Nasdaq Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 19, 2022

There are 12 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the NASDAQ Second Quarter 2022 Results Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker today, Ed Dittmeier, Investor Relations. Please go ahead.

Speaker 1

Good morning, everyone, and thank you for joining us today to discuss Nasdaq's Q2 2022 Financial Results. On the line are Adena Friedman, our CEO Ann Dennison, our CFO John Zekka, our Chief Legal Risk and Regulatory Officer And other members of the management team. After prepared remarks, we'll open up the line to Q and A. The press release and presentation are on our website. We intend to use the website as a means of disclosing material non public information and complying with disclosure obligations under SEC Regulation FD.

Speaker 1

I'd like to remind you that certain statements in this presentation and during Q and A may relate to future events and expectations and as such constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from these projections. Information concerning factors that could cause actual results to differ from forward looking statements is contained in our press release and periodic reports filed with the SEC. I will now turn the call over to Adena.

Speaker 2

Thank you, Ed, and good morning, everyone, and thank you for joining us. My remarks today will focus on Nasdaq's 2nd quarter financial and business performance as well as the progress we've made to drive forward our strategic priorities for the year. I'd like to begin by acknowledging that we continue to find ourselves amid an uncertain macroeconomic and geopolitical environment. Yet while markets, investors And corporate clients all experienced increased levels of volatility during the Q2, Nasdaq's strategic vision and our ability to execute on it remains clear. The strength and quality of our businesses puts us in an excellent position to navigate these dynamics.

Speaker 2

Our record net revenue and non GAAP EPS results demonstrate our ability to capture new opportunities in different operating environments, even as we continue to strengthen our positioning for longer term growth through focused investments. I'm proud of our team's focus on delivering consistent results to our clients against this dynamic backdrop. Let's turn to our results. I'm very pleased to report Nasdaq's strong financial performance for the Q2 of 2022. We achieved a record $893,000,000 in net revenues, A 6% increase compared to the prior year period and 9% on an organic basis, excluding the impacts and changes in FX rates and acquisitions and divestitures.

Speaker 2

Our total annualized recurring revenue or ARR increased 9% to $1,970,000,000 Annualized SaaS revenues totaled $679,000,000 in the Q2 of 2022, growing at an even faster rate of 12%, which reflects strong demand for our anti financial crime solutions and investment analytics offerings. SaaS revenue now comprises 35% of total company ARR, a new high. The consistent growth we're seeing in our recurring revenue segments provides a powerful starting point for our overall performance, but we also delivered strong results across both our index licensing and trading revenues. Turning next to specific highlights from our business segments. Our Solutions segments delivered combined total revenue of $582,000,000 during the 2nd quarter, Several of our businesses, including our index and analytics offerings, the expansion of our listed issuer base, our anti financial crime offerings, As well as strong demand for our IR and ESG services.

Speaker 2

In our Investment Intelligence segment, we delivered $283,000,000 in total revenue in the quarter, an 8% overall increase from the prior year period and 10% excluding the impact of FX, with growth contributions from across the businesses during the quarter. Revenue in our market data business increased by 1% from the prior year period and 3% excluding the impact of FX, primarily due to an increase in proprietary data revenues from international clients. In our index business, we saw revenue growth of $17,000,000 or 16 versus the prior year period, driven by positive net flows of $71,000,000,000 over the last 12 months, including $25,000,000,000 of during the especially challenging beta environment experienced in the first half of twenty twenty two. We also saw especially strong results from license features activities, which together with inflows more than offset the negative impact of market beta. And in our analytics business, Revenues grew 8% from the prior year period and 10% excluding the impact of FX.

Speaker 2

Our flagship eVestment analytics offerings Saw continued strong user adoption both across our asset owners and asset managers and drove annualized SaaS revenues for the Investment Intelligence Segment increased 12% versus the prior year period to $215,000,000 Turning next to our Market Technology segment, We delivered $131,000,000 in total revenues in the 2nd quarter, a 12% increase in the prior year period. This is primarily driven by continued growth in our broader anti financial crime technology solutions business. Our anti financial crime technology business had Strong second quarter with a 29% increase in revenues versus the prior year period. Growth was driven by sales in our fraud and anti money laundering or what we call Bramall Solutions as well as the impact of the Verifin acquisition deferred revenue adjustment recorded in the 2nd in the prior year period. We welcomed 37 new clients during the quarter.

Speaker 2

We continue to gain momentum with our efforts to expand Barrefin's presence with larger Tier 1 and Tier 2 banks through our proof of concept trials. These are active evaluations within our prospective clients' compliance infrastructures. While this diligence process results in a relatively long technology purchasing cycle, it is an important step to drive our success and extending our solutions to this area of the market. Moving next to our Market Infrastructure Technology business, we generated $56,000,000 in net revenues during the Quarter. Importantly, we made continued progress on the deliverables within a group of particularly large client projects that we have discussed in recent quarters, reflecting our increased ability to work with clients on-site.

Speaker 2

Specifically, we completed Phase 1 deliveries for all 4 of our largest implementations by the end of the quarter. While some of the projects have follow on phases, we are pleased to have met these important milestones so far this year. Market Infrastructure Technology also had some exciting new relationship that were announced during the period. In May, XP, a provider of financial products and services in Brazil, announced the development of their new trading platform for digital assets, A Singapore based marketplace for carbon credits announced their decision to leverage Nasdaq's SaaS based marketplace services platform to power their new spot exchange for carbon credits, which is slated for launch in early 2023. As I noted earlier, we are actively engaging in person with And the team recently welcomed over 100 officials from 50 global marketplaces to our Annual Technology of the Future Industry Conference.

