Nasdaq, Inc.

Q2 2024 Earnings Conference Call

7/25/2024

spk04: Good day and thank you for standing by. Welcome to NASDAQ's second quarter 2024 results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To re-draw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Atul Garrett, Senior Vice President, Investor Relations. Please go ahead.
spk09: Good morning, everyone, and thank you for joining us today to discuss NASDAQ's second quarter 2024 financial results. On the line are Adina Friedman, our Chair and Chief Executive Officer, Sarah Youngwood, our Chief Financial Officer, and other members of the management team. After prepared remarks, we will open the line for Q&A. The press release and earnings presentation accompanying this call can be found on our Investor Relations website. I would like to remind you that we will be making forward-looking statements on this call that involve risks. A summary of these risks is contained in our press release and a more complete description in our annual report on Form 10-K. Also, please note that we will discuss our financial results on a pro forma basis and with year-on-year growth rates, which means that we are showing results versus the prior year period as if we owned Calypso and Axiom SL for all of 2023 and excluding the impact of FX. References to organic growth exclude the impact of FX, acquisitions, and investitures. 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 sections of our investor relations website at ir.nasdaq.com. I will now turn the call over to Adina.
spk00: Thank you, Otto, and good morning, everyone. Thank you for joining us. On the call this morning, I'll provide some perspective on the external environment, discuss our strong quarterly performance highlights, as well as our progress against our strategic priorities, and then I'll hand the call to Sarah to walk through the financial results in more detail. Turning to the economy in the US, we're continuing to see solid but slowing GDP growth, along with cooling inflation and slightly rising unemployment. These data points support the potential for easing monetary policy in the coming months as the Fed continues to strive for an economic soft landing. The general stability in the US economy and the potential for a lower cost of capital going forward is resulting in modest improvements in the IPO landscape as we've progressed through 2024, including solid activity this week. However, investors continue to contend with external uncertainties in the timing of monetary policy shifts, as well as that dynamic macro political environment. As a result, we continue to expect modestly improving IPO activity for the remainder of 2024, And our current US IPO pipeline indicates that stronger momentum is likely to manifest starting in the first half of 2025. We're also seeing stronger economic underpinnings in Europe, aided by the ECB's easing monetary policy, including improving economic prospects in the Nordics. The improvement is not yet translating into a material increase in new public issuances, but our European IPO pipeline is healthy and growing, particularly for 2025. As investors and industry participants navigate the dynamic market environment, we continue to see sustained, robust trading activity in the markets, as well as strong demand for mission-critical technology solutions from financial institutions globally. As a result, our markets continue to experience strong volumes, and client demand for our fintech solutions remains consistent with trends we have seen through the cycle, which provides a healthy backdrop for continued revenue growth across our solution suites. Now let me turn to our financial results, which demonstrate the power and resilience of our diversified business model and our ability to succeed through economic cycles. We delivered a strong quarter with $1.2 billion in net revenues, an increase of 10% year over year, with solutions revenues at 13% growth. Our overall annualized recurring revenue, or ARR, grew 7% to $2.7 billion. I'm particularly pleased with the strength of the performance across our business which is a testament to the power of our platform. We're integrating the ADENZA acquisition ahead of schedule and are realizing the investment thesis that underpinned the transaction as we demonstrate its value for clients, shareholders, and employees. Our expenses for the quarter increased 7% year-over-year within our guidance. Our operating income grew approximately 14%, and importantly, our operating margin increased to 53%. representing over one percentage point of operating leverage, while we continue to invest to support growth in our business and deliver on synergies. Turning now to a discussion of the business highlights, starting with capital access platforms. While ARR growth in the division remained at 1%, our index revenue grew 29%, resulting in overall revenue growth for capital access platforms of 10%. In listings, we welcomed 31 operating company ITOs, maintaining our strong win rate of 72% based on NASDAQ-eligible listings. While the slower IPO environment remains a headwind, we're encouraged by signs of improvement as supported by our most recent IPO Pulse Index, which is at near a three-year high. Overall growth in data and listings continue to experience challenges as modest growth in market data and the slowly improving IPO environment were offset by the impact of prior year delistings. Growth in our analytics business benefited from continued demand across the investment community for actionable intelligence and increased efficiency. However, that growth was partially offset by continued headwinds in corporate solutions, resulting in more muted growth for workflow and insights. Our index business delivered another exceptional quarter with $17 billion of net inflows during the quarter, totaling $53 billion over the last 12 months. We also achieved another record in index ETP AUM, exiting the quarter at $569 billion. Turning next to financial technology, ARR growth across the division was 13%, including 25% in financial crime management technology, 14% in the combined Axiom SL and Calypso solutions, and 9% in the combined market technology and trade management services. The division had 69 new client signings, 96 upsells, and four cross-sells. We also saw continued cloud adoption, as 68% of Axiom SL and Calypso's combined bookings in the quarter were cloud-based, with a strong pipeline for future quarters. Turning to the specific subdivisions, financial crime management technology continued its strong momentum. We signed over 50 new clients in the SMB space, and we continue to make progress in the upmarket segment focused on Tier 1 and Tier 2 banks. In July, we signed a new international Tier 1 bank, which is also an exciting cross-sell. Going forward, we continue to maintain a strong sales pipeline within the core SMB segment, and we have a growing pipeline of new clients and upsells among Tier 1 and Tier 2 banks. Across regulatory technology, we see