Nasdaq, Inc.

and welcome to the NASDAQ second quarter 2020 results. At this time, all participants' lines are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Ed Dittmeier, Vice President of Industrial Relations. Please go ahead, sir.

Good morning, everyone. Thank you for joining us today to discuss NASDAQ second quarter 2020 financial results. On the line are Idina Friedman, our CEO, Michael Potasnik, our CFO, John Zecca, our chief legal and regulatory officer, 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 over the call to Adina.

Thank you, Ed. Good morning, everyone, and thank you for joining us. I would like to begin by acknowledging how deeply proud I am of the NASDAQ team's continued commitment to our clients and the communities in which we live during these last few months. With the second quarter being our first full period with a vast majority of our global workforce working remotely, I could not be more proud with the results that we have delivered for our stakeholders amid what is still a very unprecedented time. The executive leadership team and I are acutely aware that our colleagues, clients, and so many of our stakeholders are tackling work, family, and health responsibilities simultaneously. We are in the fortunate position that our business can operate in a remote working environment globally, and we have remained highly productive and available to our clients throughout this period. That said, we also recognize that some of our team members prefer the opportunity to work in an office environment, and over the long term, we believe that there are social and creativity benefits that come from working together physically. Therefore, we are working to reopen our offices in a deliberate way as the virus subsides to specific cities and countries where we operate, and we are taking a very measured approach to the reopening of our offices that prioritizes our employees' health and safety. In that regard, we will continue to make it completely voluntary until at least year-end 2020 for our employees to choose to return to our offices. The second quarter was marked not only by the deepening impact of the global health crisis, but by the escalation and recognition of the social injustices across many communities around us. We are committed to creating lasting, positive change, and I'll highlight two examples. Last month, we announced immediate actions to strengthen our continued commitment to diversity and inclusion. In addition to our $5 million first quarter pledge to COVID-19 relief, in the second quarter we pledged an additional $3 million in cash donations to organizations serving underserved minority communities and fighting the impact of the health crisis. In addition, as we look at NASDAQ's broader purpose in the communities where we operate, particularly as a proponent of inclusive growth and prosperity, we see the NASDAQ Foundation as a core component of our societal mission. As a result, in addition to committing to an annual contribution to the Foundation of approximately one-quarter of a percent of operating profits starting in 2021, we also made a one-time capital injection in Q2 of this year of $10 million to improve the funded position of the Foundation and to support its refined mission. We will update the market as we announce specific campaigns designed to support our Foundation's objectives. There's also a lot of momentum inside of NASDAQ to improve and accelerate our efforts to advance our culture. Therefore, we're increasing our internal resources that's devoted to programs focused on diversity-oriented professional development, employee experience, and talent acquisition. Our ultimate ambition is for the NASDAQ team to reflect the diversity of the populations of each of the countries where we operate and to provide a performance-driven culture that demonstrates respect and belonging for all of our employees. We are fully committed to taking the necessary steps in the months and years ahead to achieve this ambition. This starts with publishing our diversity statistics from countries where we are permitted to collect that data, which we will start to do by the end of the third quarter. These will serve as an honest assessment of where we are and how far we need to progress. NASAC has always had a strong commitment to all three elements of ESG, environmental, social, and governance practices. We believe our societal efforts will further enhance our position as a leader that is continuously striving to improve. Now I will turn to our strong financial results for the second quarter of 2020. NASDAQ delivered net revenues of $699 million, an increase of $76 million, or 12%, from the prior year period, driven almost entirely by organic growth. I'm incredibly proud to report that, once again, each of our four business segments delivered positive organic growth during the quarter, a testament to the resiliency of our business and the dedication of the NASDAQ team under the new remote working environment. Net revenues in our market services business grew 22%, while revenues in our non-trading segments grew 7% from the prior period. On an organic basis, revenues across the non-trading segments increased 6% year-over-year, with growth from acquisitions contributing 1% to total growth. Operating leverage was particularly strong as expenses were up slightly during the period, resulting in the non-GAAP operating margin expanding nearly 500 basis points to 53% and contributing to non-GAAP EPS growth of 26%. Turning now to the specific highlights in the second quarter, I will also briefly address the evolving industry and client dynamics we are observing and how we see these influencing our performance for the remainder of 2020. I will begin with our foundational marketplace businesses. Our market services segment saw net revenues of $276 million, a 22% increase from the prior year period. This was led by higher cash equity trading and equity derivatives revenue amidst the continued surge in volume for cash equities and equity-linked derivatives. These elevated volumes were driven not only by evolving expectations around the pandemic's implications, but by the way the pandemic seems to be accelerating certain long-term dynamics that have spurred significant sector rotations in the market. We said last quarter that the volume outlook set up constructively due to both the pandemic's uncertainties and the fact that 2020 finishes with the U.S. presidential election. A quarter later, we increasingly expect that the current economic and political backdrop will continue to support elevated volumes during the latter half of the year. Our corporate services segment delivered revenues of $126 million, a 2% increase, boosted by a return in new listing activity and continued demand for our