Nasdaq, Inc. (NDAQ) Earnings Call Transcript & Summary

Good morning, everyone. I'm Elias Abboud. Craig Siegenthaler and I cover U.S. exchanges here at BofA, and I'm pleased to be joined on stage by Nasdaq's CFO, Sarah Youngwood. With 4,500 companies on its exchange, NASDAQ is the largest listing venue in the U.S. It is, of course, a leader in both stock and options exchange options trading. But since 2017, it has been in the midst of a strategic pivot to being a scaled technology and information services provider as well. Today, nearly 80% of Nasdaq's revenue is from nontrading businesses. This includes indexing data, corporate services, marketplace technology, regulatory reporting and financial crime management technology. Sarah was appointed as CFO in 2023. Before coming to NASDAQ, she was the CFO for UBS, where she played a key role in modernizing the bank's infrastructure and facilitating the acquisition of Credit Suisse. She also has 25 years of experience at JPMorgan where she held senior roles in investment banking and Investor Relations and as the CFO of Chase and JPMorgan's technology unit. Sarah, thank you for spending some time with us.

Thanks for having me.

So Sarah, to get started, my sense is that a fair number of our European clients still think of NASDAQ as an exchange. So to start, why don't you talk to us about the strategic pivot that the company has undergone over the past decade and lay out the motivation and vision behind your entry into these adjacent business lines?

Yes. Thank you. So we are the trusted fabric of the financial system. So by that, we mean that we architect the world's most modern markets. We power innovation, and we built trust in the financial system. And so you're right. When you think about all of the exchanges that we run, including, of course, NASDAQ, that is 30% of what we do. 30%, and that includes the market services piece and the listing piece. All of that is 30% of what we do. 15% or over 15% at this point is actually an index business including the NASDAQ 100, but $1 trillion in ETP AUM constitute that index business and has grown tremendously over the last 7 years. And then the balance of it, about 50% is core infrastructure and for the financial system. And by core infrastructure, you've named many of those, those are really important rails and gold data that enables the financial system to run in to transform. And our vision was about, call it, a decade ago. we saw trends, technology trends that we're going to transform the financial system. And to be honest, it's all happening today, but it was visible 10 years ago. The first one is the cloud. The second one is the distributed ledger. And the third one, of course, is AI. Originally algorithmic AI and now Gen AI. And like catching those trends, cloud 12 years ago, distributed later 9 years ago and AI 10 years ago, we were able to put ourselves in a position where today, naturally, we're at the right place at the right moment. But that all started a decade ago. And what's very important is that we have modernized continuously during those 10, 12 years. And as we've done so, we've prepared ourselves to be ready to modernize the financial system. And that our clients, the financial system operators need solutions that are going to be GenAI-ready, that are going to be digital net ready that are going to have data that they can't buy somewhere else, that help them have the liquidity, the trust, integrity in the financial system as the financial system changes. But I think what is even more powerful is that as we did that we did it with the shareholders in mind. And so we did it trying to get, okay, higher some addressable market share, like serviceable addressable market. And more alpha more solutions revenue. You mentioned the 80%. And today, we are a rule of 70 business. So if you think of the rule of 40, with score at 70. There are only 18 companies that are at scale in a growing mode, 8% or more and that are at rule of 60. So it's a very good company in which we are, and it's a very rare algorithm to have rule of 70. And so a rule of 70, 80% solutions double-digit alpha growth in the last 2 quarters and also mid-teens revenue growth over the last 2 quarters. So we feel very good about where we are. And we feel that, that transformation has been not only very timely starting 10 years ago, but also really giving us an opportunity to deliver for the shareholders.

I see. Let's dig in on tokenization for a moment. So you announced that you'd be launching NASDAQ equity tokens in the second quarter of 2027. Can you help us understand how these are going to work?

