TMX Group Limited (X.TO) Earnings Call Transcript & Summary

Hi, everyone. Thanks for being here. My name is Aravinda Galappatthige. I'm one of the TMT analysts here at Canaccord Genuity. Very pleased to have the TMX Group for the second year in a row to present here at the Canaccord Genuity Boston Conference. For those of you who may be new to TMX Group, they operate key global markets and clearing houses as well as data and analytics platforms in the broader capital markets space. And with me to sort of give us an update is David Arnold, the Chief Financial Officer. David, thanks for being here. Good to see you again.

Thanks for having us again. It's good to be back.

Absolutely. So let me start with kind of a high-level question on Global Insights, very central to your strategy. Above 40% of your revenues now, probably creeping up towards half of your EBITDA. Can you sort of elaborate on your broader strategy there because there's a variety of businesses here, how they kind of tying together, and we can drill into each of them later on.

No, it's a great question, Aravinda, and it's one that there's a lot to unpack there. If you think about it, that business is now all consolidated under common leadership. So Peter Conroy is now overseeing that. He most recently ran Trayport. So now he's overseeing both Trayport, TMX VettaFi as well as TMX Datalinx. And you're correct. I mean, it is important to the strategic thesis of our growth trajectory. Global Insights, we have a long-term aspirational objective for it to be more than 50% of the revenue of the company. It's currently in the low to mid-40s, which is excellent progress. If you go back in the history of the company, that number would have been in the teens at one point in time. Then we acquired Trayport back in 2017, and it started to move up. Obviously, organic growth is the primary driver of the growth in that kind of segment, but it has absolutely helped adding TMX VettaFi to the equation. If you think about that business and it's kind of growth trajectory, it's more recurring revenue than transactional revenue. That's also part of our long-term strategic thesis, which is to grow our recurring revenue to be more than 2/3 of the total revenue of the company. Then the third piece, which is so important to us is really growing revenue outside of Canada, right? The Canadian core part of our business is fundamental to us, the Toronto Stock Exchange, the Venture Exchange, AlphaX in Canada, but also the Montréal Exchange and then all of our clearing businesses, as you alluded to. So the core is critical to us, but we want to do more, right? And we want to take some of the core to other jurisdictions. But also, we want to leverage the superpower of the network effect within the company. And so Global Insights is really the second part of that trick. We need the core to grow and to fire on all cylinders and then Global Insights, we hope will actually accelerate the growth of the company, in part because we set out a couple of objectives for Global Insights, which is most of the businesses in that segment, as I said, TMX Trayport, TMX VettaFi, we aspire to grow them as high-growth businesses, which we define as effectively high single to double digits. And both of those businesses have actually grown at the upper end of that kind of range. And then the third business is obviously TMX Datalinx, which is around 5-plus percent, which we define as strong. So critical to the execution of our strategy, those businesses, and I'm sure you're going to ask me a lot more questions about them.

Yes, absolutely. Let's start with VettaFi. We're probably 20 months in since the acquisition. Obviously, very catalytic for the company, for the stock. When you think about sort of all the due diligence you did, the plans that you had, having now consolidated it, what's sort of been new? What have been sort of your learnings? How has it sort of performed relative to your initial sort of the work that you did?

That's a great question. So for those that aren't as familiar with TMX VettaFi, this was a business that we acquired a minority stake in initially. We had 2 board seats. It gave us a really good opportunity to understand the business even better than we did when we did the initial due diligence on the first stake that we took in the company. And then we very rapidly decided that we would love to own the rest of the business. We were able to announce that transaction in December of '23 and closed on it in January of '24. So you're right, it's a good 20-odd months. The investment thesis was really a couple of prongs. The first prong was addressing a client need, right? A lot of our clients had asked for some custom and bespoke index and benchmark capability. And we've really done a good job of addressing that need in the U.S., but now also into Canada. Part of the investment thesis was for that business to be what we would define as a high-growth business, which is to grow the business high single to double digits. On a pro forma basis, it's always been in the teens since we've acquired it. And so it is delivering on our expectations. But to be clear, Aravinda, if we say expectations, people think that it's just meeting. Our expectations are very high, right? We wanted this to be a high-growth business for us, and it is meeting those very high expectations.

Yes. And then that's what I wanted to kind of maybe develop on because when you think about the ETF market, as long as -- as long of a growth curve as it's experienced, it's still growing 20-plus percent. I mean, if you go from an AUM perspective. Obviously, the dynamics are changing. There's a bigger shift towards active, a bigger shift towards team and obviously, fixed income, which you've sort of looked to build on. How can VettaFi sort of continue to leverage this high growth in the market, especially as it sort of twists and turns with these changing dynamics?

