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

Okay. Welcome back, everyone, to the 20th Annual Global Exchange and Fintech Conference. We're very pleased to have Chair. Are we going by Chairwoman, our Chair..

Just Chair. Chair and CEO.

Chair and CEO of the Nasdaq, Adena Friedman. The only thing that has more longevity than the global exchange conferences Adena at Nasdaq, who she just -- as you pointed out to me, it's almost 30 years that you've been at Nasdaq.

I must say exactly 30 years from right now, I started at Nasdaq as an intern.

Congratulations..

Yes. Thank you.

And it also going on the 6.5 years as CEO, and she's had impact on Nasdaq's strategy and the results, and that's what we'll walk through here. So first, welcome.

Thank you. I love the setting. Thank you.

It's a fireside chat. So, we have to do the best we can have our fire. I guess -- and thank you for the video. Thank you very much.

Absolutely.

The -- when we look at the environment a couple of years ago, we had IPOs -- of a robust IPO market and tech indices going up into the right. So, it's been a little bit more of a -- there's more headwinds now than prior. But, I guess your assessment of the current environment, I know you've done a lot to diversify Nasdaq as well to handle this. But just, I guess, your assessment Adena on the current environment.

Sure. Well, first, before I do that, though, Rich, I mean, I've known Rich since I became CFO in 2009. So, I've been working with Rich a long time. And he honestly, really, you have been helpful. You were really helpful when I was first becoming -- starting to get into the Investor Relations field as CFO, and you are extremely helpful, like or very early on. So, it's been a great relationship and we're definitely going to miss you. But, in terms of the current environment, I think just to level set, everyone's understanding today, we have three key divisions within Nasdaq. And we talk about these divisions in terms of three key themes that underwrite them. The first is the liquidity theme, where we really try to help maximize the liquidity of the capital markets through our own markets and through Market Tech, and that's our market platforms division. The second is in transparency, really helping corporates and investors have a better experience across the capital markets by providing them workflow tools and analytics and data to help them do their job better. In addition to, of course, the listings. And then, the third is our integrity pillar, which is really our anti-financial crime suite. So, if we look at the kind of the environment for each of those, I think the area that has had more challenges this year has been within the capital access platforms, which is our corporate and investors because we have not had as many IPOs, so that's been a tougher environment, which then means that some of the corporate solutions that we sell to newly listed companies who haven't had as much of a growth environment for them for those businesses. And then, on the investor side, we have our index suite and our index products have done quite well in terms of inflows. We've had $23 billion of inflows in the last year through the first quarter, $6 billion just in the first quarter of this year. But of course, the market environment is very different. So, our overall index business has had more challenges year-over-year. And then we've had, as we've been discussing since January, kind of elongated sales cycles across our analytics suite. But, so that business has had some growth challenges, but it continues to demonstrate great resilience. And in terms of our IPO landscape, we have actually a 10% increase in companies, who are on filed to go public on Nasdaq versus Q4 of last year in the range of about 150 companies on file to go public. I think, we just have to kind of look at what is the landscape going to look like as we go through the rest of the year. I think, then with regard to our market platforms business, the liquidity pillar, we've shown some really good, I think, recovery of demand in our Market Tech business and some nice growth there. And then, on the trading side, it's been kind of mixed. Options volumes continue to be very strong. I think, we continue to perform extremely well there. Equities volumes have had more of a mixed year in the United States, but we've been able to demonstrate really good resilience there. And then, our European trading business has had probably the most challenge because we get paid on value traded. So, it's a combination of lower volumes and lower market cap. And then lastly, our anti-financial crime division, our integrity suite, that's had really strong demand characteristics. We've been able to sign bigger and bigger clients. We continue to see a really healthy pipeline of opportunities. So that's really moving along well. So, the net-net of it all of it is that we've been able to have a 7% growth in our annualized recurring revenues, and we continue to show really, I think, really strong resilience in those things that we can control in a more challenging environment.

So, I think you coined the phrase, the strategic pivot when you first took over, you reorganized the way businesses were managed and reported, I think it was at the end of last year.

