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

All right. Good morning, everybody. My name is Michael Cho, and thank you for coming to the 2023 Ultimate Services Conference. This session is with Nasdaq, and we have Nasdaq's Chair and CEO, Adena Friedman here; as well as Ato Garrett, the SVP of Investor Relations. So Adena, wonderful to have you here. Adena's been with Nasdaq for over 30 years and 7 of which as CEO. And so it's a pivotal time during Nasdaq's strategic journey here, and we have plenty to dig in here. Just for a format, just to remind everybody, we have about 30 minutes together. We'll do about 20 minutes of Q&A that I will lead with Adena, and then we'll open up for audience Q&A at the end for the last 5 to 10 minutes.

So with that, I'll kick off right here. I mean, I'll start with the kind of big picture question, something that I know you enjoy answering. And you and I have talked earlier in the day about this as well, but you have a unique view into kind of the capital markets, that macro environment, just sitting at Nasdaq. And so just curious. We've seen some encouraging signs of capital markets and maybe a little bit of a revival in activity. But it seems like a start and stop type of environment. So I guess, one, like what are you seeing from your seat today and the willingness of companies to access equity capital markets?

Well, I -- first of all, I think that there are a lot of companies willing to access the public markets. It's whether or not they feel that the investors are ready to receive them with open arms. So I think that this year and last year have been challenging in terms of thinking about it from the point of view of the investor. And I'm speaking to all investors here, so you all know it's very difficult to model the future earnings and the future cash flows of a company if you don't know what the cost of capital is, you don't know what the inflationary environment is and you don't know what the overall economic environment is. So you only have the alpha element of the company to be able to draw on. And if it's a company that you don't know well because they're not already a public company and they haven't had prior disclosures, it's harder for you to kind of form a thesis and have conviction. And as a result of that, I think that in this period of time, where we've had a fast-rising interest rate environment and a very fast-changing inflationary environment, we've seen that investors and companies, while companies are ready to tap the public markets, they just don't think that -- yet that the investors will be ready to put that risk capital to work. So it's been a very slow IPO market for '22 and '23. What we do have, though, is we have over 100 companies that are ready to tap the public markets that have chosen to come to Nasdaq. I think that they are hopeful that the first half of '24 will be a more inviting time. And there is -- there are reasons to be hopeful on that. First, I do think we have a more known cost of capital environment. I think we're already starting to see a cooling inflationary environment. The big question now is, of course, what is that going to mean for the overall economic environment? But if you have at least some of those unknowns known, and then you look at the alpha generation and what that company is really capable of doing for the economy or for their clients, it gives you more fortitude to be able to make those risk decisions. And so we're hopeful that the first half of the next year -- then you go into the election cycle, so we'll see how the latter half looks. But we're definitely hopeful that we'll have a better environment next year.

Okay. Great. And so I guess with that context and with that backdrop, because clearly, there's a lot of movements in the market in the near term, some cyclical and some not so. I guess if you look at your own business in Nasdaq, I mean, how do you think -- how do you feel or how do you kind of approach this environment? And how do you think Nasdaq is positioned in the outlook ahead? And I guess before we even go there, for the newer folks in the room, I mean, maybe you can also walk us through kind of Nasdaq's strategic journey, at least during your tenure as CEO. And again -- and how that's positioned for the environment as well.

