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

Get started for important disclosures. Please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. All right. With that out of the way, good morning, everyone. I'm Mike Cyprys, lead analyst covering brokers, asset managers and exchanges from Morgan Stanley Research. And it's my pleasure to welcome Sarah Youngwood, CFO of Nasdaq. As many of you know or many of you may know Nasdaq to be a global exchange operator, but in recent years, Nasdaq has been transforming the business through a series of acquisitions to become a technology and platform provider to serve corporates, investment managers and financial institutions as they navigate and interact with the global capital markets and broader financial system. So we're thrilled to have Sarah with us here to discuss the transformation. Sarah recently joined Nasdaq. It's just about 100 days. Is that right?

That's right.

Congratulations on the 100-day mark, Sarah. And was previously CFO of UBS and prior to that, spent about 24 years at JPMorgan Chase in a number of leadership positions, including CFO of the Consumer and Community Banking division, as Head of Investor Relations and has also spent many years in FIG Banking. So Sarah, welcome.

Mark, thanks for having me.

Thanks for coming all the way out here to San Francisco.

So you're about 100 days into your role at Nasdaq. Just had the Investor Day earlier this week. I must say, well done in such a short amount of time on the job, just 100 days in. But you're not exactly new to the industry. So maybe you could talk about what drew you to join Nasdaq? And what did you think of the company's financial profile? And just curious, any sort of perceptions that you've had of Nasdaq over the years?

Well, I'm delighted to be here. And yes, 100 days and already an Investor Day. So I joined Nasdaq after having been my whole career in financial services. And I think I've been privileged to have been at leadership positions at both JPMorgan Chase and UBS. And you think of that as the #1 global bank, #1 U.S. bank, that's JPMorgan Chase, #1 international bank and #1 wealth manager. So I felt that through that experience, I had the privilege also of being acquainted with technology, and that's where I wanted to go in my next chapter. So Nasdaq is a technology company. It's a platform company. It's one that has been at the innovation helm. And I've been really -- that was important to me. It's a modern technology company. The second piece that was important to me was for the company to have financial excellence. And that financial excellence, we'll talk about it more, is clear at Nasdaq. Its revenue growth, its margin, its free cash flow conversion, it's really everything that I'm looking for as the steward of shareholders and as a person who was going to invest in the stock since that's how it compensated. I wanted to make sure also that I had that staying power in terms of like financial excellence as well as a catalyst. And for me the catalyst, I was at the Adenza acquisition, which I looked at with the vantage of being the CFO of a large bank. And from that point of view, it became very clear to me how critical this was in enabling Nasdaq to become a strategic partner to the financial fabric. So that was two. And then the third item is always you want to join a team, a team that you are excited to be part of. And for those of you who were at Investor Day, hopefully, you just like noticed the dynamics of everybody on the team where everybody is rooting for each other. And everybody has caliber. It's a very deep bench, and that was very visible to me from the outside. And as I became acquainted with more people through the interview process, and I am just thrilled to be part of that team.

Great. And at your Investor Day, you highlighted the financial profile of Nasdaq as making it 1 of 15 companies, I think it was, with a rule of 60, so no longer rule of 40, rule of 60, resulting with -- for more than 5% growth, 55% EBITDA margins. Impressive qualification there. Who else is in that group?

Yes. So I looked at it as rule of 40. All of you probably here swear by the rule of 40. We are rule of 60. And I started looking at like how many companies in the world are rule of 60? And actually, that's 48. And then I took it down and I said, okay, but the rule of 60 was not invented for people who don't grow at least at 5%. So let's get rid of those, and that cut it in approximately half. And then I put an element of scale in it. And that also put it down to 15 people in this group are going to include NVIDIA, Microsoft, Mastercard, Visa. And you have Meta, Oracle, I mean I'm going to not name them all, but you've got great companies that are part of this group. And for me, it's the confluence of innovation that is actually delivering for shareholders. And that's what I like about this group.

Staying with Investor Day for a moment, earlier this week, what key takeaways did you come away with?

