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 2023 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded August 8, 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 second quarter of 2023, 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 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 delighted to host you in our earnings call. I'm pleased to report the results for second quarter of 2023. We have maintained our upward trend. We achieved an organic revenue growth of 2% in the second quarter compared to corresponding quarter despite headwinds from the political turmoil relating to the proposed Judicial reform and lower number of trading days in the second quarter of the year. The adjusted EBITDA in the second quarter remained almost unchanged from the corresponding quarter last year totaling ILS 35.6 million. The profit in the second quarter of 2023 totaled ILS 18.8 million, representing a 32% growth compared to corresponding quarter. Yehuda Ben-Ezra, our CFO, will provide a detailed discussion of the financial statements later. As a result of the uncertainty surrounding the proposed Judicial reform and the global rise in interest rates and inflation, Tase [ living ] indices continued to underperform in comparison to leading international indices. IPOs have come to a standstill and capital raising by public companies significantly reduced compared to the first half of 2022. However, the trading volumes of government bonds and T-Bills have been steadily growing. Despite the higher interest rates, the company's churn to marketable bonds for debt refinancing. In the first half of 2023, the business sector raised ILS 43.9 billion through offerings and private placements of bonds to institutional investors and the public compared to ILS 45.7 billion in the first half of 2022. Despite the political turmoil, the assets under management of TASE indices surged in the second quarter of 2023, compensating for the withdrawals in the first quarter. In the first half of the year, the TASE equity indices gained ILS 500 million in AUM and the volume of OTC assets that track the TASE indices grew by ILS 1 billion. TASE equity indices currently manage about ILS 41.3 billion of ETF tracking funds and OTC transactions and their resilience reflects the significant untapped growth potential of the Israeli economy which could be realized once the political consensus is reached. Israel unique demographics, robust economy and relatively low free float of TASE equity indices act a strong growth engines. We are confident that the TASE index reform, which I mentioned in our previous call and which will take effect this coming November, will improve the indices and boost their AUM. Foreign investors activity on TASE remains strong, with total net purchases of shares of ILS 4.6 billion from January through May 2023 in addition to purchases of ILS 14.1 billion in the full year 2022. According to the Bank of Israel, net purchases of government bonds by foreign investors on TASE totaled ILS 20 billion from January through May 2023 compared to net sales of ILS 1 billion in the full year 2022. These purchases have generated strong trading volumes in our government bond market. In line with the goals of our strategic plan, we have entered into a groundbreaking agreement with Fireblocks for the development and advancement of activities in digital assets. This collaboration will allow TASE to enhance its value proposition to the Israeli market by establishing for the first time a dedicated, transparent and supervised framework for digital asset activities. For example, we will be able to offer qualifying institutions custody services for crypto-currencies and other digital assets. We are making progress with our trading strategy and liquidity enhancement. In July, we launched a new weekly option series on the TA-35 index that expires on Tuesdays in addition to the Thursday expiration series. This additional expiration date is designed to accommodate the growing popularity of the weekly options on the TA-35 Index. And we are confident that it will increase investor's engagement in our derivatives market. Furthermore, in July, we launched the trade repository and OTC real-time reporting system, which enables investors instant access to information on transaction executed of the order book, all in alignment with international standards such as Mifid2, the publication of transactions on the trade repository is subject to a fee. We believe that providing more direct and transparent access to information will help to optimize trading by both local and foreign investors, putting us on par with the leading global capital market. And now I would like to update you on the buyback plan. Since the initiation of the plan in May 2022 until after the reporting date, TASE has purchased a total of 5 million shares at an average price of ILS 17.6 per share, amounting to ILS 88 million. The remaining balance of the buyback plan is ILS 12 million. Additionally, in the second quarter, we executed a special buyback of 4.6 million shares at an amount of ILS 86 million, which was not subject to the prescribed restriction and the safe harbor protection terms. In conclusion, we will continue to pursue new growth opportunities and work towards achieving our strategic goal for the coming years. And now I'd like to hand over to Mr. Yehuda Ben-Ezra who will provide a detailed review of the Q2 results.

