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

Thank you, Brian, and welcome to the 2024 Piper Sandler Global Exchange & Trading Conference. My name is Patrick Moley, I head the exchange and online brokers and trading companies here. It's my pleasure to kick off this year's conference with Chair and CEO of Nasdaq, Adena Friedman. Nasdaq is a global exchange operator and financial technology company servicing a broad range of market participants. Adena has been with the company over 31 years now, CEO for the last 7.5 and has overseen a pretty significant strategic pivot. It's taken Nasdaq into more of a financial technology software company, the larger mix of recurring revenues. So thanks for joining us.

Thanks. it's great to be here.

So I thought we'd start kind of high level and just can you speak to kind of the evolution of Nasdaq since you took over as CEO and where we maybe sit today in terms of the strategic [indiscernible] you initiated?

Sure. Yes. Well, so I started at Nasdaq 31 years ago, but I did actually leave for 3 years. So actually, my tenth anniversary of coming back at Nasdaq yesterday. So it's been an amazing journey. When I became CEO, I've already been back about 2.5 years. So actually leaving gave me a really good perspective to come back and then relook at Nasdaq with fresh eyes. And when I became CEO, I've been back 2.5 years, I had a pretty good sense of where I thought we could become. We are a technology leader in the exchange space. We provide technology to 130 other exchanges around the world in addition to being truly a world-class exchange operator. And we've started -- so we still had the muscles to understand what it meant not only to be an exchange operator and have great technology, but to actually sell software. And we had also built up our data analytics businesses serving the corporates and investors. So I felt that we had a really interesting and a great foundation for us to have more impact in the industry. And I started talking to CEOs and COOs of the banks as well as the investment management firms and asking them, okay, based on what we offer today, how can we be a better partner? And they said, you are a great partner. You have great technology. But my biggest challenge is -- and this is back in 2015, '16, my biggest challenges are managing criminals out of the system, managing the challenges of post-trade and risk management and managing the regulators. And so it's great that you have great trading technology, connectivity services. You offer some portion of that with surveillance, but I have bigger problems. And so it was a really interesting conversation. And so as we started to define what would Nasdaq become, we really focused on how can we have -- be better partners to the banking industry, how do we be better partners to the investment management industry and then how can we make sure that as a provider of an exchange to our corporates that we help them be great public companies. And that was the journey, that was the start of the journey. As I look at it now, we're several years in now, so 7.5 years in, I feel great at where we are in terms of having executed the pivot. And now it's a matter of really making sure that we bring everyone together in a really, really comprehensive way to have that impact that we believe we can have. This year is a year of integration. We've had 2 very, very strategic positions over the last 3.5 years between the Verafin acquisition and the Adenza acquisition. And so we have 3 key priorities for 2024. We are really focused on integration, innovation and acceleration those are the words that if you ask anyone at Nasdaq right now what are the key priorities at Nasdaq, it's integration, innovation, acceleration. We say it like every single town hall every 3 weeks. So we have the integration of Adenza and as well as the continued integration of Verafin to make sure that our Financial Technology division operates with the level of efficiency and effectiveness it can deliver for the clients. We also have the 3 divisional -- the divisional structure we've set up. We're also, within Capital Access Platforms, really bringing together the team and making it so we can have more impact through the data that we have collectively across corporates and investors. Innovation, it's all about AI. We've done a great job, I have to say, at Nasdaq in really embracing cloud. We started working on cloud 12 years ago and so we have integrated -- cloud is kind of the foundation of pretty much everything we do at Nasdaq now. So whether it's our software solutions serving corporates and investors, our anti-financial crime solutions, our surveillance solutions, our markets, we are able to deliver every element of our franchise in cloud. As we brought in Adenza, they're a little less mature there. So AxiomSL -- actually, they rewrote AxiomSL in -- 5 years ago as a cloud-delivered solution. So they -- we're very, very -- we're accelerating that in terms of having more and more clients sign up for AxiomSL through a cloud-delivered solution. But with Calypso, that's a very complex application. And so there, they are delivering it in cloud, but we know we can do more to help optimize that and to really deliver the most advanced cloud-delivered solution there. So we have a really great journey there. So now if you have all of your capabilities in cloud, it means you've modernized your data management and you've modernized your infrastructure and you've gotten yourself to a really modular state. Well, that allows you to go play a lot of offense with AI. And so we've been extremely focused on AI, I know we're going to talk about that, as to how we implement it. The last thing I would say is kind of a little bit of a fun financial marker as to how we progressed. In 2017, we generated $2.4 billion of revenue. On a pro forma basis, in 2023, we delivered $2.4 billion EBITDA. And so we really have grown and expanded this business quite successfully. We're really proud of that.

