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

All right. Hello, everybody. Welcome to, I guess, our first afternoon session in here. I'm Ben Budish. I'm Barclays analyst covering brokers, asset managers and exchanges, if anyone doesn't know me. And I'm delighted to have with us Ann Dennison, who is CFO at Nasdaq. Ann, welcome. Thanks so much for being here.

Thanks for having me, Ben.

Maybe just kind of just kick it off, an update on kind of the markets business. What are you seeing in the kind of macro impacts? How should investors be thinking about the implications of sustained high inflation, rising rates, potential recession? What are you guys seeing from your end there?

Yes. I mean it's been quite a ride for the past couple of years. In 2022, we're operating in a very dynamic environment, as is everyone else. So we feel really good about how NASDAQ has delivered against that environment, but there are some headwinds to talk about like inflation. So 1 of the things that inflation, I think, has done for us and also for others is really put spotlight on talent and the competition for talent has just been incredible. We did a couple of things coming out of last year, thinking about our pay scale. We've been investing in culture and making sure that we're creating an environment where people want to be there. They agree with our mission, our vision, our culture, but inflation is a factor. And so we had about a 2 percentage point hit to our expenses this year that we sort of built in from day 1, knowing that we were operating in a more difficult inflationary environment. So we're going to watch it very closely as we move forward, but it's on our minds.

That's helpful. Maybe another kind of high-level question, but on the regulatory side. just to kind of continue kicking it off that way, maybe less Nasdaq-specific, but maybe your thoughts. Chair Gensler's obviously made his comments quite public in terms of what he thinks would be potential improvements to market structure. There's no formal proposal yet, but what are your kind of thoughts there? What sounds like it would be constructive? Are you maybe -- where are you maybe perhaps more hesitant?

Sure. Yes, I actually thought maybe we'd have a final proposal or some sort -- not final, we have a proposal that we formal -- excuse me, formal for that effort, it's the safe effort, in time for the conversation today, but it looks like we don't have anything. So what's interesting about what Gensler has laid out in his views, a lot of it is really consistent with how Nasdaq thinks about things. So we put in a white paper out. I think at the beginning of 2022, where we talked about market infrastructure and really stressing about moving slow, being careful. Maybe my words are not exactly the right ones, but we have a great market infrastructure in the United States, the best markets in the world. So ripping them apart and trying to get something better is not how we are thinking about it. But in terms of the overall themes around clarification as it relates to what best execution means improving the NBBO. A lot of those things were part of our white paper and part of what we believe would be helpful to the markets. And when we think about coming out of last year, at 1 point, we had more than half of the trades happening off the lit markets. And so something to consider. And so -- but the devil here is going to be in the details. So when a formal proposal comes out, knowing what those specific proposals will be is something we'll have to dig in and really understand.

Okay. Fair enough. Maybe kind of now digging into Nasdaq a little bit. I think on the listing side, it's really been like a tremendous success area for you guys over the last many years. I think in the last quarter, you said you had the majority of new listings, the 34th consecutive quarter. What's driving the success there? What sort of changes have been made to kind of kick start that? And how do you see it continuing?

Sure. I mean year-to-date, this year, we have 85%. We've won 85% of new listings. Now of course, there's not a ton happening this year. We -- for the last couple of years, we're winning about 4 out of every 5. So really strong performance. I'd say there are 4 factors that I would point to. One is our brand. And so we've got a community of pretty amazing tech companies that are part of the NASDAQ. And people want to -- other companies, I should say, want to be part of that, where Apple and Microsoft and just as an example, there's really a lot of amazing companies. So that's part of it. I think that's attractive to folks. I think the second thing I would highlight is we've got a pretty full suite of solutions and services that we provide to clients. So many of them through the IPO process get free services for 3 years, kind of get like a menu and they get to choose which ones they want, not everything is for free. But there's a lot of things there that help them along their journey of meeting the requirements of public companies. So I think that's very attractive. And we just started this past year, including ESG services as a component of that free suite. So -- and a lot of companies are hearing from their investors on ESG and have taken us up on using those services. The third thing I would say is our indices. So we've got the NASDAQ 100 and our thematic indices that are built around being a Nasdaq-listed company. And so it's a draw for some companies. It helps them, in some cases, have money coming into their stocks through the passive investing, but also it's a way to help them get branding and get some marketing as it relates to their particular brand that as they're brought into the indices, and we do marketing around it. And the last thing I would say is just we have an incredible team on the listings front. They -- we're working. It's a very quiet listing environment. We're working with a lot of companies to help them on their journey, even though that journey might be delayed, so.