That's right.

So I guess, speak to what you've put together that diversified, how's this all -- you've done a great rundown of each -- and -- I think as you did that run down, it sort of highlighted the complexity is probably the wrong with the diversity of Nasdaq. Now people are aware with all the different businesses went through. But, can you talk about how it works together from a diversification model. Could you've highlighted that...

Yes. About -- I think at the end of '22, we had about 71% of our revenue is really recurring revenue. And I think that that's a really good example of how we continue to diversify our platform with the remainder being trading. And that's been in an environment where trading revenues have grown really nicely and have been quite robust. So, we continue to show a really great strength in how we've diversified our revenue. But what that means is though that we're really providing a much diverse suite of solutions to our clients. So as I mentioned, within capital access platform is we really try to connect corporates with investors and investors with corporates. So, we bring companies into the markets. We provide them a suite of IR and ESG and governance solutions to help them navigate the public markets. And then, on the investor side, we have a great suite of index products. And then, we also provide data and analytics to help investors navigate the complexities of the environment with new tools that help with asset allocation decisions, portfolio management as well as just data end market data. I think that when it comes to our market platforms division, we really focus, as I said, on providing the technology that's going to maximize the liquidity in the world, right? That's kind of the way we think about it. We have our own technology that empowers our own markets, and then we provide our Market Technology to 130 other markets around the world, as a technology partner to those exchanges. And, I think that really has helped us given us like a platform to invest in this technology. So, I know we're going to talk about cloud, but we've been -- we've completely rewritten our technology stack to be microservice architected, cloud-enabled we're moving our markets into the cloud. We're working with our clients to move their markets into the cloud. And that creates a much more resilient, scalable infrastructure, much more nimble infrastructure. And also, it enables us to really take advantage of the data that we have within our markets in new ways. And then on the anti-financial crime side, that's really how we really help enhance the integrity of the financial system. And that is an area of great growth and opportunity for us. And we really look at it as kind of regtech and anti-fin crime. How do we help our banks and brokers comply with regulations through our surveillance suite and then, anti-fin crime through our fraud and AML detection capabilities. And I think, that has been just a great growth pillar for us. The demand for those continues to go up even in a more challenging environment.

Yes. When we think about again, you highlighted that the anti-financial crime is the fastest-growing business. I think the growth rates have been above 20%. But I guess, when you look at that business, we've just seen the bank crisis, you've acknowledged that there's elongated sales cycle with that...

Well, actually, we have not seen an elongated sales cycle really, so much so in that part of the business. So it's really been more in the investment analytics and the Corporate Platforms business. Yes.

So does the banking crisis. You've talked a lot about in prior meetings that we've had about fraud. I guess the demand for this business that really 10 years ago, you wouldn't have thought Nasdaq would be as penetrated in its not only anti-financial crime, but the surveillance business.

Yes. So we actually bought into the surveillance business, we bought a company called SMARTS back in 2010. So, we've been in that business now for 13 years. It's been an amazing growth business for us. In terms of providing trading firms, exchanges and regulators with the ability to surveil the activities of their trading units or their markets, looking for market manipulation, insider trading, things like that and then just regulatory compliance complying with the rules of the markets. I think that as we started to think about, well, how could we grow and scale there, we started talking to our clients who had a very outside-in point of view, and we said, "what more can we do to help you?" -- and they said, yes, please help us because fraud and AML is a growing problem. It's pervasive across the banking system across the brokerage system. Is there any way that you can kind of do more because they really do frankly love working with us, which is great. So, we did a very complete review of the anti-fin crime regtech space, and we made the decision to acquire Verafin. Verafin is a cloud-based solution, completely SaaS-based. It provides -- it has a consortium data model, where they bring all the data together across 2,500 banks so they can do very advanced algorithmic fraud detection, AML detection capabilities. And they look for patterns and behaviors and changes. They look for how criminals kind of work the system and go across the system to perpetrate their crimes, and they've been able to provide that to 2,500 banks because small banks and medium banks need to be as good as this as the very large banks. And yet, they don't have the same capital capabilities. So, Verafin has been a very efficient and effective tool, a complete workflow tool across fraud and AML. And it's growing. It's -- when we acquired it, we had mentioned that it was a 30% growth rate at scale, and it's got just great and continue to show that. And yet it hadn't yet penetrated the Tier 2s and Tier 1s. So, as we've been owning that business over the last 2 years, we've really helped them continue to move up market. We had our first Tier 1 bank signed with us in last -- in first quarter. We had another Tier 2 bank. And what was cool as a Tier 1 bank bought the fraud detection suite and workflow, all of the workflows and try detection side and the Tier 2 bank bought the AML suite. So, you can kind of see how you can land and expand within these organizations. And the Tier 1 bought it solely for their U.S. operation, but it is a global bank. So we'll be able to continue to grow with them. So, we do feel like it's just a great growth area for us and an area that people want to partner with us on. And I think regtech, we're very good regulation. We understand regulation and the need for that compliance. So I think, whether it's regtech or anti-fin crime, I think we are a great provider of those solutions to the industry.