sustained demand across both existing and new clients, as financial institutions face increasingly dynamic regulatory environments including changes in regulation globally related to asset thresholds. Among the many regulatory trends that are driving sales demand, we're pleased with our progress in signing clients around the world as they focus on implementing Basel IV and preparing to implement Basel III Endgame. In capital markets technology, we continue to see strong demand for mission-critical technology as many of our clients focus on modernizing their infrastructure to enhance resilience and performance. For Calypso, we see robust new demand, especially in the treasury segment, in addition to cloud transformation of large-scale clients. In our market services division, we delivered revenue growth of 3%. We experienced healthy volumes across North America and Europe, and we achieved a sequential increase in North American options market share, as well as growth in NASDAQ U.S. equities on exchange market share and capture. Our U.S. index options achieved record revenues more than doubling versus last year due to higher capture and volumes. In our U.S. cash equities business, we executed successful Russell, MSCI, and S&P rebalances during the quarter, which showcased the strength and resiliency of our markets. During the Russell event, for instance, nearly 2.9 billion shares representing a record notional value of over $95 billion were executed in the closing process representing the largest liquidity event on the Nasdaq Stock Exchange or the Russell Reconstitution. In our European markets, the strength of our market ecosystem, as evidenced by the depth of book, breadth of participants, and product innovation, continues to drive market share gains. Overall, we're pleased to report a solid quarter of market services and remain focused on retaining our leading position across all of our markets. I now want to spend a few minutes updating you on how we're executing against our 2024 strategic priorities of integrate, innovate, and accelerate. Starting with integrate, we have actioned over 70% of the $80 million of net expense synergies, and our leverage ratio reached 3.9 times at quarter end, both ahead of plan. Both Axiom SL and Calypso are fully integrated into the financial technology division, and we've established strong leadership, a well-structured operating model, and a one NASDAQ go-to-market approach to ensure we're delivering for our clients with the highest level of efficiency and effectiveness. Our CRM's integration for the Calypso and Axiom solutions is now completed ahead of schedule, and this supports divisional sales coordination as well as the sales incentive program established at the beginning of the year. Importantly, across Axiom SL, Calypso, and Verifin, we've been highly focused on cultural integration into the broader NASDAQ enterprise. And internal surveys continue to show that our employees are highly engaged and energized to deliver for our clients. We're also making strong progress advancing our innovate priority. We currently have approximately 50% of our employee base working with AI tools focused on enhancing productivity as well as driving our product roadmap. By the end of Q3, 100% of our developers will have access to AI co-pilot tools, and we recently had over 650 employees participate in several AI hackathons across NASDAQ. During the quarter, we continued to introduce new AI capabilities within our client-facing solutions. Consistent with other Gen AI capabilities recently launched in our Verifin and BoardVantage solutions, with an investment, we have deployed a new AI power feature for the Market Lens module called Pension Meeting Minute Summarization. The feature provides asset managers with key insights on current and future pension fund strategies to help inform their business development and engagement priorities with top pension decision makers. We also have a strong pipeline of AI features scheduled to launch in the coming quarters, including in market surveillance and IR insight. And we're seeing strong early traction in client adoption and effectiveness related to the capabilities that are already in market. Specifically, Dynamic Mellow, the first SEC-approved AI order type, which we launched in April, is driving a 20% increase in both volumes for this order type and improvement in fill rates compared to the prior static version. Verifint's integrated GenAI feature, Entity Research Copilot, is now deployed at more than 250 clients, and we expect to complete our rollout in the third quarter. Client feedback has been positive, demonstrating that the integrated copilot functionality With the integrated co-pilot functionality, Verifin solutions can reduce alert research time by up to 90% compared to banks that do not use Verifin. Beyond AI, we continue to drive innovation towards key growth priorities. For example, in our index business, innovation is at the heart of our growth strategy as we extend the franchise to new markets globally, drive institutional adoption, and introduce new products beyond the NASDAQ 100. During the quarter, 50% of index product launches were outside of the United States, and we're quickly gaining traction in investor adoption. In total, we launched 18 new products with our partners, including 12 ETPs and three insurance annuity vehicles geared towards our institutional clients. Additionally, we're pleased that our AI-themed ETPs saw more than $1 billion of inflows over the last 12 months. Wrapping up with our accelerate priority. The addition of Axiom SL and Calypso has significantly elevated the dialogue we have with our clients as a strategic partner. There's no better evidence of that than the early traction we're seeing in our cross-sell efforts. Since closing the transaction, we have executed on 11 FinTech cross-sells. We had four this quarter, including two cross-sells of our Axiom SL solution to Calypso clients. This is a great start, but it's only the beginning on our journey to exceed $100 million in cross-sells by the end of 2027. Just eight months since the acquisition closed, 10% of the opportunities in our pipeline are cross-sells and we expect this to grow sequentially. The division has several strategic cross-sell campaigns underway, which are generating strong top-of-funnel interest and underpins our continued confidence in our ability to grow cross-sell bookings over the coming years. To wrap up, We're pleased to deliver a quarter of strong results driven by continued momentum and solutions and the power of our diversified platform to drive scalable, profitable, and durable growth. Importantly, we're delivering on the addenda acquisition thesis as our clients increasingly see Nasdaq as a strategic partner that can help solve their largest, most complex challenges. We look forward to leveraging this momentum to unlock our next phase of growth. And with that, I'll now turn the call over to Sarah to review the financial details.
