Nasdaq Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2024

There are 12 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to Nasdaq's Second Quarter 2024 Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Atul Garrett, Senior Vice President, Investor Relations.

Operator

Please go ahead.

Speaker 1

Good morning, everyone, and thank you for joining us today to discuss Nasdaq's Q2 2024 Financial Results. On the line are Adena Friedman, our Chair and Chief Executive Officer Sarah Youngwood, our Chief Financial Officer and other members of the management team. After prepared remarks, we will open the line for Q and A. The press release and earnings presentation accompanying this call can be found on our Investor Relations website. I would like to remind you that we will be making forward looking statements on this call that involve risks.

Speaker 1

A summary of these risks is contained in our press release and a more complete description in our annual report on Form 10 ks. Also, please note that we will discuss our financial results on a pro form a basis and with year on year growth rates, which means that we are showing results versus the prior year period as if we owned Calysto and Acxiom SL for all of 2023 and excluding the impact of FX. References to organic growth exclude the impact of FX, acquisitions and divestitures. Reconciliations of U. S.

Speaker 1

GAAP to non GAAP results can be found in our press release as well as in the file located in the financial section of our Investor Relations website at ir. Nasdaq.com. I will now turn the call over to Adena.

Speaker 2

Thank you, Otto, and good morning, everyone. Thank you for joining us. On the call this morning, I'll provide some perspective on the external environment, discuss our strong quarterly performance highlights as well as our progress against our strategic priorities, and then I'll hand the call to Sarah to walk through the financial results in more detail. Turning to the economy in the U. S, we continue we're continuing to see solid but slowing GDP growth along with cooling inflation and slightly rising unemployment.

Speaker 2

These data points support the potential for easing monetary policy in the coming months as the Fed continues to strive for an economic soft landing. The general stability in the U. S. Economy and the potential for a lower cost of capital going forward is resulting in modest improvements in the IPO landscape as we progress through 2024, including solid activity this week. However, investors continue to contend with external uncertainties and the timing of monetary policy shifts as well as our dynamic macro political environment.

Speaker 2

As a result, we continue to expect modestly improving IPO activity for the remainder of 2024 and our current U. S. IPO pipeline indicates that stronger momentum is likely to manifest starting in the first half of twenty twenty five. We're also seeing stronger economic underpinnings in Europe aided by the ECB's easing monetary policy, including improving economic prospects in the Nordics. The improvement is not yet translating into a material increase in new public issuances, but our European IPO pipeline is healthy and growing particularly for 2025.

Speaker 2

As investors industry participants navigate the dynamic market environment, we continue to see sustained robust trading activity in the markets as well as strong demand for mission critical technology solutions from financial institutions globally. As a result, our markets continue to experience strong volumes and client demand for our FinTech solutions remains consistent with trends we have seen through the cycle, which provides a healthy backdrop for continued revenue growth across our solutions fleet. Now let me turn to our financial results, which demonstrate the power and resilience of our diversified business model and our ability to succeed through economic cycles. We delivered a strong quarter with $1,200,000,000 in net revenues, an increase of 10% year over year with solutions revenues at 13% growth. Our overall annualized recurring revenue or ARR grew 7% to $2,700,000,000 I'm particularly pleased with the strength of the performance across our business, which is a testament to the power of our platform.

Speaker 2

We're integrating the Adenza acquisition ahead of schedule and are realizing the investment thesis that underpin the transaction as we demonstrate its value for clients, shareholders and employees. Our expenses for the quarter increased 7% year over year within our guidance. Our operating income grew approximately 14% and importantly, our operating margin increased to 53%, representing over 1 percentage point of operating leverage, while we continue to invest to support growth in our business and deliver on synergies. Turning now to a discussion of the business highlights, starting with Capital Access Platforms. While ARR growth in the division remained at 1%, our index revenue grew 29%, resulting in overall revenue growth for Capital Access Platforms of 10%.

Speaker 2

In listings, we welcomed 31 operating company IPOs, maintaining our strong win rate of 72% based on NASDAQ eligible listings. While the slower IPO environment remains a headwind, we're encouraged by signs of improvement as supported by our most recent IPO Pulse Index, which is near a 3 year high. Overall growth in data and listings continue to experience challenges as modest growth in market data and the slowly improving IPO environment were offset by the impact of prior year delistings. Growth in our analytics business benefited from continued demand across the investment community for actionable intelligence and increased efficiency. However, that growth was partially offset by continued headwinds in Corporate Solutions, resulting in more muted growth for workflow and insights.

Speaker 2

Our index business delivered another exceptional quarter with $17,000,000,000 of net inflows during the quarter, totaling $53,000,000,000 over the last 12 months. We also achieved another record in index ETP AUM exiting the quarter at $569,000,000,000 Turning next to Financial Technology. ARR growth across the division was 13%, including 25% in Financial Crime Management Technology, 14% in the combined Acxiom SL and Calypsys solutions and 9% in the combined market technology and trade management services. The division has 69 new client signings, 96 up sells and 4 cross sells. We also saw continued cloud adoption as 68% of Acxiomacel and Calypso's combined bookings in the quarter were cloud based with a strong pipeline for future quarters.

Speaker 2

Turning to the specific subdivisions. Financial Crime Management Technology continued its strong momentum. We signed over 50 new clients in the SMB space and we continue to make progress in the upmarket segment focused on Tier 1 and Tier 2 banks. In July, we signed a new international Tier 1 bank, which is also an exciting cross sell. Going forward, we continue to maintain a strong sales pipeline within the core SMB segment and we have a growing pipeline of new clients and upsells among Tier 1 and Tier 2 banks.

