TMX Group Limited (X) Earnings Call Transcript

Hi, everyone. Thanks for being here. My name is Aravinda Galappatthige, I'm one of the TMT analyst here at Canaccord Genuity. Very pleased to have for the second year in a row TMX Group, and with me is David Arnold, the Chief Financial Officer of the company. TMX obviously needs no introduction, but it's -- they operate global markets and clearing houses in Canada, the TSX and the TSXV as well as the Montreal Exchange on the derivative side. And here in the U.S., the Boston Auctions Exchange and more to come on that as we'll discuss during this conversation. And then the Global Insights business, which includes a myriad of analytics and insights businesses in the capital markets space represents almost half at this point of the profitability of the firm. So a lot to discuss. David, thanks for being here again.

It's a pleasure.

So typically, we leave the M&A questions a little later, but you've been busy. So let's kick it off with that. I mean you've been active ever since sort of the milestone acquisition of VettaFI, you've kind of been making tuck-in acquisitions. Of late, the size has been ticking up, Cboe, RAFI and then most recently, the MEMX deal. How would you kind of characterize your M&A playbook at this point? Has it really changed much in the last 4 or 5 years?

No, it's a great question, Aravinda. So firstly, thank you for having us back at the growth conference. I think it's 45th year... .

46...

Yes, 46. Jeez, impressive. So yes, for me, this is an interesting question because our M&A playbook really hasn't changed, right? This is all anchored in our growth strategy of the enterprise. We have some transformational objectives we've set out, which is to really have more recurring revenue than transactional revenue, more revenue outside of Canada than inside of Canada. And as you touched on, our Global Insights business having at least half of our revenue coming from that segment. So we've really tried to accelerate our strategy using 3 techniques. The first is really organic growth. It's one of our superpowers. We are really good at building technology, running great markets and infrastructure as well as the full ecosystem. But then there's also the ability for us to partner with individuals. And then, obviously, the third lever is to accelerate it through M&A. And so that M&A playbook hasn't changed. What's very, very important to us is being disciplined. Price discovery and fit with the culture of the organization is very important. It's interesting. You just read 3 announcements in the second quarter. Those obviously had very, very different tenures behind them, right? Sure, we were busy getting to announcement, but they will close on different schedules, and they're in different parts of the business.

Exactly. So maybe just we'll take the bigger one and the most recent MEMX and BOX. Maybe just sort of walk us through that transaction a little bit for those in the audience that may not be familiar with it. But the central question is, you always talked about being positioned more strongly in the U.S. You've always had sort of the controlling ownership of the Boston Options Exchange. But when you look at the portfolio now, you're going to have, I think, 3 options exchanges here and an equities exchange. You obviously have the ATS, which you built up organically. And then obviously, VettaFi and Verity. How do you put all that together? I mean how does all of that potentially fit into a broader U.S. strategy?

I mean, look, we were clear at our Investor Day and prior that we have a North American expansion strategy. You just got to call it like it is. The U.S. is the most liquid most competitive market in the world. And we are just north of the border. And so for us, competing with the U.S. marketplace is very, very important to our success in Canada. . And similarly, it's important to our long-term success to have the presence in the rest of North America, principally the U.S. So it fits really squarely in there. I mean the Boston Options Exchange was ceded originally through our Montreal Exchange as part of that legacy in the business. But we've always had an opportunity to evaluate can we do more? And many folks yourself included, have asked us over the years, like what more can you do in the auction space. So this creates a scaled U.S. kind of equities option venue. The management team at both of those businesses are very, very strong. The management team at MEMX is going to be in a primary driving seat with Jonathan Kellner, leading the enterprise. So we're excited because it answers a question now, right? Like a lot more can you do? And as we get into the various put call options in the future, we have our U.S. ATS, we've got to figure out, do we vend that in, don't we. So there's lots of options for us. But job one is go through the kind of competition and regulatory filings with the SEC and then obviously, integrating those 2 businesses.

Okay. And you're looking to close this early '27...?

Yes. I mean we don't know how long the SEC process will take. We've used some of the benchmarks, which is somewhere in that kind of 1-year window.

Okay. Yes, makes sense. So let me switch over to the ETF market. I mean I attended your exchange conference, it is very interesting. I mean you kind of have appreciation for how much ETFs have grown. And ever since you've acquired VettaFi, you've been sort of essentially nourishing it with these tuck-ins, whether it's sort of geographically going into EMEA, whether it's sort of strengthening the sort of the teams with indices, fixed income and nuclear indices and so forth. And despite maybe some concerns, I mean you probably had one of the best quarters for VettaFi 26%, 27% organic growth. So what's the outlook for that business? I mean what does VettaFI look like now fully armored with all of this?

