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

All right. For important disclosures, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Good afternoon, everyone. Thanks for sticking with us here. I'm Mike Cyprys, lead analyst covering brokers, asset managers and exchanges for Morgan Stanley Research, and it's my pleasure to welcome Sarah Youngwood, the CFO of Nasdaq. Many of you know Nasdaq to be a global exchange operator, but in recent years, has been transforming the business through a series of acquisitions to become a technology and platform provider to serve corporates, investment managers, financial institutions as they navigate and interact with the global capital markets and broader financial systems. So we're thrilled to have with us Sarah here today to discuss the transformation. Sarah, welcome.

Thank you.

Thanks for coming.

So why don't we start out big picture, a little bit of a level-setting question for you -- for those that are a little bit less familiar with the Nasdaq story. To my earlier point, Nasdaq has been most recognized for its exchange and listings brand, but in recent years, has been transforming into a fintech and financial services broader provider. And Sarah you spent many years at JPMorgan as an executive. You joined Nasdaq, I think it was a little over a year ago, 14 months, maybe roughly there. So just curious to hear your perspective on Nasdaq's evolution, where are we headed over the next 3 to 5 years? And if you could also maybe just touch upon a little bit how you're allocating your time these days?

Sure. So I'll start with 2017 when Adena became the CEO just to start somewhere. So at that point, we had Adena spending time with clients. And what you heard from clients was you are trusted, you have innovation on your great exchange, you are a point solution to us, you could do more. And you could become this holistic partner. And so we went on a journey to leverage what we have and to do that. So what did we have? We had a brand that stood for trust and innovation. If you look at what we have today, 200 billion messages exchanged a day just for scale. That's very difficult. And every day, we open and close the market. We have validated and we already had validated in 2017 that we can move data at scale, that we can do it in a very resilient way. Those things we already had in 2017. The numbers are bigger now than they were in 2017. But that gave us the platform to actually then go do more for those financial institutions and other clients to become the trusted fabric of the financial system. We were already a counterparty. We were already doing some of the regulation, for example, surveillance. We were already doing some [ SaaS ] like exchange technology for others. And at this point, we're doing much more of that, which then opens for us 80% of this point is in our solutions. We've got solutions that have a TAM, which is very large being $79 billion. So that's the total addressable market share. And the serviceable addressable market share is $31 billion and growing at 8%, which then gives us the ability, when you look forward, to have that [ anchor ] the bottom of our medium-term outlook growth rate. We only have 10% penetration of that SAM. Therefore, we have the ability to go 8% to 11%, so continuing to penetrate into those growth rates and then adding operating leverage and good free cash flow conversion to that. And so excited for the opportunities ahead. In terms of like where I spend my time, I spend time, first of all, on what you would describe as the CFO's job, which is the operational and strategic direction of the firm, making the right decisions, executing on those decisions, and that's including a broad platform, which I have with me and also leveraging technology, data and a fabulous team. And the second part is what we're doing today, spending time with investors, making sure that our story of transformation and growth is being heard. And the third one, I think, is maybe a bit different because, as you mentioned, I come from having been a client. So I have a lot of empathy for clients for having been both a bank CFO as well as a leader in investment banking. So I have those perspectives. So I can actually be a sounding board to our clients and add value, whether it's on the products or even in some of the customer relationships because those are customers that I've had for years.

Great. So you are involved in some of the sales processes?

I'm, too yes.

Great. Maybe just diving into Verafin, start there, your Anti-Financial Crime Management business. That's the fastest-growing revenue stream at Nasdaq today, growing at 20% plus annually. Maybe talk a little bit about some of the demand trends that you are observing for the Verafin business globally. Where do you see some of the most pertinent need for cloud-based AML solutions as you look across different jurisdictions and regulatory backdrops?