Yes. I mean, I would say in general, and as you said, I did start at Nasdaq over 30 years ago, Nasdaq is really built for resilience. It's built to manage through economic cycles well. There are, of course, beta components to our business like there are for everyone. But the way that the platform, the Nasdaq platform has been built and expanded, I think we have a very resilient business model. Where we've been really focused on is taking that resilient business model and creating new levers of growth and expansion for the business. And that's been really how I've been thinking about my tenure as CEO. And that really kind of has driven us to a strategic framework that I think really has helped drive a lot of the decisions we made. We look at our core foundation as being a market operator. And when you think about markets, there are 3 key themes that they really -- that really resonate and that really drive within the capital markets: one is liquidity; the second is transparency; and the third is integrity. And those are the 3 key pillars of making a successful markets business. And we've been trying to grow and expand our business along those 3 levers. If you think about our liquidity platform, we obviously have great markets, and we do try to maximize -- minimize friction and maximize liquidity within the markets. But now we also provide that technology to markets all over the world that allow them to have very modern market infrastructure to minimize friction, maximize liquidity. And with Calypso as part of the Adenza acquisition, they provide critical risk management, collateral management, clearing technology, trading analytics technology, that really helps the banks and brokers minimize risk and maximize the capital that they can deploy into the markets, which then drives liquidity. So that liquidity pillar is a very defined strategy for us, and we now have technology and markets to provide to that. The second pillar is transparency, and that's where we really focus on what do investors need to know to make smart asset allocation decisions, and what do corporates need to do and provide to investors to make it so that they can be successful public companies? So we have, of course, our listings business and our core market data business coming off the exchange. We now have a very successful Index business and driving really transparent investment, investable assets, that's been an incredible grower for us. And then we have a suite of Workflow and Insight tools that supply both corporates and investors with the tools and information they need to make smart decisions in the markets. So that's kind of our transparency pillar. And then the third pillar is integrity, and that's where we have our -- now our broader regtech suite with our Anti-Financial Crime suite, Surveillance and our Axiom platform. And that's where we help the banks and brokers manage out crime, really do try to be the best in class, the best in the world, and providing banks and brokers with the capability to root criminals out of the system, both in terms of trading technologies or trading behaviors as well as just core banking fraud and AML. And then also helping them comply with all the regulatory obligations they have across the world. So that is a scaled suite of regtech solutions now that we have to kind of drive that integrity pillar. So that's how we've kind of looked at our platform and how we've grown from being a market operator to being a solutions provider to the industry.

That's great. That's great. And I guess we can -- maybe I'll just jump in into one of the more, as you referenced, a couple of the assets here, and then one of the newer parts of the platform in Adenza with Axiom and Calypso. Before I dig in a little bit further, I guess a just kind of bigger picture in terms of the Adenza acquisition and the fit with Nasdaq. I mean -- and maybe this is a little premature, but folks have -- some people have started to call this kind of the culminating acquisition in terms of the -- your strategic journey with Nasdaq. I mean, I guess, again, I realize there's a lot of work to do with integration and execution. But would you view this as kind of completing the necessary kind of steps to put Nasdaq on its journey for the next...

Yes, it's a great question. So first of all, I can honestly say, I'm as excited today to like come to work and be at work and drive the strategy as I was 7 years ago. So I see a lot of opportunity in front of us and I'm really, really excited about what we can do now with the complement of capabilities that we have. But it has been a journey. It's been a very specific, and I would say, strategic way for us to think about how to grow and expand with the impact we have on the industry and to create a consistent growth business within Nasdaq. I don't like to call it a culminating one, but it is a big leg in the journey. We -- but we have this vision to be the trusted fabric to the world's financial system. And it's interesting, we had -- up until this year, we said we want to become the trusted fabric to the world's financial system. I said, "Guys, we now are the trusted fabric to the world's financial system." And we now have to kind of drive that, scale that, and make sure that we can grow our business consistently, with that as the key theme of who we are and what we can do.

Okay. That's great. And then I guess if we peel back a layer inside Adenza, you have 2 very good businesses in Axiom and Calypso. Just kind of curious, you've talked through medium-term targets as well as near-term targets for revenue growth. But maybe you could provide kind of some insight and update on the underlying, kind of the main drivers for the businesses...

