TMX Group Limited (X) Earnings Call Transcript

All right. Good afternoon, everyone. My name is Scott Fletcher, and I cover the diversified financials for CIBC. And our next presentation is TMX Group. And joining us today is David Arnold. David, thanks for joining us today.

Thanks, Scott. Pleased to see you in person.

Yes. So at CIBC, we just relaunched coverage of TMX relatively recently within the last month and looking forward to getting a chance to discuss the business today. So I want to start big picture. And over the last decade, TMX has really evolved into a broad market infrastructure business that crosses equities, derivatives, trading and clearing, market data, indexing, capital formation and corporate solutions, a lot under the hood now. So as you look across the organization today, where do you think that the evolution of the business is most visible? And then what do you see as the next steps on the TMX journey given you've got a lot now in place?

There's a lot to unpack there, Scott. So let's start off on the first part. Like, I mean, we've -- you're right, we have evolved. The journey is not complete. We set out some long-term aspirational transformational measures. The first was really to have recurring revenue be about 2/3 of the revenue pie. We're not there yet, so there's a way to go there. We obviously were very, very much Canadian-centric, less of a global market infrastructure player. And so we really wanted to evolve to more of a global information business. And so we set an aspirational goal to get about 50% of our revenue from outside of Canada. And then the third objective was really for our Global Insights business as a global information provider to really be 50% of our revenue. And then a couple of years ago, we hosted our Investor Day, and we set out a very ambitious TM2X goal. And what we basically said to everyone was it took us 14 years to go from $500 million in revenue to $1 billion. And we would like to go from $1 billion to $2 billion in half the time. And the 2x really speaks to not just the $1 billion times 2 to 2, but also the speed, right? We want to do everything in 2x the speed. And so those that picked up on it realized that well, it took you 14 years to go from 0 to 1. So I presume you're going to try and do it in 7 years or less. And we're well on track to achieve that objective.

Right. I mean from -- by my standing, it looks like you're more than on track to meet that target if everything closes as expected with the recent deals. But before I get to the M&A from this year, I do want to sort of come back to the recurring revenue, which is something you mentioned in your answer there because one of the themes we highlighted in our initiation note was just how much the recurring revenue has increased as a percentage of the business. Can you just walk us through how that's impacting the quality and the resilience of the earnings profile of the business right now?

Yes, it's a great question, Scott. I mean -- and there's -- these are long-term transformational measures. So quarter-to-quarter, they will fluctuate. And we've had a very, very strong transactional 3 or 4 quarters in a row. The Montreal Exchange is predominantly transactional revenue, the trading venue on the Toronto Stock Exchange and the Venture Exchange. So we were very, very clear where we said we want to grow our recurring revenue to 2/3, but not at the expense of the transactional parts of our business. And so we've actually seen a little bit of a period here where our recurring revenue in absolute dollars has grown leaps and bounds. But the percentage of the whole firm, it's kind of stayed around 53-ish percent. We still have a long way to go to get it to 2/3. But as I said at the beginning of the answer, I really want to do it with accelerated growth in all parts of the business, which sometimes I have to tongue in cheek say to some of our transactional businesses keep growing because it's going to force the recurring revenue businesses to work even harder.

Right. And that makes sense. And I think -- I don't think it's lost on anyone that the transactional revenue has really been strong in the last few quarters in the market. The markets have supported that and your business is going to benefit from strong markets. But I think that's a good segue into M&A and TMX has been extremely active, I would say, in the first portion of 2026 so far, 3 significant deals. So can you just walk through how M&A more broadly supports the strategic plan and what criteria you're using to evaluate potential transactions?

So everyone from the Board, the senior management team, our CEO, John McKenzie, we view -- we don't have an M&A strategy, Scott, to really kind of put a fine point on it. We have an enterprise growth strategy for the firm. And one of the ways we like to accelerate that strategy is either fueling organic growth or partnering with key market participants to actually fuel the growth or fuel it by inorganic growth. And yes, we happen to announce 3 meaningful transactions. Some have closed, some are still to close in the first half of the year. So it looks kind of busy. And mainly the reason they're getting a little bit of a profile is because some of them are going to result in our leverage going between 1.5 and 2.5x and just a little north, whereas we've actually been very diligent in acquiring businesses to help accelerate the growth over the last 3 or 4 years. They just haven't obviously moved the needle other than 3-ish years ago, we acquired the VettaFi business in the U.S. to really help accelerate our index and benchmark work. So the disciplined approach to it is all of them are going to be accretive within the first year without factoring in synergies. It is an advantage to us that our CEO is the ex-CFO. So for myself sitting down with him as we evaluate the financial metrics, he gets it all right off the bat. And so we have a very disciplined Board as well that are keeping our feet to the fire to make sure that these are strategy accelerants and not just acquisitions for the sake of an acquisition.

