TMX Group Limited (X) Earnings Call Transcript & Summary

[Audio Gap] And that's really been fueled across all of our business segments, as opposed to just 1 or 2. And then the second one is really accelerating the growth that we've spoken about, where we have a strategy to be more global than local. And we announced 3 transactions. It represented roughly $2 billion in inorganic investment. And we're firing on all cylinders right now. Looking ahead, we're excited. We're hoping to continue building this momentum into the second half of this year and then, quite frankly, into 2027.

Excellent. Listen, the TM2X vision really targets $2 billion of revenue at twice the speed it took to double the revenue to $1 billion in 2021 -- sorry, 2022. And that effectively targets a $2 billion top line, I think, by the end of 2029. And David, by my numbers, I think you're on track to getting there 1 year early organically. And I think with the recent Cboe and MEMX deals, it looks like you'll exceed that target by roughly 2 years' time, in 2027. Am I getting ahead of myself, or does that...

No, Phil, I actually think your math is directionally there, and maybe you've been a little conservative. If we look at the first half of this year, organically, we did $975 million in revenue, right? So if you just look at the exit run rate out of the first half of the year, it's going to be touch and go as to whether we actually get there by the end of this fiscal year, which would be a couple of years ahead of the target. So obviously, it's been fueled, as I said, by those 8 quarters and, obviously, the 2 quarters into this year of double-digit revenue growth, which well outstrips our long-term guidance of high-single digits or mid-single digits for revenue growth. So obviously, the organic transactions -- which you touched on -- they do help, but they really help to accelerate it. But on an organic basis, we're literally within spitting distance.

Excellent. And Loui, welcome. We're going to dig in deeper to the listing business a bit later in the conversation. But maybe start off and give us a sense for how the IPO pipeline is shaping up and really what you think we need to see for a more robust IPO recovery in Canadian markets.

Yes, sure. Thanks, Phil. I'd say we're having a pretty strong year. I think historically, when we look at IPO activity, a good year would be 10 large IPOs, right? And I think year-to-date, we're roughly at 6, with a few more in the pipeline before the end of the year. So with that being said, I think this is shaping up to be a pretty strong year. Now, we often focus on IPOs, but the reality is we have -- we're close to 300 listings this year. So a lot of activity that happens on the market comes in different ways, whether it's a reverse takeover or whether it's a direct listing. So listings activity is actually very, very strong aside from just the traditional IPO. The other thing we often miss is when we look at our venture market, year to date, I think we're at 15 graduates from TSX Venture to TSX. In our view, we view those as IPOs as well -- much smaller, but those don't really get captured as an IPO. So I think we've had a very good year. Obviously, Apotex was a big one, Alliance Grain Traders and a few others in the mining sector. When we look at our pipeline, it's still very, very strong. As I mentioned, we have a few more that are in the pipe that hopefully will close before the end of the year. Obviously, lots of different variables will drive whether those deals come to market or not, but we're pretty confident that we'll see at least 2 or 3 more strong IPOs before year-end. When we look at our broader pipeline, we have more than 2,000 companies in our long-term pipeline, a lot of private companies that we engage with. Our short-term pipeline, I would say -- so when we say short term, that's in the next 3 years -- is roughly about 500 companies that we're in active dialog with. And then when we get shorter -- to the next 12 months, at least another 85 to 90 companies that we're in active dialog with. So things are looking really, really strong. Financing activity continues to be very, very strong. So we're very, very positive going into year-end and into 2027. What can we do to drive even more activity? Obviously, we spent a lot of time lobbying the federal government for tax change, tax policy. We spent a lot of time with the CSA trying to reduce burden and doing a lot of things internally to blur the lines between public and private, so making it very, very easy for these private companies to consider the public markets. And I think a lot of the rule changes that we've done over the last 3 to 4 years have really, really accomplished a lot of that.

Excellent. And David, I think the last 5 years have been strong, double-digit EPS growth. So what gives you the confidence that you can repeat that over the next 5 years?

Yes. So there are a couple of points here, Phil. I think the first one is we set a long-term financial objective to grow earnings per share double digits. And it's always good when you set out an objective and you deliver upon it, and we continue to do so. So while the last 5 years isn't the long term, it really bodes well for not just the last 5 years, but what goes into the next 5. I think I've got to call it out: We have a really strong, dedicated team at TMX. They are very, very focused on organic growth initiatives. We bring together our top sales individuals for forums and seminars through the year, but it culminates in a conference that Loui actually hosts with a number of other colleagues to really figure out all the cross-sell opportunities and to really accelerate growth. We typically -- because some of those folks are some of our more senior leaders in the firm, we then follow up with the leadership team meeting the very next day, and we really focus on organic growth and really how we can accelerate the strategy at TMX. So I think you have to call it out. It's a really, really good team of individuals. And then the second one is really we're becoming more global than purely local, right? And so we've shifted to more recurring revenues than, let's say, transactional revenue. We have an objective to roughly get to 2/3. We haven't quite got close to that number yet, so there's a lot of runway, if you will, for us to go there. But what's really, really fascinating to me when I analyze the numbers, which I love to do, the high-growth businesses that we -- the businesses where we classify them as having high-single-digit to double-digit growth -- combined are contributing more than 50% of the revenue of the franchise. And so, that, I think, is part of the growth acceleration for us over the last 5 years, and I think bodes well for the next 5.