Sure. Yes. So we have discussed -- we tend to help investors understand our business by talking about these medium- to long-term growth drivers across the Solutions businesses, and we give you ranges within that. And we've said that the Adenza platform or the capabilities within Adenza should drive low to mid-double-digit growth in the business over the coming -- the medium to long term. And when we look at Calypso and Axiom, which are the 2 key products within the Adenza business, I think they both have really interesting growth drivers. So when it comes to the Calypso product, it's a well-known product that's provided a lot of post-trade support for banks and brokers around the world for quite some time. The way that they've built the platform, both Calypso and Axiom, is actually it's very modular. So they have a platform layer and then they have application modules on top. So they have a very, very good ability to go in and land and expand it within a client. It's very nimble, it's very configurable, and they can bring data across the platform. So if you are sitting in the trading business and you're trying to understand what the trade analytics are on the trades you've done, that information then can flow into the collateral management business, that flows into the clearing business, that then now flows into a treasury tool that helps a treasurer understand the risk profile and helps them manage the capital or the treasury layer. That's a newer capability. And then they also have capabilities that also help them understand the ESG risk associated with their bond portfolios and things like that. So they have kind of a whole way kind of to continue to grow and expand the relationships there. And then within Axiom, they have a whole regulatory reporting suite, which, as you all know, regulatory requirements are just growing and expanding around the world. There are lots of different outside-in growth drivers within -- in terms of whether it's Basel III endgame or it's the new capital requirements in the United States or it's something that's happening in Asia that's going to drive new requirements and obligations. Axiom is best-in-class. It's the #1 provider of regulatory technology for banks and brokers around the world. And they've really been able to -- they have a huge land-and-expand capability within the largest banks, and they've been going down-market to make it so they can provide those solutions to Tier 2 and Tier 3 banks as more banks are falling into that regulatory framework. So we see them both as having very good growth levers in terms of landing and expanding.

And I guess what about -- if we zoom out from the Adenza-specific drivers, like how does that integrate more broadly into that Nasdaq suite of products? And talk about the cross-sell opportunity that...

Sure. Yes. So now we have a Financial Technology division that has -- we have core market infrastructure to provide to what we call FMIs, which is the new word for exchanges. So we have core market infrastructure. You then also have, with Calypso, you've got capabilities across collateral management, clearing, risk management, to serve those FMIs. And so that audience, we have about over 100 exchanges that we provide core market infrastructure to, and they have about 10 or a dozen exchanges and central banks that they provide their technology to. So we see that as a good growth driver for us in terms of introducing them to more of our clientele. I think then with regard to the regulatory reporting side of the business, we also have the ability to take the Verafin business and grow them upmarket. And we do think -- we already are opening a lot of great doors for them, and they have a great pipeline of opportunity upmarket. They've signed two Tier 2s and two Tier 1s through the third quarter of this year. But they also have the ability to really expand their business in that way, and I think that Axiom will open doors. But also, they're starting to do some proof of concepts in -- on the U.K., and Axiom is a global platform. So as we have -- we start to really drive the global portfolio of Verafin services, we do think that there's a really good opportunity to cross-sell. And frankly, there's the other way around. So Verafin within North America has a lot of Tier 3s and Tier 4 banks, and that's an area that Axiom is specifically going into, as is Surveillance. So that's an area where, as they go down market, we have a wonderful way to help them as they go into other banks in the United States. So that's the second lever. And then frankly, there's a broader lever. If you think about the -- whether it's trading and kind of our markets business and introducing to Calypso, and especially the United States, I think we have a lot of opportunity there. Whether it's also the fact that every single bank is a corporate, and they have governance needs, they have IR needs, they have other needs across our franchise. And a lot of them have asset management services, so there's eVestment opportunities there, too. So we see this as a broad opportunity for us to sell Nasdaq into the financial services industry, and we now have to execute against that. So I know that is a big execution play, and we have a very good plan to execute that.

Speaking of execution, maybe we can talk a little bit about more around kind of the sales force integration, maybe a little bit about the technology integration that you foresee with the pending [indiscernible].

