The Tel-Aviv Stock Exchange Ltd. (TASE) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Tel Aviv Stock Exchange Q3 2021 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded November 15 (sic) [ 22 ], 2021. The recording will be publicly available on TASE's website. With us on the line today are Mr. Ittai Ben-Zeev, CEO; and Mr. Yehuda Van Der Walde, CFO. Before I turn the call over to Mr. Ittai Ben-Zeev, I would like to remind everyone that this conference is not a substitute for reviewing the company's annual financial statements, quarterly financial statements and interim report for the third quarter of 2021 and which full and precise information is presented and may contain inter alia forward-looking statements in accordance to Section 32A to Securities Law 1968. In addition to IFRS reporting, we might mention certain financial measures that do not conform to generally accepted accounting principles. Such non-GAAP measures are not intended in any manner to serve as a substitute for our financial results. However, we believe that they may provide additional insight for better understanding of our business performance. Reconciliations between these non-GAAP measures and the most comparable related GAAP measures are included in tables that can be found in our earnings press release and the slide presentation accompanying this call. Both can be accessed on the English MAYA site and in the Investor Relations portion of our website at ir.tase.co.il/en. Mr. Ben-Zeev, would you like to begin?

Thank you. Good evening, Israel time, everyone, and thank you for joining us today. I'm happy to host you in our earnings call. The third quarter of the year followed the same trend of early 2021 with new IPOs, high yields on TASE indices and strong trading volumes. The quarter ended on a strong note despite the fourth wave of the coronavirus that Israel suffered during most of the quarter and which is now being experienced by many countries around the world. Thanks to the campaign for administration of a third booster shot, the Israeli economy continue to operate with minimum restrictions. We are excited to see the growing dominance of technology companies in the Israeli exchange as it should be in the state of Israel, the startup nation. Recent publications show that the export of Israeli high-tech services has doubled within 6 years totaling USD 27.5 billion last year, half of the overall Israeli export of services. This is also reflected in the growing number of start-ups that go public. The IPO market continued to generate new offerings with 21 IPOs in the third quarter, including 12 high-tech companies and 1 R&D partnership, which is the 13th partnership joining TASE. Also for the first time, SpArk was listed on TASE which follows a different model than the customary global SpArk model. Overall, ILS 2 billion was raised in the third quarter's IPOs. Since the beginning of 2021, a record number of 92 new companies listed on TASE with a significant increase in the number of high-tech companies with a record number of 60, which represent a majority of the new companies on TASE. This is significant even on a global scale. According to the data published by the World Federation of Exchanges, WFE, as of the end of August 2021, TASE has the second largest rate of new companies with 24% since the beginning of 2020, while the Shanghai Exchange holding the first place with 27%. The growth in the number of new companies is also reflected in the market cap of the shares traded on TASE which, for the first time in its history, broke the trillion shakel ceiling. The yields on TASE indices also broke historical records. The lending indices achieved high yields since the beginning of the year, even in comparison to leading global indices, TA-35 and TA-90 indices rose by 26% and 29%, respectively, year-to-date, reaching an all-time record. TA-125 Index also recorded an impressive increase in terms of total market cap when for the first time all the companies in the index crossed the ILS 1 billion individual market cap mark. Price rises were also the trend in most sectorial indices with particularly significant yields in TA-Oil&Gas at 56% and in TA-Banks5 Index at 53%, reaching an all-time record and in TA Construction Index at 51%. Alongside the promotion of the primary market, we constantly work to enhance the liquidity in our secondary market. A year ago, we launched a securities lending platform. And today, we took another important step towards the enhancement of liquidity. TASE Clearinghouse Board approved today the Phoenix Insurance Company as a custodial member, a move which will enable the Phoenix to operate as a direct participant in the securities lending platform. The Phoenix has a market cap of approximately ILS 10 billion, the highest among the insurance companies listed on TASE and manages