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 2024 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded November 20, 2024. 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 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 third 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 the Securities Law 1968. In addition to IFRS reporting, we might mention certain financial measures that do not confirm -- 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.co.il/en. Mr. Ben-Zeev, would you like to make -- would you like to begin, please?

Good evening, Israel time, everyone, and thank you for joining us today. I'm happy to host you in our earnings call. Despite the ongoing October 7 war, we concluded Q3 2024 with strong performance and record results. This quarter's revenue grew significantly, up 14% on the same quarter last year, reaching a new high. Also, this quarter, we have seen a 17% increase in adjusted EBITDA as well as significant growth in the net profit, which was up 43% on the same quarter last year. Yehuda Ben-Ezra, our CFO, will discuss the financial statements in detail later in this call. The Israeli capital markets have exhibited remarkable resilience and stability throughout 2024, maintaining strong performance despite the ongoing war. The market's fundamentals remain robust, demonstrating the underlying strength of Israel economic infrastructure and its ability to weather complex circumstances. The leading TASE indices have continued to rise with the TA-125 up 21% year-to-date versus 15% for the Dow Jones Index, 4.3% for the MSCI Europe Index and 24% for the S&P 500. By the end of Q3 2024, TASE's equity market cap reached ILS 1,184 billion, a 12% increase from year-end 2023. Compared to 2023, trading volumes in TASE markets increased significantly in the first 9 months of 2024 with equities ADV reaching ILS 2.1 billion, up 5% over the ADV in 2023. In our bond ADV reached ILS 4.4 billion, up 12% over ADV in 2023. The rise in trading volumes stemmed mainly from government shekel bonds, where the ADV reached ILS 2.3 billion compared to ILS 1.9 billion in 2023, driven by the steep increase in issuances by the Ministry of Finance. In light of the ongoing war and the increase in the cumulative deficit, the Ministry of Finance continued to raise debt and issued bonds totaling ILS 171 billion in the first 9 months of 2024, compared to ILS 57.8 billion in the same period last year. The average daily volume in corporate bonds reached ILS 1.1 billion, a 6% increase compared to 2023. Trading volumes in Israeli government T-bills were also higher, averaging ILS 1.5 billion daily, 5% more than the average daily volume in 2023. TASE corporate bonds market continues to be a major channel for public companies seeking to raise debt. Debt raised by the business sector in the period January, September 2024, reached ILS 87.4 billion, up 31% over the amount raised in the same period last year. In our mutual funds market, the daily average turnover of creation and redemption rose to ILS 1.8 billion, 29% higher than the average in 2023. The market cap of the mutual funds at the end of the first 9 months of 2024 reached ILS 405 billion, 23% higher than the market cap at the end of 2023. We are also seeing a reawakening of interest from foreign investors that since last July has again been buying equities on TASE. By the end of the third quarter of 2024, foreign investors had made net purchases of ILS 3 billion. During the first 9 months of 2024, 5 new companies completed an IPO on TASE and 1 new company was added as a dual-listed company. We continue to work on implementing strategic plans to strengthen business activity as well as continuing to work on promoting our core activities. In the trading field, we launched at the beginning of November, a Block Trade facility for large-scale prearranged and protected transaction that ensure real-time transparency to the market. In addition, at the end of October, we completed the second phase in the development of the new OTC trading system, whereby it will be adopted for foreign investors and will align with international standards and enjoy a series of moves that we have already made and talked about in our previous earnings calls, such as the reform of TASE indices, the addition of weekly expiration dates on TA-35 options and the launch of the block system that I mentioned earlier. We continue to invest and develop the exclusive indices market. In September, we signed an agreement to launch six new exclusive indices with analysts' mutual funds. And to date, we have entered into exclusivity contract with four leading index creators, which are expected to launch over 20 new indices in the coming months. In early September, we launched for the first time, futures contracts on three leading indices. TA-35, TA-90 and TA Banks-5. Within this framework, the first market maker has been appointed to ensure liquidity and trade volumes in this market and to enable the public to invest at more competitive prices. In addition, following the measures we took at the beginning of the year to reduce the multipliers in the derivatives market on the option on the TA-35, TA Banks-5 and TA-125 and foreign currency indices, we have seen average daily trading turnovers on these options grew by 7% compared to 2023. The weekly options turnover has also risen by 9% over the 2023 average, increasing to 52,000 units a day, the highest since the launch. At the same time, the monthly options turnover rose by 6% over the 2023 average increasing to 65,000 units. In September, the ISA approved an update of custody fees within the framework of benchmarking to international standards. Using the same framework, the ISA also allowed us further flexibility in the future years with regard to some of the fees for base products and services, including data distribution and connectivity. This is a major development for TASE as it provides us with flexibility in the company's business management thereby enabling TASE to continue investing and developing the Israeli capital market. Last August, the ISA also approved for the first time for nonbank TASE members to trade in crypto currencies for the customers. This is a major development, enabling investors to be exposed to a broader variety of products, and we believe that the brokerage firms will seize the opportunity to operate in this field. Regarding the transition to a Monday to Friday trading week, we continue to work with the regulators, the ISA and the Bank of Israel on various aspects of the implementation of this change, with the aim of reaching the most fitting solution for international investors and for the Israeli domestic participants. We are continuing our efforts to make more information accessible to the public. And in October, we initiated a television and digital campaign to launch the TASE+ system, which includes an AI-based analysis of investments and the tracking of equities in Israel and abroad that allows the public to experiment with virtual portfolio management in an accessible and friendly manner and is available free in Hebrew and English. This initiative is part of TASE strategic goals to make the capital market more accessible to the public, to remove trading barriers and to expand the knowledge available to the public. So far, more than 30,000 existing and potential investors have opened an account. In conclusion, the Israeli economy continues to show exceptional resilience, and we continue serving as a robust platform for both corporate capital raising and government debt issuing. TASE's Q3 results validate our strategic plan, reflecting our investments in innovative financial products and cutting-edge technological development. These achievements reinforce our commitment to executing our long-term vision and position us strongly to meet our goals in the coming years. And now I'd like to hand over to Mr. Yehuda Ben-Ezra, who will continue with a review of the Q3 results.

