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

All right. Good afternoon, everyone. Thanks so much for joining us for this next session. And if you don't know me, I'm Ben Budish, I cover the U.S. brokers, asset managers and exchanges. And for this fireside chat, really pleased to have Sarah Youngwood, CFO of Nasdaq here. Thank you so much for being here.

Thanks for having me.

Maybe just to start, can you talk a bit about how you see the current macro backdrop coming out of a period of heightened volatility earlier in the year. How does the environment look across capital markets, IPOs, the broader fintech business? I think investors are particularly interested and your expectations for IPO activity over the next 6 to 12 months?

Yes. So I'll start with [indiscernible] would say that environment is constructive. We still have very good investments, especially in AI and digital. You also have a consumer that remains very resilient and earnings that are supporting the valuations that we're seeing. So when you take those together, we would say constructive. Let me translate that into IPO to your question. We've seen a very robust IPO environment. So the first thing is pipeline is absolutely there. We have had the best half year we have ever had with $111 billion raised. Of course, that includes $86 billion with SpaceX, but that only tells you that the market is looking for scale, mature opportunities but there was also a broad array of what is in the pipeline. So we're seeing a pipeline, of course, in the whole area infrastructure, whether you're talking about semi data centers or AI models themselves. And then you've got defense, which remains here. We've got a little bit in insurance and real estate. And even biotech, which had been a little bit of calm for a while is starting to come back. And so we are quite excited to see the breadth of what we are seeing in the IPO market. And then if I then take that to our fintech space, we had an excellent performance in the second quarter, 15% revenue growth, 16% ARR growth, and what that tells you about the environment is really a tremendous engagement with our clients. We are viewed as a core infrastructure for them, we're viewed as an AI [indiscernible] transformation partner, which enables us to be mainly in the dialogue. And so whether you're looking at pipeline whether you're looking at the tenor of our deals, the booking mix we are seeing just really good starts with our clients and with how they're behaving with us.

Great. Maybe just quickly staying on the topic of IPOs. Can you talk a little bit about Nasdaq's win rate? I think last quarter, you're home to the 7 of the 10 largest operating company IPOs. What's driving that track record? How do you continue to win today?

Yes. So we look to win, and we have a wonderful 73% win rate, as you said, 7 out of 10. What that's really representing is the fact that whether you're talking about switches like Walmart or people coming to market like SpaceX, but also like many, many others people are looking for the association with Nasdaq on the quality of trading, of course, but also on the innovation and trust that is represented in our brands as well as at this point, we have the top 10 companies that are all listed on Nasdaq and [indiscernible] the association with us. And that creates a flywheel takers on that create relevance and the index is beneficiary for it and also, of course, benefits our listed companies and the data that we get out of those great companies as well as the trading is all a wonderful ecosystem that we have been able to derive. And so we feel great about our position in the market.

Fantastic. Talk about your Market Services business. I feel like usually this is the one we stick at the end. But how many interesting things going on -- so number of initiatives you've got underway on the trading side. Maybe tell us a little bit more about Nasdaq Digital Liquidity Networks, the Level Markets acquisition, any updates on the tokenization pilot, token design, the progress we made with the [indiscernible] network. I know there's a lot in there, but...

