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

Welcome back, everyone, to Piper Sandler's Global Exchange and Fintech Conference. We're very pleased to have the President and CEO of Nasdaq, Adena Friedman presenting to continue on our discussions about networks and virtuous cycles and so forth that really the exchange is, in all and some shape or form, I think, participating, but that certain have -- have certainly been successful over the last couple of years. So Adena, welcome.

Thanks. Thanks, Rich. It's great to be here.

So I'm going to avoid the sweet spot analogy because that confers maybe sort of luck. I want to talk more about the virtuous cycle and how you've sort of built off the foundational businesses of NASDAQ. And the foundational business being really the listings business. And how robust it's been recently and then how that leads into, say, some of your other business segments, and you could choose because we know it is a flywheel, but how that has benefited sort of not only corporate platforms but some of the other, whether it be certainly the market services business. But I'll turn it over to you, Adena.

Okay, great. Yes, thank you. Well, first of all, it's great to be here. And it has been a really interesting time at NASDAQ here in terms of that virtuous cycle. We've always had it. So we always have seen NASDAQ as a platform business. And when you think about who are the constituents we serve on the platform, as you said, it starts with the corporates. The companies who are looking to tap the public markets to raise capital, they come to NASDAQ and then, of course, we benefit from the trading of those companies. We offer them IR and governance solutions that then help them mature as public companies. We then, of course, have our index business, and our index business has grown and expanded beyond Nasdaq listings, but those -- the benchmark indexes that we have, of course, are a wonderful outgrowth of the listings business. And then, of course, then with all those relationships with the buy side, we now have a scaled data and analytics platform to serve the buy side. And then on the back of all the technology that we have to serve our markets, we provide that technology to 130 other markets and about 200 broker-dealers, and now with Verafin, 2,000 banks on the anti-fin crime side. So it's -- the platform that we've built, I think, is definitely benefiting tremendously from kind of not only the momentum in the economy but all the work and all the foundations that we've laid here at Nasdaq. So with the listings business, we've had about a 17% increase in our listings over the last 2 years. We thought that 2018 and '19 were busy years. We had about 185 listings each of those years. And then last year, we started off strong. We've had this incredible pipeline of companies coming and then COVID hit. And we thought, the year is going to look different. Well, it did look different, but we ended the year with 315 IPOs. And so far this year, we've had 350 IPOs. Now when we break that down, we have -- obviously, there have been a lot of SPACs that have come out, and they raised capital generally using the capital market, which is a lower fee base. So the SPACs today represent about 5% of our overall annual listing fees. But when they combine with an operating business, they generally graduate to the Nasdaq select market, which, of course, increases the fees and then makes them eligible for our IPO package for IR and governance services. So we have a long tail on the back of those back combinations, which is really terrific. With the operating companies, we've had about 130 operating companies go public just this year so far, with a very, very busy pipeline. We have about over 200 companies that have filed S-1s or on file -- not S-1, sorry, they're on file with us in terms of anticipating a potential listing sometime in the future. So it's a very active time. I also do want to point out that our Nordic markets have also been active. We've had 50 listings in June alone. We've had -- we have 11 listings this week in the Nordics. It is a very, very vibrant marketplace as well. And so we also have that same flywheel. And there, of course, we have a higher market share of trading, and so that flywheel has even -- benefited even further with our Nordic exchanges as well.

Thank you for that recap. I actually went back and if you look -- and it should not have been, but it was a surprise to me, when you look at your listings revenue and -- from the first quarter of '19 to about the second quarter of '20, it was pretty steady. But then you saw the last 3 quarters or so, a dramatic increase. If you look at the averages, these last 3 quarters has been 20% revenue -- the revenue per quarter has been 20% higher than the 6 quarters prior, so 7 quarters prior. And I guess, I did check your peer, and they were flat. So you are seeing the benefit whether it be combination, I'm sure, of Nasdaq as well as the Nordics. But I do want to take -- move to a logical step to me because I've been -- my foundation is on the trading side. But I don't know whether -- can you walk through, just because it's a listing, for some people that aren't as familiar, what advantage does Nasdaq have to monetize a listing from a trading standpoint?

