is accurate. And then on the other side, we have a reporting tool now that's a SaaS-based solution that allows them to put all of their metrics and information into one place. And then we will map it and tag it out to all the rating agencies, and we'll send it out to them in the format that they need it in. And so it becomes a very efficient way for them to do their reporting or at least more efficient, not very yet because there's so many different things that they're learning, but more efficient. And those 2 solutions, we've really launched in the last, I would say, year or 2, and we've seen really fast pickup. But it is -- so it's definitely helping to drive the growth on the corporate solutions side of corporate platforms, but it's still a small part of the overall revenue there because that business is a $250 million business. So we have -- but it also means we have thousands of clients, both our listed clients and many others, that we can then serve with these solutions. So we're pretty excited about it.

Yes. All makes sense. All right, let's talk a little bit about private markets. Obviously, it's an area that's growing very rapidly within financial services. Many would argue it's probably one of the fastest kind of growth area, not just within asset management but in capital markets sort of broadly. Nasdaq has an offering here as well by providing a liquidity platform, as you mentioned, to private companies. How do you envision your services here to evolve over the next couple of years? Is it going to be limited more towards private companies only? Or can you see yourself getting bigger in kind LP secondary exchange as well? That's the part of the market that's growing pretty rapidly also. So help us kind of -- help frame that opportunity you see there for yourself.

Yes. So we're here to address both needs. So we have 1 suite of solutions that's really geared towards private company shares and it's basically secondary tenders and private company shares. And we have another suite of solutions that's really geared towards private equity funds and GP to LP or LP to GP secondaries. And we actually had to get very specific approval by the SEC and the IRS to be able to run that equity -- the private equity fund market. And so we are the only provider of that today where you can actually have price discovery in an auction, and it's a much more efficient way to manage secondaries in the private equity space. So we're very, very excited with that. We also have created actually something called an auction fund that will allow basically a ’40 Act fund that allows for episodic auctions instead of tenders, which allows you to have less cash drag in your funds. So pretty cool. But on the private company side, we've been in the market with a private company shares trading platform for about 7 years called Nasdaq Private Markets. And we facilitate tenders -- company-led tenders to allow for early investors to get liquidity in stocks. And it actually had a really strong year. And -- well, it was interesting in 2020. It started off really strong. We saw a lot of programs developing, and then everyone paused. And all the programs kind of stopped for a while. And then it just like went on a tear at the end of the year, so we ended up with a really strong year for that business. And we agree with you, Alex. It's a big growth area, and it's one that's very nascent still. Like it's been around, but it's still just finding itself and finding its legs as to can you go from tenders to other secondary, can you run primaries, like there's a lot that we could do with that over time, and we're excited about it.

Right. Well, since we started talking about trading businesses, let's talk about something you started the conversation with, just kind of the base for what Nasdaq is still, which is some of the trading businesses both on the equity side and the option side. The angle that I was hoping to dig there is really more kind of what's going on currently, which is, obviously -- we've seen explosion in retail volumes around the industry for several months now. And at this point, 50% of -- give or take, 50% of all cash equity volumes are now taking place off exchange, a lot of it is driven by the retail trading dynamics. So maybe spend a couple of minutes how you're thinking about that for Nasdaq. Is there an opportunity for Nasdaq to get larger in the retail space? Are you thinking regulation could play into that? Because clearly, there's been recent kind of questions around maybe payment for -- to flow, and we have new SEC chairman potentially coming in, in the next few weeks. So lots of things could be at play. So I'm just kind of curious to get your perspective on the state of U.S. cash equity and retail specifically.

