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

Good afternoon. Our next session here is with Nasdaq. I am pleased to welcome Adena Friedman, President and CEO of Nasdaq, back to the SDC. Adena has been CEO of Nasdaq for about 4 years now, over which time she has overseen a pretty significant transformation of the business towards a much more SaaS-driven technology company. Shareholders clearly approved this with the stock being up over 2.5x over the course of her leadership. Before her CEO role, she held various senior positions at Nasdaq as well as the Alternative Asset Manager at the Carlyle Group. So welcome back, Adena, and thank you so much for participating in our conference.

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

Great. So let me kick it off with kind of [ our intro ] and the changes that have occurred with the company over the last few years and to make it more of a SaaS-driven tech company. It feels like that strategy actually accelerated last year with the purchase of Verafin. So just to kick off, as you think about the next few years, how does the Nasdaq growth strategy evolve? And sort of which businesses are you most excited about going forward?

Yes. So as you said, we really have been focused over the last 4 years, really. When I became CEO, we did a strategic review. And we understood what are we really good at, where are our clients needing our services, where do they expect us to be a great provider to them, what are the trends that are driving the industry and how are they going to change? And then what are the technology trends that are coming into the industry and how will they change the industry? And on the back of that, we made some key strategic decisions. We leaned in on our market technology capabilities, our anti-fin crime technology abilities. And we really wanted to develop out an ecosystem to support the buy-side in a more material way. And then we also -- but at the same time, we made some decisions on companies or parts of our business that were not as effective and really were not as strategic to our capabilities. And so we actually exited 3 businesses in the last few years. And we've announced the exit from our treasury trading business this year, so that we can like hone in on what we're really good at. And what we're good at is providing technology and analytics to power the buy-side, the sell-side and other exchange groups. And then we have a whole suite of services to support our corporate clients as well. And on the back of that, if we look forward now, we have a very scaled anti-fin crime technology suite as well as we're the #1 provider of market technology solutions to other exchanges and marketplaces around the world. We continue to see really great growth drivers across both of those areas that will power our business for many years to come. And we also now have a very unique ecosystem supporting asset owners and asset managers in traditional asset management as well as alternatives to support their workflows, precommitment decisions through portfolio management and liquidity solutions in the private side. So we feel that we have a long runway of growth opportunities there. And then supporting our corporates, we, of course, have our listing franchise that has had a wonderful renaissance period over the last 3 years. We've had, I think, a 17% increase in our listings over the last 3 years. We also, though, have a suite of services around investor relations and governance and that we've been evolving to also support ESG needs for our corporate clients. And we see a really great runway of growth across that ESG service -- that suite of services and technologies that we can offer there as well.

Great. So I think that transformation has led to pretty strong top line growth, roughly 8% organic over the last couple of years, which puts you not exactly the high end of the exchange group but the high end of even sort of some of the high-growth data providers. But as you look over the -- again, look over the next 2 to 5 years, how do you frame or quantify or how should we think about what -- maybe what the bull case for growth is at Nasdaq?

