Nasdaq Inc - 144A (NDAQ) — Q1 2018 Earnings Call Transcript

Good morning, everyone, and thank you for joining us today to discuss Nasdaq's first quarter 2018 financial results. On the line are Adena Friedman, our CEO; Michael Ptasznik, our CFO; Ed Knight, our Global Chief Legal and Policy Officer; and other members of the management team. After prepared remarks, we'll open up to Q&A. The press release and presentation are on our website. We intend to use the website as a means of disclosing material, non-public information and complying with disclosure obligations under SEC Regulation FD. I'd like to remind you that certain statements in this presentation and during Q&A may relate to future events and expectations, and as such constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from these projections. Information concerning factors that could cause actual results to differ from forward-looking statements is contained in our press release and periodic reports filed with the SEC. I now will turn the call over to Adena.

Thank you, Ed, and good morning, everyone. Thank you for joining us. I know many of you on the line today participated in our Investor Day at the end of March either in person or via webcast, and I would like to thank you for your time and focus on the Nasdaq's story. If you haven't viewed the presentation, I encourage you to do so via our IR website. At the Investor Day, we talked about the changing world we and our customers operate in and the opportunities and challenges those changes create. We detailed our strategy and vision along with key initiatives, and we talked about how we intend to measure our progress with special focus on the medium to long-term time horizon. So for today, I want to complement that by focusing on our current business performance, our progress on the 2018 execution priorities we set for ourselves, and lastly address the latest developments in the capital markets. I'm pleased to report Nasdaq's strong financial performance for the first quarter of 2018. We achieved record revenues and strong organic growth in the first quarter, driven by an acceleration in the growth of our subscription and recurring revenues as well as record revenues in our trading business as we capitalize on improving industry volumes through the breadth and diversity of our leading marketplaces in combination with strong market share and stable pricing in many of our markets. Meanwhile, our bottom line results confirm that our financial model is performing at a high level by capitalizing on our revenue growth to deliver strong record earnings and EPS growth. We also continue to invest meaningfully while growing our dividends and delivering strong total shareholder returns...

Thank you, Adena, and good morning everyone. My commentary will primarily focus on our non-GAAP results and all comparisons will be to the prior-year period unless otherwise noted. Reconciliations of U.S. GAAP to non-GAAP results can be found in the attachments to our press release and in the presentation that's available on our website at ir.nasdaq.com. I will start by reviewing first quarter revenue performance as shown on page 3 of the presentation and organic growth on pages 4 and 16. The 15% or $85 million increase in reported net revenue of $666 million consisted of organic growth of $55 million, including 8% organic growth in the non-trading segments and 11% organic growth in Market Services, a $17 million favorable impact from changes in foreign exchange rates and a $13 million impact from acquisitions, net of an $11 million purchase price adjustment on deferred revenue associated with the closing of the eVestment acquisition...

Yeah. Good morning, Adena. Good morning, Michael. And congrats on the strong quarter here.

Thank you.

So, I guess, the first question is on Information Services, very strong quarter, and just trying to understand as your model has had the jump just from quarter-over-quarter was $18 million, and we know we had eVestment for a couple of months in the prior quarter. So, I guess, can you walk through sort of where the increases came from, some portion was from eVestment, but where the other increases came from I think would be helpful here.

Sure. Well, if we look at organic growth, organic growth for our Information Services business in the quarter was 14%, which is very strong. And if we break it down between our index business and our data revenues business, the index business was up 37%, which reflected higher assets in our licensed ETPs, but also reflected higher volume based on the licensing fees on the Nasdaq 100 Future. So, we had both high volumes in the Nasdaq 100 Future and really strong inflows into our ETPs. And if you also had recognized that this is compared to the first quarter of last year, so you also have the market performance over the last year reflected in the AUM as well. And then if you turn over to the data products revenues, it’s a 7% organic increase and that really is kind of growth across both our tape and our proprietary data and about 2% of that was due to higher recognition of like unreported usage from prior periods. So, basically we've got some of that catch up from prior periods and then on the rest of that is just strong demand for our data products and continued growth there...

All right. Thanks a lot.

Hey, Mike.

Maybe – hi, just, maybe a first question, just on the Corporate Services business, similar to the comment on the Information Services, like sequentially it seemed like there was more strength both in the Listings and in Corporate Solutions. So, I don't know if you can give any color on – if there is anything unusual. I know you mentioned some of the wins on the Listings side. But in either of those, there was anything unusual in the quarter? And then on the Corporate Solutions, just when we think about the drop going forward with the sale of the business, just anything that has changed in terms of maybe the revenues that we should be thinking that will be going away with the new expense guidance?

Sure. So, in terms of the Corporate Services business overall, there is nothing unusual in the quarter. So, it is good, strong, organic growth. And I think that the one thing that there is a little bit of help from FX, but nothing significant there; but generally speaking, it is just strong organic growth. In terms of the impact of the pricing changes that we've been introducing over the last three years is kind of fully formed at this point. Then on top of that, we have had a strong IPO environment as we've launched into the year and a decent one last year as well. And then the Nordic market, as we calculate listing fees on the Nordic market, it's calculated on the market cap. So, the strong performance of the markets last year then delivers the ability for us to have a look at more revenue as we come into this year on the Nordic listings. And then I think that on Corporate Services, we have been executing well in the businesses that we're in. And so, I think that we are starting to show some real momentum in the IR intelligence suite...

