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 Q2 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, August 8, 2022. 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 second quarter of 2022, in 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 as non-GAAP measures are not intended in any manner to serve as substitute for our financial results. However, we believe that they 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 in 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?

Good evening, is well time, everyone, and thank you for joining us today. I'm happy to host you in our earning call. We are concluding another strong quarter with record results and impressive growth in the core activities. The second quarter was characterized by continued organic growth in TASE's areas of activity. This quarter, we are proud to report new records in the financial results with a growth in TASE's revenue and a 36% increase in the EBITDA compared to the corresponding quarter last year. At the end of the first half of 2022, the TASE markets stand out compared to international exchanges. TASE's leading indices TA-35 and TA-90 outperformed many of the leading global indices with a decline of 8.5% on average. This is due to favorable macroeconomic conditions in Israel and a wide variety of securities listed on TASE and the balancing of the traded sectors, which place us ahead of other exchanges. The TA Oil and Gas Index alone soared by 33% in the first half of the year as a result of the surge in global oil and gas prices and the growing demand for the export of gas from Israel. The higher-than-average volatility in the capital market resulted in strong equity trading volumes in the first half of the year, which reached an average daily volume of ILS 2.5 billion, 33% increase over the average volume in the full year 2021. While IPO activity was down compared to 2021, we still had 9 IPOs that raised ILS 1.4 billion in the first half of 2022. In total, 14 new companies joined TASE since the beginning of the year, including one company that was split off another company, one that performed dual listing and 4 reverse mergers. The first half of the year was also marked by strong capital raising in secondary offering on the equity market, which totaled ILS 13 billion out of the total amount of ILS 14.4 billion raised on the equity market, representing 56% (sic) [54%] of the total amount raised in 2021, which was a record year. Capital raising from the public on the bonds market remains strong at ILS 43 billion, representing close to 55% of the total capital raised from the public in year 2021. In bond indices, we approved a significant reform in the calculation of bond indices to align them with global bond indices and with TASE's equity indices methodology. Additional upcoming upgrades to the bond indices will enable us, among others, to launch new and more complex bond indices for a more innovative and advanced universe of bonds. Another growth was recorded in TASE's revenue from the line of data products that focuses on B2B sales. In this context, I would like to announce the launch of a new service in the coming quarter [ TASE Insight ], a specialized analytical product for the listed companies, which down the road will also be made available to other audiences such as investment managers and fund managers. We are constantly investing in the development of the technological infrastructure alongside the development of new services and products all in alignment with cutting-edge international standards. In our last call, we reported that we invited several significant international trading entities to operate on TASE, both through existing members and by becoming members themselves. The entry of international trading entities and the increase in the number of clients contributed to a steady demand for the connectivity and colo products and for the London point of presence. To accommodate this level of activity, we recently upgraded the capacity of these services all the way from London to Tel-Aviv. The colo 1 compound is at full capacity and we already have new clients in the colo 2 compound. In addition, I am delighted to inform you of a new remote member at TASE, Jump Trading Europe B.V. Jump is among Europe's top-tier international trading entities, which operates as a provider of liquidity and trades on multiple exchanges around the world. Jump is an example of an international trading entity that joined colo in the second quarter. Another international trading entity joined colo alongside Jump, and I'm confident that we will soon be seeing more such entities join TASE, both as members and as colo clients. These moves are expected to increase the trading activity on TASE. I'm also pleased to report that Artisan Partners has informed TASE that it has received approval from the Israel Securities Authority to acquire TASE shares above the 5% limit and up to 10%. Artisan further informed the company that it has reached the 5% threshold requiring reporting as an interested party. Artisan non-U.S. small meat growth strategy managed by Rezo Kanovich, first invested in the share of TASE in July 2019 around the roadshow phase. We continue the alignment of TASE with international standards. In this context, I would like to inform you that the Israel Securities Authority has recently approved our plan to cancel maximum commission on OTC transactions which will come into effect soon. In addition, our Board approved the plan to update our index licensing fees. An application for approval of the updated feed is under review by the ISA, which we continue to pursue with the regulator. Finally, before I hand over the stage to Yehuda, I would like to give you an update on the status of the share buyback, of which we announced last quarter and referenced on the last quarter earning call. As you recall, we announced the launch of the first stage of the buyback plan with a purchase of up to ILS 36 million over a period of 6 months. As of August 4, 2022, we repurchased 1.1 million shares, representing 1.11% of the outstanding shares of TASE for a total amount of ILS 18.5 million. We will continue our purchases in the coming months until we complete the first stage of the buyback totaling ILS 36 million. And now I would like to hand over to Mr. Van Der Walde who will continue with a review of the second quarter results.