assets of close to ILS 300 billion. Phoenix is the first Israeli institutional investor joining TASE as a custodial member alongside Euroclear, which has been operating as a custodial member since 2019. As a reminder, a custodial member is a participant that manages its assets directly on TASE and received TASE clearing and custody services, but may not trade on TASE. As we mentioned in the past, one of the major challenges we were facing in the implementation of the lending platform was the lack of cooperation from the major banks TASE members. This important move will enable institutional investors to lend securities directly on the platform without the need for any intermediator. It will reduce costs, encourage competition and bring more liquidity to the capital market. We believe that more institutional investors will follow the Phoenix in the foreseeable future and choose to become a custodial member and a direct participant on the securities lending platform. At the same time, we have been talking with several large entities that have requested to join TASE as retail brokers alongside First Digital Bank, which has already joined TASE and will start operating in the coming months. TASE UP private companies platform also gathered momentum as Group 11 VC fund raised $200 million for its fifth fund from top-tier Israel institutional investors and for the first time, distributed a tranche to accredited investors which could buy participation units in Group 11 Fund directly. We can see a growing demand from new issuers, and we currently have 3 companies in our pipeline. We also continue to develop new products and services for both local and international investors. Last month, as part of TASE alignment with international standards, we activated the MBO, market by order data service, which is comparable with the global standards. We also launched a series of new products through the TASE Data Hub API system that enables foreign investors to create an interface that channels information to the systems such as corporate events and payments of the listed companies. The demand for data is on the rise, including the demand by foreign customers as part of the growing attraction to the Israeli capital market. This ties in well with our joint initiative with the Embassy of France and the Business France agency, which culminated in our visit to Paris in October accompanied by several Israeli technology companies. The purpose of the visit was to connect the business community and investors in France to Israeli innovation and allow the Israeli companies to discover and create opportunities for growth in Europe through the development in France. The visit was very successful and included, among others, a meeting with [indiscernible] advisor and with leading French investors. The growing interest has significantly increased the flow of foreign money in TASE. According to the Bank of Israel data, in the period of January to August 2021, foreign investors made purchases in a total amount of USD 2.4 billion as compared to net sales of $0.4 billion and $1.4 billion in the years 2019 and 2020, respectively. The inclusion of Israel in the World Government Bond Index, which began during the coronavirus crises also contributed to the surge in the flow of foreign investments into TASE. Finally, I would like to share with you some of the significant steps taken by the Israeli government, which we expect to drive the investment on TASE upwards. The first step is the listing on TASE for the first time of Israeli government foreign currency bonds, which can now also be traded on TASE. At the end of October, the first 6 series with a value of ILS 40 billion were listed, and we expect the lifting of further series in the coming months. This will enable the Israeli public to trade in the same internationally listed bonds locally on TASE in shekel. The second step is the government's resolution as part of the approval of the state budget for 2022 to discontinue as of mid-2022, the issuance of earmarked bonds that currently comprise 30% of the managed assets of the new pension funds. The total issue volume of the earmarked bonds was approximately ILS 40 billion a year, and we expect that the government will be required to finance itself by other methods and that part of it will be done through TASE. Furthermore, we also expect that the new pension funds will have to reallocate these excess funds and part of it will be invested through TASE. I believe that the combination of a strong entrepreneurial private sector with emphasis on local high-tech companies and government initiatives that boost the capital market activity is a strong combination that allows us to look forward to 2022 with great optimism. And now I would like to hand over to Mr. Van Der Walde who will continue with a review of the third quarter results.

