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

Okay. Good morning. My name is Michael Cho. I am an equity analyst here at JPMorgan, and welcome to the second session of the Ultimate Services Conference here. It's my pleasure here to introduce Nasdaq CFO, Ann Dennison. And so the format of today's session will be, we'll do a Q&A and fireside chat for about 20, 25 minutes, and we'll leave the last 5 to 10 minutes for Q&A and open it up there. So without further ado, all I'll jump right in.

So Ann, I guess I'll just start high level, right? So I realize you just hosted an Investor Day about a week ago. But for the folks newer to the Nasdaq story, I was hoping you can just walk through some of the new medium-term goals you've laid out and maybe some of the underlying drivers that you see over the next 3 to 5 years, again, for folks who are new to the story?

Yes. Absolutely. So maybe if I could just set the stage a little bit. When we think about our revenue base, $3.6 billion in revenues on a trailing 12-month basis, about 75% of those revenues relate to what we call are solutions businesses. So those -- and then 25% relate to our trading businesses. And so when we think about our medium-term outlook, it's very difficult to predict what the markets are going to do and what the volumes are going to be in the market. So we focus on that bigger portion of our business that is substantially recurring revenues. And we think about our different segments and what our opportunities are and we put out a medium-term outlook for the growth in each of those -- each element of our solutions businesses. So the solutions businesses are made up of our anti-financial crime business, our capital access platforms business and then also our marketplace technology businesses where -- which includes our connectivity -- market connectivity business as well as the business where we sell market technology that underpins exchanges and other -- the traditional exchanges and new markets. And so that's how we think about it. From an overall outlook perspective, which is our 3- to 5-year outlook, anti-financial crime, we expect to grow in the 18% to 23% range. Capital access platforms in the 5% to 8% range over the medium term and marketplace technology 3% to 5%. And so when you put all those pieces together, we'd expect our solutions businesses over the medium term to grow at 7% to 10% top line rate. And when we think about -- when I think about the evolution here, we've really made some big steps forward. A few -- 3 years ago, we were at 5% to 7%. When we did the Verafin transaction, we moved that to 6% to 9%, and now we're moving to the 7% to 10% rate. And that's -- the special thing about it is, it's not -- it's a move up, obviously, a 1% move up on either side of the range, but it also represents a bigger portion of our business than it has ever represented before. So when we think about our 6% to 9% range, which we talked about at our last 2020 Investor Day, that only really covered about 66% of our business. The 7% to 10% range covers 75% of our revenue base.

I guess just on that point, you talked about kind of taking the medium-term target, at least the organic revenue growth target, from 6% to 9% to 7% to 10%. And I realize the 6% to 9% was a couple of years ago, pre-Verafin. So I guess my question is, are you seeing certain areas in the business, in the core fundamental business where you're seeing underlying acceleration or pickup? And I'm just trying to -- I realize there's a lot of moving pieces when you shake out the 7% to 10%, but specifically, I'm just trying to get a sense of where you are seeing that underlying acceleration to give you confidence in today's market to step up that organic revenue growth target.

Yes. I mean before Verafin, we were 5% to 7%. So we took it up to 6% to 9% with Verafin. We continue to see the strength and the opportunity in the anti-financial crime part of the business. So that's a contributor. We've also seen a better and better story within what's now we call our workflow and insights businesses. So within that, we've got our investment management workflow business as well as our governance and IR products. On the analytics side, with a continuously growing addressable market there that we are positioned well to win in. And then on the governance and IR products, we have a really terrific cross-sell opportunity with over 1,000 new listed -- new companies that are listed across the globe on our Nasdaq exchanges.

Okay. Okay. Wonderful. I guess with the new medium-term top line targets, you also talked through kind of ongoing organic reinvestment, right, a key to the story as well. And so I was hoping you could touch on some of the key priority areas as you look to the next 3 to 5 years in terms of organic reinvestment.

Sure. So we spend a lot of time, as we do every year, thinking about our strategy and sort of what's the next phase for that. And as part of thinking about our divisional realignment and aligning our divisions in the most powerful way, we identified 3 areas where we see real secular trends and an opportunity for -- and a right for Nasdaq to win. And those 3 areas are market modernization, so where we see markets moving to the cloud, not just ours but our clients, and modernization in carbon and digital. The second trend is in ESG, continued focus on ESG by both corporates and investors, both of which are our clients. And then third, in the anti-financial crime space. So when we -- which is growing -- has a growing TAM at about 17% a year rate. And so we think about the opportunities in our product set, those are the 3 areas that we will focus on, and our primary focus is growth organically. So we'll be focused on putting most of our investment into those 3 areas, but that would also be where we would look for the strategic opportunities outside of the organic investment.

Yes. And as far as the capital allocation process that you go through, has that changed at all with the new segmentation that you announced recently as well?

