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 Q1 2023 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded May 23, 2023. The recording will be publicly available on TASE's website. With us online today are Mr. Ittai Ben-Zeev, CEO; and Mr. Yehuda Ben-Ezra, 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 first quarter of 2023, and which full and precise information is presented and may contain inter-alia forward-looking statements in accordance with Section 328 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 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.cl.il/en. Mr. Ben-Zeev, would you like to begin?

Good evening, Israel time, everyone, and thank you for joining us today. I'm happy to host you in our earnings call. In the first quarter of 2023, we saw continued strong performance of our business and record financial results. I'm pleased to announce that our quarterly revenue crossed the ILS 100 million mark for the first time. We also achieved record net profit and adjusted EBITDA numbers of ILS 25.5 million and ILS 44 million, respectively, with adjusted EBITDA margin reaching a record 44%. Our CFO will discuss the financial statements in detail later. Market conditions in the first quarter of 2023 were characterized by elevated volatility and uncertainty. The challenging conditions included the impact of rising inflation and rising interest rates domestically and globally and compounded by the political turmoil from the proposed Judical overhaul. These conditions negatively impacted equity market valuations and volumes and resulted in a significant slowdown in IPO activity. In our fixed income market, we saw a significant increase in the trading volumes. Despite the challenging market conditions, we are able to maintain a well-balanced trading and clearing environment, thanks to the brief of products traded in our market, including shares, bonds, mutual funds and exchange-traded funds. We see signs of stabilization in our market with a Judical overhaul being put on hold in an effort to find national consensus. We are encouraged by S&P latest decision to reaffirm Israel rating outlook, which is a vote of confidence in the value economy and an important boost to the Israeli capital market. As part of our strategic plan, we are committed to improving the liquidity in the market. In 2017, we launched an all-new index methodology that gave companies an incentive to increase the free flow by applying the free flow brackets, which grant those companies that increase the free float rate a weight bonus in the index. As a result, since 2017 to date, we have seen sales by controlled group's increase with a corresponding rise in the free float, which to date stands at 63%. Starting November 2023, we plan to launch a new equity index reform, which will provide public companies with a strong incentive to increase the liquidity of the shares through a number of actions such as structure the IPO to maximize liquidity on the day after the IPO, increasing the free flow held by public liquidity providers such as mutual funds, portfolio managers and retail investors, diversify and expand the base of long-term investors and engage the services of primary dealers, all in alignment with the standard practice in leading global indices. The new reform will also exclude off-exchange transaction from the calculation of liquidity ratios and thus creating incentives to move such transactions on the exchange. We believe that the new reform will increase the volume of assets that track TASE indices and will help to enhance trading liquidity in both the short and the long term, which would translate to greater trading volumes. We continue to move forward with Project Eden, the dedicated plc that we have recently announced in collaboration with the Ministry of Finance. For the first ever issuance of digital Israeli government bonds on a blockchain-based platform. We have joined forces with 3 leading global technology providers to develop the platform, including smart contract implementation and business process design. Next week, we will be holding a special event at TASE, during which we will run a live test on the platform, together with the office of the Accountant General at the Ministry of Finance and 12 leading local and international banks. We believe this Project Eden is the first and important step in the development of the local digital assets arena and the exploration of innovative trading technologies with the ultimate goal of an advanced cutting-edge Israeli capital market. We are constantly working to strengthen TASE direct engagement with the public. And as part of what we are developing the services and data products to support this goal. I am pleased to announce that we launched today the TASE plus smart portfolio that we have developed with leading fintech company. It is an advanced smart tool for tracking shares in Israel and abroad, that incorporates analysis and AI-based financial insights. This move will enable us for the first time to engage directly with the public and continue to develop advanced investment management tools for the benefit of the public. We earned TASE plus as part of the launch of a new website that offers among other things, a data store that supports digital payments. Online of data products is also designed to encourage participation in the capital market, both by companies and by public as a means to increase market liquidity. We continue to advance ESG activities, and I'm pleased to inform you that within this framework, we have donated an amount of ILS 300,000 towards the establishment of an impact investment fund for the training and placement of diverse populations in quality employment in collaboration with SFI, Social Finance Israel, a public benefit firm that implements models for solving social issues in Israel and develops the impact investment market in Israel. We have also recently published an ESG questionnaire in English, which we developed in collaboration with good vision and ESG advisory services firm that is designed to assist TASE listed companies to develop their ESG activity in line with global standards and enjoy better exposure to international ESG rating firms and to a larger pool of local and international investors. And now I would like to give you an update on TASE's buyback plan that was approved in March 2022 in an amount of up to ILS 100 million. Since the beginning of the buyback plan in May 2022, TASE repurchased 3.9 million shares for a total consideration close to ILS 66 million at an average price of ILS 17.1 per share. This concluded our previously authorized buyback plan. TASE has excess liquidity of ILS 273 million, strong financial statements and organic growth has also demonstrated this quarter. Taking into account the company's options for investing surplus funds, the returns they will generate and the state of the Israeli capital market in recent times in general and the company's share prices in the recent period, in particular, the company believes that the purchasing its own shares is a business opportunity that benefits shareholders and have the potential to increase their value alongside the improvement of financial indices. Therefore, the Board of Directors authorized today to continue with the third buyback plan of up to ILS 34 million over a period of about 6 months. The Board also authorized a special buyback plan of up to ILS 90 million until the end of June 2023, which is not subject to the prescribed restrictions and to the terms of the safe harbor protection. In conclusion, I am confident that TASE will maintain its growth momentum in the coming years, as clearly demonstrated by our financial statements for the first quarter, and we will continue to pursue the goals that we have set in our multiannual strategic plan. And now I would like to hand over to Mr. Yehuda Ben-Ezra who will continue with a review of the Q1 results.

