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

All right. For important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. With that out of the way, good morning, everyone. I'm Mike Cyprys, equity analyst covering brokers, asset managers and exchanges for Morgan Stanley Research, and welcome to our fireside chat with Nasdaq. And we're excited to have with us here, Ann Dennison, Nasdaq's CFO. Nasdaq, as many of you know, is a global exchange platform and technology company that serves the capital markets by providing listings, data, analytics, software and other services. Ann, thanks for joining us here.

Thanks for having me.

Great to be back in person.

So we're about 5 years into your strategic plan, and success pretty evident across all of your segments firing on all cylinders. First half of this year, though, a little bit more challenging backdrop here with elevated market volatility, higher inflation, rising interest rates, just to name a few. So how are you navigating Nasdaq against this backdrop? And what are some of the implications for a global technology company such as Nasdaq?

Sure. So when we think back over the past few years, obviously, we had all the tailwinds behind us and our performance reflects that. But we are what I consider to be an all-weather company. So we have the ability. We have some businesses that do well when there's lots of volatility in other businesses that maybe don't. So we have a nice mix of businesses, and we continue to perform. So this year, coming out of the first quarter, our Solutions segments' revenue growth was about 13% on the top line. And so as we look forward and as a technology company, our focus really is on expanding our relationships with our clients. And so as we expand our SaaS businesses, and we're just positioned really well to add more value and continue to grow.

And you've been in the CFO role for a little over a year now. So how are you allocating your time? And what are some of your priorities?

Yes. So first and foremost, my priority is to continue to support Nasdaq in its strategic evolution and the next phase of its strategic evolution. And so I spend most of my time, as probably many CFOs do, around strategic capital allocation. And as we think about investing in those areas where we see the most opportunity for secular -- or the most opportunity for growth given the secular trends, so whether it's anti-fin crime, ESG and our Index and Analytics business, I spend most of my time making sure that we're putting capital to use in the right way for investors. And then secondarily, I'd say the other thing we're quite focused on as a finance organization is making sure that we're making data-driven decisions, and that the businesses more broadly have the right data to make the decisions that will help us drive growth over time.

Now your Solutions segments are a key pillar of the firm's growth strategy. Which of those businesses would you say are earlier stage versus ones that are a little bit more mature?

Sure. So when you think about our medium-term outlook, we say we want to grow 6% to 9% over the medium term CAGR in our Solutions segments. Most of that growth is going to come from our Market Technology and our Index and Analytics business. So those are more than just one business, but those businesses are in the earlier stage of their growth or in the early stages of their growth with favorable secular trends. If we sort of sit back and look at then the rest of the Solutions segments, Corporate Platforms, so that has our listing and our IR and ESG business. Our IR and ESG businesses are, especially ESG in the earlier stages of growth. ESG, a very favorable secular trend, and we think we have a special opportunity there, where we have listings that's a more mature business, but listings grew 26% revenue [ flat ] in 2021, and we had 1,000 new listings. So when you think about the opportunity in front of us, so 1,000 new operating companies over the past 2 years, those companies are receiving free services in the IR and ESG space. We have a special opportunity looking out, is starting in 2023 and 2024 as some of those free periods end. So while listings is a more mature business, it does help feed the rest of the organization.

And for your Solutions businesses, you're targeting 6% to 8% revenue growth?

6% to 9%.

Sorry, 6% to 9%, and clearly coming in above that. Now over the -- and that's over the medium term, the 6% to 9%?

Yes.

You've been outperforming that in recent years. But given the tough macro backdrop that we're in today, I guess how do you think about the sustainability of that 6% to 9% growth in the Solutions segments?

Yes, we stand by our 6% to 9% over the medium term. We have outperformed. In 2020, we did 10%; 2021, we did 14%, and then in first quarter this year, we did a 13% growth number there. I think we're well positioned in many of the businesses to continue on our growth trajectory and hopefully to weather all environments.

Speaking of environments, inflationary backdrop, one in particular, we'd like to dig into there. I guess how much inflation are you able to pass through in terms of price, would you say?

Sure. So yes, I mean, I think every company's CFO, many, many people focused on inflation, especially given some of the numbers we saw last week. We thought about our overall framework. And coming into this year, we've got our 6% to 9% on the top line. We've got our 3% to 6% expense sort of framed out that way, and that inflationary pressures are probably adding about 200 bps to our expense range, which I think we shared coming out of the first quarter. Some of -- many of our businesses, we have CPI escalators, whether it's in Market Tech and in some of our other Corporate Platforms businesses. And then we also have pricing power in, let's say, our Listings business. And so while we will be able to pass it on dollar for dollar, we do have leverage and contracted CPI escalators in some cases.