Yes. So that was a great synopsis. And I want to touch on all that, but I thought maybe we just start with the macro and kind of get your thoughts on the setup heading into the back half of the year. We have a presidential election coming up. How are you thinking about the second half and what that could mean for the Index business or your Market Services business? What are your thoughts there?

Well, it's interesting. I think that -- I mean, if you kind of had a pretty good sense of where the election was going to go, I would say that it would be a pretty normal year. Since we don't really have a good sense of where the election is going to go, it could become a more volatile year as we progress. What happens with the Listings business, starting there, is generally what you'll see is a lot of companies will try to get out in September to mid-October and then take a pause. And likely there won't be a lot of listings through the remainder of the year. And now we've already -- we're already in a state of really trying to really kick off the IPO market to begin with. I mean, we do have really interesting companies seeking to get out. And I would say that the -- we do feel like some acceleration in the IPOs that are coming out and a lot more receptivity from investors. So if they were a normal year, you'd see kind of a pickup as you go all the way through the second half. I would say that you're going to end up seeing a pause midway through the third quarter -- I'm sorry, early in the fourth quarter. In terms of trading, obviously, volatility brings trading. And so that could result in some pickup in trading. And then the last thing is on the Index side, it's interesting. It's -- you have to look in the past. So if you look at what happened in 2016 when President Trump was first elected, actually, I don't know if you remember, but the night that he got elected, the futures investors got really spooked and the futures really did quite poorly that night. And then the next morning, the markets rallied. And so it's really hard to know how the markets are going to react. I think we, at least, in this particular case, now have 2 known quantities and so you have a little bit of a better sense. Investors can probably plan ahead and have a little bit of a better sense of what would be the economic impact of the different presidential candidates. And so it likely won't be nearly as volatile as it was last time -- or the first time, I should say.

Sure. And you touched on the Index business there. You had a very strong first quarter. I think, organically, revenues were up 38% year-over-year. Could you talk about some of the growth initiatives in that business? And then maybe adding on to that, I know Nasdaq's historically been looked at, I think, as more of a retail-oriented index. What are you doing there to kind of broaden out the institutional adoption?

Yes. Well, first of all, on the Index performance, we're obviously thrilled to see how well the Index business is doing. Some of that is obviously our own effort and some of that is the markets. But what what's really been interesting is since 2019, we've had almost 200 -- or a little over $200 billion of inflows -- net inflows into the Index business. And of that, $86 billion of that is not from the Nasdaq 100, right? So there's been a lot of inflows into the broader Index franchise now that we have delivered. And we continue to launch new products and our new products are thematic. They can be -- so they can be thematic in terms of like innovation-oriented indexes that are really tied to the Nasdaq brand. They can be ESG-oriented and we definitely are having a lot of success across our ESG strategies. They can be factor indexes, our momentum indexes and our other kind of, what I call, strategic index franchises, they're also doing well. So we have, I think, an amazing growth pillar within the Index business and we're really, really proud of that. As we -- but you're right that the Index business up until now really has been retail driven. And we have not been -- I would say we're not a supermarket of indexes. We don't try to be a supermarket of indexes. We're very specific in how we invest and where we invest our brand and our capital to serve our clients. We're much more strategic with our clients in terms of aligning our brand with the index products, aligning our clients with what we can do very well and some of the really advanced, I would say, algorithmically oriented index products. But I also would say that we would like to branch out. And so to -- and get more engaged in the institutional. I mean, it's kind of shocking to me that more of the 401(k)s, the endowments, the asset owners are just not as invested in the Nasdaq 100 because the Nasdaq 100 has outperformed pretty much every index in the country. So over the last 30 years, if you look at our performance, it's been amazing. So we're trying to make sure that we start to work and collaborate through our relationships because the investment gives us these deep relationships across our asset management community. How do we drive products that are relevant to asset owners leveraging our indexes, and we're starting to work with the insurance industry, the asset owners to really create products that are tailored to their needs, and it's pretty exciting.