Speaker 2

The overall sentiment from clients there was incredibly encouraging, particularly as the market infrastructure operators see the advantages that our technology, including our cloud deployed solutions can bring to their respective customers as they contemplate shifts in their operating models and look for new ways to differentiate their offerings. We remain confident in our ability to improve our organic growth through the remainder of 2022 and into 2023. Moving to our foundational marketplace businesses. Our Market Services segment delivered net revenues of $310,000,000 during the Q2. We maximize opportunities presented by robust levels of activity through strong market share and consistent pricing strategies.

Speaker 2

The share volume traded on NASDAQ Exchanges grew by 22% compared to the prior year quarter and Trade Management Services Revenues hit a new quarterly high of $87,000,000 up 7% versus the prior year, reflecting an increase in demand for connectivity and infrastructure services. At the end of June, Nasdaq's closing cross set a record for the number of shares traded during the 2022 Russell U. S. Indexes reconstitution. 3,300,000,000 shares, representing nearly $64,000,000,000 were executed in 2 seconds across Nasdaq listed securities, A 40% increase in shares crossed from last year's event.

Speaker 2

I'm incredibly proud of our Market Services team on achieving yet this important milestone. The new closing cross record is a testament to the investments we've made in our technology and a result of the trust the team has worked diligently to build with all investors, including through some of the most volatile market periods on record. Nasdaq's Nordic equities markets also saw strong volumes as well. The value of shares traded on Nasdaq's Nordic and Baltic Markets for the first half of twenty twenty two was the 2nd highest since 2,008. Finally, our Corporate Platforms segment delivered revenue of $168,000,000 in the 2nd quarter, a 13% increase from the prior year period, driven primarily by our expanded listed issuer bases across both our U.

Speaker 2

S. And Nordic listing franchises, as well as growth in demand for our IR and ESG services. Revenues in our IR and ESG Services business increased 9%, underscoring the strong demand for our consultative and technology based solutions during the period. The number of corporate clients using Nasdaq's IR and ESG Services solutions increased 6% from the prior year period, while we've also been expanding relationships of existing clients. In addition, during the Q2, we acquired Metrio, A provider of corporate sustainability data, analytics and reporting services to corporates.

Speaker 2

Metrio's SaaS based platform is complementary to our existing suite of IR I'm sorry, of ESG reporting solutions and will accelerate our ability to support corporate clients and their expanding sustainability management and reporting needs. Our growing expertise in all Components of E, S and G enable us to help our corporate clients confidently navigate the complexity of the modern capital markets, including managing their investor relationships Turning to our Listing Services business, revenue increased 15% to $107,000,000 As the number of Nasdaq listed corporate issuers, excluding SPACs, increased 9% compared to the prior year period. Nasdaq continued its competitive in attracting the majority of new U. S. Listings for the 34th consecutive quarter with 38 IPOs raising a combined $2,800,000,000 for an 88 percent win rate.

Speaker 2

In Europe, our Nordic, Baltic and First North exchanges also welcomed 25 new listings. As I wrap up, I will summarize by saying that our Q2 results demonstrate how Nasdaq's client centric culture and diversified business model We will now begin the Q1 of 2019. We will now begin the Q1 of 2019. We will now begin the Q1 of 2019. We will now begin the Q1 of 2019.

Speaker 2

We will now begin the Q1 of 2019. We will now begin the Q1 of 2019. We will now begin the Q1 of 2019. We will now begin the Q1 of 2019. We will now begin the Q1 of 2019.

Speaker 2

Through our world class technology. This includes the progress we're making as we migrate our own markets to a cloud enabled state, including the planned migration of our MRx 2nd, under the pillar of transparency, we believe that we are incredibly well positioned to execute on our unique and substantial opportunity We are centered first on a foundation of serving the specific needs of corporate clients By providing advisory services, along with SaaS based data aggregation and reporting capabilities to facilitate their ability to communicate their ESG and climate strategies and progress to the investment community. And 3rd, under the pillar of integrity, we play an important role in seeking to make the entire financial system more safe And fair for savers and investors through our powerful and diverse anti financial crime offerings combined with our network of bank and brokerage clients. We remain relentlessly focused on advancing our strategy and we believe that Nasdaq is well positioned to navigate the geopolitical and macroeconomic uncertainties that may persist as we move forward into the latter half of this year. And with that, I'll now turn the call over to Anne to review our financial details.

Speaker 3

Thank you, Adena, and good morning, everyone. My commentary will primarily focus on our non GAAP results, and all comparisons will be to the prior year period unless otherwise noted. Reconciliations of U. S. GAAP to non GAAP results can be found in our press release as well as in a file located in the Financial section of our Investor Relations website at ir.nasdaq.com.

Speaker 3

I will start by reviewing Q2 2022 performance Beginning on Slide 10 of the presentation. The 6% increase in reported net revenue of $893,000,000 is the net result of Organic growth of 9%, including a 12% organic increase in the Solutions segment and a 4% organic increase in Market Services, partially offset by the net impact of acquisitions and divestitures and a 2% negative impact from changes in FX rate. Moving to operating profit and margins, non GAAP operating income increased 6%, while the non GAAP operating margin of 54% was unchanged compared to the prior period. Non GAAP net income attributable to Nasdaq was $342,000,000 or $2.07 per diluted share compared to $316,000,000 or $1.90 per diluted share in the prior year period. Turning to Slide 11.

