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

All right. Good afternoon, everybody. My name is Michael Cho. I'm the JPMorgan equity analyst here covering NASDAQ, and you -- welcome to the 2:30 session with Nasdaq's Chair and CEO, Adena Friedman. So Adena, welcome again.

It's great to be here.

Thank you for coming. Look, for format, we will do about 20 minutes of Q&A, and then we'll do the last 5 to 10 minutes, open it up for audience Q&A and call it a wrap.

So Adena, yes, I'll just kick off, big picture. You've been with Nasdaq 30-plus, and I think you're entering your ninth year of CEO tenure. And so again, you've seen a lot. You've been through a lot, multiple cycles, multiple administrations. Clearly, Nasdaq is on this strategic journey over the last number of years and kind of a business mix shift and really changing the way you deliver value to clients. And I think you've highlighted a few key pillars that kind of ground your strategic guidance or trajectory ahead, right? And so I think it's liquidity, transparency and integrity. So I guess if you think about those pillars and where the most opportunity lies for Nasdaq, again, been on a shift for a number of years and you're guided by these pillars. Like can you kind of talk through the Nasdaq story in the eyes of these pillars and where you see the most opportunity ahead?

Sure. Yes. Thank you. Yes. As you all know, we have been expanding the business to make sure that we can be a deeper partner to the financial industry. And we do use those pillars as a way to guide our strategy. So we've also used these pillars as a way to kind of structure our divisions. We have our Market Services business, which is really the liquidity pillar in terms of us operating our markets and driving liquidity into the markets that we own and operate here in the U.S. and Europe. And also, I would also point to Calypso, which is a risk management platform in our fintech division, where if we can encourage our clients use that technology to manage risk more effectively, it unlocks liquidity back into the markets around the world. We also provide technology to exchanges around the world that help them unlock liquidity within their own economy. So that liquidity pillar really crosses over between Market Services and part of our fintech division. Our fintech division, as I mentioned, is really geared towards that liquidity pillar and integrity. So we have our regtech suite with AxiomSL, which is a regulatory reporting tool as well as with surveillance and then anti-financial crime. I mean all of those tools are there to really drive the integrity of the financial system. And then we have our transparency pillar, which is our Capital Access Platforms division, where we provide transparency between corporates and investors. We obviously have our listings business, our data business out of the markets. But we also provide services that really connect corporates more successfully with investors in IR and governance. And then we have solutions that cater to the investment management community in terms of making smarter asset allocation decisions with a transparency tool called eVestment and then driving transparent investable products with our index business. So it's been, I think, a really great way for us to demonstrate the way that we can use technology to bring markets forward, to make markets more higher integrity and to drive transparency across the system to make people work better together. So that's how we look at it.

Wonderful. Okay. And I'm going to -- I promise to dig into each of the businesses and segments. But before we even go there, I mean, look, we had the election last week. We were just talking about this. And so look, there's a lot of conjecture around -- I'm not going to ask you how many IPOs or how much M&A. But from a regulatory or policy perspective, with the new administration, Republican Congress and a number of kind of other factors at play, clearly, there's a -- I don't want to call it, maybe an expectation or some perspective less -- or changes in regulation and policy ahead. And so I guess as you look at your businesses that you kind of just talked through now, I mean, are there any areas or potential areas that you're just kind of keeping an eye on that could have some development as it relates to Nasdaq? And again, your business kind of touches a lot of different areas. So I'm just kind of curious if there are areas that you are just keeping an eye on as potential changes.