Yes. And you mentioned them being under-invested in Nasdaq 100, I think when we look at like the success that S&P and Cboe have had with the SPX complex, when we look at options, it always surprises me that there's not a greater adoption of Nasdaq-based index options. Is that something that you think you can really -- you grow that franchise? And do you think you could kind of replicate the success that SPX has seen?

Yes. In fact, I think that we are underway with that. I would agree that we did not have as strong a strategy, let's say, 10 years ago, 7 years ago supporting the Nasdaq 100 franchise. And yet now, I think we've really invested a lot. We've invested a lot in the partnership with CME, and they are a fantastic partner to us. And then with the launch of the Nasdaq 100 Options products, the NDX franchise within our options markets or proprietary options, we've seen really nice growth and pickup. Part of that is building out the institutional community to actually support that index -- those index options. But part of it is also getting them into the retail platforms, educating the industry on how to leverage them and use them for hedging, how to use them to build their strategies. And we're now starting to see really nice pickup in volumes there. So that's actually a true -- becoming a really interesting growth pillar for us in our Markets business. I'm pretty excited about that.

All right. So shifting gears to Financial Technology segment, which obviously includes the Adenza businesses. I believe that acquisition was announced a year ago next week.

Oh my, gosh, yes.

And at Investor Day in March, you talked about -- you're targeting $100 million in cross-sell revenues by year-end 2027. Can you talk about some of the cross-sell campaigns you've been running, success you've been seeing there? Has that had any sort of meaningful contribution to revenues yet?

Yes. So first of all, that is the third pillar, by the way, of this year. I said -- I mentioned integrate, innovate and accelerate. Accelerate is all about the cross-sell, building out the cross-selling capabilities within Nasdaq and really delivering on that $100 million that we committed. And I -- it's great. I have to say, so far, number one, the Financial Technology division has really come together and gelled. And we actually had our senior executive offsite here in this hotel yesterday. And the team is just doing really, really well together, Tal's an amazing leader. And so we have a really great team working, functioning really well together. We have very -- we've built out people, process and systems, specifically within fintech around delivering on cross-sells in terms of aligning the sales force and the sales incentive plans, making sure we have a true processing campaigns, and we'll talk about that. And then also having the systems, all the CRM systems, integrated so we have a much better line of sight into our banking -- or all of our clients actually across all of fintech and then at Nasdaq across all of Nasdaq. So within fintech and what we delivered was $100 million-plus within fintech, the broad fintech platform of cross-sells. But as we continue to mature the cross-selling abilities, we're going to be looking at this across all of Nasdaq because obviously banks are public companies, too. They're also -- a lot of them have asset management arms within their organization. So how do we make sure we kind of really compound on that over time. I think that in terms of early progress, within fintech, we have a couple of campaigns we've launched. But it's not just about campaigns, I have to say, Patrick. When I -- I actually -- I've been all over the world in the last few weeks and when I meet with the senior executives and it's consistent whether I'm meeting with them or Tal or Valerie or anyone, they want to do more with us. I think they see us as a trusted partner. They like our solutions. They're very good solutions and they're kind of best in class. And so as they say, well, can you help me solve this next problem, this next problem, they really want to be able to leverage more. They're looking to do more with fewer vendors and to be a more strategic partner. So the cross-sell so far has been quite successful just organically. And then we also have campaigns. One is collateral management, which this is a pretty obvious one. Calypso has a great collateral management solution and we provide technology to clearinghouses all over the world. So how can we get more of the Calypso's collateral management capabilities embedded and integrated into our clearing solutions that we offer to exchanges, that's one. Having AxiomSL, they are more of the mid-tier banks that really need to have more regulatory reporting obligations. And a lot of those mid-tier banks are Verafin clients and Calypso clients. And so that's a very obvious cross-sell as well. And then we have a few other smaller campaigns, but those are the ones that we're watching that we're seeing a lot of success around early. It is not a significant driver of revenue growth this year, it won't be. These things take time. You go from intent. Obviously, you're the funnel, right? And the funnel with banks is not fast. It takes a lot of contract. Essentially, the bigger the bank, the longer it takes. But the fact is that when we can land into these banks, it's just a great, great opportunity. So we're excited about it.

