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

All right. Good afternoon. We'll go ahead and get started with the next session. I'm Patrick O'Shaughnessy, capital markets analyst here at Raymond James. Presenting next, we have Nasdaq. And on Nasdaq's behalf, we have CFO, Ann Dennison. Ann is going to go through a handful of slides to kick us off, and then we will move into Q&A from there. So with that, Ann, welcome.

Thank you. So thank you, Patrick, for having Nasdaq here today, and the rest of the Raymond James team. And also thank you to all of you guys who are attending this session. I know you have choices. So hopefully, I can make it worth it. I'm going to just do a quick stop here on the disclaimer page. I was thinking about reading it, but it's a little bit long. So I'm just going to leave it there. It's available on our website if you want to read it. These are our legal disclaimers, required legal disclaimers. Okay. So we're going to kick it off. I'm going to kick it off with this slide, really, to talk about some key themes that I'm going to cover throughout the next -- I have about 10 slides all in all. So 3 key themes. We are successfully executing to maximize growth. Our medium-term objective for growing our Solutions segment businesses, that's our Corporate Platforms, Market Tech and Investment Intelligence businesses is 6% to 9% over the medium term, so 3 to 5 years. That's number one. Number two, we are well positioned in attractive markets. So we've got 4 areas where we're focused on growth. Those 4 areas, and we'll get into them a little bit later, have a $20 billion serviceable addressable market that we can tap. And so we are well positioned as we move forward looking at the opportunity set. And then the last theme I want to note and I'll talk a bit about later is that we are transitioning our business from the current model to a SaaS model. And so over time, we want more and more of our business to be delivered via cloud-enabled SaaS solutions. We've got -- roughly 34% of our recurring revenue is SaaS right now, and we've got a target of 40% to 50% going into 2025. Okay. So we're going to shift now. I want to just give a snapshot of the business and where we stand. So we are well diversified across 4 different business segments, which you see up on the pie chart here. We've got a strong recurring revenue base, strong profitability and growth, which I think and I believe makes us a really unique opportunity or a unique investment opportunity. So when you look at the components of our business, 70% of our business is non-trading. So that's the sort of outside, the blue line. More than half of our revenue, so we did $3.4 billion in revenue last year. More than half of that is in what we call annualized recurring revenue. What that means is we have contracted subscriptions for $1.9 billion of our revenue going into the following year. We've got greater than 50% EBITDA margin. And our EPS CAGR over the last 5 years has been 18%. So that's sort of a snapshot of what we look like. So how do we get that 18% EPS CAGR? If you look back to 2017, I'm starting with here because that's when we kicked off our strategic pivot, we've had 9% CAGR in revenues over that 5-year period. At the same time, we increased our margin by over 600 bps. And so what that translated into is 18% CAGR or -- on the EPS, so twice the levels of revenue growth. So this is my favorite slide. I hope it's your favorite slide, too. So I'll put the EPS growth into context. So we had, as I said, strong EPS growth over that period. We outperformed the market. But then there are 2 sectors that we compare ourselves to most. One is Western Hemisphere exchanges. The other is info services companies. If you put the 2 together and you average them, our EPS growth was 1/5 higher than the average of those 2 sectors together. But if you look to the right-hand side, our PE valuation is about 1/5 lower than the combined -- the average of those 2 sectors as well. So I just want to highlight that before we move on to the business a little bit more. I feel like just leaving it up here -- no, I'm just kidding. I'm just teasing. Okay. So I wanted to just go into a little bit more detail on our different businesses. So we have 4 segments, like I said, to start. We sort of bucket them into 2 pieces. On one side, so on the left-hand side of the slide here, you see Market Technology and Investment Intelligence. Those 2 segments, we have in the category of our technology and analytics businesses that are higher growth businesses. And then on the right-hand side, we have the foundational marketplace core businesses. So we've got our Corporate Platforms business, which is our listings business and IR and ESG business, as well as our Market Services business, which is our leading U.S. and Nordic trading venues. And what I'd just say about -- on the right-hand side, those are the businesses that underpin what we call the flywheel effect of our businesses. So our success there promotes our success across the entire platform. Just going really quickly from left to right. In Market Tech, we -- through the -- we had a legacy anti-financial crime business. Through the acquisition of Verafin, we further solidified our leading position as a provider of anti-fin crime solutions to banks and other market participants. Next, on Investment Intelligence. This is the segment that -- where we work with partners to launch thematic indexes like our Nasdaq 100. That sits within that segment. Corporate Platforms, talked about this. We've got the #1 listings business in the Nordics and in the U.S. on the equity side as well as our suite of offerings that we cross-sell to our listed clients around IR and ESG services. And then we have