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

All right. Well, we're at 3:00 now so we're going to get started with our next session. It's my pleasure to welcome Sarah Youngwood, CFO of Nasdaq. Over the years, Nasdaq has significantly evolved from being a global exchange operator into a technology and platform provider, serving clients across capital markets ecosystem and really broader financial system as well. During our chat, we'll spend some time with Sarah on how Nasdaq is progressing against your goals and initiatives in 2024 and more importantly, talk a little bit about '25, what you have in store. And thank you for joining us. It's your first time, we were just saying it earlier. It's your first time at Goldman's Financial Conference probably since the time you were a JPMorgan IR.

That's right.

So welcome back, I guess, and it's great to have you here.

And excited to be back. That was a good one.

So I wanted to start off with your key priorities into 2025. So earlier this year, Nasdaq held an Investor Day outlining a number of key medium-term targets. We can go through all of them but at a high level, solutions revenue growth, 8% to 11%, again so you talked about 5% to 8% expense growth. You're well on your way there. You guys seem to be executing quite well on a pro forma base against these. So as you look out into 2025, what are some of the top-of-the-house priority for the team?

Yes. So growth is an important priority, and you're going to see us continuing to do growth. In addition, we also, of course, have the expense and the operating leverage that comes with that, the deleveraging and then on the innovation and the acceleration, AI and the cross-sell. But if I take a step back on growth, I think it's really important to look at growth in the context of what we are achieving. We start with a formation, which is we aim to be the trusted fabric of the financial system. We have established our trust over 50 years as a critical market operator. And we also have the technology that can move 200 billion messages a day. And that's no small feat. And so what we've done is we've been able to actually expand our mandate to be able to serve as a global tech company that has more recurring revenues, higher growth by actually continuing to leverage those skill sets but really adapt them into data, workflows, innovations. And we are already performing, as you just mentioned, I appreciate that. For example, the Index business is a 6x over 7 years. So that transformation is very much happening. You'll see us executing also on the Calypso and AxiomSL businesses. That is very much in the mid-teens as we have told you to expect. And Financial Crime Management, a great opportunity where we're well positioned, and that is in the mid-20s. So when you take all that together, we've got a $31 billion SAM. We've got an 8% growth of that SAM, 10% penetration of that. And that enables us to continue to fuel that growth, which by definition, is very much the first priority of next year but while continuing on the synergies, the deleveraging, the innovation and the cross-sells.

Got it. Okay. Let's spend some time on probably all of these over the course of the next 30 minutes or so. I do want to start with Adenza. Obviously, it was a big deal for Nasdaq. You closed the deal about a year ago, so you're well into integrating the transaction now. You talked about Adenza's ARR up about 15% year-over-year as of 3Q. So to your point, kind of right in the middle of what you promised the market. Can you update us on where you are in the integration process? What's been accomplished so far in 2024? What's coming up in '25? And one of the questions that I get all the time from the outside looking in, what are the -- some of the most important KPIs we should be focused on looking out into next year?

Yes. So what we're seeing on Adenza, first of all, thanks for saying it, we're performing well. We're executing. It's a really strong case of people, systems, process, all of that just like being very diligently executed. And what's even better than that is that our clients are seeing us as one team. And they have complex problems and we can help them on solving those most complex problems. If you look at the specifics and to get to some of the metrics, on people, the first thing we did was we put together a leadership team. And that was like early on, like literally within a month of closing, you had clarity on everything. We also put in the incentive plans because if you want to achieve anything, you are going to need to have the incentives lined up. That goes back all the way to January. Then you go to systems, you need the integration of Salesforce. We did that in our integration. We're 6 months ahead, so that was done in the beginning of the second half of the year. And that enables us to not just look at like offline dashboards but you have all of the data. We started doing campaigns and tracking all of those campaigns very early, and we're seeing good performance of those campaigns. We expressed it to you also in terms of like the pipeline. And so what is the percentage of the pipeline that is cross-sell that is already over 10%? That's an important marker that tells us that we are on track toward the $100 million-plus that we have. We also, of course, have all of the financial dashboards, synergies dashboards to make sure that all of the efficiencies are tracked very detailed and you've seen us on that delivering ahead. So we're already at 80% achieved on the synergies with those actions contributing to the operating leverage of this year already. And then you are seeing the deleveraging also being ahead.

Yes, great. All valid points. Let's get maybe a little bit more specific. Adenza's growth overall is tracking up somewhere in the high teens, I believe, for 2024. And this is just revenue growth, the way the market will obviously look at it. AxiomSL a bit slower, Calypso a bit higher. A lot of it is timing and just accounting recognition of various things. But as you look out into '25, '26, how should we think about growth for both of these businesses?

