London Stock Exchange Group plc (LSEG) Earnings Call Transcript

Good morning, and welcome to the LSEG Q3 results. [Operator Instructions] I would like to remind all participants that this call is being recorded. I will now hand over to David Schwimmer, CEO of LSEG; and Michel-Alain Proch, CFO, to begin the presentation. Please go ahead.

Good morning. Thanks for joining the call. I'm here with MAP, our CFO; and Peregrine, Head of Investor Relations. We continue to deliver very strong growth. Revenue is up 8.8% in the third quarter and 8.6% year-to-date. All our businesses are contributing to this growth. Markets continues its outstanding year, with our sustained investment ensuring it's well positioned to help customers navigate the ongoing economic and political uncertainty. Our subscription businesses accelerated, growing at 6.6% in Q3, up from 6.3% at H1, and on track to deliver 6.5% for the full year. We are raising 2026 guidance again to reflect this continuing strength. We now expect full year revenue of at least 8%, putting us on track for the strongest year of growth since 2018. We're also raising our guidance for EBITDA margins and cash generation. MAP will walk you through those in a moment. Taken together, our revised guidance speaks to a business that is growing faster, is more profitable and is generating more cash than anticipated at the start of the year. Our strong cash generation gives us significant flexibility in capital allocation, combining bolt-on M&A and significant cash returns to shareholders. I've spoken before about the culture of innovation we've embedded at LSEG and the pace of product development this is driving. Last week, we announced a partnership with NVIDIA that will reduce the time for customers to analyze our massive Tick History data set from days to minutes. And last month, we launched World-Check Resolve, a new AI layer which reduces false positives by around 75% and saves our customers a lot of manual checking. Where we have these leading positions, we continue to invest to maintain that gap and drive growth. On AI, we're driving adoption at scale. 95% of our top 200 customers are now using our AI solutions. I'll come back to this in a moment. As you will have seen, we have had 2 really exciting developments this week. On Monday, Tradeweb announced its acquisition of Trumid, a high-growth electronic credit trading marketplace. [ Billy ] and [ Sarah ] have already taken investors through the logic of this deal, but I'll recap this briefly later. And this morning, we have confirmed the acquisition of Octus, a leader in the provision of credit solutions in the illiquid and private credit space, backed by highly proprietary data. This deal fits squarely within our criteria in terms of both strategic fit and financial discipline. It's highly complementary to our existing fixed income product suite and enhancing to growth. Much more on that later. Finally, on capital allocation, we have made record returns to shareholders this year, returning GBP 3.4 billion in the first 9 months, with GBP 800 million remaining on our current buyback program in Q4 and Q1 of next year. We're on track to return around 10% of our market cap in total since January of this year. We also have capacity for an additional GBP 1 billion to GBP 1.5 billion in 2027. We built a business capable of partnering with customers through the whole trade life cycle and data value chain across multiple asset classes. Trading and data are ever more intertwined as financial markets grow and increase in sophistication, reinforcing our strategy and strengthening our position. It's inevitable that the external environment will evolve, whether that's asset prices, issuance trends, market volatility or GDP growth, but the balanced and diversified nature of our subscription and transaction revenues and our alignment with multiple long-term growth drivers position us to perform well in almost any environment. You can see the power of this all-weather business model in the steady and accelerating growth on this slide. Before I hand to MAP, let me update you on the significant progress we're making in the delivery of our AI solutions and how they're resonating with our customers. You'll recall our focus for this year was rolling out solutions and driving customer adoption. With 95% of our largest customers using at least 1 of our AI solutions and 80% of our top 50 customers using 2 or more, we've made real progress in driving adoption in Q3. We had 47,000 users of Workspace AI search at the end of Q3 and have just passed the 50,000 mark. User engagement with the product also continues to deepen, with the average queries per user up 30%. Crucial to this success are the ongoing enhancements we're making, including scheduled queries through Microsoft Copilot, a bespoke library of user prompts and greater export functionality. LSEG Everywhere continues to build. Over 2/3 of our largest customers and over 300 in total have now connected or are onboarding to our MCP. But our customer engagement on enterprise AI goes far beyond just MCP. As highlighted at the first half, customers increasingly want to access our AI-ready data via multiple distribution channels, including APIs, cloud platforms and traditional bulk feeds. Overall, we saw a 50% increase in AI-related commercial discussions in Q3, and 80% of AI license sales involved a customer buying new or additional data sets. With new AI distribution channels, our customers want more of our data. AI is enhancing the value of our data, showing that our data and analytics business is more valuable in an AI world. With that, let me hand over to MAP to take you through our financial performance in more detail.