Yes. I mean I think the one area that people are most focused on just is, will this be more of a catalyst towards more capital raising in 2025? And we've been saying for a few quarters now, frankly, but we've been expecting that the 2025 will be a better environment for IPOs. We're continuing to expect that. I do think that the conversations with companies that are thinking about the public markets in 2025 have become a little bit more confident in their tone. But I would also say that we are not expecting like the flood gates to open. I think that there are a lot of companies already looking to go out. I think they just have more confidence that they will have the opportunity. They might be a little bit more certain on their timing. And we've talked about the first half of 2025 as being where we hope to start to see some real pickup. That will also -- that's been an area that's been -- like if I look at the business, I think our businesses have performed remarkably well over multiple cycles over the last 8 years. But that's an area where that's the one business inside of Nasdaq that's had a tougher beta over the last couple of years. So what that does is it makes it -- so our listings business just doesn't grow at the same rate. We have a great balance in that business with 5,000 listed companies across the U.S. and Europe. But -- so IPOs kind of -- they create a little bit of a growth tailwind or headwind. And -- but generally, it's a very stable business, but it has been a growth headwind over the last couple of years. And then also, it parlays into our Corporate Services -- Corporate Solutions business, which is part of our Workflow and Insights subdivision in our CAP division. And that also has seen growth come down as companies just are in more of a capital preservation mode, particularly kind of mid- to small cap companies that have not had as much success in the markets the last couple of years have been more conservative in their buying behaviors on those products. So -- and we haven't had what we call new inventory in terms of new companies coming out. So if that can lift up and we can see the market performance be more broad-based and uplifting broad-based, that I think could create also a positive trend for the Corporate Services business. But other than that, our business is it's a great business. So it performs well in a lot of different cycles. The structural trends that we have really invested in across our fintech division, anti-financial crime, regulatory tech, capital markets tech, those are areas that are really long-term trends that we see as being good consistent trends and the demand and buying behaviors have been quite consistent over periods of time. So we're not expecting significant changes there.

Great. You talked about this maybe growth flywheel. I don't think you said that, but this kind of growth flywheel that may -- or that occurs as capital markets activity picks up. And so maybe you could kind of flesh that out a little bit more in terms of how that actually happens from an operational perspective, what you've seen over the number of years you've been at Nasdaq? And maybe talk about any lags in time or kind of timing of how and the magnitude of how much that flywheel kind of effect as it happens.

It's a great question. So it is a flywheel. I would put -- we have described it that way in the past, so I'll call it that now. So if you have companies come into the capital markets, they suddenly need to mature. They need to get to know all of you as investors. And they need to know how to target the right investors for their programs. They want to make sure they're maturing in terms of the relationships with this new constituent, and we provide a great deal of services, the largest and I would say, most successful Investor Relations intelligence business in the world. And we have thousands of clients where we help them understand who are the underlying buyers and sellers of their stock, how is that changing and shifting? Who should they target? What is the perception that investors have of them? And as that flywheel is a positive flywheel, you have capital raising going on, the markets are performing well, potentially the companies are growing, the stock is growing, then that is a positive flywheel against the trends there because they want to understand how they can attract themselves to new investors and they get engaged. When the capital markets are not as robust and certainly, it's been kind of a tale of 2 cities in the markets over the last few years between large cap and small cap, and the performance there, that has made it so that they're more in -- let me just -- I might keep the service, but I might come down in terms of the number of users or I might not take some of the discretionary services there. So we have seen that as being a little bit of a growth drag, but not necessarily -- and we, again, have thousands of customers. So it's a very good ballast. In terms of then the second flywheel is in trading. If you have newer companies going public, you've got newer stocks coming into the market. It's obviously that drives some trading. And being a listing exchange gives us an opportunity to be their provider of the open and closing cross, which, of course, is a good event for us in our markets. And it also drives our indexes and kind of participation in our indexes front in terms of how we can structure indexes and have exciting companies in our indexes. And that's obviously a growth business for us as well.

Okay. Wonderful. Before I move on, just on capital access. I mean, as you said, over the last maybe year or 2, in a depressed capital markets activity environment, I mean, Nasdaq has cited some elongated sales cycles in some of its products, as you just mentioned now. I mean, do you think -- again, this is kind of the moment where everything kind of comes back into...