Speaker 2

Across regulatory technology, we see sustained demand across both existing and new clients as financial institutions face increasingly dynamic regulatory environments, including changes in regulation globally related to asset threshold. Among the many regulatory trends that are driving sales demand, we're pleased with our progress in signing clients around the world as they focus on implementing Basel IV and preparing to implement Basel III Endgame. In Capital Markets Technology, we continue to see strong demand for mission critical technology as many of our clients focus on modernizing their infrastructure to enhance resilience and performance. For Calypso, we see robust new demand, especially in the treasury segment, in addition to cloud transformation of large scale clients. In our Market Services division, we delivered revenue growth of 3%.

Speaker 2

We experienced healthy volumes across North America and Europe, and we achieved a sequential increase in North American options market share as well as growth in Nasdaq U. S. Equities on exchange market share and capture. Our U. S.

Speaker 2

Index options achieved record revenues more than doubling versus last year due to higher capture and volumes. In our U. S. Cash equities business, we executed successful Russell, MSCI and S and P rebalances during the quarter, which showcased the strength and resiliency of our markets. During the Russell event, for instance, nearly 2,900,000,000 shares representing a record notional value of over $95,000,000,000 were executed in the closing costs, representing the largest liquidity event on the NASDAQ Stock Exchange for the Russell reconstitution.

Speaker 2

And here in our European markets, the strength of our market ecosystem as evidenced by the depth of book, breadth of participants and product innovation continues to drive market share gains. Overall, we're pleased to report a solid quarter in market services and remain focused on retaining our leading position across all of our markets. I now want to spend a few minutes updating you on how we're executing against our 20 24 strategic priorities of integrate, innovate and accelerate. Starting with integrate, we have actioned over 70% of the $80,000,000 of net expense synergies and our leverage ratio reached 3.9 times at quarter end, both ahead of plan. Both Acxiomiscel and Calypso are fully integrated into the Financial Technology division and we've established strong leadership, a well structured operating model and a One Nasdaq go to market approach to ensure we're delivering for our clients with the highest level of efficiency and effectiveness.

Speaker 2

Our CRM's integration for the Calypso and Acxiom solutions is now completed ahead of schedule and this supports divisional sales coordination as well as the sales incentive program established at the beginning of the year. Importantly, across Acxiom SL, Calypso and Verifin, we've been highly focused on cultural integration into the broader Nasdaq enterprise and internal surveys continue to show that our employees are highly engaged and energized to deliver for our clients. We're also making strong progress advancing our innovate priority. We currently have approximately 50% of our employee base working with AI tools focused on enhancing productivity as well as driving our product roadmap. By the end of Q3, 100 percent of our developers will have access to AI co pilot tools and we recently had over 6.50 employees participate in several AI hackathons across NASDAQ.

Speaker 2

During the quarter, we continued to introduce new AI capabilities within our client facing solutions. Consistent with other Gen AI capabilities recently launched in our Verafin and BoardVantage solutions, with an eVestment, we have deployed a new AI power feature for the Market Lens module called Pension Meeting Minute Summarization. The feature provides asset managers with key insights on current and future pension fund strategies to help inform their business development engagement priorities with top pension decision makers. We also have a strong pipeline of AI features scheduled to launch in the coming quarters, including in market surveillance and IR insight. And we're seeing strong early traction in client adoption and effectiveness related to the capabilities that are already in market.

Speaker 2

Specifically, dynamic Mellow, the first SEC approved AI order type, which we launched in April, is driving a a 20% increase in both volumes for this order type and improvement in bill rates compared to the prior static version. Verafin's integrated GenAI feature, NDD Research Copilot, is now deployed at more than 2 50 clients and we expect to complete our rollout in the 3rd quarter. Client feedback has been positive, demonstrating that the integrated CoPilot functionality with the integrated CoPilot functionality, Verifin Solutions can reduce alert research time by up to 90% compared to banks that do not use Verafin. Beyond AI, we continue to drive innovation towards key growth priorities. For example, in our index business, innovation is at the heart of our growth strategy as we extend the franchise to new markets globally, drive institutional adoption and introduce new products beyond the Nasdaq 100.

Speaker 2

During the quarter, 50% of product and index product launches were outside of the United States and we're quickly gaining traction in investor adoption. In total, we launched 18 new products with our partners, including 12 ETPs and 3 insurance annuity vehicles geared towards our institutional clients. Additionally, we're pleased that our AI themed ETP saw more than $1,000,000,000 of inflows over the last 12 months. Wrapping up with our accelerate priority. The addition of Acxiomacel and Calypso has significantly elevated the dialogue we have with our clients as a strategic partner.

Speaker 2

There's no better evidence of that than the early traction we're seeing in our cross sell efforts. Since closing the transaction, we have executed on 11 FinTech cross sells. We had 4 this quarter, including 2 cross sells of our Acxiomascell solution to Calypso clients. This is a great start, but it's only the beginning on our journey to exceed $100,000,000 in cross sells by the end of 2027. Just 8 months since the acquisition closed, 10% of the opportunities in our pipeline are cross sells and we expect this to grow sequentially.

Speaker 2

The division has several strategic cross sell campaigns underway, which are generating strong top of funnel interest and underpins our continued confidence in our ability to grow cross sell bookings over the coming years. To wrap up, we're pleased to deliver a quarter of strong results, driven by continued momentum in solutions and the power of our diversified platform to drive scalable, profitable and durable growth. Importantly, we're delivering on the Adenza acquisition thesis as our clients increasingly see Nasdaq as a strategic partner that can help solve their largest most complex challenges. We look forward to leveraging this momentum to unlock our next phase of growth. And with that, I'll now turn the call over to Sarah to review the financial details.

Speaker 3

Thank you, and good morning, everyone. In the Q2, we made excellent progress in both the integration of Adenza and the accelerated pay down of debt. We actioned over 70% of net expense synergies 6 months ahead of schedule. We have also come in ahead of our accelerated deleveraging plans ending the quarter of 3.9 leverage. Turning to our 2nd quarter results on slide 10.