Thank you, David, and good morning to all of you. As you just heard, we delivered another strong financial performance in the third quarter. Organic revenue up 8.8%. Data & Analytics was up 5.2% as our ongoing innovation and investment in content drives demand across our solutions. Data & Feeds continue to be particularly strong, up 7.5%. FTSE Russell was up 10.2%, with subscription revenues reaccelerating as we said it would. We continue to see sustained demand for our screening and identity verification services in Risk Intelligence, which grew 9.8% in Q3. Taken together, our subscription businesses grew 6.6%, a good acceleration from the 6.3% in the first half. Our market division is sustaining its very strong performance, up over 12%, with strength across all the businesses. OTC derivatives was the standout performer, with continued strength at SwapClear and almost 30% growth in client volumes in Q3. We continue to work with the industry to drive adoption of our Post Trade Solution for uncleared OTC products, signing 4 new members to TradeAgent in the quarter. Tradeweb also grew strongly, benefiting from sustained innovation and investment against the backdrop of shifting interest rate expectation. That drove 22% growth in volumes in Q3. Finally, cost of sales grew below revenues, benefiting from the change to the swap tier agreement we made at the end of 2025. As a result, we delivered almost 10% growth in gross profit for the quarter. Turning to our subscription revenues. We are well on track to deliver full year subscription growth of around 6.5%, an acceleration from the 6% growth in 2025. These revenues are highly recurring, typically around [ 9% to 3% ] annually, and that brings good visibility. New sales made in previous quarters feed through to revenue once the product is installed and activated, and we have a good line of sight to these time lines, too. The ongoing investment we make into content, capabilities and distribution is reflected in product pricing and annual increase in LSEG data access agreement, representing 18% of G&A revenues. And over time, AI revenues will make a growing contribution to the subscription revenues with a long run rate for growth. Turning now to our markets division, which has seen another outstanding quarter. Volume interest rate swaps on our trading and clearing platforms were very strong in Q3 as customers turn to our solution amid economic and political uncertainty. These dynamics also supported strong volumes across fixed income, equities and FX, as you can see on this slide, putting market condition to one side and taking a long-term view. These are leading businesses with strong structural growth drivers. Our sustained investment in helping -- is helping drive this growth by developing new solutions and expanding reach. Through this strategy, we have delivered a 5-year CAGR of over 9%. Turning to our full year guidance, most of which we are raising once more. On revenues, we expect organic revenue growth in 2026 to be at least 8%. This is a meaningful increase to the guidance we issued at H1. We are raising our margin guidance, again, expecting between 100 and 120 basis points of improvement this year. This reflects our continued strong top line performance and our focus on efficient management and delivery of operating leverage. We reiterate our CapEx guidance at 9.5%. And finally, our guidance for free cash flow that already reflected the highly cash-generative nature of our business model, but we think we can do even more this year and now expect equity free cash flow to be at least GBP 2.8 billion. As David said earlier, our strong cash generation is allowing us both to execute on M&A when it makes sense and return cash to shareholders. And you can see on this slide that we have returned a record amount of capital to shareholders this year, and we are on track to return around 10% of our market capitalization in a little over 12 months. With that, I will hand back to you, David.