Excellent. So a lot's going on at TMX Group. Maybe talk about strategic priorities for the year ahead?

Execution, execution and execution. And then John said to me yesterday, "Execution." So really, it's execution of our global growth strategy. And then I think completing the integration of the recently announced initiatives is the most important thing. A number of them are still subject to regulatory approval. So we've announced and signed, but we haven't yet closed. But we were successful in closing Cboe Australia. So our TMX Australia franchise is now part of the family. And it was really nice to welcome them to our all-employee meeting recently. And really, it's -- we had a couple of our senior team members visit them in Australia recently, and it's an energetic team of individuals that really feel like they've been part of TMX forever. So we've got to complete that integration. We've obviously now closed on our RAFI integration and VettaFi -- or acquisition of VettaFi. So we have to finish that integration and then keep continuing to execute quarter after quarter, day after day, because that is what it's going to take.

Okay. We'll shift gears a little bit, and we'll talk about some familiar themes, right? Threats, defensive moat as well as TMX as a fast follower. And I think 2026 feels like the year of disruption fear, right? And that's weighed on TMX valuation despite some positive momentum in developments. Some of the key concerns: it's AI disruption, tokenization, perpetual futures. So I know both of you have been asked these questions frequently over the last little while, and I'll nuance mine and say, with the hindsight of reflecting on some of the primary investor touchpoints and, at times, misconceptions, maybe talk to some of those concerns, the TMX moat and even upside opportunities you might see stemming from these.

Yes, it's a great question, and Loui and I will probably tag-team on this one. It's interesting. We've got a proven track record of innovating at TMX, right? And we often don't -- and it's very much in our Canadian nature -- we don't laud our successes and our firsts. But the first to bring the ETF to market, incredible development of technology and intellectual IP on matching engine technology. And it's really something that gets overshadowed when John and I often refer to the fact that on certain of these emerging, what I would call more retail theme-based topics coming out of the U.S., that we will be a fast follower, right? It's not because we don't have the skills and capabilities to lead. It's just in some of these, we really need to see a proven client demand, right? There's a lot of talk about prediction markets in the U.S., perpetual futures, a lot of talk about digitization of securities, where Loui and I would argue that cash securities or cash equities are really digitized in the Canadian ecosystem. And so, it's really looking at some of those and being able to actually deliver what our clients want and need, and not maybe be swayed by a retail theme coming out of another part of the globe that's well suited in that economy and environment, but maybe less suited in the Canadian ecosystem. So yes, because of the work that we're doing with MEMX and BOX, and now the MEMX Group, which we hope to be able to close on next year, they recently announced that they would do binary options or prediction futures or options on events based on earnings releases. That's something that we will look at doing possibly on the Montreal Exchange, but there needs to be enough of a demand from the Canadian investor community for us to actually deliver it. So that's the theme that I would have is: we're going to be a fast follower where we're not quite sure there's a proven client demand. But when there's a client demand, we are going to lead.

Okay. So maybe I'll reframe that and pitch that a slightly different way. Again, you described TMX as a fast follower. What makes that a good strategy for TMX and its shareholders?

So it's interesting, we don't like to spend shareholder money and shareholder capital on speculation where, as I said earlier, there isn't a proven client demand. And so, we're spending a lot of time speaking to the client community, both in Canada and abroad, where we have operations, as to what their wants, desires and needs are. And really, a good case in point was the Canadian broker-dealer environment really talking about collateral management and really helping make collateral management a little bit more efficient. We partnered with Clearstream to bring to market a product called CCMS, the Canadian Collateral Management System. Once again, it wasn't something that we developed in the laboratory and said, "We hope that someone would need this." This was us co-creating with the industry. In the next few days, our teams are actually bringing together a number of thought leaders on September 15 across Canada to talk about, in the broker-dealer community, the digitization concept -- what is it going to solve? How can we do it? How do we partner with various different other networks, Canton Networks and others, to actually bring a solution to the Canadian marketplace that is fit for purpose and isn't just following maybe a trend that we see in the U.S. or in another marketplace?