So we presented ourselves after the strategic pivot as having done very deliberate investments to become a technology company, a platform company. And I want to leave you with like a few words. First of all, growth, but not just any growth, profitable, scalable, resilient growth and growth delivered organically. So we were very clear that our first capital priority is organic growth. And I think we gave a lot of sense to how to achieve it. The second thing that we would like to leave you with from Investor Day is the deleveraging. You heard that a lot. We are ahead on our plans of deleveraging, and all of that deleveraging is made possible by the fact that we have a very strong free cash flow profile. We have a free cash flow conversion that is at one -- or above 100% or above. And that is the thing that gives us a lot of like ability to do a lot of good for shareholders across different priorities. And then we talked about our strategy of integrate, innovate, accelerate, all very important words. We are integrating ahead of plan, and we talk about that in terms of our synergies in terms of deleveraging. We are innovating and we gave a lot of tangible proof points in terms of AI, the cloud, all of the things that we are doing that deliver tremendous value to the franchise and to our clients. And then accelerating through the cross-sells, and I'm sure we'll talk about that more.

So growth, deleveraging and the strategy sort of as we go forward from here is condensing more than 4 hours into just a few seconds there. But maybe let's dig in on each of those points, maybe just starting with the growth and sort of dovetail to the strategy. Let's talk about Adenza. This was your recent acquisition, $10.5 billion acquisition that meaningfully expands your capital markets and regulatory technology offerings with Calypso and AxiomSL. Now what's unique as a former bank CFO, you have sort of an interesting and unique perspective here on these regulatory technology offerings for financial institutions. So can you talk about Calypso and Axiom, the offerings themselves? What are the key benefits to users? And how do they differ from others in the marketplace?

Yes. So I'll start by kind of like taking a step back and putting my previous hats on because one of the things that is actually interesting for me is I am -- I think I have a lot of empathy for our clients because I was one of them. And so when you look at it, you look at what's important. First of all, trust. Do I trust this institution because my data is the most sacred thing that I have, if I am a financial institution. And AxiomSL and Calypso have been operated with a level of trustworthiness that is exceptional and very important. The second thing is like many of the organizations are local but also global. And what is the scope? And both of those on what impact investing with as a financial institution because they will serve your needs, whichever your needs are. So for example, AxiomSL is in 55 geographies. And if you look at the scope of what they do, just Axiom itself did 1,000 updates just last year. If I'm a financial institution and I try to think, am I going to stay on top of the thousand things that I needed to do across all of my geographies? A bit complicated. And therefore, it's great to be able to rely on a partner. I also want to make sure that if I make the investment of partnering with a financial partner, with a vendor like Nasdaq or like Adenza that it's going to be worthwhile. So like it's a long contracting process. I need to work with the architectural guys to make sure that the data is landing in a safe and secure way. All of those investments are only worthwhile if you can expand. And one of the nice things about both of those companies is that because they've built an integrator between AxiomSL and Calypso, now I can actually -- whichever I'm invested in is useful to the other one. And so reducing my time to implementation is part of my ROE -- ROI as a bank CFO. So I am really looking at reducing my own complexity, having somebody who is modular, who is at scale, who is going to cover all of my needs. And so when you look at it specifically, both of them are covering different parts of the regulatory agenda. One is going to be on regtech. The other one is going to be on the whole end-to-end trade, from pre-trade to post-trade and all of the reporting that goes with that. And of course, all of those different types of institutions of different sizes benefit greatly with a lot of trust.

Why don't we dig in on Calypso, first? Can you just give us a flavor of the revenue customer mix that you see there? And talk about some of the steps that Nasdaq is taking in order to accelerate growth with Calypso, which is the end-to-end trade life cycle offering.

That's right. So the main bread and butter of Calypso is to produce any part of the trade management life cycle that you would want. So pre-trade, trade, post-trade, collateral management, treasury, accounting, regulatory reporting, all of those trades. And that is the -- it's a platform that's very broad, but that is delivered in as many pieces as you want. And that's very interesting because people can come in to one asset class and one piece of the chain, and that's the land, and then we have the expand. When we talked about it, the revenue growth formula, and that's actually the same one for both AxiomSL and Calypso is 50% is on the expense. 50% of the revenue generation growth is on the expense. And then the other 50% is on the pricing and on the new logos. So that's very important because you have constant abilities to expand. The second one is Calypso is already very entrenched in Europe, for example. And we can have our Calypso product delivered in the U.S. to some of the Verafin clients and vice versa. Verafin clients, by the way, will be able to leverage the European footprint of Calypso. So you've got very nice synergies because it's banks of the Tier 3, Tier 4 are across both of those platforms. So we're seeing a very nice addition here in an area of growth. And then Calypso is making great strides also in terms of like in the cloud, and that will continue to be also an area of benefit.

