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 Nasdaq CEO, Adena Friedman, here to present -- or virtually here to present. And before -- well, let me first give you a little intro before you make your statement, Adena. She's been CEO since January of 2017, so she made it through the first 5 years so well. She got renewed for another 5 years. And I hear they're already thinking about the 5 years after that. Because Bob was there for 13 years, I think, overall. But I'm teasing. So she's in her second term, and I'll let you start with your statement that you want to talk about.

Yes, I just wanted to say thank you for accommodating me to be remote today. Unfortunately, I had a really longstanding commitment here in Stockholm. As you probably know, Stockholm is our largest office in the world. And after COVID, it's been important for me to be here with our employees, but also I had an event this week that I just -- literally just couldn't avoid. So I just want to thank you for letting me come. I've heard amazing things at the conference, so I can't wait to talk to Ed. I already talked to Ann. She told me how great the meetings have been. So thank you so much for accommodating me, but I really look forward to the conversation.

Great. We'll get started. And first, your technology is great. You're coming in as if you're right around the corner. So I guess, in -- from all accounts, Adena, you get high marks for the first 5 years. You've executed the strategic pivot. And I think you'd acknowledge that there's been some fair tailwinds as well, good markets, good company valuations, and the indexes have improved. Moving up certainly benefits your business -- some of your businesses. So I guess, could you talk about the sustainability of this growth as we move into -- might not be as friendly -- at least not right now, hopefully, they improve quickly, but move into a sort of different environment? And I guess, that would be to start.

Well, obviously, I would say that the bar is just getting higher, so really, really pleased with the performance of the business as I've come through the first 5 years and really looking forward to and, obviously, jumping into the next 5 years. But I am really, really pleased with how we've been evolving the business. I do view Nasdaq as a very sustainable and resilient business in different market environments. I think we've made it even more resilient with the additions of some of our software businesses. So our Anti-Financial Crime business is really -- it's really addressing a structural need in the industry that will persist certainly through different economic environments. The need for our investment -- the investment community to really understand their investment thesis and make sure they're making asset allocation decisions in a dynamic environment is very important. So the eVestment acquisition and Solovis acquisition, those capabilities that we offer at the investing community now are, in many respects, more important than ever. So it helps carry our clients through these dynamic times. And then, of course, we've expanded within market technology as well as within our Markets and Corporate Platforms businesses to address our corporate clients' needs in a more holistic way, taking them from the very small companies, having a private market, our IR capabilities and governance capabilities and now our ESG services that really help enable our clients to manage through a variety of different economic environments. And then, of course, our Markets business has been benefiting from all of the -- the markets themselves have had a lot of interesting structural changes. We have 1,000 more listed companies today than we had before the pandemic, so that obviously gives people more inventory to trade. And we also have been benefiting certainly from changes in the composition of investors with more retail in the market. So our view is that we can -- we're an all-weather company. So we look at ourselves as providing critical services in a variety of different economic backgrounds. And we don't really know what the future holds, but we're ready for it.

I think every CEO has talked about they wish they knew what was going on, but they're preparing to the best they can to move through the cycle, Adena. So one thing you brought has been a focus on SaaS revenue, a focus on recurring revenue, and it's actually become, now, and I believe you were the first to do it, but a standard metric that I'm going to -- I believe most exchanges -- 3/4 of the exchanges report now. So congrats on moving that transparency and disclosure up in the priority of all the exchanges. So I guess, the question is how do you see Nasdaq continuing to lean on this growth of recurring revenues, this targeting of SaaS-type revenues, which, generally, I think, have looked at more favorable from a valuation standpoint? And just one item I'm remiss -- totally remiss in not introducing Ed Ditmire, who has also worked and partnered with Adena as they executed on this pivot and actually a revaluation as well. So anyway, sorry, Ed. And then back to you, Adena.