Yes. I mean, it's been -- well, all of 2020, I think we saw elevated volumes and some elevated volatility, but it has been a very healthy year of growth for equities and options. And I would point out that we're the largest options exchange today as well. So we've been able to benefit from both trends. I also think that we do -- we really do a nice job. We really believe in providing great service to clients. It's a great platform. It's highly scalable, extremely low latency and with huge capacity and throughput. And I think we kind of were built for what happened in 2020 and what's happening now. So I'm really kind of proud of what we've been able to create and perform throughout this period. And so -- but when we look at it, the dynamics around retail are really interesting. In some respects, the fact that we've had a lot more retail interest in the markets and participation lifts all boats, right? So the whole -- the overall volumes in the market go up. And even if our share of that trading is lower or, frankly, considerably lower, we're not usually the place where retail rest its orders. They tend to go to internalizers. The fact is that the overall activity in the market creates a lift for everyone. The second thing is that -- but the counter to that is that if you have about almost 50% of the market in the dark, is that the right balance of market structure. And I think that's going to be something that the regulators start to examine as they're examining the aftermath of what's happened over the last couple of weeks. But I also -- so there could be some regulatory considerations there. But I also would say, if you think about it from the point of view of retail, they're basically getting -- they're not paying any commissions to trade. Oftentimes, many of the platforms don't provide -- require a minimum in terms of a balance. And they have an opportunity to interact with any stock or option in the market in a very efficient way, and they get instantaneous execution, most -- almost all the time. So it's a pretty good experience for them. So you have to be careful not to upset that balance while you're trying to make sure that you're optimizing for transparency, and that's the counter. So making sure that there's enough transparency in the market to reflect the actual supply and demand is super important. And I think that's where the regulators will focus some time. I think they'll also focus on short sales and the short sale -- kind of all of the rules around short sales will probably be somewhat part of the examination as well.

Got it. All right. Why don't we shift gears a little bit? Let's talk a little bit about some of the corporate initiatives that you guys have at a kind of higher level, at the Nasdaq level. A couple of years ago, you've announced the strategic pivot, which is a lot of what we talked about today. That entailed sort of pruning the portfolio a little bit, right? You guys have exited or sold some of the businesses that were, frankly, slower growing. And most recently, the example is the legacy ETP business that you are in the process of selling Tradeweb. Are we towards the end of that journey? Are there still assets that you feel could belong better with somebody else or could not be sort of core to Nasdaq strategy or we're largely done with this sort of pruning process of your existing franchises?

So what -- I think I'll go through and walk through kind of our more -- like what -- how are we evaluating our assets to know whether or not they should be an area where we want to invest more in or maybe there's something that we would want to say that they're better off somewhere else. So when we -- when I became CEO, we launched a strategic initiative to kind of rethink the strategy of Nasdaq. And we started to think about where do we want to lean in more with more investment, where do we want to maintain our investment, where do we want to lighten up our investment and what might we not really be the right owner of. Then we went through a process. And we involved actually the top 40 or so leaders within Nasdaq to kind of make the final decisions there. And it was -- it's actually a very important exercise because it allowed everyone at the senior level to start to buy into where we were going as a company, where we are growing as a company and, therefore, where should our asset allocation focus and be. And in that process, it was pretty obvious, like it was a pretty good alignment as to where we wanted to grow and get bigger and put more capital behind it and where we should probably think about finding a new home for certain assets. And on the back of that, we sold our PR distribution business and our IR web hosting business. And thereafter, every year now, we go through the same exercise. We evaluate the portfolio. We say, are we still investing in the right things? Are we putting enough money behind those growth areas? Are we maintaining our investment appropriately? And are there areas where we either need to lighten up or think about getting out of? And every year we do it. And you've seen -- so we then exited the BWise enterprise risk management business. We knew that for us to be successful and to scale it, we'd have to invest a lot more in it. And we just did not see that as the best next dollar to spend when our corporate clients didn't see us as like the go to provider. Now with NFI being the next scaled business, it really was that we've done a lot to revamp that business, to replatform it and get it. And the trajectory is actually quite nice in that business now. But the market structure has changed a lot in fixed income in the U.S. And there are big scaled players. And if we want to be successful in the long term, being a niche dealer-to-dealer treasury trading platform is just not going to do it, like we're going to have to -- there's a way to scale that, but it would require a lot of investment and most likely acquisitions. And we just didn't think that was the right -- that's not probably the right next dollar for us to spend. But it is the right next dollar for a Tradeweb to spend. I mean so they're already scaled in D2C. They have a really great franchise. And for them to really shore up their D2D presence makes a lot of sense for them. So our view is that they're the better owner, and we can then reallocate our capital towards things that can grow faster for us.