Right. And on that vein, when I'm thinking about M&A, sometimes you need to think about how a certain deal balances financial returns, but also strategic fit and then integration capacity, which I think is particularly relevant for you right now. So how do you balance those 3 sort of pieces when you're looking at potential deals?

You've actually nailed it, Scott. It's -- that's a lot of what we spend a lot of time talking about is which parts of the business is this helping accelerate growth? Can we actually manage that? I wish we could put out press releases for the things we walk away from. People would understand the disciplined approach that we have. So yes, if I unpack the 3, right, like CBOE Australia and CBOE Canada, CBOE Australia, it's more of a -- we're taking on all of the staff, including the technology team, and that's more of a technology build on the TMX stack. And that obviously has closed already. So we're now well into the transition services agreement. The technology build won't take us as long as industry testing will, and that's why we have a good transition services agreement with CBOE. Obviously, CBOE Canada is still undergoing Competition Bureau review and the OSC. And so we're participating in that process. And we'll follow that process. And -- but at least then the technology piece of that will be slightly easier than the Australia piece. So it won't be as taxing. The VettaFi acquisition of RAFI Indices is very much contained to the VettaFi team. And then last but not least, the BOX and MEMX coming together, which we announced, that's really going to be first a merger of those 2 businesses, less so a drain on TMX. So when you unpack it all, you realize, wow, this is actually not a drain on all parts of the organization in equal kind of measures.

I think that's one thing that stood out to me is if you take the time just to look through both the impact on leverage and the impact on the business, the way that the deals will close will sort of give you that flexibility, whether it's from capacity or from both operationally and financially.

Absolutely right.

I want to dig into some of those deals and talk a little more in depth. I'll start on the indexing side. So VettaFi, you acquired in 2024 and sort of the largest stake. VettaFi since become an increasingly important part of the TMX strategy. It's been standout performer, I would say. What has impressed you most about the business after you bought it? And where do you see the biggest opportunities ahead for it?

So I think the most important thing for us with our VettaFi team is it's the talent. We obviously have a long-standing relationship with S&P as our kind of benchmark index and benchmark provider. But we have a lot of client demands for more thematic and bespoke indices. And this was an opportunity for us to fulfill that demand. Without taking too much time, Scott, you know the story, right? We originally were going to build it. We then had an opportunity to partner with VettaFi by taking a minority stake. And then we had an opportune moment in the market cycle to put a bid to own the entire business. And so -- and when we did that, we had a couple of board seats during that 20% ownership stake. And John, our CEO, would come back from Board meetings, you'd say, I'm most impressed with the quality of the talent over there. And so that, I think, was a very, very attractive part of that. And they are really, really skilled at what we would call like the tuck-in of indices, right? So a small index and benchmark provider in a different theme, whether it be nuclear or robotics is taking on those assets under index retiring the legacy index calculation engine and moving on to our own proprietary software, which is our index factory. And that, I think, is why the opportunity now with RAFI is a great opportunity to once again leverage that. And we will continue, Scott, to do index and benchmark tuck-ins. It is a very, very important part of our diversification of asset classes in the VettaFi business.

And then within the indexing business, there is a breadth of tools, whether that's indexing, ETF intelligence, workflow tools for the product. How important is that breadth of ecosystem and what is from the outside at least a pretty competitive marketplace. There's a lot of people providing these services.

That actually was a big part of when we initially started off, we looked at a number of index and benchmark businesses, either to partner with or to acquire while we're evaluating building it ourselves. And we left many, many of those meetings with the kind of conclusion that it's just a calculation engine, right? There's nothing special there until we met VettaFi, right? When we did, we realized with etftrends.com, etfdb.com, which are 2 of the preeminent sites that in any ETF investor goes to, to do research in the U.S. that they've actually got something different. And then they had their podcasts and what they do to help an ETF manufacturer bring eyeballs from the registered investment adviser community, the RIAs in the U.S. So that really got our attention. And I think that is -- that coupled now with bringing in the RAFI fundamental research-based indices, we've got an opportunity there to not only cross-sell to existing clients, but actually accelerate the growth of that business more so than we were thinking.