Thanks, MAP. I'll now spend a few minutes focusing on the Octus acquisition. We are really excited about this transaction. It's a great business. And the timing is excellent, given the work we have done already to transform our data platform and scale up in fixed income and private company data. I'll explore all of these points in more detail, but to summarize here, Octus is a leading provider of credit solutions with a focus on illiquid and private credit. Its data is highly proprietary. Its financial track record is outstanding, with very strong growth and improving margins in a market which will continue to grow at a double-digit rate. Our margin guidance is unaffected by this deal. Access coverage and customer footprint are highly complementary to LSEG's and will unlock significant product and cross-sell opportunities. The transaction will be accretive to our top line growth and accretive to EPS after 2028, and we are retaining a high-class management team led by Kent Collier. And as MAP will lay out, this deal fits well in the context of our broader capital allocation strategy. We're completing our current GBP 3 billion buyback, and we believe investing in our shares at this level continues to be a good use of capital. We can see capacity for a further GBP 1 billion to GBP 1.5 billion of buybacks in 2027, taking us to the top end of our leverage range a year from now. Octus looks a lot like our D&A business, but focused on a specialized asset class, illiquid and private credit. For example, distressed debt, leveraged loans and CLOs. And its solutions span the full credit life cycle, idea generation, deal tracking, detailed analysis, underwriting and portfolio and risk management tools. As with D&A, it delivers through feeds, APIs and workflow platforms. And these solutions are based on differentiated and proprietary data sets. Private credit is not like the investment-grade corporate bond market. Documentation can be extremely hard to come back. Structures can be highly bespoke and complex. And sometimes, you have to spend days sitting in courtrooms following legal processes. Even accurate financials on private companies can be hard to trace, as many of you have found over the last few days. Octus has been building up this data and associated insight and expertise for over 12 years, and it includes thousands of contributory records from customers, issuers and investors, often detailed documents on specific loans. This is just not possible to replicate. We've done extensive customer due diligence, and it is clear from the feedback that Octus solutions are extremely important for day-to-day research, workflow and risk management. So like our existing data assets, this is a business that is becoming more valuable in an AI world, and Octus has built strong AI functionality, with MCP connectors and its own credit AI platform bringing proprietary intelligence and analytics directly into customer workflows. To give you a couple of stats, just in 2026, its AI platform has generated more than 4 million automated classifications of complex market data and had 0.5 million tool calls to its MCP. Octus is a high-growth business in a high-growth market. Revenue has grown at a strong double-digit CAGR since 2022. In fact, it has compounded at a double-digit rate since its inception, now has over 750 customers and 40,000 individual users with very high retention rates. The private credit market is growing at around 10% to 15% annually. There are more participants every year, and as I just mentioned, greater deal complexity just drives increasing demand for specialist solutions. And the user base is broadening, from investors and advisers to underwriters, risk managers and compliance teams. As we're seeing in our own business, AI is driving a range of different delivery mechanisms, increasingly delivering Octus' proprietary credit solutions directly into customer workflows. Revenues are currently weighted around 80% to the buy side and legal profession and around 70% to the Americas. So as I'll cover on the next slide, that is highly complementary to LSEG. Let's look at how these businesses will fit together and create opportunities for additional growth. First, the combination of LSEG's more liquid and public credit coverage combines with Octus' illiquid and private focus to give coverage of the full credit spectrum. Second, we are able to drive a step change in our overall private company's coverage, marrying all the work we have done building our private company data set with Octus' 95% covered in the private credit universe. This will give us leading private markets coverage. Third, our business today is weighted to the sell side and global institutions, where we have deep strategic partnerships. We are underpenetrated on the buy side where Octus excels. This presents a significant cross-selling opportunity. And similarly, for our respective geographic footprints, we will bring global distribution for Octus, which until now has been more focused in North America. Now MAP will spend a couple of minutes on the financial aspects on Octus and the deal.

Yes, David. And on the financial of -- for LSEG, this deal is also highly attractive. We have talked about the revenue and growth profile. This will be accretive to D&A growth and will, of course, be incremental to our 7% guidance for our subscription businesses in 2027. It is also already generating really strong margins, which is a sign of high quality for a business that has achieved such strong growth, and we only expect those to improve as the top line growth continues. Octus has a roughly 40% adjusted EBITDA margin and a strong operating leverage, which is allowing us to confirm the group EBITDA improvement of 150 bps over 2027 to 2029 from the 2026 baseline. Putting this together, it is neutral to EPS in 2028 and accretive thereafter. David, back to you.