our Market Services business, so our core foundational platform that is a -- generated over $1 billion in cash last year. So I want to just spend less than a minute, though, on our strategic repositioning. So new CEO, going into 2017, we kicked off a strategic pivot. And in that pivot, our objective was to take a look at our capital allocation and not pull back investment from our core foundational businesses but to invest more in those businesses where we saw the biggest opportunity for growth. And so as part of the pivot, we doubled the scale of our higher-growth Market Technology and Investment Intelligence businesses. We changed the dynamics of the Investment Intelligence business, which used to be majority driven by core market data. And now if you look at that business, more than half of it is in the higher growth areas, the analytics and the index business. We divested a bunch of assets. So they represented about 20% of our revenues. They represent only 5% of our profit and virtually none of our growth. So those businesses are no longer part of our portfolio. And we really look at our R&D spend in terms of how we're going to maximize the value for investors and the growth proposition there. So how did that all translate into results? So we -- after the pivot, so looking from end of '16 to 2017, we doubled our -- or more than doubled our organic growth rate. We were at an average of 4% prior to '16 and '17. We were at 10% if you look at the last 4 years. We expanded our operating margin by over 400 bps, and we expanded our -- or we increased our return on invested capital to 11% in 2021, which is a 300 bps expansion and aligned with our target of double-digit ROIC return to investors or above 10%. So how are we doing business? What's changing about the way we're doing business? And I think this is pretty important. When you think about our products, we are selling technology across many of our segments. We are on a journey to move more of our business into the SaaS model, where we are developing -- we have very deep client relationships across the entire complex. But when we have a SaaS relationship, we learn more and more about our clients, and we can provide more value over time, and those are stickier relationships. So we've been on a journey here, and there's more to come as we continue to execute. We started with our SaaS being about 21% of our recurring revenue. We got it to 34% coming out of the end of 2021. And like I said earlier, we're going to get it to 40% to 50% as we get into 2025. That's our ambition. So this slide is really about how are we positioned in those higher-growth markets that I -- or higher-growth opportunities that I talked about earlier. And so if you sort of add up all the numbers on the page really quickly, we've got about $20 billion in serviceable addressable market related to the opportunities that we think are supported by secular trends and really have opportunity to sell with the products that we currently offer. I think one example is look at market tech on the -- all the way on the left-hand side, $9.5 billion in serviceable addressable market. That's against $500 million in revenues for 2021, and we feel really well positioned to expand our share there. And that's a growing market. Anti-fin crime is about half of that growing at 17%. I'd also maybe highlight on this page, IR and ESG services. So we have a 7x our current revenue opportunity in the current market. And I think every conversation I have is about ESG. And so we're expecting this market to expand over time. And this is about serving the corporates, this market, not about serving the investment management community. So how are we going to measure our success over time? So these -- the 3 criteria on the left-hand side here, how we're going to measure our success. And then the right-hand side is about the result. We're looking to drive medium term, 3- to 5-year on average, growth of 6% to 9% in our Solutions segment. And then we think about expenses related to that. So we want to drive expenses, to invest to drive the growth, but we want to limit our expense growth to 3% to 6%, depending on how we do on the 6% to 9% I just described. We also are very focused. We look at our opportunities in front of us, whether they're organic or inorganic. We want a 10% or above ROIC for our investors. We do all of those things, and we believe we generate -- we have the best chance of generating double-digit shareholder return. So this is my second to last slide. I'm just going to spend 1 minute on ESG here because I think there's an important distinction about Nasdaq I just want to highlight. We're really focused on our own ESG and what -- our impact on climate, how we think about our workforce and making sure we're thinking about growing the best workforce possible. But we're also very cognizant of how our experiences can inform how we help our corporate clients. So we have a special ESG business that's focused on the needs of corporates. And we have over 8,000 clients in our portfolio to tap into to provide these services. So things like reporting solutions, Board advisory, ESG advisory. And then we also think about our anti-financial crime and other solutions that help move the world forward in a positive way. So before we wrap it up, I'm just bringing back the first slide that I started with. So just want to reiterate on the key themes. We're looking at everything through the lens of maximizing our potential for growth. We are in a strong position from a competitive perspective to take advantage of secular trends. And we have a clear strategy to sort of transform our business to be scalable in the long term, which is sort of transitioning on the SaaS model. So -- and that's the end.