Contracted CPI.

Yes.

In the Market Tech?

In Market Tech and some of our other businesses, yes.

Some of the other businesses, okay. So that should be helpful. Is there a timing lag of any sort on that?

It happens -- well, the contracts sort of come up for review all throughout the year. And so it happens as we go through the year in various pages, but not a 3-year timing lag, yes.

Okay. So more like a 1 to 2 years?

Yes. More in the 1 -- over a year period.

Okay. And then just more broadly, how much of the growth that you've been putting up has been coming from price versus, say, additional subscriptions or units? And how do you think about that looking out when you think about that 6% to 9%?

Sure. So it depends, depending on the year, it's about 1% or 2% of the growth. I'd expect it to roughly be in the same range.

Okay. 1% to 2% on the price side?

On the price side, 1% to 2% on the price side.

Okay. All right. And then as part of your transformation, you're growing SaaS revenue streams that are currently, I think, about 18% of firm-wide revenues, about 1/3 of the recurring revenues. So I guess where do you see most of the opportunities today on the SaaS side? How do you think about the contribution from new clients versus acquiring new SaaS revenue pools or even converting existing clients?

Yes. I think it will come from a combination of all 3 of those. When we think about our SaaS businesses, so as you said, about 1/3 of our ARR is SaaS. Our goal is to get that to 40% to 50% by 2025. And so how is that going to happen? A variety of different ways are businesses that are growing the most. So our Anti Financial Crime business, our Analytics business or SaaS businesses, they're going to grow through acquiring new clients, expanding the set of services we're providing to existing clients, and then we'll look to complement inorganically our SaaS portfolio.

And then maybe staying with the SaaS topic. Can you just give us an update on how Verafin is tracking relative to your aspirations there? And how is the current geopolitical climate with new sanctions impacting demand for some of these anti-financial crime capabilities?

Yes, sure. So coming into the deal back in February '21, we had sort of framed Verafin as wanting to get to like $140 million coming out for -- on a full year basis. Verafin exceeded that by a few percentage points. So they are really right on track in terms of what we expected from them as well as where we're headed with the synergies that we expected on the revenue side sort of coming under the Nasdaq umbrella. So Verafin selling to the 3 -- to credit unions and Tier 3 and below banks in North America, accessing our relationships and Nasdaq with the 1 and 2 banks worldwide. So we are -- we've got a couple of things in play there, and they are performing exactly as we hope they would. On the sanction side, that's a great question. One of the really special things, I think, about a SaaS business and the opportunity it gives you, we're running Verafin on one platform, 1 cloud-enabled SaaS platform that when things come up, whether they're new sanctions, Ukraine war, new sanctions, all of our bank clients needing to understand sort of how to incorporate that into their broader Verafin, within a couple of weeks, creates a module and pushes it out to all 2,000-plus clients. So that does two things, that deepens the relationship with the clients, but it also is a selling point for new clients. So we've had a lot of interest, and it's been a very good discussion around new client acquisition as it relates to the sanction modules.

And maybe you could just remind us about what Nasdaq brings to the table to sustain Verafin's growth? And how sustainable is the recent 30% growth rate?

Yes. So I guess maybe starting with just setting the table. So we've got our legacy Anti Financial Crime business, which is surveillance business. We've got about 15% penetration of the market in that business. Verafin coming in was only serving -- was not serving the Tier 1 and Tier 2 banks, serving -- and just in North America. And they have about 7% penetration. So we think there's two opportunities. One is further penetration of the existing markets that they serve. And then two, our legacy Anti Financial Crime business is serving the Tier 1s and the Tier 2s globally, and we have very deep relationships through that business and also through our Market Services business with many of those clients. So the goal is to make the connections and get the entree for Verafin into those banks. And so that's happening already. We've got -- we've signed 3 Tier 1 and Tier 2 banks since the acquisition. And we have proof of concept in play with many of them currently.

Without the proof of concepts?

So proof of concept is -- I'll just use an example. There are different modules. If one -- if bank ABC wants to see how the Verafin wire fraud module will work in their environment, Verafin will create the [indiscernible] in sort of a test environment and will run the wire fraud analysis for that bank. And they'll be able to see whether Verafin has captured all of the things that they would have expected to be captured or if they captured more than what's being captured in the existing systems. So it's almost like a test case, you get to run a little pilot program.

Gives people the ability to get comfort in a...

That's going to work, yes.

That's going to work. And how has that been going so far?

Yes, very positive, very positive feedback and outcomes.