Thanks, MAP. As you will have seen a couple of days ago, Tradeweb announced its planned acquisition of Trumid, an electronic credit trading platform. You can see how it fits together with Tradeweb on this slide. And just as Octus is for LSEG, Trumid is highly complementary to what Tradeweb does today. It extends Tradeweb's presence into gray markets and new issuance, has great customer penetration with hedge funds and additional specialized dealer protocols. We think this is a great deal for Tradeweb and LSEG. And when you combine it with what Octus does for us and our ongoing organic investments, we have made huge strategic strides with these 2 transactions. We are building a global leader in fixed income, in proprietary data, news and analytics, with AI-enabled workflows and execution tools and with trading [ venues ], operating from public investment grade through high yield to private and distressed. This is a great growth engine. Yes, it has been a big week for M&A, but we think about capital allocation over multiyear periods. We have looked at many deals over the last 5 years, and very few made the cut in terms of strategic fit or financial return. These acquisitions do both. At the same time, we have bought back GBP 8 billion of our own shares since 2022, accelerating significantly over the last 18 months, with our share price depressed. We'll continue to buy back shares because we think that provides attractive returns. The current GBP 3 billion program will complete by February next year, which means another GBP 800 million across Q4 and the first 2 months of 2027. And then we have capacity for a further GBP 1 billion to GBP 1.5 billion through 2027, which would take us to around the top of our leverage range by the end of next year. So I appreciate that's a little longer than our usual Q3 presentation, but there are a lot of great things happening across LSEG. We're delivering record results and raising full year guidance. We're driving strong adoption of our AI solutions and expect that to make a growing contribution to revenues. We are driving an unprecedented pace of innovation across the business. I've spoken to some of this already, but this is also a good moment to remind you that our Head of Markets, Daniel Maguire, and his team, will host an online investor event in December to give more insight into our initiatives across digital markets. Finally, we continue to invest, both organically and where it makes strategic and financial sense through acquisitions to further enhance our customer proposition. Through that strategy, we are building a business that is better positioned than ever for sustained long-term growth and value creation. And now MAP and I are happy to take your questions. Peregrine, over to you.

Thanks, David. [Operator Instructions] So operator, I'll hand it to you.

[Operator Instructions] And your first question is from the line of Andrew Lowe of Citi.

I just wanted to ask on the Octus deal, it feels a gap in your [ debt ] coverage with the private credit. As you look to explore options to fill this, did you look at building this data organically? Could you just talk through what the challenges of doing this were that led you to go down the organic routes? And sort of related to that, if you could maybe talk a little bit more about the moats to Octus' data and provide some tangible examples of why the data cannot be found elsewhere? And if Octus can access the data, what stops others from replicating its offering over time? And what's the right to win in the market?

Thanks, Andrew. Great questions. We always think about the build versus buy equation. And on both private markets data and fixed income data, we have been investing substantially in those areas. And we have added a significant amount to our fixed income content, our fixed income evaluated pricing, corporate actions, et cetera. And we have also added extensively to our private assets data over the last few years, including bringing in frequent data and Nasdaq eVestment data but also a lot of our own. What is really special about Octus is how proprietary it is and how hard to source a lot of the data that Octus provides is. And just to give you a couple of examples, there are 12-plus years of deals data covering substantial aspects, 95% market coverage. And so that's data on thousands of deals. It's information on thousands, 3,000-plus public and private issuers over, again, 12-plus years. It has thousands of, I'd say, 11,000-plus transcripts analyzed for structuring and valuation comps. So just a huge library of content and deal documents across 28,000 issuers and 65,000 deals going back, again, 12-plus years. Now that in and of itself, huge amount of highly valuable data. The content that Octus has, this is not publicly available. This is often only available through confidentiality agreements in secure data rooms with restricted rights, and Octus has aggregated and anonymized rights to certain private data that is protected by those confidentiality provisions. So no one else is getting access to that information. On top of that, Octus has about 280 experts, financial and legal experts, who are providing their own analysis. They're getting information through their relationships through their on-the-ground research. They are gathering insight in complex bankruptcy restructurings, often sitting in courtrooms or finding out information right outside of courtrooms. They put out 60,000-plus articles every year, and that ranges from sort of real-time news and alerts to legal or covenant analysis as well as research on private companies and credit. And so you put all that together, this is highly specialized, highly proprietary, not replicable. No LLM is going to be able to scoop that up anywhere. And so very, very high quality, very highly proprietary and they also have contributed data. So as you see, I could go on for a little while on this, but we have done extensive due diligence. I would encourage any of our investors to do extensive due diligence on how proprietary this is. This is a great proprietary data set. The other thing I should just say as a final point, in addition to what Octus brings, LSEG has great fixed income and credit capabilities in parts of our business that people typically don't focus on. For example, LPC, which has great syndicated loan data. IFR, which has insight across mostly the public credit sector. And of course, our yield book analytics, which are industry standard fixed income analytics. So when you bring this together with what Octus provides, it really is an extraordinary and attractive combination.