Thank you, Ittai. As Ittai has already mentioned, TASE has once again posted strong financial results for Q3 2024, demonstrating resilience despite the ongoing war. This result serves as a testament to the economic strength of Israel and the robustness of its capital market. Some of the main financial metrics are shown on Slide #4. Our revenue for the quarter amounted to a new high of ILS 109 million, increasing by a record 14% compared to the corresponding quarter last year. This is the highest revenue in the quarter since TASE IPO. Adjusted EBITDA improved significantly by 17% to a total of ILS 45.1 million, but the adjusted EBITDA margin also improved from 40.2% to 41.4%. Our net profit experienced substantial growth of 43% and increased to ILS 26 million. This is the highest net profit in the quarter since TASE IPO. I will continue with Slide #10, which shows some of the key highlights from our results for the first 9 months of 2024. During which we continue to post strong financial results. Total revenue amounted to ILS 322.4 million, a 12% increase compared to the corresponding period last year. Adjusted EBITDA totaled ILS 139.5 million, representing a 19% increase over the corresponding period last year. The adjusted EBITDA margin improved significantly to 43.3% compared to 40.7% in the corresponding period last year. Adjusted net profit totaled ILS 80.7 million compared to ILS 66.6 million in the corresponding period last year, a significant decrease of 21%. I will continue with Slide #6, which shows some of the key highlights from our results for the third quarter. Revenue amounted to ILS 109 million compared to ILS 95.5 million in the corresponding quarter last year, a 14% increase, which was evident across all operations. Our revenue from non-transactional services increased by 2% to 62% of total revenues. Adjusted expenses totaled ILS 79.1 million compared to ILS 72.1 million in the corresponding quarter last year, a 10% increase. The increase in the expense is due mainly to employee benefit expenses, computer and communication expenses and marketing expenses. Adjusted EBITDA totaled ILS 45.1 million compared to ILS 38.4 million in the corresponding quarter last year, an increase of 17%. The increase is due to higher revenues. Adjusted net profit amounted to ILS 27.2 million compared to ILS 20.1 million in the corresponding quarter last year, 35% increase. The increase is due mainly to higher revenue from services, although this was partially offset by the increase in costs and tax expenses. Let's go now to Slide #7. We can take a deeper look into the composition of our revenue in Q3 2024. Revenue for trading and clearing commission increased by 13% compared to the corresponding quarter last year, and totaled ILS 41.8 million. The increase is mainly to the increase in the trading volumes and to their -- they're having been 4 more trading days this quarter. The increase was partially offset by the reduction the effective commission rate. Revenues from listing fees and annual levies, increased by 9% compared to the corresponding quarter last year and totaled ILS 22.4 billion. 5% of the total increase in revenue rise from listing fees and levies, while a further 4% is due to an increase in revenue from examination and listing fees, mainly as a result of a greater number of companies applying for listing and offerings. Revenues from Clearing House services increased by 11% compared to the corresponding quarter last year and totaled ILS 21.3 million. 5% of the increase is due to increase in the revenue from Clearing House services to companies and funds, while a further 4% is due to an increase in revenue from custodian fees as a result of the increase in the value of the assets that are held in the custodianship, the remaining 2% of the increase is due to an increase in the revenue from Clearing House services to members. Revenues from data distribution and connectivity services increased by 27% compared to the corresponding quarter last year and totaled ILS 23 million. 