Well, I think, first of all, one of the areas that we've invested in over the last 4 years is our next-generation trade life cycle technology. And that will give us an opportunity both to manage our own markets in a new way, to potentially leverage the cloud to kind of manage our markets in a cloud environment, which will create more efficiencies but also new opportunities to kind of expand out our trading ecosystem both in our own markets. But then also, we're providing that new technology to our market tech clients. And so as they're renewing their contracts and continuing to evolve their own markets, we have the chance now to offer them a much more full managed solution that is cloud-enabled for their needs as they move forward. So we see that as being a big investment we've made with a big payoff opportunity for us over the coming years and continuing to evolve our relationships with our market tech clients. We definitely think that anti-financial crime is an area of very high growth. It's about 17% growth. It's about a -- what we do -- the part of the ecosystem that we serve is about an $8 billion TAM across both surveillance and fraud and AML detection and investigations. So we have a chance to continue to grow our presence in North America and then take the fraud and AML solution global across the banking platforms across the world. So that, to us, is just a really long runway of high growth. And then again, in our investment ecosystem serving the buy-side, we have this chance to really broaden out that network effect of the asset owners and asset managers and the data sharing across that ecosystem. So I think that in general, the bull case is that the private equity world continues to grow and gather assets. Their need for sophisticated solutions grows. The anti-fin crime space continues to become more sophisticated, and we're very well positioned with a SaaS-based, cloud-based solution set that serves those needs over the next 10 years. And then we also have a great growing group of corporate clients, where they have ever more sophisticated needs to manage their ESG programs. And we are there as their #1 kind of provider, hopefully, to help solve those challenges for them. And then on the back of that, we have this great foundational marketplace business in the U.S. and Europe. And there, I think that we've done a nice job of managing through a very turbulent period in the markets but also managing the growth of retail. And if the bull case would be that retail is here stay, the bull case is that we continue to see that accrue to the benefit of our trading volumes, our market data, our connectivity services. And then as we create a cloud ecosystem to support them, it actually just opens up more opportunity for us. So that's the bull case.

Okay. I'd love to dig into retail, particularly given some of the muni stocks going crazy today. But before we get to retail investment, can we just maybe dive a little bit more into the financial crime business and Verafin? So a couple of questions. You've had the business for a couple -- for a few months now. Curious how integration is going. Are the sales functions yet integrated? And more importantly, have you seen any sort of traction in your ability to attract sort of that bigger client base and cross-sell up into your larger financial institution space?

Yes. So we completed the acquisition in mid-February. So we're a couple of months in now, and it's been terrific. I think that first of all, Verafin is just a top-notch business. I mean, the leadership and the entire team is really amazing. The culture there is extremely integrated and tight. They've built out a cloud-native SaaS business. They do weekly releases. So they have an incredibly tight kind of release process and a really, really disciplined business, in general. So really great foundation. Where we have seen -- where we've been focusing on integration is, number one, on the sales opportunities. And not so much having an integrated sales team yet, that will come over a longer period of time, but more making sure that we are looking at those joint opportunities together. We're opening doors for them to larger banks. There also, we're helping them really develop what's their go-to-market plan for these larger banks, so that they know that they can kind of land and expand over time. What are they great at within their platform that will serve the banks quickly so we can kind of get some early wins for there. So that's one area of focus. The next area is then also on technology. So they have, as I said, a weekly release cycle. In our surveillance business, we do more like every month or 6 weeks, so it's a longer release cycle. So how can we shorten our release cycle and be more agile? So we're going to learn from them on that. But then on the flip side, we have great ability to manage real-time data in the cloud. And that's an area that they want to continue to evolve their platform towards. So we have an ability to share our expertise. And then the third area is just broader strategic. So how do we prioritize the next big opportunities? How do we look at our go-to-market in Europe, in Asia? Because those are big strategic decisions we're making to make sure that we create a really long runway for growth. And so that's been the third thing we've really been focused on so far.

How should we think about Verafin's competitive differentiation? I think a big problem with AML software or AML, in general, is the prevalence of a lot of false positives and -- which makes it incredibly inefficient. So how does Verafin compare to either competitors in that measure or big banks' in-house solutions? Just trying to get a sense of how much better Verafin is in the way that we can actually sort of quantify.