Thank you, Ittai. Good evening, everyone, and thank you for joining us today. I will start with a brief overview of the main components that impacted the revenues and expenses of the third quarter of 2021. Due to the Jewish holidays in the third quarter of 2021, there were only 56 trading days, a decrease of 6 days which comprised 10% compared to the corresponding quarter last year. This had a direct impact on our revenues from trading and clearing commissions. The lower number of working days also indirectly influenced our other activities whose increase had otherwise been even higher. In addition to the Jewish holidays, the third quarter coincides with the summer vacation in Israel. This had a positive impact on our expenses. Due to the lifted COVID-19 restrictions, the employees used their vacation days during school holidays and the Jewish holidays. This had a direct impact on the employee benefit expenses. The lower number of working days also resulted in a decrease in computer and communication expenses. As to our results, the third quarter of 2021 continue the positive momentum of the previous quarter. Despite the mentioned impact, we had a stable revenue growth, as I will show in detail in the upcoming slides. I will begin with Slide 4, which shows some of the key highlights from our results of the third quarter. Our revenues for the third quarter of 2021 increased by 4% compared to the third quarter of 2020 and amounted to ILS 75 million. Adjusted EBITDA for the third quarter of 2021 totaled ILS 22.8 million compared to ILS 19.3 million in the third quarter of 2020, an increase of 18%. Financing income in the third quarter of 2021 totaled ILS 1.8 million compared to the financing expenses of ILS 0.9 million in the third quarter of 2020. The adjusted net profit amounted to ILS 9.8 million, an increase of 74% compared to the corresponding quarter last year. After going over the highlights of our financial results, let's take a deeper look at the composition of our revenues and expenses. Please go to Slide 5, Our revenues from trading and clearing commissions decreased by 8% compared to the third quarter of 2020. In total, ILS 28.7 million. The decrease between the third quarter of 2021 and that of 2020 resulted from a 10% decrease in trading day in this quarter compared to the first quarter of 2020 due to the Jewish New Year holidays and was partially offset by an increase of 3% resulting from increase in the effective commissions. Our revenues from listing fees and annual levies increased by 14% compared to the third quarter of 2020 and totaled ILS 16.9 million, 7% of the increase [ resulted ] from revenue recognition in respect of listing fees and 6% of the increase resulted from annual levies. Our revenues from the Clearing House services increased by 14%, totaling ILS 15.9 million. 11% of the increase resulted from custodian fees and 3% of the increase resulted from existing services rendered by the Clearing House members and listed companies. Our revenues from distribution of data and connectivity services increased by 10% compared to the corresponding quarter of 2020 and totaled ILS 12.9 million. 5% of the increase resulted from data distribution to overseas customers. Approximately 3% of the increase resulted from derived data and approximately 3% of the increase resulted from connectivity services. I will now discuss our expenses in the third quarter of 2021. Please go to Slide 6. In the third quarter of 2021, our adjusted expenses totaled ILS 64.3 million compared to ILS 63.8 million in the corresponding quarter of the previous year, an increase of 1% year-over-year. The expenses related to employee benefits increased by 1% and totaled ILS 35.4 million. The increase in the expenses mainly results from the annual salary update and an increase in headcount. The relatively low increase compared to the previous quarter of 2021 resulted from the utilization of vacation days, as I mentioned before. Computer and communication expenses decreased by 5% compared to the corresponding quarter of the previous year and totaled ILS 6.4 million. The decrease resulted mainly from a 10% decrease in working days in this quarter compared to the third quarter of 2020. As I mentioned before and was partially offset by an increase in operation costs of newly added computer systems. Marketing expenses decreased by 36% compared to the corresponding quarter of the previous year and totaled ILS 1.7 million. The decrease is a result of the timing of marketing campaign launches. The depreciation and amortization expenses increased by 9% compared to the corresponding quarter of the previous year and totaled ILS 12.1 million. The increase in depreciation and amortization expenses due to the launch of the central blockchain securities lending platform in the fourth quarter of 2020. I would now like to review our financial position highlights. Please go to Slide 7. As of September 30, 2021, our equity totaled ILS 647 million and comprises 74% of the financial -- of balance sheet excluding open derivative of position balances from our Clearing House activity. In addition, we have approximately ILS 362 million in cash and investment in financial assets. We don't have any financial debt. We have ILS 144 million excess liquidity and ILS 299 million excess capital above our regulatory requirements. And with that, I will turn the call back to our moderator to conduct the Q&A.

[Operator Instructions] The first question is from Dan Fannon of Jefferies.

I guess if we could start with some of the strength in the listing side of the business and maybe give us a sense of the backlog and where momentum is on the primary listings. And then as I think we've asked before and just where the kind of dual listing opportunity sits today. And as you think about next year, how are those conversations going?