Ed has been an awesome partner and helpful. Just really, honestly gets the voice of the investor in the room at every step of the way, so he's awesome in that way. In terms of our annualized recurring revenue, so we ended 2021 with approximately $1.9 billion of annualized recurring revenue. And then of that $1.9 billion, $650 million of it or so is SaaS revenue. So we do feel like we are a scaled SaaS platform provider. We provide a lot of recurring revenue streams that have a lot of growth embedded in that. And in addition to the fact that we have a great Markets platform and we have a great index business, those are the 2 primary parts of the business that are not included in ARR, but they are obviously wonderful parts of our value proposition in the business itself. I think that -- our view is that, as I mentioned before, we have a lot of structural benefits that we offer. So we are a critical services provider to corporates as they're navigating in the public markets. And our IR, ESG and governance services are all SaaS-based solutions that really allow them to navigate through a dynamic environment. We have, as I said before, 1,000 more companies listed on Nasdaq today than we did a couple of years ago. So those clients now, some of them are getting our IPO package in those products. But as those IPO packages roll off, they'll start to become paying clients to those services. We then -- of course, Anti-Financial Crime is entirely SaaS-driven and has a lot of structural tailwinds, I think, just associated with the industries having to address a massive $1 trillion problem in the industry that we can help them solve those problems. And then I think that in eVestment, Solovis and kind of our Analytics space, that's another structural growth area because investor workflows are developing. You're needing more modern technology to allow asset owners and asset managers to manage their businesses, and we do believe that our workflow solutions really help address that. So again, a nice structural element of growth embedded in that business as well, and that is just on top of a great Markets platform that we're really proud of as well.

And Adena, and -- you've gone through the businesses. You sort of reviewed the structural growth in a lot of the business. Just to get a little bit more specific, to understand Nasdaq best and to understand the segments you're in, so on the Corporate Platforms, you have the listings business. There's no doubt there's obviously a slowdown that we've heard from Hong Kong, globally a slowdown in IPOs. So -- but there's also a movement to newer things like ESG and so forth. So I guess, one, what's the hope -- are we -- how is the pipeline doing for corporate listings? And sort of is ESG strong enough to balance -- at least offset some of the headwinds we're seeing from a listings and valuation standpoint?

Sure. Well, I think, first of all, we do still have a lot of companies on file to go public, so it's really a matter of can the environment recover enough that those companies feel that the investors are ready to take a risk attitude that invites them into the public markets. And we don't really know when that's going to -- when that window is going to reopen. But we are getting ourselves and our clients ready to make sure that they're ready for the public markets when the markets are ready for them. And we have about 270 companies on file to go public right now. So it's a good, healthy pipeline, but they need a healthy environment, and that's -- we have to see whether that will develop as we go later into the year. I think that one of the nice things that we've done about our Corporate Platforms business is we have broadened out the suite of solutions we offer our clients in a very strategic way. We focus on the CFO, the IRO and the Corporate Secretary as our core clients. And when we look at what are their needs, they need to really invest in their investors and understand them and manage a very dynamic investor environment. They need to make sure they're managing their governance and their Boards and continue to evolve their Boards as their business evolves. And they also need to make sure that they do address ESG, both in terms of actually developing action plans, then learning how to communicate those action plans, making sure the rating agencies understand them and then reporting on those to investors, and that is definitely a growth area for us. But if we take all of the new companies that have gone public over the last couple of years, we have a whole suite of solutions now we can sell to them over the next few years as they're managing through a very different environment, while we also wait for the markets to be open and available for new companies. So we feel very good about the strength of our Corporate Platforms business right now.

Your Investment Intelligence business, strong organic growth, 12%, I think it was -- in the first quarter, 12%, so it's still doing very well. Could you talk about how the market Data, index and Analytics business -- again, valuations are certainly going to impact some of the index business, and volumes probably aren't as high, say, in the future as they were with the equity markets -- when the equity markets were really at high valuation. So anyway, how will the Investment Intelligence navigate the headwinds as well?