spk03: Thank you and good morning, everyone. In the second quarter, we made excellent progress in both the integration of EDENZA and the accelerated pay down of debt. We actioned over 70% of net expense synergies six months ahead of schedule. We have also come in ahead of our accelerated deleveraging plans, ending the quarter of 3.9 leverage. Turning to our second quarter results on slide 10. We reported net revenue of $1.2 billion up 10% with solutions revenue up 13%. Operating expense was $539 million up 7% within our guidance with an operating margin of 53% and an EBITDA margin of 56%. Overall, this resulted in net income of $397 million and diluted EPS of 69 cents. Slide 11 shows the drivers of our 10% pro forma revenue growth for the quarter. We generated 8% alpha growth on a net basis, driven by new and existing clients, as well as our focus on product innovation. Overall, beta factors were 2% this quarter, driven by higher valuations in NASDAQ indexes, as well as higher overall volumes in market services. On slide 12, we had 7% ARR growth, and as part of that, we had 17% SAS revenue growth, resulting in SAS as percent of ARR, now at 37%, up 4 percentage points. Let's review division results for the quarter, starting on slide 13. In Capital Access Platforms, we delivered revenue of $481 million, reflecting growth of 10%. We had another exceptional quarter for our index business, with revenue of 29%, driven by $53 billion of organic inflows in the last 12 months, including $17 billion this quarter, and market performance, both resulting in average ETPA UM of $531 billion. In addition, future volumes were up 25%. Data and listings revenue was up 1% while ARR was down 1%. The difference was driven by small one-time revenue benefits primarily related to listings. Revenue from higher data sales and usage, new listings, and pricing offset the impact of delistings, downgrades, and lower amortization of prior period initial listing fees. We expect the quarterly headwind from lower amortization of prior period listing fees to increase from an immaterial impact in 1Q24 and approximately $1 million in 2Q24 to about $3 million in each of the next four quarters. However, we have seen roughly 25% fewer delistings in the first half of the year versus the prior year period, suggesting that delistings should be less of a revenue headwind in 2025. Lastly, workflow and insights revenue was up 4% in line with ARR growth of 4%. This was driven by continued growth in innovative analytics products, mainly data link and investment. This was partially offset by continued headwinds in corporate solutions. Analytics had a strong quarter with both revenue and ARR in high single digits. Operating margin was 56%, up one percentage point. Looking forward, we expect full-year revenue growth for capital access platforms to exceed our medium-term growth outlook range, with index expected to come in above its range, workflow and insights expected to come in below its range, and with data and listings essentially flat year on year. Moving to financial technology on slide 14. We had another quarter of strong growth with division revenue of $420 million, a 16% increase, and with ARR growth of 13%. This performance reflects double-digit revenue and ARR growth across our three subdivisions. Financial crime management technology delivered 24% revenue growth and 25% ARR growth with 53 new clients in the quarter. Capital markets technology had revenue growth of 14% and ARR growth of 11% on the back of seven new clients and 38 upsells in the quarter. The difference between revenue and ARR growth is driven by the timing of on-prem renewal and professional services fees. Together, trade management services and market tech grew revenue 2%. We experienced strong subscription revenue and AR growth, up 9% for both businesses and up 3 percentage points sequentially. The lower growth in revenue was due to year-over-year decline in professional services revenues. As we mentioned last quarter, in market tech, we had a very large implementation in 2023, which created a $27 million revenue benefit in the full year of 2023. And this year is resulted in subscription revenue, or ARR, of $11 million. We expect this year-over-year headwind to persist in Q3 and abate in Q4. Calypso had revenue growth of 34% and AR growth of 13%. Revenue was higher than the expectation we provided in the first quarter call due to broad strength in sales activity, including a strategic early renewal, 29 upsells, and five new clients. As we look forward, we continue to see solid momentum in the business and expect capital market technology revenue growth for 2024 to remain in line with our medium-term outlook. Overall, for the second half of 2024, we expect more normalized growth across the products within the division versus the first half of the year with consistent growth across quarters. Regulatory technology had revenue growth of 16% and AR growth of 10%, with seven new clients and 58 upsells in the quarter. The difference between revenue and AR growth is driven by Axiom SL, which had 23% revenue growth and 14% AR growth. The 23% revenue growth was primarily due to strong subscription revenue, including a large on-prem renewal, 29 up sales, and one new client in the quarter, partially offset by a decline in professional services fees due to the timing of client deliveries. The FinTech operating margin was 47% in the second quarter, up three percentage points, including the benefit of synergy realization. As we finalize the business combination accounting for ADENSA during the measurement period, let me update you on a change we are evaluating on Axiom SL. As part of this potential accounting change, we would recognize on-prem subscription-based revenue on a rateable basis over the contract term, whereas we currently recognize approximately 50% upfront. This is due to the frequency of critical mandatory regulatory updates that we implement and embed in the Axiom SL software throughout the contract term. We believe this change would enhance our financial reporting and would not change the ADENSA medium-term outlook we had provided, nor our ability to achieve it this year. If an adjustment is made, it would not have a material impact on NASDAQ overall, and 2Q would remain a strong quarter with FinTech revenue growth near the top of its medium-term outlook range. Solutions revenue growth at the high end of its medium-term outlook range. And Axiom SL and Calypso combined revenue growth above 20%. Importantly, combined AR growth of 14% and net revenue retention of 111% would be unchanged. Specifically, at the Axiom SL level, we expect subscription revenue growth to be more consistent going forward and remain in line with our medium-term outlook. Axiom SL 2Q24 subscription revenue growth would have been generally in line with ARR. However, the timing-related decline in professional services fees I mentioned earlier would have driven total Axiom SL revenue growth for the quarter to the low-to-mid single digits. We expect to receive additional information to finalize our analysis in 3Q. And if we make the change, we will provide updated historical information by quarter for 2023 and the first half of 2024 during 3Q and ahead of reporting our 3Q earnings. Now wrapping up the divisions with market services. Net revenue was $250 million for the quarter of 3%. Worth was driven by higher volumes in cash equities in both North America and Europe, as well as in U.S. options. Increased capture in North America equities, U.S. index options high growth, share