Speaker 3

We reported net revenue of $1,200,000,000 up 10% with solutions revenue up 13%. Operating expense was $539,000,000 up 7% within our guidance with an operating margin of 53% and an EBITDA margin of 56%. Overall, this resulted in net income of $397,000,000 and diluted EPS of $0.69 Slide 11 shows the drivers of our 10% pro form a revenue growth for the quarter. We generated 8% outside growth on a net basis, driven by new and existing clients as well as our focus on product innovation. Overall, beta factors were 2% this quarter, driven by higher valuations in NASDAQ indexes as well as higher overall volumes in market services.

Speaker 3

On slide 12, we had 7% ARR growth and as part of that we had 17% SaaS revenue growth, resulting in SaaS as percent of ARR now at 37%, up 4 percentage points. Let's review division results for the quarter starting on slide 13. In Capital Access Platform, we delivered revenue of $481,000,000 reflecting growth of 10%. We had another exceptional quarter for our index business with revenue up 29%, driven by $53,000,000,000 of organic inflows in the last 12 months, including $17,000,000,000 this quarter and market performance, both resulting in average ETPAUN of $531,000,000,000 In addition, future volumes were up 25%. Data and listings revenue was up 1%, while ARR was down 1%.

Speaker 3

The difference was driven by small one time revenue benefits, primarily related to listing. Revenue from higher data sales and usage, new listings and pricing offset the impact of de listings, downgrade and lower amortization of prior fees. We expect the quarterly headwind from lower amortization of prior period listing fees to increase from an immaterial impact in 1Q 2024 and approximately $1,000,000 in 2Q 2024 to about $3,000,000 in each of the next four quarters. However, we have seen roughly 25% fewer delistings in the first half of the year versus the prior year period, suggesting that delistings should be less of a revenue headwind in 2025. Lastly, workflow and insights revenue was up 4%, in line with ARR growth of 4%.

Speaker 3

This was driven by continued growth in innovative analytics products, mainly data link and eVestment. This was partially offset by continued headwinds in Corporate Solutions. Analytics had a strong quarter with both revenue and ARR in high single digits. Operating margin was 56%, up 1 percentage point. Looking forward, we expect full year revenue growth for Capital Access Platform to exceed our medium term growth outlook range, with index expected to come in above its range, workflow and insights expected to come in below its range, and with data and listings essentially flat year on year.

Speaker 3

Moving to Financial Technology on Slide 14. We had another quarter of strong growth with division revenue of $420,000,000 a 16% increase and with ARR growth of 13%. This performance reflects double digit revenue and ARR growth across our 3 subdivisions. Financial Crime Management Technology delivered 24% revenue growth and 25% ARR growth with 53 new clients in the quarter. Capital Markets Technology had revenue growth of 14% and AR growth of 11% on the back of 7 new clients and 38 up sales in the quarter.

Speaker 3

The difference between revenue and ARR growth is driven by the timing of on prem renewals and professional services fees. Together, Trade Management Services and Market Tech grew revenue 2%. We experienced strong subscription revenue and ARR growth, up 9% for both businesses and up 3 percentage points sequentially. The lower growth in revenue was due to year over year decline in professional services revenues. As we mentioned last quarter, in Market Tech, we had a very large implementation in 2023, which created a $27,000,000 revenue benefit in the full year of 2023.

Speaker 3

And this year is resulted in subscription revenue or ARR of $11,000,000 We expect this year over year headwind to persist in Q3 and abate in Q4. CALYSTO had revenue growth of 34% and AR growth of 13%. Revenue was higher than the expectation we provided in the Q1 call due to broad strength in sales activity, including a strategic early renewal, 29 up sales and 5 new clients. As we look forward, we continue to see solid momentum in the business and expect Capital Markets Technology revenue growth for 2024 to remain in line with our medium term outlook. Overall, for the second half of twenty twenty four, we expect more normalized growth across the products within the division versus the first half of the year with consistent growth across quarters.

Speaker 3

Regulatory Technology had revenue growth of 16% and ARR growth of 10% with 7 new clients and 58 up sales in the quarter. The difference between revenue and ARR growth is driven by Axiom Accel, which had 23% revenue growth and 14% ARR growth. The 23% revenue growth was primarily due to strong subscription revenue, including a large on prem renewal, 29 up sales and 1 new client in the quarter, partially offset by a decline in professional services fees due to the timing of client deliveries. The FinTech operating margin was 47% in the 2nd quarter, up 3 percentage points, including the benefit of synergy realization. As we finalize the business combination accounting for Adenza during the measurement period, let me update you on the change we are evaluating on Axiom XL.

Speaker 3

As part of this potential accounting change, we would recognize on prem subscription based revenue on a ratable basis over the contract term, whereas we currently recognize approximately 50% upfront. This is due to the frequency of critical mandatory regulatory updates that we implement and embed in the Acxiom at our software throughout the contract term. We believe this change would enhance our financial reporting and would not change the Adenta medium term outlook we had provided nor our ability to achieve it this year. If an adjustment is made, it would not have a material impact on Nasdaq overall. And 2Q would remain a strong quarter with FinTech revenue growth near the top of its medium term outlook range, solutions revenue growth at the high end of its medium term outlook range, and Axiom Estelle and Calypso combined revenue growth above 20%.

Speaker 3

Importantly, combined ARR growth of 14% and net revenue retention of 111% would be unchanged. Specifically, at the Actium SL level, we expect subscription revenue growth to be more consistent going forward and remain in line with our medium term outlook. Acxiomet's our 2Q 2024 subscription revenue growth would have been generally in line with ARR. However, the timing related decline in professional services fees I mentioned earlier would have driven total AXA Method revenue growth for the quarter to the low to mid single digit. We expect to receive additional information to finalize our analysis in 3Q.

Speaker 3

And if we make the change, we will provide updated historical information by quarter for 2023 and the first half of twenty twenty four during 3Q and ahead of reporting our 3Q earnings. Now wrapping up the divisions with market services. Net revenue was $250,000,000 for the quarter, up 3%. Growth was driven by higher volumes in cash equities in both North America and Europe as well as in U. S.