investor relations intelligence solutions, as well as higher revenue from corporate governance solutions. After returning to organic growth in 2019, our IR and governance businesses saw an acceleration in the first half of this year, driving 8% organic growth in corporate solutions in the second quarter, excluding a 2% impact due to unfavorable changes in foreign exchange rates. Our IR advisory services, including our relatively new ESG advisory solution, were top contributors in the period. We believe the restructured and repositioned Corporate Solutions product suite has a much stronger alignment with the secular trends that are driving our corporate clients' interactions with their investment community and other stakeholders. That said, we did experience reduced demand from corporate clients in sectors that are highly impacted by the effects of the pandemic, such as travel, retail, energy, and financials, where a focus on expense controls has become a priority. Additionally, prospect engagement in a virtual environment has created elongated sales cycles for some of our corporate services. Recognizing that these impacts could change quarter to quarter, we have endeavored to provide our clients with near-term savings opportunities within a context of what are meant to be continued and eventually rebounding long-term relationships. In our listing segment, NASDAQ led U.S. exchanges for IPOs during the period, welcoming 42 IPOs for a 67% win rate. For the first six months of 2020, we welcomed 69 IPOs, representing 69% of all U.S. IPOs. Our IPOs have raised $17.4 billion, which represents 66% of total IPO capital raised in the United States. Excluding SPACs, we have welcomed 55 operating company IPOs for an 85% win rate in the first half of the year. Listings highlights from the second quarter include three of the top four largest IPOs by capital raised, including Royalty Pharma, the largest U.S. IPO of 2020 to date, Warner Music Group, and Zoom Info, the largest technology IPO of the year. Notable SPAC listings during the period included DraftKings and Nikola Motor Company. The reopening of the IPO window is very encouraging. We have seen a steady inflow of listings from technology and healthcare, industries illustrative of the kinds of companies innovating to solve some of society's most pressing challenges, which are finding a very receptive audience with investors. Companies are also responding positively to NASDAQ virtual experience during IPOs, reflected in our market-leading win rate. Feedback from newly listed companies and also, importantly, from the investment banking and underwriting communities have been tremendous. Our partners appreciate the seamless manner in which we transitioned our IPO-first trade process once we shifted our operations to a remote environment in March. Looking ahead to the second half of the year, we see a very healthy pipeline of companies looking to tap public markets, with many intending to execute ahead of the November U.S. presidential election. Now let me turn to our technology and analytics businesses. Our market technology segment delivered $84 million in revenue and signed $38 million in new order intake. Our annualized recurring revenue in the quarter was $268 million, a 9% increase year over year. New order intake overall was moderate during the period, as client decision-making around large-scale technology projects has slowed during the pandemic. Looking within the product offerings, we note that we had strong new order intake in NASDAQ trade surveillance, a SaaS offering focused on our broker-dealer clients, And we signed five new Marketplace technology customers, all of which were signed after a virtual sales process, and all of whom selected our SaaS-delivered market technology solutions. We were also excited to announce during the second quarter the launch of Nasdaq's Marketplace Services platform to provide our market technology clients with seamless access to standard cloud-based infrastructure components and full-trade lifecycle capabilities as they move to the next phase of their digitalization. This service was announced alongside the signing of our first client, LexMarkets, which will leverage our cloud matching service to power their trading platform for commercial real estate securities. There is heightened interest in the ways that our next-generation technology, particularly the SaaS capabilities that we have built into both market infrastructure and surveillance products, can help our clients deal with heightened scalability and flexibility challenges that the pandemic brings. These examples also highlight how we've made significant strides in adapting the ways that our technologists are performing in a more remote work environment. Still, implementation projects, new order intake levels, and funding for new markets initiatives have been modestly impacted by pandemic-related factors. We continue to expect to see the short-term, mostly logistical growth headwinds that increase the risk of the market technology being below the bottom of our medium-term growth objectives for the current year. Turning to our information services segment, we delivered net revenues of $213 million, up 19 million or 10% from the prior year period. Index AUM rose to $272 billion at the end of the period, up 34% versus the prior year, and eclipsing the previous quarter end high of $233 billion in the fourth quarter of 2019. Index revenue was $68 million, up 24% year-over-year, with contributions driven primarily by the increase in EPP licensed product AUM and secondarily from fees generated from trading of licensed futures. We're incredibly pleased with the strength and resilience of our flagship index products during the quarter. We believe that the NASDAQ Composite and the NASDAQ 100 performance reflects investor interest in the companies that are supporting the modern infrastructure for tomorrow's economy, workforce, and workplace. Year-to-date, AUM in all ETPs licensed to NASDAQ's indices are up over $40 billion, and almost 26% of that increase, or $26 billion, sorry, of that increase, or 64%, came from net investor inflows to the products, with the remainder from market performance during the year. While this segment is sensitive to what can be reversals in exogenous market data and futures buying trends, there's no ignoring that the second quarter's positive results put us in a better position for our full-year performance. Our investment data and analytics revenues increased 13% from the prior year period, including the contribution of Sylovis, which we acquired in March. While 2020 organic growth of investment is seeing some impact from budget tightening on the part of the buy side, the addition of Sylovis' real-time performance and risk modeling gives us more