And speaking -- you mentioned RAFI. Can you just maybe give us a sense of what RAFI does differently and what attracted you to the business and why you think that the 2 of them together makes a bigger hole than the sum of the parts?

A lot of our underlying cash equities through the existing VettaFi portfolio prior to acquiring RAFI were very much based on custom thematic and bespoke type indices, so robotics or the AMLT, Alerian product, very much concentrated on a part of the kind of energy spectrum. And early on, we said, you know what, we need to diversify into other asset class and get more into the kind of basket of cash equities that are listed on the U.S. exchanges. And what we really liked about RAFI's is they don't take the traditional market cap approach. They take a fundamental research-driven approach. So it could be based on cash flow. It could be based on top line revenue growth to come up with different weightings. And it isn't to replace Scott, the actual portfolio within a client's portfolio. It's to augment it. So the asset manager might say, I want to put 5% or 10% into U.S. cash equities, but let's put half of it into RAFI's fundamental research-based ones and then maybe the other half into the more traditional market cap-based ones where the weightings would be different. And so that attracted us to it. And then I go back to it, it's when the team got to actually spend time with the people, right? There's a lot of technology in these businesses, but the human capital is the differentiator.

And are there opportunities to combine the intellectual property and the capabilities between RAFI and VettaFi?

Absolutely. We're going to run it as one integrated business. We do now have an office on the West Coast. We've actually had staff on the West Coast of the U.S., but they're predominantly work from home. We now actually have an office in Newport Beach that will be our home on the West Coast, kind of running in parallel with our Vancouver office up in Canada. And so yes, there's opportunities both in terms of simplifying the technology stack, like we're going to migrate the RAFI calculation engine on to Index Factory. But then the second thing is the ability to bring clients to the RAFI product that maybe weren't necessarily aware of that product prior to -- because really, the primary would be like Schwab, Invesco are really big proponents of that. We have a ton of other asset managers that maybe weren't as aware of the RAFI product that we're going to bring to that now.

Well, it's a very interesting piece of the business. So it's good to dig into. Before I move on, I just want to ask the audience if there are any questions that you have for David. All right, moving on. So sticking with the M&A from '26, I wanted to move on to the CBOE and the MEMX transactions, they're different than RAFI and that they're more in keeping with the TMX traditional exchange businesses. Now there is some nuance to the makeup of the type of revenue that those businesses have. So can you walk us through the rationale for those 2 assets and how they fit within the broader portfolio?

Yes. So with CBOE Australia, which we've now branded, we've closed on it. So it's TMX Australia Exchange, a lot of recurring revenue over there from the data part of the business. But it was something that we had looked at back in early 2020 and 2022, specifically more 2022. We had looked at the Australian market as one where we have a right to play and a right to win. And so -- but at the time, we identified as well that we really got to get into the index and benchmark space, hence, the VettaFi journey. We wanted to build our U.S. ATS. So we kind of put it on the back burner. And then when it became evident that CBOE were looking to sell it, we took a long, hard look at that business because there are so many similarities to the Canadian ecosystem. There are 27-ish already Australian businesses that are listed in Canada. We actually had a business development resource on the ground in Sydney. He now has an office to go to as opposed to working out of his home office. And so yes, we see lots of opportunity there. Day 1, though, Scott, is really about like-for-like, connecting to the broker-dealer community, helping them get their front office systems and back-office systems integrated. Thereafter, I think that there's opportunity for us to bring index and benchmark capabilities to ETF manufacturers. There's more work we can do on the data front. And dare I say the TSX Venture Exchange concept, the junior versus senior is something that we would love to bring to the Australian marketplace. So we're excited about that. And yes, and then the Canadian part of it is we just want to make Canada stronger. And with less participants in the Canadian marketplace makes for a stronger ecosystem. The Canadian banking infrastructure have to connect to a lot of different venues in Canada. So an opportunity to simplify that is actually advantageous to our clients.

And on the CBOE acquisitions, it sounds like there's a lot you can import or export, I guess, from the TMX business into them. Is there anything you can import and bring in from those assets into the TMX business?