Speaker 3

Options, increased capture in North America equities, U. S. Index options high growth, share gains in European equities from a very strong base and one additional trading day. This was partially offset by lower share in U. S.

Speaker 3

Options and equities, though share for options was stronger sequentially and increased over the course of the quarter. We also had lower USA revenue. Market service 2nd quarter operating margin was 58 percent, a 1 percentage point decline from the prior year, primarily due to continued investments in market monetization and regulatory obligation. Moving on to non GAAP operating expense on slide 16. This quarter was $539,000,000 reflecting pro form a growth of 7% or $15,000,000 sequentially.

Speaker 3

This is within the guidance we provided on our Q1 earnings call. And as a reminder, 2nd quarters include the impact of annual merit adjustments and equity grants. All in, we generated positive operating leverage with an increase in both operating and EBITDA margin of over 1 percentage point. This included the benefit of synergies this quarter and the funding of additional revenue related expense. We originally targeted $80,000,000 of net expense synergies through the end of 2025.

Speaker 3

As of Q2, we have already actioned over 70% of that amount, 6 months ahead of schedule. The P and L benefit of the actions already taken represent approximately 1 percentage point reduction in expense growth in the first half of this year. Please note that the actions of 2Q and 3Q have a longer time line to expense recognition. And as such, we expect the full impact of synergies to moderate expense growth by approximately 1.5 percentage points for 2024. For the full year, we expect non GAAP operating expense of 2,145,000,000 to $2,185,000,000 reflecting an increase to the bottom end of the range to account for strong revenue generation, which increases variable compensation and EBIT and enables us to invest in growth initiatives, while also accounting for the synergy benefits realized in the year.

Speaker 3

Additionally, we continue to expect a full year tax rate of 24.5% to 26.5% on a non GAAP basis. Turning to our capital allocation on slide 17. Nasdaq continued its track record of strong free cash flow generation with $328,000,000 in the 2nd quarter, representing a conversion ratio of approximately 100% over the trailing 12 months. This takes into consideration specific one time costs associated with the Adenza acquisition and integration. This quarter, we continued to prioritize debt reduction and are ahead of our accelerated deleveraging plan.

Speaker 3

We paid down net $174,000,000 of commercial paper and ended the quarter at 3.9 times gross leverage versus 4.1 times last quarter. This was achieved while also increasing our quarterly dividend 9 percent to $0.24 per share or $138,000,000 reflecting a 37% annualized payout ratio and repurchasing approximately $60,000,000 of our shares to opportunistically take advantage of the attractiveness of our stock and start to offset 2024 employee dilution. Looking ahead, we remain focused on deleveraging and expect to pay down the remaining commercial paper balance near term, while remaining opportunistic and flexible. We also remain committed to offsetting employee dilution. In closing, we are thrilled with the pace at which we are delivering and the results of our integration.

Speaker 3

We are executing on our plans with focus and discipline, building a financial technology powerhouse, driving durable growth and profitability for our shareholders. Thank you for your time and I will turn it back to the operator for Q and A.

Speaker 4

Thank

Operator

And I show our first question comes from the line of Dan Fannon from Jefferies. Please go ahead.

Speaker 5

Great. Thank you. So within Financial Crime Management, you highlighted price increases as a contributor to growth. I was hoping you could talk about pricing more generally across your businesses and specifically what maybe price contributed to the strong growth in the quarter across the various segments?

Speaker 2

Sure. Well, I would just say that, as we've talked about in the past, price increases are different per product and kind of different from in terms of how we structure contracts with our clients within FinTech. So, we don't provide you a very specific answer to that question, but I think that if we think about what we've said at least for the Aksimasil and Calypso products in the past is that about half of the revenue increase that we see in any given quarter comes from upgrades and upsells of our clients and the other half comes from new sales and price increases, the price changes we make within the contracts. Some of our contracts have CPI increases and some where what we would do is we would up sell our clients or increase price upon contract renewal. So that would mean that we would have a constant price for a period of time and then increase price on contract renewal.

Speaker 2

We do that on the basis of increased value to the client or the fact that the client themselves are growing and therefore they're getting more value out of the product. So that's a that it kind of depends on the product, Dan.

Speaker 5

Understood. And you mentioned that 10% of the pipeline is made up of cross sell opportunities. I guess, and a lot of upsells and momentum is known as you highlighted in the business across a lot of the businesses. I was hoping you could talk about kind of the use cases you're seeing early within the cross sell and maybe how those that dialogue is progressing from what you're having SysX today and where you see that momentum in terms of the actual products?

Speaker 2

Sure. Well, within the quarter, as I mentioned, we had 4 cross sells and 2 of them were selling AccemaCell to Calypso clients. And so that really comes from the fact that we have a really strong relationship with our clients in Calypso. They have new regulatory obligations that they're having to become ready for and they've chosen to work with us. And one of the benefits we have is that we can actually we have a data API connector between those two products.

Speaker 2

So we can take data directly out of the Calypso platform and feed it into Acxiom SL and make it much easier to implement the Acxiom SL solution for those regulatory obligations. So that is definitely helping to drive demand. We also in terms of our cross sell campaigns, we have one cross sell campaign that's really focused on our exchange clients where we have clients where we provide clearing technology and Calypso has amazing collateral management capabilities. And so we are working with them to show the benefits of adding the Calypso collateral management into their clearing operations. And then we also have, as I mentioned, the Calypsox CML, And then the third one is actually looking at our Bearfin clients across the United States and offering both treasury management as well as some Axiom SL regulatory reporting solutions to the broader bank community.

Speaker 2

So those are the areas where we're doing strategic campaigns and we're definitely seeing that beating the funnel. But also, frankly, with as I mentioned in July, we have one of our great Tier 1 clients for AccemaCell and Calypso has now signed up to take Barafen. So I think the strength of our relationship with them across all of our frankly, all of our business has been a driver of having them trust us with their anti financial crime needs as well.