Yes. So just to put some numbers around the opportunity or the threat. You've got $3.1 trillion of issues around AML. And when you also have a $500 billion of that, that is a true cost to the bank being the fraud cost or the scams cost. So once the banks have those costs, regardless of regulation, what they want to do is reduce those costs. And so we've got products which are really around every type of fraud other than the credit card fraud. So wire fraud, check fraud, the real-time payment fraud, you can go on and on. And what we are able to do is consortium use data, which cannot be replicated without actually 1 bank by 1 bank adding that data to the consortium. We have it done under the Patriot Act. And we do that -- now that gives us access to close to $10 trillion of assets. So what we can do is generate an ROIC for our banks. So we're very focused on our ROIC, but our bank clients are very focused on theirs, too, as they should be. And so to the extent that you can pay for a technology that reduces your fraud cost, that's the easiest thing to sell to your senior management team because there is a reality, which is if I give you $100,000 and you can save me a multiple of that immediately in the first year, there is no reason why I don't want to do that. We also have -- this is done all cloud-based, all AI. It's also leveraging Gen AI, which I think is very promising. And all of that enables us to help go as fast as the fraudsters which enables the banks to catch up without really changing their own technology. We can integrate with 70 core banking systems. We're very easy. And we also don't need to displace anybody. We're happy to be added.

Maybe jumping out a little bit, let's talk about AI since you did reference that. Maybe talk a little bit about how Nasdaq is leveraging AI across your different businesses today, maybe starting with Verafin there just because it already is sort of an AI at a core user, if you will. Where are you along the journey? And how do you see that progressing? What's next to come for Nasdaq?

So think about AI in 2 pieces. You've got in the products and on the business. So in the products is a part which I think differentiates us because we have already some Gen AI that is in production. We just talked about financial crime. And that's an example here, for example, where we have a copilot that can reduce the time spent on reviewing alerts by 90%. So the beauty of that is that it's really data integrated in workflows that helps the human be much more efficient. It's exactly what AI promises to be. And we've already put that into all of our -- I mean, 2,000 of the 2,600 of our clients and got 1,000 using it. We've got a very strong engagement on 80% of them. So that's such a very good example of how we can differentiate ourselves. And it's also reflective of our philosophy, which is we didn't like charge separately for that. We basically gave it to everybody. And then we can, in our net retention benefit from both the moat that we have created as well as the ability to price for the benefits that we give to our clients in reducing costs, both broadcast and operational costs. That's like a good example, but we also have AI in, for example, Calypso, we have a product on XVA, which is some liquidity calculations. If you can use AI to do less calculation, that is very efficient for the bank, and again, saves money for the bank, also simplicity of the operations, reduces errors. The other thing that we do is in the Capital Access Platform, a lot of summarization. We use it, for example, in our Boardvantage. And so those are very high-quality summaries that are tailored to those type of documents, leveraging the partnership that we have with Microsoft on that. We have the ability to also summarize in some of our IR documents for the IROs. We also have the ability to look at some ESG applications when we look at peers. So we have it in a lot of our products. Then on the business is something which is part of the efficiencies and productivity gains that we can gain. And we've gone from what I would have called explorations to, at this point, implementation, execution. And so included in the $140 million of restructuring that we're doing, we have a portion that corresponds to POCs which have now matured to the point of being actually embedded in forecast, and therefore, being part of what we can present to you guys as part of our expense efficiencies.

Just -- to dig in just a little bit there, I just want to make sure I heard right. So 1,000 users, is that right, you were mentioning with the Verafin one, with the Copilot tool? So these are clients?

Clients.

That are using it?

Yes. So if you think about 2,600 banks, 2,000 have it and then 1,000 are using it.

Interesting. And as you kind of look ahead over the next 3 to 5 years, just any sort of perspective on sort of like what's next to come as you think about AI tools, adoption, other ways to sort of bring other tools to the marketplace?

Yes. We think it's a very important way to continue to build both protection of our business as well as differentiation of our business. One of the things that defines us and that has been part of our journey and what we have insisted upon is we are innovative, and we are building whether it's with Amazon or with Microsoft, that I just mentioned, tremendous differentiation. And so we are early adopters of technology. And we ensure that we give the opportunity to our clients to effectively benefit through our innovation capabilities. And so we are going to stay true to that. We're going to continue to bring them that innovation, so that they can continue to stay with us to operate the transformation, which legitimately they wanted to operate. If you look at it in stats, now 93% of the large banks believe that they should be in the cloud. That was just 5 years ago, 52%. 22% of them believe that they should be using a provider, an external provider like us for regulatory or those type of services. And so as long as we maintain the leadership, which we have, gen AI is part of that. We're very well positioned in terms of those trends.

Great. Maybe turning to Axiom. That's your software solution for regulatory reporting, risk and compliance, talk about the competitive landscape there, how Axiom differentiates versus others? And maybe talk about some of the scope for adding additional services and sleeves and modules.