So as you strategically pivoted the company devoted resources to the faster-growing areas and even divested certain businesses. But, when you -- there's been this emphasis, and it's really, I think you might have led this an emphasis of recurring revenues, SaaS revenues. So, I guess the question is, can you talk about how you look at -- there's obviously, you have goals now to grow that and everybody monitors that now, but you also have the trading businesses, some of the transaction-driven business. How do you balance? How important is it to the enterprise value to continue to have certain level of market tune? How do you look at the values?

Yes. Sure. No. I mean our markets are foundational to who we are. We -- my view is that we are great at them, and we are investing a lot, to remain the best in the business. I think, that the fact that we are able to sell our technology to other exchanges gives us a reason to invest a lot in our technology that underpins our own markets. And we eat our own cooking. So, if we're going to redo and revamp the entire trade life cycle technology, we're going to deploy that within our own markets. So as you know, we took our first options market into a cloud environment at the end of last year. We're continuing to really actually have all of our surrounding systems are now in the cloud that makes them much more scalable, much more resilient. We're continuing to modernize all of the technology that underpins our own markets. So that we can continue to be the best at who we are, what we do there. And we do really look at how do we optimize for client outcomes within our markets. And as you know, there are 3 key pillars, right? There's volumes, which we can't control, and there's pricing in the capture rate and then their shares. So those are the three things that we thought we really focus on how do we optimize for client outcomes. We don't -- we're not going to chase share that's not value additive to the overall experience that our clients have. But, we also are going to make sure that we have a very deep and liquid marketplace. We have 6 options markets and 3 equities markets to provide us flexibility to be able to cater to different types of investors and market participants. And we do feel like as a result, we really have a really strong franchise here in the U.S. and in Europe that really underpins the capital markets of our economies. So it's a very, very important part of what we do for sure.

Just making sure that, that's still...

Absolutely. Absolutely. We've been investing a lot there.

Understood. You've also, I don't know whether the word is inherited, but certainly took up sort of kept the leadership voice of Nasdaq, and I'm going to say two key roles, so on ESG as well as on the overall aspects of the marketplace on regulation. So, I guess the first question has to do with ESG. Can you talk about your efforts there. You certainly have made not only in products, but also stances that you've taken to sort of promote corporate governance, I guess. So, why was that important to you -- and can you just outline sort of what's your -- the things that you're spearheading there.