Dan, with regards to the IPO, as I mentioned before, we are with [ 92 ] year-to-date. So I guess that 2022, we won't see the same number. But with respect to the pipeline, there are dozens of [indiscernible] prospectus and companies that want to become public companies. The whole perception in Israel has changed in the past couple of years. Now companies wish to become a public company on TASE. They understand the benefit. They understand that we are a growing market with respect of the retail participation and the cheapest way of raising equity and debt. So I guess that if nothing fierce happens in the world, we will see dozens of IPO next year as well. With respect to the dual listing, I would say that probably now we have the highest probability of having dual listing companies from New York coming to our market. We are having serious discussions with some of the companies. As I mentioned before, the way I see it is that the main obstacle is a psychological one, who will be the first one. How will the media think about it? I think that nowadays, all of those companies fully understand that there is benefit. Some would say that the benefit is not big enough for them to do that move. But personally, I believe that as long as we do our job the way it should be done. And as the exchanges get more global investors, more exposure I think that many of those high-tech companies, the main investors are American one, and they can get a broader exposure to European and Asian investors through us. And in addition, the ETF market in Israel, which is relatively deep and some active funds. So clearly, we'd love that to happen in 2022. But at the moment, we don't have anything concrete that we can report about it.

Understood. And then a question on the Clearing House services revenue. I heard the and read the year-over-year trends in terms of why it grew, but curious about the sequential decline of roughly ILS 1 million quarter-over-quarter. And then what the addition of the Phoenix -- the expansion of that pool of partnership can bring and how we should think about other partners and maybe the revenue contribution as that business grows. But so first, just kind of what happened quarter-over-quarter and then a little bit more longer term.

Yes. So as we mentioned in the past, what we are doing with the clearing and the settlement, we actually turned it into a line of business a few years ago, and we have been developing new products and new services, which obviously generates additional income over the year. On top of it, we are enjoying that we are running more custody in terms of notional value, which also adds to the income. I believe that we have plenty of additional things to do in our clearing and settlement. And what we just did with Phoenix, this is something that I see it as a very important move going forward. We tried to work with the banks in order to boost liquidity and get the securities lending up and running. Unfortunately, the large bank in Israel and I've spoken about it in the past, didn't want to participate. And the fact that the largest insurance company in Israel by market cap did the modification in order to become a direct participant. It has a few important elements. Besides the fact that this is history, this is the first time that we are having an Israeli institution as a direct member. By definition, now Phoenix will not need to go through a bank in order to put their securities, whether it's equities or bonds into the lending securities pool. Now by doing so, by definition, they will have a better yield because the holding will start working better than their competitors. So I assume that some of their competitors, [indiscernible] is running institutional investors over time would like to be a participant as well because of the trading and the yield that will extract out of the securities lending platform. But furthermore, by working directly with us, there's also a possibility that over time, they will post more and more custody directly from the banks into the exchange, and they may need other services over time that they would like us to supply to them. So I think that this is just the first step in something that can become very interesting over the years not only for the Clearing House but also for the exchange as a whole because I believe that it will help to boost liquidity. It will be easier for some of the international investors that currently they want to see more liquidity. So overall, the way I see it, it's a very positive sign.

And then just the sequential change just in terms of what we just -- what you just reported, the delta, the ILS 16.9 million versus the ILS 59 million.

It's a combination of -- the Clearing House is divided 2 sections. One is the custodian. It's -- the revenues from custodian, it depend on the value of the assets, and we reached the number of ILS 3 trillion of assets that Clearing House manage. So it's contributed to our revenue. It's including government debt and the raising money through the the market. And it's also -- there is a difference between the phase that a Clearing House member paid and a custodian member paid. It's almost double. So every ILS 100 billion, it's adding that the custodian will move from the banks to directly to be managed by us, will contribute ILS 1 million to our annual revenue. In the services, we believe that the new 100 companies that added from last year and from this year to the stock exchange will contribute more revenue to the Clearing House from activity of the members and the companies in actions and that they will continue and raise, go again to the market and raise money and -- or debt in the market. So it also will be impacted by that. And we have a little bit seasonality between the quarters because we had less trading working days also in the Clearing House. So the companies and the Clearing House had less days than in the second quarter of this year. So all that together, it's what's the trend

Dan, does it answer your question?

Yes. So there's just more of an AUM-weighted dynamic. So the days isn't just affect the trading side, it affects the fees on that side of the business.

Yes, definitely. Yes.