Great. Well, along those lines, things that could grow faster, maybe to focus on the other side of that coin, which is M&A and actually you guys making acquisitions, Verafin obviously being the later example of some of the growth areas that could be really scaled within Nasdaq and really have the nice synergies with your current offering. How should we think about the opportunities for more deals? And maybe for this audience base, again, maybe not as familiar with your framework around deals, help us -- kind of remind us what are the criteria you're looking for when you valuate potential transactions?

Sure. Well, we -- at Investor Day, we laid out 3 priority areas for us to consider. In terms of organic investment, so where are we investing more, right, so in organic investment and the potential for inorganic investments. So one is in the anti-financial crime space, and the Verafin acquisition is an appropriate example of us leaning in hard to really grow and scale that -- our presence there. Why do we think we have -- why do we think that's the right next dollar to spend? I think that Nasdaq is a very high integrity player in the capital markets. Our capital markets clients really do like our surveillance solution a lot. It's the go-to solution in the industry. And they've been asking us to get -- to do more. When the customer is coming to say, can you do this, too, can you do that, too, can you do -- can you add an anti-money laundering capability into your business, things like that, that's when you know that if it's already growing fast, you got great client relationships and you're really good at what you do, it's time to lean in. So that's an area we're going to be -- we're going to continue to lean in, and Verafin's a great example. The second is in ESG, but it's a very immature space. So we do have a real opportunity organically to lean in more investment dollars there and really serve the corporate clients in a scaled way. But we also think that there could be some bolt-ons to do over time that can shore up our capabilities, get us deeper into the -- maybe the e-side of it or kind of allow us to lean in further there. So that's going to be an area that we might look at some bolt-ons. And then the third is in the alternative space that we talked about, really rounding out the workflow capabilities for asset owners and over time really addressing the asset manager needs in the alternative space. We have a great organic strategy, but we have done like a deal like Solovis and other -- some other bolt-ons that could help us round out that suite. So those are the priority areas. But I should say that in the market space -- in the market services space, there are going to be occasionally areas that we might want to consider. And an example of that was the Oslo Exchange. We didn't win that, but it was an area we chose to dive in on because we own the markets in Sweden and in Finland and Denmark. And it would have been a natural add-on for us, highly synergistic to our customers and to us. So -- but we did not go after some of the larger exchanges in Southern Europe because it just -- it wasn't going to be particularly synergistic to us, and it's not the next dollar we want to spend. So I just want to help people understand the framework, but that's how we think about M&A. In terms of the framework for M&A, we're leaning in on SaaS. We're leaning in on recurring revenue and growth. And we want to make sure we provide for a ROIC. And we basically said that as Nasdaq, we want to maintain a ROIC of 10%, but we might be willing to accept a lower ROIC on a particular deal if it really scales us in SaaS and scales us in terms of our ability to grow and expand our franchise successfully.

Great. That's very helpful. All right. We've got a couple of minutes left. So maybe I'll squeeze 1 more in. And it's really about the capital return dynamic, which is sort of part of the sort of double-digit total shareholder return framework that you outlined at the Investor Day. The leverage level at Nasdaq is a little bit higher than we've seen in the past, obviously, in the back of the deal that you've announced. Help us think about the kind of capital priorities for the next year to 1.5 years between deleveraging, obviously, dividend growth and some buybacks?

Yes. So starting with the dividend, our commitment to our shareholders is we like to grow our dividend as our earnings grow. And I think we've been able to demonstrate that we're able to do that on a regular basis to continue to grow our dividend as our earnings grow. The second is that we'll do buybacks primarily to maintain share count. So we have equity programs, and we want to make sure that we keep our shareholders neutral to those. And then with the next dollar, we would look at investing in the future, but also having a deleveraging, plan similar to what we did after eVestment where we want to try to get back down to kind of below 3x in a reasonable period of time. And we have a lot of cash flow. So it does enable us to do -- we have the benefit of having all of that, right? So we can pay a dividend, we can do some buybacks, we can pay down some debt and we can still invest in the franchise, and that's kind of how we look at our capital plan.

Great. That all makes sense. So on that note, I think we're right at time. So Adena, thank you so much for dialing in. Thanks for joining us. Very helpful discussion, and we hope to see you here again next year.

Great. Thanks so much, Alex.

Talk to you soon.

Bye.