opportunities to catalyze allocation decisions on the part of asset owners, Decisions that, in turn, for higher usage of investments, leading asset manager research and selection tools. Revenue in market data saw modest organic growth during the period and continues to deliver consistent results. We've seen relatively stable performance and expectations in our market data products. And finally, for the third quarter, For the third consecutive quarter, the majority of our revenues in the information services business came from the index licensing and investment in analytics products, a direct result of focusing our investments into expanding our capabilities in higher growth areas within information services. So after reviewing each business collectively, what does this mean from our investors' perspective? Well, overall, we continue to benefit from a business model that delivers well during challenging times due to the resilient and diversified nature of our business. With our diversity of offerings and customers, we benefit from certain segments bolstering our results when others face some short-term pressures. That has been the story of NASDAQ for many years now, and overall it provides for more stability and predictability than many of our direct peers. We continue to see 2020 as an elevated risk environment related to the pandemic's implications, and related changes to client purchasing behaviors could continue building in some portions of the business as the year progresses. But we also recognize that the strong performance of our index business and the rebound in demand for IPOs has us feeling directionally more optimistic than we were three months ago. On the last quarter call, we referenced our long-term outlook of 5% to 7% annualized growth in our non-trading businesses. As we experienced the early days of the pandemic's impact on the economy, we communicated that we saw risks in our ability to achieve the lower end of that growth range in 2020. Given the strength of our second quarter performance, we believe that the risks have moderated somewhat. Therefore, unless there is a sharp reversal in the current environment, our confidence has increased in our ability to achieve the lower end of our 5% to 7% organic revenue growth range collectively across our non-trading businesses for the full year of 2020. We will continue to provide updates on our growth progress as we address our third quarter results in October. In addition to the strong results from our businesses this quarter, we also saw positive developments on the regulatory front in the period. In June, the D.C. Circuit Court of Appeals ruled decisively against the SEC on two issues that were very important to us. First, the courts ruled that the SEC exceeded its legal authority by creating a process to review fees long after they had taken effect. The rule vacated or invalidated the SEC's actions in October 2018 when it overturned the ruling of its own administrative law judge that proprietary data prices were properly regulated and constrained by competition and mandated the review of hundreds of other fees. Second, the courts ruled that the SEC's access fee pilot was unauthorized because the SEC lacks the authority to adopt rules that impose obligations if their sole purpose is to gather data. For the Commission to regulate, it must identify a problem and justify its proposed solutions with sufficient economic analysis of the costs, benefits, and possible alternatives. The pilot would have subjected thousands of U.S. issuers to a multi-year experiment to determine what might happen if liquidity and sensing rebates on exchanges were restricted or eliminated. We continue to believe that U.S. stock markets are the envy of the world, delivering unmatched liquidity and resiliency at an extremely low cost in a highly competitive environment. We hope that as the SEC moves forward in its efforts to find ways to improve the markets, they do so with the utmost thoughtfulness to ensure that reforms truly deliver benefits across a wide range of issuers, intermediaries, and investors that depend on them. Going forward, we urge the SEC to adopt a more inclusive approach to developing consensus around rule proposals and significant rule changes, particularly when those changes are wide-ranging and carry a significant risk of unintended consequences. As we look to the second half of 2020 and beyond, we now know that we will be navigating a world and economy characterized by the pandemic's effects for longer than we were expecting. We have also learned important lessons during this period that bolsters our confidence in our longer-term strategy to maximize opportunities as a leading technology and analytics provider while maintaining our foundational marketplace-focused businesses. Importantly, we observed several key trends that underscore the flexibility of our strategic ambitions to serve markets everywhere. For example, we're now able to reach a new set of clients and finalize deals in our market technology business using our SaaS-based solutions, which provide more turnkey and scalable market capabilities for our clients in a fast-changing economic environment. While our index business will always be subject to cyclical beta-related impacts due to the nature of its revenue model, We have seen a new appreciation for the thematic approaches that characterize the majority of NASDAQ's index franchise, and, of course, the good fortune to be in the right thematic for a world that is changing in ways that make technology and healthcare more important to everyone's lives than ever. Additionally, our institutional and investor clients are increasingly turning to a data-driven decision-making in a volatile and unpredictable environment, which underscores the value of our data analytics offerings. And lastly, over recent years, There's been a growing urgency among companies globally to make a positive contribution to the environment and to focus on governance practices. This year, the focus on the pandemic and its impact on our society, and in particular on our underserved communities, has elevated the commitment from the private sector to key areas of social responsibility as well. As a result, we're starting to be rewarded for our efforts to expand our offerings, addressing corporate issuers and other clients' rising ESG needs. As I wrap up, I will summarize by saying that NASDAQ remains sharply focused on advancing our strategic mission. Our global team has demonstrated their seamless adjustment to the remote nature of our current operating environment, and our team's ability to deliver uninterrupted service to our clients is demonstrated in our strong results this past quarter. And with that, I will turn it over to Michael to review the financial details.