So it's interesting, Aravinda. So we -- when we first acquired VettaFI, one of the things we did look at is we need to diversify that business into other asset classes, right? And so you touched on them, right? Nuclear was, one, we obviously did the work on the fixed income side with the Credit Suisse, UBS indices that we took over. And really, for us, it's been -- let's continue to diversify the business. And what RAFI does for us is it exposes us to a whole different approach to weightings within an index or an ETF at the end of the day, which is using fundamental research that Robert Arnott and his team at RAFI have done an incredible job in creating a really, really good business. So that once again then diversifies all. But at the end, yes, the top line is very impressive of recent quarters. I've got to anchor everyone back to our long-term guidance, which is really high single to double-digit growth. because I'm not looking to print 26% or 20% plus every single quarter. We've got a much longer kind of horizon for growth in that business. And the long-term guidance of high single to double digits is a great value proposition for us.

Could we sort of view what you have been doing and what you did with RAFI as well is not just about growth, but sort of molding this industry this business so that it can deal with the changes that would naturally come.

Absolutely. The strength in the business by having a more diversified client base and going across multiple asset classes and different parts of the cash equities kind of spectrum. It creates a stronger franchise and create some critical mass. And yes, you can look at it as a moat. We consider it to be more defensible through market cyclicalities.

Okay. Makes sense. You've recently closed cboe, the Australian component of Cboe acquisition. Can you sort of help us understand the opportunity in Australia because I think your starting position alone is close to 20% in terms of market share, obviously, very close parallels between the way Canada operates as well. What's sort of the broad opportunity in Australia?

It's a great question, Arvinda. I mean the first thing that we've done is we've obviously announced the closing. We've rebranded. It's now TMX, Australia Exchange and it really does provide a significant opportunity for us. And this is a very, very interesting one where we did some business development work back in 2022. We went to Australia, a number of us from the senior management team. And we really liked what we saw. We saw a great opportunity. Cboe had recently moved into the Australian marketplace. So we are like we could probably organically build a third competitor in that marketplace. But we'll put it on the back burner because we've got a lot of other work to do. We had VettaFI in the works and stuff like that. And then when Cboe announced that they wanted to divest of Australia and Canada, and specifically Australia, we saw it as an opportunity to accelerate that. So we once again -- the M&A opportunity was an acceleration of an intended strategy, which is to go into Australia. We already had business development resource on the ground in Australia, helping with mining and associated kind of natural resource businesses that naturally had an affinity with listing on the Toronto Stock Exchange or the venture exchange. So the outlook over there is good. I mean I think that first job is migrate off of the legacy technology as part of our transition services agreement, build the like-for-like functionality and then look to bring some of the TMX DNA to Australia. It could be a really, really good proving ground for a venture exchange equivalent down there. And there could be great opportunities for dual listings for a lot of individuals list on the Australian TMX Australia Exchange, but then also list on the Toronto Stock Exchange or the venture exchange here. So I'm excited for what this brings. We pretty much took on the entire team from the Australian business. So we're hitting the ground running. And when we talk to our clients in Australia, they are very excited that we've decided to invest in the business.

So you talked about rebranding it. I mean, stylistically, are there significant changes to be made in terms of how you would run that? Or is it...?

No, I think that the team in Australia are very strong. Emma leads an incredibly strong seasoned team of professionals. So they're going to do their thing, and we're going to help fuel that by supporting them, investing in them and bringing some additional capabilities to the Australian marketplace.

So maybe a topic that's been quite relevant to the last, I guess, the last 3 months and maybe even a bit before that, but still we're discussing because it does affect your stock price and Global Insights is half of your business. So what's -- how do you view what's been going on with software. The valuations of -- I mean July was not bad, things came back. But considering the starting point, we're still off a fair bit. Do you sort of look at this and say, I still have a good balance sheet. I could maybe things assets that would have been less attractive than a more attractive now? Or are you sort of maybe taking a step back and sort of trying to adjust to a macro?

Yes. And I think you're hinting on without saying it AI. And so let's unpack a little bit of it quickly, Aravinda. So the first part for me is we see AI as more of an opportunity than a threat in the company. We are really actively using artificial intelligence through various different large language models in our software development teams. But remember, we don't develop software to sell to others, right? We develop software to run our infrastructure and our marketplaces. And in some cases, we even buy in software from others, we've decided it's not core for us to actually do that. And so our software development teams are actively using CoPilot, GitHub and other large language model AI tools to be more productive in their coding, right? And so that's really, really positive. Obviously, on the M&A front, one of the things that we do, do is we have a number of filters as you would expect us to. And we would look at strategic alignment, cultural fit, we look at valuation. But one of the other filters we've done is really can this business that we're maybe interested in acquiring to help accelerate our strategy. Does it have a competitive advantage or a weakness to AI, right? Could it be under threat. And that's an important part of our filter. So we've walked away from a few things that we've looked at that we felt that, that business is probably going to be disrupted. And other parts of our franchise, we feel that the moats are -- it's proprietary data. And we, today, and some of our data offerings take nonproprietary data that we use artificial intelligence to scrape, but we actually merge it with proprietary data to derive the insight that our clients actually subscribe to. So that's our take on it because we're not a software manufacturer per se, it's less of a disruptor for us than anything else.

So maybe just a quick follow-up to the point about proprietary data, especially when you think about the VettaFI RAFI side of the business, is there not going to be made -- argument to be made that the proprietary data in and of itself can be recreated.