Speaker 4

Great. Thank you.

Operator

Thank you. And I show our next question comes from the line of Alexander Blostein from Goldman Sachs. Please go ahead.

Speaker 6

Hey, good morning everybody. Thank you for taking the question. I was hoping we could start with discussion on momentum you guys are seeing at Adenca and you provided a number of different KPIs, both in terms of the upsells and the number of new clients you've signed and the cross selling. Can you help us maybe frame what these sort of KPIs mean in terms of the revenue opportunity you see on the back of these wins? So I don't know if it's a revenue pipeline or revenue backlog, you kind of set a frame around these wins, but just trying to better understand what this could mean in terms of revenue growth.

Speaker 6

Thanks.

Speaker 2

Yes. I mean, I think that the ARR, the contract values of the new sales are factored into ARR in terms of the annualized contract value. And so that as you see the ARR coming in, I think it's 13% across all of FinTech. And then we've given you the ARR growth for each of the subdivisions. It really does help you have a predictive effect on the I think that I think that's what we look at in terms of the overall health of the business, the overall health of how we look at the forward potential, the subscription revenue.

Speaker 2

And then of course there was also the professional services revenues and we try to give you some understanding of the dynamics there. As we've mentioned before for the AkamaCell and Calypso combined properties, when we look at the overall outlook for the business, medium term outlook for revenue, it's slightly below our AR expectations because of the fact that professional services fees grows a little bit more slowly in general over a long period of time than the subscription revenues. But that's I think that's the way to kind of evaluate the business.

Speaker 6

Great. Awesome. Helpful. So and then on Barafin, you highlighted the Tier 1 international bank, which is I know is an important market for the firm. Can we maybe spend a little bit more time on sort of how you see that opportunity set and the revenue contribution from international markets shaping out for Barafin as you kind of push further into that market?

Speaker 2

Yes, great. Well, first of all, today the Tier 1, Tier 2 banks, the revenue contribution is still very small because we're still signing new clients, we're implementing them. We don't start recognizing the revenue until we implement in terms of making sure that we have them up and running. And the implementation times are ranging from, I would say, 6 months to a year depending on the complexity of implementation. So and most of the new sales that we've had in the Tier 1, Tier 2 space have focused on payments fraud.

Speaker 2

We also have this new consortia based check fraud solution that's really exciting. There was definitely driving demand. And as we go into the international bank, one of the things that we've been focused on both in Canada and the UK is looking at payments fraud across kind of what I'll call international payments fraud into their U. S. Operations in other parts of the world.

Speaker 2

But that's where we really have this incredible strength in our business and in our solution. We can cut down false positives anywhere from frankly 20% to 40% depending on how they implement it. We can increase fraud found and that's been really exciting for the banks to see. We run these proofs of concepts to prove out the solution and it's pretty remarkable actually is the benefit they get. Taking that proof of concept and turning to a contract takes time.

Speaker 2

So we are super excited to see our latest Tier 1 signed in July. The proof of concept was done probably by April or so, just to give you a sense.

Speaker 6

Great. Awesome. All right. Thank you so much.

Operator

Thank you. And I show our next question comes from the line of Kyle Voigt from KBW. Please go ahead.

Speaker 4

Hi, good

Speaker 7

morning. Maybe just the first question on the deleveraging that's coming in ahead of expectations. You noted that repaying the additional CP is a priority, but I think there's only 50,000,000 dollars left on that. And I think you're generating close to $250,000,000 plus of free cash flow for dividends. So can you just help us frame what's the preference here in terms of enacting further repurchases opportunistically on a go forward basis after you repay the $50,000,000 remaining?

Speaker 7

Or should we think about the priority really getting that net leverage lower and simply letting the cash build up on the balance sheet near term?

Speaker 3

Thank you very much, Kyle. So we remain focused on the capital priorities that we have outlined at Investor Day. So of course, always the organic growth first and then the deleveraging remains very important. So you are right that we would start with the PPE and the balance that you mentioned is approximately correct. And then after that, we would be opportunistic.

Speaker 3

We, 1st of all, have done about half of the employee dilution related share repurchases. So I think you would expect us to continue to do that. And we use the word opportunistic, flexible because there are other things we could be doing, which is around either debt or equity.

Speaker 7

Okay, understood. And then just a follow-up and I hate to

Speaker 4

use this as a question, but

Speaker 7

I just wanted to clarify something specifically that you said, Sarah, on the listings business. I know you said $3,000,000 of initial listings amortization headwind starting in the Q3 and the Q4. Just kind of clarify, is that on a year over year basis? Or are you talking about an incremental $3,000,000 headwind on a sequential basis in 3Q and then another $3,000,000 sequentially in 4Q?

Speaker 3

What I gave is that in 2Q, it's $1,000,000 year on year And then in 3Q and after for the following 3 also, it would be $3,000,000 So you could add 2 on the sequential, but it's year on year. So €3,000,000 year on year, €1,000,000 becomes €3,000,000 between 2Q and Q2.

Speaker 7

Understood. Thank you very much.

Operator

Thank you. And I show next question comes from the line of Michael Cho from JPMorgan. Please go ahead.

Speaker 8

Hi, good morning. Thanks for taking my question. I just wanted to follow-up on Verafin as well. You talked through kind of the proof of concepts going and the kind of the it seems like it would seem like a pretty turnaround for the most recent Tier 1 from April and to signing in July. I mean, can you just give any more color around the pipeline

Speaker 4

or the additional proof of concepts

Speaker 8

you're undertaking right now for the proof of concepts you're undertaking right now for the Tier 1 and Tier 2 clients? And then just like broader, longer term, like what do you think the right pace of new client additions should be for this cohort of Tier 1 and Tier 2 clients as we look further down the road as that sales force scales as well?