Great. Maybe shifting over to Investment Intelligence, which has been a fast grower for you, in part benefiting from the uplift in markets. So I guess looking forward, how do you think about the key growth drivers for Investment Intelligence?

Sure. So I think within Investment Intelligence, we've got 3 components to the business: Data -- Market Data, Index and then we've got our Analytics business. Data is on the slower growth side, low single digits. And then the 2 higher growth businesses are the Index and the Analytics business. How is Index going to grow? And so we're very focused on the expansion of our product set. When you think about, obviously, we benefit from market values being higher. But we've also had an incredible amount of flows into the products over the past few years. And even in this difficult environment, coming out of the first quarter, we had net positive flows. So clients or companies being interested in exposure to [ thematics ] and smart beta products is part of the suite of offerings. So we're going to grow there through offering new products. Our Innovation Suite, which we launched in October of 2020, has $5 billion of AUM already in the suite. So that's the path there, growth in new products. And then on the Analytics side, it's really an expansion, mostly an expansion of the customer base through client acquisition as well as providing more to the existing client base.

Maybe shifting over to the Corporate Platform, where you provide services to listed companies as well as nonlisted companies on your exchange, right? So I guess how penetrated are these services relative to where you'd like them to be? And maybe talk about some of your sales strategy approach to accelerating growth there.

Sure. So we've got about 10,000 clients in that overall Corporate Platform space, and about half of those are listed clients. So the opportunity -- we have opportunities to sort of -- we have a suite of products. When you think about our listings products, we have our IR and ESG products. We've got a suite of offerings there. So the opportunity is to penetrate more products with more clients and obviously, then to bring more clients into the fold because it sort of has a flywheel effect across that business ecosystem and our broader businesses. And so the strategies for growth there is really deepening our relationships with our clients. We've got -- I think I mentioned earlier, so we've -- we have 1,000 new operating companies that are listed on Nasdaq in the last 2 years. Those 1,000 companies are receiving -- they get a list of things they can choose for free. And those things are the ESG products or the IR products, governance portals. Those free services start to roll off towards in the middle to end of 2023. And our goal is obviously to convert as many of those as possible to paying customers.

And turning over to ESG. You have multiple business lines at such ESG that have different offerings on the ESG front today. And I think just the other day, you announced an acquisition for Metrio, if I pronounced that right?

Yes, correct.

That's a sustainability software provider. So maybe you could just remind us [indiscernible] big picture on Nasdaq's aspirations on the ESG-related revenues. And then you could talk about how Metrio fits into your sustainability suite.

Sure. So we believe that we have a very sort of special role to fill in the ESG space that is underserved at this moment. So when you think about some of the other big players, they're mostly serving the investment management community. Our special place is to serve the corporates. And we have, like I said, 10,000 corporate clients, all of which are in different stages of their ESG journey. And so as we think about the suite of products and tools that we have to help them in their journey, whether it's the start of their journey when they're doing analysis to look at their materiality or they need advisory, we have that, all the way through to when they're doing their reporting, which is our [ Tool 1 ] report. Metrio, which is a Canadian-based point solution in ESG space, is a nice complement to the existing tools that we have, where clients can use Metrio to do data and analytics around their ESG information as well as the industry that they operate in, in order to sort of help figure out their path and where to focus. And so we're excited about putting the pieces to get together and giving clients really the full solution.

IPO activity, it's pretty much tough...

For lack of thereof.

Yes [indiscernible] ground to a halt this year. We're sitting here in June with a big pipeline that you guys have at Nasdaq. I guess what's it going to take for that pipeline to start to pull through? And -- or the last couple of years, just looking back, was that more of a pull forward of demand, just given how strong? Was it just -- how do you think about that? And what sort of growth can we see in the Listings business looking out the next couple of years?

Yes. It's interesting. We get the question on pull forward a lot. But the pipeline, the healthy pipeline that you mentioned, I think there's 270 companies that have filed to go public on Nasdaq. That's double what it was at the start of last year. So that suggests there's still a lot of demand. And what's it going to take for that to start coming into the market, really stability in the market and some sign that investors are willing to buy before companies are going to be willing to take that step and [ float ] their shares. Hard to tell timing of that. I keep thinking it -- it's about to happen. Things are getting stable, but yes...

And any thoughts on the longer-term growth on the Listing side?

Yes. I mean our Listings business is a mature business for us. And so we think about 3% to 5% for the overall platform, the overall Corporate Platforms growth, Listings will be on the lower end of that where we'll see the IR and ESG businesses on the higher end for sort of a mix that gets you to 3% to 5%.