Yes, sure. I mean, generally speaking, when we think about coming to market and you look at the gates that companies go through to get to the market and get access to investors, there -- it's becoming a more complex field for companies. And so, we want to help them navigate that. And at the same time, we play our own role, as one of those gatekeepers. So, in terms of our board diversity rule that we have now in place, it's really tied to governance. We are really experts at governance. We believe that that's a big part of the role we play in taking [indiscernible] we examine the independence of their audit committees. We look at the Board composition as part of the assessment of companies going public. And when we -- we're constantly focusing on what makes great corporate governance and there are a lot of studies that have come out to talk about board diversity as a component of good corporate governance -- and so on the back of the work that's been done out in the field, our view is that having a disclosure rule that helps bring more disclosures to investors about the Board diversity and then encouraging our companies to have some diversity on our Board. I think, has been a role that we've chosen to play. Outside of that, though, when it comes to ESG, it's a very complicated world, the E, the S and the G. And companies are getting inundated with requests from investors, they're different metrics, they are different taxonomies, they're different rating agencies, different investors [indiscernible] and different things. It's a very, very confusing world, but also it can become very expensive and time-consuming for corporate. So we've actually created a whole suite of solutions that, number one, we have an advisory team to help advise companies on how to communicate the right way to investors, about their programs what -- and also to look at, like if they want to be in these funds, what would they have to do in terms of their ESG programs to make themselves eligible for certain funds and certain investors. The second thing is then, we have a reporting suite that allows them to put all of their ESG and sustainability information into one tool, and then we map it out to all the rating agencies, all the taxonomies and make it as easy as possible for them to kind of manage that environment. And then over time, we're hoping that we can also then extend that tool to make it so we can offer information out to the investors directly that give them a line of sight into companies, but also just trends in ESG. So, we also are making -- creating ESG indexes and other things to make it. So we also provide investors opportunities around ESG. But we're not trying to make -- we're not a rating agency. We're not taking a position. We're helping to facilitate the corporate experience here.

Adena, your knowledge of Nasdaq shows you're 30 years. Close to 30 years in there. The in-depth just to be direct the in-depth knowledge of each of the businesses and each of the initiatives like fine in...

We care really deeply about what we do. And we think really -- we think deeply about what we're doing and why and what it's going to do to provide value to the clients. As we go and invest in these areas, we have a lot of conviction around them for sure.

And just a little bit outside the curve just on regulation. So we have Chair Gensler at lunch. He has introduced 4 equity market structure proposals. It was interesting to see, I guess, Nasdaq position. It wasn't -- frankly, some things you -- I think you advocated a more slower phased-in approach, where because the four things could have different interactions. I think on tick size, you're a little bit like don't go the whole length. Even though, I think some thought that exchange would want to be able to go to the very small [indiscernible] might help an exchange may not help the market. But I guess, as you developed your position, what was the driving factor in just, I guess, highlight probably 1, 2 things that you think that Nasdaq stepped out and really made a statement in a firm comment to the SEC.

Yes. Well, I think the first thing we started with was the equities markets worked quite well today. We've demonstrated and the immense amount of resiliency in a very volatile environment. They worked well during the -- all of the chaos of COVID. They worked well in terms of managing through a lot of change. And so, we have to start with the fact that we have a good foundation, and we have a very strong foundation. And so -- and the second thing we always talk about is the law of unintended consequences. There is a lot of money that flows through the markets. And there's a ton of activity. We manage about 60 billion to 80 billion messages a day that flow through our options and equities markets. It's an enormous amount of activity. The log on a tenant consequences is very large. You make a mistake, and it can have a really, really significant impact on liquidity, on client experience, on investor experience. That's the second thing we thought about. The third thing was what will make markets stronger. So of course, it's a forever improvement opportunity in markets. And nothing is perfect. The markets aren't perfect. So how do you kind of strive for a better place. And, we've really focused on strengthening the national best bid and offer. That to us is that is the demonstration of true supply and demand in the market. It allows every investor, that data goes out to billions of people and on a real-time basis. And so, making sure we strengthen the national best bid and offer to reflect a true supply and demand in the market to be able -- that's accessible and instantaneously accessible. I think is the most important thing we can do. And so those are the principles we started with. And we said, okay, well, what's holding back the national best bid and offer from being a true reflection tick size? We have certain stocks there what we call tick-constrained. -- exchanges can only reflect or can only accept quotes in pennies. But off-exchange venues can accept them in sub-pennies. And so, that creates this kind of 2-tiered market where the national best bid and offer is not a true reflection of supply and demand. So, we do think that there's an opportunity to bring the tick size in, but let's do it in a way that doesn't then create what we call sub-pending ahead, and other things that aren't really a value-added reflection of supply and demand. And so, we ask for them to consider kind of like $0.005, but make it so everyone has the same standard that we all have to work with. The second thing was looking at how to bring more retail orders into the markets, and they have their auction proposal. Our view is let's talk about what are the principles of having order -- retail order flow reflected in markets. So the SEC provides the principles the exchanges determine what mechanism is going to be able to achieve that principle. The SEC actually proposed a very complex auction, as opposed to the principles that would allow us to figure out what is the right mechanism. Is it an auction? Is -- and that mechanism, we have to be nimble, that mechanism might change. Regulation is not nimble, but exchanges are nimble. So give us the principles will then come up with the mechanisms. And then on best execution, I think that we do believe that it's good to have a strong best execution role across asset classes, but you have to make it consistent with the one that already exists, which is FINRA's best execution rule in principle. And right now, they're not aligned. So how do you make those two aligned, so that we don't have more confusion in terms of how to comply. So those are -- those are kind of our underlying principles on how we commented on the proposal.