Thank you, Dina, 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. I will start by reviewing second quarter revenue performance as shown on page 3 of the presentation and organic revenue growth on pages 4 and 14. The $76 million increase in reported net revenue of $699 million is the net result of organic growth of $75 million, including 22% organic increase in market services and 6% organic growth in the non-trading segments. A $3 million positive impact from acquisitions and a $2 million unfavorable impact from changes in foreign exchange rates. I will now review quarterly highlights within each of the reported segments. I will start with information services, which, as reflected on pages 5 and 14, saw a $19 million, or 10%, increase in revenue. Organic revenue growth during the period was 9%, primarily reflecting very strong growth in our index business, and then smaller but positive contributions from each of the investment data and analytics and market data businesses. Operating margin of 62% declined about one point compared to the prior year period, primarily due to the inclusion of Syllobus. Market technology revenue, as shown on pages 6 and 14, increased $5 million, or 6%, with organic growth of $4 million, or 5%. Organic growth during the period primarily reflects an increase in software-as-a-service surveillance revenues. As Adina noted, annualized recurring revenue, or ARR, rose 9% compared to the prior year period. Operating margin of 18% was up 8 points from 10% in the prior year period, and year-to-date margin of 14% for the segment is up 4 points. Turning to corporate services, on pages 7 and 14, revenues increased $3 million or 2%. Organic revenue growth was 3% or $4 million, reflecting an increase in U.S. listings revenues and increases in both IR intelligence revenues and governance solutions revenues. This was partially offset by lower event-related revenues at the NASDAQ market site and lower NASDAQ private market program activity, both mainly due to the business impact of COVID-19. The operating margin of 39% for the segment was up three points from the prior year period. Market services net revenues on pages 8 and 14 saw a $49 million or 22% increase, excluding the negative $1 million impact from unfavorable changes in foreign exchange, the organic revenue increase was $50 million, also 22%. The organic increase during the period primarily reflects increases in cash equities and equities derivatives net revenues due to higher industry trading volumes. The operating margin of 64% for the segment remains elevated due to the high volume environment. Turning to pages 9 and 14 for review expenses, non-GAAP operating expenses were $327 million in the second quarter of 2020, an increase of $5 million or 2% compared to the second quarter of 2019. This reflects a $7 million increase from the impact of acquisitions, as well as higher compensation expense, infrastructure costs, and depreciation expense, partially offset by lower corporate travel expenses, event spending, and changes in foreign exchange rates. Turning to slide 10, we are tightening our 2020 non-GAAP operating expense guidance range to $1.33 billion, to $1.36 billion. While we have experienced reduced levels of travel and event spending, it is important to note that we plan to continue to invest in the infrastructure necessary to support the current and potential for even greater activity on our platforms. In addition, we are also continuing to allocate the capital and resources to deliver on our longer-term growth initiatives and our full-year expense guidance range reflects these investments in the second half of the year. Based on our latest internal expense forecast, which takes into account the impact of the relatively strong organic growth has on variable compensation, as well as the latest foreign exchange rates, as we stand here today, we see ourselves as most likely to be in the top half of our updated expense guidance range. Moving to operating profit and margins. Non-GAAP operating income increased $71 million in the second quarter of 2020, and the non-GAAP operating margin was 53%, compared to 48% in the prior year period. The nearly 500 basis point increase in the margin year-over-year reflects strong operating leverage, particularly in market services business, as well as multi-year efforts to enhance the company's scalability, though we would expect some near-term reversion should market volumes moderate. The net interest expense was $25 million in the second quarter of 2020, a decrease of $3 million versus the prior year. The non-GAAP effective tax rate was 26.4% for the second quarter of 2020. For full year 2020, we continue to expect the non-GAAP tax rate to be between 25.5% and 27.5%. Non-GAAP net income attributable to NASDAQ for the second quarter of 2020 was $256 million, or $1.54 per diluted share, compared to $203 million, or $1.22 per diluted share in the prior year period. Let me now turn to the balance sheet. After taking steps in the first quarter of 2020 to increase cash reserves and eliminate near-term maturities, in the second quarter, NAPA took advantage of a receptive credit environment and issued a $500 million 30-year bond. Then, as the short-term credit environment continued to improve, we became more comfortable with reducing our cash position to more normal levels and used the proceeds from our debt offering and the excess cash on hand to redeem outstanding commercial paper and to repay all the borrowings on our revolver. As a result, the company returns in lower leverage while enhancing available liquidity. Turning to slide 11, the net of these actions is that debt decreased by $626 million versus March 31st, primarily due to $1.1 billion of aggregate net payments on revolver borrowings and commercial paper that I mentioned a moment ago. Our total debt-to-EBITDA ratio ended the period at 2.4 times, down from three times in the first quarter of 2020. Net debt-to-EBITDA was 1.9 times, down from 2.3 times in the first quarter of 2020. Also, during the second quarter of 2020, the company paid common stock dividends in the aggregate of $80 million and repurchased common stock in the amount of $30 million. Year-to-date, through June 30th, the company has repurchased common stock in the amount of $152 million, largely completing our objective to use share repurchases to offset pollution of equity compensation and other sources of gross issuances to ensure investors benefit from a stable share count. With that, I'll turn it back over to the operator for Q&A.

Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Please limit yourself to one question and re-queue for any follow-ups. Please stand by while we compile the Q&A roster. Our first question comes from Rich Rapetto with Piper Sandler. Your line is open.

Good morning, Adina. Good morning, Mike. I guess my question is, good morning. You seem like you're in the sweet spot right now giving exposure to equity trading and equity options as well as having the high percentage of recurring revenue. I guess My question is, with so much volume now going into, you know, from retail, the TRF percentage up in the low 40 percentage, are we missing anything? You know, I'm trying to look at the unintended consequences of having so much off-exchange volume. Your revenue capture actually went up in equities, which I didn't understand. But just trying to see how, you know, given that you're in this sweet spot, you know, make sure we're catching... you know, all the reflections here, all the possibilities.

Sure. Well, I would agree that retail participation in the markets, both the equities markets and the equity options markets, has been – certainly has been elevated this year. And you are right that it is resulting in more off-exchange volume occurring. I think that what we've been really focused on is for the volume that does come to the exchanges, what can we do to maximize that? our position. And so we've been working really hard, Rich, on a few fronts. One is certainly just overall customer service and availability. Second is just the scalability of our business and ability to handle these really large volume days, particularly like the Russell and the S&P 500 rebalance days. Third is that we continue to improve the performance of our systems with tech improvements and things that we're doing to make sure that we optimize the performance of our markets. And then the last thing is making sure that we really educate our customers on how to use all the elements of our markets, like our MELO orders and, you know, other things like that to capture as much volume as we can. But the retail volume, you know, generally gets internalized and then, of course, turns into secondary volume that comes to the exchanges. So we do benefit from the overall elevated environment, but we do find that the level of internalization is something that we watch pretty carefully because you don't want there to be a diminishment of the price discovery that's occurring in the market by having too much of the volume go off exchange. So it's something that we certainly are focused on. I think the one thing that we are focused on, Rich, is just making sure retail investors are educated as they're coming into the market. The online retail brokers do a really good job of that. FINRA does a really good job of that. So we're just partnering with them to make sure that we're helping them with their educational efforts with the retail investors.

Anything on the revenue capture? That was part of the question, the one question.

So the revenue capture is really a function of a lot of things. So one is just which markets are they leveraging to come into the market and, therefore, what's our capture rate. I think we also are, you know, we're very careful in looking at how much volume is coming into the auctions. We did have two very large auctions in the quarter at the end of the quarter with the S&P 500. I think that was 1.2 billion shares in the Russell rebalancing. was 1.5 billion shares. And those obviously create lift as well in terms of the auctions versus the intraday trading.

Got it. Thank you.

Thank you. Our next question comes from Alex Cram with UBS. Your line is open.

Hey, good morning, everyone. Quick one on COVID and the current pandemic. You talked about how obviously there's some negative impacts on the revenues, but also positive on the expenses. Anything to note positive on the revenues? I mean, are there new business wins or anything that has come out, new use cases that your clients have seen where you may be benefiting coming out of this, or is it too early to tell?

No, actually, in a couple areas, Alex, I think it is actually relevant. So the first is how the demand for more of our staff-based technology is actually elevated during this period because I think more and more the clients are realizing that that to have the scalability and the flexibility they want to be able to have what I would say capacity on demand, to be able to manage their infrastructure remotely, you know, all of those things really benefit from a SaaS market structure, you know, SaaS market technology. And certainly as they've moved a lot of their compliance and surveillance teams remotely, there's even more demand for our surveillance solutions because they want to make sure that they are able to propagate those across the firm. So I think those things actually have benefited from the need for people to be more flexible about where people work and having less reliance on their kind of homegrown infrastructure. And so all five of the new clients in the market operators that we signed in the quarter were SaaS-based solutions, so they're all our next-generation solutions, both in surveillance and market and trading solutions. And I think that, you know, in general, our overall demand for those types of services has gone up. I think the second thing is in the index side. We are continuing to have a lot of great dialogue with our index partners about new products that we can bring to market that do play into the long-term changes in, you know, in the economy and making sure that we deliver indexes that investors feel like they can invest in over the, you know, I think that's another area that we're really focused on, Alex, that's more COVID-related. And then I guess the last thing is on our data analytics platform, Quandl, we are seeing more demand for certain elements of alternative data because they're trying to get ahead of government data, for instance, so they're really trying to get much better insights into demand and how it's changing and shifting in the world. And I do think that a lot of our Quandl products are relevant there. So those are the things that we're seeing, Alex.

Very good. Thank you. I'll be back in the queue.

Great. Thanks, Alice. Our next question comes from Ken Hill with Rosenblatt. Your line is open.

Hey, good morning. I was hoping to ask about NASDAQ Marketplace services platform. So I know you guys launched this at the end of June and have some detail on the website. And, you know, I was hoping you could help me kind of narrow the focus a little bit because it seems to have a lot of great buzzwords in there and have a huge focus, which can do a lot of things that a lot of fintechs and exchanges want to do. So I'm hoping to understand maybe how you see it specifically positioned within NASDAQ. I know you mentioned some early ones with Lex there, but then maybe who the natural customer base is for this and maybe the addressable market for it here over time.

Yeah, no problem. So I think it's funny. We always joke with our marketing department on the buzzwords. So, but I think that, let me just kind of break it down. If we think about what we've been investing in over the last several years in market tech, the first thing is what we call a NASDAQ financial framework, which is really the platform, the core platform that allows for a microservice architecture. And what that means is you have this, like, common data layer, common data management capability, common security layer, a common code base across everything you're building across And that's kind of the core platform. Regardless of what functionality you put on top of it and what capabilities you build, it's this common platform that all of our market tech solutions now are built on top of. And then on top of that, you then build capabilities like functionality, trading, pre-trade risk management, post-trade processing, settlement, surveillance, things like that. What we've done with the Marketplace Services Platform is essentially completed the trade lifecycle in a microservice architecture so that you can basically deploy a market much faster in the cloud so everything is fully cloud-native. And you can go, and it's much more of a kind of a turnkey solution for new markets. So I would say, Ken, the primary client for the Marketplace Services Platform are new markets. They could be Existing clients that want to launch new markets, they want to launch a repose market, or they want to launch something that's in the financial instruments themselves, crypto markets and things like that as well. Or it can also be used for kind of this new market concept that we've been talking about in terms of outside the traditional capital markets. LexMarkets is a real estate security platform. It's a really new construct, and we think that the Marketplace Services platform is kind of a perfect use case for that. And so it's just really creating a full trade lifecycle. Our first iteration of it was the matching engine itself, and now we have a full trade lifecycle in that microservice architecture. So hopefully that helps kind of break down a bit.