Okay. Shifting gears over to your tech stack. Nasdaq has embraced the cloud for many years in a number of your businesses, which maybe you could talk a little bit about there. But now you're bringing the cloud to the financial markets, right, with your partnership with Amazon's AWS. So I guess what's the most important for you to get right with that partnership? And maybe you could talk a little bit about that, too.

Sure. So we are really excited about this journey for the markets. We've been on the cloud journey for many, many of our products and especially our SaaS products, delivering cloud-native -- SaaS tools delivered on the cloud. It's very powerful for clients, and you can really provide value and update your product on a regular basis from direct feedback from clients if you've institutionalized client listening. And so that's what we believe is really the power of the cloud. This year, our goal is to bring our first market onto the cloud. And so as part of that, we are -- think about it as bringing the cloud to the market as opposed the market to the cloud. So we're bringing what we call private building, a private local zone with AWS in Carteret, New Jersey, where clients can link in to that data center or already linked into that data center. And so we'll effectively get -- help our clients get the benefit of the cloud by bringing it to them as opposed to bringing them to it. And there's a lot of things to be leveraged there in terms of new technologies, latency, thinking about access to data and analytics that we'll be able to make available to our clients through that. And then ultimately, our vision is to then sort of replicate this structure across the globe where all of our Market Tech clients [ sit ] so that we can help our clients create the same sort of ecosystem.

And what are the benefits for your customers just in terms of leveraging the AWS Outposts?

Sure. So I think it really comes down to not having to change their infrastructure, but yet getting the benefits of the cloud. So we're bringing the cloud to them. They'll get improved latency or lower -- improved latency, better data and analytic tools and access to the newest technology without having to create a new ecosystem.

Okay. Maybe just staying with the exchange business, Cash Equities, Options -- activity has been quite healthy?

Yes.

For a little bit now, right, particularly in Options. I guess what's the risk that volumes compress from here, particularly on the options side where that has been very robust? And just how do you think about the drivers of growth there looking out the next 3 to 5 years?

Sure. So we have seen, especially on the Cash Equity side, right, the volume sort of come off of the highs that we saw in 2021. And the impact on the Options side hasn't been as pronounced as what we've seen. And we think there's some structural element to the way that Options are sort of interacting with Cash Equities. That sort of ratio of Options to Cash Equities has increased over the last, at least 5 years and continues too. When I think about what's the growth opportunity there, our business is -- we think about it as a flywheel. The more listed -- especially on the Cash Equity space, we are in about 80% of our trading revenues on the Cash Equity side from trading in our listed clients. And so we have a tailwind of a 20% increase in the number of listed companies that will help us sort of -- will fuel the trading businesses, I should say, as we look forward.

And stock splits. We've seen a number of companies announced stock splits and including yourself.

Yes.

I guess how meaningful could that be to the exchange business?

Yes. On the U.S. side, it can be pretty meaningful depending on the number of shares. We earn our fees based on a per shares traded. And so particularly when our listed clients decide to do a split, there is a benefit just in terms of the number of shares traded, all else held equal. So we would see a benefit there. But there's also -- and the reason why we're doing a split, we believe, there's a benefit to the liquidity profile of the stock to do the split and to find a price that's in the right place. And so we work with our clients to -- some of our clients. Some of them doing on their own.

Okay. We're going to open up for questions in just a moment, so get your questions ready. Maybe just let's talk about expenses for a little bit, right, against the rising inflation backdrop. There's a war for talent, cost pressures all around, I guess. Just how much pressure do you see on the expense base? And how much flex is there in the business if you needed to manage expenses a little bit tighter?

Yes. We do like to come back to our calibration of our revenue growth on the Solutions segments to the range of expense growth. So that's 6% to 9% revenue to the 3% to 6%. This year, 2022, is a little special given the pressure we've had from not just inflation, but also return to office. So that's another roughly 200 bps. But in general, right, we're going to look to manage within the ranges that I just spoke about and therefore, manage expenses if we see revenues, the revenue trajectory disruptive for any reason.

And how is the current operating environment, would you say, tracking against the growth algorithm that you've laid out there for the business? And what's the opportunity to deliver positive operating leverage?

Yes. So we have, over the past 5 years, sort of transformed and started providing the guidance and expanded margins over the past 5 years, 300 bps. So it's working. It's work over the long term. I mean we want to strike the right balance to invest so that we can continue to grow and recognizing some of that leverage comes later on in the cycle as we realize the benefits of the investments that we have.

Great. Any questions in the room? Right over here.

Could I just ask, in terms of your kind of Nordic operations, how core are those going forward? Obviously, the thrust of the growth opportunity set seems to be more kind of data, ESG, analytics. So how does that kind of fit into the broader group strategy? You've got obviously a European player. Euronext is pretty keen to consolidate. So how should we think about that?