It's hard to know. I mean I think it's too early to know that. But I would say there is -- one thing you brought up is how immediate is the impact. And I would say that there is a lag in a couple of ways. First, the initial listing fees that we collect from companies as they go public are amortized over multiple years. So you have both a delay and it kind of creates a little bit of a slow-moving train is how I say it, both on the upside and the downside. And so we've kind of hit -- we've talked about the fact that we've had more of a downside view of that over the last 18 months. And so we're starting to see the delisting slow down. We're starting to see listings pick up. But they still will have -- there will be a tail effect of that. It's not instantaneous. And then the second thing is on the corporate services and particularly in IR, that's where you talk to come and there's a sales cycle associated with IR. There's getting to -- we give them an introductory package as part of their listing for free for a period of time. So it's really when they roll off or we add additional services. So again, there's a lagged effect to that as well.

Okay. Great. Let's go to everybody's other favorite topic, Axiom and Calypso. So you owned or closed the transaction, I guess, a little over a year now, year into integration, ARR continues at solid double-digit levels. As you progress through this integration period, I mean, even over the last year and prospectively ahead, I mean, what are you hearing from clients in terms of what they like, what they don't like and areas maybe where you think there's more opportunity across that set of clients?

Yes. So I'll level set a little bit. So we have now a fintech division that has 3 subdivisions. We have our capital markets technology suite, which is our -- the exchange business, so how we provide technology to other exchanges as well as the Calypso platform, which is a scaled risk management platform for the trading firms. And then we also have our trade management services business that supports all the connectivity services we have. And that's one subdivision. Then we have our regtech, which is AxiomSL and our surveillance business. And that's all regulatory reporting and trade surveillance. And then we have our anti-financial crime suite with our Verafin platform. And all of them have kind of -- they've all -- it's really been fantastic to see, frankly, number one, the team come together really successfully. Tal Cohen is the leader of that team with our markets team as well, and he's just -- he's a tremendous leader, but he's also been bringing the team together, getting them to gel, work together. We have a divisional structure in terms of divisional level leaders of sales, our Chief Revenue Officer, CTO, Head of Client Success, Client Delivery, CFO, et cetera, within that division, and they've worked really well together. And what's resulted from that is great engagement with clients. And both Tal and I are -- we love meeting with clients. And we do -- it's been amazing to hear from them what they're looking for. And I do feel like they understand now that we can be a very complete provider of capabilities across their key risk vectors, whether that's managing the regulators, managing risk and managing criminals out of their networks. And therefore, they see us as a provider that, number one, understands their challenge because we're highly regulated too. We obviously have an incredible focus on cybersecurity as a company, and that I think gives them confidence. And then we also can structure an MSA, a master services agreement that allows us to come in with a solution, land and expand and work with them more holistically. And the dialogue with the clients has been really strong along that. One thing that's of note in terms of like where do we see opportunities to continue to expand. Number one, the TAM is giant and so is the SAM. So the serviceable addressable market is in the -- I'm looking at Matt, it's in the $30 billion range across that division. And it's growing because there's just a general growth trend, and it's probably growing closer to like 6% to 8%, around 8%. That allows us to just have a lift in terms of just like being in that space. But then if we can actually win share or if we can grow our presence as the clients are growing across the world or if there's a new risk that comes and we can be their provider, it just allows us to grow even faster. Market modernization has been one major trend, and that's driving demand across our services and regulatory reporting is another major trend. And that's a global business. It's the largest global business, our global technology platform with AxiomSL. And then, of course, anti-financial crime is a major trend. And there, we're really in North America today. So we have an opportunity to globalize that business over time as well. So those are the major trends that we're really focused on.

Wonderful. I'm going to -- I'll touch on Verafin anti-financial crime in a second, but you kind of talked about bringing a number of teams together, particularly within fintech to ultimately drive kind of greater value, greater products into clients. And so One Nasdaq is something you've frequently talked about, and this is kind of part of when you gave some examples here. But I mean, can you kind of flesh out in day-to-day practice, what does One Nasdaq look like as you execute go-to-market with some of these newer initiatives to ultimately increase market share in the market?