So, it was about $50 million in the quarter. So, it's a bit higher than the run rate of the 195 that we've disclosed and we mentioned that we were selling the business, we’re putting the business up for sale. And so, it's a little bit higher run rate in Q1 than had been in the prior year.

Right.

Okay, Michael. And then just – on those expenses, in terms of the new guidance, I think you guys mentioned the expenses were $170 million for that business, but there were some costs that were going to remain in there, and it kind of looks like we can see that with the revised down meaning, it's not the kind of the full benefit this year.

That is correct. So, you'll see that we expect costs to come out this year, but the full run rate really won't go into effect until a year after the close. We have some stranded costs that the organization is working to eliminate as we go through the next year. And we also have a CSA agreement, things like that, that just have to work their way through over the next year with West Corp.

Yeah, hey, good morning.

Hi, Alex.

Quick question on eVestment. Talking to some clients recently, it sounds like you're increasingly approaching them now with enterprise pricing. So, just wondering, if that is in fact kind of like a new way that you guys are pricing the business. And if that could be an incremental or how much of an incremental driver of revenue that could be, I think there's been historically something like password sharing and stuff like that. So, obviously, I think you're trying to cut down on that. So, just any comment on that specifically would be helpful.

Sure, we actually, we do basically offer, Alex, what I'll call an à la carte menu. And then we allow for clients to take multiple components in an enterprise way and we kind of discount off of the rack rate on each of the components to get to an enterprise. But a lot of times that means they might take more of the services than they otherwise were taking on an à la carte basis. But it gives them a more stable cost base for them to be able to manage in terms of all the services they're getting from eVestment and it allows us to kind of what I call kind of relend and then we expand into more, more services over time with the clients. And that then culminates in that enterprise type of approach to pricing. So that has been a strategy that the company was on before we bought them and they're just continuing down that roadmap, but it is definitely helping with the revenue growth as more of our clients are realizing that there's just a lot of value in everything we have to offer...

So, as we stated when we closed the transaction that we would begin the purchase program, so that will begin once our trading window opens. So, we will start to repurchase those shares that will be around $290 million to $300 million will be the range of the share buybacks that we would be looking at. And that will start at the end of this week. And we'll take a period of time in order to execute that...

Morning, everyone.

Good morning.

I want to touch – just wanted to touch on the Market Technology margin again. Maybe if you can just talk to how you're seeing the path to improvement? It sounds like deliveries really weighed a bit on this quarter, maybe you can give us the size of the magnitude there, so we could parse it out, what's the incentive comp driven and also the R&D expense to think about the path of margin improvement because obviously this level of margin for Nasdaq run business is pretty low at the end of the day.

Yeah. And I would say as we said before, we don't anticipate this to be kind of an indicative margin for the business. But we have said at Investor Day that we do anticipate lower margins in the Market Tech business as we are driving investment into that business, particularly driven by the Nasdaq's Financial Framework investment and the build-out of both our banks and brokers offering on market infrastructure as well as the buy-side surveillance offering...

Hi. Just on Financial Framework. Can you talk about your expectations around upgrade the Financial Framework from the existing customer base, because I'm especially interested in how much of this could happen upon contract renewal or whether they could do it earlier? And just lastly, how much of the order backlog relates to Financial Framework?

Sure. I don't have a specific number on the order backlog as it relates to the Nasdaq Financial Framework. But I can tell you that the – well, what happens is definitely when we have a situation with our already an upgraded cycle, so they are looking at a new contract. So, for instance, the Singapore Exchange was kind of in a new cycle for their trading engine and rather than continuing down the road off the trading engine that we've been working with them on for a while, they chose to upgrade to the Nasdaq Financial Framework on that contract renewal and that, that will be the more typical way that our clients work with us, our existing clients work with us on systems for which we already provided service...

Hey, guys. Good morning. Just one...

Hey, Alex.

...just one question around Market Services, when we look at the Trade Management Services and kind of the growth there, in the deck you guys cited the demand from third-party connectivity and colocation. Just curious I guess kind of where is that coming from and I don't think we're just thinking about the kind of the end user customer base for that product set we haven't seen a ton of growth there, so maybe are there anything new that will be helpful?

Yeah. I mean I think that it's actually a combination of things, so included in the Trade Management Services is the connectivity and co-lo, but also the Trade Reporting Facility and that has a volume component to it. So, there is some volume related revenue growth, but I would also say that we have found that there are more clients wanting to add ports or add connectivity capabilities because of the volumes as well. And so, it's really kind of a combination of the volumes driving some of the revenue directly, but also having it come from just more demand for our connectivity services on the back of volume... Okay. Great. Well, thank you very much for your time. Well, obviously, we're very pleased with the results of the quarter. We definitely see some really good momentum across our businesses this year and we're excited to continue to drive the business forward. So, thanks very much, and we look forward to speaking with all of you soon.