Yes, sure. As you mentioned, there are 3 subsegments. So we have our Market Data business, our index business and then our Analytics business And first of all, I think one of the points to make is ARR, annualized recurring revenue. As I mentioned before, our index business is not included in ARR, but it's obviously highly reoccurring, which is based on, as you mentioned, AUM and futures volumes. And then the tape plan revenue, which is really a shared revenue pool across the exchanges, is also not included in ARR, but the rest of the business is, so just so everyone understands that. In terms of the dynamics, I think that if we focus on index for a second, we have a lot of -- a very broad index platform. We've got about $350 billion of assets under management tied to our index products. And we do both our benchmark indexes, thematic indexes and smart beta indexes. So we have really broadened the scope and scale of what we deliver to investors today. While the index values are down because of market cap, one of the things we have been seeing, though, is we still continue to see inflows into our index platform. So that can cushion some of that market cap impact. And then the second thing is, as you mentioned, futures volumes actually remain very robust and supportive because of the volatility in the market, so that also creates a cushion when you have a downward cycle in terms of market cap. But we obviously are watching that closely. We're still launching new index products. The investors are looking to invest. They're just looking to invest in different things, so we have to make sure we stay dynamic there. In the Analytics business, I think I mentioned that before, it's very dynamic from an asset allocation perspective. We focus on asset owners, which are pension funds, sovereign wealth funds, family offices, and making sure we give them the tools they need to make an asset allocation decision, then manage their portfolio. And then to the extent they want secondary liquidity in private assets, we also provide them a liquidity capability. So we've been really looking to evolve that. We have a lot of growth potential there because we are -- we have a great core audience of 1,000 clients and asset owners who use eVestment, but a much smaller number who actually use Solovis, which is the portfolio management tool. And so we have a lot of growth runway there. And then among our asset managers, they're looking to get more intelligence out of eVestment. They put a lot of data in, so that asset owners can make smart decisions, but they get a lot of competitive intelligence out of it, too. So we've been looking to broaden how they use eVestment for their purposes as well. So we feel good about the general element of growth there as well.

And then on Market Technology, the third segment of Corporate Solutions, so I think, certainly, the pandemic impacted sort of the run rate, what you could do in regards to providing technology to global clients. But as you look at now you've added Verafin, I don't know it, because it could be, what's going on geopolitically, could be a tailwind here because of sanctions and so forth. Is it adding to sort of -- it's not only Anti-Financial Crimes, but sanctions and the technology to comply with sanctions? Or what's the environment? How is it going to impact Market Technology?

Yes. So I think that we've gone through a little bit of a change in Market Tech where we had new leaders. So Lars had retired. He's been there for 18 years. He's done a great job. But we now have 2 leaders. We have Roland Chai, who's managing our market infrastructure technology business, and I'll talk about that in a minute. And then we have our -- Jamie King, who is now leading our Anti-Financial Crime technology business. Both of those roll up to Market Tech, but it allows our investors now to kind of see those units in the growth trajectory and, frankly, how we manage those businesses. You'll be able to see us and, I think, hopefully, we'll be transparent with you as to how these businesses are developing. So starting with Market Infrastructure Technology, that business was definitely the most impacted by COVID. Those are large-scale implementations for clients, in some respects. We had signed some very big contracts with customers, particularly in the post-trade area, before the pandemic. And then suddenly, we had to shift to a totally different way of working with them. We tend to co-locate with our clients when we do those large-scale implementations. We then had to move on remote. We had to try to change the way that we delivered software. Our clients also had to focus in the short term over -- on resiliency and capacity. They, in the second year of the pandemic, started refocusing on the future again. And -- but we definitely had more of an impact there than in any other business. I think we've come through that now. We've come through the hardest parts of the implementations of these large-scale systems. We have a nice, healthy -- we've actually showed order intake -- record order intake last year. And we have really great dialogue with new and existing clients as we're coming in through 2022. So we feel that the trajectory of that business should improve as we go through this year and into next year. In terms of AFC, the Anti-Fin Crime, that's a growth -- that's just a high-growth business. It's a SaaS delivered service, both in terms of surveillance and fraud and AML detection and investigation work. We have multiple avenues for growth in terms of moving Verafin up to the Tier 1 banks. We've developed a crypto wallet solution now for both traditional banks and VAS to be able to leverage our Anti-Fin Crime capabilities for virtual wallets. And we also have really focused in on the fintech space in terms of offering much more advanced fraud and e-mail detection capabilities there. So we have lots of ways to grow. The sanctioned screening is just a feature that we have in our tools that we've been modern -- and we've been continuing to, I would say, evolve or advance, just so that we're staying on top of the sanctions -- the new sanctions obligations. But that obviously is something we have to do, and we are fairly -- we're good at, and we provide the banks really good services. But I would say those 3 other areas are the areas that are really going to drive the growth.