Speaker 3

As Adena mentioned earlier, ARR totaled $1,970,000,000 an increase of 9% from the prior year period, while annualized SaaS revenues totaled $679,000,000 an increase of 12%. I will now review quarterly segment results on Slides 12 through 15. Starting with Market Technology, Revenue increased $14,000,000 or 12 percent with $10,000,000 of the increase due to the impact of the deferred revenue write down on Verafin in the prior year period. Organic growth for the Market Technology segment was 14% in the period and was driven by the Anti Financial Crime Business, Though Market Infrastructure Technology saw a sequential improvement. ARR for Market Technology totaled $451,000,000 an increase of 5% compared to the prior year period.

Speaker 3

The Market Technologies segment operating margin was 12% in the period. Investment Intelligence revenue increased $22,000,000 or 8%, reflecting organic revenue growth of $25,000,000 or 10%. Organic revenue growth during the period reflects primarily strong growth in our Index and Analytics businesses as well as positive contribution from market data. ARR totaled $586,000,000 an increase of 7% compared to the prior year period. Our index revenues were up 16% compared to the prior year, due principally to higher revenues derived from NASDAQ licensed derivative products, Where we saw the benefit of both higher trading volumes in the products as well as hitting the revenue threshold that triggers a step up in licensing economics, which happened about a month earlier in the year than we did in 2021.

Speaker 3

Based on the strength in the future side of index licensing during the period, The percentage of index revenues from AUM based licensing was 5 percentage points lower than the approximate 2 thirds level we typically speak about. The Investment Intelligence segment operating margin of 66% increased 1 percentage point from the prior year period. Corporate Platforms revenues increased $19,000,000 or 13%, including 16% organic growth. The increase was primarily driven by higher U. S.

Speaker 3

Listings revenues as well as higher adoption across the breadth of Investor Relations and ESG Advisory and reporting offerings. Our listed corporate issuer base increased 11% or 9% excluding SPAC. Corporate Platforms ARR was $586,000,000 and increased 15% compared to the prior year period. The Corporate Platform segment operating margin of 46% increased 4 percentage points compared to the prior year period, driven by a combination of recent growth in the listed issuer base and lower marketing expense due to the subdued IPO environment. Market Services net revenues increased $2,000,000 or 1%.

Speaker 3

The organic revenue increase was $11,000,000 or 4% And there was $9,000,000 negative impact from changes in FX rates. The organic increase reflects growth in Trade Management Services, Equity derivatives and cash equity revenues. The segment operating margin of 65% was unchanged from the prior year period. Turning to Page 16 to review both expenses and guidance. Non GAAP operating expenses increased $21,000,000 to $413,000,000 The increase reflects a $42,000,000 organic increase, partially offset by a $17,000,000 decrease from the impact of changes in FX rates and a $4,000,000 decrease from the net impact of acquisitions and divestitures.

Speaker 3

The organic expense increase is primarily driven by higher compensation and benefits expense, reflecting two factors. First is our continued investment in new employees to drive growth, including a 9% increase in the team over the past 12 months. 2nd is annual merit increases, which is reflected in the quarterly expense run rate starting in the second quarter. The merit increase was higher than prior years due to inflationary pressures on compensation, and we built the higher increase into our guidance at the beginning of the year. We continue to make significant investments in this tightened labor market to attract and retain the top talent in our industry.

Speaker 3

We are narrowing our 2022 non GAAP operating expense guidance to $1,710,000,000 to $1,740,000,000 tightening both the top and bottom of the prior range to account for expectations of continued investments, current FX rates and the continued strong performance thus far in 2022. Turning to Slide 17. Debt decreased by $182,000,000 versus 1Q 2022, primarily due to our repayment of the $499,000,000 Repayment of $499,000,000 of the 4.25 percent senior unsecured notes due June 2024, partially offset by a net issuance of $421,000,000 of commercial paper and $105,000,000 decrease in Eurobond's book values Caused by a weaker euro. Our total debt to trailing 12 months non GAAP EBITDA ratio ended the period at 2.9 times, down from 3.1 times in the Q1 of 2022. Let me take a moment now to update you on the dividend, stock repurchases and our Board approval to split our stock.

Speaker 3

During the Q2 of 2022, the company repurchased $166,000,000 and shares and paid common stock dividends in the aggregate of $98,000,000 We have successfully completed the share repurchase program to offset dilution related to the divestiture of our U. S. Fixed income business in June of 2021. As of June 30, 2022, There was $293,000,000 remaining under the Board authorized share repurchase program. I'm also pleased to announce that our Board proved and declared a 3 for 1 stock split in the form of a stock dividend.

Speaker 3

As we had previously disclosed, the approval of an amendment to our charter To increase the number of authorized shares of common stock to permit us to effect the stock dividend required the approval of both the SEC and our shareholders. We received both approvals last month and filed the Charter amendment yesterday. The record date for the stock dividend will be August 12, with a distribution date of August 26, and we expect trading to begin on a split adjusted basis on August 29. Turning to Page 18 of the presentation, I'd like to touch on some of the very material progress We've made executing on our sustainability strategy. 1st, in terms of external impact, as Adena mentioned, we announced and closed On the Metria acquisition in June, expanding our corporate serving ESG solution set, which will complement the more framework based approach of our existing OneReport solution.