Yes. So the first thing I would want to anchor you in is medium-term outlook. So that medium-term outlook, midteens for the ARR and low to mid-teens for the revenue. I would say in general, that's always going to be true. And what we feel very good about is that we gave you information at the time of the closing of the deal, and we are reiterating that information and we keep reiterating that information. Then you have the nuances, and you talked about some of the accounting nuances. The first one is -- and it just applies really to Calypso. The only thing that is not ratable now is Calypso. But that does mean that if you have a renewal, the timing of that renewal matters to the revenue and not to the ARR. So look at us and judge us on ARR for Calypso because you can celebrate the very elevated revenue growth that we had in the first half of this year in Calypso, but at the same time, that means that at some point, there is an offset somewhere else. And then the second thing I would note is professional services fees, which is for the Adenza business is something like a 20% part of the total revenue. That can be more lumpy and we have seen a bit less of that on AxiomSL this year. And then lastly, and that is not in the Adenza businesses, but we remind people that on Market Tech, we also had a pretty lumpy item for this year which goes away for next year.

Yes. Okay. All fair. Let's expand this a little bit. I want to talk about just banks as a customer segment because it cuts you guys in a number of different ways, but also overlaying that with the current environment and, of course, the change in administration. There's a broader expectation that deregulation is coming or, to some degree, not as intense of a regulatory backdrop for the G-SIB banks and maybe some of the smaller banks. In addition to that, there's a view maybe there is going to be a bit more bank consolidation. So let's talk about both of these themes and how that could impact sort of various parts of your ecosystem. There's some natural businesses like Verafin, obviously, serves smaller banks. Axiom, you guys work with a lot of larger banks. So how do you think about that potential change in the context of your growth opportunity?

I think when I think about all of Nasdaq, this is going to be an administration that is supportive of capital markets, of growth of an economy that is supportive. And in that sense, I think that you have a backdrop that is positive. You also have the specifics of smart regulation. I think they are going to want to use a lot of like we want to be efficient, we want to be smart, we want to be well calibrated. And we very much benefit when our clients benefit. We also benefit when there is change, and I think we can expect change from this administration. And if you look at the very specific item that one could say like Basel III Endgame, is that going to happen or not happen? First of all, there is a possibility that it could be well calibrated rather than not happening. But in any case, those are very small numbers in our pipeline. So when we look at the opportunity, if our clients do well, they could have more budgets to do more with us. We are a solution that is more effective, cheaper, well enabled in terms of cloud, AI, et cetera, across the board. And we certainly don't expect for deregulation to enable more financial crime or to enable less asset and liability management. We play in places which we believe are important and where smart regulation is going to be good for clients and good for us.

Got you. Okay. How does bank consolidation impact? I know it could cut it a number of different ways. But based on your experience with some other bank deals maybe from years ago, how -- which way does it typically cut? And I'm not sure if it's easy to summarize but how would you frame that?

Yes. So I'll take it by business. If you look at the Verafin businesses, that's probably actually a tailwind rather than a headwind because we charge by the asset size, and it's also a product that is additive. So in the same way that you would probably not remove a cyber help, you're not going to want to take the risk on something which is proven to reduce your wire fraud or your check fraud or your efficiencies in dealing with some of your AML. So we feel very good, and we've had that experience in the 2023 events where this was very well digested by our organization. If you look at it in AxiomSL, it is the leader and it is very efficient and modular. So you're very rarely going to find an opportunity to do something more efficiently in the context of an integration than to just basically do AxiomSL because it's easy to implement, it's modular, and it's going to serve you where it serves you and it doesn't need to be the backbone of your whole infrastructure. So it's okay for it to deal with one thing differently than another one. So we think this one is well positioned, too. You could have a little bit of 1 plus 1 equals, is it fully 2? But then because we only have a 10% penetration, you have the ability to do upsell at an attractive way that applies, that enables you to have a winning proposition for both the client and for us. Calypso is maybe the one where I would say depending on who the acquirer is, if there was a competing system, you would potentially see something. But if they have a choice in the context of the acquisition, I am convinced that they will want to do Calypso, which is more modular, more cloud oriented. And so when we look at it like in the totality of those products, at the end of the day, first of all, it will take some time for bank M&A to happen. And when we size it and with the sensitivities, we don't see anything that would be material to talk about within [indiscernible]

Got it. Okay, that's really helpful. Let's talk about fintech a little broadly and the way you guys articulated growth for that subsegment or segment of various subsegments within fintech. You talked about 10% to 14% revenue growth, and you expect to be at the upper end of that. Once you get a couple of years out from the Adenza acquisition, some of these revenue synergies come through. In one of your earlier comments, you mentioned that integration is going well. It sounds like $100 million of cross-selling revenue still clearly on the table. You feel pretty good about that. What's the timing around that? Just give us a little more color where you are in terms of cross-selling and actually recognizing some of these revenue synergies.