Thank you, Ittai. In the current quarter, we continued to achieve strong financial results with total revenues reaching ILS 93 million despite a 5% reduction in the number of trading days. Our revenue increased by 2% compared to the corresponding quarter of 2022. The adjusted EBITDA similar to the corresponding quarter of 2022 and totaled to ILS 35.6 million. Our adjusted net profit climbed steeply to ILS 20.4 million, representing substantial growth of 42% compared to ILS 14.3 million in the corresponding quarter of 2022. In the first half of 2023, we continue with a strong financial result. Revenue totaled ILS 192.9 million, an increase of 2%. Excluding the nonrecurring effect in the corresponding period last year, the increase in revenue totals 5%. The adjusted EBITDA in the first half of 2023 reached historic high record of ILS 79.1 million, representing a 9% increase compared the corresponding period of 2022. The adjusted EBITDA margin has also improved significantly, increased to 41% compared to 38.5% in the corresponding period last year. The adjusted profit in the first half of 2023 totaled ILS 46.5 million compared to ILS 29.2 million in the corresponding period last year, a significant increase of 59%. I will begin with Slide #5, which shows some of the key highlights from our results from the second quarter. Revenue from services totaled to ILS 92.9 million compared to revenue of ILS 91 million the corresponding quarter of 2022, an increase of 2%. The increased revenue is due mainly from data distribution and connectivity services. Our income from non-transactional services increased to 62% compared to 61% in the corresponding quarter. Expenses totaled ILS 72.6 million compared to ILS 68.1 million in the corresponding quarter of 2022, 7% increase. Increase in cost is due mainly to increase in computer and communication expenses, expenses with respect to share-based payment, and to marketing expenses. The adjusted EBITDA for the second quarter of 2023 totaled ILS 35.6 million compared to ILS 35.8 million in the second quarter of 2022, a decrease of 1%. Adjusted EBITDA margin decreased to 38.3% compared to 39.3% in the corresponding quarter. Financing incomes. In the second quarter of 2023 total ILS 3.6 million compared to financing expenses of ILS 3.4 million in the corresponding quarter of 2022. The increase is due mainly to the transition to financing income as a result of the positive return on the company's investment in market-based securities. The adjusted net profit increased significantly and amounted to ILS 20.4 million compared to ILS 14.3 million in the corresponding quarter of 2023, an increase of 42%. The increase is due mainly to an increase in revenue and the transition to financing income. 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 second quarter of 2023. In detail, let's go to Slide #7. Our revenues from trading and clearing commission decreased by 1% compared to the corresponding quarter of 2022, in total ILS 35.5 million. The decrease is due mainly to the reduction in number of trading days which contributed 5% and to the reduction in the trading volumes of corporate bonds, which contributed 4%. In opposition, a 6% increase in revenue results from the T-bills issuance and the cancellation of the maximum commission on OTC transaction, a 2% increase in revenue results from increase in revenue from mutual funds. Our revenue from listing fees and annual levies decreased by 1% compared to the second quarter of 2022 and totaled ILS 20.1 million. The decrease is due to the reduction in revenue from the examination of prospectuses, at a rate of 2% of total revenue, which was partly offset by an increase in the annual fees from mutual funds, at a rate of 1% of total revenue. Our revenue from Clearing house services increased by 3%, totaling ILS 19 million. The increase resulted from an increase in clearing house services to companies. Our revenues from distribution of data and connectivity services increased by 15% compared to the corresponding quarter of 2022 and totaled ILS 17.4 million. A 12% increase is due to the updating of the index-usage pricelist and 5% of the increase is due to revenue from data terminals for customers outside Israel. Expenses in detail. I will now discuss our expenses in the second quarter of 2023. Please go to Slide #9. The expenses related to employee benefits decreased by 3% compared to the corresponding quarter of 2022 and totaled ILS 37.1 million. The decrease in expenses mainly results from a decrease in variable compensation and due to the increase in capitalization of expenses for software development for internal use. Computer and communication expenses increased by 21% compared to the corresponding quarter of previous year and totaled ILS 8.9 million. The increase resulted mainly from an increase in the maintenance cost of new computer systems and personal costs. Marketing expenses, increased by 53% compared to the corresponding quarters of 2022 and totaled ILS 2.4 million. Expenses are affected mainly by the timing of the performance of the group's marketing activities. The depreciation and amortization expenses, increased by 2% compared to the corresponding quarter of 2022 and totaled ILS 13 million. The increase is mainly due to the upgrading of infrastructure and launching of new products. The financing income in the second quarter of 2023 totaled ILS 3.6 million compared to the financing expenses of ILS 3.4 million in the second quarter of 2022. The transition to financing income this quarter resulted from a positive yield on the company's investment in market-based securities as compared to a negative yield in the corresponding quarter of 2022. In addition, the increase in the interest rate generated interest income on the deposits of the company. Now let's move to the balance sheet. Slide #11. As of June 30, 2023, our equity totaled ILS 614.6 million. The equity ratio, including the deferred income from listing fees and excluding other derivatives position balance from our clearing house activity is 88% on the balance sheet. We have approximately ILS 319 million in cash and investments in financial assets. We don't have any debt. The excess capital at the end of the second quarter totaled ILS 536 million compared to ILS 613 million at the end of 2022. The excess liquidity at the end of the second quarter totaled ILS 190 million compared to ILS 257 million at the end of 2022. The decrease in the excess capital and excess liquidity is attributed to the buybacks purchasable shares in amount of ILS 174 million. The Board of Directors also approved a safety precaution which serves as an additional layer for handling stress scenarios, and it is a decision of the Board of Directors. Cash flow. I would like to review our cash flow highlights. Please go to Slide #12. Tase free cash flow increased by ILS 13.7 million compared to the corresponding quarter of 2022 and totaled ILS 17.9 million. Operating performance contributed to the second quarter of 2023 cash flow of ILS 10.7 million and ILS 3 million of decrease in investing activities is due to the timing of implementation of the group investments, growth plans in the quarters. Tase financing activities decreased by ILS 75.1 million compared to the corresponding quarter of 2022 due to the payment for the acquisition of treasury shares that was increased by ILS 98.1 million. 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, I guess, follow up a little bit on just the environment and maybe what you guys are doing as a company to continue to execute and drive growth. And one of the products, I think, it's how you mentioned around the weekly options that is going to be announced. I guess maybe just expand a bit upon the derivatives opportunity, where the business is today, what you think this new product rollout might mean. And maybe from like a broader distribution perspective, who you would expect this to maybe bring to the market that isn't participating today?