Yes. So we have a very specific integration plan for the Financial Technology division. And then we also, frankly, are doing a lot of work to build out that divisional infrastructure. We reorganized around the divisions at the beginning of the year. And that's actually also driving an ability to look holistically across the divisions as to what's the core infrastructure that would really help them scale their businesses. So we do have some programs that we've launched with -- actually, frankly, we'd already started launching them with the divisional structure, and now they have even more purpose in terms of bringing our client data better together, making sure we have really best-in-class CRM capabilities, making sure that we kind of -- we think about our sales teams and how they kind of talk to each other, the governance around that. And then bringing technology, more and more technology, into our solutions as well. And I think that we have an ability to be both more effective and efficient as we execute on our integration. Within Financial Technology division specifically, we've chosen to bring everything into an organization. So Tal Cohen will lead that division, but he will have a head -- he has 2 heads of product, capital markets products, so that's going to be the Market Technology and the Calypso products; and then our regtech products, which is Axiom and Surveillance. Verafin will remain a separate unit, but with the ability to work together with both of those product leaders and the Chief Revenue Officer. We will have a Chief Revenue Officer across the Financial Technology division. We'll have a Head of Technology across that division and we have a Head of Strategy across the division. So we are trying to show that this is a complete suite. We're going to have an efficient and effective operation to drive all of Nasdaq into the banks, and we're very excited about that.

That's great. I guess one of the points that kind of intrigued, I think, investors is the cloud revenue and cloud component of Adenza today, which is, I think, around 15%. And I think most of the revenues or most of the services are delivered on-prem. And I think maybe last quarter, over 1/2 of the bookings were cloud-based. And so I'm curious, as that transition happens or occurs, one, do you expect it to continue? And two, can you just talk about the implications of I mean pricing, the revenue growth profile of Adenza ahead as this transition occurs?

Yes. So -- and I should also mention, we are also bringing together kind of client delivery, client success under one very senior leader across Financial Technology. And the reason that's relevant to cloud is, as we think about how we deliver our services with a cloud-first capability, first of all, I think Nasdaq has a lot of experience in migrating our solutions over to cloud, and this is a newer journey for the Adenza team. So they have definitely been -- they built out a capability to deliver their services as a single-tenet solution in cloud infrastructure, and about 50% of the new bookings are cloud-delivered modules. So it's very exciting to see the amount of adoption starting to come in from the clients. But we also feel that we have a longer tenure of experience in managing cloud infrastructure, optimizing for cloud infrastructure. There's a lot of work to do to make it so that you can be as efficient as possible while you're delivering a cloud-based solution. I think also there's a new way of serving those clients as a cloud-based solution. So you have to think differently on the client delivery and the client service. And we have experience in doing that as well. So we're going to, I think, help them mature their -- I should say help ourselves and mature our capabilities and delivering and serving our clients as a cloud-delivered solution for both Calypso and Axiom. And I think that, that will be a synergy. In terms of the model and how we think about a pricing approach to a client, if you're an on-prem delivered solution, you're delivering software. And they're having to build the infrastructure, manage the infrastructure and provide and keep and maintain that solution. If you are a managed service provider as a cloud-delivered solution, then you're doing that. And that commands a very different -- that's a different relationship, and so that also commands a different price point. So we are looking at that as an upsell, kind of an ability to deliver more capabilities to help, frankly, reduce their cost of ownership, makes it so that we can scale that as a service to all of our clients, and so we can have scale advantages to being a managed service provider. But we also can ask -- it's more value that we're providing. So we are -- there's a big price differential between a cloud-delivered solution and an on-prem delivered solution. So that's certainly a growth driver. There's different accounting treatment for those 2. So the one thing is, with our on-prem delivered solutions, the license revenue is -- there's -- about 1/2 of it is recognized upfront and the other 1/2 is ratable over the contract term. Whereas in cloud, you ratably take the entire thing over the contract term. So there'll be some adjustments there. But we see this as a very significant opportunity for us.