And we'll talk about the cloud in a moment. But maybe just shifting over to Axiom. How penetrated is the offering compared to the opportunity set? And where do you see some of the biggest drivers of growth ahead for Axiom?

So AxiomSL, if you've been doing CCAR as a bank, it's kind of like the way to -- it's the highway that delivers your stress testing to the regulators. So I don't want to say it's compulsory, but it's highly encouraged. It's a very helpful platform. It's also a platform that is in, as I mentioned, 55 countries. And so it enables you to be local globally without thinking about it, and to add a module as you want to expand or as you realize that there was a part of your infrastructure that is not as efficient as it could be done by a vendor. And so part of that expansion is very much -- always going into a new geographies. So if you think about the penetration, whereas you have approximately all of the GP. So it's like 95% at the Adenza level that are in those products. It's certainly on the Axiom product, you have the ability to be today around at 9%, 10% penetration. And therefore, you just add modules and add modules as you want to provide new things. For example, we have a large client recently who took on some cloud adoptions. We have a different one who took on ESG products. And just last quarter, we sold several ESG products. It's both the Calypso and AxiomSL because they are integrated in terms of the data.

Why don't we shift and talk about the cloud. And you alluded to before, it's a growing portion of the new bookings. At Calypso and Axiom, I believe about 50% of new ACV is cloud-installed versus an installed base that's maybe around 25%-ish on the ARR. I think you said 15% of revenues. Maybe you could just talk about the decision points and hurdles that your customers are facing in terms of making that decision, do they migrate Axiom and Calypso to the cloud. And what might accelerate or even slow this transition?

Yes. So first of all, we are letting our clients go to the cloud as they wish. And so we are a client-first, we can support them on the cloud, we can support them on-prem. We like the fact that our clients today are very focused on their own transition to the cloud. What they are seeing is that it's a more efficient way to be served. And the reason why it's more efficient is don't think of it as the whole bank needs to go to the cloud in one big bang. And it is much more of a module. You can take a piece and put it on the cloud and decommission a few systems, and turn some of your own internal teams into effectively a managed service that is delivered by Adenza or by Nasdaq at this point. And that is giving us the ability to have about 1.5x of the revenue in terms of ARR because we are effectively taking a little bit of the TAM that was not included in our own revenue or even in the SAM. And that creates a win-win for the client. So it's not a matter of like huddles or a matter of like decision points. We go at it when the clients want to. But because it's mutually beneficial, it's happening on 50% of the ACV, and there are some clients where it becomes 100%. We're seeing a very strong proportion of the new clients who are just starting clean with that cloud offering.

Yes, with the migration to the cloud, at Investor Day, you did flag that this has some implications for revenue recognition. But are there any implications for ARR and any implications for cost structure and expenses? And how do they sort of compare between cloud and on-prem from that?

Yes. So I'll leave the revenue discussion to the slides that we have in Investor Day. And there, the one piece to remember is that at the end of the day, when you transition, what's important is the ARR and the cash flow is all the same. But the ARR is usually higher for a contract that is in managed services because of the managed piece you've got that is valued. And therefore, that's approximately 1.5x the revenue in terms of ARR. And when you look at how that translates, first of all, you start from this very compelling platform. Adenza, last few years, has been in the high 50s EBITDA margin. And so that high 50s EBITDA margin is a product of delivering to the products, all of the greatness that I just talked about. And when we go on the cloud, then you have that incremental revenue. And over time, we have gone over the investments that are needed to realize the cloud. And as we optimize, optimize, optimize, which is one of our technologies from the [ panel set ], then you could see over time the benefit of additional margin. But that will take some time because you do have the need to do the investments to support that cloud migration too.