Dan, so clearly, because we've been mutual for so many years, we still have things that we need to do catch up to other markets, and this is part of the organic growth that we see ahead of us. And the derivative market is a very good example for that. And by talking with the market participants, clearly, when you have things happening in your environment like we're having in the past few months, then the volatility moves in. And by having more products, then you have more engagement. So we already issued in July the weekly options. And we've seen traction in those elements. And we are constantly talking with the market and thinking of more products and more services that we can give it. And it basically will help to accommodate not only the local players, but also the global players because we have seen interest on various parts. I mentioned before the significant number of the government bonds that have been acquired by international investors. So overall, the way we look at it is volatility is part of the game as an exchange that runs, both bonds, equity and derivatives. And we have to be very tune to the market and to modify also some of the things that we want to develop in order to accommodate the market needs.

That's helpful. And I guess, as you think about the kind of current environment, understanding that the backdrop isn't great. But as you think about conversations with non-local participants bringing in more international players, whether that's via co-location, listings, remote members, as all -- I guess, update on those kind of dialogue and/or backlog or conversations?

Sure. So we have seen no impact, because of the Israeli situation, on the global arena. Meaning that if you look at our data services, we've seen a constant demand and growing demand from international players [ extracting ] our data services. So we are continuing all of the discussions about the remote member and the colocation, actually going to start the third piece of our colocation racks. So the current political situation in Israel has no negative impact on that front. Clearly, there is an impact on our indices, as I mentioned, and also on our new listing because it's very difficult to estimate when and how there will be a consensus. I think that everybody in Israel agrees that this is -- it's not helpful. But unfortunately, our politicians are arguing, who's to blame for that and they can't find a solution that everybody will be happy about it. But we don't see any negative impact. If you look at all our non-transactional segments that we run also going forward.

Understood. And then just on expenses and thinking about what your priorities are here, middle of the year, the backdrop you've just outlined, is marketing probably less of a priority given the other uncertainties locally? Or -- just trying to understand the first half run rate versus maybe thinking about the second half, if there are any real changes.

Yes, sure. So clearly, the first half was lower because of the situation. But it can be a point that if in 2 months' time, everything is reached, the whole momentum will change in Israel because if you look at what happened in Israel, with the protest and all of the talking, clearly shows how many people here care about the country and want the country to be successful. So if the politicians will reach some kind of a resolution, then we will try to get all of the dedication and caring and everything all together, how we can stress them -- our economy. And a good example for that is these value institutions. We believe that these value institutions can be more supportive in our local market. So currently, what you just mentioned is correct about the marketing projections, but it can change over time because of the circumstances.

That makes sense. And then just thinking about some of the other longer-term dynamics that you've been addressing whether that's with some of your stakeholders or ultimately with the regulator in terms of some of the pricing opportunity as you see ahead, is all of those potential outcomes or changes on hold as you -- as this process unfolds politically?

No, not at all. All of the things that we are doing has no connection whatsoever to the political turmoil. No -- nothing to do with it. We have a new ISA regulator that will very soon step into the office if nominee was approved. We have a very good dialogue in the past few months with our regulator. We are constantly discussing new things that we are doing. We have been waiting for the new regulator to step in because we want to start to push forward the group structure that we announced and the political situation has no any implication to those dialogues and the things that we are progressing and will continue to progress. including fees and other things that we are doing.

Great. And then just on share repurchase in the buyback, you have 12 million remaining. You've obviously been active and you had the special buyback, plus what you've announced. So as we get towards the end of the current authorization and given your excess capital position, should we assume -- or is it reasonable to assume another re-up of a buyback authorization? Or how is the Board and the management thinking about capital deployment beyond the current authorization?

That's a good question that I don't have an answer for that. We actually discussed it today with our Board. We tell that the advantage of what happened in the political arena in Israel that it affected a public company, and it also affected us as a public company. So we took advantage by doing the buyback. That's the advantage of what happened. Clearly, we have a very strong balance sheet. And we will need to take it to the Board and discuss it. We are in a situation that we are keep reviewing opportunities and stuff like that, but we are a company that -- we don't see anything specific that we need in order to continue to grow our revenues. So we will discuss it with the Board and then we'll think what will be the best outcome for the company currently, I don't have an answer to that question.

[Operator Instructions] There are no further questions at this time. Thank you. This concludes the Tel-Aviv Stock Exchange Q2 2023 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.