Yep, got it. Thanks for the detail there.

Sure.

Thank you. Our next question comes from Brian Bettle with Deutsche Bank. Your line is open.

Great. Thanks. Good morning, folks. Let me just shift gears to the expense outlook and appreciate your comments on that, Mike. Just, yeah, obviously a very good performance with the operating margin, you know, continuing to grind higher here, and it looks like the, you know, about 300 basis points of operating leverage so far halfway through the year with 6% non-trading revenue growth and 3% off expense growth. So maybe as we move into the second half of the year, do you think we can still have that type of operating leverage and maybe just throw in a comment on the non-trading revenue growth side in market technology with a little bit of a spin on the new order intake? Does that roughly depend on That spells our trajectory improving a little bit in the second half. Sorry for all the bundled questions.

No, no, that's okay. So we've got a discussion of operating leverage and a discussion of order intake and market tax. So I just want to make sure, Michael, do you have any comments on the operating leverage that you want to start with?

Well, I think we've covered it to some degree in the remarks, the DNS. Obviously, the operating leverage is getting the benefit from the additional revenue we're receiving on the trading activities. and that side of the business, and we can continue to, as we said in my remarks, invest in the business. And so we do think that there will continue for the full year, the overall expense guidance is around that 3% range. So that's what we're targeting, and that's what we look at that. In my remarks, we said sort of the mid to the upper end of the range with respect to that expense guidance. That's where we come in around 3% for the full year. And then on the revenue side, it's really with respect to what happens with respect to the operating or the revenue activity that we have on the trading side, which is what the real driver as to whether it's going to stay where it is, increase or decrease, it's dependent somewhat in the short term based on the trading activity.

Yeah, and then on the order intake question for market tech, I think the question is are we dependent on the same kinds of order intake for us to drive our current year results. And I would say, Brian, that we certainly continue to see a good pipeline of opportunity with order intake. As I said before, I think that we are seeing a little bit more moderated order intake this year because of the fact that bigger technology decisions are taking longer. So that kind of the chunky, big order intakes that we tend to get from our larger clients are taking longer as they're managing through their own situation before making significant changes to their systems or launching new things within their markets. But I would say that we do continue to see a healthy pipeline. And as we said before, we do see some risk to our ability to reach the lower end of the growth target for our market tech business. this year just because of some of the challenges in terms of time to sales and the way that we're implementing in a remote environment. But overall, the overall health of that business continues to be really strong, and demand for our services continue to be really strong. So I don't have a specific answer to your question about order intake relative to revenue. I'm hoping that we've given you guys enough understanding of the dynamics we're seeing for you. I'll guess you got the right conclusion there.

It definitely looks promising in this environment. Thanks for the detailed answer.

Thank you. Thank you. Our next question comes from Mike Carrier with Bank of America. Your line is open.

Good morning, and thanks for taking the question. You mentioned that you're more comfortable in the low end of the non-transaction revenue growth range this year, but expecting some client activity in corporate and tech to be slower, which makes sense. I'm just curious, if you were, you know, seeing this scenario for a longer time period, like are you seeing clients and, you know, obviously I think NASDAQ is, but adapting enough that you could eventually, you know, see a pickup in orders, you know, like if we're in, you know, some of this type of environment for a longer period of time. And then, Michael, if, you know, that is the case and we don't see a pickup in activity, you know, what areas, you know, would you have on kind of the expense side, you know, for flexibility? Thanks.

Sure. So I do think that clients are adapting. You know, it's kind of they first had to get through really, you know, a surge in volume and a complete change in their operating model, and so they obviously put certain decisions on hold. And then you have the second thing, which is, okay, now we've got to deal with this new normal, and what does it mean for our business? And so how much, how far are we going to lean in on new enhancements or new products, new markets? I think, though, however, there was just an enormous amount of kind of momentum and demand coming into the year for new markets to launch, for people to try to put more instruments on their platforms, and for them to really thrive towards, frankly, a more flexible infrastructure. And so I don't think those decisions will be put on hold forever. Like, I think that a lot of them are just taking a little bit longer so they know exactly how they're going to make that capital allocation decision while they manage through a longer-term environment. The other thing I would say is, obviously, the exchange world in general has done – has performed well. And obviously the markets have performed well. I think that the volume activity is not just here in the United States, but it's in other countries as well. And so the overall resilience of the business models of our customers make it so that those types of decisions might take a little longer but will ultimately be made because they definitely see the benefit of modernizing their infrastructure. On the broker-dealer side, I think that some of the sales have been more on those immediate needs, and that's why our surveillance sales have been really strong. But over time, broker-dealers also want to optimize their infrastructure. They're going to prioritize things where they're making money, and they are making money in trading. So we do think that those are opportunities also in the long term to revert back to where we were seeing demand before. And then I'll turn it over to Michael on the question on expenses. Thank you.