Okay. And then if you could expand upon the opportunity with the retail partners, you said -- you highlighted the 1 that has signed up and then a pipeline of others that are -- that you're talking to how -- I guess they sign up, they get access and then we will start to see the participants through the volume? Or I guess, what is the way that, that gets monetized and we would see it through your income statement as you expand the retail partnership and access to those customers?

Yes. So we did plenty of changes over the past few years in order to motivate new entities to become retail brokers. So now we are in serious discussions with a few of them. And currently, in Israel, besides the banks, we have only 4 brokers that operate in securities. That's all. We anticipate that once, let's say, we'll have like additional 3. By definition, they will put more money on marketing. They will get more people involved in the market. Obviously, it doesn't mean necessarily that the trade on TASE. Some of it can be foreign securities. But overall, the pie by definition, will be larger. And because -- even though retail participation increased a lot over the past 2 years, still, it's single digit, the way we estimate retail participation in TASE which is very low compared to other Western markets. And that's even though everybody in Israel uses mobile phone and the retail in Israel has $200 billion in cash just sitting doing nothing. So we believe that once we'll have more distribution channels, by definition, will get more traction in the exchange. It's difficult for us to assess -- what will be the impact next year because it depends on how strong these entities will be in the first year. But I can tell you that I'm very confident that over the next few years, the numbers will be much more substantial because of the ingredients that we have in the Israeli market. With regards to our technology, we are completely ready to connect any new retail broker that will come, by the way, from Israel and outside of Israel.

Okay. And then just lastly, I believe last quarter, you talked about the update we will get, I believe, with your next earnings report in terms of updated growth targets and/or I guess, priorities? And then also, I would assume with the capital, you mentioned M&A on the last quarter as a potential. So if you could just let us maybe set the framework of what we should be anticipating in terms of kind of the update in terms of what you will actually talk about? And then if you -- can you assess the priorities given your excess liquidity position, how that's -- what those are today.

Sure. So we came out at early 2017 with our 5-year strategy and those 5 years are about to finish. And we started management discussions about the next 5-year strategy. And obviously, everything will be consulted with our Board of Directors as well. We see that when we analyze what we achieve, it's clearly for us that we still have a lot of organic growth ahead of us. We believe that we can grow our business double digit for years to come. We see ourselves as a growing company. So we don't need to do any M&A in order to bring growth to our numbers. It's very obvious that some of the core elements of an exchange like liquidity, we are not happy from what we see. We believe that we can extract much more liquidity once all of the market participants behave the way it should be. So some of our new strategy and some of the management discussions that we are having now are putting a lot of emphasis and focus, what should be the next step we need to do in order to motivate and boost the elements of the core market infrastructure like the Tel Aviv Stock Exchange. Another important element that we are now discussing in our management is because we have our own tech guys and are very talented one, and we are not dependent on any outside suppliers. When we look at the world of DLT, crypto, digital assets and many things that are happening in the world, we know that we have the ability to participate and do some of those elements. Clearly, we don't need to do it now. We have plenty of things to do to grow our business. But part of that discussion is that we want to be ready if a year from now, we want to do something, we won't start thinking about it all over again. So part of those discussions is basically analyzing what's happening worldwide. And obviously, we're having very interesting discussions. Now as I said a few times, we have too much cash on our balance sheet. We thought about onetime dividend, none of our investors is in for onetime dividend. All of them are growth investors, and they want us to invest. Regarding buyback, we are getting feedback for some of our investors, the liquidity is not enough. So if we do a buyback, it will hurt the liquidity. And by definition, we do not want to do anything that will hurt our investors. And with regards to M&A, we don't need at the moment to do any M&A. Part of the analysis that we are doing, we are observing many things. But we have all of the elements we need at the exchange as we are. So we don't plan to do in the foreseeable future, anything in that respect. But as I told you before, when you run a company, you always want to look at the short term but also at the medium and the long term and everything on the same time.

The next question is from Todd Jacobson of Lord, Abbett.

I have a couple of questions. One is when we look at the region, there's an awful lot happening. You've got the what's happening in Dubai with a government initiative for more privatizations and then you have in Saudi Arabia, the actual exchange potentially going public. And I'm just -- from your perspective, as these initiatives are unfolding, which I would argue is positive for the region, increase liquidity, increases in attention. Do you think you are a direct beneficiary from some of those actions?