Yes. No, it's a great question. So as most of you know, we -- all of the exchanges trade all of the shares. Every U.S. equity security is traded on Nasdaq regardless of where they're listed. However, with Nasdaq-listed companies, we have a higher market share of our own listed companies than we do have of others. So we have, of course, are the #1 exchange venue for Nasdaq-listed companies with higher market share than our overall average. We are, frankly, the #2 venue for New York Stock Exchange-listed companies. So obviously, they have higher share on their own listed names. And the benefit of that also is, of course, we have more features and functions that we offer to our Nasdaq-listed companies most notably the opening of close, which also gives us kind of a different capture there. So it's wonderful when you have the flywheel effect working. We have 80% of all operating company IPOs are coming to NASDAQ. We've raised over $90 billion on Nasdaq just so far this year. And so all of those new shares, all of those new dollars are now traded in our -- on our exchange, and with higher share and more features and functions available to those companies. So that's kind of the next wave of that flywheel effect is the benefit to trading. And as we know, it's been a very high-volume environment now since about the end of February of last year. But -- and that's a combination of a lot of things. First, it was volatility, then you had more retail coming into the market. But then on the back of that, you also have more companies on exchange trading, and that also drives more shares of trading as well. So it's -- again, it's a flywheel effect that's coming into play right now.

So the listings drives incremental trading revenues. I think it's almost 3x the market share, I believe, on a Nasdaq-listed stock that you have but beyond the trading and get the open and close, but can the effects on Market Day a very simple one?

Sure. Yes. So I think then on the back of the trading, of course, then we have a great index business, and we've had our marquee index with the Nasdaq 100 has always been our benchmark. It clearly leans into the future of the economy. We then have developed a lot of other index products that are supported by our listings as well. The Nasdaq Next 100, the Nasdaq Next 50, and then also on top of that, some thematic indexes like the semiconductor index, biotech and others. So we have a whole profile of indexes that really lean in on the future of technology. Now we also then have a very wide scale, broad scale, smart beta index franchise as well that's not dependent on being listed on Nasdaq. So we took our benchmarks and our position with our Nasdaq-listed indexes, and we've turned that into a much broader index franchise now with over $350 billion of AUM tied to our indexes. And so about 40% maybe a little under 40% right now of the AUM is in smart beta indexes as opposed to the benchmarks. And on the back of all the interest that we've had in our markets over the last year, we've continued to expand the Nasdaq 100 and Nasdaq Next 100 franchise, listing them in other countries around the world, and continue to kind of broaden the profile of those benchmark indexes around the world as well. Now lastly, on the back of all of that, you then also have more retail investors coming into the market. And that means more -- and that's from all over the world. So that means more of the retail platforms are looking for real-time data. So we've had a very nice -- and we've been at this now for several years, but we've gone and globalized our sales and our product offerings to make it -- so whether you're in Asia or whether you're in Latin America, you have access to real-time data on Nasdaq. And then, of course, they -- those retail platforms use U.S. brokers to bring order flow into Nasdaq. So it's a really nice, as you said, kind of flywheel effect across the franchise.

So we've gotten from corporate services to -- we got to market services and investment intelligence. But these listings don't come or your share of the listings don't come without a brand, without the Nasdaq brand that's been established. So if you want to be conceptual a bit when you continue on the flywheel, that how does the brand impact some of the things you do in, say, market technology and say even Verafin?

Yes. Yes. I wanted -- as we started back in 2017, when I became the CEO, we did a very deep strategic review of the business. And we said, what are we really good at? What aren't we as good at? What do the customers expect of Nasdaq? How does our brand resonate with our clients? And what we found was most certainly this -- we have a brand, of course, of innovation. We are very fortunate that we have that brand because of all of the listed companies that come to us, but also because of the innovation that we've instilled inside our culture forever, almost for 50 years. But we also have that brand of integrity. And so one of the areas of our business that we've really focused in on has been how do we take our technology that powers our own markets and bring that around the world both in terms of our trading technology and settlement technology, but also our anti-financial crime technology. And we've been in that space now for many years. First, with our core market tech, where we power 130 other markets around the world. And when you think about what is part of that buying -- what is part of the value proposition is having other exchanges understand, but they're taking the same technology that powers our own markets. And then on the anti-financial crime side, we have our market surveillance platform, our trade surveillance platform and now with Verafin, our anti -- a broader anti-fin crime platform for AML and fraud across the banking system. And that really comes with that brand of integrity, trying to drive integrity and make sure we enhance the integrity of the capital markets and now the broader financial system. So that's how we've been able to leverage our brand to continue to expand out the products and services we can offer our clients.

So I mean, it certainly makes sense that if NASDAQ, not of the brand, if it powers Nasdaq, it can power doing x billions of shares a day and options as well, it can power a different exchange. And I'm sure we could go on and on with this flywheel and take it even further with the private exchange. But I do want to get your thoughts on a couple of -- as we talked prior, you said that's one way to look at it. And it does. It explains I like the sort of the concept of the flywheel and how it impacts the different segments. But you also just talked about your strategic pivot. And there is other perspectives on how to look at it. And maybe just give you a version of how you pivoted to be a tech company, where at some point, more than 50% of your revenues come from technology, could be viewed as tech revenues or SaaS revenues. And the advantages is that these investors appear to give SaaS-type revenues, the recurring sticky-type revenue, so?