Yeah, I think it's just a bit of an extension of what Adina was saying with respect to we look at the expenses in the context of the revenue. And so if we're in a period where this is continuing, and then obviously along with that there's a good chance for uncertainty, so we'll be seeing good revenue or activity on the transactional side of the business. So that goes to really the resiliency of the business. But obviously in an environment that we're sitting in, we are seeing the benefit of reduced levels of spending on some of the discretionary spend or things like travel, Our marketing events have moved online, and so you save some of the in-person costs and the cost of hosting those events, and we have moved those online, but then there are some savings that's related to that. So we'll obviously always look at our discretionary spend, and we'll look at the non-essential initiatives that we're looking at as an organization that you do over the longer term. But we're definitely going to, and I want to make sure we're clear about this in continuation of my remarks, that we're continuing to invest in the capacity and the infrastructure to meet the market's demands. In addition to that, we will continue to invest in the long-term growth initiatives for the business. And so we will look to manage expenses where we can and where possible, but we will continue to invest for the future. Got it. Thanks a lot.

Thank you. And our next question comes from Chris Harris with Wells Fargo. Your line is open.

Thanks. Good morning. So there was a decent-sized drop in the U.S. options capture rate in the quarter. Can you talk a little bit about what's going on there? And then is this a good run rate, would you say, for U.S. options capture?

Sure. So the U.S. options capture is really a function of the level of retail that's come into the options markets because those types of orders tend to gravitate towards the price-time markets. as opposed to the floor-based markets or the complex markets like we have in ISD. So that – and as you know, the price-time markets tend to have a lower capture. So I do think it's much more of a trend of retail. Now, whether or not that trend will continue over the long term is something that we all – you know, we'd like to see in general because while the capture is lower, the volumes are up, right? So you have to kind of look at it as a balance there. And so, in general, we feel that having more participation in the markets, more varied participation in the markets, and more democratized participation in the markets, those are all good things for the capital markets in general. And so, I would say, Chris, we'll have to see how resilient the retail is. But I would say that you should look at it more as a function of that as opposed to concrete or discrete decisions we've made. It's more just where the volume is going.

Got it. Thanks.

Thank you. Our next question comes from Alex Blosky with Goldman Sachs. Your line is open.

Great. Good morning. Thanks, everybody. I was hoping to get into the InfoServices segment for a second. Could you guys talk a little bit about sources of growth, particularly around the U.S. profit since this quarter, as well as the pickup in investment and data products out there? It also seems like to be a pretty nice pickup sequential, so maybe a little bit more color there would be helpful. Thanks.

Sure. Yeah. Sure. So, on the prop products or proprietary products, we are continuing to find demand for our products, particularly as, frankly, the retail investing dynamic continues to increase. I think that more and more of the retail brokerage firms and those firms that are really geared towards retail investors want to have access to real-time information and And we offer it in a really flexible way. And we work very hard to be highly competitive with our peers in terms of offering a superior product at a great price. So that has been an area of growth for us as we've continued to expand the usage of our data across the broader capital markets ecosystem. I think that in terms of the data and analytics business, it's been driven by a couple things. First, we still continue to have good growth in investment, although it's somewhat moderated from from last year just because we've been really working very hard to really solidify the core value proposition that we have for clients. We changed our pricing model last year, and it's actually really benefiting the resiliency of that business this year, the usage of our data and analytics this year on investment, and it's kind of setting us up to really continue to drive growth for new product delivery. So we've had actually a 39% increase in the usage of investments this year over last year. And that's really because more and more of the C-suite of the asset managers are really picking up and leveraging the investment data to make more strategic decisions around how they want to launch products or allocate their assets to different investment strategies. And I think that will give us a really good position to grow and expand the product base there. We also have the benefit of Sylovis coming in and also driving growth. They have strong demand for their services. And we signed our first kind of Sylovis client on the back of it being an investment client. So we are opening doors through our investment relationships for this Sylovis product. So I think all of those things are the reasons why we're seeing – healthy growth in that business, but while also shoring up the resiliency of the business with the change in the pricing. Great.

Thanks very much.

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

Hi. Thanks for taking my question. Maybe just one on the index business. I wonder if we can get an update on how much of that index revenue line is driven by AUM-based fees now. I think the last update was around 60%. And I'm wondering if you could help us understand the average fees on assets benchmarked to that NASDAQ 100. I think primarily the Qs where the AUM is up 54% year over year versus the total AUM of 34%. I'm just wondering if there's some favorable mixed shift going on there on top of the really strong growth.

So in general, and I just want to make sure, you know, we've been looking at this in terms of percentage of our revenue in the index business that comes from AUM-driven revenue versus the futures volumes and the data revenue. And about 60% to 65% of the revenue in the index business comes from AUM. And that's kind of an average over the last – or a range that we've experienced over the last few years. And somewhere in the range of kind of 10% to 20% comes from the futures volumes. It really just depends on the quarter in terms of the level of activity there. So hopefully that gives you a little bit of a sense of the scale. In terms of the fee base, we don't publish fees specifically to index businesses or our specific indexes that we launch with our clients. But I would say that the NASDAQ 100 index program and the way that the partnership we have with Invesco is a longstanding evergreen partnership. So the fee base within the NASDAQ 100 has been the same for a long time.

Understood. Thank you.

Thank you. Our next question comes from Ari Ghosh with Credit Suisse. Your line is open.