Sure. Can you maybe on that last point in terms of the listing environment? No doubt that it's kind of quiet everywhere. Can you maybe talk about the pipeline though, as it seem like if market conditions turn the right way, became less volatile. You see the markets kind of start to go up again. What does the pipeline look at like in terms of companies that are interested in taking that next step?

Yes. I mean we have a lot of companies. I haven't confirmed this. Coming out of the second quarter, we had more companies in the pipeline than at any other point over the past 2 years so operating companies, we've got a lot of companies that are ready to go. When we were finishing up the second quarter, what we were hearing from the companies we're talking about, talking to us, we're looking at the end of the third quarter. Now what we're hearing is probably the beginning of 2023 and I think what needs to happen probably a couple of things, but companies need to know when they go out to raise capital that they're going to be able to raise the capital that they need to fund their business. And so I think there's a lot of uncertainty around that, obviously, and the volatility in the market doesn't help there. So there's probably a few things that need to happen to make it possible for us to see sort of a steady flow. But we're focused on -- so those 4 things that I talked really focused on getting ready to give clients the best experience. And those are the things we can control, building relationships and making sure that we know what our clients' needs are. So when they're ready to go, we're ready for them.

Makes sense. It's very helpful. You mentioned, I think, earlier that when -- 1 of the reasons companies might join NASDAQ is because of the suite of services you offer. And so given the wave of IPOs in the last several years, how would you kind of frame up the financial implications of these companies are about to -- in the next year or 2 years, 3 years, roll off that free trial period and perhaps sign up? What does the revenue opportunity look like? And what does it require in terms of -- does it require more selling? You have to call upon these companies to, hey, why don't sign this contract? Or is it going to happen more organically? How should we think about that?

Yes. So I think we could focus in on the last 2 years, so between 2020 and '21, we had 1,000 new operating companies come to market. SPACs are not included in that number because SPACs don't buy services generally right until they find a target. So we've got 1,000 companies that we've given free services too. And it's a bit of a mix because we changed the model for competition reasons, but it's anywhere from 2 to 3 years of free services. It's all coming in at 3 now, but some of the older deals were 2. And so companies get to choose and we -- and the choosing part is really important because if you think about it, if you sign up for a service, but you never turn it on and you never use it, it's not going to be very sticky when that period rolls off. So what do we try to do? We try to work with the clients to help them implement, to help them, to show them the value of the tools to make sure that they're getting value out of the tool. And then when the free period rolls off, that's our opportunity to convert them to paying client.

Okay. Great. So I know I think you mentioned 1 of the services you really started offering as an option with ESG. Can you maybe talk high level about your ESG solutions? And I know you've made a couple of acquisitions recently in that field, Puro and Metrio. Can you kind of give us an overview of what those are specifically and maybe kind of more broadly, what you are -- or how you're kind of helping these companies manage their ESG reporting requirements or whatever it may be?

So we think -- yes, absolutely. So we feel like we're at a pretty special place in the market, meaning there are a lot of companies that are out there that serve the investment management community and raiders and rankers and others. And there aren't a lot of companies in the ESG space that are dedicated to the corporates. And so we view ourselves in a large way to be dedicated to our corporate clients. We obviously want to serve the investment management community. We have lots of products, but we're filling a void on the corporates, and that's important. So when I think about what corporate's needs are, they're different depending on the life cycle where they are in their life cycle. But companies that are coming to the market just need to understand the parameters may need help understanding what their investor base wants. And those types of things we want to be there to provide them. So whether it's advisory services in their journey, understanding what's material to them, all the way to using our OneReport tool, which helps them -- I remember starting as CFO and having to do some of the ESG reporting and there was a lot of acronyms, TCFD, CDP, I can't remember all of them. I don't know what all of them were. What this tool allows you to do is put the information in once and then it sort of can be captured in the different reporting forms, which are in different ways with 1 set of inputs. So we try to provide solutions like that for our clients that help them with their workflows and help them do their job in a more powerful way. We did a recent acquisition, which you just mentioned, Metrio, was the name of it, which is a complementary tool to the OneReport tool that helps clients look at data and KPIs and analytics as it relates to their ESG journey. So we're building out sort of that sort of framework and including things like ultimately a market where they can go and buy their carbon removal offsets. So we want to give corporates and then ultimately, investors a full suite of options.

