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

All right. We're back. Hello, everyone, and welcome to our session with Nasdaq. For everyone who hasn't seen me so far today, I'm Alex Kramm, senior research analyst at UBS covering the U.S. exchanges, rating agencies, information services and the commercial real estate brokers. And next up, as I just mentioned, we got Nasdaq with us and the, I guess, not so new anymore, but newish CFO, Ann Dennison. So thank you very much, Ann, for joining us for I guess the first, hopefully, of many of our conferences and maybe at some point, again, live conferences if we ever get back to normal. Anyways, just as a housekeeping item for the audience, we -- there's an opportunity to ask questions throughout the session. We'll do a fireside chat here, and I have plenty of topics that I want to cover. But if you have any burning questions, please use the web tool to send a question.

So with that, again, Ann, thanks for joining us. Since there is no formal presentation, why don't we start real big picture here. Forget the environment and COVID, et cetera. In 2017, and you were already at the company at that point, there was a strategic pivot that Nasdaq had announced. It seems like you've accomplished a lot since then. So 4 years later, can you give us an overview what you were trying to accomplish? Where we are now? And then, of course, what's still ahead as you have entered now the next phase of the company evolution. Thank you.

Great. Thanks, Alex, and thanks for having me here. Happy to be here and I really look forward to the next in-person one. So on the pivot. So going back to 2017, a new CEO coming in, executing a strategic pivot, going out to our clients and really understanding the landscape. And our goal of the pivot was really to transform our business to meet critical client needs and bolster our position in the highest-growth opportunities in front of us, so in the Market Technology space, Analytics and ESG services. And we really focused on, throughout the pivot, creating scalability and a long-term path for growth. At the same time, we continued to invest in our foundational businesses, which really complement our other product set. And so we've made substantial progress, increasing the portion of our revenues coming from these areas in market tech and analytics. And then looking at sort of the stats, we more than doubled the growth trajectory for our Solutions segments. So if you look at '16 to '17, our growth rate on average was about 4%. Between '18 and '20, we averaged 9% growth. So what do we do from here? So from here, we have a clear path to build off of these higher-growth opportunities while accelerating our transition to more SaaS offerings in our tech, data and analytics businesses. So we did announce some objectives at our 2020 Investor Day, including the -- one objective of delivering -- or deriving, I should say, 40% to 50% of our ARR from our SaaS offerings by 2025. And then with the Verafin acquisition, we've raised our organic growth outlook for the Solutions segments. And so in general, we also -- next phase includes adopting more of the best practices of SaaS companies in terms of things like client acquisition, new product development really to continue to support our evolution and accelerate it.

Great. I'm sure we'll unpack more of this in a second. But just as a quick follow-up, as part of the strategic pivot, you've also -- I mean you've acquired some assets, but you also divested a few. Where do you see the portfolio today? Are there still things that don't fit? What areas do you need to strengthen? So I guess it's a question about both buy and sell.

Sure. So I think if I look at the portfolio today, and we feel better than ever about our positioning, the business portfolio and our organic growth potential. We raised our medium-term organic growth objectives for -- 2x since initiating the initial pivot. And since the pivot, we've divested noncore assets, including our U.S. fixed income business. And through those divestitures, we've received over $700 million in proceeds. So that's sort of what it looks like so far. Each year, we go through a comprehensive capital allocation process where we look at all of the products across the portfolio. And we're going to continue to do that over time. So from a not-fit perspective, there's nothing notable right now, but we're going to continue to do that process as we move forward. In terms of strengthening, we are focused on 3 key areas of investment: in our anti-fin crime; our analytics, so the investment management workflow capabilities; and also in our ESG space. So as we move forward, we're investing in the kind of capabilities and skills that really distinguish the most innovative technology leaders and will help us drive growth and scalability, things like agile project development practices, machine learning expertise and more sophisticated marketing and client acquisition analytics. All of those are designed to give us an opportunity to improve our effectiveness beyond what our portfolio repositioning has delivered thus far.

Okay. Great. And then maybe just coming back to the first question. But as you know, for me, the focus has always been -- was very much on the organic growth in the nontransaction areas. You just talked about it. You raised the medium-term targets from 5% to 7% to 6% to 9%, which, by the way, for those people who don't remember a few years ago, that was, I think, 3% to 5%. So you've raised them a couple of times now. But what gives you confidence that you can stay in that range over the medium term? Again, pretty holistic question, but you know where I'm trying to go.