Speaker 3

2nd, in terms of corporate sustainability, we published our annual sustainability and TCFD reports in June. On advancing our climate strategy, we have had our 2021 GHG emissions verified by a third party and submitted our science based targets to the Science Based Targets Initiative for official validation. Lastly, In July, we received a 2 level upgrade of our MSCI ESG rating to AA, recognizing the overall strength of our Sustainability profile, including our leading governance standards in particular. We continue to see opportunities to advance our sustainability program across multiple aspects and look forward to updating you on our progress regularly. In closing, Nasdaq's 2nd quarter results reflect the continuation of the company's ability To consistently perform well across a wide range of operating environments, we delivered record quarterly revenues, 12% organic revenue growth in the Solutions segment and a 54% non GAAP operating margin, resulting in what we see as strong momentum thus far in 2022 that we can build upon moving forward.

Speaker 3

Thank you for your time, and I'll turn it back over to the operator for Q and A.

Operator

Thank you. Please standby while we compile the Q and A roster. Our first question comes from Rich Repetto with Piper Sandler. Your line is open.

Speaker 4

Yes. Good morning, Adena, and good morning, Anne. I guess, first question is, Adena, on regulation. And I'm sure you had a chance To sort of digest Chair Gensler's comments about equity market structure that he made just over a month ago. So I guess, I, by and large, look at it as a modest positive for exchanges, but bringing more volume back to lit venues, At least that's his intention anyway.

Speaker 4

But I'm just trying to see what you thought because he was critical of exchange rebates. And was there anything that particular in particular stood out to you as noteworthy or that you might there could be unintended consequences because You put out, I think, 5 or 6 different areas you wanted to focus on.

Speaker 2

Yes, sure. Rich, it's great to hear from you. And I would say that with regard to the market structure discussions and proposals that we're seeing, first of all, we have a long way to go and because we haven't yet actually seen formal proposals. But as we're listening to Tera Gensler and understanding where he's focused, I think that we're Yes. 1st and foremost, pleased that he does really recognize the value of exchanges and competition in lit markets.

Speaker 2

He's really focused on strengthening The National Best Fit and Offer, so that investors have a really solid understanding of true supply and demand in the market at all times. And he's really focused in on transparency, in terms of transparency around best execution, disclosure of execution quality, And really focusing on how to bring more orders into the venues because and that's also focused I'm leveling the playing field from a competitive perspective between exchanges and dark pools. So overall, we see what he's trying to achieve, we think It's beneficial to investors. I think as we look at some of the incentive structures that he's focused on, obviously, we see great value in the rebate structure that we have on changes because it really incentivizes participants to put their quotes into a lit venue and make those quotes available on the national As part of the National Best Bidding offer, and so the incentive structure is really literally designed to support lit quotes and lit orders. But I think that generally speaking, we still have a long way to go to understand what all the proposals will be.

Speaker 2

And then of course that then starts a long process around The comments and the industry engagement to determine what a final proposal would look like. So it's just the beginning, but we are encouraged by a lot of The areas that he's focused on.

Speaker 4

Got it. And I don't know whether this qualifies as a necessary follow-up or not. But I guess just looking at your expense guidance, you narrowed it a bit, but second half expenses would still be up 5% more than first half. So Anne, any color and just your expense control this quarter was pretty standout. So anything Why the 5% increase in the back half or more color behind?

Speaker 3

Sure, Rich. So just back to sort of how we think about Expenses in the context of revenue growth, we align our medium term outlook for our solutions segment's revenues is 6% to 9%, and then against that we think about a 3% to 6% expense growth. Coming into the year, we did we talked about and built into our guidance an additional 2% to reflect inflationary factors as well as the cost of return to office and travel, etcetera. And so that's all built into the guidance. There is some variability in the way that things come in throughout the year.

Speaker 3

And so When you look at the Q2, there's a couple of things, FX, taking that down And just variability in the timing of accruals. And so as we look forward to the back half of the year, we'd expect To come in, depending on performance, either at the midpoint or towards the top end of our expense guidance range. And just like in past years, we'd expect an increase in 3Q and that to be even higher in 4Q where We have some seasonality in expenses. Yes.

Speaker 2

And I think it's also just really important to note that in the last 8 consecutive quarters, we've had double digit growth in our solutions segment. So We've not have been exceeding the overall medium term outlook that we've been providing in those segments, which then of course Really makes us make sure that we have the right personnel and the right team to be able to support that growth, not only in terms of Having all these new clients that we're now servicing from the growth that we've experienced, but also continue to make investments in the businesses to continue to drive the growth that We're hoping to achieve. So all of that is reflected in the guidance and in addition to obviously the performance we've shown so far.

Speaker 4

Got it. Great color. Thank you.

Operator

Our next question comes from Alex Kramm with UBS. Your line is open.

Speaker 5

Yes. Hey, good morning, everyone. Just going into the Technology segment for a second. You ran through a lot of numbers there and I think I may have missed some. But can you perhaps help us isolating The growth in the Financial Crime segment, that was a little bit softer than I thought, but maybe help us how Verafin did in particular On a standalone basis and maybe what's going on in the legacy Financial Crime businesses.

Speaker 5

So any color around

Speaker 2

The basis of that sub segment, which is anti FinCrime, but if I give some color around on the 2 components. So there's 2 components to the anti FinCrime business today. 1 is The Verafin business, which is the fraud and AML detection and investigation technology and the other is our market surveillance and trade surveillance business. And both of them continue to have healthy growth and healthy engagement with clients. I think that as we look at That business, just like we do with Market Tech, we look at it over a 12 month period, not so much quarter by quarter.