I think as we thought about how to align ourselves for success, we think this is an amplifier of our capital allocation strategy where we can make even more powerful decisions and capital allocation with the way we've aligned the divisions. I think fundamentally, the way that we approach our capital allocation and where we're investing in the highest growth opportunities, that hasn't changed, but we think the alignment of the divisions will help us amplify our potential success.

Okay. Okay. Great. And I have to ask this, I guess, with respect to investments -- and digital assets is something top of mind for folks in the room, for Nasdaq as well. You recently formed a digital asset group or team. Just given what's going on in the digital asset world today, over the last week or so? Has that changed anything in terms of your investment or capital allocation or your thoughts around the digital asset opportunity that you see...?

The opportunity I'm seeing? So for sure, we're -- we haven't launched yet. And so we announced our intent to launch in 2023, starting with the custody solution for institutions. And we see the pain points that institutions have around access to custody and also workflows that can be trusted. And so we still very much believe that, that is an opportunity for us. But obviously, with FTX and things imploding there or exploding, whatever the right terminology is, and some of the contagion that we've seen in other parts of the crypto space, we're stepping back and taking the opportunity to learn from this and to understand if we had launched, what would the implications have been to our solutions and to sort of reset ourselves. We still think the opportunity is a big one and that the crypto is -- or digital assets, I should say, are here to stay. I think the question will be on the timing and the pace of institutional adoption and whether any of this that has happened in the last week sort of alters that.

Yes. No. That's fair. I think one of the questions that we get and I think I suspect you get as well is kind of around recessionary planning or planning during a downturn, whether it's severe or moderate. I guess I'll characterize it in terms of your ability to invest in investment spend, right? How much flexibility do you have in terms of investing or pulling back or being more aggressive in the time where we may see some softness in the macro?

Sure. Yes, it's a great question. And we do think about -- we talked earlier about our medium-term outlook on the revenue side and that 7% to 10% outlook for revenue growth. When we also look at our expense base, substantially all of our expenses are related to those solutions businesses. So we do also think about an outlook for expense growth in the 4% to 7% range against that 7% to 10% growth. And so we have the flex there, meaning, we're going to manage our expenses to a level of growth that aligns with what we're seeing on the top line. And so if you look back -- we've got a pretty great track record. We've expanded our margins over 500 basis points over the past 5 years. We -- in this year where we have some headwinds in assets and in listings, we're running at about a 53% margin. And if you look back over the past few years, in 2021 and in 2020, we expanded our nonoperating income by 21%. So we definitely have leverage where expenses are obviously growing at a much lower rate than revenues. And even in a challenging year, if you look back to 2019 where we saw volumes sort of falling off in the market, our revenues only grew by 3% that year, but our -- we held our expense growth to 2% in that year. So we expanded operating income by 5%. So we have a great track record of sort of managing for it to make sense, I think, is probably the way I think about it and the flexibility to do that.

Right, right. No, that's great. And I guess just a follow-up to that, I mean, like you said to your point, did you -- in the past, you had been able to flex up and down as necessary. And I guess in today's you mentioned current inflationary environment -- you mentioned at least a couple of times in the past around the pricing adjustments that you have tied to many of the contracts. I realize every new one -- every contract is different and every solution is different, but maybe you could just flesh out what you mean when you say pricing adjustments as we kind of walk into this higher inflationary environment?

Sure. Yes. So we have the most opportunity around pricing within our SaaS businesses where we -- we've got about $700 million in annualized SaaS revenues. And for those products, we -- those are deeply embedded into our clients -- our client workflows. And so we have the real opportunity to work with our clients to add value, which increases our pricing opportunity because we're generally -- we've got 3-year contracts on average for these products. And so when you get to that renewal period and you're having the conversation with the clients around pricing, it's a conversation about the value add over that contract period. And so those conversations are the ones that we like to have where we've added value, and it's -- we've got a long-term view of how we manage with clients. We think about the rest of our businesses that are not SaaS. We do have, in some contracts, CPI escalators that happened at various points in the year depending on the specific contracts. That's across our surveillance, products in our market, infrastructure, technology products. And then we have other -- for example, in our listings -- in the listing space, we generally do a pricing increase. It can -- it varies. And I think this year, it was 3%, and that happens January 1 of the year. So it depends on the business. But we think from a -- when we think about pressure on expenses, we think our pricing increases can absorb about a 2% to 3% inflationary impact on our expense base.

And from your comments around timing, it sounds like there really isn't a lag when we're thinking about expense growth versus top line growth when it comes to any of the CPI adjustments or pricing adjustments?

Yes. I think there -- pricing adjustments are happening for different businesses throughout the year, and increases in expenses are dependent on -- for vendors, depending on when our contracts are renewing with our vendors. And obviously, we're closely -- we're watching closely what's happening with inflation as it relates to our employee base.