Well, I want to say about the privatization, bear in mind that also in Israel, we have a pipeline of privatization that we are waiting for them to happen. So it's not only in our region, but it's also in Israel. And I believe that now that we have a new government. And finally, after 3 years, the budget has been approved, some of those privatization will kick off. I would say that clearly, there are some initiatives that we can benefit out of them. We have a good relationship with the Emirates, and we believe that a very interesting things that can happen. But a, this is relatively new to the region. Part of the educational process that we are going through here in Israel is also explaining like to the companies. And the -- what we did in France was a very good example that we showed those tech companies just by coming as a part of a delegation that we organized, it was completely different than what they were used to, what they did it themselves. But I think it will take a year before things will materialize in the region. This is not things that can happen in the next few months. That's the way I see it is.

And when you say materialize, are we talking specifically about potential dual listings? Or are we thinking of the one on the [ line ]?

It can be numerous things. It can be dual listing. It can be creating joint pools of liquidity between markets. And it can be, as you mentioned, privatization. It can be setting up together some joint ventures in certain elements. There are multi opportunities.

Okay. Okay. But again, your perspective is it will take years for this to unfold?

Yes, that's what I think. Yes.

Okay. Okay. And then you actually brought up crypto, which I was going to ask about. And just -- could you just flush out -- I mean you said this is going to be part of your strategic discussions. What would be the case against creating a crypto exchange? Is it -- do you think there's -- there would be political resistance to it or the whole barriers to perception to having this? Just how are you thinking about it?

I would say not political, but regulation, meaning that which relate also to perception. In Israel like people are starting to say, well, there's crypto activity outside of Israel. People are not paying tax. We don't have the data, and people are losing money. Maybe we should be better off if it will be regulated from various reasons. As an exchange, you don't want to invest in infrastructure in certain elements that afterwards over time, the regulator will come in and say, well, you can't do it. So I think that crypto, as an example, if there will be a clear path with regards of regulation, which is to meet the main issue then it becomes interesting.

Is that be [indiscernible] very topical.

Yes, go ahead.

No, I just run out to your point, that's very topical in other parts of the world. Is it topical in Israel right now to provide more regulatory clarity?

There are conversation about that. There is a team that has been discussing for the past several months in the ISA, which is our regulator, the whole crypto issue, but they haven't published yet any conclusion about it. So for us, currently, it's unclear.

Okay. Okay. So picking up your point, you're going to work on having a platform ready to go. You would be ready, but you're not going to do anything until the regulatory...?

No, no, that's not what I said. What I said is that it's part of our management discussions. We have plenty of ideas and plenty of thoughts about various things. By the way, we don't have the time and the money to do many of the things that we are discussing. I guess that in 2 months' time, we will have to prioritize the things that we want to do, whether it's the money you make out of it or maybe the risks that are associated like regulation risk. All I'm saying is that when we analyze this segment, we know that we have abilities in-house to do some of those elements. But currently, there's completely not clear with regards to the regulation, what can be done and what cannot be done. I guess that probably in a couple of months, when we announced our new strategy, we will also highlight besides the core elements of our business, which are the areas that we plan to focus in the next couple of years.

What's the timing for you releasing that?

Probably 2, 3 months.

Okay. Last question I had is on -- we talked in the past about your union contracts that the contract comes up next year. Could you provide more granularity in terms of when do the negotiations start? And when will we get clarity on what the new contract would look like?

Yes. So the current agreement expires at September 2022. And usually, what happens in Israel that sometimes there are negotiation before and they get to an agreement. And also, there are occasions that the agreement expires and still there are negotiation a few months afterwards. This is very common in Israel. We plan -- but obviously, there's the size of the union to make the negotiation and get a new agreement before September 2022, but it can only happen if we are satisfied from the outcome of the new agreement. I think that you can assume that under no circumstances the new agreement will bear a higher rate of expenses than the current one. It will be the same or lower.

And why is that in what is an inflationary labor world? Why would it be no worse?

Well, that's part of the negotiation. I can't disclose everything.

Okay. Great. That's all I had. I appreciate it.

[Operator Instructions] There are no further questions at this time. Thank you. This concludes the Tel Aviv Stock Exchange Q3 2021 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.