And I would say your comments reflected a -- they weren't standing out there alone as far as the...

Yes. We work with our clients throughout the entire process. We talk to them a lot. So -- and we may not agree on all of everything. But we -- I think we know -- everyone understands why we're taking our own positions. And if we're together, we're not -- I think everyone understands it, but we really did focus on what will make markets better, not what will make it -- what will make life better for Nasdaq. We really did try to focus on what's going to make the market stronger.

The comments reflect that. For sure. I guess my wrap-up question is that -- and this is sort of echoes my comments that are made in our talk today, but you've been a symbol, you force you represent the market -- as you put it, and if I got the words right, Nasdaq is a symbol a modern capitalism. And the model has changed. It isn't just the matching engine that was the business maybe 20 years ago, but you've taken positions, whether it be on corporate governance, on regulation, a spokesman for the industry overall. So I guess, as you continue on with this role, how does that marry up with, say, Nasdaq goals and Nasdaq? What is the Nasdaq and the future look like? And how does that align because it's got a component that's a spokesman for the industry, but how does that marry up with long-term financial results...

Yes. Well, we actually, as part of last year's effort to come up with our three divisions and to kind of reorient the company around those 3 key pillars that I mentioned, we really started to think about what is our purpose, what is our vision, what's our value proposition. And we have -- and we really have leaned in to say, we really advance economic progress for all. That's our purpose. Like how do we advance economic progress around the world, whether that's creating technology that allows capital markets to be really advanced, whether it's helping banks and brokers navigate and have -- kind of have integrity and compliance within their systems, whether that's allowing corporates and investors to can navigate that complexity more successfully. The purpose is advancing economic progress. The second is to be -- our vision is to be the trusted fabric to the world's financial system. And then, we look at it and say, our value proposition is to be the platform that improves and enhances the liquidity, transparency and integrity of the world's economy. And, if you think about kind of how we're oriented and what we're doing and kind of how we're leaning into our strategy, I really believe we are really focused on those three key elements of our purpose, our vision and our value proposition. And I think that we have a long runway of growth and opportunity to expand what we do to serve our clients more holistically across those 3 key pillars, and I'm really excited about kind of how we're going to take the company in the future. So, it's a very exciting time.

Time is up. But, I think you've said it very clear -- beautifully that Nasdaq is going to be a spokesman but you're going to that these opportunities -- that your businesses will grow at the same time?

Absolutely.

And we grow together.

And they will. There's a real kind of -- there's a way we look at this together as a team. As to how we manage these 3 pillars to make sure we stay together, and we're serving our community in the right way. So, I really appreciate. But Rich, working this to you. It's been really fun. I honestly, it's always fun to be up here with you, and thank you very much.

You've had fun. We've had a lot of -- sometime we'll work out and do a taekwondo black belt...

That would be good. Great. Thank you.

Thank you.