Yes, absolutely. So as you mentioned, over the last 3 years, we've been able to set higher targets for our organic growth in our nontrading or Solutions segments. So moving originally from the mid-single to 5% to 7% in '18, and now 6% to 9% as we look forward with Verafin in the mix. And when we look at how we’ve performed against those targets, we've been able to deliver near the top end of these ranges over several years, while also seeing high performance in our Market Services segment that we don't give a growth outlook on. So that's sort of the history. But what gives us confidence going forward as we look at the organic growth objectives is really the strategic and capital decisions that we made to pivot towards the higher growth opportunities as a technology and analytics provider. And we are really aligning here with the stronger and more durable secular trends that have much larger growth opportunity and addressable market. So that gives us confidence as we look forward.

Okay. So let's shift a little bit more near term here. So the 2 segments that have outperformed the long-term targets the most, I guess, this year are both Corporate Platforms and the Investment Intelligence business. So how sustainable do you think these results are? What can go wrong? Are there any areas that you're clearly over-earning on. I think we've asked it in the past. And maybe even outside of those 2 segments, any other areas that are just really hitting above their long-term growth rates because of market data, capacity demand. This environment may have driven some outsized growth that was more than normalized. So what areas should we be thinking about?

Okay. So let's start with Corporate Platforms. So Corporate Platforms, we've experienced in recent periods, the highest levels of IPOs in 20 years in the U.S. market. And we've capitalized on that with the strongest value proposition and competitive position that -- competitive positioning, excuse me, that we've ever had. And now -- and this has allowed us to win 4 out of the 5 companies that have gone public. Look, longer term, those wins did translate into substantially higher annualized recurring revenues in the Corporate Platforms business. And that will be recurring, right, creating a much higher base to grow off of in the future in terms of listing revenues. But perhaps more importantly, giving us that positive flywheel effect in terms of the potential for things like increased equity trading as well as selling our IR and ESG solutions that we deliver to our corporate issuers. So that's the Corporate Platforms side. Then you also asked about Investment Intelligence. So in terms of Investment Intelligence, index in particular, grew far above our typical medium-term expectations in part or materially due to the way we've issued like our thematic indexes. So we've got the Nasdaq 100 and its constituents, and that has become more prominent than ever before because of the importance that technology in our economy has and the relevance of our index franchise to the current economy. So the index business definitely has significant sensitivity to beta dynamics in the market. And so of course, we would see downside of, say, market valuations, if there was a correction and market valuations significantly contracted. But we'll continue to execute on the opportunities to introduce new products. We've done 30 so far this year and generate positive net inflows regardless of the beta fluctuations. And then you asked about downside for things like market data or connectivity demands. And theoretically, we can -- if we were to encounter a substantial, prolonged contraction in the markets, we could see some downside there. But historically, the typical correlations there to market volumes have been pretty modest in most periods.

Okay. That's helpful. And I guess, other than that, no real items that you think about in terms of over-earning that we didn't touch upon, right?

No. I'm sorry [indiscernible]

No, that was so comprehensive. I appreciate it. Flipping to the other side. I mean really on the Market Technology side, that unfortunately has been a laggard over the last year or so. I mean is that still all COVID hangover? And you've talked about this on the earnings call. Or are there any other underlying trends that we should be watching? I mean you've positioned that business as really the fastest-growing part of Nasdaq. That's what you want it to be. So what will it take to get us back there, I guess, is the question.

Okay. Yes. No, great question. So maybe I want to just start with within the Market Tech business, we now report 2 subsegments. So there's the Anti Financial Crime Technology business and the Market Infrastructure Technology business. And so we can maybe talk about them a little bit separately. The anti-financial crime business is the higher-growth business and is growing organically in 2021, consistent with the medium-term outlook. So that component of the business, which is largely SaaS and cloud enabled, has not suffered some of what we've seen, the COVID hangover as you described it. So -- but if we move to the market infrastructure business, that business, where we're delivering more large-scale, on-premise solutions for our clients, has been more acutely impacted by the pandemic-related factors that we've been talking about over the last 12 months, including delivering and selling in a largely remote environment for these large-scale delivery and implementation projects. So hopefully, this environment changes in the future, but it's still one we're dealing with. That said, as we talked about on the Q2 earnings call, we saw a healthy mix of -- both a mix and dollar amount of order intake, mix being existing and new clients, during the second quarter. And we noted in the conversations that we're starting to see some positive momentum from the client conversations, with them focusing on the longer term. So we see an improving demand picture. Plus we're executing against the higher-growth secular opportunities in the anti-fin crime, including Verafin. So together, those things give us confidence that we'll -- we're on the road to get back.