gains in European equities from a very strong base, and one additional trading day. This was partially offset by lower share in U.S. options and equities, though share for options was stronger sequentially and increased over the course of the quarter. we also had lower USAID revenue. Market service second quarter operating margin was 58%, a one percentage point decline from the prior year, primarily due to continued investments in market monetization and regulatory obligations. Moving on to non-GAAP operating expense on slide 16. This quarter was $539 million, reflecting pro forma growth of 7% or $15 million sequentially. This is within the guidance we provided on our first quarter earnings goal. And as a reminder, second quarters include the impact of annual merit adjustments and equity grants. All in, we generated positive operating leverage with an increase in both operating and EBITDA margin of over 1 percentage point. This included the benefit of synergies this quarter and the funding of additional revenue-related expense. We originally targeted $80 million of net expense synergies through the end of 2025. As of Q2, we have already actioned over 70% of that amount, six months ahead of schedule. The P&L benefit of the actions already taken represents approximately one percentage point reduction in expense growth in the first half of this year. Please note that the actions of 2Q and 3Q have a longer timeline to expense recognition. And as such, we expect the full impact of synergies to moderate expense growth by approximately one and a half percentage points for 2024. For the full year, we expect non-GAAP operating expense of $2.145 billion to $2.185 billion, reflecting an increase to the bottom end of the range to account for strong revenue generation, which increases variable compensation and enables us to invest in growth initiatives while also accounting for the synergy benefits realized in the year. Additionally, we continue to expect a full-year tax rate of 24.5% to 26.5% on a non-GAAP basis. Turning to our capital allocation on slide 17, NASDAQ continued its track record of strong free cash flow generation with $328 million in the second quarter, representing a conversion ratio of approximately 100% over the trading 12 months. This takes into consideration specific one-time costs associated with the ADENZA acquisition and integration. This quarter, we continued to prioritize debt reduction and are ahead of our accelerated deleveraging plan. We paid down net $174 million of commercial paper and ended the quarter at 3.9 times growth leverage versus 4.1 times last quarter. This was achieved while also increasing our quarterly dividend 9% to 24 cents per share, or $138 million, reflecting a 37% annualized payout ratio, and repurchasing approximately $60 million of our shares to opportunistically take advantage of the attractiveness of our stock and start to offset 2024 employee dilution. Looking ahead, we remain focused on deleveraging and expect to pay down the remaining commercial paper balance near term while remaining opportunistic and flexible. We also remain committed to offsetting employee dilution. In closing, we are thrilled with the pace at which we are delivering and the results of our integration. We are executing on our plans with focus and discipline, building a financial technology powerhouse, driving durable growth and profitability for our shareholders. Thank you for your time, and I will turn it back to the operator for Q&A.
spk04: Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone. To withdraw your question, please press star 11 again. We ask that you please keep your questions to no more than one question and one follow-up. And if time permits, we'll be more than happy to take more questions. Please stand by while we compile the Q&A roster. And I'm sure our first question comes from the line of Dan Fannin from Jefferies. Please go ahead.
spk02: Great. Thank you. So within financial crime management, you highlighted price increases as a contributor to growth. I was hoping you could talk about pricing more generally across your businesses and specifically what maybe price contributed to the strong growth in the quarter across the various segments?
spk00: Sure. Well, I would just say that, as we've talked about in the past, price increases are different per product and kind of different in terms of how we structure contracts with our clients within FinTech. So we don't provide you a very specific answer to that question, but I think that if we think about what we've said, at least for the Axima Cell and Clipso products in the past, is that about half of the revenue increase that we see in any given quarter comes from upgrades and upsells of our clients, and the other half comes from new sales and price increases and price changes we make within the contracts. Some of our contracts have CPI increases and some where what we would do is we would upsell our clients or increase price upon contract renewal. So that would mean that we would have a constant price for a period of time and then increase price on contract renewal. We do that on the basis of increased value to the client or the fact that the client themselves are growing and therefore they're getting more value out of the product. So it kind of depends on the product, Dan.
spk02: Understood. And You mentioned that 10% of the pipeline is made up of cross-sell opportunities. I guess in a lot of upsells and momentum, as you highlighted in the business across a lot of the businesses, I was hoping you could talk about kind of the use cases you're seeing early within the cross-sell and maybe how that dialogue is progressing from what you're having success today and where you see that momentum in terms of the actual products.
spk00: Sure. Well, within the quarter, as I mentioned, we had four cross-sells and two of them were selling Axiomacell to Calypso clients. And so that really comes from the fact that we have a really strong relationship with our clients in Calypso. They have new regulatory obligations that they're having to become ready for and they've chosen to work with us. And one of the benefits we have is that we can actually, we have a data API connector between those two products. So we can take data directly out of the Clipso platform and feed it into Axiom SL and make it much easier to implement the Axiom SL solution for those regulatory obligations. So that is definitely helping to drive demand. We also, in terms of our cross-sell campaigns, we have one cross-sell campaign that's really focused on our exchange clients, where we have clients where we provide clearing technology And Calypso has amazing collateral management capabilities, and so we are working with them to show the benefits of adding the Calypso collateral management into their clearing operations. And then we also have, as I mentioned, the Calypso Axiom SL. And then the third one is actually looking at our Verifin clients across the United States and offering both treasury management as well as Axiom SL regulatory reporting solutions to the broader bank community. Those are the areas where we're doing strategic campaigns, and we're definitely seeing that feeding the funnel. But also, you know, frankly, as I mentioned in July, we have one of our great Tier 1 clients for Axiomacel and Calypso has now signed up to take Verifin. So I think the strength of our relationship with them across all of our, you know, frankly, all of our business has been a driver of having them trust us with their anti-financial crime needs as well.