No, you're right. I mean the dynamics are changing, and it is quite different in Canada versus the U.S. And also as we look to expand into other geographies, it is going to be quite different. But if I really focus on the U.S., for sure, that is a shifting dynamic. VettaFi is really well positioned to address the changing dynamic because of the depth of breadth of our offering, right? We obviously have a -- what we consider to be a best-in-breed index and benchmark capability. Obviously, some companies are very focused on bringing an ETF to market, and it might be actively managed, but others have got ones that are tracking to indices. And so we're able to service both sides as this market is evolving and changing as opposed to only being focused on one end of it. And then it's really about how we help those investment managers that are creating this product get traction, right? And that's part of what we see. But you're right, the landscape is changing. We're well positioned for that different kind of path as it evolves. But it's also been growing incredibly strong, right? It's one of those fastest-growing investment segments, ETFs. And we've seen the benefit on the Toronto Stock Exchange. I mean, I think John McKenzie, our CEO, mentioned on our most recent call that the amount of ETFs that we've listed in the first half of this year is almost more than what we did all of last year.

And you alluded to sort of helping investment managers gain traction, which as I kind of got to know VettaFi, I realized the significance of that part, the distribution part of the business. Can you speak to that component, the digital distribution because it's -- I know that you've sort of -- you're evolving how that can continue to contribute to the story.

That actually is very important for us, Aravinda. So some firms that provide index and benchmark capabilities, that's effectively all that they do, right? And it's a very important part of the business. But for us, and it's part of the -- really the TMX mantra is our clients' success equals our success. So across various different parts of our business, we will build based on market capitalization or funds raised. Just like in TMX VettaFi, we will build based on the assets under management and as they grow. And part of that is actually helping bring that investment product to the investable eyeballs out there. Our network at VettaFi of registered investment advisers across the U.S. is unparalleled. Many of them are subscribers and active participants on 2 of our web properties, etftrends.com and etfdb.com. And so digital distribution was very attractive to us in our original hypothesis to purchase VettaFi, but also how we're seeing it grow. And while we sometimes talk about digital distribution and analytics as separate, it's really an extension of the index and benchmark work. It's the part that really helps bring eyeballs to the new product, helps actually bring investable assets to new investment opportunities. Some of it's done through both of our webinars, webcasts and/or profiling or highlighting. And that's cool because for us at TMX, it means we're not just going to help you launch your ETF. We're really going to help you be successful in your ETF growth. So that's something that we really found as a bit of a unique proposition with TMX VettaFi.

Okay. So maybe lastly on VettaFi, when you think about the synergistic opportunity, obviously, low-hanging fruit in Canada. It's one of the reasons, as you alluded to, you acquired it. And then I know you've made 2 acquisitions in the EMEA region. Can you kind of give us an update on how sort of the penetration outside of the U.S. is sort of progressing?

Yes. So you touched on both of them. I mean, the initial hypothesis with TMX VettaFi was to partner with TMX VettaFi. At the time, it was just VettaFi. We had the minority stake to help grow similar capabilities in Canada, right? Now Canada is slightly different from the U.S. The registered investment advisers, a ton of unique independence in the United States. A lot of the folks in Canada are attached to either a large brokerage and/or a wealth management firm. So slightly different, but that has proven out to be very, very successful. The part that you touched on the second part of your question, and really, the first part of Canada is meeting expectations, as I said, which were very high earlier. But the European expansion was something that was really attractive to us, right? It was on the strategic road map for VettaFi when we became full owners of the business, really helped them accelerate that, right? And most recently, we added iNDEX Research to our capabilities. What attracted us to iNDEX Research is they have a number of European-based AUM, ETF and benchmark products. That attracted us as a foray into Europe. And then most recently, we just added ETF Stream to the team. It's a team based out of London. They are busy being integrated into our London office alongside Trayport and Datalinx and other team members. And that's really exciting because they've got digital distribution capabilities much like VettaFi in the U.S. has. So I expect us to do some very interesting things in the next 12 to 24 months, both in adding some additional AUM tuck-ins, but also growing organically in the European space. So I'd watch this space carefully in the next 24 months.

Absolutely. So let's move on to Trayport. I mean you provide a lot of metrics to investors and whether it's licensees, ARPU, retention, I mean, the numbers look impressive. Can you sort of explain sort of the value -- because I still get a lot of questions about what exactly is Trayport, sort of the value proposition they offer because you're consistently growing in the mid-teens, right? And even just in the European market. So maybe just develop a little bit on that.