Yes. And actually, there is a lot. And so if you go back to 50 years ago, we were created to actually collect capital to innovation in a totally [indiscernible] using technology. And that has resonated. And over the last 50 years and never more so than right now. We are continuing to evolve what markets are doing, to grow markets, to make sure that we do that, respecting the principles that we have put forward. Integrity, transparency liquidity and also the intelligence that comes with all of that. And so all today is to continue to do that as the markets evolve. So the intersection of digital ledger and ARR. We are seeing those trends converging into a great transformation, and we're particularly well positioned. So we've organized ourselves around digital liquidity network. So it was the first 1, and that is really our effort to drive all of the trends that reflect the investor demand for always on and to make sure that this is done in a way that is, again, respecting this liquidity, transparency, integrity principle and putting both the investors and the issuers at the core of that. So then you go to the next phase, level ATS and we just acquired the third largest ATS. And that's very important because this is a [indiscernible] off market of exchange. And that gives us the ability to continue to give different pools of liquidity to our investors so that they can operate whether in the [indiscernible] world or outside of the [indiscernible] world and the way they want to operate and with us at the center of that. This level ATS can also a connectivity gateway in some ways, that gives you access to 2,500 buy side and sell side, so quite important as we think about continuing to remain in the middle of the flow of capital. Then if we actually go backwards to last year, we had announced that with the DTC, we wanted to make sure that we had the settlement either [indiscernible] or token. That's not approved, and this is on its way for a launch. So again, continuing to make progress, but then with now [indiscernible] we did 2 things: build on investment of $100 million in [indiscernible], but also a strategic investment. And the idea here is that together, we can help to bridge between Fiat and [indiscernible] and making sure that we maintain the depth of the liquidity pools and also putting the Nasdaq issue in the center. So we have this as Nasdaq [indiscernible]. They're also taking our surveillance. And that's an interesting thing because we're talking about Market Services that, that transformation of market is also incredibly productive for us in terms of core infrastructure provider to markets and local participants as they transform. So that gives you a lot. And then just to round it up with the last one, collateral management and -- we have also put forth for [indiscernible] the topic of using [indiscernible] as a central point in the collateral management, but also moving collateral between tokens and Fiat.

Very interesting. So you're the CFO, someone ask you the P&L question. When you put all these initiatives together, how do you think about the ultimate opportunity for Nasdaq, whether it's market share gains, increased trading volumes as liquidity improves across global trading hours or any other potential benefits to share volumes, P&L? How do we think about all that?

So I would say yes to all, but it goes broader than that. So the way to think about it is now when you have always on, when you create potentially additional demand for the U.S. markets, and we're very well positioned for that. And you will create by being able to navigate between on-market and off-market additional liquidity pools that we're able to participate into that will also create with all of those new products, and I should have mentioned one more thing, which is the ability to have new products that are getting approved right now, you create the identity for us to do the hedging, again, additional volumes, additional market shares, but also for us to be the infrastructure provider and that now is a market tech and [indiscernible] side of the equation. And so we think we're particularly well positioned for this moment because we are AI forward, we have a very strong digital effort that is now extremely robust, well organized and that enables us to be both on the market services front, as well as on the foundational part.

Great. Maybe one last question on the topic of trading and innovation. What are Nasdaq's latest thoughts on prediction markets/event contracts and perpetual future. So can you talk about where opportunities may exist for Nasdaq as these products continue to gain traction? Like how do you think about all that?

Yes. So we really believe in the evolution of markets and the role that we have had and will continue to have in the mind of all of that. So if you take even contracts, for example, first of all, we were able to get [indiscernible] contract approved with the SEC, and that's part of those new products that I mentioned on. So that should launch shortly probably at the end of this year. And so if you're looking at that, that is basically Nasdaq 100 and doing binary contracts, binary events on that. And so continuing to add to that, we could certainly be interested in KPI related events, but again, all within the constructs are being approved by our regulators. And probably not focused right now or in general, beyond right now on sports and politics, but we stay within the financial realms where we think that all of those, if they are doing well and if they are satisfying investor demand, if they're well structured, if they're bringing investor trust to the market, can be kind to be additive. And so we think we have an important role to fall here because we have been able to support the formation of markets, which today -- the U.S. is [ 1.5 ] of the markets in the world. And Nasdaq is the largest market. And so bringing all of that demand from the rest of the world into the U.S. and continuing to evolve the U.S. markets with the principles that we stand for. [indiscernible], if you want to -- so what we've talked about at earnings last quarter is that [indiscernible] itself is probably representing less than 1% of revenue overlap for us, which is probably what you were moving on. And that's probably the right thing to do. But to the extent that there is a version of [indiscernible] that is interesting and a resilient with appropriate leverage should be open minded to it. And again, in the meanwhile, we can provide additional capabilities to those will participate in those markets in terms of providing to them coinfrastructure again, whether you're talking about trading, whether you're talking about surveillance, we have a lot of tools, which the new players in this world are interested in turning ourselves towards us for because we can help to do things in a very good way.

Great. All right. Moving to your index business. This one has been extremely successful for you. I think ETP AUM is now over $1 trillion, index options, revenues are growing very rapidly. You've noted that a meaningful portion of inflows recently have come from products launched over the past 3 to 5 years. So maybe can you talk a bit about what's working particularly outside of the core Nasdaq 100 franchise?