spk02: Great, thank you.
spk04: Thank you. And I show our next question comes from the line of Alexander Blosbein from Goldman Sachs. Please go ahead.
spk10: Hey, good morning, everybody. Thank you for taking the question. I was hoping we could start with discussion on momentum you guys are seeing at Adenza. And you provided a number of different KPIs, both in terms of the upsells and the number of new clients you've signed and the cross-selling opportunities. Can you help us maybe frame what these sort of KPIs mean in terms of the revenue opportunity you see on the back of these wins? So I don't know if it's a revenue pipeline or revenue backlog. You can kind of set a frame around these wins, but just trying to better understand what this could mean in terms of revenue growth. Thanks.
spk00: Yeah. I mean, I think that the best way to measure that is through ARR. Because the ARR, the contract value is of the new sales are factored into ARR in terms of the annualized contract value. And so that as you see the ARR coming in, I think it's 13% across all of FinTech. And then we've given you the ARR growth for each of the subdivisions. It really does help you have a predictive effect on the subscription revenue that's coming in across those businesses going forward. And I think we give you a lot of the ARR figures, both in the script and in the release and presentation. So I think that's what we look at in terms of the overall health of the business, the overall health of how we look at the forward potential, the subscription revenue. And then, of course, there is also the professional services revenues, and we try to give you some understanding of the dynamics there. As we've mentioned before, for the XMSL and CLPSO combined properties, When we look at the overall outlook for the business, we need to have some outlook for revenue. It's slightly below our AR expectations because of the fact that professional services fees grows a little bit more slowly in general over long periods of time than the subscription revenues. But I think that's the way to kind of evaluate the business.
spk10: Great. Awesome. Helpful. And then on Verifin, you highlighted the Tier 1 International Bank, which I know is an important market for the firm. Can we maybe spend a little bit more time on sort of how you see that opportunity set and the revenue contribution from international markets shaping up for Verifin as you kind of push further into that market?
spk00: Yeah, great. Well, first of all, today, the Tier 1, Tier 2 banks, the revenue contribution is still very small because we're still signing new clients, we're implementing them. We don't start recognizing the revenue until we implement in terms of making sure that we have them up and running. And the implementation times are ranging from, I would say, six months to a year, depending on the complexity of the implementation. And most of the new sales that we've had in the Tier 1, Tier 2 space have focused on payments fraud. We also have this new consortia-based check fraud solution that's really exciting that was definitely driving demand. And as we go into the international banks, one of the things that we've been focused on, both in Canada and the U.K., is looking at payments fraud across, you know, kind of what I call international payments fraud into their U.S. operations and other parts of the world. But that's where we really have this incredible strength in our business and in our solution. We can cut down false positives, you know, anywhere from, frankly, you know, 20 to 40 percent, depending on how they implement it. We can increase fraud found. and that's been really exciting for the banks to see. We run these proofs of concepts to prove out the solution, and it's pretty remarkable, actually, as to the benefit they get. Taking that proof of concept and turning it into a contract takes time, so we were super excited to see our latest Tier 1 sign in July. The proof of concept was done probably by April or so. I'll just give you a sense.
spk10: Great. Awesome. All right. Thank you so much.
spk04: Thank you. And I show our next question, comes from the line of Kyle Voigt from KBW. Please go ahead.
spk05: Hi, good morning. Maybe just the first question on the deleveraging, you know, that's coming in ahead of expectations. You noted that repaying the additional CP is a priority, but I think there's only $50 million left on that, and I think you're generating close to $250 million plus of free cash flow for dividends. Can you just help us frame what's the preference here in terms of enacting further repurchases opportunistically on a go-forward basis after you repay the $50 million remaining? Or should we think about the priority really getting that net leverage lower and simply letting the cash build up on the balance sheet near term?
spk03: Thank you very much, Kyle. We remain focused on the capital priorities that we have outlined at Invest Today. So, of course, always the organic growth first, and then the deleveraging remains very important. So, you are right that we would start with the CP and the balance that you mentioned is approximately correct. And then after that, we would be opportunistic. We, first of all, have done about half of the employee dilution-related share repurchases So I think you would expect us to continue to do that. And we use the word opportunistic, flexible, because there are other things we could be doing, which is around either debt or equity.
spk05: Okay, understood. And then just a follow-up, and I hate to use this as a question, but I just want to clarify something specifically. that you said, Sarah, on the listings business. I know you said $3 million of initial listings amortization headwind starting the third quarter and the fourth quarter. Just kind of clarify, is that on a year-over-year basis, or are you talking about an incremental $3 million headwind on a sequential basis in 3Q and then another $3 million sequentially in 4Q?
spk03: What I gave is that in 2Q it's $1 million year-on-year, and then in 3Q, and after for the following three also, it would be three million. So you could add two on the sequential, but it's year-on-year. So three million year-on-year, one million becomes three million between . Thank you.
spk05: Understood. Thank you very much.
spk04: Thank you. And our next question comes from the line of Michael Cho from JPMorgan. Please go ahead.
spk07: Hi, good morning. Thanks for taking my question. I just want to follow up on Verifin as well. Dina, you talked through kind of the proof of concepts going and it seemed like a pretty quick turnaround for the most recent tier one from April and to planning in July. I mean, can you just give any more color around the pipeline or around the additional proof of concepts you're undertaking right now for the the tier one and tier two clients? And then just like broader, longer term, like what do you think the right pace of new client additions should be for this cohort of tier one and two clients, you know, as we look further down the road, um, as that, that sales were scaled as well?