Yes. Since you just mentioned Verafin, I'm going to jump right there. Give us an update, I guess, is the fast way to ask it. I mean the company is clearly in a fast-growing space, financial crime. So again, how has Verafin been doing since you've owned it? And most importantly, where do you see the biggest opportunities? And how can Nasdaq help in that, I guess, continued growth for that business?

Yes, sure. So we're so far so good, I would say, to start with. Our aspiration coming into the acquisition was to support the excellent growth that Verafin was already exhibiting, and then really to accelerate their progress in certain areas. So Verafin right now serves Tier 3, 4 and 5 U.S. and Canadian banks, so North America -- in North America. And they've established a leading position there with over 2,000 customers. But where we think we can help and open doors is really in penetrating the Tier 1 and the Tier 2 space. And so the Nasdaq relationships in our existing -- the existing surveillance business or Trade Surveillance business, the majority of the clients there are in the Tier 1 and Tier 2 space. So we're going to be working with them to target the global banks where we generate most of our pre-Verafin business on the anti-financial crime side. So we're incredibly focused on fostering the adoption of Verafin by the Tier 1 and 2 banks, both domestically and internationally. And so that's what we should look to as we sort of move forward as the litmus test for whether we're executing on the strategic vision that we brought into the acquisition.

Any early success? I think you mentioned something on the earnings call. But maybe any other things that you can point to where -- I don't know if it's even like pipeline. But obviously, any sort of new customer wins that you would highlight?

Yes. What we did point to on the second quarter call was we signed our first European client in this space. And super happy to close that one. We'll wait for the third quarter call to give an update on how we're progressing around the rest. So nothing to update right now, but we hope to be updating along the way as we make progress in our area of focus.

Fair enough. And then maybe just staying on the financial crimes space in a minute -- for a minute, do you think if you look at that space holistically that you're in a good position now? I mean there are a lot of different companies doing a lot of different things. And you've had a legacy business, now you have Verafin. But are there certain use cases that you're not touching that you think you should be touching as you may want to have a more holistic solution? Or how should we think about your positioning in that financial crime space?

Sure. So I would say, think about our -- we have strong positioning in the AML and fraud space, and fraud encompasses Trade Surveillance as well. And so we've got complete offerings there for certain client verticals. And we think that the combined capabilities of Nasdaq and Verafin give us a unique scale and global reach, and we are really well positioned to meet our client needs and capitalize on the secular trends in what our expectation is a large TAM that's growing at 17% a year. So our product offerings are strong. There are opportunities for us to further penetrate the growing global market. Also, we could further expand our offerings into certain client verticals like the fintech space or the crypto space. So we're serving 9 crypto exchanges in our Trade Surveillance business. And we think there's opportunity beyond that on those client verticals. And then in terms of cases we're not strong in, I guess I would think about it more in terms of just areas of financial crime that we're not serving. And there are certain categories of financial crime. I think probably the biggest one is the Know Your Customer, or the KYC space, and then there are other product verticals that we just don't offer products in. And so we see really good growth opportunities in the product offerings that we're in. And so we're -- right now, we're not pursuing sort of a broader product objective.

Yes. KYC seems to be a crowded field, but you don't think that is -- that you need to have that as a building block. I guess just to come back to that question.

Yes. I mean it's not on our near-term plans, but those could change.

Fair enough. And then just shifting gears a little bit. One of the things -- and I didn’t even seen in the last presentation anymore. But at the Investor Day, I think alternative asset management was another focus area. And I don't want to say you've deemphasized it, but it hasn't come up. So just a reminder, what you're doing there, or if there's an appetite still in that space, opportunities you see? Or has that taken a little bit of a back seat?