Yes. So AxiomSL is -- think about it as all of your regulatory needs but in a very modular way. So if you are a financial institution, we can cover you in 55 countries with 110 regulators across 5,100 (sic) [ 5,000 ] reports. If you were to build that yourself, that's boring, it's not differentiating. And it's also prone for errors. And so we're very well respected around the world, Including by regulators for having done a good job doing that. And therefore -- and we've done it now in a cloud-based and very modular based set of capabilities. And so it's very difficult to think of somebody who can do it in a more efficient way than we can. And therefore, we continue to be able to accompany our clients in their different journeys, whether it's different products or whether it's different geographies because it's always easier to think about an add-on with us then to think about understanding that particular set of regulators and needs for a region.

And so when you think about the competitive landscape, maybe just talk a little bit about who you're bumping up against as you're looking to win more sales or win more modules? And how do you think about expanding out the offering as well for Axiom?

Yes. So on Axiom, they are -- if you look at each market, you could find somebody who is doing something like Moody's has some pieces or S&P has some pieces. But you're not going to find somebody who is end-to-end and cloud-based and as modular as we are. You have most of the GSIB users, it all started with the stress testing and then it added from there. And when you have that strong base, you also have the ability to -- for the -- to continue to expand that into, for example, some of the broker-dealer community, is going to have some needs and then we can set those types of things, too.

Okay. And with the Adenza acquisition, right, that brought you Calypso as well as Axiom and then an earlier acquisition of Verafin, maybe talk about the opportunity there with cross-sell across this entire fintech business. What's been the uptake so far? What sort of anecdotes or traction are you able to share with us today?

Yes. So we're trying to share early indications that we are on track and in fact, well positioned towards our $100 million plus by year-end 2027 of revenue target. So this is something which we're very focused on. And one of the leading indicator is how many have you had? The answer is 17, 11 last year. And the other question is how much of your pipeline is it? It's above 10%. We did give a little bit of background last quarter that, in fact, it was even higher than 15% last quarter, but because some of those deals were pretty mature in the pipeline by the time they exceed the pipeline, which is a good thing. And in terms of becoming revenue or at least bookings, you end up then resetting. And as long as you are above that 10% rate, then we believe, based on our math, that we're well positioned towards that $100 million plus. So those are some of the artifacts. We also really have been able to build that culture. So whether it's the cross-sell campaigns, the incentives, the fact that we have merged the instances of sales force between Adenza and the Nasdaq, we were able to operate. And what gives me a lot of comfort as the CFO is that I'm saying for sales that are spanning geographies, products and different types of clients. So you are seeing that it's a broad-based theme that is not just embraced by 1 particular piece.

Just to make sure I heard you right on the numbers. So it's $100 million of synergy targets, which you had previously communicated by '27 for which you've executed on 17. Is that correct?

No, no, no. the 17 was a number of deals.

Number of deals.

Yes, yes, yes.

Number of...

Number of cross-sells. Yes. Yes.

Cross-sell. Okay. 17 cross-sells so far.

Thanks for clarifying.

And then when you look at the pipeline, about 10% of the number of deals in the pipeline.

10% -- yes.

Number of deals. Okay. Not dollar millions. I just wanted to clarify.

Correct. Yes.

Great. Before we wrap up on fintech, maybe we could just talk for a moment about the new administration.

This 10% is actually dollars.

That's dollars. Okay. Thank you.

Yes.

Just wanted to keep $8 to $10 dollars...

And because actually, some of those deals are a bit bigger than some of the other pipelines.

Okay. Before wrapping up on fintech, maybe talk a little bit about the new administration. We've seen the administration here in D.C. They're moving very quickly on policy decisions. What's been the reaction from your customer base at Nasdaq?

Yes. So first of all, it's still...

Early.

Just 1 month more early days. And the first thing I would say is that we have very good and interesting deals that are in the pipeline, and we have a very good dialogue with our clients. And the second piece of it is you have to think of us as being diversified and also globally diversified. So you're going to have different dynamics across that. So in many of our solutions in fintech, in fact, there was no impact on this environment. If you're looking at financial client management, if you're looking at surveillance, you're looking at a lot of demand, given the complexity that we've talked about, given how much of a priority it is for our clients. If you're looking at capital market stack, there are some conversations, especially in the U.S., which -- with clients that are dealing with a fair bit of information coming from the new administration. And so as a result, we are seeing some technology decisions and the timing of those that are recalibrated a bit and that can have some sales delays related to that. But we're not seeing any material changes in the demand environment. So overall, still early days.