Hey, good morning, everyone. So, Dean, I was just listening back to your comments on the index business. You know, if I look at the recent performance, it's especially noteworthy given that even outside of market beta, organic net flow growth, I believe, is accelerated to around the 15% range. and it's outpacing industry trends. So could you talk about some of the differentiating factors and modes around your index business versus some of the larger index players in the industry? And then looking ahead, just curious where you see the most room for product innovation Is it around, you know, smart beta, ESG, or some other white space out there where you see the most opportunity, you know, just as we think about, you know, you're looking at avenues and opportunities to hit that medium-term growth targets in the index business?

Sure. So I think that the first thing I would say is the NASDAQ 100 and the NASDAQ IPIC indexes are, you know, just great foundational franchises for us. And then we have a very – I think actually a great cadre of smart data indices that also have done quite well in terms of just leaning into overall thematic trends. So I just think that we've been pretty good at selecting the types of themes that we want to launch in our index business. We're a little bit more, I would say, of a niche type of player. We don't do every index that you can possibly imagine. We really do work very closely with our partners to launch products that we think will have really strong investor demand but also play into trends. So the trends that we've seen as being, you know, highly successful are trends around technology, cloud indices, IT security indices, biotech indices, and obviously the flagship NowTik 100, which has a lot of – I'm waiting towards the technology sector in general. But it is actually a broad-based index that has a lot of sectors in there, but technology is obviously the most prevalent. So I think it's just that our market, as well as the indices that we build around our market trends, are, I think, just playing into the next generation of our economy. And I think as a result of that, we've had this resilience. And even, you know, in other down periods, like in 2018, the fourth quarter, we did not have this much reduction in AUM because even if the market performance was down for the quarter, we saw a lot of inflows coming in, which offsets, obviously, drops in market performance. In this particular case, that's why we noted in my remarks that over 60% of the increase in AUM was actually from inflows, not just market performance, because it does tell you that we're leaning into a lot of long-term trends with our indexes. So hopefully that answers your question, Ari, on that.

Very helpful. Thank you.

Okay.

Thank you. And we have a follow-up from Alex Cram from UBS. Your line is open.

Yes. Hey, hello again. Quick one, maybe, maybe not. You mentioned ESG three times in your prepared remarks today. So just curious if you can give us a little bit more color, which is obviously a super fast-growing macro trend. And so any idea how big ESG is for you today, how fast it's been growing, and will you see how much of an impact it can make in the future in terms of potential growth here?

Sure, yeah. And that actually goes to Ari's second question, which I didn't answer, which is, You know, where do we see the bigger trends going forward in the index business? And ESG is certainly one of the big macro trends, and it is an area that we want to make sure that we, again, in a very specific way that we're also playing into the ESG trends. We're trying to make sure that we do, for instance, ESG versions of the OMX-30s. We have other ESG thematic indexes that we're launching with our partners. But that's one area of ESG that we're definitely focused on, but it's still very small for us, Alex. I think that the other is actually in our corporate services business where we did make a very small acquisition in a company called OneReport, but that has really catalyzed demand from our corporate clients. So I think our largest near-term opportunity is but still coming off of, you know, we just launched the ESG advisory service like 18 months ago, so this is still pretty new, is really in helping our customers navigate a very complex environment around ESG reporting, making it easier for them to report their information by putting it into one place and having one repository that we then translate and map out to all the metrics providers. Ultimately, we're going to want to expand that so we can actually map that directly into institutional investors' databases, And then additionally, making sure that we capture that information and make it so we can provide our corporate clients with more reports on their own trending, how they're trending against peers, things like that, so that they can get more intelligence from all of the work they're doing around ESG. And I think that we see that as kind of a short term in terms of really building up our consulting capabilities as well as our technology service to make it easier for them to do the reporting. And then long-term, as we really create even more intelligence for our corporate clients and for institutional investors on overall trends in that. And then the last area of ESG that we're focused on, which, again, is still very small from a revenue perspective, but we definitely see a lot of growing demand for it, is in the NASDAQ Sustainability Bond Index. I'm sorry, NASDAQ Sustainable Bond Index Network. which is really kind of a – in Europe, it's a sustainable bond market where they list the bonds and make them available to investors in Europe. In the U.S., it's not yet a market, but it's essentially a listing venue for people to come in, and we do a lot of work to make sure we vet the bonds and other financing instruments around sustainability and confirm that they are, in fact, meeting sustainability needs. and giving those companies access to the markets through the sustainability bond network. But that's still, again, small. So if I were to rank order them in terms of near-term opportunity, I would say the corporate products that we're launching are definitely the highest near-term opportunities, but all three of them have good long-term opportunities for growth for us, Alex.

Okay, but too early to give any sort of corporate-wide ESG metrics or revenues like some of your information services peers are already doing.

Yeah, no, I would say it's too early for us. And they're kind of embedded in different segments, so it's not something we pull together as one number.

Okay, thank you. Yep. Thank you. And I'm glad there are no further questions in the queue. I'd like to turn it back to Mr. Dana Friedman for closing remarks.

Okay, great. Well, thank you all very much for your time today. We are very pleased to see that our businesses are delivering strong organic revenue growth in the quarter. Guided by our strategic direction, we have a clear focus to finish 2020 strong as we reimagine markets to realize the potential of tomorrow. And we're committing to executing our plans diligently while keeping our employees safe and set up for success while in the remote environment. But thank you very much, and have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect, everyone. Have a great day.