Yes. So I'll start with our clients, the voice of customer and we do a lot of voice of customer all the time is very positive. And so the clients are seeing us coming together and being additive to what they can do. And so they think of us now in a much more open-minded way in terms of like what else can you do with me? And that bodes well for the cross-sell. When you look at the timing of the cross-sell, there is a long sales process. And that's not new news. It's not longer than expected. It's just as expected. But just as expected meant that we always expected the progression to be back-ended. And so it is healthy to talk about it in terms of like percentage of the pipeline, in terms of like the number of deals, the POCs, the voice of customer, the feedback we're getting from customers, but the dollars of revenues immediately are not very large yet.

Got it. Okay. Let's hit up Anti-Financial Crime for a couple of minutes. It's your fastest-growing business, mid-20s medium-term revenue growth targets. In '24, you're tracking a little bit below kind of 23-ish percent range. So still within the range, a little bit below the range. Can we talk a little bit about what kind of factors contributed to slightly slower growth this year? And how are you thinking about it next year?

Yes. So I'll start by giving like a little bit of background on like Financial Crime Management is in the mid-20s because you have a $3.5 trillion opportunity, where 15 years ago, Verafin started, AI and cloud under the PATRIOT Act has the ability to do consortium data in a very pure way. And that enables us to give clients the benefit of that. And so we're the #1 ranked in the space. And when you look at it on, for example, a wire fraud, you can have 25% less sales positive and 250%-plus fraud costs. So it's a very compelling product which also happens to not be very expensive. And so when you take all of that together, we have this mid-20s opportunity. And what enables us to sustain it is to look at it through 3 lenses. First of all, the small- and medium-sized businesses where we still have ways to go, 2,500 banks. And that's where you're seeing us go a little bit higher in the spectrum. That's a little bit part of what we've seen this quarter. That's one of the factors where as you go to higher tiers, you extend a little bit of time to value, and that can create a little bit of timing gap. And then the second leg of growth is your Tier 1s. And the Tier 1s are super exciting because if you look at a TAM of $11 billion in that space, that TAM is half in the Tier 1s and Tier 2s. And we're all at effectively 0 or marginally 0 in terms of revenue recognition. So our penetration there being where it is, we have great growth opportunity. But now again, on timing, we had some strong professional services fees a year ago with therefore a bad comp and again, a little bit of timing there. So I would say nothing fundamental that has changed, but that explains those pieces. And then you have the third leg of growth. Again, it takes several legs of growth to stay in a sustainable way in the mid-20s and that is international. And where we have one international and that is landed, but we have several POCs and we are developing strategies which we believe will be very well received.

Great. Okay. Let's talk about another really fast-growing business for you, which is Index. We spent quite a bit of time on this. You mentioned that earlier today as well. Clearly, lots of structural underpinnings in that business, and Nasdaq occupies an important role there. A lot of it has been beta, though, right? In fact, I just look at the -- and I love the way you guys talk through your revenue bridge, what's alpha versus what's beta. Markets are up, a lot of flows coming into the Qs. That's all great news. How are you thinking about the alpha component? How are you thinking about either new index creation or expanding the customer base for the existing indices that are outside of the Qs, trading products against that? So what else are you doing to continue to drive growth in that business outside of just the beta?

Yes. So first of all, nobody has seen 6x in 7 years was just beta. And so we definitely have had a lot of alpha in there. And we have alpha last quarter when we had $62 billion of inflows. We also have 35 new products that we did last quarter. The way we play that strategy is across -- and we're investing fairly heavily in Index. We see lots of opportunities in Index. We think that it's very fruitful. So there are 3 places. The first one is going to be new products, the second one is going to be international, and the third one is going to be institutional. So new products, as I mentioned, 35 last quarter. We always give you a lot of like flavor and it is NDX and non-NDX, and we are seeing a lot of like appetite from our partners, asset managers to co-create with us. And so that has been very productive. Of the 35 on international, 20 were international. So you're seeing that as a big part of how we are diversifying the platform and expanding. What's great about Nasdaq is it's valued as one of the top 100 global brands. And that global factor means that when you have the brand value of Nasdaq, it's not just brand value here in the U.S., it's a brand value that is global and that is supporting our growth. And of course, we also have very strong technology, which is being deployed and that enables us to be a great international partner. And then institutional, $700 billion of annuity space and we've got a 6% penetration. And so if you think about the need for the insurance industry to be more invested in Nasdaq 100 or any of our other indexes, it's a lot more than the current level of penetration. Therefore, a big opportunity. Seven of last quarter's new products were with insurance companies. So we have a pretty dedicated effort there, and we're seeing that as being well received also.