And that's the Calypso, one with...

Capital Markets.

What's driving that?

Just the amount of uncertainty that is coming from what those particular clients are seeing, but it's very specific conversation. So right now, you would think of it as just specific and not material impact to the demand.

Okay. Maybe shifting over to listings. Maybe you talk a little bit about what you're seeing now in terms of the IPO pipeline and how you see the cadence of that unfolding this year.

Yes. So you are seeing -- and we're seeing that in our IPO both index that the elements are starting to be open for the reopening of the capital markets. We had already said second quarter. And so I would say, somewhat disappointed that not everything has happened in the first quarter. But for us, we have been pretty clear with that. First of all, it takes a while to get prepared. Second of all, it takes usually having a full year to wanting to go public. And we are seeing that there is some activity that has started to happen. And there was a very nice pipeline that is set up for the rest of the year. We are continuing to have the very strong win rates that we have had. So we talked about an 80% win rate. And you are seeing that right now, of course, there is a little bit of choppiness in the market. But overall, nothing that has changed the general appetite to do the work, get ready. So we think that the environment remains very promising, especially starting in the second quarter.

Okay. While we're talking about markets here, maybe we're talking about 24/7 markets or maybe 24/5 before we get to 24/7. So just wanted to get your thoughts on how you see that developing in the U.S. What hurdles need to be overcome? What's the potential implications for market infrastructure? And how are you thinking about that for Nasdaq and the industry too?

So what we are seeing is Nasdaq has always been the big kind of capital markets. And the U.S. has provided to market the deepest, most transparent capital markets. And this is something which we're all very proud of. So certainly, as you have accelerating technologies, as you have accelerated demand, that's actually a very good thing for people who have the ability to do a lot with their technology. And so we power 130 marketplaces for the 20 that we have. So we invest a lot in our exchange technology. So from that point of view, we're very well positioned. We also really, from an ethos, believe in access and transparency and in global access. So from that point of view, we very much support the efforts that are ongoing. And then when you look at it more specifically, you do understand why with more of the global participants wanting to be participating in the U.S. markets, including our Nasdaq market, that you would actually see that they want to do it in their daylight. That makes sense. And so then whether it's 24/5, 24/7, different things. You do need to make sure that it's done with good governance. And so we're part of some committees, some discussions with regulators, with others to make sure that as it happens, it happens with the right structure and market structure. So that it continues to provide the transparency, integrity and liquidity, which we all stand for.

Do you have a sense on the time frame for that? Is that a '25 event?

We don't have a sense. It is really more about agreeing on which proposal makes the most sense rather than going.

Okay. And crypto has emerged again as a topic of conversation, particularly under this new administration. We've seen an uptick in overall activity levels across crypto. It's been some time since we've approached this topic with Nasdaq, but just wanted to get your latest thoughts on how Nasdaq is thinking about playing a role in the digital asset ecosystem.

Yes. So I think of it in like 3 portions. The first one is we're a provider of infrastructure to the financial system. So we're going to do just that with crypto. And we're already doing that. In the fourth quarter, we powered 3 marketplaces. So we entered into deals for 3 marketplaces that are crypto marketplaces. The second part of it is you've seen us launching with a great partner, BlackRock IBIT, which is the largest ETF in that domain. And then we followed up with being also the first on the options that corresponded to this one. And then you could really see many more of those assets where we would provide the transparency and the infrastructure behind it. So whether you're talking about index or baskets or futures, you have a lot on that can be built around that and where we are very well positioned. And then the last piece of it is there was an important change, which was related to custody and whether the crypto or liabilities for the banks. When there were liabilities for the bank, that made it really difficult for the banks to incorporate that into their infrastructure. But to the extent that is passed, then you are able to think about Calypso, about surveillance as integrating this into the banking system, which creates, again, infrastructure opportunities for us.

So potential more business for Calypso and Axiom is you're thinking about...

You could see some regulation around it, but probably it could be crypto financial crime management, but surveillance -- right now, the Calypso and surveillance also.