We talk about One Nasdaq because we have 3 divisions. We have 2 co-Presidents that oversee those 3 divisions. And while the divisions themselves have organized now in a divisional structure, there's a lot of work at the enterprise level to drive everyone together. And honestly, we all work really, really well together. So I think that as a result, in addition to making sure the divisions are working -- we're driving cross-sells within the divisions, we're making capital allocation decisions across those -- within those divisions. We're also driving enterprise programs throughout the whole company across those divisions. And those programs will be -- one is client data management and kind of creating an infrastructure that allows us to look at our clients holistically, and we're well underway with that. That's really helped develop our cross-sell capabilities. And then the other, of course, is the application of AI. And we talked about AI, both on -- in the product and on the business. And we have kind of a holistic enterprise approach to AI adoption and implementation, both in our products and making sure the teams are well supported and they have the expertise they need and they have very specific use cases that they're deploying for our clients, but also on the business as to how we bring this and integrate it across the organization to drive productivity, efficiency and all those things. So that's been -- those are the One Nasdaq kind of initiatives that we've been most focused on.

Okay. Great. I was going to go to Verafin. You mentioned AI. Let me just do that while we're on the topic. So you mentioned GenAI. You have a number of products out there, and I assume plenty more behind it. Like you said, Nasdaq operates in kind of 3 key segments, but a lot of businesses even within those segments, right? And so when you think about Nasdaq's approach to GenAI and product development and areas of focus, I mean, is there a guiding principle or strategy behind how you approach and allocate resources across these different businesses for potential behind this?

Well, the first thing is we have an ROI approach to all of our investments, including AI investments. But AI has been a pretty -- I mean, it's not a heavy investment against -- because we've been making investments for a decade to kind of position ourselves to be able to be -- to play offense on AI. The most important thing a product company can do, a technology product company can do is position them with modern architecture, modern platform and modern data management. And we have been on a journey for 8 years of just drumbeating that through the company so that we have our capabilities, they're developed in cloud, cloud native, they're available through cloud, and we're taking advantage of the modern data management that's available. We also have very scaled data sets that are proprietary to Nasdaq. It's -- of course, our market data is proprietary to us coming off our trading engines. But within eVestment, which is our investment management platform, we have 25 years of history across thousands of asset managers and asset owners in terms of asset allocation decisions and strategies and success that then we can mine that for intelligence. We now have all the Mercer data incorporated into that platform. So all the research is in there. And that then allows us to provide efficiencies to you guys. So if you're an asset manager and you want to understand what pensions -- what strategies pensions are deploying, we now summarize all the pension meeting minutes using GenAI to make it much more accessible to you. And then you look at a product like our governance platform, which is our Board portal platform or our IR platform. There's an enormous amount of information across those. So how do we make meeting minutes more efficient, but also meeting materials. We can summarize meeting materials for -- in our governance platform, make it easier for Board of Directors. We can make it so that we have better data and sustainability data for IR and understanding and comparing your sustainability practices versus your peers. So we kind of look at how we enhance our products using GenAI because we're able to play offense very quickly. I think the one that's been noticed the most and one that we're really, really excited about is in our anti-financial crime tool because it's such a huge efficiency generator for the clients. But Verafin has always been AI first. And it is -- we use Bayesian models. We're actually even fine-tuning those Bayesian models even more, using a lot more algorithmic AI to drive alerting, but we also have automated the entity research process for banks. And as you can imagine, you have a lot of analysts who are looking at the alerts and trying to figure out what's a false positive and what's not. They go out and they look at known sources, they pull data in and they write up a report. Well, we can automate all of that and give them the report, here's all the sites so they can be much more efficient, and that obviously is a major value driver to that platform. So those are the types of things that we're already in market in production with.

Wonderful. And you said you kind of approached from a financial perspective, there's an ROI attached to the investments that you make. I mean, do you think there's a real kind of monetization opportunity for AI products?