That's great. I'll switch gears. The other top-of-mind topic that comes up frequently is Verafin. And you've acquired Verafin a couple of years ago and it's been a solid grower since, and solid business. And even recently, I think we've seen some acceleration in the revenue growth profile of Verafin. So I'm just curious kind of one, what are you seeing underlying in terms of the uptick in clients and revenue? And two, like is this a sustainable trend that you expect to remain heightened for the medium term?

Yes. I think we have just an enormous opportunity within Verafin. I think there's 2 things. We organize Verafin in 2 key lanes. There's the small to medium bank lane, so what we call SMB. And that's led by a specific leader who has an incredible machine that he has created with sales leadership and basically the ability to create a great experience for the clients. But he's got a very, very specific way of managing our SMB clients. And then we have an enterprise team. And that's the team that's really going upmarket to deliver to the enterprises, to the Tier 1s and Tier 2 banks. They both have great growth drivers to them. We've signed 137 clients?

137, yes.

Yes, 137 clients so far this year, of which 4 are in the enterprise, and the rest are in small and medium banks. So it's a very -- there are thousands of banks out there. So we have great -- we have a great opportunity to continue to penetrate that. And then with the enterprise clients, they have very specific needs. And that's where, with this SMB market, we tend to deliver the entire platform. It's a fraud and AML detection, investigation and case management platform. And we deliver the whole thing, and here you go. We are your provider. With the largest banks, they have a lot of providers. They might have internal build. They might use a different provider. So what we can do is modularize our technology and say, "Oh, okay. So you are having a hard time with your fraud detection." Every bank is. "We have a much better solution for you where we can come in and just provide that fraud detection capability. And you can, through our APIs, integrate that into your internal workflow tool. Or we can come in and provide you a full suite, fraud and -- fraud detection workflow tool. Or we can provide you a full suite, AML, fraud detection and workflow tool." So we have ways to kind of modularize our capability. We can do it just for wire fraud; we can do it for wire fraud, check fraud, ACH fraud and now real-time payments fraud. So we have an ability also to look at it modularly like that, and there's a lot of land-and-expand capabilities. But what makes Verafin different than all of the other providers is that it is a cloud-based solution. It is a cloud-native solution. It's multi-tenant cloud delivered. And therefore, we have a consortium data pool, data lake that we call it, where we bring all the transaction data across the 2,500 banks we serve to find and root out criminal behavior. That's a very different solution than any other solution that exists because, with the power of data and analytics, we use Bayesian models to kind of look at outlier behaviors, patterns of behaviors. We can look at payer and payee much more completely than any other provider. We can take down your false positives significantly, and we can increase your real positives significantly. And we do proof of concepts now with the large banks to prove that out, and it's very, very successful. So we have a good pipeline growing, and it's a great business.

That's great. I've got to get a capital access question before we open it up to the floor. So just on capital access, one of the things that we've talked about for a number of quarters now is kind of the elongated sales cycle in certain products that sell into corporate clients. I guess one, any update there in terms of the sales cycle and the elongated nature of which? And then two, what do you expect in terms of converting some of the corporate clients next year and the year after into paying clients post their IPOs for your stuff?