21% of the increase is due to updated the index usage fees and the increase value and use of TASE indices, while further 4% is due to an increase in revenue from data distribution to private customers, the remaining 2% of the increase is due to an increase in revenues from connectivity services. I would like now to discuss our Q3 2024 expenses. So please refer to Slide #9. Employee benefit expenses increased by 10% compared to the corresponding quarter last year and totaled ILS 41.7 million. The increase is due to the increase in wages and variable compensation. Computer and communication expenses increased by 10% and totaled ILS 11.2 million. The increase is due mainly to additional expenses with respect to licensing and maintenance of new systems and to an increase in manpower and projects. Marketing expenses increased by 190% compared to the corresponding quarter last year and totaled ILS 1.8 million. The expenses in the quarter include the cost of a new campaign launched at the end of the quarter, as compared to campaigns launched in the corresponding quarter last year. Depreciation and amortization expenses increased by 7% compared to the corresponding quarter last year, a totaled ILS 14 million. The increase in depreciation and expenses due mainly into the upgrading of infrastructure and the launch of new products. Net financing income totaled ILS 4 million compared to net financing income of ILS 2 billion in corresponding quarter last year, in excess of 103%. Financing income in the quarter increased due to interest income on deposits and profits for marketable securities, which was partially offset by the increase in financing expenses as a result of a bank loan obtained at end of 2023. I would like to review our financial position highlights at the end of Q3 2024, as shown in Slide #14. Our equity totaled to ILS 686.6 million and comprised 79% of the balance sheet, excluding open derivatives position balances and total deferred income for listing fees. We held ILS 498.3 million in cash and investments in financial assets. The balance of bank loan totaled ILS 112.4 million. The surplus equity of regulatory requirement at the end of Q3 2024 totaled ILS 594 million compared to ILS 380 million at the end 2023. The increase in surplus equity is mainly due to ILS 242 million in proceeds received from the sale of the Arrangement Shares. The consideration received by TASE was carried directly to the equity and is being invested in TASE technological infrastructures. The surplus liquidity over regulatory requirements at the end of Q3 2024 totaled ILS 138 million compared to ILS 145 million at the end of 2023. I would like now to go to Slide #15 to review our cash flow highlights in Q3 2024. Cash flow from financing activities resulted in negative cash flow of ILS 14.8 million compared to negative cash flow of ILS 18.9 million in the corresponding quarter last year. The lower negative cash flow are due mainly to payment for the acquisition of treasury shares in the corresponding quarter last year. Cash flow from investing activities resulted in negative cash flow of ILS 13.7 million compared to positive cash flow of ILS 98.3 million in the corresponding quarter last year. The change in cash is due mainly to the consideration received from the realization of marketable securities in the corresponding quarter last year. TASE free cash flow amounted to ILS 39.9 million compared to ILS 17.5 million, the corresponding quarter of last year. The increase is mainly due to an increase in cash flow from operating activities and from the consideration received from the sale of the Arrangement Shares, which has been invested in TASE technological infrastructure. And with that, I will return the call to our moderator to conduct to Q&A.