Yes. I think you look at both fraud detection and AML detection. And so on the fraud side, I think they have a very good proven ability to -- they invite the idea of doing a PoC with a client to say, "Okay, you have this incumbent. Well, give us your raw data, we'll show you how we would analyze that data." So you have a tool that basically stimulates again what we have found in your data and just show that they can greatly reduce false positives and be more accurate, right? So it's both false positives and maybe finding players that the other provider didn't find. They have a -- do a really nice job managing those PoCs so that, that kind of builds credibility and they can go in and then get the -- basically [ up seat ] the incumbent. And then the same thing on AML, it's harder. It's more -- AML solutions are more complex. But the area where they have both a big advantage in the U.S. is the network effect of the fact that the United States government does allow for limited data sharing solely to -- for rooting out financial crime. And so they have 2,000 banks now in their network. So when they have a client onboarded, they're not just looking at the relationship between the bank and its clients. But they're looking at the relationship with the bank and its clients and its client's relationship to other banks so they can help them really hone in on the real challenging or troubling activity faster from that network effect. And that's a big, big draw. And it makes it -- them much more accurate. So I think that's where they win. In terms of who the competitors are, they tend to compete with either in-house build or with more on-prem operators like Actimize or some of the large ERP providers that have some on-prem solutions. So where they differentiate themselves technologically is it's a much lighter implementation. It's easier to get up and running, and they get this weekly release cycle. So they're always staying up with the latest things they have to protect against.

Yes. So that network effect around the data and 2,000 banks seems very interesting and like a decent moat to the business. I would be -- I think a big, it would seem to me at least, a really good selling point for the bigger banks. So just curious sort of what's been the pushback in terms of penetrating big bank market. And it's early days yet, but are you actually seeing real evidence that you are able to fight that pushback and sort of penetrate there a little bit better?

Yes. I mean, they really haven't gone after the big banks. So there hasn't really been pushback. They just -- they've been very much a ground-up approach to market penetration. They're extremely disciplined. So they say, "Okay, we're going to start with the smallest banks. We're going to penetrate that space, and then we're going to advance our solution enough to manage the midsized banks. And we're going to penetrate that space, and then we're going to advance ourselves enough to manage the -- penetrate the larger banks, et cetera." And they've kind of gone up 2 rungs. And now they're just starting the penetration of, say, top-end Tier 2 or Tier 2 and Tier 1. And that's where we frankly, have the biggest, the most penetration of our solutions from a market -- a trade surveillance perspective. So we come at it from a capital markets perspective, where we have almost 200 banks and brokers who use our trade surveillance solutions. And AML and trade surveillance are convening. They're kind of converging a bit. If you are banking with a bank and you want to look at how to launder money, you might leverage the capital markets side and trade within that bank. And so we think that there's a way to kind of look holistically at those relationships and continue to find that behavior. But that's a great long-term vision. In the meantime, we think that they have certain solutions that are ready-made, ready to go, particularly around fraud detection, some AML detection. And then they have to broaden it out around investigations and case management. And that's areas where we'll continue to develop the platform to make it as robust as the largest banks need it to be.

Perfect. Sounds like there's already a lot of wood to chop from a growth perspective. But I'd be curious if post-COVID, the addressable opportunities have increased. If I think about work for home and the complexities around fraud, et cetera, because we work from home, I think about growth of crypto markets or the marijuana industry, just help to understand if there have been -- there are increased opportunities post-COVID.

I would say that there's increased opportunities just based on the continued development of the world. So COVID has not really had any particular negative effect on the business. If anything, though, they -- I would say they use conferences and other things to kind of create the top of the funnel. So that's an opportunity for them in a world where we kind of reconvene to continue to build out the top of the funnel. But generally speaking, I would say that all of those trends are driving the need for more advanced solutions. The work from home, this is a very portable solution. Same with trade surveillance, by the way. We definitely saw some growth in demand from just the work-from-home transition on the trading side. But we also just see all of those trends that you mentioned as just a growing amount of opportunity -- risk to the banks and opportunities for Verafin.

Let's just talk about the wider Market Tech business as a whole or the core Market Tech business, if you like. I think that's more of an on-prem versus a SaaS solution, and it has been impacted by COVID, I believe. So can you just talk about some of the actions you have taken to help stabilize growth and improve margins? And then longer term, how do you think about that business itself? Or what would it take for that business to also transition towards more of a SaaS model?