Your next question comes from the line of Hubert Lam of Bank of America.

Great. For Octus, can you talk about how you get to EPS neutral in year 1 in accretion thereafter, if you include interest costs of, say, like 5% to 6% to finance it? So what are the assumptions to get there for revenue growth and EBITDA margin at Octus from 40% today? Are the cost savings at Octus coming through? And how quickly do you expect revenue synergies to come through?

Yes. So I think to get to this point, you need to take the financial we gave during the presentation. So we think that Octus will land anywhere between 300 million and 320 million in 2026 in terms of revenue. Then you take a low -- between low and mid double-digit growth for 2027. And you can take the same for 2028. EBITDA margin, you have an accretion of about 300 bps in '27 and the same in '28, so that's giving you a EBITDA margin for 2028. And as far as the debt is concerned, we think we'll be able to have compound debt interest rate at 5.5%. And when you make this calculation, the 5.5% on 3.5 billion is about -- if you take out the cash generated by Trumid, it's about 180 million of net financial expense for 2028. And that's the actual profit that will be generated by Trumid. So -- I'm sorry, by Octus, I'm sorry. It's too many acquisitions, as I said. So by Octus, yes, and that's where you'll get the 2028 EPS accretion.

And then, Hubert, just to touch on -- you asked about synergies as well. So there will be modest cost saves here. This is not a cost synergy-driven transaction. And we think there are very attractive revenue synergy opportunities over time initially through cross-sell. LSEG is global platform, strong penetration across the large institutional and sell-side institutions. And Octus tends to be more North America-focused and has great presence amongst the credit buy-side firms. So we think there's really attractive cross-sell opportunities going both ways there. And then you should expect to see us building both enhanced and new product over time that will combine the -- of one of the great assets I was just talking about before as we create, build and monetize new products. So excited about that opportunity as well over time.

Great. So does that mean that -- you say near term, you expect revenue growth to be low to mid-double digit with the revenue synergies. Should we expect it to be higher than what it is near term?

No, I think as I was saying, Hubert, I think a good proxy is taken mid-teen double-digit for the next 2 years, all included.

And we'll take our next question from Michael Sanderson at Barclays.

On the other side, I guess, what Hubert was asking about. Just trying to understand a couple of the other elements of the Octus dynamics. First of all, sort of the costs of bringing on and implementing the business. I mean, I'm sure we've all seen the legal cases about whether that's been spinning around at the moment around sort of providing the structure to optimize these businesses when they come across. And so I guess just trying to understand how you bring that in and how much that will cost and -- for us to think about. And sort of all add into that, the key individuals at Octus, what sort of terms have they kept within the business because from my understanding, they are seen as a very powerful and important part of the story over the last decade.

Yes. So I'll answer your second question and then MAP can try to touch on your first one. This is a talent accretive transaction for us. And we're excited to have Kent and his team joining us. They've done a great job building this business. I think they're excited about the opportunity to partner with LSEG. I think together, we can do a lot more in the space. And so we have put in place, in addition to, what I'll call the natural excitement and the alignment that we all have around serving our customers, a retention program. And a significant part of the proceeds that the management team will be receiving will be reinvested in LSEG shares, and there will be an appropriate incentive structure around that and around the performance. So we're, as I said, really excited to have Kent and the team joining. And we think they'll add a lot to both the Octus business within LSEG, but also to LSEG more broadly. And I'm very excited about that.