Sure. Yes. So I would say the strategic pivot really focused in on an outside-in view of the client needs what they are today, what they're going to be tomorrow and what technologies are they going to look for in order to serve those needs. And so what we've really been focused in on is making sure that we do use modern technology to serve our client needs. Now some of that is the benefit of launching an entire product base on a SaaS platform, a hosted platform. So for instance, our trade surveillance platform has always been SaaS. Our governance platform has always been SaaS. When we rebuilt the IR platform after we bought it from Refinitiv, we basically rebuilt it as a cloud-based SaaS platform. EVestment has always been a SaaS platform and cloud base. That's been in Amazon for a long time. And Verafin was also built as a SaaS platform and now is fully -- it's cloud native. They rebuilt it completely as a cloud-native platform many years ago. So we have the benefit of having all of these great SaaS platforms that serve our various constituents, so in IR and governance, in anti-fin crime and the data analytics that serve the buy side. But our market technology has historically been an on-prem business. It's just a -- it's more traditional where most exchanges around the world have operated and continue to operate with an on-prem architecture and infrastructure. And what we're trying to do now is push that envelope to take our clients forward, take our own markets forward into a more cloud -- I would say, a cloud-ready state, and then over time, look at that migration into a cloud environment for markets around the world. So 4 years ago, we -- actually, 5 years ago, we embarked on building out our next-generation trading life cycle platform. And we built it as a micro service architecture kind of platform. So we call it the Nasdaq Financial Framework, that's the platform. And now we've been migrating all of our applications onto that platform. And now we're ready, we have in-production service now both for one of our options markets. We've migrated it on, and we're going down the path of migrating our own markets onto it. But we also have the Nasdaq marketplace services platform, which is a trade life-cycle solution that's cloud native, deployed in the cloud. We have clients using it in the cloud. And we are now moving our core market tech business slowly and surely over to a SaaS orientation for our clients. And I think that will serve them much better and allows them over time to think about changing their footprint and bringing more of their markets into a cloud environment, making them more scalable, more affordable over time to manage as well as our own markets that we're going to do that -- for over time as well. But then for any new market that comes alive, so we serve -- we actually provide the technology several crypto exchanges, new markets like fractionalized real estate, a couple of exchanges in the fractionalized real estate space, sports betting, those are all cloud-native applications now that allow us to really scale that business in a SaaS format. So one of the things we did at our Investor Day is we talked about, "Okay, well, how much of our revenue is annualized recurring revenue, ARR? And then what percentage of our ARR do we want to have a SaaS revenue?" So first of all, what's included in ARR, we have about $1.5 billion or a little over $1.5 billion of revenue that is ARR. What's not included in that is our index business because that's AUM driven and our markets businesses. But first, AUM-driven revenue is wonderful and annualized and sticky, but it's not contracted as annual revenue. Then as a percentage of ARR, we want at least 40% to 50% of our ARR to be SaaS revenue. And today, we're in the 30s. So we have some room to go to get into that and Verafin, obviously, is going to help us catalyze that as well.

The -- that's helpful because there is -- as you were talking, I was saying this, I don't really think there's -- maybe the better way to say it is they were integrated, the different perspectives to look at it. You certainly leverage the flywheel, but you integrated or you integrated these other objectives to get...

That's right. That's exactly how to look at it. It's kind of -- you start with the outside-in, and you say, how do you want to deliver that? Then you say, "Okay, well, what does that mean in terms of our operating model?" And our operating model is we want to bring more and more of our capabilities into a SaaS environment. We want to make sure that we create a nice recurring revenue opportunity for ourselves, higher growth opportunity as well, better cost of management for the client and hopefully, a higher value proposition for them, while we obviously deliver a higher value proposition for our shareholders.

Got it. Got it. I got 2 last questions. One being -- I'm going to sort of leverage this idea of bread and flywheel. But you are now spoke -- when NASDAQ speaks about market structure, it's -- there's -- it's a trusted voice as well as ESG, which you have spoken about. But let's just take the market structure aside. Chair Gensler spoke -- he's been very -- he spoke yesterday at this conference. And again, if I could sum it up briefly, nothing really new, but the certain topics that you have -- it seemed like he had even more conviction whether it's payment for order flow, gamification, concentration, et cetera. So I guess the question is, where does Nasdaq come out on some of these reforms you see for retail? And do you think -- what would you recommend as the approach there? Because he's been pretty strong coming up, sorry.

