Nasdaq, Inc.

Good day, ladies and gentlemen, and welcome to the NASDAQ fourth quarter 2018 results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. If anyone should require operator assistance during the conference, please press star and then zero on your telephone keypad. As a reminder, today's conference is being recorded. I would now like to turn the call over to Ed Dittmeier, Vice President of Investor Relations. Sir, you may begin.

Good morning, everyone, and thank you for joining us today to discuss NASDAQ's fourth quarter and full year 2018 financial results. On the line are Adina Friedman, our CEO, Michael Potasnik, our CFO, Ed Knight, our general counsel, and other members of the management team. After prepared remarks, we'll open up to Q&A. The press release and presentation are on our website. We intend to use the website as a means of disclosing material, nonpublic information, and complying with disclosure obligations under SEC Regulation FD. I'd like to remind you that certain statements in this presentation and during Q&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 Adina.

Thank you, Ed. Good morning, everyone, and thank you for joining us. My remarks today will focus on NASDAQ's strong 2018 financial and business performance, review the progress that we've made to drive forward our new strategic direction, we'll discuss how NASDAQ is addressing important issues in our foundational marketplace businesses, and lastly, detail our execution priorities for 2019. Turning to our results, I'm incredibly pleased to report that NASDAQ's strong financial performance for the fourth quarter and for the full year of 2018. 2018 was a critical year for NASDAQ as we pursued a new chapter for the company that was guided by our strategic pivot to maximize our opportunities as a technology and analytics provider while we sustain and grow our core marketplace businesses. The good news is that the strong results we delivered in 2018 confirm our renewed vision and how we can execute on it successfully, and I will go into that in a little bit more detail. Our annual revenue growth materially improved in 2018 as we delivered solid full-year organic revenue growth of 8% across our businesses, up from 2% in 2017. This was driven by our recurring segments all contributing at or above their respective medium-term growth outlook ranges, while our market services business delivered its best performance in seven years, achieving organic revenue growth of 9% for the full year. Focusing in on the fourth quarter of 2018, we delivered strong financial results across our businesses. Especially strong information services and market services performance contributed to total company top line organic revenue growth of 11%, while operating leverage delivered three percentage points of operating margin expansion over the prior year quarter. Non-GAAP EPS of $1.26 increased 21% year-over-year. While I'm incredibly proud of the company for executing well in 2018, as I said before, I'm most excited about the encouraging early proof points it provides to confirm that we're on the right track as we continue along our strategic direction in 2019 and beyond. Turning to the specific highlights from our businesses throughout the year, and more specifically in the fourth quarter, and starting with market technology, that segment delivered 10% organic growth in 2018 within its medium-term organic growth outlook as it progressed with the transformational implementation of the NASDAQ financial framework platform. Total order intake in 2018 was $223 million, including $74 million in the fourth quarter, and an unusually strong mix of new clients in addition to renewals, should make this particularly impactful in future periods. Specifically, we signed 12 new market infrastructure operator clients in 2018, up from six new clients in 2017. And we signed 20 new buy-side and sell-side clients for our RegTech surveillance solutions, up from 12 in 2017. In our information services segment, strong organic growth of 11% in 2018 was delivered through moderate study growth in market data while our index licensing segment put in an especially strong year with 20% organic revenue growth. Investment, which makes up most of the investment analytics segment revenue, only began being included in our official organic calculation in mid-October when it passed its one-year anniversary from close, and nonetheless, it continued growing at the double-digit rates we expect. Starting with our index business, full-year 2018 revenues increased 20%, due principally to higher average AUMs, which were 27% higher for the year on average, as well as record volumes in NASDAQ-licensed future contracts, which were 76% higher than the prior year. The fourth quarter did see declines in AUM levels due to the market pullback declines that were more profound at the end-of-the-year value than at the daily average in the period, but the year-over-year quarter comparisons still show a 3% increase in AUM and licensed ETPs at the end of Q4, well above the NASDAQ 100 and S&P declines of 3% and 4%, respectively, in the same timeframe. In investment data and analytics, we saw continued strong momentum at investment in 2018, the first full year as part of NASDAQ. Investment's double-digit revenue growth is driven both by bringing new clients onto the platform, particularly in international markets, as well as expanding how we serve our existing clients through upselling to more sophisticated analytic modules, as well as broadening how many people at a client use the solution. While Information Services' organic momentum was excellent in 2018, during the fourth quarter, we also completed the acquisition of Quandl, a Toronto-based provider of alternative and core data to more than 30,000 active users. This investment was made to better position us in the evolving alternative data space, where we combine Quandl with our analytics hub business, we will bring a very strong value proposition to a market of increasingly technology-enabled buy-side investment professionals. Moving to our foundational marketplace businesses, our corporate services segment delivered 5% organic growth in 2018 with a particularly strong performance by our listings business. For the sixth consecutive year, NASDAQ led U.S. exchanges