Speaker 2

Yes, sure. Yes, so right now we've actually had an increasing number of POCs and we're we don't give specific numbers, but it's a really healthy number of clients evaluating our solution with the proofs of concepts that we have underway. Over time, we'd like to actually think we won't have to run as many because we'll have proven the solution out enough times across clients that it just becomes something that people fully understand and they don't necessarily need a proof of concept, which is why we're right now that number is building as we're gaining more traction, we're signing clients, more clients are curious about it and they want to understand the benefit to them. But over a period of years, we'd like to think that it'll just become part of the flywheel. So I would say right now, we should continue to expect a small number of clients over a period of a year, not necessarily every quarter as we've kind of shown, but hopefully we're going to see more momentum and more regular signings in the years ahead.

Speaker 2

So it just be it builds on itself and that certainly has been the experience of Verifin over time and they leg into a new segment of the banking industry. They'll get ones or twos kind of in a quarterly basis that will start trickle in and then it starts to become more of a regular pace. And then they start to really demonstrate the strength, particularly with the consortium data that they have that really kind of feeds on itself and therefore it gains momentum. But I can't give you a specific I wish I could give you a specific understanding of how much time that would take, but we're definitely measuring in periods of years at a time, like how do we gain more momentum? How do we sign more clients each of the years and in the years to come?

Speaker 2

But that's about

Speaker 8

as much color as I

Speaker 2

can give you right now.

Speaker 8

Okay. No, that's great. Thank you. And then just for a follow-up, just inside the Capital Markets Tech within FinTech, clearly some good revenue tailwinds happening there. I mean, sorry, I think you've called out a few moving pieces there, but can you just flush out maybe the quarterly quarter to quarter uptick in revenues and if there's anything one time or large from clients there?

Speaker 8

And then I think you also mentioned maybe like more normalized quarterly year over year growth in the second half versus first half. Can you just flush that comment out as well? Thank you.

Speaker 3

So basically what we had is really a broad momentum across our businesses, but specifically here also in the CALYPSO where we had one strategic early renewal, but also 29 upsells and several new clients. And so it was 5 new clients. And so as you look forward, you are going to continue to see solid momentum in the business. And we told you also that 2024 would remain in line with our medium term outlook. But of course, given the type of first half we have had, I think it was not a surprise that we mentioned that we would expect more normalized growth across the products within the division versus the first half of the year.

Speaker 3

And also we pointed out consistent growth across quarters. And so this is on what we said at the Capital Markets Technology revenue level.

Speaker 2

Yes. And I just want to make sure it was actually within the subdivision, which is the Capital Markets subdivision.

Speaker 8

Yes. Okay, great. Thank you.

Operator

Thank you. And I show our next question comes from the line of Patrick Moly from Piper Sandler. Please go ahead.

Speaker 9

Yes. So I just wanted to go back, Adena, to your comments on the IPO environment. It sounded like you said that you expected the landscape to sort of improve throughout the remainder of the year, but you didn't expect it to manifest until the first half of twenty twenty five. So could you maybe just clarify your expectations for the rest of this year and when you expect that to show up in the financials?

Speaker 2

Sure. Well, I think we've seen a modest improvement year over year. I think in a way, I think we've all been surprised by the fact that you've got strong market performance in general, but continued, I would say muted IPO environment. Now we are seeing a very good week. We have the largest IPO of the year happening today and we had another great IPO yesterday.

Speaker 2

But I think that we still are seeing it coming trickling in like that, not necessarily a steady stream of IPOs coming to market in size. And so, as we look out over the pipeline and certainly the conversations we've had with clients, we do think that we'll continue to see a modest improvement year over year in the IPO environment, which of course last year was not a strong year. But as we've a lot of the conversations we're having, particularly in the technology space has been more geared towards the first half of twenty twenty five. Now that's changed, right? So if we can if there's some positive momentum that happens in the economy, positive things that are happening as we go through the fall, I think you could see the door opening up because more and more companies are getting ready to go out.

Speaker 2

But I'd still think a lot of the merge are thinking that they'll wait past the year and go in 20

Speaker 9

25. Okay, great. And then just a follow-up on index options. You're seeing really strong momentum there. I think you mentioned that revenues had doubled versus last year.

Speaker 9

Volumes were up, I think, 50% year over year. So it does seem like you're taking price there. Could you maybe just update us on the broader vision for index options at NASDAQ and maybe your approach to pricing

Speaker 4

potentially at

Speaker 9

the expense of not picking up as much market share as you'd like, just kind of how you think about that?

Speaker 2

Well, I think first of all, we're really excited about how the index options business is developing. And I think that the trading ecosystem as well as investors are recognizing the benefits of being able to hedge their index exposure through the options markets. And obviously we've seen that with other index franchises, but now with the NASDAQ 100, we're really building momentum and leveraging both futures where futures volumes were up 25% year over year quarter as well as in terms of the options business. And now you have more ability to do that. So very excited about where that's going.

Speaker 2

It is something where we have it as a premium part of our options franchise because I think that the benefits that our clients are getting from the hedging capabilities are very strong. And so it kind of warrants the fees that we charge there. It is not having a that's not having an impact on demand. The demand is really strong and continuing to grow. Now we've done a lot of work.

Speaker 2

There's been a lot of leg work over the last several years to build up an understanding of the options, how to use hedging. We have a data capability that we give out, we provide to the clients to help them understand, just do a lot of analytics on it to help them understand how to use the options the right way. And so the educational process we've had frankly over 3 years, I think is really now paying off. And we expect to continue to grow. We will be looking at additional indexes, additional indexes that we want to bring on to our index options franchise.

Speaker 2

But even now, the other thing I would mention is that there's also a really cool flywheel back to the index business. So the index team and the options team team has been working hand in hand to make this work really well because there's benefit back to the institutional community with Index and their ability then to have a better hedging tools and their ability therefore to adopt our Index products more successfully. So that's another part of the flywheel that's coming out of this.