Yes. No, sure. It's still one of our 3 key areas of strategic priority. So it sits within the Analytics business within Investment Intelligence. And the alternatives offering is across analytics, data and workflows when you think about eVestment, Quandl and Solovis. So eVestment is a leading institutional investment intelligence platform that covers public and private markets and serves investment managers, asset owners and consultants. And then our tuck-in that we did recently is Solovis, which is a multi-asset portfolio management platform, and their client base is limited partners. And then we have Quandl, which is a marketplace for financial, economic and alternative data. So when we think about the road map and the opportunities that we see, we are focused on expanding our private market capabilities into our existing Analytics offerings, adding alternative data content and workflow tools and allowing us to serve the broadening needs of investors across the public and private markets by expanding our asset class coverage. So very much still part of our strategy for the long term.

Yes. I may be asking the second question -- the same question again, but -- and maybe I should have asked this one before. But zooming out and not just thinking about alternative asset management, when you do -- when you do look at the long-term strategic vision, the 2 biggest SAMs, I guess, relative to your current presence are within the technology and the Analytics business. So again, looking at analytics a little bit more broadly, because analytics is a broad heading, right? Analytics can be a lot of different things, right? What else that we haven't talked about, do you mean exactly by analytics? And what you're the most excited about?

Yes, sure. So we're extremely excited about the potential for analytics and workflow solutions to really address some of the material challenges that the investment management community and their asset owner space as they're facing change in the industry. So we are excited about the solutions we offer to clients that make them more cost efficient, help them compete for more assets -- for assets more effectively, and also to get new insights that could help them generate additional alpha, like within alternative investment data, for example. So -- and you mentioned the SAMs. And as you said, in technology, we've got our largest SAMs in Analytics and technology. And we really couldn't be more pleased to have the positioning and the potential to be a leader in Anti Financial Crime Technology, which is a really fast-growing area, like I said before. And where there's both a great business opportunity and also an ability to contribute positively to the world in terms of fighting crime.

Like we want -- all want you to, I guess. Just one quick follow-up here. And I noticed this last night when I was looking at your latest investor presentation that you put out, there was a slide that when you think about your 2025 targets -- and again, this may just the way the bar is laid out. But basically, it looked like in your 2025 goals, the index and the Analytics portion of your -- were going to be the same size. And I don't know if you -- if you know what I'm talking about. But basically, I think combined, they’re supposed to be 60%, and Market Data is going to be a smaller portion. It almost looked like they're going to be the same size. I don't know if that was by design or not. But when you think about your 2025, do you actually think that Analytics could be as big as index? Or is it just for illustrative purposes, right? Because if you want to get there in 4 years, you probably need to do a bunch of M&A to really take the Analytics business to be as big as index.

Yes. That may just be sort of how the illustration come out -- came out on the chart. There's not a specific objective to make that happen. What we have been focused on is really looking at the combination of Analytics and index and making them the majority of the Investment Intelligence segment overall, which is a recent achievement. So I'll have to look into that split there and understand that, but that's not a specific objective that we really…

Yes. I just wanted to verify if you're trying to tell us anything there. Switching gears for a minute. Since you are the CFO, so I need to ask about costs. When you did Verafin -- actually, when you closed Verafin, I think you raised your long-term expense growth targets. That being said, with the business being so strong, you've also gone above your targets, I think, in the last couple of years here a little bit. So can you talk about your expense philosophy broadly? I know you're a growth company. You need to invest. But how important is it to show investors long-term margin expansion? And how willing are you to make hard decisions? In particular, when it goes the other way as you have some market-sensitive businesses that can work against you once in a while.

Yes. Maybe starting with some history. So we've been very deliberate on how we're allocating resources. And that has led us to deliver the highest operating margin in company history in the most recent period as well as exceptional organic revenue growth. And so our non-GAAP operating margin was 49% in 2019, went to 51% in 2020. And in the first half of 2021, it was at 54%. And we have organic revenue growth for the Solutions segments for the first half of this year at 17%, and that was 10% in 2020, so well above historical periods. When we think about how we manage the balance between revenue and expense growth, we've got our outlook on the Solutions segments, and we've obviously got our range of expense growth on expenses. And so in any given year, we can be outside of the range depending on where we are from a revenue perspective. As we look forward, like you said, we are a growth company. We need to continue to invest to achieve the levels of growth for the long term. But as always, we always carefully consider the environment we're in, and we aim to strike the right balance and deliver attractive top line growth and bottom line growth. So I guess it's the -- probably, we would say that we'll make hard decisions when we need to, but we're going to look at the long-term prospects and make sure we're hitting the right balance in the short term as well.