Great. Maybe switching gears a little bit to kind of Verafin, which is your acquisition of late. Last earnings call, you started to mention that the company was starting to do more proof-of-concept trials with Tier 1, 2 banks. Can you talk about what that entails in terms of the time line? I think you've given more color in the past on the smaller banks and credit unions Verafin served. So what does it look like once you start going from proof of concept, how do long what is the journey like to kind of signing a contract and sort of getting into a full commercial agreement?

Yes. I mean it's a great, great question. We're still learning the answer to the question. So as a reminder, when we purchased Verafin back -- we closed on the deal in February of '21, they were serving and continue to serve Tier 3 and below banks and credit unions in North America. The sales cycle there is somewhere around the 3-month mark and 3 months on average to get the clients up and running, right? So that's before moving up cycle. Our strategy in purchasing the company was to really help them go upmarket with our relationships. We have and continue to have an existing surveillance, anti-financial crime surveillance business, whose clients are the Tier 1s and the Tier 2s and across the globe. And so as we thought about how we're going to find revenue synergies, this was how. We are in proof of concepts with all of the Tier 1 U.S. banks. And it looks a little different. You're selling a full suite to a smaller bank, but you may be talking to big bank on about wire fraud only. And so those proof of concepts take time. And so the question of how long and how quickly the contract, it's a TBD, but we'll keep you updated along the way as we learn. It will be longer than the smaller banks, and it will be different, but we're super excited for the journey ahead.

Great. And what about like a technological perspective? It sounds like the answer is perhaps is not so different. And as maybe these bigger banks, they'll take the products they need, and it's less bespoke, more they take it as it is on a cloud service basis. But are there any -- you mentioned it's just -- it's different. So the big banks, the sales cycle is different. But on the tech side, is the suite that Verafin currently has, is that -- even if it's just product by product, rather than the full suite? Is that appropriate for what the big bank needs? Or is it -- is there more work to be done there? Or is it -- are you doing any kind of unique customization or anything like that?

Yes. So we're not looking at any unique customization, 1 of sort of the foundations of the Verafin tool has been 1 product, which makes it very powerful that you can deliver updates to all of your clients at once. And so we will -- when we talk about the Tier 1s and the Tier 2s, it's unlikely you do a big bank approach. So we will be looking at different modules. And I'm sure we will learn and improve things for the entire suite of clients that get the product, but we will be developing customized products for individual banks. Yes. It's -- they're ready, right? The technology is ready. It's now about where you might have more challenges is in the implementation with the big banks and hooking up to their difference to their differentials.

Great. Maybe kind of one last question here on Verafin specifically. Can you maybe talk a little bit about the competitive environment? And how sustainable do you think this very attractive high growth that you've been seeing -- how sustainable is that as you look out over the next several years?

Sure. I mean without giving a forecast, I think it's sustainable. And we are competing depending on where your -- depending on which tier you're in, you're competing with different players. Verafin's been super successful at moving into a tier, dominating it, and then moving up to the next one. And so this is the journey they're on with us. And then -- so we hope to dominate and then move out. What we're competing with in the Tier 2s and the Tier 1s is really there is NICE Actimize is a competitor that is in quite a few of the top-tier banks usually with an on-prem solution. We are competing with homegrown systems, and we're competing with a lot of folks that are the AI for digesting the data and sorting through it. And so I think there's a couple of different elements there.

Okay. Great. Maybe kind of switching gears a little bit on the market infrastructure side, it sounds like this was a space that there was some COVID-related challenges as everybody was working from home. I think you guys have indicated more recently this has started to pick back up. So maybe can you talk about your confidence that you're sort of back on track here. To what extent should it be maybe lumpy as projects pick back up? Or is it -- are we sort of kind of back to the normal growth that you would have historically expected?