Thank you, Ittai. Good evening, everyone, and thank you for joining us today. I'm very pleased to participate in our earnings call. This is my last earnings call as CFO of TASE. Over the last 4.5 years, it was my privilege to act as CFO of TASE. During this time, I successfully lead our finance, accounting and Investor Relations and helped lead the transition from a private company to a public company through a global offering IPO as the first company trading a TASE to do so. I leave TASE in the very capable hands of Ittai, the Board and the senior management who will continue to lead TASE to great achievements and records. In the second quarter, TASE's strong performance continued. This was the second [ consequence ] quarter which over ILS 90 million in revenues. In addition, the adjusted EBITDA margin reached a new record of 39%, 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 second quarter. Our revenues for the second quarter of 2022 increased by 8% compared to the second quarter of 2021 and amounted to ILS 91 million. Adjusted EBITDA for the second quarter of 2022 totaled ILS 35.8 million compared to ILS 26.2 million in the second quarter of 2021, an increase of 36%. Financing expenses in the second quarter of 2022 totaled ILS 3.4 million compared to the financing income of ILS 1.3 million in the second quarter of 2021. The adjusted net profit amounted to ILS 14.3 million, an increase of 16% compared to the corresponding quarter last year. Tax expenses in the second quarter of 2022 totaled ILS 5.2 million compared to ILS 3.4 million in the corresponding quarter last year. The increase in the effective tax rate was due to the reduction in the fair value of the company's investment in government bonds, for which deferred taxes were not created. After going over the highlights of our financial results, let's take a deeper look at the composition of our revenues and expenses. Let's go to Slide 5. Our revenues from trading and clearing commissions increased by 13% compared to the second quarter of 2021. In total, ILS 35.9 million. The increase between the second quarter of 2022 and that of 2021 resulted from higher share trading volumes, which contributed 10% and from an increase in corporate bond trading volumes, which contributed 5% to the increase and was partially offset by a reduction in the effective commission rate primary in mutual funds and T bills. Our revenues from listing fees and annual levies increased by 10% compared to the second quarter of 2021 and totaled ILS 20.3 million. 5% of the increase resulted from listing fees and 7% resulted from annual levies as a result of an increase in the number of companies and funds and was partially offset by examination fees. Our revenues from the clearing house services increased by 8%, totaling ILS 18.3 million, 6% of the increase resulted from existing services landed by the clearing house members and listed companies. Our revenues from distribution of data and connectivity services increased by 14% compared to the corresponding quarter of 2021 and totaled ILS 15.1 million. 7% of the increase resulted from a raise in the revenue from connectivity services and 4% of the increase is due to a distribution of trading and derivative data outside of Israel. I will now discuss our expenses in the second quarter of 2022. Please go to Slide 6. In the second quarter of 2022, our adjusted expenses totaled ILS 68 million compared to ILS 70.2 million in the corresponding quarter of the previous year and a decrease of 3% year-over-year. The expenses related to employee benefits increased by 1% and totaled ILS 38.3 million. The increase in expenses mainly resulted from the annual salary updates and bonus provisions. Computer and communication expenses increased by 1% compared to the corresponding quarter of the previous year and totaled ILS 7.4 million. Marketing expenses decreased by 72% compared to the corresponding quarter of the previous year and totaled ILS 1.6 million. The decrease is a result of the timing of marketing campaigns, campaign launches for digital media and traditional media. The depreciation and amortization expenses increased by 8% compared to the corresponding quarter of the previous year and totaled ILS 12.7 million. The increase in depreciation and amortization expenses due to the launch of several new products and services in the last 12 months. The financing expenses totaled ILS 3.4 million compared to the financing income of ILS 1.3 million. The transition to financing expenses dropped from a negative return of 1.9% on the company's investment in marketing Israeli government bonds. I would now like to review our financial position highlights. Please go to Slide 7. As of June 30, 2022, our equity totaled ILS 677 million and comprises 76% of the balance sheet, excluding open derivative position balance and from our clearinghouse activity. In addition, we have approximately [ ILS 391 million ] in cash and investments in financial assets. We don't have any financial debt. We have ILS 154 million excess liquidity and ILS 317 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 wanted to follow up on the colocation comments. You mentioned, I think, the first facility is full and you moved on to the second. Could you remind us how many racks or how many customers are in the first -- were made up that first facility and how much capacity you have to add additional participants?

Well, the first colo consists of 17 racks altogether. We have clients that took -- the like one complete rack. We also have some clients that took -- that are sharing basically 1 rack with 2 clients. As you know, we started and we built it over time, and we do see increased demand for the data and for connectivity. The location is in our building, and we have more capacity to bring more clients on board. And this is basically the colo, the second one that now we opened.

Okay. And is the second one as large as the first one?

Right now, not. But according to the demand, we can find extra space in our premises.

Got it. Okay. And is there a way that you could contextualize the difference in activity for someone that is using that service versus what would be just a traditional member or participant in the market, so we have an understanding of what this means in terms of the potential magnitude to velocity and activity.

Well, we can't identify it entirely. I would say that by definition, clients that use the colo not only did they pay some fees by using the colo, but they will be using a lot of the data and they will have more trading activity. So by having more colo locations over time, it will contribute to our trading revenues. But it's not like we can assess a methodology of how many more clients we have on the colo, that amount it will contribute to our trading revenues. And also, you have to remember this is a relatively new activity on TASE. It's not like that we have been doing that for 5, 6 years. And also it's important to me to add we have both Israeli plus that are active on the colo and also international ones.

Understood. You also mentioned that, go ahead.

We will consider in the future maybe to give the percentage of the volume through the colo. We will look at it.