Thank you, Ittai. Good evening, everyone, and thank you for joining us today. This quarter TASE continue with the strong financial results. Our revenues totaled to ILS 100 million, a new record in the TASE revenues, also a new record in our adjusted EBITDA totaled to ILS 43.5 million, and our adjusted net profit totaled to ILS 26.1 million. Now I will begin with Slide #5, which shows some of the key highlights from our results for the first quarter. Our revenue totaled to ILS 100 million compared to revenue of ILS 97.7 million in the corresponding quarter last year, an increase of 2%. The increase in revenue is due mainly to the increased volume of the activity excluding the nonrecurring effects of an update to the estimated period of revenue recognition from listing fees recorded in the corresponding quarter of last year, in the amount of ILS 4.3 million, a 7% increase year-over-year. The adjusted EBITDA for the first quarter of 2023 totaled ILS 43.5 million compared to ILS 36.8 million in the first quarter of 2022, an increase of 18%. The adjusted EBITDA margin increased to 43.5% compared to 37.7% in the corresponding quarter. Financing incomes in the first quarter of 2023 totaled ILS 2.5 million compared to financing expenses of ILS 5.2 million in the first quarter of 2022. The adjusted net profit increased significantly amounted to ILS 26.1 million compared to ILS 14.9 million in the first quarter of 2022, an increase of 76%. After reviewing the highlights of our financial results, let's take a deeper look at the breakdown of our revenues and expenses. I will now discuss our revenue in the first quarter of 2023. Let's go to Slide 7. Our revenues from trading and clearing commissions increased by 6% compared to the corresponding quarter of 2022 and totaled ILS 41.9 million. The increase is mainly the result of the increase in the revenue from previous issuance and the cancellation of the maximum commission on OTC transactions, which contributed 9%. And from increasing revenue for mutual funds and corporate bonds resulted in a 3% increase in revenue. This increase in revenue was partly offset by decrease in income from shares due to the reduced trading volumes resulted in a 6% decrease in revenue compared to the corresponding quarter last year. Our revenues from listing fees and annual levies decreased about 18% compared to the first quarter of 2022 and totaled ILS 20.3 million. The decrease in revenue from listing fees and levies is due to the updating of the estimate concerning the period of recognition of revenues from listing fees on shares and EPS, percent of IFRS is still in the amount of ILS 4.3 million performed in the corresponding last year. Our revenue from clearing asset services increased by 10%, totaling ILS 19.1 million, 12% of the increase resulted from existing services surrendered by declaring ourselves members in listed companies. The post partly offset by a decrease of 4% in revenues from custodial fields resulted of the reduction in the value of assets that are held in the custodial ship of the TASE Clearing House. Our revenue from distribution of data and connectivity services increased by 20% compared to the corresponding quarters of 2022 and totaled ILS 17.1 million. 11% of the increase is due to the updating of the index usage price lift. 3% of the increase is due to rise in revenue from connectivity services and 3% of the increase is due to revenue from data terminals for customers outside Israel. I will now discuss our expenses in detail. Please go to Slide #9. In the first quarter of 2023, our adjusted expenses totaled ILS 69.4 million compared to adjusted expenses of ILS 73.3 million in the corresponding quarter of previous year, a decrease of 5% year-over-year. The expenses related to the employee benefits decreased by 5% and totaled ILS 38.2 million. The decreased expenses mainly results from a decrease in the variable compensation, the cash and expenses and due to the increase in capitalization of expenses for software developers for internal use. Computer and communication expenses increased by 32% compared to the corresponding quarter of the previous year and totaled ILS 9 million. The increase resulted mainly from an increase in the maintenance cost of the new computer systems. Marketing expenses decreased by of 85% compared to the corresponding quarter of the previous year and totaled ILS 0.9 million. The decrease is a result of the timing of marketing campaign. In the first quarter of 2022, the company launched new advertising campaigns at a total cost of ILS 3.9 million. The depreciation and amortization expenses increased by 3% compared to the corresponding quarters of the previous year and totaled ILS 12.9 million. The increase is mainly due to the upgrading of infrastructures and launching of new products. The financing income in the first quarter of 2023 total ILS 2.5 million compared to financing expenses of ILS 5.2 million in the first quarter of 2022. The transition financing income this quarter resulted from a positive yield of approximately 0.5% of the company's investment, the market well securities as compared to a negative yield of approximately 2.5% in the corresponding quarter last year. In addition, the increase in the interest rate generated interest income on deposits in the amount of ILS 1.5 million. Now I will move to the balance sheet. Please go to Slide #11. As of March 31, our equity totaled ILS 692.9 million, the equity ratio, including the deferred income for listing fees and excluding open derivatives, position balance from our Clearing House activity is 88% of the balance sheet. We have approximately ILS 401.6 million in cash and investment financial assets. We don't have any financial debt. The excess capital at the end of the first quarter totaled ILS 650 million compared to ILS 613 million at the end of 2022. The asset liquidity at the end of the first quarter totaled ILS 273 million compared to ILS 257 million at the end of 2022. The Board of Directors also approved a safety caution, which served as an additional layer towards handling stress scenarios, and it is at the discretion of the Board of Directors. Now let's move to the cash flow. Please go to Slide #12. Tax-free cash flow increased by ILS 5.2 million compared to the corresponding quarter of the previous year and totaled ILS 34.8 million. Operating performance contributed to the first quarter of 2023. Cash flow of ILS 1 million and ILS 4.2 million from the decrease in investing activities is due to the timing of implantation of the group investment work plan in the quarter. 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 to start, if we could talk about the market data line, it looks like the index fees, which you announced, I think, a few quarters ago in terms of the pricing change kicked in. I just want to see if that ILS 2.5 million run rate for the authorization for index usage is a good run rate and maybe broadly the market data index revenue line, thinking about prospectively how we should think about maybe some of the growth from here?