Terrific. Well, thank you very much. That's very informative. A good overview of the company. So I think, obviously, one of the key themes of your presentation and of your investor communications for a while has been repositioning the business and becoming this next-generation Nasdaq. How would you assess where you are in terms of that repositioning? Do you think you guys have the company where you want it to be? And maybe it's just more internal initiatives at this point? Or is there still more transformation to go?

Yes. So when we think -- I think back to sort of the initiation of the pivot that I talked about earlier, we had a lot of things to do there as we thought about the trends and what we want to be and where we have the right to win. I'm going to start tongue-tying myself. And so we've had tremendous success over the past 5 years executing against those, but we're not done, right? So we've honed things in a bit as we've gone through the pivot. So we started with tech and analytics. Now we've narrowed things. And we said, anti-financial crime, ESG, investment management workflow space is where we see the biggest opportunities. We're on this evolution of transitioning to SaaS, and that's going to take time. It's going to take time to get our clients, especially in the market tech space, wanting that. And so I kind of see it as a continuous evolution and refinement and making sure we're thinking about those secular trends and where we can win and honing our strategy to take advantage of that. So not done is your answer.

Got it. And so I think it's one thing to be in the right end markets, but it's another thing to effectively compete within those end markets. So how would you assess Nasdaq's competitive positioning in the various segments?

Yes. So that's a great question. And we've got -- so when you think about our suite of businesses, and we've got -- we talked about the 4 segments, we've got leading positions in many of our businesses, and then we've got opportunities to get there and others. So I would kind of think about in the foundational marketplace businesses where we've got our -- we've got #1 positions in U.S. cash equities, derivatives, and the Nordics, we're leading positions, I should say, there. Our listings business, we won 4 out of every 5 listings in 2021, and the big ones as well. So we've sort of entered a new realm. On the market tech side, market infrastructure tech, we've got -- and our legacy anti-financial crime, we've got leading positions in both of those businesses with very significant opportunities that we've been able to capitalize on. Where do we have room, so in terms of becoming a leading in our AML and fraud solutions, so we've got 7% market penetration there. We think over time, we can get it to the sort of 14%, 15% range that we have in our legacy businesses. We have opportunity geographically to expand our eVestment product, which is database for the investment management community. So leading positions in many places, but it's a commitment. No matter where we turn, it's a competitive market and we're constantly thinking about how to compete in the right way.

And one of those areas that you mentioned you are having success with is our listings franchise, and you have gained market share over your closest competitor. Have you guys done anything differently to really boost growth in your listings franchise? And certainly, the IPO environment has been helpful, but that doesn't drive market share. So what have you guys been doing? And then can you talk about how success within the listings franchise really drives growth elsewhere in the company?

Yes. Sure. Thank you for that question. So we haven't changed our philosophy on listings, but we've been on a journey. We -- the year Nasdaq started out, difficult to get listings, and we were getting listings that the NYSE wouldn't take. The world is very different now. And what we're really doing is selling the full power of Nasdaq. So when we go to sell a listing, it's not just about the listing. It's about the other services that we can provide. It's about the fact that we've got the deepest liquidity pool in the U.S. cash equities market in the U.S. And then you have the opportunity to maybe be part of some of these thematic indexes that can be really exciting for a company to be a part of. And so we sell the whole package, and that's been very successful, and our brand and the marketing we put behind it as well. The second part of your question was around?

How does your listing success flow through to the rest of the company?

Oh, sorry. Of course, yes. So we'd like to talk about the flywheel effect all the time because we'll start with listings. We have 20% more listings than we did 2 years ago. We earned 80% of our trading revenues from trading in our listed names. And so let's pretend like the trading environment doesn't change at all. Just by the fact that we got 20% more listings means we have 20% more opportunity within the trading business. So that's one example. Another example is we have IR and ESG products that we sell to both our listed clients and to a set of other clients that are not our listed clients. We have 1,000 new listings over the past 2 years. That means we have 1,000 new clients to sell to as soon as their free period ends after the listing. So those are 2 examples, but we have them across the business.

And then maybe to drill down a little bit into your ESG offering for corporates. I think a lot of us probably are pretty well aware of ESG ratings and the competition and the M&A in that space. But I think what you guys are doing is relatively unique. So can you talk about the interaction that you're having with your clients and the feedback that you've gotten from corporates on what you're helping them with?

Yes. I think it's super interesting because when you think about -- I mean, everybody is talking about ESG these days, and Europe is way further ahead. The investment management community is way further ahead than the corporates. And the corporates are desperate for help. They want to know how to look at it, how to start, how to assess materiality, how to report it, how to engage. And so the role -- the special role that we see ourselves playing because we are corporate, so we have at least some -- a lens from the other side is what are the types of things that we can give our corporate clients in order to make their journey easier, so reporting tools, advisory services, holistic solutions to Board governance. And so those things are a focus in addition to everything we want to do with the investment management community. But that corporate lens, I think, distinguishes us because we look opportunistically all the time for different solutions, and there isn't a big player out there providing those services to the corporates. They're either evaluating the corporates or they're smaller tiny point solutions that are serving different needs and the corporate has to kind of button them all together.