Yes. And then just on the topic of the time it takes with banks, we spoke about the macro, the impact they're going to have on the IPO window. What are you seeing in terms of sales cycle headwinds? Are those turning to tailwinds? How do you expect that to kind of play out into the end of the year?

In terms of IPOs? I just want to...

No, just in terms of the selling some of the solutions to banks, some of the Solutions businesses.

Yes. I mean, I would say that in general if we look at -- across fintech, they're actually -- because of the fact that the world is so much more complex, the regulatory environment is challenging all over the world, it's not just the U.S., this is a global business. And the fact that risk management is becoming more and more complicated and complex, there are a lot of tailwinds underpinning the financial technology business. And then when we look at market tech in terms of the exchanges, they're all wanting to embrace the future of technology. They're realizing they're sitting on an incredible cadre of data. And yet based on the architecture of their solutions, they're not architected to be able to take advantage of that. Our next-generation trade life cycle technology is literally designed around modernizing your data management so that you can unlock the potential of what you have and start to really leverage cloud. So we had our Technology of the Future Conference with our exchange community last week, and it is just an amazing transformation of conversations from you're really thinking about moving your markets to cloud to how can I get this technology and how quickly can I put it in place. So we have a lot of tailwinds there. Across the Capital Access Platforms business, we've had more headwinds there. And I think there because the corporate community has gone through a lot of change and a lot of disruption since 2020 and 2021 that has made us so that the sales cycles for our core investor relations and government solutions has been slower. And we're starting to see a little bit of improvement there as we kind of come into 2024, but it's going to be a while. That's going to take a while. As we talked about the flywheel, it's a flywheel in both directions. And so when you have fewer IPOs, you have fewer opportunities to sell your solutions beyond the IPO. But as we kind of see a recovery there, we feel good about what we offer. And then with eVestment, that one actually has been a pretty consistent business. We've done a lot to invest in our partnerships with Mercer and several other data providers that have made the solution much better. And now we have a chance to really go out and sell those solutions.

So moving on, I want to talk about capital allocation, how you're thinking about it these days. You've been delevering faster than expected, I think you're down to 4.1x net debt-to-EBITDA now. Target is to get back down to 3.3x. Is there potential for continued outperformance there? And how are you thinking about uses of capital once you get back down to that target level?

Yes. So I think that -- let's just put out the capital plan. We have our dividend and we're continuing to be committed to increasing the dividend as our earnings grow, and we talked about trying to get to that 35% to 38% payout ratio as we kind of progress through '24 and '25. I think that's a steady program. Then the next thing is delevering. And as you said, we've been able to accelerate some of that delevering. And we do have confidence that we will meet what we talked about at Investor Day, which is delevering below 4x 9 to 12 months earlier than we originally had scheduled, which would mean Q2 or Q3 this year, and then getting down below the 3.3 at least 6 months early. We feel very good about that. And I think the one thing is as we go forward and we show -- and we demonstrate that delevering and we have plenty of room to do that, we also want to do some buybacks. We obviously are going to manage buybacks to manage down employee dilution. That's an every-year thing. And then we'll be opportunistic in using buybacks to deliver on the accretion. But the delevering is a really, really critical thing to get done and we feel great about it. I think that beyond that, honestly, we have a 3-year path here to execute, execute, execute on integrate, innovate, accelerate. That is our focus and that is our focus. So as we move beyond that kind of get really, really great and then have everything working perfectly, then we'll continue to look at how can we build solutions that continue to grow and expand our business. And we really -- just acquisitions aren't on our radar. But what we did say at Investor Day is to the extent in the future we consider acquisitions, we will be looking at them on incremental return to investors. That's as far as we've gone.

