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 2024 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, May 22, 2024. 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 2024, 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 substitute to 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, Israel time, everyone, and thank you for joining us today. I'm happy to host you in our earnings call. Overall, TASE is reporting strong results for Q1 2024 and quarterly revenues hit an all-time high of ILS 108.3 million, up 8% from the same quarter last year. Our adjusted EBITDA also reached a record of ILS 48.6 million, a 12% increase from the same quarter last year, with EBITDA margin reaching a record 45%. Our quarterly results demonstrate the resilience of our business. Despite the headwinds from the ongoing war, we achieved record quarterly results driven in part by the continued organic growth of all TASE core operations. Yehuda Ben-Ezra, our CFO, will discuss the financial statements in detail later in this call. Despite the country still being in the midst of the war, the market showed resilience in Q1 2024. And the TA-35 and the TA-90 indices posted a positive return of 8% and 11%, respectively, compared to an increase of 6% and 10% in the Dow Jones and S&P 500 indices in the U.S. As a result of the rise in the TASE indices, the total equities market cap at the end of the quarter was ILS 1,155 billion, 9% higher than the market cap at the end of 2023. Compared to 2023, Q1 2024 trading volumes in the main trading channels increased significantly. Trading volumes in equities were about 7% higher than the average daily trading volumes for all of 2023 and averaged ILS 2.1 billion a day, despite the high volatility and high volumes that characterized trading in 2023, stemming from the unprecedented events that took place last year. Heightened activity was recorded in every type of bond traded on the bonds market. The daily trading volume in government bonds averaged ILS 3.4 billion, 18% more than in 2023, with shekel bonds recording the greatest increase. The average daily volume in corporate bonds reached ILS 1.2 billion, a 14% increase compared to 2023. In this context, I would like to mention that at the beginning of January this year, we reduced the minimum order size for CoCo bonds from ILS 50,000 to ILS 10,000, a move that has increased the average daily trading volumes by 270% to ILS 32 million in Q1 2024 compared to ILS 12 million in Q1 2023. We also saw high trading volumes in Israeli government T-bills that have reached ILS 1.9 billion a day, which is 38% higher than the average daily trading volume in 2023. In Q1 2024, 2 new companies completed an IPO on TASE compared to just one IPO in all of 2023. Equity offering raised ILS 2.5 billion, similar to the amount raised in Q1 2023, but more than twice that raised in Q4 2023. Corporate debt issuance raised ILS 21.8 billion, similar to the amount raised in Q1 2023, but slightly less than the ILS 25.4 billion raised in Q4 2023. In light of the ongoing October 7 war and the increase in the cumulative deficit, the Ministry of Finance continued to raise debt in Q1 2024 and issued bonds totaling ILS 51.9 billion on TASE compared to ILS 36 billion in Q4 2023. In addition, the Ministry of Finance raised a record ILS 28.7 billion at the beginning of March in an overseas issuance compared to ILS 23 billion in Q4 2023. It's worth noting that this issuance attracted record demand, the highest in the history of the state of Israel, 5x the amount issued, and with the participation of about 400 different investors from 36 countries around the world. The total amount of debt raised by the Ministry of Finance in Israel and abroad in bond offerings totaled ILS 80.6 billion in Q1 2024 compared with ILS 59 billion raised in the previous quarter. The sharp increase in these issuances, mainly on TASE, contributed to the significant growth in trading volumes that I mentioned earlier. We continue to implement our strategic plan of strengthening international participation in our market. I would like to report that about a week ago, we published for the first time, in cooperation with the Israel Securities Authority and the Bank of Israel, a call for public comments in relation to the transition to trading on Fridays as is customary throughout the world. We believe that aligning our trading days with the rest of the world will help increase accessibility for international investors. We continue working to introduce new traders to the Israeli capital market and to encourage foreign brokers to become members of TASE. In this context, I would like to mention that at the beginning of April, the international trading group, Jump Trading, began operating on TASE. Jump Trading is one of Europe's leading algorithmic trading operators and serve as a market maker and a liquidity provider on the world's largest stock exchanges. We are also seeing an increase in the value of the public holdings in foreign funds traded on TASE, which at the end of Q1 2024 stood at ILS 8.8 billion, ILS 2.3 billion higher than the value at the end of 2023. I would like now to bring you up to date with TASE equity movements in Q1 2024. As you recall, following the signing of a deal last December for the sale of the bank's legacy arrangement shares, we distributed a special dividend of ILS 231 million. Subsequent to the sale of the shares to local and foreign investors in January, we received ILS 242 million. This sum went straight into TASE equity in January and is earmarked for developing investment in TASE IT infrastructure. Deducting the dividend paid out from the payments we received from the sale of the shares left us with ILS 11 million, which was added to TASE equity. On top of this, we distributed an additional dividend of ILS 42 million during March, representing 50% of TASE 2023 profits. And we adopted the dividend policy for 2024 to 2026, which will be to distribute 50% of the annual profit as declared in the annual report. Finally, I'm pleased to inform you that at the end of March, we signed an agreement with the TASE employee union for the next 5 years until the end of 2028, which regulates the terms of the employment -- employees' employment. It is our belief that the estimated average increase in the overall annual cost of the company's payroll expenses will not have a material impact on TASE results over the course of the agreement's term. In conclusion, the Q1 financial statements show that even during this challenging war-time period in Israel, the stability and resilience of TASE as a critical component in the Israeli economy is clearly evident. We will move forward on the path of further growth for TASE, while achieving the goals we have set for ourselves in accordance with our strategic plan for the coming years. And now I would like to hand over to Mr. Yehuda Ben-Ezra who will continue with a more detailed review of the Q1 financial results.