Great. Why don't we shift and talk about Verafin. This was another technology acquisition that Nasdaq made about 3 years ago, about a $3 billion acquisition at the time. Verafin, this is a cloud-native solution for banks, providing fraud detection, anti-money laundering tools. It's been a strong grower for you guys. You've expanded the client set. So the question is, what's next for Verafin? And what do you see as the major drivers of growth and upside ahead?

And so Verafin provides the fraud management for institutions. And their bread and butter has been U.S., smaller institutions, the Tier 3, 4 and below community banks. We have 2,500 banks representing $8 trillion of assets in those banks. And not just those assets, but the other side of the trade. So think about big data, and that company was started 15 years ago with AI as a premise, thinking that you can basically look at like 70 core banking system, bringing all of that data into one vision and then provide better ways to fight $500 billion in fraud that are in the system. And the first thing we do is we continue to do that. And so last year, we did 230 new clients just in those smaller banks and that's what has fueled the growth engine in the mid-20s, and that's also the guidance that we have provided. In terms of the next leg, you continue to do that, but at the same time, you also have the Tier 1 banks. Last year, we signed our first Tier 1 -- first 3 Tier 1 banks and our first 4 Tier 2 banks. And that provides you contracts that have a much higher ACV. They have longer implementation and longer proof points. But once you're in, you've got the ability to land and then to expand. And then once we have this level of leadership in the U.S., we start having the ability, especially with some of the Calypso synergies to go into Europe, for example. And so we talked about the U.K. and then Verafin and its origin on a Canadian company. It is in Newfoundland, and Canada actually has not yet been tapped. So of course, that's also an area of expansion that's very natural for us. And so a lot of good opportunities. And we believe that consortium data with the ability to do algorithmic AI for the last 15 years as well as GenAI now is incredibly helpful and provides ROIs that are unprecedented for our clients. Client ROIs.

Great. Why don't we talk about IPOs, listings. It's been a pretty anemic environment in the last couple of years. What changes that, you think, in your view? Maybe talk about the IPO backlog at NASDAQ. What sort of activity do you expect this year, over the next couple of years?

Yes. So I would use the word caution and optimism. So we are optimistic, but of course, but of course you remain cautious as you'll become optimistic. And we've got an IPO index, which is the fruit of looking at all sorts of like macro data as well as our own data. And when you take all of that data, and it works very well when we like actually looked at it and backtracked in history, whether it would have been a good predictor. It was. And that ideal index would tell us that, we are today, at the highest point since 2021. So we're not at the 2021 by any stretch, I don't want to say that. But we are certainly at the level where the data would tell us that the elements are finally assembled to start to go back to a more normalized IPO environment. So -- and in terms of like the dialogue with our clients, we have a pipeline that is healthy. But more importantly, we have a dialogue that is starting to accelerate. And so it's the level of engagement that we're seeing that's giving us hope. But remember that those things are slow waves. And so we are not saying that it's going to accelerate and then suddenly it's going to open like in one go, in 1 month, but that -- we have the elements having now reached what should be a soft landing. And to see, especially as the right policies is as expected in the second half of the year, the elements that would support a more healthy and vibrant IPO market.

Great. So we talked about a number of different growth engines across Nasdaq. Maybe just bringing it all together, how should we think about the growth algorithm for revenues as well as for expenses at Nasdaq that you sort of need to support the top line growth? And just how do you think about the scope for margin expansion over the next couple of years?