Yes. I mean there's a lot of considerations within this business, and we were really sort of happy to have some of the milestones to point to that we've had in a positive way. It was a rough couple of years in the business and COVID was a big part of it because of the on-prem nature of some of the projects that we have and the need to be with the clients. The sales cycles were longer and then the delivery cycles were longer and getting through complicated things was just harder. So we've had some nice proof points. We had strong order intake coming out of last year and then for the beginning of this year, and a lot of that was new business. And we've had some milestones we've hit them on delivering on some complex projects. So we're feeling great about it. When we think about outlook and performance over the medium term, there is some seasonality in the market infrastructure tech business, which third quarter can be slower. We usually see more change request in the fourth quarter. So I wouldn't expect it to just be a linear road, but we're really happy with the progress. And we -- coming out of the second quarter, we said see progress towards the end of 2022, going into 2023, and that still stands.

Maybe 1 more kind of just like a little detail on that business. In terms of the margins, I think they've been really fluctuating quite a bit. How do we maybe think about like a normalized margin profile for that?

Yes. I mean over time, the margins there are going to increase. They're going to increase as we grow the business also as we transition the business to SaaS. So we have all new clients that come into the business go into the SaaS products. Those are very scalable margins now, but the SaaS portion is small and new. And so not yet where we want them to be. But then we will continue to transition clients to SaaS over time, and I think clients are ready for this exciting journey. They're hearing about markets in the cloud are markets that we're moving to the cloud, and they want to be part of the journey.

Okay, great. Okay so within the Infrastructure business, I know you support like a dozen digital asset exchanges, if that's right.

Yes, we have, yes. Go ahead.

So maybe can you kind of give us an update here that market has been particularly volatile. What kind of activity are you seeing in terms of the pipeline of potential customers? Or can you speak a little bit about the kind of book of services you currently provide and how demand has been kind of ebbing and flowing with the broader like crypto market?

Sure, yes, with the crypto winter. So we have been very focused on thinking about infrastructure in this space. And how do we provide infrastructure with an institutional focus. And so as you mentioned, we've got our technology that powers -- I believe it's 10 exchanges now. And we are also doing surveillance for 10 markets. And we just signed a trade surveillance crypto trade surveillance contract. So we're continuing to expand. We're thinking about anti-financial crime. If you -- it wasn't even 2 years ago, maybe 1.5 years ago, we were up at a strategy session talking to the Verafin team, and they were saying none of -- nobody is worried about crypto like in the core banking. And so fast forward a year or so, we were back up again, and they have this really great way of tapping into all of their client conversations. They pull up their client conversations, and you can see that digital or crypto had been very -- mentioned very few times in 7 or 8 months ago. It was the top topic. And so because of that, we're in beta right now for tools within the money laundering module as it relates to crypto. So we're looking at the evolution of -- the natural evolution of all of our business areas. And so I think what's interesting to us is that there doesn't seem to be any institutional pullback of interest despite the crypto winter. And so we think it's here to stay and that we have a big role to play on the infrastructure side.

Okay. We're definitely looking forward to seeing how that all evolves kind of going forward very. So it's colorful to say the least.

For sure. For sure.

Perhaps on the Investment Intelligence side, so maybe sort of a similar question in terms of demand. What are you seeing for eVestment? What is the kind of customer cohort like? What kind of tools are they looking for? And maybe over the longer term, what are the key structural drivers of this business?

Yes. So we've seen some pretty healthy growth across what we call the asset owner solution is meant to capture both eVestment and Solovis. What we're seeing and we're continuing to see is investment managers and asset owners really wanting to distinguish themselves. And so wanting the tools where they can get the best access to data and then from a portfolio construction perspective, have the tools to manage things the way that will be most powerful to them. And so we've seen that to be continued conversation with clients. We're looking at things like asset class expansion to give them workflow tools outside of what we currently have. But we're really happy with the progress there, and we continue to invest there to drive what we hope to be high single -- or low double to mid-double-digit returns.

Okay, great. Maybe on the index side, there's a similar question about growth. How do you think about growth in terms of new products versus property like your big marquee products like the NASDAQ 100 and other indices in terms of increasing adoption by retail users? What are the kind of growth drivers there?