Speaker 9

Very helpful. Thanks, Adena. Sure.

Speaker 2

Thank you.

Operator

Thank you. And I show our next question comes from the line of Craig Siegenthaler from Bank of America. Please go ahead.

Speaker 10

Thanks. Good morning, everyone.

Speaker 2

Good morning, Craig.

Speaker 10

So, we had a question on Salovis. Back in May, Bloomberg reported that you're considering a sale of Salovis. And while this could help you reach your financial leverage target faster and maybe the next deal. We were just curious given the news, because Solovus' strategic fit fits pretty well within your objective to provide software, data and other services in the financial service ecosystem. And arguably there's other businesses maybe like the Nordic Exchange, which doesn't fit as well.

Speaker 10

So I was just wondering if you could comment on the potential for NASDAQ to sell existing businesses. Thank you.

Speaker 2

Yes. So I won't comment on any particular rumor that's out there, but I would just say this. We do a very detailed review every year of our capital allocation. We look at our businesses strategically, financially across several different factors and evaluate how each one of them fits into our overall client experience and making sure that we're always the right owner for the businesses. And as you've known since I became CEO many, many years ago now, seven and a half years ago, we've made decisions to divest of certain businesses where either we're just not the right owner of the business, because our clients are not seeing us as a strategic owner.

Speaker 2

They might see us as an owner. They definitely understand that we own the business, but they might not necessarily strategic for our franchise or we have capital allocation priorities that are that really skewed towards different parts of our business. In terms of you did mention areas of our business, I would say I do want to say one thing. We view our Nordic business to be very strategic to NASDAQ. And I've said this on prior calls, the Nordic exchange business, they were the best exchanges in Europe.

Speaker 2

The innovation ecosystem that exists in the Nordic is incredible and very consistent with the U. S. And I would say that we do a great job of operating those markets and we're really proud to be the operator of the Nordic market. The other thing is the team there is really contributes a lot to our broader technology business. So we deploy members of the Nordic team out to work and help our market tech clients around the world.

Speaker 2

We have a great set of clients in the Nordics that are now wonderful clients that are FinTech solutions. So there's a lot of strategic intersection with our Nordic business. I do want to provide a defense of that. But generally, Craig, we do this work and we make these decisions over time, because we look at it as in terms of the long term strategic fit to NASDAQ.

Speaker 10

Thank you, Athena. And just I had a follow-up on the response to the last question, on index options and specifically the NASDAQ 100 Index.

Speaker 4

What is

Speaker 10

your desire and ability to expand NDX with 0 DT options? And then also with rising retail engagement and there's a lot of interest around tech overall. So it fits perfectly in here. I was curious on your comment about launching other indexes. I'm just curious in terms of what you could do there.

Speaker 2

Yes. I mean, we always look at our their index products that we think, as you mentioned, have really strong retail appeal, but also institutional appeal where they're large enough and there's enough assets in there to drive liquidity into a futures or an options product. And really looking at it from a hedging perspective, we have a whole range of index products beyond the Nasdaq 100. We have thematic indexes in terms of different technology trends like cloud and IT security, AI. We have thematics across different investment strategies like momentum strategies, dividend strategies, things like that.

Speaker 2

And so to the extent we think that there actually could be a trading ecosystem we could build around that, we will consider it. I don't we don't have any particular index product right now that we're targeting, but I would say that we do a lot of great analysis on that. And then in terms of how we structure the options and how we look at option duration, we will obviously evaluate that in the context of investor appetite and we'll work with the SEC on that when appropriate.

Speaker 10

Thank you.

Operator

Thank you. And I show our next question comes from the line of Alex Kramm from UBS. Please go ahead.

Speaker 4

Yes. Hey, good morning, everyone. Just wanted to come back to what you called out on Calypso or Capital Markets with that early strategic renewal. Can you just explain what exactly happened there? Why?

Speaker 4

And is that something that we should expect more often? And then maybe related to that on the impact side, looks like ARR up $25,000,000 quarter over quarter in that segment. Can you dimensionalize how big that renewal specifically was? Also on the transactional side, you beat me pretty handily. So maybe more than $10,000,000 Is it all related to that?

Speaker 4

So just trying to understand how big some of these individual renewals could be? Thank you.

Speaker 2

Yes. So I would actually say that having early renewals is not totally unusual, right? I mean, if we call it out just because it was we're really excited about the fact that we had a strategic client who chose to renew early and extend their contract. And I think that it's something that we're proud of. Now with as we mentioned with Calypso revenue, just to remind everyone, our view is that ARR is a very good reflection of how you should look at the overall health of the business, the stability, because of the fact that the license fees, you have half the license revenue recognized upfront and half recognized over the life of the contract.

Speaker 2

But our cash revenue, how we get the cash in the door and the overall ACV value of those contracts is better reflected in ARR. So we continue to see the ARR being very stable, very healthy. We think that's fantastic. We will have events like this early renewal that happened on occasion. We also had, as we mentioned, 5 new other clients, 29 upsells, all of that, Alex contributed to the strong revenue in the quarter.

Speaker 2

But over time, as I think as Sarah was saying, over time, kind of looking at ARR is a better reflection of the overall growth characteristics of the business. I think it's a better way to look at it over time as opposed to in a single quarter.

Speaker 3

Yes. The only thing I would add is, by definition, an ARR impact of a renewal is not as much as a new client or an upsell. And so if you were focused on why we had a good performance on ARR at Calypso or in Capital Markets Tech, it was really because of the breadth of everything that has happened.

Speaker 4

That's helpful. Thank you very much. And then secondarily, topic that we talked about a lot a few years ago, on the back of the strong listings environment that we had at that point, there was a lot of excitement around eventually getting IR solutions on the back of that when those start paying. I know obviously there's been a decent amount of delistings since then. So I guess this is not really coming through, but maybe you can just tell us where we are in that if you're still seeing a decent amount of upsells or is that unfortunately it's just not coming to fruition given the kind of companies that were listed 3 years ago or so?