spk00: Yeah, sure. Yeah. So right now we've actually had an increasing number of POCs and we're, you know, we're, we don't give specific numbers, but it's a, it's a really healthy number of, of clients. Um, evaluating our solution with the proof of concept that we have underway. Over time, we'd like to actually think we won't have to run as many because we'll have proven the solution out enough times across clients that it just becomes something that people fully understand and they don't necessarily need a proof of concept, which is why we're, you know, right now that number is building. As we're gaining more traction, we're assigning clients, more clients are curious about it and they want to understand the benefit to them. But over a period of years, we'd like to think that it'll just become part of the flywheel. So I would say right now we should continue to expect a small number of clients over a period of a year, not necessarily every quarter, as we've kind of shown, but hopefully we're going to see more momentum and more regular signings in the years ahead. So it just builds on itself. And that certainly has been the experience of Verifin over time. And they leg into a new segment of the banking industry. They'll get, you know, ones or twos kind of in a quarterly basis. It'll start to trickle in and then it starts to become more of a regular pace. And then they start to really demonstrate the strength, particularly with the consortium data that they have, that really kind of feeds on itself and therefore it gains momentum. But I can't give you a specific, I wish I could, give you a specific understanding over how much time that would take. But But we're definitely measuring in periods of years at a time, like how do we gain more momentum? How do we sign more clients each of the years and in the years to come? But that's about as much color as I can give you right now.
spk07: Okay. No, that's great. Thank you. And then just for follow up, just inside the capital market tech within FinTech, clearly some good revenues tailwinds happening there. I mean, So I think you call out a few moving pieces there, but can you just flesh out maybe the quarterly, quarter-to-quarter uptick in revenues and if there's anything one-time or large from clients there? And then I think you also mentioned maybe like more normalized quarterly year-over-year growth in the second half versus first half. Can you just flesh that comment out as well?
spk03: Thank you. So basically what we had is really a broad momentum across our businesses. but specifically here also in the Calypso where we had one strategic early renewal, but also 29 upsells and several new clients. And so it was five new clients. And so as you look forward, you are going to continue to see solid momentum in the business. And we told you also that 2024 would remain in line with our medium term outlook. But of course, Given the type of first half we have had, I think it was not a surprise that we mentioned that we would expect more normalized growth across the products within the division versus the first half of the year. And also, we pointed out consistent growth across quarters. And so, this is what we said at the capital market technology revenue level.
spk00: Yeah, and I just want to make sure. It was actually within the subdivision, which is the capital market subdivision.
spk07: Yeah. Mm-hmm. Okay, great, thank you.
spk04: Thank you. And I show our next question. It comes from the line of Patrick Moley from Piper Sandler. Please go ahead.
spk06: Yeah, so I just wanted to go back, Adina, to your comments on the IPO environment. It sounded like you said that you expected the landscape to sort of improve throughout the remainder of the year, but you didn't expect it to manifest until the first half of 2025. So could you maybe just clarify your expectations for the rest of this year and when you expect that to show up in the financials.
spk00: Sure. Well, I think we've seen a modest improvement year over year. I think, in a way, I think we've all been surprised by the fact that you've got strong market performance in general, but a continued, I would say, muted IPO environment. Now, we are seeing a very good week. We have the largest IPO of the year happening today, and we had another great IPO yesterday. But I think that we still are seeing it trickling in like that, not necessarily a steady stream of IPOs coming to market in size. And so as we look out over the pipeline and certainly the conversations we've had with clients, we do think that we'll continue to see a modest improvement year over year in the IPO environment, which of course last year was not a strong year. But a lot of the conversations we're having particularly in the technology space, has been more geared towards the first half of 2025. Now, that's changed, right? So if there's some positive momentum that happens in the economy, positive things that are happening as we go through the fall, I think you could see the door opening up because more and more companies are getting ready to go out. But I still think a lot of them are thinking that they'll wait past the year and go in 2025.
spk06: Okay, great. And then just to follow up on index options, you're seeing really strong momentum there. I think you mentioned that revenues had doubled versus last year. Volumes were up, I think, 50% year over year. So it does seem like you're taking price there. Could you maybe just update us on the broader vision for index options at NASDAQ and maybe your approach to pricing potentially at the expense of not picking up as much market share as you'd like? Just kind of how you think about that.
spk00: Well, I think, first of all, we're really excited about how the index options business is developing. And I think that the trading ecosystem, as well as investors, are recognizing the benefits of being able to hedge their index exposure through the options markets. And obviously, we've seen that with other index franchises. But now with the NASDAQ 100, we're really building momentum and leveraging both futures, where futures volumes were up 25% year-over-year quarter. as well as in terms of the options business. And now you have more ability to do that. So very excited about where that's going. It is something where we have it as a premium part of our options franchise because I think that the benefits that our clients are getting from the hedging capabilities are very strong. And so it kind of warrants the fees that we charge there. It is not having a, you know, that's not having an impact on demand. The demand is really strong and continuing to grow. Now, we've done a lot of work. There's been a lot of legwork over the last several years to build up an understanding of the options, how to use hedging. We have a data capability that we give out, you know, we provide to the clients to help them understand, you know, just do a lot of analytics on it to help them understand how to use the options the right way. And so the educational process we've had, frankly, over three years, I think is really now paying off. And we expect to continue to grow. We will be looking at additional indexes additional indexes that we want to bring on to our index options franchise. But even now, the other thing I would mention is that there's also a really cool flywheel back to the index business. So the index team and the options team have been working hand in hand to make this work really well because there's benefit back to the institutional community with index and their ability then to have a better hedging tools and their ability therefore to adopt our index products more successfully So that's another part of the flywheel that's coming out of this.
