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

For Marketplace Technology? So we've given some guidance overall around the -- or I shouldn't say guidance, some outlook for that business being a 3% to 5% grower over the medium term, the Marketplace Technology. We've seen some outsized growth in the Trade Management Services portion of the business, given all of the market activity over the past few years, 3 years. And we're on a journey as it relates to the Market Technology component of the business, which we had talked about coming out of 2020 and 2019 and a bit into '21, some of the logistical issues of navigating through the pandemic in that sort of business. So we're starting to come out of the other side on that. We've seen organic growth for the past 2 quarters. But overall, when you put all the pieces together, we're looking at a 3% to 5% grower over the medium term.

And Nasdaq is also pursuing growth within digital assets. Can you expand on the outlook for the broader digital assets industry and how Nasdaq is approaching the opportunity?

Sure. So we've been very thoughtful about approaching the digital asset space and thinking about what is the right place for us to be situated in it. We've had a lot of touch points already. So we've been a provider of technology to crypto exchanges through our Market Technology business. And then we also have Anti-Financial Crime Solutions, both in the surveillance space and now as part of Verafin. One of -- so one of the things that we decided to do in 2022 coming out of a pretty deep evaluation was to make an investment to become a trusted partner to institutions in the custody space as it relates to digital assets.

Anti-Financial Crime has the potential to grow at an 18% to 23% revenue CAGR over the next 3 to 5 years. Can you start with your growth outlook for Verafin? And how the sales process differs when the team approaches small and medium banks versus Tier 2 institutions? And then what is required to convince the Tier 1 multinational institutions to use Verafin?

Sure. So I mean, Verafin, maybe it comes back to the way Verafin has approached their strategy since day 1. They've been founded 20 years ago. They had a land and expand strategy, so moving upmarket. And this -- our journey to the Tier 1s and the Tier 2s is just a continuation of the strategy that they've been executing on for the last 20 years. And as we think about what needs to happen for us to penetrate there and to have success there, I think the first -- and this sort of aligns with their strategy. The first part is securing a Tier 1. We signed up -- we have a few Tier 2s. We have a Tier 2 that came in with an enterprise agreement at the end of the fourth quarter. In order to get into the Tier 2s and Tier 1s and expand there, the approach that we've been taking is the proof-of-concept approach, which you talked about. And what we're really trying to do with that approach is to show and demonstrate the value of the technology and of the data that we have as part of the Verafin suite. So we have data from 2,300 banks that are part of the ecosystem. And not just last month's data, but all of the years they've been part of it, all of their transaction data. So I think a great example of success as part of a proof of concept with a Tier 1. They come to us, they want to talk about wire fraud. We take their data. We run -- they've already run their process. We run their process. And we're able to identify not only more fraud than they were able to in their process, but we're also able to identify or to have 35%, in this 1 particular case, less false positives. So that's a really great proposition for a bank. They ran their process, they had results. We run the Verafin process, and it gives them a much better answer. And then leads them to the possibility of being able to scale more effectively and also just have better identification of fraud. As we think about -- part of your question was around the sales force. So the Verafin team has done a restructure over the past year to really focus -- to have a focused group around the sales process for the Tier 1s, which is the next sort of evolution of their current process but also requires some special focus, given that it's -- we're entering a market as opposed to expanding in it just yet.

And maybe has the Nasdaq brand being associated with Verafin helped improve that sales process and open new doors for the team?

Yes, absolutely. And that was one of the things that we talked a lot about coming into the acquisition in 2021. We have -- within the Anti-Financial Crime business, we have a surveillance business. The surveillance business, all -- I won't say all, but almost all of the clients there are the Tier 1 and the Tier 2 banks, not just in North America but across the world. And so we have relationships there. We have relationships, part of the trading business. We have relationships across Nasdaq that have opened doors. The product, Verafin product, is going to sell itself, but the doors will be opened through the relationships that we have. And then vice versa, the other thing we don't talk a ton about, is that there's opportunity for us to move the surveillance products into some of the small and medium-sized banks as well. And we see that as another opportunity to sort of catalyze the overall growth for that segment.

Can you walk us through your expense outlook in 2023 versus your medium-term outlook? And can you speak to the flexibility of the Nasdaq financial profile and ability to lean into periods of high growth and pull back during more challenging periods?

Sure. So maybe I'd like to start with, we generally think about our expense growth to align with our solutions businesses revenue growth. So we have an ambition of 7% to 10% top line growth over the medium term for the solutions businesses. And we think about that aligning with a 4% to 7% increase in expenses over that same term. So having the flexibility within those ranges to take up our expenses to drive growth for the long term or to bring them down if we're seeing some pressures on the top line. And so as we think about heading into 2023, we very much are thinking about that model. What we don't want to do is not invest for the long term if we see short-term beta implications within the trading businesses. But we do have the ability to flex and to be smart about what we spend to the extent that we're seeing either longer-term structural changes in that -- in the trading business or if we see some shorter-term pressures during the year on our solutions businesses revenues.

Nasdaq recently announced a $30 million expense synergy opportunity alongside $115 million to $145 million of non-GAAP implementation charges. Can you walk us through the objectives of the program and your optimism for accelerating revenue growth and operating leverage going forward?