Great. Okay. Let's talk about some of the cyclical businesses for Nasdaq. Listing, probably the first one that comes to mind. It's been a bit slower. A couple of things going on there. Obviously, we haven't really seen a lot of IPOs in the last 2 years. On top of that, you were seeing some headwinds with respect to delistings that impact revenue growth for you guys this year. To start, I guess talk a little bit about the pipeline. There's a lot of enthusiasm around IPO markets opening back up into 2025. What is sort of the expectation? I know it's going to be a slow build. It's not like there's a lot of IPOs and it all hits revenues next quarter. But that pipeline and sort of probability of that pipeline coming through, what are you guys seeing on the ground?

Yes. I love that you're asking about the probability of the pipeline because what we're seeing, actually, if you look at the filings, which you can look at, it has not really changed tremendously for the probability of the pipeline as well as the quality of the pipeline is really special. The other thing that you're not seeing in the numbers is the pitches. And there was just a lot of activity around companies that want to go public that may be sponsored back and where the sponsor was like, "I'll fund it." And now they are like, "Okay, finally, I can use the public capital markets as I had expected." It could also be not private equity related, and we're seeing some great companies that have been private for a while and that are catching this market as, okay, that might be the right time for us. And so we're seeing a very healthy pipeline. We're seeing our position at Nasdaq as continuing to be very good. Of course, we have had a 75% win rate, and so we're very well positioned. We are seeing the flow. You're seeing the extension of the window into this year. So we're already fairly late in the year, and you still have some things that are planned on happening. And then first quarter, second quarter, pretty robust. But at the same time, making sure that like you can decide in a day, okay, now the market is there, I need to go. You need to have the time to value S-1. Sometimes you might decide, I want to wait for my full year numbers. That puts you into the second column. So there are time lines to everything, but in general, very healthy, very supportive, a lot of dialogue, and we feel very well positioned.

Got you. Great. Not directly related to that, but a healthy end customer base should also be helpful to some of your other, I don't want to call them legacy Nasdaq businesses, but let me just call them non-fintech recurring part of the solutions revenue stream. One thing that comes to mind is Workflow and Insights. It's been slower. One of the reasons it has been slower is obviously the customer base has been struggling, to some extent. To what degree an easier capital markets backdrop, more companies going public, more IPOs could actually enhance the Workflow and Insights part of the business? That's the one that feels like it's the farthest below your targets in terms of growth and what I guess could that mean for growth over the next year or 2?

Yes. So I'll start with what has performed well even in this environment, the business of eVestment has been a good business. The business of Data Link, which is the nonregulated data has performed well. Even actually the data piece that's regulated because of international expansion has been quite healthy. In the pieces of like IR Insight, Boardvantage, nobody invested in those products if they didn't want to really be public. And so you definitely have more of a reason to want to invest in your IR function, in your secretary of the Board function. And then that also coincides at least for Boardvantage for us where we have put a lot of investments in our products but also in IR Insight, that's the case, where we have gone from, for example, migration to the cloud, which is great and very important but potentially not features and functions. And so we are in a place in a cycle where we have good features and functions, so we feel pretty bullish about the fact that those are good products. But at the same time, you can now caveat that with the fact that a lot of those are 3-year cycle because they're for 3 years. And so great sale and nothing in the revenue for a long, long time. And so this one is going to be the most delayed in terms of corporate solutions to come through. And then ESG, I would say, is not seeing tailwinds yet.

I got you. And is that structure consistent on the forward as well? So when the company goes public on Nasdaq, IR solutions or IR function and Boardvantage, like that is also coming in with a discount for 3 years and no fees for 3 years? Or there's room to change that where companies that are going public might -- if they want to sign up for the service, they might have to start paying for that right away.

Look, there are different products where you pay or you don't pay, so it's not an absolute statement. But in general, it is part of the value proposition. And we end up having a very good value proposition for clients when they go public, so we're not trying to change that value proposition.

Got it. Okay. Let's talk about retail for a minute in terms of more of a thematic and a bit of a macro trade. But retail trading has been incredibly powerful and feels like it's accelerating. Talk a little bit about how you're thinking about monetizing that. I know we don't spend a lot of time talking about the kind of the exchange businesses for Nasdaq. But how big an opportunity is that? And I'm really thinking more from a data access, connectivity perspective, a more vibrant, a more active retail investor. What does it mean for Nasdaq? Kind of how do you take advantage of that?