spk04: Very helpful. Thanks, Adina.
spk00: Sure. Thank you.
spk04: Thank you. And I show our next question comes from the line of Craig Segenthaler from Bank of America. Please go ahead.
spk01: Thanks. Good morning, everyone. Morning, Craig. So we had a question on Sylovis. Back in May, Bloomberg reported that you're considering a sale of Sylovis. And while this could help you reach your financial leverage target faster and maybe the next deal, we were just curious, given the news, because Sylovis' strategic fit fits pretty well within your objective to provide software data and other services in the financial service ecosystem. And arguably, there's other businesses, maybe like the Nordic Exchange, which doesn't fit as well. So I just wanted to comment on the potential for NASDAQ to sell existing businesses. Thank you.
spk00: Yeah, so I won't comment on any particular rumor that's out there, but I would just say this. We do a very detailed review every year of our capital allocation. We look at our businesses strategically, financially, across several different factors, and evaluate how each one of them fits into our overall client experience, and making sure that we're always the right owner for the businesses. And as you've known since I became CEO many years ago now, seven and a half years ago, we've made decisions to divest of certain businesses where either we're just not the right owner of the business because our clients are not seeing us as a strategic owner. They might see us as an owner. They definitely understand that we own the business, but it's not necessarily strategic for our franchise. Or we have capital allocation priorities that really skew towards different parts of our business. In terms of, you know, you did mention areas of our business. I would say, I do want to say one thing. You know, we view our Nordic business to be very strategic to NASDAQ. And I've said this on prior calls. The Nordic exchange business, they are the best exchanges in Europe. The innovation ecosystem that exists in the Nordic is incredible and very consistent with the U.S. And I would say that we do a great job of operating those markets. And we're really proud to be the operator of the Nordic markets. The other thing is the team there really contributes a lot to our broader technology business. So we deploy members of the Nordic team out to work and help our market tech clients around the world. We have a great set of clients in the Nordics that are now wonderful clients in our fintech solutions. So there's a lot of strategic intersection there. with our Nordic business. I do want to provide a defense of that. But generally, Craig, we do this work and we make these decisions over time because we look at it in terms of the long-term strategic fit to NASDAQ.
spk01: Thank you, Athena. I had a follow-up on the response to the last question on index options and specifically the NASDAQ 100 index. What is your desire and ability to expand NDX with zero DT options. And then also with rising retail engagement. And, you know, there's a lot of interest around tech overall. So it fits perfectly in here. I was curious on your comment about launching other indexes. I'm just curious in terms of what you could do there.
spk00: Yeah, I mean, we always look at are there index products that we think, as you mentioned, have really strong retail appeal, but also institutional appeal. where they're large enough and there's enough assets in there to drive liquidity into a futures or an options product. And really looking at it from a hedging perspective, we have a whole range of index products beyond the NASDAQ 100. We have thematic indexes in terms of different technology trends like cloud and IT security, AI. We have thematics across different investment strategies like momentum strategies, dividend strategies, things like that. And so to the extent we think that there actually could be a trading ecosystem we could build around that, we will consider it. We don't have any particular index product right now that we're targeting, but I would say that we do a lot of great analysis on that. And then, you know, in terms of how we structure the options and how we look at option duration, we will obviously evaluate that in the context of investor appetite, and we'll work with the SEC on that when appropriate.
spk04: Thank you. Thank you. And I show our next question comes from the line of Alex Cram from UBS. Please go ahead.
spk08: Yes. Hey, good morning, everyone. Just wanted to come back to what you called out on Calypso or capital markets with that early strategic renewal. Can you just explain what exactly happened there? Why? And is that something that we should expect more often? And then maybe related to that on the impact side, Looks like AR up 25 million quarter over quarter in that segment. Can you dimensionalize how big that renewal specifically was? Also on the transactional side, you beat me pretty handily. So maybe more than 10 million. Is it all related to that too? Just trying to understand how big some of these individual renewals could be. Thank you.
spk00: Yeah. So I would actually say that having early renewals is not totally unusual, right? I mean, we call it out just because we're really excited about the fact that we had a strategic client who chose to renew early and extend their contract. And I think that it's something that we're proud of. Now, as we mentioned, with Calypso revenue, just to remind everyone, our view is that ARR is a very good reflection of how you should look at the overall health of the business, the stability, because of the fact that the license fees, you have half the license revenue recognized up front and half recognized over the life of the contract, but our cash revenue, how we get the cash in the door and the overall ACV value of those contracts is better reflected in ARR. So we continue to see the ARR being very stable, very healthy. We think that's fantastic. We will have events like this early renewal that happen on occasion. We also had, as we mentioned, five new other clients, 29 upsells. All of that, Alex, contributed to the strong revenue in the quarter. But over time, I think as Sarah was saying, over time, kind of looking at ARR as a better reflection of the overall growth characteristics of the business, I think is a better way to look at it over time as opposed to in a single quarter.
spk03: The only thing I would add is, by definition, an ARR impact of a renewal is not as much as a new client or an upsell. And so if you were focused on why we had a good performance on ARR at Calypso or in Capital Markets Tech, it was really because of the breadth of everything that has happened.