Sure. One thing, if you don't mind, if I could add to the previous answer on expenses before I talk about restructuring, is I want to just highlight. We've got -- FX movements can sort of move the needle for us in terms of the dollars in the expense base. So when we think about our biggest currencies that sit within our expense base are the euro, the AUD and the SEK. And so we think just from the time that we gave guidance until now, those rates have moved about. The dollar's weakened about 1 percentage point against -- on average against those currencies, which that translates into roughly $5 million of incremental expense during the year. So we're going to be sensitive to what's happening there. And we think about our expenses as organic growth, but there will be some pressure there. And then there's a -- we are kind of hedged from a P&L perspective, so we'll see some of that dollar weakening helping us to roughly the same dollar amount on the revenue line. On your question as it relates to restructuring. So coming out of the realignment that we did in -- at the end of the third quarter that we announced, in Investor Day, and recognizing just how big of a lift this is, right? We talked earlier about the fact that we're realigning against the secular opportunities in front of us. And we want to make the right changes as we think about sort of moving forward and optimizing or amplifying the opportunities that we have and optimizing the organizations. So the restructuring program is really designed to capture the expenses, the onetime expenses associated with making those decisions. So I would give an example around putting 2 organizations together and having 2 sets of technology around customer relationship management, and decommissioning one, and rightsizing or setting up the team for success to support that. So that would be an example. Location strategy and those types of things. So we would expect those particular charges related to that realignment to be part of the program and then to achieve a return. And all -- any of that spend to the tune of conservatively, in my view, $30 million. Which is mostly all -- substantially all expense-related, but we see a real opportunity for some of this spend to drive revenue synergies, which are a little bit harder to quantify in the shorter term.

At this point, we can pause for audience questions. [Operator Instructions] And just as we get that situated, across the Nasdaq business, can you speak to the pricing power and areas where pricing is expected to increase? At the Investor Day, the team unveiled a 7% pricing increase at Verafin tied to research and development. And could there be higher prices across data analytics and listings in 2023?

Sure. So one other thing that we mentioned at Investor Day is that we thought our pricing power could sort of cover about 2 to 3 percentage points of expense inflation. So as we think about our businesses, we really think about the long-term view as it relates to pricing, meaning we're on a journey with our customers. We want long-term strategic relationships with them. And it's not always about the highest price in a particular year, but adding value and then growing and expanding our relationships with our clients, which naturally leads to pricing increases over time. That said, so when you talk about like the 7% price increase on Verafin, that's a list price increase. And what that really reflects is incremental value that we're creating for our clients. When we have -- we sign about 3-year contracts is the average on the Verafin side. We may negotiate at something less than list. And we're increasing the list price every year and then working to get those clients closer and closer to the list price. And the conversations are really good because they're happening after 3 years of providing value and expanding our services within the remit. But that's just 1 example. We've got CPI escalators in some of our contracts, in our surveillance contracts, some of our Market Technology contracts. Those often have caps on them and they come in throughout the year. We did a pricing increase on our global listings in the 3% to 4% range and then a handful of other very specific actions on the data side and other elements of the business. So those will all -- with the exception of listings, they'll all be trickling in throughout the year.

And just coming back to AFC. As we think about the combined growth picture, does the outlook for 2023 embed the monetization of a Tier 1 financial institution?

So I think it's very modest in 2023. When we think back to our journey and the acquisition, we very much had an appreciation from the start that there -- that this wasn't, we're going to turn it on and move into the Tier 1s. That there was a period of time where we had to get the product ready, get the sales teams ready. And we're kind of right on track with where we expect it to be. Proof of concepts are going really well. We are hopeful to announce the signing of a Tier 1, so I think it's an important milestone. And we're very confident in the long-term vision and we're right on track. We still have runway within the existing client base to continue to drive the growth.

And given the potential sales cycle elongation within investor relations and portfolio management solutions, can you touch upon demand characteristics in your other businesses that are helping to offset these challenges?

Sure. So I would say, first and foremost, we sort of came out of an Investor Day. And then going into the fourth quarter, we started to sort of see some of what we talked about in the fourth quarter, sort of in December, late December coming into January. And very specifically, where we're seeing the elongation of sales cycles is in our IR business itself, plus within the analytics business, the asset owner solution of the business, so the Solovis component of the suite of offerings. And a lot of what we're seeing there is related to just escalation of decision-making. So where we used to have decisions being made by an IRO, this is on the IR side, now those decisions might need to go to the CFO or CRO, so it's taking longer to close those deals. The demand is really strong across the board. I think more broadly, to answer your question on where we can offset some of that, when we sort of step back and recognize that our -- the products that we're offering are really designed to help clients digitize and to scale. And so we think across the suite, seeing strong retention; we're seeing strong demand; and we have the opportunity, like for example in AFC, to really continue to drive to those growth rates or ambitions on our growth rates and help defray some of the maybe slowdown we're seeing in those 2 particular products.

The Trading Services business, it has a long-term opportunity to expand adoption of proprietary indexed option product. As industry allocations to technology and Nasdaq indices grows, can you speak to your outlook for this opportunity?

Specifically on the Nasdaq 100 Options? Yes, sure. So maybe if I just talk a little bit about the history there. And so about 5 years ago, we launched the proprietary Nasdaq 100 Options product. And as we think about adoption, what we've been very focused on is really building out the whole ecosystem. So introducing portfolio modeling tools to help institutions model -- obviously model their portfolios, but to use -- to better model how they can use the Nasdaq 100. We're building out VOLQ, so an ability for institutions to hedge on the Nasdaq 100 Options. And so as we think about the broader ecosystem, it's really about building that out and that translating into volumes within the NDX, we call the Nasdaq 100 Options product. We saw about a 40% increase in ADV in coming off of 2021. And so we're excited. We're growing off a small base, we're excited about the opportunities, and we're really focused on creating an ecosystem that sort of fosters the success of that product and the long-term opportunity.

And with that, I think this is a good place to pause. Ann, thanks again for joining us.

No, my pleasure.