Yes. So our big principles, and you're going to hear those words all the time or politic our liquidity, integrity and transparency. And so this transformation of the financial system is happening. You've got the conversions of AI and the digital assets with continuous transformation. And those trends reinforce each other. So when we're looking at what we need to do, we need to maintain liquidity in this particular case. As we introduce the digital ledger because the digital ledger is going to provide benefits for both the issuer and for the investor. But the problem is to make sure you do that without breaking what we have today, which is a very deep liquidity pool. So we provide NASDAQ equity token is maintaining one unified liquidity pool. You have all of the rights of the security itself. It trades in the same way the current fiat security actually trades, and in addition, you have the benefits to token, which insurer benefit from having some of the actions that are written into your toker or that enable you as an issuer to have a closer relationship with your shareholders by embedding in some ways, messaging or actions, dividend could be an action, for example, into your token. And so you've got no harm done on the liquidity because of the unified clarity. You've got more potential for the issuer to have capabilities on its token. And then from the investors' point of view, you have the ability if you are in token and move to use it more swiftly in terms of moving it as collateral, for example, to reduce your collateral needs.

I think there's probably about a dozen other competing stock tokenization initiatives at this point, including some other issuer-centric models, like super state securitized. Can you maybe speak a little bit more about how -- what you guys are doing with stock tokenization differs from those other initiatives already in the market?

Yes. So I'm going to go back to that word liquidity. To the extent that you do a wrapper, for example, and I'm not saying that every solution is a wrapper, a wrapper is breaking the liquidity pool. And so what you really want to make sure is that you are enabling the trading to happen in the way it does because whereas you can have the ability to trade a few shares here or there in a small liquidity pool. The beauty of the financial system here is the speed at which it operates, as well as the depth with which it operates. And so we go back to, for us, making sure that we have something that has a transparency on the integrity, but very importantly, that does not break the liquidity pool. And we believe that markets will decide in some ways. Markets are valuing connectivity or valuing nanoseconds, are valuing debt. There is a reason why half of the capital markets happen to be in the U.S. in the deeper liquid market. There is a reason -- money goes where liquidity is. So whether it's the corporates that are going there or whether it is investors that want to trade there.

Got it. Let's switch gears to the other hot topic -- hot topic in their space, AI. So can you speak to how your conversations with bank executives around AI have evolved over the past 6 months?

Yes, it's really an interesting trend because we talked about the cloud adoption and it really took 10 years. The Gen AI adoption is on a very different pace. And the dialogue is becoming very, very deep over the last 6 months. They are Gen AI applications, I would say, everywhere. And so from how you use your data, are you going to deliver my data and talk in efficient way. And we do. And we have even patent pending ways to provide our data in token efficient way, for example, for investment, whether it is what are the features that are upcoming for Gen AI that enable the issuer to either have a copilot or to also have, if you are a large financial institution, a lot of the work done independently. So I'll give an example. In Financial Crime Management, which is a $4.4 trillion issue, there are a lot of things that need to be done. The first thing is we use Gen AI to actually catch up for itself by putting that consortium data of 2,800 banks, $13 trillion of assets into one on cloud well segregated that enables us to give better alerts to our customers. So the quality of the alerts is the first Gen AI output. And then you can go further and you can have agents. We have 800 out of our 2,800 banks that operate with our agents, which means that they have gone through AI governance committees and they are using on a daily basis, agents. Sanctions is one that we introduced in December. We have 6 of them at this point, 2 in beta. But the sanction, one, for example, is going to enable you to file the sanctions with 80% of the sanctions not being touched by a human. And so 80% not being touched by a human can translate into real efficiencies for our clients. And that's what we're seeing with now a pretty good level of experience with 800 of our clients using that. And that's just an example. If you go into our reg tech, we have different solutions that are also serving both the quality as well as the efficiency, all of the regulatory reports or generating benefiting from Gen AI to code, for example, but also delivering capabilities to the clients to make sure that we help them detect the data that they are giving us in terms of like is it going to comply with the 1,000 ways that needs to comply. And what I think becomes more and more interesting is when you actually convert you to trans and you say Calypso, you're going to have in the cloud Gen AI capabilities, but you're also going to be able to move collateral. And so now you are using digital assets and Gen AI and those solutions are enabling us to be viewed by our clients as their trusted transformation partner. They need to go on their journey. They need to meet that transformation of the financial system. The needs are very strong, and there are very few counterparties that are as trusted as we are and as innovative as we are.