Understood. The AWS, Amazon Web Services partnership, we talked about the -- CME's cloud partnership with Google. But yours with AWS as well as even CME's with Google sort of -- am I right that it sort of reinforced or gave credibility to this idea that you are helping other exchanges with markets that could be potentially augmented with the cloud? Could you expound on how AWS and how these other partnerships exchanges have -- sort of validate or give credibility to your model, I guess?

Yes, sure. Yes. So I think, first of all, we've been working with AWS for about 10 years just in terms of bringing more and more of our business processes and workflows into the cloud. Most of the SaaS businesses that we've mentioned, not all, but most of them are actually in the cloud today, and we're working on making sure that they all are cloud-enabled going forward. So we've done a ton of work with AWS over many years, so we know them really well. In the last 3 years, we started working with them on building out an ultra-low latency edge compute system that's specifically geared towards the capital markets and our needs. And then last year, we signed a partnership with them. So for our markets, the surrounding systems like our market operation systems and our revenue management systems and things like that, they're already in the public cloud. But the matching engine itself is very much -- it's a very bespoke ecosystem we've created within our primary data center, and we have ultra-low latency needs. So what we actually have done with AWS is they're coming into the data center. They're bringing outpost into the data center. We're going to create a private local zone. We're doubling the size of the data center with Equinix. They're investing in us in our data center, and so that we can actually bring the cloud to our clients and also make it so that we can migrate our markets into a cloud environment. So it's a great partnership. We are underway with our first market. We expect to launch that at the end of this year. And then we get to see how it does. How does it perform, how do we make sure that we're building that robust ecosystem around it with colo, how do we continue to evolve our markets? And therefore, we'll continue the migration with AWS. But it's pretty exciting. I think, Rich, the only other thing I would say is it does give a roadmap for our market tech clients, our low-latency market tech clients to kind of see that they can embrace the cloud and bring it into their environment, expand their environment on the back of that. But we what -- we actually have been launching new markets in the cloud, the public cloud. So we've had a couple of clients launch in the public cloud as just -- let's have the market and have it be a cloud-delivered market. That is really, really exciting because these are markets that will develop into very high-volume market hopefully. And it does give us a chance to show and prove out our technology and all the work we've been doing over the last 5 years.

Adena, ESG, you've been at the forefront of ESG as well, Nasdaq has. A lot with -- actually with the women's movement as well, requiring so many -- a certain percentage of Board members be minority or women. So given, I guess, what's going on, I think it's fair to say that there's at least some more challenges of ESG just given the macro environment as far as certainly on the commodity side, maybe not to do with listings and equality. But -- so anyway, could you give us a view of how ESG stands, how your push to make listed companies to come up to ESG standards and what you're doing for the ESG movement, I guess, where you've been a leader?