Yes. So I mean, I could spend a lot of time trying to explain Trayport and really get into a deep dive. But the best way I to really explain it to folks is what Trayport is able to do for the asset classes that we're currently playing in, and I'll really focus in on power and natural gas in Europe is we bring together a network of brokers, traders and exchanges because some contracts are traded on exchange. A lot of the contracts, though, are over the counter, right, and bringing those all onto a screen, so digitizing it so that a trader can do full price discovery in the marketplace, assuming they have the appropriate authorization and bilateral credit agreements with the broker, they're actually able to then on the screen, trade. And if they do happen to want to trade an exchange-traded contract as well, that will actually go right through to the exchange venue. So it really becomes this digital portal to see all of the network pricing, execute all of their trading strategies. And quite frankly, it is a digitization effort, if you think about it, Aravinda, because prior to Trayport in this space, people would have picked up the telephone, right? They would have phone -- a trader would have phone a broker and the broker would have executed the trade and then the back-office paperwork would follow. That is all digitized within the Trayport environment, which really helps us as we think about other asset classes, right? We brought renewables onto the environment. And that is really, once again, digitizing something that might have normally been via a phone call or fax machine.

And when you think about -- I mean, the similar question for VettaFi. When you think about the international expansion there, you have over the last year or so, touched on your efforts in the U.S., Japan, including new products as well, crude oil and so forth. As you think about the longevity of this growth curve, maybe just talk a little bit about how those initiatives are trending.

And I do want to speak to those initiatives, but I also like to bring it back to the core of Trayport is really subscriber growth, right? And our trader subscriber growth numbers continue to impress. We continue to add new logos month after month after month, quarter after quarter. So the core is growing really well and really healthily. And so how else are we growing Trayport? First is the other geographies, as you touched on. When we first acquired Trayport, it would have done no revenue in the United States. That number is now almost pushing GBP 7 million annually in pounds, and that's off a base of 0, right? We've recently heard about Japan that is deregulating. We are working very closely with folks in Japan to bring Trayport to that geography. And then the other asset classes that I touched on. Renewables is already live on the Trayport platform. You mentioned oil. We spoke about that at our town -- at our Investor Day a year ago. I was going to say town hall, but it was an Investor Day. And long story short is that expanding the asset classes just creates more opportunity. And if you give some sizing to it, right, Japan is effectively the same size as Germany and France added together. And the U.S. is effectively the same size as all of Europe. So that kind of gives you some scaling. And then lastly, over geographies and asset classes, it's also functionality. We've been adding premium subscriber services like charging and analytics, algorithmic trading to the Trayport platform, all of which is driving the growth.

Yes. In the interest of time, I'll just jump into derivatives. We can obviously talk about Trayport a lot. I mean this has been -- I mean, the growth -- I mean since you were last year, I would not have guessed that it's grown like, I don't know, 40%. I think the last quarter was 33%, 50% before that. How can you kind of demarcate between sort of what's sustainable, what was driven by the volatility that we've seen in recent times? Obviously, you're developing your product suite as well. So that's a big part of it. Maybe just touch on that.

Yes, it's a great question. And in fact, a lot of people have been asking me that in Q1 and in Q2. What I go back to -- and your numbers are bang on Aravinda. So we did 17% in 2024 in growth in the Montréal Exchange. And so -- and that was absent some of the volatility we've seen in the first 6 months of this year. So that's kind of the best way that I can answer the question, which is because it's tough, right? We see the volumes and now the question is, is that volume due to some of the products and offerings that we've put on the table like term, CORRA. CORRA and other types of futures. Is it because some of our products have really now matured and there's lots of average daily volume, open interest is up. So now we're sunsetting a market-making program. And so how much of it is that versus, let's say, some of the macroeconomic factors that are going on around the world. But -- so I would guide people to look back to 2024 is kind of in that 17% to 20% range and then maybe the delta one can attribute to kind of what we're seeing right now.

That's a good way to think about it. So we got 7 minutes to talk about tokenization. But there has been some -- it's been discussed quite a bit even in exchange circles. I think ICE has an MoU with Circle, and I think CME is making some -- has a few initiatives in play. What's your high-level take in terms of what's going on there?