Yes. We think retail participation is incredibly important. Actually, if you look at what is differentiating the U.S. and the Nordics business from the rest of the world is retail participation. And so that participation is increasing. We do believe that it is structural. It's not -- and it's also global to a degree. So we like seeing that. And it's important for that participation to be supported by different ways, for that retail participation to be expressed. And so in the options market where we have a 30% share in the U.S. and where we are the clear leader, you have a lot of that retail participation that happens on exchange. So that's positive for us. And then when you look at the equities piece, that's typically going to be done off-exchange, but then that becomes a data opportunity, and we're well positioned for that data piece. When you look at the connectivity again, it is good for us to have done the investments, to be well positioned to have that space that we have secured in NY11 because that is supporting our clients who are facilitating those retail flows. So again, we are participating in the trend, and we think that it's a structural trend. And it's one of the things which are being supported right now.

And is there a pricing opportunity or a mix opportunity from retail platforms? So in other words, when a retail investor becomes more active or when Robinhood is pursuing a bunch of new customers, those that are taking market data, does that come with a different price point and therefore, slightly more accretive than the back book? Does that make sense?

Yes. And so if you're talking about the general data, it's a regulated data. And so it's subject to that regulator data and the pricing that we put there. To the extent that more of a hedge fund, for example, would take some nonregulated data, that's where there is more pricing benefits.

Got it. Okay. Including like active retail, for instance, if somebody takes the more proprietary data?

Yes. If you end up doing like more of the -- I'm expressing a view with derivatives, that's where there is a bit more.

Understood. Great. Okay. We have about 5 minutes left. So I do want to hit on 2 topics, one being expenses. You guys have executed quite well so far this year. You're targeting 5% to 8% expense growth over time, but you're still benefiting obviously from some of the synergies from Adenza near term. You said you've actioned to about 80% so far. I'm assuming not all of that is in the run rate for 2024. So just help us maybe unpack how much of what you actioned will hit in '25 on a run rate basis? And when does the remaining 20% hit the P&L?

Yes. So if you take 80% actioned and you compare that to the 2% that we have given to the year, you would say, "Well, that means that there is more to come in 2025," and you'll be right. And so we told you that you have approximately 2% impact. So that would mean that the growth rate '24 versus '23 of expense is benefiting by 2 percentage points because of the synergies and the efficiencies that we're generating there. So that's something which is helping us this year on the operating leverage, and it is also something which will continue to help us for next year on the operating leverage, with a caveat which is that we are organic growth focused. And therefore, we are also reinvesting some of that if we see some attractive organic growth opportunities. And so you can't take all of that and yield it to the bottom line.

Yes. Okay, fair enough. Capital management, similarly to expenses and revenue, you guys have done a really nice job getting leverage lower towards your target levels. I think a lot of folks in the room also really appreciate a little bit of a buyback as part of the Thoma Bravo secondary earlier this year. So talk to us a little bit more about expectations for share repurchases in the next 12 to 18 months. Leverage level gets pretty comfortable fairly quickly here. So what are the expectations there?

Yes. So we have a lot of free cash flow. When you start with a lot of free cash flow, that gives you the ability to do more than one thing, which is what we've done this year. So organic growth, as I just mentioned. And we do have some really attractive opportunities that are in front of us and that we are funding very well. The second thing that we're doing is progressive dividend, and so continuing to execute on that. The third thing is then a dialogue between share repurchase and the additional paydown. And we have prioritized the paydown while doing the employee dilution for this year. And we think that, that was important to always do the employee dilution. But when you do the math, EPS accretion dilution neutral on the paydown versus the shareholder dilution versus -- sorry, the employee repurchase. Then you look at free cash flow accretive to do the paydown and then you look at doing the multiple. And we did a fair bit of regression and it's very, very clear that when you are above 3x, it's hard to get paid fully for the level of growth that we generate. And so we are factoring that in our decision-making. That being said, we are reserving optionality, and we will continue to do so. But so an organic growth path with a focus on deleveraging, that's going to continue but with reserving optionality.

Once you get down to the appropriate leverage level, the way you talked about, is it fair to assume that buybacks will become a bigger part of the story, given how much cash you guys generate? Really high cash flow conversion and, to be fair, an important source of earnings growth potentially.

Yes. Look, we certainly like share repurchases in general. We think that it's a very big part of the equation. And if they all have an organic growth story, it's a super important part of the EPS and return on invested capital story for our investors.

Okay. Great. Well, I think we'll leave it there. Sarah, thank you very much. I appreciate your time. Thank you for coming to the conference.

Thank you.