I do. But I also would say this. So everything we've mentioned has all been within the construct of our budgets. And like this is a very efficient implementation of these technologies. So it's -- we have the teams. We are already agile. We're already on cloud. We already have our data in a good state. So it's really just deploying the tech. And we can either show, number one, we want to prove value. So I think one thing that we've been hearing, and I really ascribe to this is you want to prove value so that you then can demonstrate to your clients and say, we know you're getting a lot of value because we can see you're using it. We can see the fact that we've saved you hours of time on certain activities. And therefore, as we talk about the next contract, or we talk about the next module, or we go in and look at also client retention, all of those KPIs should be a net result of having delivered this value to you. And that's, I think, we're so early in the use cases of AI that it's important at this point to prove value. And then if you prove value, you're going to get returns from that, and we will make sure that we do drive those returns, but that's the approach we're taking. There are a couple of modules where we are actually just going out and saying this is a new module, it's an upsell, but most of it is being embedded into the platforms at this point.

Okay. If I just take a step back just on this topic, I mean -- and it's really not Nasdaq-specific, but just kind of your Nasdaq's place in the world and Nasdaq's place in serving large financial institutions and financial services companies around the world. When you think about GenAI and adoption of AI, what are you kind of hearing from clients? Or what do you think in terms of the kind of the largest hurdles for more adoption of this from other financial services companies?

Yes. I mean, I think, first, you have to have really good governance that you establish very right upfront in how you're evaluating the models, testing the models, implementing them in your company, making sure you have a secure enclave to be able to bring the models in for use in your products and on the business. And we've done all of that. I think it's really important, particularly if you're serving a financial institution because they do a lot of work on you. Like they audit you, they really want to understand exactly how you've deployed the technology. But then the second thing is the discoverability of the models and the auditability of the models. So our Bayesian models in anti-fin crime, we have to prove like complete discoverability of the inputs resulting in the output, which is actually difficult to do sometimes. So you have -- it does hold, I would say, service providers back or technology providers back sometimes from bringing certain models in if you can't prove complete auditability to a financial institution. And so that work has got to be done upfront using advisory teams or client groups that allow you to kind of prove things out and then you go. And -- but I have to say what we do is we have clients that we go to early. We work with them to make sure they can accept the technology. Then we then beta test it out to the clients and then we roll it out. And so it's a little bit more of a concentrated process. And algorithmic AI is kind of -- we already have all those muscles from the work that we've already done. So this next wave is not that different.

Okay. We have a little bit more than 5 minutes left. I want to make sure there's question time. So if there's -- please just wait for a mic.

Adena, what are the incremental costs of going from being a private company to a public company in terms of regulatory, incremental D&O cost, compliance. Is that $20 million for a company annually?

Well, I mean, it definitely depends on the size. I would not put it at that level for most companies. But it depends on the size of the company and the complexity of the company, but I can give you like the major drivers. And then -- so you've got Sarbanes-Oxley. So that's a control infrastructure you really have to put in place, and that includes both audit costs, people process systems. So you've got incremental costs associated with that, probably need to modernize your financial consolidation system and that can be -- that's a big project for some firms. And then you also have to pay for the audit firms. And it depends -- and that's completely dependent on how many controls you're putting in place. So if you've got 80 controls, it's not going to be nearly as expensive if you have hundreds of controls. So that's one. And I think that's the biggest ongoing incremental cost plus the IR team. Usually, IR teams are really small, like 2 to 3 people. Sorry, Matt. But yes, they're small and the tools are actually quite affordable. So it's not -- that's not a huge cost driver. And then -- but then the last thing is the proxy process and the proxies, we're talking sub million, but you probably -- I think on average, I think we came up with somewhere in the range of like $500,000 to manage through a proxy process for a midsized company, but a small company would be less than that.

My supposition is that as we've seen over the last 30 years, we've seen public company count go from 8,000 to 4,000. And I'm wondering what are the biggest reasons why we have seen -- yes, we've had an IPO downturn in the last couple of years. But if you look over the past 30 years, we've seen negative growth in listed companies.