Okay. So again, what are examples where it makes sense to really push to be an innovator or, in this case, a disruptor?

So I think the places where it is one of our core strengths -- for example, matching engine technology, different order types. Some of the next-gen technology that we use to build Alpha-X U.S., our U.S. ATS, was to do that, right? And we're now well positioned as we bring together MEMX and BOX to actually critically look at the MEMX technology, the Alpha-X U.S. technology and really innovate to that next level, and that's where we can lead. And that's where I think we should lean into our strength, versus areas where it isn't a core differentiator or part of our defensive moats that's better purchased from a partner and/or potentially a cloud service provider.

Okay. So data analytics, I think, continues to be a valuable source of growth and recurring revenue. And I think Trayport has seen strong top line expansion for years, although the relative pace slowed a bit in 2026. So what do you see as the biggest drivers for near- and midterm growth for Trayport?

So I think it's a couple of things. The first is continuing to execute on the core Trayport technology platform that really brings together the network of brokers, traders and exchanges for a lot of over-the-counter products that are actually traded in the energy sector in Europe. But I think the second one is more product offerings, right? We, at 1 stage, did not have algorithmic trading as a capability in that ecosystem. We listened to what our clients' wants and desires were. That was very, very self-evident. In addition, there were some charting and analytics capabilities that they were really asking to take data out of the ecosystem so they could throw it into Excel and other visualization tools. So really adding more product will help fuel it. But then also, it's diversification of asset classes is very important, too. We spoke at our Investor Day about getting into other asset classes and exploring oil. And then, finally, it's the geographic expansion, right? We've done a decent job. We have almost $10 million of our revenue coming from the Trayport business based out of the U.S. right now, in North America. But Japan is deregulating, and that's really a growth market. And so, that's where I think the growth would come, and that's more in the long term. On the near term, it's product enhancements and facilitating that client growth in the user base.

Excellent. So given some of the broader, I'll call it, industry changes with SaaS-type models, is there any discussion or work being done to consider Trayport more as a usage-based revenue model?

Yes. So Trayport today -- and this is one of the things where there's sometimes a misunderstanding -- publishes metrics from our Trayport business that are very common metrics that SaaS-based businesses will publish. As a result, some people have said, "Oh, well, Trayport must be a SaaS-based business." And we really don't sell software as a service at Trayport. What we effectively do is sell access to a network, and we sell it based on user subscribers, right? We obviously have 2 models. We have clients that will be on a 1-year pay-as-you-go, subscriber-use-based licensing agreement. But then we have a great swath of our clients that actually use our site-license opportunity or model. And that's effectively priced over multiple years. And effectively, it's an all-you-can-eat arrangement during that term. And so, I think in the -- it's really dispelling the fact that, yes, when we show net NRR and ARR, which are very common SaaS-based metrics, it isn't purely a SaaS business because we don't sell software as a service.

Okay. So I think it's been a very active period of M&A for TMX. I guess the combination of BOX and MEMX, I think, is the most recent transaction announced. So can you walk us through some of the highlights of that, and also what you think makes this exciting for shareholders?

So that's a very, very exciting transaction for us because we've been asked the question for a number of years, which is you have a 48% equity earnings interest in BOX, but you have a voting interest just north of 50%. You've built a U.S. ATS. Why don't you bring them together? What more can you do to accelerate your growth in the U.S.? And so, this was a shareholder-led transaction, with really some shareholders are common between MEMX and BOX. But then there are a number of unique shareholders in both entities. And so it was really shareholders coming together where we felt that we could actually create a far more compelling options and trading venue in the U.S. that stands a chance, long term, of really competing to be the fourth-biggest venue in the U.S. And so we were excited about that. We said on announcing that we would be roughly around a 59% owner in that. By the time we get to close, that number might be somewhere between 55% and 60%. And the reason it might slip down a little bit is the reaction from the shareholders and the marketplace to this announcement has been incredibly positive. And so, some of our shareholders in both entities that had indicated initially they might roll 50% of their equity stake and take 50% off the table are now expressing an interest to roll either 100% or a greater percentage than their 50%. So we're actually quite excited about that. And that will actually help us as well, Phil, when we come down to our leverage because we had said we'd roughly have to disburse around $800 million for this. It will be south of that, depending on where we land up. I think as well, bringing together these listed-options venues in the U.S. is going to be really, really powerful for the constituents. I think we're going to have an opportunity to modernize the technology stack of the combined entity because the technology that Jonathan Kellner and his team have built at MEMX is really state-of-the-art. And we were due for some technology upgrades on the BOX side. So I think that's going to help us there. And it's going to help us on the global expansion agenda. Our desire to be a meaningful player in the U.S. has continued to be something that we've steadfastly stood behind, and this is another step in that direction.