Okay. Okay. Great. I guess speaking of employee base, just curious on your thoughts in terms of talent. And I realize that was -- there's some puts and takes, but just kind of curious on your thoughts in terms of Nasdaq's ability to attract and retain talent as well.

Yes. And we've been super focused on this for many years now, and pay is an important component, and so we want to be competitive there. But we think culture is also a big -- a very, very big part of the equation of whether you can attract and retain the best talent. Our employees are very focused on ESG. So from a corporate -- Nasdaq's corporate ESG perspective. And so we think about all the pieces and we focus on all of them. We've done, what I think is, a great job at attracting some of the best talent across the industries we operate in or work in as well as retaining our client base. So we -- our attrition rates have not increased substantially coming out of the pandemic. And we've seen a lot less sort of in the -- how you say -- fight for talent that we were seeing sort of coming out of 2021. We were competing against all of the crypto players and a lot of big tech for talent, and we've seen some of that pressure abate.

Okay. Okay. Great. Maybe I'll just switch gears and talk about -- if we can talk about kind of more of -- some of the products and specific solutions. I guess I'll just start at the high level. Maybe you could just kind of -- again, for folks that are new in the room, kind of walk us through maybe a typical client journey. And I guess that could be a corporate client or an asset owner or an asset management client. But again, if you could just kind of walk us through client journey and some of the products that Nasdaq -- or solutions at Nasdaq offers in terms of, again, corporate client or asset management?

Sure. Yes. Maybe I think a corporate client -- let's go with the corporate client and just for the benefit of everyone that may not know Nasdaq as well, we have over 10,000 corporate clients. So we are serving the corporate community in a host of ways that extends beyond just listing on the exchange. But the way I would describe sort of the journey we go on with our clients is that we're very engaged with our corporate clients often before they are -- before they've done an IPO. So getting -- helping them get ready from a governance perspective and -- to be a public company. So we go on this journey with them to both take them through the public process and then help them once they've done an IPO, figure out how to be as successful as possible across a variety of different needs. So once they've gone public, some of the things that we provide as part of a public offering are free services in the ESG space to our reporting tools and to our advisory services as well as managing their IR business. And so we help them get those things up and running, and then, ultimately, hopefully, expand the services that we provide to them over time to help them be successful in executing a corporate ESG strategy and managing our investor base.

I guess we could stay on the ESG since you brought it up. So I guess one of the things that -- I guess it wasn't surprising, but one of the things Nasdaq did is, along with the resegmentation and the investor last week, was redefine what constitutes ESG for Nasdaq in terms of ESG revenues, right? And so I guess, one, maybe can you just walk through what it is that you mean when you say Nasdaq's ESG solutions or ESG revenue? Like what makes that up? And then two, if you could help us understand some of -- again, there are a few moving pieces within the ESG -- and help us understand kind of the broader go-to-market for Nasdaq as it relates to ESG.

Absolutely. So when we say our commercial offerings in the ESG space, it really spans across many of our businesses. Our most -- or one of our distinctive offerings is on the corporate side where we are a provider of ESG services to the corporates, and so those things include our governance, products, so board portal products. In addition, we've been building out our ESG reporting and risk analysis suite of tools. So we've made a couple of small bolt-on acquisitions over the past few years to increase our capabilities there. So really to help clients along their journey of reporting under all of these different frameworks and also assessing the risk that they have in the ESG space. So that's on the corporate side. Then on the investor side, we think about the opportunities in ESG from an index perspective. So expanding the ESG indexes that we sell as part of our index suite of products as well as within our eVestment tool we have an ESG database as part of our eVestment solutions, and so that's part of the ESG journey for investors. And so that's the suite -- sorry, I left one thing out. We also have -- part of -- within the trading businesses, we have a carbon removal market called Puro. That's part of our ESG suite of offerings. That is also an opportunity for corporates to come in and to offset some of their -- to execute their emission strategy. So we put all of that together, we've set some ambitions for ourselves, too, over the next 5 years, to double that revenue base, which is pretty exciting. The go-to-market -- so we haven't changed the go-to-market strategy on any of that yet. But with the realignment, we're thinking -- and it's happening now. We're putting those divisions together, and we're thinking about the sales force and how we sell and that will evolve, I expect, as we execute on the realignment.

Just want to be mindful of time here. We have about 5 minutes left. I will stop here for a second to see if there are any questions from the audience. And if you have a question, just raise your hand, wait for the mic. And as you think about your questions, I'm just going to keep going on ESG. So one of the things that's brought -- and brought up a couple of times around ESG and one of the key drivers, I think you'd agree, is around kind of the regulatory aspect, and to be specific, incremental regulation and the types of regulations that are coming down the pipe. So I was hoping at least from Nasdaq's perspective and Nasdaq's portfolio of ESG products, we could kind of flesh out the opportunity you see for your product specifically as it relates to potential regulation that's coming.