Speaker 2

But it is also probably worth noting that in the Q2 of last year, Verifin had a truly outsized growth quarter. And so we're trying we're looking at that in the context of their current quarter in the context of that very outsized Quarter last Q2. I think in general, as we mentioned, we are seeing continued strong growth across Verafin. We expect Verafin to continue throughout the year to perform along the lines of where we what we've been discussing with all of our investors Since we bought Verafin and we also are seeing really good engagement with the Tier 1 banks To try to deliver those services up market, I think the one thing about that is that the sales cycles with those Tier 1 banks are long. And we know that.

Speaker 2

I mean, we obviously serve Tier 1s with our surveillance solutions. Just getting through the contracting process can take time And that can create a little bit more variability quarter over quarter in terms of the growth rate there. But we see really strong performance around the SME banks, the Smaller banks, the mid sized banks, Fintechs and now really engaging more and more with the Tier 1 banks. With regard to the Trade Surveillance and Market Surveillance business. Trade Surveillance continues to have really great engagement in terms of renewing contracts, Expanding contracts, we now have a crypto trading module that we're we have we signed our first client around And we also we're continuing to invest in that business.

Speaker 2

I think the market surveillance part of that business is a little bit a Lower growth business and it always has been, always will be. It's a smaller client set. And there we had, I would say, more of a kind of a flat Year over year quarter experience. So I think all of that adds up, Alex, to what you saw. And I think that we but we continue to see great momentum in the business.

Speaker 5

Very good color. Thank you for that. And then just a quick one. On the analytics business, not to be too nitpicky here, but The analytics business, I think the dollar revenues were flat literally over the last three quarters. I didn't think there was a lot of FX in there, but maybe I'm wrong about this.

Speaker 5

So Just anything that's happening in this environment that I should be aware of or maybe it's just effects?

Speaker 2

Yes. No, it's well, It's a combination of things. So I'm going to try to answer some of them. I'm going to hand it to Ann to make sure I give you a complete answer. But I think the first thing is eVestment continues to have Good growth.

Speaker 2

They continue to find sign new clients and continue to grow and expand what they're doing. And that shows up incrementally every quarter, Sequentially, obviously, there are going to be some quarters that are stronger than others just in terms of sales and expansions of our contracts. I think though that what you've got a couple of dynamics under the surface that one is just we have now some Revenue associated with running programs around secondary transactions for private equity funds and that showed up in the Q1. And then I think there was something else in the 4th Was it FX or?

Speaker 3

It's not FX. We have a couple of other small nonrecurring items that tip over the rounding. So there's a little bit of noise behind it, but the Or of the analytics business, the asset owner solutions are growing as expected.

Speaker 5

Okay. We can flush it out later. Thank you very much. Yes.

Speaker 2

Great. Thanks, Alex.

Operator

Our next question comes from Brian Bedell with Deutsche Bank, your line is open.

Speaker 6

Great. Thanks very much for taking my question. I'll bundle 2 questions into 1, If they're related, Solutions segment organic growth, you get this question a lot, I know, on the 6% to 9% growth and obviously you've been tracking well ahead of that again this quarter as well. So just maybe in thinking Yes. My guess is you're not changing that 6% to 9%.

Speaker 6

But maybe just talk about your optimism of continuing to exceed that level, Given some of the organic growth initiatives that you're talking about in market infrastructure and new opportunities For infrastructure for trading venues that are outside your norm and then the Tier 1, 1, 2 bank Cross sell, realizing of course that cycle is longer, but you're starting in right now With a stronger organic growth rate. So I guess what would drive that rate, solutions organic down into that 6% to 9% given a lot of the opportunities you have. And then the related follow-up is simply on index Just thinking about what that run rate might be into 3Q, given you've reached the threshold, I guess, when did you actually hit the threshold in the second

Speaker 2

Sure. Okay. So I think we're going to answer the second question first just because it's probably a shorter answer. Go ahead, Anne.

Speaker 3

Sure, Brian. So on the index question, We hit the threshold in late April. And so you can think about it, the threshold affecting 2 out of the 3 months of the quarter.

Speaker 2

Yes. And so on a run rate basis going forward, I mean, obviously, it's subject to the volumes in the futures markets. But I

Speaker 3

think that's Yes. All else equal, they look a third better that that particular part of the revenue. Yes. We'll look at 3rd better going into the 4th Q3. In terms of the bigger question that

Speaker 2

you asked regarding organic growth, I think that, the first thing I would say is We really are pleased with the performance of the business and we do have, we provide mission critical software and analytics solutions To corporates, to other exchanges, to banks and brokers and to investment management firms. So we do feel that our solutions really do Add value, particularly with these periods of volatility, it's really important for corporates to really understand how their investors are changing and how to engage with investors. And Obviously, ESG is a long term growth trend for that. With our investment analytics, asset allocation decisions are super important, being able to manage your portfolio successfully as an The owner is really important and so those services are really sticky. Anti thin crime, obviously, huge long term trend in providing more advanced technology there.

Speaker 2

And then for market operators, you've got mission critical technology that drives our business. So we feel very good about the stickiness of our products as we're delivering them to clients. We have been investing across the franchise in terms of really delivering, and improved and More modern technology solutions as we go. And I think all of that is accruing to our benefit in terms of the growth rate. But we also there are a couple of things to think about in terms of their solutions segments.

Speaker 2

I think that, as we think about Going forward, we have really strong growth in our listings business because we still have 9% more listed companies today than we had a year ago. Based on the IPO environment we're seeing today, that could be something that flows into 2023, that growth rate in our listings business. But The flip side of that is we now have 9% more companies and as they roll off their IPO packages, we'd like to make sure that we Secure them as paying customers for our IR and ESG services. So that kind of gives us the ability to continue to grow there. And beyond that, I think you're right on the market Infrastructure Technology side, Brian, that I do feel like we're really engaging really well with clients today.