Just that in one question. So I'm going to start at the top. So you start with a sum of $31 billion. That sum of $31 billion is growing at 8%. Last year, we didn't have a favorable macro environment, and we actually delivered for Solutions, a growth rate of 8%. So you've got a real anchor at the low end of our 8% to 11% between those 2 things. Then we spent literally the 4 hours talking about all of the areas we have to increase our penetration. So our penetration right now is just above 10% of that sum. And we have multiple avenues to increase our penetration. For example, I talked about the GCs, where it's just 11% of our Solutions revenue. And that 11% is a very, very low penetration. And we talked about, for example, the Tier 1 examples that are just landed and are just going to get started in 2024 for Verafin, that's just one example in Solutions. And then -- so you have ability to expand your penetration within that [ lower stand ] that is growing. And then you have the cross-sell. And we had a [ one ] Nasdaq panel that showed the value of all the things that we can do together now that we have the ability to be a strategic partner and a platform that enables our clients to effectively give us more of their trusted business. And with that, that's a $100 million-plus of synergies and cross-sell -- that's really cross-sell revenue, $100 million-plus by year-end 2027. And then we also have an additional $250 million target, which is one that was preexisting from our past Investor Day, also by year-end 2027. And so if you take all of those elements, we feel that it's quite visible that we have a line of sight to achieve our 8% to 11% Solutions revenue. So then you go, okay, is it going to be profitable growth? Then you have 300 basis points of operating leverage between the Solutions revenue and the expense revenue in terms of our outlook. So one is 8% to 11% and the other one is 5% to 8%. So that operating leverage enabled us to not only -- and we start from a good place, as I mentioned, 53% operating margin, 56% EBITDA margin. So we're in an exceptional starting place, and we continue to add operating leverage to that in addition to the growth that we have. So that is the opportunity. Once you have that, we also mentioned that we are very well invested. What's remarkable, I think, at Nasdaq is that the company has been investing through the horizon and through the products. And so they did cloud 10 years ago, AI 7 years ago, [ I go with Nick ] of course. And so we're not sitting here with the need to catch up. The data is well organized. It's utilizable. That's why we're able to spend smaller incremental dollars to progress and to now implement GenAI, for example. And so the CapEx, therefore, is not in need of a catch-up. And so you continue to have this free cash flow conversion that is at approximately one or above. And so when you have all of those elements, now you have very, very strong free cash flow that can add value to shareholders.

And one of the uses of the cash flow is deleveraging.

Exactly.

Which was another takeaway from Investor Day. It seems that the sort of expectation around deleveraging has accelerated a bit by about 9 to 12 months or 6 to 12 months or so. Maybe you could talk about what's changing -- what's driving that change in outlook there on the faster pace of deleveraging? How much debt paydown are you sort of anticipating there to hit those targets?

So when you go back to the moment of the acquisition, when we closed the deal, we structured the maturities to have effectively 2 bookends. They are across 35 years. That gives us a lot of time. But we had $1.9 billion that was short term and that was intensely [ undone ] to give us optionality in terms of deleveraging. In that $1.9 billion, we actually already repaid $260 million in the fourth quarter of the term debt. And that's a trend that you should continue to expect from us. And as you think about it, like as a math problem, you have actually accretion dilution between the debt paydown and the share repurchase given the level of rate at which we seek as well as the share price. You've got that being fairly in sync. And so if you've got that fairly in sync and the debt paydown is also accretive to the free cash flow, it is absolutely the right thing to do with that. But because we have $1.6 billion, we are not moving to a strategy. And so if I go back to our capital strategy, we are going to delever ahead of time and be at that 4x, 9 to 12 months ahead. We're going to be at 3.3x at least 6 months ahead. That is after having done organic growth as our first priority. And then we continue to have also a progressive dividend and share repurchase to offset employee dilution, remains part of our process. And we will continue to look at share repurchase beyond that, but it needs to be something that is attractive for shareholders.

Maybe just on the buyback point, what can we expect on that over the next 18 months? And it seems like it might be a bit less than maybe what we had previously thought? Just how to think about that?

So I would say that we want to continue to anchor in -- first of all, anything we do will be in the context of having delivered in those deleveraging target that we think are very important. We also think that doing the offsetting of employee dilution is a very healthy thing to do. That's not a huge component of our free cash flow, but it's something that we should do. And then on the margin, we are not commenting specifically as to what we might or might not do beyond that.

Okay. So at the very least, offsetting employee dilution and then opportunistic beyond that. Okay. Capital allocation, right? At Investor Day, you outlined 3 key themes in terms of the move forward around integration, innovation acceleration. So how much of the focus in terms of driving that and the bandwidth there is going to be around organic versus inorganic as you look out over the next 5 years? And as you think about your suite of offerings today, which you have built out over the last couple of years against the nearly $80 billion TAM, I guess, what capabilities could make sense to augment or add at this point? Or do you feel it's pretty much built out?