Dan, so in terms of the data part of the increase is because of the index and the other part is because of the activity and the products and everything that we are conducting, something around ILS 1.5 million, it's an increase in the quarter because of the new pricing of the index. And in terms of run rate, I just want to remind you, as we stated a few months ago, that starting 2024 it will be doubled. So if the AUM remains the same, the ILS 1.5 million will be ILS 3 million starting 2024 and onwards -- third quarter, of course.

I'm sorry, the third quarter, is that you said?

No, no. I'm saying each quarter and onwards, because the ILS 1.5 million is like for the first quarter, so it's around ILS 6 million for the whole year. But it's very important for me to emphasize that this is only part of the growth that we see and have.

Understood. Moving towards the Clearing House revenues, which also continue to grow quite nicely. Can you expand a bit upon how we should -- what's driving that, particularly on the Clearing House services and potentially the prospects for that going forward?

Yes. So as I said, before, we have invested a lot in the past few years in many new services and upgraded services. And we have a lot of activity. Sometimes, in terms of the AUM, it can impact negatively. Sometimes, there can be also some timing issue because like toward the end of the year, if it falls on a weekend, some of the actions can be at the first day of the new year. But in general, when we laid out in October our new strategic plan, part of the organic growth that we see ahead is based on our clearing and settlement services, which is combined of many actions and services that we apply. It does not consist on 1 or 2 big pillars. It's a combination of many things.

Okay. Understood. And I just want to clarify on the listings revenue. The accounting -- the change in reporting, if I recall, that was more for first quarter last year. As we think about what you just reported this is a reasonable run rate then assuming what happens with additional company share issuance, other things that can drive it. But the -- in terms of onetime accounting changes, is there -- was there anything in this quarter that impacted the revenues?

No, none, none. And as you mentioned, what you said is very accurate.

Okay. Great. And then moving to expenses, marketing, obviously very low this quarter versus what we've seen, and you talked about the timing of certain programs. So I guess as we think about the remainder of this year, I believe marketing is expected to be down, but what -- how should we think about the quarterly flow of those campaigns?