Yes. So first of all, just to take a step back, our Market Tech business, we now are -- have started to disclose 2 subsegments within Market Tech. One is the anti-fin crime technologies that we were just talking about, and those are all SaaS-based solutions. There is one component of that in the market solution for surveillance. Historically, it has been on-prem. But in the beginning of 2020, we launched a SaaS version of our market surveillance solution, and that's actually been -- every new sale has been in that -- with that solution. And we had actually, I think, almost like certainly a large handful of clients sign up for that SaaS solution in 2020. So that's all kind of migrated towards a scalable model. On the traditional, we call it market infrastructure technology. That's where we have historically been on-prem. Most of -- the vast majority of our clients continue to be on-prem. And so it's kind of a license implementation and service and maintenance contracts way of managing our revenue and managing our clients. But as I mentioned, we've made a significant investment in our next-generation trade life cycle technology, and that's in microservice architecture technology. We built the platform, and now we're building the application components. We now are -- have gone to market with what we call the Nasdaq marketplace solution, which is the opportunity for us to run an entire market in the cloud with a fast spin-up, custom config work but not custom code. And that creates a much lighter implementation to completely Saas. We're trying to get all of our new clients to embrace that technology, and that's been the way that we've been selling new clients. Our existing clients, though, we have to migrate over many years. Because they have long-dated contracts, they have to get themselves ready for a big transition. And so we are working with them right now to kind of talk about how they can migrate on to our next-gen platform with their renewals. And so that will be more like a 5- to 7-, maybe even 10-year migration up to a completely cloud-based type of way of operating. And we may have certain clients that always have challenges going to the cloud. But this platform, they can operate it on-prem. But we can service it as a cloud, right? Like we can service it in a SaaS format even if they choose to deploy it on-prem, if that makes sense. So that's our -- that's the future of Market Tech.

Great. Let's switch over to another of your fast-growing businesses, your Investment Intelligence business. Maybe sort of the index business, I think that, at least by our measure, is one of the fastest-growing index businesses out there. That said, you have had some recent client losses, I think, including, I think, a recent Vanguard loss. So can you just talk about maybe that particular piece of business, what drove them to let that go? But more broadly, how do you think about the long-term ability to retain sort of your clients?

Yes. So I think, first of all, we do have a spectacular index business. And we have had the opportunity over many years now frankly to grow and expand that business in terms of coming into partnerships with our index providers. And what we -- when -- we perform best when our index providers really leverage our full partnership approach. So we work with them on product creation. We do all the research for them, but we also leverage our brand and our marketing power to really help build out the investor ecosystem to support an index, and we really maximize the opportunity. So for instance, with Invesco, we've always had the QQQ with them. But now we have this whole innovation suite of products, and we launched the Nasdaq Next-Gen 100 Index with them last year and quickly gathered over $1 billion of assets. We're launching the biotech and semiconductor index products with them soon. And so we have a chance to really drive demand from investors for those indexes. But we also have some index partners that actually just see us more as a vendor. And so I think in the case of Vanguard, they kind of saw us just more as a standardized vendor. And that makes the decision different in terms of how they work with us but then how they might choose to leverage a different index for that strategy. And I think we obviously always look at those types of situations and say, "How can we get better?" I think operationally, we've gone through a very significant transformation of the business in the last several years. So we're IOSCO-compliant. We're really, really proud of the way that we can operate the index franchise today. But then we also have to make sure we manage those partnerships as effectively as possible. So you always learn from a loss, but we frankly have an enormous amount of momentum across all of our clients. And we're really proud of what we can do. And we see a lot of runway for growth there.

And then more broadly on the Investment Intelligence business, I think the growth targets you have there, about 5% to 8%, but you've been growing almost 2% to 3%, that pace over the last 18 months. So maybe can you talk about just broadly what sort of secular trends you see that have sort of helped grow that business? And as you look over the next couple of years, kind of what excites you in terms of growth opportunities there?