You launched an MCP server for NASDAQ DataLink earlier this year. Can you talk about the extent to which that data demand has been additive and incremental versus cannibalizing other data delivery channels?

So I ought to say that when we deliver the data in a better way, we charge more, not less. And that's a good thing to do. And so when we deliver the data in a way that is easy to consume, we benefit from it as NASDAQ and you benefit from it as our shareholders. What we have is the ability to deliver the data to you in the way you want. MCP is a very, very useful way to deliver the data. We -- but we can do it also by API, by whatever it is, that works for different financial institutions or brokerage houses. What has been very powerful is that we can really embed ourselves in your trading systems. So if you need to trade, again, it's not like you're going to check a screen and then trade. We have the ability for you to embed that data at the point where you want to consume it. If you're a hedge fund and if you want to embed it in strategies, it's there, it's basically available in real time where you need it. If you're a retail brokerage house somewhere in Asia or in Europe and you want to enable your clients to trade in the U.S. financial system, especially December 6, as we go always on, you have the ability to have that data at the fingertips of your clients in whichever app they may be consuming on your behalf as a brokerage house.

Over at Verafin, a pillar of your growth strategy has been the movement up market into the Tier 1 banks. Can you update us on where Verafin stands today amongst the Tier 1s? And is it a meaningful portion of ARR yet?

Yes. So I will answer that -- we have 3 pillars really of growth in financial crime management. Financial crime management is underlying all of the -- a majority of the $350 million that we have is small and medium-sized banks. We come in, and we are the financial crime management platform for those banks. And that has been how Verafin constituted its brand in the financial system. But once you have 2,800 banks, majority of which are smaller banks, you become extremely attractive to the larger banks because where fraud will go is not just between one large bank and a second large bank. Is actually wherever fraud goes. And if you're a large bank, you can maybe have an agreement with 2 or 3 large banks or 5 or 10, but what you're not going to be able to do is 1 by 1 under being an agency of the government because you cannot mix in personal information without the right roles and frameworks assemble 2,800 banks of data. And with that, we've been able to add approximately 20 large banks. And those large banks that would be Tier 1 and Tier 2 banks, examples, Citi, an example, Goldman Sachs, those are names that we can name, but there are many others that we can. In Canada also, we've been very successful with some of the large banks. And so we have that second leg of growth which is today, to answer your question, still small in terms of its pace but growing in a fast way. And we had 11 signings this year, year-to-date, which is more than what we had the year before. So we are accelerating. We are -- we talked about the year before being back-ended in terms of like those large signings, but the second half of the year is upcoming. And so we have a lot of potential tailwinds coming from the fact that those large banks represent half of in there some serviceable, addressable market share in the financial client management. We're talking about approximately a $9 billion sum. And so when you're taking half of that, it's $8 billion, we are able to have a very, very large potential share that is today untapped.

Your Calypso business is very well known globally for its capabilities and rates. But we've seen a lot of product innovation across derivatives over the past couple of years. We've got perpetuals. We have compute features coming. Can you talk about the opportunity to expand Calypso's capabilities across more asset classes?

Yes. So Calypso is a pretrade post-trade treasury management system. And when you think about that, if anybody thought that it was simple to do all of that, before the proliferation of products, before the digital assets, before you could even think about moving a collateral in token form. That's what -- I mean it was probably very less to imagine that you could do that on your Excel form, but some people did. When you add the complexity that we are seeing today, there is no doubt, even as fairly small institutions that you need help. And you're going to want to have that help from somebody who is cloud-ready, Gen AI-ready, digital assets ready and ready for all of those products that we are talking about. And that's basically us. We're also very modular, which means that we're not going to sell you like a very large package if you're looking for something that's pretty precise. We're able to give you exactly what you need and to enable you to grow with us. As you go to new geographies, as you expand into other products. It's a very easy decision to make. And this has been a product that has been very much modernized under all watch since we bought it, and that is very modern at this point and are ready for all of those technologies to help to benefit the financial system.

In Axiom, you already count every single GSIB bank as a client -- can you talk to us about the moving pieces to let that business continue to grow high single digits, low double digits, in line with your guide?