Yes. So they're very -- I think there are 2 very distinct things that we've done. One is -- well, actually, probably 3. So the first thing is for our listed companies, we've actually -- to be very clear, we have established a new rule that -- it's a disclosure rule. And what we've asked is for every listed company to provide a table that shows the demographic composition of their Board based on self-described information by each of the Board members. So they can provide their management team, how do they identify themselves, and they can -- and then we anonymize it or they anonymize it and put it into a table, and they disclose it every year. And then we've asked the companies also to reach -- to have at least one woman and one other underrepresented minority or LGBTQ member of their Boards over the next 4 years or explain why not. So it's not a hard mandate. It's a disclosure rule that allows investors to have a much more standardized and, I think, disclosive way of evaluating Boards and evaluating companies on that basis. So that's one initiative that we undertook in 2020 and 2021. The second is, of course, our own corporate environment. We just put out our sustainability report and our TCFD report yesterday as Nasdaq, as a company for our own investors to be able to evaluate us on how we're doing. And we continue to make, I think, a lot of great progress in our own sustainability. And then we have a whole business around helping companies manage to ESG. So investors today, they care about this -- a lot about different elements of ESG. Some investors care about governance or social impact. And others care a lot about environment. So companies have to navigate through that, and it's hard. We have 5,000 listed companies. We have more than 6,000 companies we serve with our solutions. And they're getting a lot of new questions, all these different standards, different rating agencies, no standardization. And so what we're trying to do is say, "Okay, let's help you develop your program. What are you actually doing to advance ESG inside your company? How do you want to describe it? How should you disclose it, making sure you also have a repeatable process around disclosing it?" So we have OneReport, which is a reporting tool. We have our advisory service that helps advise companies on this. And then we have Puro, which is a carbon removal marketplace. So as companies are managing to net zero, they are going to need to buy carbon offsets, and we have Puro as a high-quality carbon removal market where we're trying to really create a marketplace around supporting suppliers of carbon removal capabilities and giving corporates a way to manage to net zero. So we have a lot of innovative things we're doing on the business side, while we're also managing our corporate sustainability program. So a long answer, but thanks for asking.

I applaud you for your efforts around ESG. I know it's got a lot of attention, we'll put it that way. But congrats. I applaud it.

Thanks.

So the last question, every leader, I've asked to give a forward outlook, something that looks forward, what they see as their company in another 3 to 5 years. It just so happens it fits nicely with your next 5 -- your new contract as the second 5-year contract. You've accomplished a lot in the first with the strategic pivot. We've talked about how the environment is -- might not be as friendly right here in the near term right now. But can you tell us what you see Nasdaq looking like in the next 3 to 5 years? Are we setting up for the sort of spring loaded -- given this sort of macro headwind right now, are we setting up with a spring-loaded environment where Nasdaq excels as we come out of the cycle? Or how do you view it from your leadership position?

Yes, sure. Well, first of all, I've had the fortune of being with Nasdaq for 26 of the last 29 years. So I started at Nasdaq 29 years ago, so I've been through a lot of different cycles, and I've seen Nasdaq weather through those. And I feel -- that's why I really do feel very fortunate to work here. I think that we do a great job of providing a platform that helps investors navigate through a lot of different environments. I think as we look at the next 5 years -- so therefore, I also would say, over the next year or 2, we might see more turbulence. But as I look at the business as CEO, I always do look at the next 5 to 10 years as to where we really want to take the business. And I think there are 3 key themes that we're trying to make sure we focus in on. One is -- we call them insights, integrity and liquidity. But let's start with insights. It's really a matter of that ESG, focusing on really continuing to develop our ESG capabilities to support our corporates and investors. The second is on the liquidity, which is really digitizing markets, continuing to see the modernization of market structure, the modernization of market infrastructure and making sure that we also don't -- we lean in on how the digital world will bring itself into the marketplaces around the world. So that's in terms of our markets, but also Market Tech business. And then the third theme is integrity, and that's really our Anti-Financial Crime capabilities and what we want to do to grow there. So if we can do a great job in building out our ESG businesses, a great job in really leaning in on the digitalization of markets and a great job on developing and growing our Anti-Financial Crime business, we feel like we will really be able to lean into the growth trends of the industry over the next 5 years.

Super. Adena, we know you explained why you couldn't be here. We appreciate the effort you made to participate. And I think everybody sees what you've accomplished, and looking forward to the next 5 years at -- you at the Nasdaq helm.

Thanks, Rich.

So thank you, and thanks, Ed. He was behind the scenes. Heavy contributor, that's all I can say.

He was ready to come in if I didn't have the right answer. No, I'm just kidding. Also, of course, you never know with video, but I'm glad that it worked so well. And I look forward to being there in person next year, Rich. So thank you.

Super. Thank you, Adena.