Thank you, Ittai. As Ittai mentioned earlier, despite the complex situation in Israel, TASE has again posted strong financial results for Q1 2024. Some of the main financial metrics are shown on Slide #4. Our revenue for the quarter hit a new record, totaling ILS 108.3 million. Our adjusted EBITDA is ILS 48.6 million, also set a new record, while our adjusted EBITDA margin reaching a record of 44.8%. I will continue with Slide #6, which shows some of the key highlights from our results for the first quarter. Our revenues totaled ILS 108.3 million compared to ILS 100 million in the corresponding quarter last year, an increase of 8.3%, which was evident across all operations. Our revenues from non-transactional services increased to 60% from the total revenue, an increase of 2%. Adjusted expenses totaled ILS 73.2 million compared to ILS 69.4 million in the corresponding quarter last year, an increase of 6%. The increase in expenses is due mainly to employee benefit expenses, computer and communication expenses, and marketing expenses. Adjusted EBITDA totaled ILS 48.6 million compared to ILS 43.5 million in the corresponding quarter last year, an increase of 12%. The increase is due to the higher revenues. Financial income in Q1 2024 totaled ILS 1.4 million compared to financing income of ILS 2.5 million in the corresponding quarter last year. The decrease is due to financing expenses on the loan obtained at the end of 2023. Adjusted net profit amounted to ILS 27.8 million compared to ILS 26.1 million in the corresponding quarter last year, an increase of 12% (sic) [ 7% ]. Now let's go to Slide #7, where we can take a deeper look into the composition of our revenue in Q1 2024. Revenue from trading and clearing commissions increased by 2% compared to the corresponding quarter last year and totaled ILS 43 million. The increase is mainly due to an increase in the volume of mutual fund units and to an increase in the trading volume of T-bills, which were offset by a lower number of trading days in the quarter and the reduction in the effective commission rate. Revenue from listing fees and annual levies decreased by 6% compared to the corresponding quarter last year and totaled ILS 21.6 million. 4% of the increase arose from annual levies and an additional 2% is from higher revenues from listing fees. Revenues from clearing house services increased by 5% compared to the corresponding quarter last year, totaling ILS 20 million. The rise is primarily driven by higher revenue from custodian fees as a result of an increase in the value of assets held in the custodianship. Revenues from data distribution and connectivity services increased by 32% compared to the corresponding quarter last year and totaled ILS 22.6 million. 22% of the increase was due to updating the index usage price list, and a further 7% of the increase resulted from higher revenue from data distribution to business and private customers, and additional 3% of the increase is from higher revenues from connectivity services. I would like now to discuss our Q1 2024 expenses, so please turn to Slide 9. Employee benefit expenses increased by 2% compared to the corresponding quarter last year and totaled ILS 39 million. The increase in these expenses resulted mainly from an increase in variable compensation and the non-utilization of vacation days. Computer and communication expenses increased by 20% and totaled ILS 10.8 million. The increase resulted mainly from an increase in the maintenance cost of new computer systems. Marketing expenses increased by ILS 0.5 million compared to the corresponding quarter last year and totaled ILS 1.3 million. Most of the increase stems from the launch campaign in Q1 2024. Depreciation and amortization expenses increased by 5% compared to the corresponding quarter last year and totaled ILS 13.5 million. The increase is due mainly to the upgrading of infrastructure and the launch of new products. Financial incomes totaled ILS 1.4 million compared to financial income of ILS 2.5 million in the corresponding quarter last year. Although our financing income for Q1 2024 increased due to the interest income of the deposits, there was an increase in our financing expenses as a result of loan obtained at the end of 2023. Taken together, this resulted in a reduction of the net financing income. Now I would like to review our financial position highlights at the end of Q1 2024, as shown in Slide #10. Our equity totaled ILS 630.7 million, a [ comprehensive 70% ] of the balance sheet, excluding [ operative perimeter position ] balance from our clearing house activity and the total deferred income from listing fees. We hold ILS 483 million in cash and investment financial assets. The balance of the bank loan totaled ILS 137.3 million. The surplus equity and other regulatory requirement at the end of Q1 2024 totaled ILS 545 million compared to ILS 380 million at the end of 2023. The increase in the surplus equity is due to the ILS 242 million in proceeds from the sale of the arrangement shares. The consideration received by TASE was carried directly to equity and will be used for investment in TASE technological infrastructure. The surplus liquidity of the regulatory requirement at the end of Q1 2024 totaled ILS 110 million compared to ILS 145 million at the end of 2023. The Board of Directors also approved a safety cushion, which serve as an additional layer of protection for handling stress scenarios. And it is used at the discretion of the Board of Director. Now we'd like to go to Slide #11 to review our cash flow in Q1 2024. TASE free cash flow increased by ILS 4.3 million compared to the corresponding quarter last year and totaled ILS 39.1 million. The increase is mainly from investment in technological infrastructure that were funded by the proceeds from the sale of the arrangement shares totaling ILS 12.4 million, which was offset by a reduction of ILS 6.3 million in the cash flow from operating activities. Cash flows from financing activities resulted in negative cash flow of ILS 45.1 million compared to negative cash flow of ILS 23.8 million in the corresponding quarter last year. The increase is due mainly to 2 dividend payments that amounted to ILS 272.7 million. This was offset by an amount of ILS 242 million from the sale of the arrangement shares. And with that, I will return the call to our moderator to conduct the Q&A.