Sure. I mean I think the core answer to that question is -- like our perspective is we want to help our clients solve their problems. And it'll be interesting to see how ESG regulation sort of unfolds over time and what are the demands that, that is going to put on our corporate clients. And so the way that we're approaching it is we've got a suite of products that will help our clients with those demands that they may face as regulation evolves and reporting becomes required potentially as part of SEC filings. And so we feel we're positioned well to help them through that journey.

Is there a competitor in that space at all today in terms of what you just talked through? Or is this completely white space?

I think it's -- there's a lot of white space here. I think probably the biggest competition is from the big 4 consulting firms that are also in this journey. But we -- given our technology offerings and -- which complement our advisory business, we feel well positioned to compete.

Does Nasdaq have any -- and I realize you were talking through SaaS and some of the reporting solutions for ESG. I mean, would you say Nasdaq has any proprietary ESG data? Or is that really not an angle that you're approaching the market with?

Yes. I mean, absolutely, that is a longer-term strategy. So we have proprietary data as part of the eVestment tool. We also have proprietary data as part of some of our corporate solutions there in one report and others anonymized data that -- from our clients. But I think as we think about -- especially on the corporate side, it's not at scale yet. And so for that data -- to monetize that and for that data to be powerful, we need to continue to execute and get that business to scale. And over time, we think that's a real opportunity, but we have the rights to use the anonymized data.

Okay. Okay. Great. Just checking again for any questions. Yes, one here.

So if we just think about the shift of the sort of 1 point shift in the midpoint of your solutions growth guidance overall, what -- is that just all inflation-driven? Or is there actually an element of share there as well built into that?

Sorry, I just had a little trouble hearing. Can you repeat the question?

Sorry, there's an echo. So the 6% to 9% to 7% to 10%, how much of that is inflation versus share gains or structural improvements in the growth of the markets?

So in that 7% to 10%, we don't -- so we don't give outlook on the market. So that's separate and not included in that. What that 7% to 10% really represents is very little of inflation and more about our positioning and the investments that we've made in the higher growth portions of our business. So if you look at kind of the evolution of our revenue base, more and more of our revenues are coming from those higher-growth businesses and sort of this is the compounding element of that over time.

Turning to a separate topic on SaaS, and I guess in some respects, any financial crime as well -- it falls to that. I mean I think last week, you actually disclosed some new metrics around SaaS, right? I think it was gross margin and gross retention. And so just curious how you expect to progress? One, what are those goals, right? And then how do you expect to progress those metrics as you continue to gain the mix shift toward SaaS? And then two, if you can shed some light with respect to anti-financial crime around those metrics as well? And again, how you expect that to kind of progress?

Sure. Yes. So maybe to start with is the fact that we've got annualized recurring revenues of about $2 billion. Our SaaS revenues right now represent about 35% of that. We have a goal of increasing both of those numbers, but getting to, by 2027, a point where SaaS represents about 50% of our ARR. And so with that, we're on a journey and we've been on this journey of introducing more metrics to provide transparency to investors for them to understand our SaaS journey and our SaaS story. And we do have a variety of different businesses, and I'll talk in a couple of seconds about Verafin, in particular, and anti-financial crime and where they are sort of from a metrics perspective in the range. But our objective in sort of sharing these new metrics coming out of this Investor Day, so like you said, gross margin and gross retention, was to provide additional transparency. We're on a journey here. We've got those metrics and not only those metrics but other SaaS metrics that someday, we want to disclose publicly that we're using to manage our businesses and I think we will continue to evolve. So we haven't set external targets or external outlook on the improvement of those metrics, but we will be sharing updates over time to show how we're progressing. And then when the time is right, maybe setting some objectives against those. But it's -- we're still early in the journey there. When we think about our anti-financial crime business, in particular, Verafin, one of the reasons and part of our strategy in expanding in SaaS is -- it's an exemplary SaaS business, meaning it's a rule of 50 business with net retention in the 107% range and gross retention over -- I think it's 97% and gross margins that are probably 10 percentage points higher than those we shared for our SaaS business as a whole. So it's on the sort of very, very positive side of our SaaS metrics, and so there are reasons for some of the differences. We think about some of our other businesses where we're required to buy data, for example, that's a gross-margin-compression-type item. And so we are -- one of the things that we were super excited about with the Verafin transaction was that now we're getting to learn about how a SaaS business like that has been run and has evolved over time and applying those learnings to the other businesses within Nasdaq.

Okay. Wonderful. I'm going to stop there. We're out of time. We're actually over also. So Ann, thank you very much.

Thanks for having me.

Yes. Thanks for being here. So I'll stop there. Thanks, everyone.

Thanks.