Speaker 2

Actually, we are seeing conversions of our clients to paying clients at the end of the free period. So that is still happening, Alex. But I think that there are other headwinds. So a few things to mention on the IR services and I would actually say this across Corporate Solutions. So the first thing is that we obviously gain new clients through IPOs, right?

Speaker 2

So that's one of the avenues for us to gain new clients, whether that's for our IR solutions, our ESG solutions and our governance solutions. So that is definitely a funnel, a pipeline for us. Now some they then become paying clients on their base services over a period of 2 to 4 years depending on the kind of the way that the IPO is structured. But we also can upsell clients in that period time. So when you have a healthy IPO environment, you have new companies coming in and then you're showing them the base services and you can upsell them on new services that really does become a really nice flywheel right after the IPO and then you have an additional opportunity when as you mentioned the IPO package rolls off and those IPO packages are rolling off.

Speaker 2

And so we are still seeing that happen. But the flip side of it is when you have delistings, then you have paying clients who are no longer listed, and that obviously creates churn. And you have other clients who are continuing to take the services, but they are, but they are, they're maybe taking fewer services because their IR budgets are being squeezed. And so that's becoming the contra, I'll call it the contra flywheel of having more delistings. I would say, when we look at the overall conversion rates, they are lower than what we've seen on an average basis.

Speaker 2

But they are but I mean, I think that's partly because of the fact that some of the companies are delisting, but those who are seeing this, they were seeing relatively normalized conversion rate.

Speaker 4

All right. Great color. Thank you so much.

Operator

Sure. Thank you. And I show our last question comes from the line of Owen Lau from Oppenheimer. Please go ahead.

Speaker 11

Hi, good morning. Thank you for taking my questions. So for AI, you have many initiatives going on. And when we look at dynamic Mellow, you highlighted 20% increase in both volumes and improvement in fill rates. Could you please talk about how it could impact your market shares and financials over time and how difficult it is for your client for your competitor to launch similar products?

Speaker 11

Thanks.

Speaker 2

Thanks, Owen. Well, I think on the first question, this is kind of a specialized order type. So it's not going to be something that's going to have a massive effect on market share, but it is a premium product. So our clients get a huge value out of it. It's a really nice way to get a higher fill rate in size at the midpoint.

Speaker 2

So it's a really it's a premium product in terms of the pricing that we charge. So it's more of a revenue opportunity than is market share opportunity. In terms of being able to replicate it, we do provide in our filing an explanation of how we do it, but I would tell you that it took several years for us to fine tune it with our AI team, data science team. It's actually quite complicated and complex to structure the right way to make sure you're getting the right outcomes. We're constantly fine tuning the various data points and the weightings of those data points as to how they're affecting the timer on the product.

Speaker 2

So I would actually say it's actually extremely hard to replicate, even though kind of you look at it like the formula is available, but how you actually manage that formula is very much a part of the greatness of our technology division, frankly.

Speaker 11

Got it. And then for Financial Crime Management Technology, we heard that some other enterprise software companies had to lower the ARR guidance because of some uncertainty in the macro environment. But the momentum in your business seems to be quite robust and you highlighted the new Tier 1 client signed in July. Could you please remind us how verifen could fare or grow in different macro environment? Is there any reason we should be worried about if the macro environment turns?

Speaker 11

Thanks.

Speaker 2

Sure. Well, I would actually talk about it. Let's talk about the FinTech level and then we can talk about it in specific areas. But the way that we look at our FinTech solutions is we provide mission critical technology that helps clients manage risk, manage their regulatory obligations and manage criminals out of their networks, as well as providing core capital markets technology to the entire Exchange ecosystem. So it is a to us, those are very durable, durable, kind of demand drivers.

Speaker 2

Managing risk, it gets as the world gets more complicated, the world gets more risky. And I think our ability at a global scale and a global level to be able to help our clients manage risk in their trading books, in their treasury operations, in their capital obligations, as well as then also to manage risk in markets is just it's tremendous honestly. And so I think that has actually been a really great demand driver. I think that as we look at the regulatory obligations, those are extremely durable around the world. Different regulators go at different paces, but there's always regulation that's changing.

Speaker 2

Now changes, it's really changes in regulations that drive demand, as well as the growth. Banks are growing and expanding their businesses into new countries that also drives great demand. And so those are things that are also quite durable. I think then on anti financial crime, as we've mentioned before, it's a $3,500,000,000,000 problem between anti money laundering and fraud. We are just getting started.

Speaker 2

And so it's not just the fact that the TAM is really large, the total market opportunity, but our solution is unique. I think our solution is remarkable, in terms of the way that we bring data together, the way that we are able to look at consortia data in a way that really allows us to be very curated in the topologies we apply using AI and in automating workflows to make it as efficient as possible that I think that creates a great opportunity for us and we're only in the really in North America today. So we have a lot of opportunity globally there. So I think Owen that we've chosen to get into this business in a way with very specific ambitions to be that solutions provider of the most complex challenges that the banks face in all economic environments. And that is what we think is going to create durable growth for us.

Speaker 11

Got it. Thanks a lot.

Operator

Thank you. That concludes our Q and A session. At this time, I'd like to turn the call back over to Adena Freeman for closing remarks.

Speaker 2

Thank you. Well, as you heard this morning, Nasdaq continues to make progress on our 3 key priorities of integrate, innovate and accelerate. And through our complementary and integrated solutions, Nasdaq is delivering consistent growth and the 1 Nasdaq strategy is accelerating our evolution as a trusted technology provider to the financial services industry. We look forward to updating you on our strategic progress in the quarters to come. And thank you all for joining and have a great day.

Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Nasdaq Q2 2024
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