Okay. Why don't we talk about capital allocation? We have a few minutes left. You've delevered to 3.6x gross debt to EBITDA. Congratulations on that.

Thank you.

It's come down meaningfully and also well ahead of plan. I think you expect to hit 3.3x gross debt to EBITDA this year. I just -- how does your capital allocation evolve once you hit 3.3x? What happens from there? And how much lower do you want to take it?

Yes. So very happy with the 3.6x being a year ahead of the expectations. And 3.3x is a milestone, not a target. So we are going to continue to think about the different pieces. One of the things to calibrate with is we've got $1.6 billion of free cash flow as of last year. So if you take $1.6 billion of free cash flow, you can do more than one thing well. The first thing we do, the $1.6 billion is after our CapEx. So we, first of all, before we even get to $1.6 billion support organic growth. Then we have a progressive dividend. We certainly do employee dilution offsets. And then you get to, okay, what do I do next? And so we have a framework which thinks about EPS accretion/dilution and of the share repurchases versus the deleveraging. And if that's neutral, which for the tranches we're looking at, it's fairly neutral, then we look at the free cash flow accretion as well as the multiple impact. And from that point of view, we are still delevering, and we think that until 3x [ after the ] change in the acquisition dilution math, that actually yields towards delevering. And then after that, you're really thinking about it in terms of share repurchase versus M&A. But you have -- before you go do that, to really think about the quality of your base case, which is very strong for us and therefore, to put it in that context.

And you mentioned M&A. I know the focus remains organic growth in the near term. But as you, I guess, move towards 3 and maybe even below at some point and you start thinking about buybacks versus M&A once you're below 3. I guess, how might the M&A appetite evolve? Where do you see potential white space at this point?

Yes. So one important thing is that we have a growth formula, which works well for investors and for ourselves, as shareholders ourselves. And so you're looking at this 8% to 11% growth rate of our solutions, which represent 80% of what we do. And you layer upon that, the expense at 5% to 8%. So that gives you some operating leverage. So now that gives you an operating income growth that's attractive. And then if you do either deleveraging or share repurchase, that gives you an additional benefit for your EPS growth. So that's all the base case. So you can look at M&A. And if we were below 3x, we would look at large-scale M&A, but you would have to feel that it is better than that base case that I just laid out. And given that we have a strong confidence in our base case, we certainly would look, but we would want to be very rigorous about it.

Okay. Maybe we see if we have any questions in the room for the last 2 minutes we have left? Over here.

I wanted to ask about some of your initiatives of moving from on-premise to cloud. Can you give us an update on just what are some of the businesses that you feel like you've had the most progress on? Where are some of the areas that might be it's taking a little bit longer and kind of what you're doing to address that?

Yes. Thank you for that. So if you think about last year, we had approximately 50% of our ACV just a bit above that was done in the cloud in fintech, Adenza -- in Adenza. And so that's the business that has probably the most opportunities. And we started at the basis of 22%, and we bring that to 27% over the course of 1 year. We have capabilities that are strong in terms of cloud and particularly in Axiom. What's very attractive, and that's why you're asking the question probably is that you can get 1.5x the ARR when you're going to the cloud. And we are able to effectively take from the TAM and put it into our own revenue growth while creating a win-win for our clients and having more cross-sell opportunities. So it's certainly something that we're very focused on. We've also made some very good progress on the Calypso cloud, but we're going to continue to invest in that. And so those are important vectors of growth for us, but we are -- the limit of it is that we -- those are important decisions for our clients, and we always follow our clients, too. And so that -- it's in their best interest, but timing is everything for them.

Any key milestones to be thinking about broadly with cloud or Calypso for this year or next year?

I wouldn't think of it as milestones, but just to finish also wrapping up on cloud. It's important to know that Verafin, for example, is 100% cloud. A lot of our products in Capital Access Platform are already on cloud. And so whereas I emphasize to answer your question on the ones where we are seeing the opportunity to do more, we've started migrating some markets to the cloud. There is more we will do, but there is also a lot that we are already doing in the cloud. And we have the ability to do a lot of the Gen AI because we have been such a great user of the cloud, and we started that journey 10 years ago for the cloud and then 7 years ago for AI.

Great. Well, I'm afraid we're out of time. Please join me in thanking Sarah Youngwood. Thank you so much.

Thank you.