No, no, that's okay. Well, we have really obviously, read everything he has said or watched what he said yesterday, and it was great to see him in the program here because it definitely helps us start to understand how he's thinking about the priorities and now he's articulating his agenda, which is helpful. From Nasdaq's perspective, we look at 3 pillars within market structure: transparency, fairness and competition. So if we look at how do we create a transparent environment for investors, and that really goes to the quality of the national best bid and offer. It does the national best bid and offer truly reflect supply and demand in the market at any given moment, and frankly, in any given microsecond, does it reflect the proper supply and demand? The second is fairness. Are all of the market participants, investors, institutional investors, retail investors are they treated fairly? Do they have fair access? Are the rules fare to support their interactions with the market? Have we reduced friction to make it more -- the markets more accessible? Those are -- that's the fairness side. And then, of course, competition. Making sure that there is a vibrant environment here that market participants are competing for order flow. Then retail brokers are obviously putting their orders in and retail investors have the opportunity to compete for order flow. And so all of that to me is a combination. So those are the principles we stand by. But I think it is important to note, first and foremost, that the markets work quite well today. The markets have been very resilient through all of the crisis moments. I think that the SEC has actually done a great job from a regulatory perspective. For acquiring that markets, brought orders to each other, we back each other up. We do a lot to be coordinated across markets, even though we compete with each other. I think that the SEC has done a great job creating a resilient system. So now it's really, to me, kind of tweaking those other points, whether it's -- what are the incentive structures that exist? Do investors have all the information they need to understand how their orders are being routed? Are they getting best execution? Is there an active competitive landscape? And exchanges and off exchange venues, is there a level playing field for competition? I think those are things that we're going to care about. And that will -- but I also would say one last thing, which is we prefer incremental iterative change than big bang change because the law of unattended consequences in this space are very high. And we want to make sure there's just so much money flowing through the system that if you have unintended consequences, it could create incentives that you didn't mean to. So I would -- it would be great if we could have a more iterative approach to advancing the market structure and understanding the impact and then trying the next thing and then trying the next thing, so that we find that optimal structure. And I -- one of the great things about market structure, as you know, it never gets boring. It's an eternal learning curve. I've been in the market for 27 years, and I learned something almost every day. And we can always get better. So let's -- we look forward to working with the SEC to continue to get better.

I think what you said about unintended consequences that was about every question that I was trying to see -- try to get the balance. If you do this, are you considering x, and that was my point. And hopefully, they will. Anyway, last question, and I think this is a great question because my intel has told me that you are into longer-term plan, the 5- to 10-year planning. It's not just about next year, next quarter, but where does NASDAQ going 5 to 10, and that's the breadth of -- pretty refreshing. So -- we are short on time, but can you just talk about what excites you most about the 5- to 10-year plan that you see for Nasdaq, that you've been a part of for the last almost 2 decades?

Well, first of all, we really have passion for what we do, and we think about that a lot. So that's actually a big part of what we talk about internally in each of the businesses. But in a 5- to 10-year basis, think about a more nimble ecosystem that serves the markets, whether it's cloud-based or at least cloud-enabled, so more nimble software serving the markets. Nasdaq having a much bigger impact on the integrity of the financial system with anti-financial crime and continue to scale out that platform, globalize Verafin and make us really the #1 provider of anti-financial crime technology to the industry. And then also really advancing the workflows for the asset management community and asset owner community, particularly in the ALT space because I think that with eVestment and Solovis together, we can really create and modernize the experience for asset owners and asset managers in the ALT space. And then, of course, on our corporate side, continuing to be that -- the #1 platform for companies to come public and access the public markets and having more intelligence and more capabilities to serve them as public companies going forward. So hopefully, you'll see that this is all really, as you said, advancing the flywheel, expanding that flywheel to have a bigger impact on the industry in the next 5 to 10 years.

That's great. And I was told not to draw too much praise that you'd be not -- uncomfortable, but you've done a wonderful job in the 4 years, and we're very interested to see where Nasdaq does and you certainly become part of the brand as well. So...

Thanks. Well, I'm excited for the next 5 years myself, so.

You're bringing that Black Belt energy through, I can feel it. Anyways, unfortunately, our time is up, but thank you. And we appreciate you participating.

Thanks a lot, Rich. Thank you.

So folks that ends our session with Nasdaq. Next up is eVestment, and they will start at 11:30. And thank you again, Adena.

Thank you.

Appreciate it.