Yes. So when you look across Investment Intelligence, we've got the index business, and we see obviously a lot of runway for growth there with new product creation. We've launched a fair number of other new products like our Water Index last year as well as a crypto index product that we launched outside the U.S. this year with a partner called Hashdex. So we have a lot of areas and opportunities for us to grow. We're building out our ESG platform and kind of our suite of index products that are centered around ESG. So we have a lot of opportunity there. I think that with the market data business, that historically has been a more mature part of the business. And when you look at it, it used to be the majority of the revenue. Over the -- and last year, it's now become a minority of the revenue. And the reason is because it's a wonderful business, but it's growing, we say, kind of low to mid-single digits. We've had certain quarters that have outperformed that just based on finding new clients, particularly in the retail space around the world that really want to propagate real-time Nasdaq information around the world. So we're really, really excited about that. But it tends to be a more mature part of the business with some real pockets of growth. And then the analytics business is also one of those that has a really long-term, consistent growth opportunity. We now own eVestment, which is an ecosystem that basically matches up information from asset managers, allows asset owners to compare and contrast asset managers and strategies and making allocation decisions. Then we have Solovis, which then allows the asset owners to manage that portfolio of both private assets and traditional assets. And then we also have liquidity solutions that allow for the buy-side to manage -- whether it's private company shares or private funds on transfers, they can manage the liquidity with us. So it's a very nice, I would say, holistic part of the system for asset owners. And we definitely see a lot of growth trends. They historically have managed that with very little technology. Now we're creating an integrated way for them to manage that workflow. And we think that, that is a huge opportunity for us in that part of the ecosystem. And we're pretty excited about that, too. So that has a higher -- I think you've said high single-digit, low double-digit growth, and we've been able to outperform that in certain quarters in the recent years as well. So we're pretty excited about where that can take us also.

Great. Let's switch over to transaction businesses, and you mentioned the retail investor. But the cash equities and options business have been very strong for you and the industry as a whole over the last year or so. It's always hard to really understand sustainability. And certainly, retail plays a part in it. But I'd be curious how do you think about the long-term growth of those businesses, if the retail engagement is sustainable. You had some experience in the '90s. What does this look like relative to the '90s sort of retail boom? I'd just be curious of your view there.

Sure. Well, I think, first of all, we don't provide longer-term outlook on the trading business because of the fact that it is harder to predict. But when we look at kind of what are the overall underpinnings of the business, it really comes down to 3 metrics, right: Share, capture and volume. And so it's actually pretty straightforward to try to figure out how you -- what assumptions do you make that drive a different outcome. Where we see -- where we've seen a lift in volumes, we've also, though, managed our share very well and our capture very well. So we've seen more retail coming into the market. Most of the retail on like equities does not actually hit the market directly. There's an indirect add-on benefit that exchanges get from the internalizers. They take in all the retail flow, but then they have to manage their own risk. And so they send certain flow to the exchanges. We also, though, have the opportunity to make sure that we manage our capture successfully. So what kind of participation do we want in our market? How do we lean in, in certain -- to try to attract certain flow? How do we do it? Obviously, we do it on a very regulated marketplace environment. But we have, I think, done a very nice job of managing our share, managing our capture in a growing volume environment. Where -- and I would say that's across both equities and options. Looking forward, is retail persistent? I think that there are elements of the retail that will be persistent. I think we've engaged a whole new generation of investors that want to control their money the way they want to control it, that have applications that are very easy to get onboarded. There's very little friction now without a transaction cost associated with trading. And so -- and they're highly engaged. And so I think that there's an opportunity for us to see persistence in that -- some level of engagement from investor -- retail investors. Where I'd like to see more opportunity for changes is for us to be able to compete for that order flow more effectively. And I think that, that will give us even more of an opportunity to show our benefits and be everything we can be. In terms of transparency, fairness, competition, I think that we do all of those things quite well. In the options world, all the volume goes on exchange. So we have definitely seen a really nice, persistent uplift in the options markets as well. And we're very excited about that, too.