Yes. I think there are a few things. I don't think it's just about the cost. I mean I think that's a component. But I think it's more to do with 2 things. Certainly, there's cycles. So let's just recognize there are always going to be cycles, right? But if you look broadly, I do think that the burden of being a public company today versus 20 years ago is definitely higher. So Sarbanes-Oxley came on about 20 years ago. You also have Reg FD and other regulations that came on. You also have, in my opinion, the Plaintiffs' Bar, you go public and you suddenly position yourself for other liabilities and risks. So you get D&O insurance and other things. And then you've got the proxy process. And I think the proxy process should be more streamlined than it is. And that's an area that we've been really, really -- we've been advocating for over a decade with the SEC to drive a more streamlined proxy process. But that is -- so it's not the -- I mean, the cost is one thing. The time and attention and the sense of, wow, this is a big decision instead of this is a natural progression is another. And then, of course, you have a lot more private capital available to keep the companies private longer as you've seen kind of a shift in pensions and other investment vehicles towards private capital. So those are all things that we care a lot about. And we want -- we've been actually advocating for a long time with the government to try to make some of those burdens more rational to make it so that being public is actually a great experience where -- and it often is. I mean it's a huge growth driver for the company. I can give you all the right reasons to go public, but those are the burdens that they do face.

And final question. Do you think that this administration is more open to reducing that burden for those private companies coming public?

I don't think we'll know until we know who's in the key roles, and we don't know who's going to be in the key roles. So we'll have to see where that comes out.

Verafin adds something around 50 to 100 new clients every single quarter, and it's been doing that for a while now. And so the natural question we get a lot, at least from our seat, and I assume you get it too is if you think about the SMB market, there's probably a saturation point at some point, and it doesn't seem that we're anywhere near that yet. I'm just curious on your take in terms of the penetration left ahead in the SMB market. And even if we get there, like will that even matter for Verafin at that point? And maybe the answer is no, we have Tier 1s in international. But I'm just kind of curious from your seat, if you think about the SMB market that Verafin is penetrating, like how do you think about saturation?

Yes. So I think, first of all -- I'll do it very broad strokes, and then we'll talk a little bit more in detail. But the #1 thing to remember is if we look at the SAM, which is I want to say $8 billion, I'm looking at that against -- yes, around between $6 billion and $8 billion. That half the SAM, which means we have a product that's fit for purpose that is a vended product that banks take. Half the SAM comes from the Tier 1 and Tier 2 banks and half the SAM comes from the SMBs. $6 billion, thank you, $6 billion on the SAM. And so if you think about that just in and of itself, we have only really addressed half the SAM available up until 2 years ago when we signed our first Tier 1 client. And so we have a huge runway of opportunity as we go upmarket. But the second thing to realize is there are about 5,000 banks and credit unions just in the United States that would qualify as SMB, right? So that means that -- and we have about 2,500 total clients in the U.S. and in Canada. So we have a lot of opportunity to continue to sell to the SMB space as we continue to demonstrate the value of the product. And what's really cool about it and to get a little bit more in the weeds, but is as we bring on the Tier 1 and Tier 2 banks, they're very excited about being able to get the insights from the consortia data lake that we've created with Verafin. So we have a consortia data lake that brings all the transactions across those 2,500 banks together. But as you bring in Tier 1 and Tier 2s, they add significant value to that consortia data lake, which then makes the product better for everyone. And that, of course, then makes it so that as we go to the next SMB, we're saying, look, we can offer you even more value. And it makes it so that product is more valuable to our existing clients. that allow us to offer them more things, but also to continue to upsell them over time. So our view is that there's like this beautiful virtual -- virtuous cycle that's created as we move upmarket and penetrate into half the SAM we weren't in and at the same time, continue to create more value for the SMBs that we have and new ones that we could bring on. So that's how we look at it.

Wonderful. Back to the audience, any final Q&A before we wrap up here? Okay.

Okay. Great. Thank you.

Thank you so much.

Thank you very much.