Yes. I mean the new products, we believe the growth is in new products. And the distribution of the existing products more broadly. We have -- which is surprising to me, and maybe it shouldn't have been, but very few funds that are using the NASDAQ 100 as a benchmark. And so we think there's some opportunity there that we haven't fully explored but new products, we launched a suite of new products in October. No, I'm going to give you the wrong date, but we've got -- yes, sorry. So we've got about $10 billion of assets under management for that new product suite and start with the next generation, the innovation suite. We want to continue to do those things and expand the product set. And we've got, I think, a path on the ESG front, which is part of our core areas of focus, but also within the NASDAQ 100 thematic umbrella.

Makes sense. So maybe like a broad kind of question on the solutions business in general. For the last many quarters, you've been trending pretty nicely ahead of your longer-term guidance. What -- I certainly appreciate the conservatism, but what holds you back from kind of raising the guidance there? Where are you perhaps more cautious? Or is it more of a philosophy of setting and deeming expectations? How do you think through all that?

Yes. I mean I think we -- the way we construct things, right, we want to be able to meet them, but the objective isn't to always exceed them otherwise, over time, they mean less people. But what they do mean when we set them is that they're 3 to 5 years, the medium term, 3 to 5 year on average, you could be below and you could be above. When we think about the past couple of years, we had tailwinds at the back of every 1 of our solutions segment businesses. And so when we're talking about our outlook, it's hard to think about that reoccurring so soon. And so we're sticking with our medium-term guidance for now, but we do have an Investor Day coming up, and I'd love for people to attend and hear what we have to say.

Can't wait. We'll certainly be looking for it. Okay. Great. Maybe just on capital priorities. Verafin, I think your last big acquisition, your leverage level, I believe, is back a little below 3x now. How do you think about kind of deploying capital right now? Are you committed to getting leverage further lower? And then in terms of what you may be looking at the pipeline, are there any particular capabilities you're looking for? I imagine anything where you can kind of accelerate anti-financial crime or wherever it may be, but if you could speak to that a little bit?

Yes, sure. So when we think about our capital pillars, we're constantly talking about them and focus on capital allocation. First and foremost, we're thinking about investing for growth, and that usually takes the form of organic, but we are looking for things to complement our strategy on the inorganic side. And so those things would be in anti-financial crime. So either directly within the areas we are in or complementary areas within the ESG space. There's not a lot of big things in the ESG space. There's a lot of small point solutions. So we're trying to find the right balance between organic investment and finding those opportunities that enhance our product set like a Metrio and OneReport, and of course, in investment management workflow space. So we are looking all the time and -- but we have to balance the opportunities, the synergies with what returns we can generate for shareholders. So it's -- and pricing, all the pricing has come down on the public side. There's probably still a differential between the private and the public side. So we'll see which 1 goes up or down to make those match.

Great. And maybe on the same topic in terms of just capital priorities between shareholder return, your philosophy on dividends and repurchases versus organic and inorganic one. How do you kind of balance all those factors?

Yes. So first priority is investing for growth, and that will be a mix of inorganic and organic. The inorganic has to meet our investment criteria and sort of generate the right level of returns for investors. So that's the first pillar. Dividends, we want to grow dividends in line with earnings. And so I think we grew dividends 11% this year, and we'll continue to do that as we look forward. Share buybacks, we want to buy back to offset employee dilution. And so we just kind of finished this buying back shares to offset the NFI dilution from [ Zalver ], U.S. fixed income business, and that's behind us now. And so as we look forward, we'll be focused on employee dilution unless there's some big dislocation in the market, and we want to do something opportunistically. And then all that's within the context of managing to an investment-grade rating. And so, we're working closely with the rating agencies, if we were to lever up to do something.

Okay. Great. So I guess another kind of big topic has been sort of the cloud journey that the company is going through. Can you maybe kind of give us a reminder where are you currently? What are sort of the near-term goals? And what are the longer-term goal? What is this -- the broader environment for Nasdaq look like in 5 to 10 years as you kind of execute on the plans here?