Speaker 2

They are focused on the future of their markets. They are focused on how they bring some of this latest technology into their marketplaces. And the conversations are going from kind of theoretical to more concrete. And then on the back of that, we also with everyone getting back together, we're able to identify new market opportunity new markets that want to form and we've signed some really interesting and Innovative markets in the quarter. So we do feel like that has a lot of momentum as we're going into the second half of this year and into 2023.

Speaker 6

Okay. So it sounds like some headwinds potentially, but really you remain optimistic on this really strong growth, organic growth in Solutions segment.

Speaker 2

I mean, we I would say I'm an external optimist, but I do remain optimistic that we're really we are delivering really great value to the clients. And We'd like to continue that. I think we just know that there are always different dynamics we have to consider. And so therefore, we're maintaining our overall medium Thanks.

Operator

Thank you. Our next Question will come from Alexander Blostein with Goldman Sachs. Your line is open.

Speaker 7

Hey, good morning everybody. Hello?

Speaker 3

Hey, Alex.

Speaker 7

Hey, good morning. Thanks for the question. So another one For you around the market structure regulation, just to follow-up on Rich's question, I guess, around Chair Gensler's proposal. With respect to the, I guess, prior administration's proposal around market data, which was albeit it feels like a bit more narrow relative to what The current SEC Commission is trying to achieve. How are you expecting this to go forward from here given that, it still feels like kind of in the background, It's not clear where that fits in with the existing proposals.

Speaker 2

Well, sure. Well, I think the first thing we should note is we were pleased with the court decision in understanding The critical value of the exchange

Speaker 7

From here, given that, it still feels like kind of in the background, but it's not clear where that fits in with the existing

Speaker 2

Well, sure. Well, I think the first thing we should note is we were pleased with the court decision in understanding the critical value of the Changes in terms of overseeing the SiP plans and then overseeing, the consolidated tape. So we are pleased with that. And I think Sure. Over consolidated data, which is a core part of the last, as you said, the last SEC rule proposal, Really means that the governance of that remains with the changes, but we also recognize we want to meet the needs of our clients.

Speaker 2

So I think Alex that there are lots of components to that rule that was approved by the SEC and I think that is Slowly going to start to move forward now that the governance is kind of settled, but it will take some time because there were like Multiple elements of that in terms of Odd Lots as well as the SIP data as well as multiple consolidators. And then they're like it's a phase in over multiple years. So I don't think we necessarily really fully understand the impact of that, but we also are engaging very much with the plans To figure out how we want to look at pricing, we have a pricing proposal with the SEC right now for them to consider. And we are Also considering our role as a consolidator and the multiple consolidator model because that could be an opportunity for us. And so I think that it's going to be a slow moving train.

Speaker 2

It is going to start to move forward now though, so that we I think because the governance structure is set And we'll just have to see how that goes over the next several years.

Speaker 7

Got it. Great. Thanks very much.

Speaker 2

Sure.

Operator

We have a question from Daniel Fannon with Jefferies. Your line is open.

Speaker 1

Thanks. Good morning. Wanted to follow-up on Market Tech and the margin there has moved around a lot. Wanted to see as you Or ask about whether you think you've seen the lows there and we can kind of consistently see margins kind of move higher. And then Within that context, thinking about the normal seasonality of the legacy Marketech business in terms of the Q4 with change orders and other things based on Some of the dialogues you've been talking about with clients, should we assume some normalization of that in 2022?

Speaker 2

Sure. I think I would say that, Daniel that we are starting to Operator in a normal mode now, Win Marketech, right? So we are engaging with clients in person. We're co locating client with clients in some cases. We are in a good place in terms of our delivery capabilities, and we're servicing our clients well.

Speaker 2

And so I think that's all great. I think that in terms of the scalability of the business, we're signing most of our new clients are signing SaaS based contracts, which I think is very helpful in terms of both in terms of the products they're buying, which are more standardized as opposed to specialized, But also in terms of how we can support them in a more scalable way over the long term. But we still do have a lot of clients that are On prem clients with 3 specialized solutions and we're still delivering those. So it's a real mix at the moment. It's a true hybrid.

Speaker 2

And I think as a result of that, you do see some more variability in margins, you see more variability quarter over quarter in revenues, but we are kind of getting back to a normalized mode in terms of change In terms of deliveries, in terms of new sales, and we are really encouraged by the SaaS orientation of the new sales. The one thing I would say about Change Request though is, As we move forward in signing more clients in a SaaS format, we are going to have lower change request revenues going forward because It's less specialized, more standardized, but more stable and more and very sticky. And so I don't think we're going to see an immediate change But I just would say over the longer term, we would expect that to kind of moderate a bit, in favor of more Sticky and stable revenue coming from SaaS.

Speaker 1

Thank you.

Operator

Our next question comes from Craig Siegenthaler with Bank of America, your line is open.

Speaker 8

Good morning, Adena.

Speaker 2

Good morning.

Speaker 8

So my question is on cash equities. A major competitor increased the pricing of trades in the opening and closing auctions this past quarter, And NASDAQ has high market share for these trades. You're wondering if NASDAQ also has the ability to raise pricing?