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

This is actually Rick Roy on for Dan today. So I have a number of questions here, if you don't mind. So a very strong quarter for data revenues, ILS 23 million. I saw you attribute it to an increase in the index fees. Is there anything onetime you'd call out in this line item? Or would you consider this a fair run rate? And also, if you could comment kind of on index AUM levels outside of pricing changes.

Sure. So Rick from California, in terms of the index, I would say that we don't have any onetime effect. We had a pricing change that took place in 2023. And now it's the second leg of the same price exchange. So from this year and on, these will be the normalized fees that we run our indexes. We also started in the past year to do some tailor-made indices. So overall, you can look at it as a steady state. And hopefully, over time, our AUM will go as well. So the number will be correlated. I think overall, clearly, in October, we've seen a decline when October 7 took place. But after a couple of weeks, the market came back. So overall, AUM is quite steady. And as I mentioned before, we actually saw an increase if you compare Q1 2024 to a year before in terms of our aggregated market cap in equities. So that's where we are at the moment.

And on that, do you have any of those new indices and/or existing indices you could call out, where you're seeing maybe a pronounced momentum?

Well, we do have -- we do launch like the tailor-made indices. But I would say that it's not like any one of them has like a material impact of what we do. It's part of our value proposition. And clearly, we see advantage, and we bring more products to the Israeli retail, which is also important. But in terms of the money that we generate out of it, it's not material, not at all.

Got it. And then if I could move on to the income statement. Where would you anticipate your biggest areas of revenue growth to be over the next year? And then following that, do you have any changes to your expense growth outlook for the year, especially considering the new labor agreement?

Yes. So in terms of our revenues, we anticipate that we will continue to grow organically in all of our core activities. Clearly, as it was in the first quarter, the data and the connectivity currently have a higher growth rate than the rest of it. And I think to look at 2024, when you observe the overall things that we have, it makes sense. But I also think that the split that we have between the transaction and non-transaction, which is usually 60% non-transaction and 40% transaction, which has been the case for the past few years, we believe that it will continue to be as with 2024. And in terms of the expense, the new agreement that we signed actually, as I mentioned, has no material impact on our expenses in the next few years. So we don't see a material impact throughout the year. I think it's worth mentioning that in the expenses that we had in the first quarter of 2024, one of the outcome of the war is clearly that employees have nowhere to go for holidays. So we had like a ILS 1 million additional expense because of accounting, that employees couldn't take vacations, which is something that over time will be normalized.

Understood. And is there anything else maybe on the non-comp side, which you foresee changes or onetime items?