Yes. So I think there are a couple of things. I wouldn't say we're going to be a pioneer or leader in that. I think we'll be a fast adopter. Part of it is really understanding the SEC are going through a bit of a consultation period right now. We want to actually see what the market structure and the rule book looks like as it goes through the consultation process. We're involved in that process. And then I think it will be how does Canada actually react and adopt and follow knowing that Canadian capital markets have always been inextricably tied to U.S. capital markets. And so as we see where the U.S. lands on that, also given Washington sentiment now towards digital assets and tokenization, it's going to be an evolving space, and we're paying attention to it. We oddly enough did spend quite a bit of time on this a few years ago, and it was driven by our Canadian banking clients who called us and said, we've got wealth management clients who are asking how they can actually get involved in digital assets, crypto and so forth. Then there were some unfortunate turn of events in some of the crypto marketplaces and which we won't belabor and then people kind of eased off. There's a resurgence right now. And I think that as that evolves, we will look to pick up the baton again.

Is when you think about the different areas you can go forward here, I mean, is the sort of the low-hanging fruit, the collateral efficiency, is that really the way...

I think that's part of it. I also think that there's an ability over there for the players in Canada to actually rely on our clearing houses to at least provide the security and robustness around the process, which I think a lot of people need because losing tokens, losing access rights and/or ability to actually trade. When you've got a trusted FMI player in the marketplace like CDS or CDCC, which are our 2 clearing houses in Canada, I think does give a lot of comfort to a lot of market participants. So I want to see how it evolves in the U.S. and then I think we're going to be a fast follower in Canada.

Okay. Very good. Your U.S. ATS. I mean, I think you commented in the recent call that it's progressing well in terms of volumes adoption. But I think -- of what John mentioned that you also think about sort of enhancing the offering to the clients, the early adopters. Maybe just kind of develop on that. I wasn't clear what areas -- what the value proposition was beyond the trading execution.

No, it's good. I mean that is once again goes back to the original tenet for the U.S. ATS, right? And that was really came from a client demand and client request. We launched AlphaX in Canada. It was really well received by many of the market participants who like the fact that it is all geared towards order execution quality, right? Order execution quality is the mantra for the team. And so the U.S. ATS is doing much the same, right? It's meeting that client demand for higher quality of execution. of their orders. And as we've gone through the first several months since we launched in January, we're in constant dialogue. The team in New York, led by Heidi Fischer with Luke's guidance. They're in constant discussion with many of our clients. And that's what John is alluding to is individuals are really satisfied with the quality of the platform. They're now expanding, would you be considering additional order types? Would you be considering additional features and functionality that we can now direct some of our other orders to this marketplace versus an existing marketplace. And so that's what John was touching on. Our team is though focused right now, Aravinda, on meeting clients' needs and demands for the existing scope, but they have already started some early use case, business case prototypes with the team that are hopefully for the next phase of growth.

Okay. It's exciting. Anything from the room before I go ahead. Go ahead, sir.

When you exclude ETFs from IPOs this year, the number of equity IPOs, secondaries IPOs can [Technical Difficulty] so does that concern you at all? And what sort of -- what's that kind of telling us to the Canadian IPO market?

It's a great question. And your facts are not wrong. It's something that has been a 2024 phenomenon, too. If you look at most of the global exchanges, pretty much everyone was struggling with IPOs and additional capital raising activities. We're quite excited for what we see in the pipeline heading into the second half of this year. We recently had an IPO of a corporate. It was well celebrated, but one doesn't create a streak and doesn't create momentum. So the pipeline is really strong. Our clients that are in the pipeline are at various different stages. And it's really a little bit of confidence, both in terms of how does the IPO perform post launch, where are valuation expectations by some of the founders. So it's quite intricate and complicated. What we have looked at, though, is Canada tends to follow the U.S. between a 3- to 9-month kind of lag. So when we look back historically, we've seen whenever we've been in a bit of a trough on IPOs and capital formation activities, as the U.S. starts to come back, Canada anywhere between 3 and 9 months starts to gather that same momentum. There's also a confidence factor, right? The first IPO that's successful enables some others that are sitting close to say, okay, I think the [ waters ] have been tested and I'm ready to go. So we're -- for sure, in a cyclical low -- in the early stage of the pandemic, we were at a cyclical high. This too shall pass. We just need some confidence from those that are waiting to bring IPOs to market. Now the interesting thing, which I'd love to add to that, Aravinda, is because we are such a diversified business, while it pains me to have capital formation activity at cyclical lows, we've delivered record results quarter after quarter because we've diversified. That was part of the strategy, but the health of the Canadian capital markets ecosystem is strong. It's just we're not seeing it yet in the kind of IPO activity that we would like to see.

Thank you, David. We're out of time.

We're out of time. Okay. Thank you.