Speaker 2

Well, I think that We've been we've had very stable pricing in our auctions for a long time. I think there were some changes that our competitors did a couple of years ago, in that We've been very, very stable there. And I think that we continue to think we provide a very, very high value in the Opening and closing auctions, we think we're paid for that value, and I think our clients appreciate the execution quality they get. So we see that more as a steady as we go because Of the fact that we provide a great service and we do feel like that we are rewarded for that. Obviously, we're really excited about what happened with the Russell because that was a that's a big event and then you have Quarterly, the Quad Witches, you have other rebalances.

Speaker 2

Those are big events for us. We invest a lot in our infrastructure to support those events. Those are really those are surge moments and we feel great about our ability to execute in those moments, but that's we invest a lot to make that happen. And I think, therefore, we're paid appropriately for that. But that's kind of how we're looking at it right now.

Speaker 9

Thank you.

Operator

Our next question comes from Kyle Voigt with KBW. Your line is open.

Speaker 10

Hey, good morning. Thanks for taking my question. Just wondering if you could speak a bit about M and A. You've delevered quite a bit to 2.7 times net debt to EBITDA. Can you remind us where you feel comfortable Taking leverage to on a net basis, given the current business mix and assuming you find an attractive acquisition opportunity.

Speaker 10

And then just regarding the M and A environment, over the past few years, you've been looking at very attractive assets in terms of Secular growth rates or medium term growth rates and improving the growth profile of NASDAQ as a whole. I guess in the public markets, we've seen valuations come in quite a bit For some of the higher growth assets, have you started to see that in the private markets? And has basically the bid ask spread kind of narrowed As we're looking at the environment today versus maybe where we were at a year ago.

Speaker 2

Sure. I mean, Anne, do you want to answer the The question in terms of leverage ratios?

Speaker 3

Yes. I'll answer the question around sort of where we would take the leverage ratios. There's a lot of dependencies there, Kyle, in terms of what is the M and A opportunity, how quickly we could delever. I think maybe the best point of reference is what we did at the Verifin deal where we took the leverage up to 3.9 And on a gross basis, and then we're back down to 29 now. And so you could think about it that way.

Speaker 3

We don't have There's no hard and set rule. It's very circumstance based. And obviously, we'd be working with the rating agencies on And whatever our deleveraging plan would be in association with that. So, yes.

Speaker 2

And I mean, I think the one thing we do say is that we do like our investment grade rating. And so We would work with the rating agencies to understand looking at deals and making sure that we factor in our investment grade rating as we're looking at and financing deals. So That's how we generally look at it. In terms of the M and A environment, it is definitely a changing environment right now. I also think it takes Time for companies to recognize what in a changing market cap environment, it takes time for companies To understand what their true value is, over time, like is the market going to recover and they feel that they're going to be able to grow their way Into their market cap very quickly, or their old market cap very quickly or are they understanding that this might be just a different longer term environment.

Speaker 2

And I think that Definitely factors into receptivity to M and A, both in the private markets and the public markets. We are definitely seeing in the private markets, Generally speaking, reductions in valuations, but that's kind of in line with the public markets or maybe Quite so much, not quite as dramatic. And but again, that's one thing to have that as a point in time reference for a CEO. It's another thing to think that that's the value that they should sell their company. So, I still think it's a very dynamic environment.

Speaker 2

But I think, Kyle, we are always evaluating opportunistic ways for us We continue to drive our strategy forward, but we are really focused on organic growth. I mean that is the vast majority of our focus inside of NASDAQ is how we want to continue to sustain our organic growth with us also looking at M and A, like small deals like Metrio and other Things that we might do is small to medium bolt ons as we continue to grow out our business.

Speaker 10

Very helpful. Thank you. Sure.

Operator

Thank you. And our next question comes from Michael Cyprys with Morgan Stanley. Your line is open.

Speaker 11

Hey, good morning. Just a question on ESG. I was hoping you might be able to remind us how much that contributes in revenue today given some of the acquisitions that And when you look at the offerings that you have on the ESG side, which product services are on ESG you think could be the most meaningful To growth in ESG revenues at NASDAQ and as you think about the offerings that you have on that side, how does that stack up relative To where you'd like to be in the marketplace with respect to ESG? Thank you.

Speaker 2

Sure. So I think that if we We don't disclose our ESG revenues separately from the rest of our corporate services revenues. But I would say that it is definitely the highest growth part of the business and it is helping drive to the higher growth rates we're seeing in IR and ESG right now. As we we've given out some thoughts at the last Investor Day as to what we hope to achieve in terms of revenues between now 2020 4 or 5, and we definitely feel that we're at least on track with that. And so and we continue to invest there.

Speaker 2

And so as we get into our Investor This year, we'll be hopefully be able to give you a little bit more content and color around that so that we can continue to help you understand how much of a business that's becoming for us and we're quite excited about But I would point out that there are kind of there are several components to it. But within the corporate space, right now, the advisory business It is actually the highest demand part of the business, but more and more it's moving into reporting. So at first, the companies were saying 5 years ago, they were saying what is the S and G and how do I communicate with investors around it. We help them think about their programs, mature their programs. We now have kind of annual contracts with clients to help them manage those programs in terms of communicating appropriately with investors.

Speaker 2

Increasingly though, we're seeing more and more companies onboarding onto OneReport and now Metrio for collecting data and reporting that data out to The rating agencies and that's going to be the long term growth driver for us. Definitely as companies are maturing their programs, it's going to be the tools that we provide to them That really helped them mature those programs and sustain them. And then the other part of the business that we don't talk about a lot because it is very, very small, like Really small, but within our European Markets business, we do have a carbon removal marketplace called Puro. Very early days, But even though it's I would say, just say it's like $2,000,000 in revenue today, it's really small. It is growing very quickly in terms of Getting more suppliers into the platform and getting corporates more and more opportunities to offset their carbon output with True high quality carbon removals and we see that as kind of a 10 year 5 year, 10 year plan to really build out a really successful marketplace there.