Yes. I think it's -- we're in a pretty exciting spot. So we've been working on our cloud journey for -- before I joined Nasdaq and I joined in 2015. And maybe I naively thought, you just move something to the cloud. You can do that, but you're not going to get -- you're not going to optimize the way that you operate and you'll be very inefficient and it will be very costly. So we've been working for many years in getting ready for the cloud or markets, I should say. And so where are we? We're going to move 1 market to the cloud this year. So we've got our partnership with AWS, who's going along on this journey with us. So we're going to move 1 of the smaller options markets this year. And so that's the short term. I think over the long term, the plan is to move all of our markets to the cloud, but we've got to do that in the right way over time. What is pretty exciting, I think, is that we've been having a lot of conversations with our clients. So we also have -- we provide technology to over 100 exchanges around the globe. We're talking to them about their journey to the cloud and what that could look like. We had our Technology of the Future Conference recently, and there was a lot of excitement. AWS is there. Our clients were there, and there was like a palpable excitement around what this could mean for their scalability and bringing partners into their private local zones with them. So in the long run, how we deliver our services, how we sell our technology is all going to change over the long term over or in some cases, shorter, but many of these are big infrastructure things that will take some time.

Yes. I was hoping you maybe dive into that just a tiny bit. Like what are the low-hanging fruit, the things that can be put in the cloud today, but maybe just there's a backlog of projects versus trading and clearing and what take for kind of those kind of functions to be put in the cloud?

Yes. I'd say anything that could be put into the cloud today, at least within our business, we have put into the cloud. So we're -- almost every one of our software offerings is in the cloud. And if it's not, it's on a short trip to the cloud. The harder things, things that haven't been done before, like running markets out of the cloud are things that we're taking a slower, more careful approach to since we're lighting the trial.

Makes sense. Well, I don't want to front run your Investor Day, but I'll ask anyway. Just the next kind of 5 years, I think the last big strategic major strategic pivot for Nasdaq began in 2017, so 5 years later. Of course, it's timely that there's an Investor Day coming up. But what are your kind of thoughts on areas to the extent you could share like the next 5 years? What are sort of the most exciting opportunities -- where are you kind of more focused in terms of like your long-term thinking.

Yes. I mean so, what I think is really great about our pivot when Adena took over and we really focused in on where we were going to invest for the future. We spent a lot of time thinking about what the trends were and how we were going to capitalize on them. And so I would say, as we sit here today and I look forward to sharing at Investor Day, we're not changing directions in any way, shape or form, but we are refining and elevating our ambitions. And I look forward to sharing that as we do on Investor Day. I don't want to front run it.

Great. Well, are there any questions from the audience? If we'd be happy to take at this time. If not, we can kind of keep going with a few others. All right. Maybe last we revisit the anti-financial crime segment a little bit. I know we talked a lot about Verafin. Can you kind of remind us what else is in there? And what are the kind of growth profiles and kind of key drivers for those businesses? And maybe at a high level, is there -- how do you think about like the cross-sell opportunity between all those products?

Yes. So within anti-financial crime, I'd say there's 2 sort of key products. Verafin is fraud, and AML, we call it FRAML. And then we have surveillance and there's pockets surveillance and trade surveillance. So there's different flavors of it. The growth on the FRAML portion of the business is in the, say, 25% to 30% range. The growth on the surveillance portion of the business is more like low, high single, low double-digit growth. And so the Surveillance business, I think the trade balance has about a 15% market share in its particular. All of the clients in that business, a lot of them are Tier 1 and Tier 2 banks in the U.S. and Europe. And so there's a real opportunity to put the anti-financial crime businesses together and leverage those client relationships, and both ways, right, and to sell our surveillance and other tools to different tiers within the U.S. market.

And for Verafin in general, is it mostly U.S. and European? I mean is there a sizable opportunity in Asia, Latin America and kind of elsewhere?

Yes. For Verafin, I mean Verafin right now, it's U.S. and in Canada. The opportunity that we're going for first is up the tiers in the U.S. There's certainly an opportunity in Asia. There's an opportunity in Europe for sure and Latin America. But we're -- Verafin had this before we purchased them, they had a really great way of attacking the market. So they start off with credit unions. They invested heavily. They won the market, they dominate it. They move to the next level. And then they did that all the way up to the point where we purchased them. So we'd like to continue to let them use their strategy, which has been so successful. So I think the U.S. is first, and then we'll be looking to going out into different markets.

Okay. Great. Well, we're just about out of time. So Ann, let me just say, once again, thank you so much for being here. It was a pleasure to have you. Really appreciate it.

Great. Thank you.