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

Just to start, you mentioned an ISA approval for custodial fees to move higher or change. I think you've mentioned giving you more flexibility. Can you just talk about what the actual approval was and how we should think about that being implemented going forward?

So basically, what it means that according to the AUM that we had at the end of June with the new fees that have been approved, it means that we will have additional revenue in 2025 of ILS 11 million; in 2026, the additional revenue will be ILS 26 million; and in 2027 and onwards, it will be ILS 44 million. So the increase will be divided into three steps. And again, this is according to the AUM that we had at the end of June. That's the effect that we will have.

And that will go into effect January 1, in 2025?

Exactly. Exactly.

And obviously, if assets grow, those numbers would be higher, and if they shrink opposite. It's a percentage of AUM, is the way to think of that?

Yes, this is correct.

Okay. And none of that showed up in the context of this quarter or 4Q, like is that fair?

Yes. It will be -- as you mentioned, affected only January 1, 2025.

Got it. And then you mentioned a bunch of new indices for leading index, I think, creators and then 20 coming. So I just want to make sure exactly the 6 are already announced and then you have 20 in the pipeline. I just want to make sure I understand the kind of product rollout that you talked about.

Yes. Yes. Yes. The tailor-made indices, it is something that our guys have very creative ideas. And clearly, because of the Israeli market and the amount of money that retail have in the bank accounts, there's a lot of things that can be done. So this is a growing business for us.

And are you -- are they starting with -- are these coming from -- are these like iShares, State Street type ETF global providers, or are these more local?

No. All of them are only local, all of them.

Got it. Okay. And then in the context of also some of the product stuff you mentioned in your prepared remarks. As you think about the rollout and the adoption that you've seen in the options business and the kind of growth that you cited, is that coming from new participants to the market? Is it existing participants trading more? Or are you able to delineate what that -- kind of who's doing -- who's the users of those products?

Well, I think that we don't have enough time that we can really assess because it's relatively new. For example, the future were launched only at the beginning of September. If I look at the derivatives market, the Israeli institutions have a lot of money. So they are used to getting exposure by -- in the cash market, which is very different than the U.S. market that were there, we know that a lot of Israeli institutions are using the futures and derivatives. We believe that as we do and launch more products and services, not only that we will get more traction from the existing participants, but we will be able to draw more attention from global participants. But this is still, I would say, relatively early stage to determine it.

Understood. And then just in the context of the outlook for 2025 and expenses and understanding that you just launched towards the end of the quarter, a marketing program is -- should we think about marketing as -- on a go-forward basis, increasing from the levels that you just put up in the third quarter and building as you kind of roll out, I assume a more full or normalized kind of level of activity?

Well, we still don't know what will be the budget for 2025. And as I mentioned before, it's also a question of what's happening in Israel, and it's been a hectic year. But I think that looking for 2025, the marketing budget will not be at the highest level that we've had in the past few years, if you want to try to think of it this way. It will be higher than what we spent on marketing in 2023, for example. But I think that overall, it will be in correlation to all of the other activities and revenues that we are generating. As I mentioned before then, even though market here is developing and we are seeing more traction, still when you analyze the distribution channels in Israel and the amount of players that are active in our market compared to other Western markets, there is still a big gap to what we see in other Western markets. Now again, this is part of what we see as a big potential of growing our business not only in the cash market, but also in the derivatives and in data and in other aspects. But part of it, we have to be a bit different than other exchanges in the way we use and manage our marketing budget because of the fact that the market structure here is not the same as other Western markets. And my guess that it still will take a couple of years before will be a more normalized market, so to speak.

Understood. And when you're characterizing that, you're talking about both institutional and retail participation...

Yes.

Broadly, or just more of the retail component?

No, both of them. Both of them. Both of them.

Okay. And then just lastly, in the context of the pricing, we talked about the custodial fees. You've already done index, which you talked about several quarters ago and is being rolled out. Other areas, as you look at your product set or your business lines that where you have already or on the margin change pricing or are in context or talking to the regulators about additional changes?

We also did a change in our multipliers earlier this year. But I think that you also need to remember that by definition, when we launch new products and new services, they come with a new fee. Currently, we don't have anything in the pipeline, which is similar to the indices or to the custody fees currently.

Got it. I do have one more. Just on a longer-term basis, you've talked historically about margins in the context of you versus some of the global peers and the opportunity, and you guys have executed quite well over the last several years. Is any change to your outlook on a longer-term basis to where your margin profile can do?

I think we feel very confident that we don't see any fundamental reason why in the next few years, this business should not continue to grow in the manner that we have been growing in the past few years.

[Operator Instructions] There are no further questions at this time. Thank you. This concludes the Tel Aviv Stock Exchange Q3 2024 results conference call. Thank you for your participation. You may go ahead and disconnect.