spk08: That's helpful. Thank you very much. And then secondarily, topic that we talked about a lot a few years ago on the back of the strong listings environment that we had at that point. There was a lot of excitement around eventually getting IR solutions on the back of that when those start paying. I know obviously there's been a decent amount of few listings since then, so I guess this is not really coming through, but maybe you can just tell us where we are in that if you're still seeing a decent amount of upsells or is that unfortunately it's just not coming to fruition given the kind of companies that were listed three years ago or so?
spk00: Actually, we are seeing conversions of our clients, you know, to paying clients at the end of the free period. So that is still happening, Alex. But I think that there are other headwinds. So a few things to mention on the IR services, and I would actually say this across corporate solutions. So the first thing is that we obviously gain new clients through IPOs, right? So that's one of the avenues for us to gain new clients, whether that's for our IR solutions, our ESU solutions, and our governance solutions. So that is definitely a funnel, a pipeline for us. Now, they then become paying clients on their base services over a period of two to four years, depending on the way that the IPO is structured. But we also can upsell clients in that period of time. So when you have a healthy IPO environment, you have new companies coming in, and then you're showing them the base services and you can upsell them on new services, that really does become a really nice flywheel right after the IPO. And then you have an additional opportunity when, as you mentioned, the IPO package rolls off. And those IPO packages are rolling off. And so we are still seeing that happen. But the flip side of it is when you have delistings, then you have paying clients who are no longer listed, and that obviously creates churn. And you have other clients who are continuing to take the services, but they are maybe taking fewer services because their IR budgets are being squeezed. And so that's becoming the contra, I would call it the contra flywheel of having more delistings. I would say, you know, when we look at, When we look at the overall conversion rates, they are lower than what we've seen on an average basis. But they are, you know, but I think that's partly because of the fact that some of the companies are delisting. But those who are seeing lists, they were seeing relatively normalized conversion rates.
spk08: All right. Great color. Thank you so much.
spk04: Thank you. And I share our last question comes from the line of Owen Lau from Oppenheimer. Please go ahead.
spk11: Hi, good morning. Thank you for taking my questions. So for AI, you have many initiatives going on. And when we look at Dynamic Mellow, you highlighted a 20% increase in bulk volumes and improvement in fill rates. Could you please talk about how it could impact your market shares and financials over time and how difficult it is for your client, for your competitor to launch similar products? Thanks.
spk00: Thanks, Owen. Well, I think on the first question, This is kind of a specialized order type, so it's not going to be something that's going to have a massive effect on market share, but it is a premium product. So our clients get a huge value out of it. It's a really nice way to get a higher fill rate in size at the midpoint. So it's a premium product in terms of the pricing that we charge. So it's more of a revenue opportunity than it is a market share opportunity. In terms of being able to replicate it, we do provide in our filing an explanation of how we do it, but I would tell you that it took several years for us to fine-tune it with our AI team, data science team. It's actually quite complicated and complex to structure the right way, to make sure you're getting the right outcomes. We're constantly fine-tuning the various data points and the weightings of those data points as to how they're affecting the timer on the product. I would have to say it's actually extremely hard to replicate, even though kind of look at it as like the formula is available, but how you actually manage that formula is very much a part of the greatness of our technology division, frankly.
spk11: Got it. And then for financial crime management technology, we heard that some other enterprise software companies had to lower the ARR guidance because of some uncertainty in the macro environment. But the momentum in your business seems to be quite robust, and you highlighted the new T01 client signed in July. Could you please remind us how Verifin could fare or grow in different macro environments? Is there any reason we should be worried about if the macro environment turns? Thanks.
spk00: Sure. Well, I would actually talk about it. Let's talk about the fintech level, and then we can talk about it in specific areas. But The way that we look at our FinTech solutions is we provide mission-critical technology that helps clients manage risk, manage their regulatory obligations, and manage criminals out of their networks, as well as providing core capital markets technology to the entire exchange ecosystem. So to us, those are very durable, durable kind of demand drivers. Managing risk, as the world gets more complicated, the world gets more risky. And I think our ability at a global scale and a global level to be able to help our clients manage risk in their trading books, in their treasury operations, in their capital obligations, as well as then also to manage risk in markets is just tremendous, honestly. And so I think that has actually been a really great demand driver. I think that as we look at the regulatory obligations, those are extremely durable around the world. Different regulators go at different paces, but there's always regulation that's changing. Now, changes, it's really changes in regulations that drive demand, as well as the growth. Banks are growing and expanding their businesses into new countries. That also drives great demand. And so those are things that are also quite durable. I think then on anti-financial crime, as we've mentioned before, it's a $3.5 trillion problem between anti-money laundering and fraud. we are just getting started. And so it's not just the fact that the TAM is really large, the total market opportunity, but our solution is unique. I think our solution is remarkable in terms of the way that we bring data together, the way that we are able to look at consortia data in a way that really allows us to be very curated in the topologies we apply using AI and in automating workflows to make it as efficient as possible. that I think that creates a great opportunity for us. And we're only really in North America today, so we have a lot of opportunity globally there. So, you know, I think, Owen, that we've chosen to get into this business in a way with very specific ambitions to be that solutions provider of the most complex challenges that the banks face in all economic environments. And that is what we think is going to create durable growth for us.
spk02: Got it. Thanks a lot.
spk04: Thank you. That concludes our Q&A session. At this time, I'd like to turn the call back over to Adina Friedman for closing remarks.
spk00: Thank you. Well, as you heard this morning, NASDAQ continues to make progress on our three key priorities of integrate, innovate, and accelerate. And through our complementary and integrated solutions, NASDAQ is delivering consistent growth, and the one NASDAQ strategy is accelerating our evolution as a trusted technology provider to the financial services industry. We look forward to updating you on our strategic progress in the quarters to come. And thank you all for joining and have a great day.
spk04: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-