Yes. So our Nordics business and our European markets business is a core part of our previous success and will continue to be as we look forward. When you -- we didn't talk about some of the ESG initiatives that we have being run out of Europe like our carbon removal market, but also when you think about our Market Technology business and who we're selling to. So of our 150-plus exchange clients, most of them are sort of -- are outside of the U.S. And what our clients want in that space is they want to know that we're running markets and that, therefore, we know what we're doing when we're selling them technology to run markets. That Market Technology business is actually run out of the Nordics as well. And so it has been a terrific business in terms of cash generation. And there are some special growth opportunities there, especially in the ESG space, but it remains a very important part of our core.

I just want to ask, what role do you see for distributed ledger technology in terms of your business going forward?

Sure. I think there are certainly opportunities for distributed [ letter ] to be employed in the post-trade space. Maybe that's sort of the near-term opportunities. And we're obviously quite engaged at evaluating where the other opportunities could exist. But I think that the most near-term ones are probably in the post-trade space.

Any other questions in the room here? Guess not. I'm going to keep going, but just raise your hand, and I'll come back to you. Maybe we could talk a little bit about capital allocation. So business continues to generate very strong cash flow. Looking out the next couple of years, how are you prioritizing the uses and what might that look like in terms of the split between buybacks, dividends and potentially M&A?

Sure. So first and foremost, we like to kind of think about it in 4 pillars. First and foremost, we want to invest to generate growth. So organic growth and then inorganic growth, if there are opportunities at the right price that complements our existing strategic priorities and where we see the right returns for investors. So that's really first and foremost, then we think about growing dividends in line with cash flows and earnings. And so we've grown our dividend pretty consistently 11% this year. And I think we returned if you look on a net income basis, if you look over the past [ few ] years, about 30% to 40% in the form of dividends. Stock repurchases, we will -- once we sort of get past the extra buybacks we need to do to offset the dilution from the sale of the Nasdaq Fixed Income business, we'll revert back to offsetting dilution from our employee issuances as our main priority in the stock repurchase program.

Any interest in opportunistic buybacks once you get through the current?

Yes. I guess we had so much in front of us coming off of NFI. It's not in the short term now.

Okay. So it's really just more for offsetting?

For offsetting the dilution.

And then the dividends to grow more in line with earnings? Is that the idea?

Dividends grow and cash flows -- earnings and cash flows...

Earnings and cash flows. So it will stay probably within that similar range?

It will, yes.

Okay. And then any thoughts on M&A? You've done some small little things here or there, like the ESG acquisition we were just talking about a little while ago. Just -- any just updated thought process around M&A? Could there be any appetite to do something larger?

Sure. I mean we look opportunistically add things that come to us or that we seek out really in the -- think about it in the space of our 3 key areas of prioritize strategic growth, so that Anti Financial Crime, Index and Analytics and then on the ESG side. And so I think if something becomes available, it's the right fit and has the right return profile, and we see the long-term growth potential and synergies in line with our business, for sure, we'll be open to that.

Great. Any other questions in the room? Another one over here.

Just a follow-up on M&A. I mean, I guess, from what you're saying there, it sounds like you wouldn't -- or put another way, do you think sort of big mergers between exchanges across border, transatlantic and others, do you think that's just too difficult to do? I mean it sounds like while you're focused on that is not really where you see the most interesting growth. It's more around ESG, data or analytics. Do you think we'll see any -- obviously, there have been things visited in the past and generally haven't happened for political, regulatory or other factors. So how do you think about that over the next 3 to 5 years?

My personal view is that we won't see sort of those big cross-border mergers. But again, really, our focus is in those strategic areas. And so when we think about exchange consolidation in our future, it really has to make sense in the context of where we were heading strategically for us to consider that.

And for the industry, it sounds like you probably wouldn't expect much in the way of...

That's my personal view, but I don't claim to be an expert on industry consolidation. So just like that...

[indiscernible].

Are you able to elaborate on -- in terms of trends for the IPO companies, types of companies that you're seeing in the pipeline?

Sure. I mean we've seen -- there's a whole mix of companies in that 270 that have filed to go. What we are seeing for some of like the biotech companies, probably are going to go no matter what, they're going to go to IPO because they need capital in order to survive. And so we'll see them coming to market sooner. I think we -- tech companies that are profitable, probably have a faster path once things -- once the market sort of comes down and is stable, whereas companies that are in a loss position, the road might be a little bit harder. So we've got a mix of all different type of companies in that 270.

Great. We'll have to leave it there. We're out of time.

Great. Thank you very much.

Thank you so much, Ann. Really appreciate it.