for IPOs in 2018 with a 72% US win rate for the year, welcoming 186 IPOs. Despite the volatility in the fourth quarter of 2018, we welcomed 41 IPOs in the quarter and achieved a 73% win rate during the period. Meanwhile, our Nordic markets continue to attract new companies from across Europe. Our Nordic, Baltic, and First North exchanges added 73 new listings in 2018 and expanded above the 1,000 company listing count for the first time. We also made important changes in 2018 within corporate services. As we worked to complete the divestiture of certain businesses, we tightly focused our offering on providing strategic C-suite and board-level solutions, and then integrated our listings and corporate solutions client teams. We now look forward to leveraging these enhancements to deepen our relationships with our corporate solutions clients in 2019. Finally, our market services business delivered very strong net revenue growth in 2018 with 9% organic growth across the year, helping drive to a record $958 million in annual net revenue. In the fourth quarter in particular, our equities and options markets experienced a significant uptick in volume due to market volatility, helping to drive a 12% year-over-year increase in market services net revenues for the period. I'm pleased to report the NASDAQ exchange platform handled incredibly busy volume days, including a peak of 28 billion messages across our U.S. equities and options markets on December 27th, with no significant degradation of our latency or performance. I'd now like to talk about where we stand in implementing and executing our strategic direction. A key pillar of our renewed strategy, specifically our pivot to maximize our potential as a technology and analytics provider, provides continued change and evolution to our organization. We continue to invest capital deliberately to add capabilities and scale to our technology and analytics growth platforms. Our investments include our organic initiatives, notably the NASDAQ financial framework and related initiatives to deliver our marketplace expertise to banks, brokers, and market operators outside the financial industry, as well as to provide compliance capabilities to the buy side, and our investment private market solutions initiative. It also includes the recent acquisitions of Synovar and Quandl, with the material portion of that investment capital coming from the divestiture of our stake in LCH Group, which had become over time a financial rather than a strategic holding. The other pillar of our strategic evolution is our continued investment and unwavering commitment to sustain our marketplace core. These foundational businesses comprising the market services and corporate services segment have earned NASDAQ a strategic position at the center of the capital markets in the U.S. and in Europe. We've been able to create strategic relationships across broker-dealers, investment professionals, corporate clients, and other global market centers, which then provides the potential to expand those relationships with our technology and analytics capabilities. The marketplaces also provide consistent profitability and cash flow, to support both investments across the franchise and capital returns to shareholders. Consistent with our commitment to our core markets in Europe, we've announced this morning that we are making an offer to the Oslo Bors VPS shareholders for a proposed transaction that would combine Norway's leading exchange and central securities depository with our Nasdaq Nordic Marketplace business. We put a specific presentation regarding this offer and the proposed combination on the Nasdaq IR website today, and I suggest listeners review it for more details. Oslo Boris has been performing well in recent periods with a 5% revenue CAGR over the last three years and operating margins in the low 40% range, but together we think that we can open significant new opportunities for efficiency and growth. In particular, we will use NASDAQ's technology to create a common Nordic exchange platform, delivering significant efficiencies to market participants already using our systems in the other Nordic markets. We also expect to deliver efficiencies in certain exchange and corporate functions across our businesses. We are excited to benefit from Oslo Bors' expertise in post-trade CSD capabilities, as they are the national CSD operator in Norway. We also believe we can leverage Oslo Bors' global leadership in shipping, energy, and seafood to open up new markets through our more global franchise and client base. Oslo Bourse's fit within our Nordic franchise is unique, and our clients have been enthusiastic about this opportunity. As we consider the acquisition within our strategic priorities, we also see a strong fit. In advancing our strategic pivot, we're very obviously expanding our technology and analytics capabilities and scale to the benefit of the company's overall growth profile, but we're also making concerted, sustaining investments in our marketplaces to ensure we continue our strong competitive position in our respective geographic and product areas. We are also focused on delivering for our shareholders. With the Oslo-Worst VPS combination, we don't expect a material shift in our revenue mix, our organic growth targets for the non-transactional segments are unchanged, and we expect to generate an ROIC at or above 10 percent within three to five years, and we expect non-GAAP EPS accretion within 12 months of closing. Now, let me address our path to close the transaction in the context of a competing approach by Euronext. NASDAQ's offer is superior to Euronext, both financially, but more importantly, it is also in its ability to support and grow the Nordic capital markets for its many stakeholders. Because of this, we've earned the unanimous support of the Oslo Bourse BPS Board, and we have irrevocables from key investors constituting over 35% of Oslo's ownership. Lastly, because Oslo Bors VPS is critical importance to the Norwegian capital markets and economy, the Norwegian stakeholders, including regulators, will carefully consider all options when determining Oslo Bors VPS's strongest path forward, and we look forward to engaging with them. Now, turning back to the current operations of our core businesses, we are