Yes. In terms of cost to bring, to bring up [indiscernible] so maybe before answering this question, a couple -- a bit more color about what we are expecting to do. So during the first -- the [ 2 ] year '27 and '28 or the 24 months following closing, we will really have 2 major priorities. One is to make sure that Octus has the relevant means to carry on having this high level of growth that I was commenting to Hubert. And then at the same time, it ensures that it respects the level of cybersecurity protection that we have for the group and so forth and so on. So it's a relatively light integration, if you want, in this first 2 years. But at the same time we're doing this, we will spend money into building the combined product that David was referring to, which is going to take us about 24 months in order to get it on the market 18 to 24 months to get it on the market 18 to 24 months after. So in terms of full cost to achieve, if you want, you can take a proxy of about 100 million that will be mostly in '27, '28 at maybe [ 129 ], but I think will be done by end of year 2028. And most of it being fundamentally in [ January ] and the ability to bring all Octus data sets into LSEG structure. And I just want to precise that I'm talking cash here. So I'm talking both OpEx and CapEx together.

And your next question is from the line of Russell Quelch of Morgan Stanley.

I had a question on AI monetization and when adoption becomes incremental to revenue. So you've given a bunch of new disclosures today signaling increased adoption and increased upselling of data. How should we be thinking about the conversion of this adoption into incremental revenue growth? I'm thinking as much detail as you can give around size and timing. And I'm also wondering now you approach pricing discussions. Will this be more linked to increased data usage this year than in previous years, where perhaps inflation was more the input to the pricing discussion?

Thanks, Russell. So on the first question around AI monetization. Look, we've been pretty clear and consistent that we expect to see acceleration of the revenue growth in our Data & Analytics. We're comfortable with the 6.5% for this year. You've seen the growth rate tick up to 6.6% in Q3, and MAP's been very clear about what we expect in 2027 in terms of the 7%. And just to be clear, incremental growth from Octus will be on top of that. So I'm not going to break out specifics around anything related to AI. We're seeing great adoption. We are seeing significant signs of monetization at this point, and I expect that to continue. So with respect to pricing, we are taking a slightly different approach to pricing going into next year, where we -- in the past, we've had pretty much a sort of single approach across our -- most of our stake to pricing across almost all the products and all customers. Going into next year, we're taking a more targeted approach where we will have those who have bigger discounts, i.e., greater discounts to list pricing, their price rise will be a little bit more than those who are closer to list pricing. And we expect that overall, this should have an impact that is roughly in the same ballpark in terms of what we have seen this past year. So I don't think, from your perspective, you should expect meaningful or dramatic differences, but I just wanted to be transparent that we are approaching pricing with a more nuanced or more multifaceted approach going into '27.

Just to be clear on that, so if you're closing some of the discounts you've given to customers previously and inflation is higher year-on-year, why should we not see a higher price increase next year than we did this year? You said -- I think you said they're the same.

I think -- as I said, roughly in the same ballpark, but it's going to be a little bit different based on both products and different customer segments and how -- what level of discount each customer has. So as we've said in the past, we always look to get an appropriate return on our investment in new capabilities and in new product, and we will be doing that during the course of this pricing cycle. At the same time, we are very focused on sort of the long-term relationships that we have with our customers. On top of that, we have, as we talked about at H1, we will have in certain areas, some usage-based or consumption-based pricing on top of that. So a few different moving parts going into '27, which is a little bit different from years past. I wouldn't make a huge deal -- you've mentioned inflation a couple of times. A few years ago, we had significantly higher inflation. And do we take inflation into account when we're going into our pricing? Of course. That's a part of the overall formula.

Your next question is from the line of Michael Werner of UBS.

I just wanted to get back to Octus, if that was all right. Just if you could help us understand, you've highlighted very strong revenue growth expectations and what we have seen in the past at Octus. I was just wondering if you could kind of break that down a little bit, whether you can provide some indication as to kind of what's coming from pricing, what's coming from upsell, what user growth has been and whether that's been accelerating or decelerating in recent years? Just to try to get a little bit better understanding as to the drivers behind that revenue growth.