I will say we're thrilled with that franchise. It now represents 15% of what we do. $1 trillion of ETP AUM, we had $109 billion of inflows over the last 12 months and we had 35% growth last quarter. And where do I start? And so it has been just like incredible. And what's great is really the alpha generation, and that's what you're talking about, which is that -- we've got the Nasdaq 100, which has been complemented with an addition to the distribution from [indiscernible], which is a fantastic partner. We also have now [ State Street ] and BlackRock that are behind it. So that continues to give us lots of legs of growth for Nasdaq 100 and continuing to create the ecosystem wellness around it, whether you're talking about options or futures, and this is an index that continues to have a lot of opportunities. Then if you look at the $109 billion I talked about, 38% comes from products that were actually launched in the last 5 years. And so that's the point you were making, which is the innovation of the last 5 years is not just cool. It's actually creating 38% of $100 billion of inflows. And then they create the next legs of [indiscernible] as they go on with market performance in addition to additional inflows that come into those indexes because those [indiscernible] accurate really over time and that 5-year mark just getting started. So in the same sense we're seeing, you have everything from option strategies on to are, for example, data center has been a big theme [indiscernible] is investable as a trend. And right now, there has been a lot of on AI infrastructure can create opportunities. And the last thing that I would add is that 50% of our inflows were coming from outside of the U.S. And so the Nasdaq 100 is really a way for the rest of the world to participate in innovation in general, because a lot of it sits in Nasdaq 100. The [indiscernible] Nasdaq 100, we also are spending a lot of time on other products with asset managers around the world.

Great. Let's talk about your FinTech business a little bit. So maybe starting with Verafin. One of the key narratives here has been the push into Tier 1 and Tier 2 banks. Can we talk about what demand looks like across that client segment? And to what extent are you seeing adoption of point solutions versus the broader Verafin platform. That's another one talked about quite a bit.

Well. So this year, we had 11 [indiscernible] deals that we have signed, which indeed so far as of the second quarter, which is more than what we had done in all of last year. So clearly accelerating. In general, when we get started with an enterprise client, they're really interested in our consortium, which represents [indiscernible] of assets. And so they usually will take on protection with that. So that will be the way they enter. But what's really interesting is that we're starting to see them do additional products once they have lined. And what we're also seeing is that whereas we have a 6 to 12 months, usually closer to 12, on the time to close an enterprise. And we actually are towards 50% of that time line when we're doing an add-on. So we are seeing momentum on and we're also seeing the enterprise clients interested all agentic platform that we have in Verafin. So it's a very broad demand for what we're doing and the great work that we've done now since we've owned Verafin over the last 5 years is [indiscernible] a brand, but establishing the data that you can't purchase. And we are now presenting ourselves with a lot more capabilities -- we also have nice partnerships that we are so that we can continue to catch the 1 earlier in a way that has been going to be additive to all of our clients. But -- now all of the enterprise plans are recognizing this.

Right. I think Verafin is also one of the businesses where you've been particularly proactive in deploying agentic AI and other AI power technologies. You alluded to that. a little bit. But can you maybe unpack that a little bit more? What are you seeing in terms of AI powered solutions, specifically, client adoption, improvements in fraud detection, workflow efficiencies and things like that.

Yes. So what's -- when the exciting about Verafin is that they have really moved towards agentic. And so we don't use that word [indiscernible] agentic are those agents which are able to not just the end coworker being a good worker. And those workers are able to generate efficiencies, both in terms of like when you time the catching of the front but also on the efficiencies that they can represent for the financial institutions. So we were seeing about 4x our productivity. When you use those agents, we have 2 that have been in place since December. They were used by 800 of our clients. So this is not something that's in beta. This is something that's used by 800 clients out of our 2,800 clients. Mostly, I would say, small and medium tier clients but also interest on the larger enterprise clients, as I just mentioned. So we're seeing that as and continuing to add to productivity and to time line. And in fraud, time line is very important. And so if you think about what's happening, where everything is going faster, -- and potentially, you are introducing payment additional risks related to that, having the Verafin solutions becomes even more important than it has ever been to [indiscernible] and to large institutions. And if the majority of people start having Verafin, then you can't afford not to have access to that additional protection and everybody is realizing that.