continuing our focus on some challenges and issues that are worthy of mention. In terms of the Nordics Commodities CCP default event, we've made considerable progress over the last quarter. We've developed a comprehensive plan to enhance and improve our clearinghouse throughout 2019 that we have vetted with the clearinghouse risk committees and board and have communicated in detail to our clients. We are underway with our key improvement areas, including enhancements to the member requirements, to initial margin, the member default fund, and the default resolution procedures. We also have developed a voluntary capital relief program for our clearing members, providing them the opportunity to opt in to receive their pro rata share of a 20 million euro pool of capital to supplement the recoveries that they expect to receive from the liquidation of the defaulting members' assets. Turning now to the regulatory landscape for U.S. equities and specifically related to U.S. equity data products, as I've mentioned in our last call, this has been a winding and largely court-litigated debate between banks and brokers and the exchanges over exchange data products and services that we feel have been an important contributor to how the U.S. stock markets deliver the highest levels of global standards in terms of efficiency, transparency, and resiliency. We believe this debate and related litigation will continue for many years to come. Last quarter, we discussed the SEC's October decision to overturn their own administrative law judge decision affirming NASDAQ and New York Stock Exchange's depth of book pricing filings and their directive to remand 400 SEC-approved exchange pricing filings back to the exchanges for re-review. NASDAQ appealed the remand order to the DC Circuit Court of Appeals, where we'd expect hearings to occur sometime late in 2019. Separately, the SEC was asked to reconsider the remand order and, in response, decided to stop the clock on its proposed six-month timeframe for exchanges to design a review procedure for the remanded filings. The SEC has not yet restarted the clock. As we manage our business going forward, we continue to expect to deliver on our information services organic revenue growth, which is predominantly driven by expansion of our market data in new geographies, as well as specific initiatives in our unregulated index licensing and investment analytics businesses. Lastly, regarding reports of a new competitive entrant to the U.S. equities exchange landscape, We certainly can't be surprised by continuation of what has been for over 15 years a hyper-competitive landscape in the U.S. securities markets. Over the last decade and a half, NASDAQ and the other exchange groups have made significant improvements to create a highly efficient, resilient, low-cost trading environment for all MARC participants, as this is at least the sixth time that our trading clients have attempted to introduce a new exchange competitor we are fully prepared to meet such an important and albeit familiar challenge if and when it receives SEC approval and launches. For your reference, on January 7th, we posted a presentation on our IR website where we addressed our strong competitive positioning and track record of delivering across increasingly fragmented markets, often in competition with venues backed by important customers, along with other important regulatory and other complexities of the modern U.S. equity market structure. So now let's turn to looking forward as we begin 2019. And we have developed the following specific execution priorities for the year. First, we want to focus on enhancing our technology presence across the capital markets and beyond, which we intend to measure principally through the implementation and client adoption of the NASDAQ financial framework-based technology solutions. At the same time, internally, we also intend to continue our adoption of NFF in NASDAQ's own marketplaces. Second, we intend to drive better client interactions in the capital markets with data, analytics, and integrity tools. Success here will be measured through our sales and growth progress with our trade surveillance, data analytics, and governance solutions across our sell side, buy side, and corporate clients. Third, we want to continue to enhance our leadership position in the marketplaces in which we operate as we continue to innovate with new functionality and strong market share in our core markets. And lastly, we want to build meaningfully on our high integrity, mission-driven culture to multiply our opportunities to innovate and to grow. I look forward to updating you on our progress on these goals as the year progresses. As I wrap up, I will summarize by saying that the fourth quarter produced strong results for NASDAQ, particularly regarding our organic revenue growth, completing a successful 2018 that provided encouraging early data points as we begin executing along our new strategic direction, as well as affirming the strength of our franchise in an evolving capital markets landscape. Moving forward as we begin 2019, we remain relentlessly focused on advancing our strategic pivot to maximize opportunities as a technology and analytics provider with the continued strong demand for our market technology solutions and our data and analytics offerings even as we continue to invest and sustain the highest possible effectiveness in our foundational marketplace businesses in the U.S. and Europe. We are very pleased to announce our offer to acquire Oslo Bors VPS and look forward to strengthening our European markets business with the Norwegian equities markets, its unique CSD capabilities, and its expertise in energy and seafood sectors. The external environment we're operating in is characterized by significant opportunities, including strong market volume environment, but is also its share of regulatory challenges that we will continue to address effectively. And with early and encouraging results of our strategic pivot in 2018, I remain confident that we're moving in the right direction, that we have every opportunity and the ability to execute against the sizable opportunities that the organization identified in our long-term strategic review. And with that, I will turn it over to Michael to review the financial details.