Yes. I would start by saying, in general, the Capital Access Platforms business has -- if we think about it, we've shown you kind of across 3 key dimensions. There's the exchange dimension, which is listings and market data. And we say that that's a low-to-medium, mid-single-digit grower, and that's basically what is kind of demonstrating this year. I think that in terms of the -- and then we have our Index business, and that's had a bit of a ride. But it's obviously in a recovery mode now, and we're very, very excited about that. The one thing to note on that is, even though the market cap has had some volatility, particularly at the beginning of the year, we've had $25 billion of net inflows into our Index franchise over the last 12 months. And so throughout this entire period of time, we've had inflows. So it's been really interesting how resilient and frankly how in high demand our indexes are. And then we have our Workflow and Insights tools. And for those, that's a combination of what we provide to corporates and then really the eVestment platform and Solovis platform out to invest and asset managers. I think that that's where we've seen a slower sales cycle in terms of corporates having to -- their IR and governance solutions. And so it's a little bit of, well, if the stock is kind of having more challenge, they kind of look at, well, what can we do to be more efficient this year? And so there's been -- it's been -- it takes longer to get through sales. But I would say the demand is still there, it's more of a timing issue. And the one area that continues to be very humming along quite well is on the ESG side. I think that the ESG requirements are not abating regardless of what you might read outside. And the corporates are really focused on becoming much more efficient in being able to gather their ESG data, particularly around sustainability and the environment, and provide that efficiently out to all the rating agencies and the taxonomies, the regulators. And that's what we do for them. So that's been a really nice grower for us. I think that on the asset -- on the investment management side, that has been -- we've seen kind of some slowness as we got into the year, particularly on our portfolio management solutions. And that's sustained, that slowness has sustained, but hasn't gotten worse, but it hasn't gotten better. I think that they're just making more discerning choices as they're also managing to their own portfolio returns.

Let me stop there. I'll pause. I'll open it up to the floor for any questions. Just please raise your hand, and the mic will come to you. And I guess while we're waiting for questions, I'll...

Yes. He has many.

You talk about ESG. One thing that just came to my head is you -- ESG reporting. Axiom does a lot of regulatory reporting. I mean -- and I think Axiom has an ESG reporting product, right?

Yes, I think I mentioned that was part of Calypso, but I think it's actually in Axiom, yes.

So I guess I'm just -- like is there some -- is one -- I mean, are they complementary? Or is one going to replace the other? Is -- how do you...

No, they're very -- they're complementary and different. So our ESG reporting tool, we call it Nasdaq Metrio, provides corporates an ability to build up and provide all of the data that they need to do to measure environmental impact, and then they provide that out to all of the agencies and everything. What Axiom does is it basically gathers a lot of ESG information from the outside, from existing data providers, and helps banks evaluate their bond portfolios from the lens of ESG, so particularly from the lens of environmental impact. So a lot of investors are asking about banks' bond portfolios, kind of that whole idea of the brown-to-green transition and how banks are managing their bond portfolios. And Axiom provides them a tool that allows the banks to evaluate what their bond portfolios look like from that lens and then provide that out to and report that out to investors. So what's nice about that is it is different, but yet complementary, because that becomes part of the reporting tool and the reporting package that banks provide to investors. And so how we start to think about integrating those together is something that we've just started to have conversations around.

A couple of minutes left. I'll finish it here with a final question on capital allocation, right? And I think you've laid out pretty clearly in terms of the deleveraging targets and a commitment to invest organically as well as buy back stock. But just kind of curious on your updated thoughts post the closing of Adenza and kind of where the stock is trading today, how you're thinking about the pace of deleveraging toward your leverage goals versus buybacks in the market today.

Yes. So we've committed to the rating agencies and to investors that we would like -- we intend and we expect to get down to 4x leverage by -- within 18 months of the close of Adenza and 3.3x within 36 months. And that is very much consistent with how we raise our debt. And we have the ability, if we want to or we decide to, is to pay down up to $2 billion of debt within the first 2 years. That's not kind of the core plan, but that gives us the flexibility to do that. But we have that plan to get to 4x in 18 months, 3.3x in 36. The second thing is we announced at the beginning of the year, and we're going to continue this, is to continue to have a nice steady increase in our dividend to get to a 36% -- a 35% to 38% payout ratio. We fell below that during COVID because we grew really fast. And so we're just trying to make sure that we bring that back to where we had our leverage ratio -- our payout ratios pre-COVID. And then the last part of that would then be to buy back stock to manage the dilution and to manage -- to make it so that we deliver accretion on the deal. So those are the 3 priorities in order, and that is how we're going to be managing our capital for the next several years as we kind of absorb Adenza, achieve the synergies and make sure that we deliver for our shareholders.

Wonderful. Why don't we stop there? Adena, thank you so much, and thank you all for attending this session.

Great. Thank you.