Yes. So I want to end, and we've got a couple of minutes left, but on -- AI was another big theme at Investor Day in March, how do you think AI is going to change the landscape of financial services? And how do you think Nasdaq is positioned for that?

Well, I think, as I mentioned before, I do think we're positioned well. I personally think AI is kind of the most revolutionary technology we've seen since the dawn of the Internet and I believe that. I think next gen -- GenAI is a game-changing technology that we don't even really understand its potential yet in every industry. So it is ubiquitous. It is remarkable at the level of intellect that we can create on the back of any uniform data that we -- and were to become data, and therefore, everything can be automated, right? So it's no longer just algorithmic. It's every element of language can become part of an automation opportunity. So within the financial industry, algorithmic AI already is a very big part of our industry. We've launched our first order type -- AI-driven order type in our markets, Dynamic M-ELO. It's increased the volumes of that particular order type by 20% since we launched it. So really excited about seeing, and the fill rates have improved quite dramatically for our clients as a result. So we have that. We're using AI to help manage our strike management program, making sure that we're optimizing strikes. We're using it inside our infrastructure to predict -- to make sure that we're using it honestly for our infrastructure to predict issues with infrastructure so that we can obviously prevent them. And then also, we have a GenAI tool that we've launched in our Anti-Financial Crime business that automates the investigative process for analysts. Like once you come up with an alert and you say this could be a bad person, a bad actor, right now, an analyst goes out and searches the Internet and tries to find anything they can about that person. We now have the ability to automate all of that, write the report, here are all the sites and generate a recommendation as to whether or not they should forward it in terms of a regulatory report, and it [ takes the ] time for investigation by 90%. So it is a remarkable tool for efficiency. We're launching that in our Surveillance business now. And then we also are providing a very cool thing where we can summarize Board reports within Boardvantage. Every director I've talked to say when can I get that? Take a 500-page Audit Committee report and distill it down to 2. So it's a remarkable technology. I think you'll see it used. Whether it's in investment research, whether it's in recommendations, whether it's in predictive investment capabilities, whether it's in optimizing the efficiency of the markets, I think you're going to see it in every element of what we do.

And do you think Nasdaq having maybe a leg up in AI, how do you think about that in terms of pricing and your ability to offer those features through some of these Solutions businesses? I mean, is that going to give you the ability to take price going forward?

Yes. I mean, what's great is that since we've got -- we have a lot of proprietary data across our franchise. It is organized in a very modern way. And we have a lot of content we deliver to our industry. It's organized in a very modern way. So we can play offense. And we are driving AI all the way through the organization: on the business in terms of making our developers more efficient, our content creators more efficient, our client success feel more efficient as well as then in the products in terms of making our products more efficient for our clients and delivering more return to them. When we do that, obviously, if we can deliver a higher return on investment for our clients, we should be able to capture that value as part of our differentiation. And we do think that we can truly differentiate our anti-financial crime tools, our risk management tools, our regulatory reporting tools and all of our corporate platform tools as well as eVestment and really driving much more insights for our clients through eVestment. So in every case, we're talking about greater differentiation and just leading the entire industry with our solutions. And with that, you should be able to get paid for that value you're creating. That's how we're looking at it right now.

All right. Great. Well, I think we're out of time. Thank you so much, Adena.

Okay. Great. Thank you.