Got it. Makes sense. Switching gears a little bit. One of the big topics of conversation in the general space is cloud. And you guys have announced your cloud partnership with AWS. I had CME here this morning, they've got something somewhat similar with Google. Can you talk about your strategy and why it's the right strategy for Nasdaq? Because there are other strategies out there with CBOE and ICE, and everybody has their own approach right now.

Yes. I'm familiar with CME's. I'm not familiar with the others' strategies, but I'm very familiar with Nasdaq and super excited for what -- this next stage of our journey. So the way that I would describe it is we've been on this journey for 5 years, right? We -- everything that we are building for our markets and for the markets that we ultimately sell through our Market Technology business is cloud -- is meant to be cloud-native. And so we're -- we've been preparing. And so when we entered into this agreement with AWS, which is a 10-year agreement, it's the next phase. And it's about taking now what we've built and bringing -- we'll bring our first market on to the cloud in 2022 -- onto the AWS Cloud in 2022, but not in a way -- maybe that was sort of like we maybe originally thought this has been a lot of work with AWS to get there. We recognize our clients have invested a lot in the data centers. And we want to be bringing solutions to our clients. It's not bringing them headaches. And so we're bringing the cloud to the data centers and creating what we call, I won't get too technical, private local zones and an outpost. So it's the cloud operating from our centers. And what the really cool thing is we're able to sell our tech to our Market Tech clients because we run the markets as well, and we know how to do it. And so therefore, as we go on this journey, what we're hearing from our Market Tech clients is they want to go too. And so as part of our AWS agreement, we looked at the whole globe and we looked at all the opportunities to set up similar zones for our -- where our clients sit and the opportunity is in front of us. And now it's going on that journey with our clients and really transforming from these large on-prem type solutions to the SaaS-enabled cloud solutions over time.

Got it. With that, why don't I pause and see if there's any questions in the audience. All right. Nothing right now. So I will keep going. What's the opportunity for Nasdaq in the crypto space? That's another space that's gotten a lot of attention of late. CBOE recently did something, ICE just announced something the other day. How do you guys foresee Nasdaq interacting, whether that's having your own direct play, providing technology?

Yes. So it's a great question, and I feel like maybe -- I don't think -- I don't know if you were talking about this last year, but certainly 2 years ago, probably not as much. It was less mainstream than it feels to be now. And so right now, our play is in the infrastructure space. We actually have built technology for 9 crypto exchanges. And we've got 9 crypto exchanges, not necessarily the same ones, using our surveillance technology to surveil their markets. And so the infrastructure space is important and we have a right to win there. The other part of -- is anti-money laundering and fraud, right? We're all hearing fraud is happening in crypto, can't be traced, although I guess the FBI can do it. But 2 years ago, so Verafin -- and this is a great example of the cloud, the deep client relationships you have in the sort of the cloud space. So 2 years ago, Verafin talks to their clients. They can look and see what sentiment from all of their clients pretty quickly. Nobody was talking about this. We did the acquisition. We came in. We said we want to look at the digital asset space. Within weeks, we had feedback from the 2,000 client banks, and we're in beta right now for an anti-money laundering solution for digital wallets that tier -- right now, Tier 3, 4 and 5 banks are providing to their clients. So that -- more to come soon on that. So we're exploring. I guess the short answer is we're exploring, we think there's more opportunity, probably mostly on the infrastructure side as opposed to creating exchange. There's a lot -- I think there's -- I don't know what the last count was, but hundreds.

And more coming.

And more coming.

So on the Verafin front, one of your key goals for 2022 is to extend your anti-financial crime business in the Tier 1 banks and fintechs. Just broadly, what sort of progress are you making along that? Because there would seem to be a lot of upside if you can upsell -- or not necessarily upsell Verafin, but really penetrate that market segment?

Yes, for sure. I mean going into the acquisition, one of the core beliefs that we had and that had to be true for us to be successful, which I'm glad to say it is, so not to hold you guys in suspense, is that we would sell to the Tier 2s and to the Tier 1s and then also expand geographically. Our legacy surveillance business, our trading business, our clients are the Tier 1 and Tier 2 banks in the U.S. and in Europe. And to some extent, in the surveillance side, certainly Asia. And so what have we seen so far? So Verafin grew, happy to report, at 30% last year, consistent with what our expectations were. They have signed multiple Tier 2 and Tier 3 banks. We're in proof of concept with a number of Tier 1 banks, and we signed 1 European client. So we're on the journey. It's certainly a long one. Sales cycles are longer for the bigger the bank and the more complex. And the proof of concepts will help us. Every bank will be different, too, but will help us make sure we've got the right product alignment for where we want to go. But early signs are fantastic.

Great. Well, with that, I think that's a good place to stop. So we will wrap it up. But thank you, everybody, for attending this afternoon, and thank you, Ann.

Thank you. Thank you very much, Patrick.