So I think I've been very, very relentless about using the word organic. Organic growth is absolutely where we're going to focus our energy. When you're sitting in front of a $3.3 billion tie that can grow with line of sight at 8% to 11% and with operating leverage that is starting with an operating margin of 53% and can grow from there, it is our responsibility to attack that problem and to deliver that for our shareholders. And that's exactly what we're going to do. It's very much a complete set of solutions that we're starting well with, and that give us the opportunity to do that over the medium-term outlook. And so that medium-term outlook is one that we believe strongly can be delivered organically. The way to do that is potentially including some adjacencies. Some of them could be built. We showed actually how we cover the different verticals for the different types of products. And you see we have very good progress. And we feel that from that place, we have a real choice between the build and the buy. And we can use a very rigorous framework, which is an ROIC-based framework, to deploy organic investments across horizons 0, 1, 2 and 3. And we're going to continue to do that. You will see in all of our products that there is the next road maps, and we gave you a lot of sense for the road maps of Axiom, the road map of Verafin, the road map of Calypso. So that is absolutely what's going to generate that growth. And that's enough to continue to make us extraordinarily relevant to our clients in the next 5 years. Could there be a tuck-in? Absolutely. That is something that we would consider, especially if we view it as a better opportunity versus the build, that would be the alternative.

And just on that M&A point, I guess, how would you sort of characterize the evolution of your framework for M&A? And what would be the potential areas for investment?

So the way we think about it is because we have this complete set of solutions, because we have a strong platform, because we have the right to grow and the line of sight towards this medium-term outlook, we are going to focus on deleveraging and on organic growth. If at some point we were to do M&A, we would consider it on a deal-by-deal basis for shareholder value add that would be versus other uses of capital. And that's really how we would approach it. But again, that is long term and not something that we're focused on right now.

Fair enough. We have a few minutes left. I want to see if there's any questions in the room here. We'll have a microphone go around. Any questions? If not, maybe just on Verafin. We're at a tech conference. AI has been a big topic of conversation. Maybe you could just talk about how Verafin is using AI today to drive solutions for customers. And what's the potential to turbocharge this with Generative AI? And how meaningful could that be?

And thanks for the distinction because if you look at it, 15 years ago, they got started with AI. And they built the whole platform on the idea that if you have all of the data and you apply AI, you can combat fraud. And more recently, they -- really, we're the first ones to embrace Generative AI within Nasdaq. And they have a proof of concept that is actually generating up to 90% reduction in the time spent to review alerts. And that's like extraordinary. Because when you think about banks, they can have thousands of those alerts. And that -- they can have hundreds of people whose job it is to do that. So when you can reduce the time by up to 90%, not all of those are going to be 90%, it gives you a very strong ability, again, to generate an ROI that is extremely attractive for clients. And so this is something which is a very natural extension of how they've been operating. And it's no surprise that Verafin -- because they have so much experience with AI across all of their platforms, we're absolutely ready to embrace GenAI. And I think that we're going to have a lot of opportunities there in the products.

Any questions? Maybe just on data. Your platform has a vast array of proprietary data sets that are generated off your engines, whether it's the markets engines, the analytics engines, the financial crime engines. How do you think about enhancing monetization of these data sets? And are there any additional data sets that could make sense to bolster on it and to enhance on it?

It's a great question. If you ask me, I think that technology is going to become more commoditized, and data and the ability to use GenAI on top of data is going to be what creates value. And we still sit on top, and Adena talked about our gold data. We have data, which is the data that exists through on the exchanges, the data that we have through the Workflow and Insights products that we have. We have data through some of the regulatory or through the financial crime. All of that data can be combined with workflows to constitute value add. You can see it in an index. You can see it in a product that puts information at the tip of our hand. And that is, we believe, the goldmine on which we sit and which we are absolutely going to continue to leverage. And having that data that is already well organized and usable, is a key differentiator.

Great. Well, why don't we leave it there. Thank you so much, Sarah, for joining us today. Please join me in thanking Sarah Youngwood.

Thank you.