Speaker 2

So that will also be a long term growth driver for us. But today, these are relatively small, but exciting and growing areas And we will be able to give you more content at Investor Day.

Speaker 4

Great. Thank you.

Operator

Sure. Our next question comes from Gautam Sivan with Credit Suisse. Your line is open.

Speaker 4

Hey, good morning and thank you for taking the question. Can you provide your outlook for for how growth of recovering in SaaS revenues could be affected by a recession in 2023, specifically how the potential for industry consolidation could affect

Speaker 2

Sure. I mean, I think that we obviously don't provide specific guidance in any of our businesses. But I would say in our SaaS businesses, the general what we've seen so far is that we have not seen any material changes in buying behaviors Across our SaaS oriented businesses and that includes Investment Analytics, our IR and ESG Services, our Anti Financial Crime And some of the newer sales in our Marketech business. And so I think that we really don't see any sort of significant changes in behaviors there. But as we go into a recessionary environment and that's hard to predict right now, but if we were to go into that and have that as a sustained Economic environment that we're navigating through in 2023, I think that we would still look at the following.

Speaker 2

It is Our products are very sticky because of the fact they provide such important services to clients to navigate the capital markets in every environment. In some cases, there are technology that are the capital markets. And so we do think they're very sticky. I think in terms of buying decisions, In a protracted recessionary environment, some of those buying decisions will take longer. We could have companies as we as We talked about that could have some M and A, and have some on the edges, some changes in their corporate status, And that will obviously have some effect on retention.

Speaker 2

But again, we're talking very high retention products, very, very important products, very sticky products. In terms of M and A though in the financial industry generally, if we look back over prior recessionary periods, you don't actually see a lot of M and A among banks And among asset managers, as a general matter. On the edges, yes, but we're talking we have 3,000 banks and we have 3,000 asset managers that use our services. So it's just not going to be a material part of the calculus in terms of our services just Based on the breadth and depth of the company as we support and also by the way, I think it's 10,000 corporate clients that use our IR and ESG services. So we just by the scale of who we are, the M and A is not going to be a huge factor.

Speaker 2

But we will certainly provide you updates if we're seeing changes there.

Speaker 4

Got it. And just as a follow-up question on compensation, like has the demand or worker talent And the technology space changed, do you think that can help decelerate some of the expense growth there?

Speaker 2

Yes, I think that it's interesting. Certainly, we've been doing the right things to make sure that we attract and retain great talent. And I feel very good about how we've been managing our compensation in this competitive environment. We have, I would say, in the last 6 weeks to 8 weeks, started to see more people really wanting to come to Nasdaq, frankly. We're a really strong company We have a strong financial profile.

Speaker 2

And I think that some people who left the company are coming back, Employees that are in some of the more hard hit parts of the technology industry Our understanding the benefits of working at a place like NASDAQ. And so I don't know yet, Bhutan, how much that might impact comp, But I would say that, we feel good about our ability to attract great talent here.

Speaker 4

Thank you for taking my question. Sure.

Operator

Our next question comes from Owen Lau with Oppenheimer. Your line is open.

Speaker 9

Good morning and thank you for taking my question. Could you please give us more color on your migration into the cloud? And I think at the end of you mentioned the first migration will be completed in the Q4 this year. Could you please talk about What have you learned so far in this process? And how does that impact your process to migrate out of systems in the future?

Speaker 9

Thank you.

Speaker 2

Sure. Hey, Owen. Yes, so we're actually quite excited about the progress we're making with AWS. So just to remind everyone, AWS is committed to create a private local zone within the Carteret data center, which is our primary data center in New Jersey To support our markets in a cloud environment, but recognize, okay, so if we just take one step back, over the last 10 years, we've really been focused Moving all of what we call our surrounding systems into a public cloud environment. So our market operation systems and some of the client facing Systems that we have to support trading, but the trading systems themselves, the matching engine itself has always been an on premise deployment.

Speaker 2

So AWS is coming into our data center. We're moving our first option to market into the AWS outpost infrastructure. Yes, our plan is to do that in the Q4. We are on track with that. What we've been learning is really helping us make sure we're optimizing for power In the context of bringing the AWS infrastructure into the data center, while we build out the data center.

Speaker 2

So over the next 2 years, we're going to be expanding the data center In connection with Equinix, that's our partner who really is working on that. And that will also expand our power. As we work with AWS in the first iterations of putting outpost in and getting them up and running, we're just making sure we're managing to the power of that structure in connection with obviously the power needs of all of our clients. And so that's the one thing that we're finding it's really interesting to learn through. But at the same time, we are very comfortable that we're moving now.

Speaker 2

We've moved MRx onto Fusion. We've tested that in an on prem environment with our clients as a baseline and we now get to therefore start testing with our clients in the fall In the new environment and to make sure that we're delivering the same performance. So we're well underway and we're learning a lot and it's been a great partnership and we feel very good about it.

Speaker 1

Got it. Thank you very much. Sure.

Operator

Thank you. And that's all the time we have for questions. I'd like to turn The call back over to Adena Friedman for closing remarks.

Speaker 2

Well, thank you very much. And it's really thank you so much Thank you for spending time with us. We continue to be excited and proud of the results we've delivered and we will continue

Operator

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

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Earnings Conference Call
Nasdaq Q2 2022
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