Nasdaq Inc - 144A (NDAQ) — Q4 2019 Earnings Call Transcript

Good morning, everyone. Thank you for joining us today to discuss Nasdaq's fourth quarter and full year 2019 financial results. On the line are Adena Friedman, our CEO; Michael Ptasznik, our CFO; John Zecca, our Chief Legal and Regulatory 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 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 will now turn the call over to Adena.

Thank you, Ed, and good morning, everyone. Thank you for joining us. My remarks today will focus on the following areas: Nasdaq's 2019 financial and business performance; the progress we've made to drive Nasdaq forward along our strategic direction; and our ambitions for 2020 and beyond. Turning to our results. I'm very pleased to report Nasdaq's strong financial performance for the fourth quarter and full year 2019. We achieved $646 million in net revenues in the fourth quarter of 2019, while non-GAAP earnings per share of $1.29 rose 4% compared to the fourth quarter 2018, despite a significantly lower volume and lower volatility market environment in the U.S. as compared to the same period in 2018. Turning to full year 2019, we generated total net revenue of $2.54 billion, including 8% organic revenue growth across our non-trading businesses, tempered by a 3% decline in our trading businesses, with total organic revenue growth of 3% for the year. 2019 was another year of strong execution for Nasdaq, exceeding our longer-term revenue growth objectives in our non-trading businesses, while also exhibiting increases in efficiency hitting a multi-year high of 49% for our non-GAAP operating margin, despite an operating leverage headwind presented by moderated trading revenues. Throughout 2019, we also continued to invest organically and inorganically to advance our offerings, guided by our strategic pivot to maximize opportunities as a technology and analytics provider, while also investing to sustain the strong competitive position of our core marketplace franchise. We are now in our third year since the announcement of our new vision for Nasdaq. Our 2019 results illustrate how Nasdaq can deliver on our technology-led strategy and more importantly, how our disciplined client-centric focus is creating value, not just for our clients but for all of our shareholders. We entered 2020 with strong momentum following a great finish in 2019. We experienced an acceleration in market technology and new order intake as the year progressed. With the investment almost 40% of our new sales were to new clients and existing clients exhibited higher average spend as product usage broadened. Our ETP assets under management are at record levels and we have a very healthy new listings pipeline. Turning to specific highlights from our businesses in the fourth quarter and throughout the year. Our market technology segment delivered 12% organic growth in the fourth quarter and 11% organic growth in 2019, as it progressed with the development and implementation of our next-gen technology platform. Our total revenue growth in 2019 was 25%, including the positive impact of the Cinnober acquisition. New order intake totaled $204 million for the fourth quarter, while our annualized recurring revenue, or ARR, totaled $260 million, an increase of 17% year-over-year. The fourth quarter features some particularly encouraging wins. As part of our new market strategy, we recently announced that we have signed a new partnership with an Airbus subsidiary called Skytra, in which we agreed to provide the full suite of marketplace solutions to enable the air travel industry to price and manage the revenue risks associated with fluctuating ticket prices. In our sell-side business, we signed two new Tier 1 global banks to our execution platform in the fourth quarter, bringing our total to six banks and brokers as we enter 2020. We also signed extension and expansion agreements with five existing marketplace clients in the fourth quarter, including Japan Exchange Group for derivatives trading and surveillance and FINRA for its multi-product trading and data platform services. Next I'd like to update you on the development and deployment of our next-generation market technology product offering, the Nasdaq Financial Framework. Work on the core platform of NFF has reached advanced stages. And while our efforts on application solutions on top of the core platform continue, we believe that both are on target in terms of our product planning schedule. As we begin 2020, other phases of this long journey become increasingly important. For example, we will focus significantly on our go-to-market approach with both our managed services and SaaS-based solutions. And we've made recent organizational changes to optimize efficient client delivery and support. We are encouraged by the growth and momentum in the segment of our business with our sights now set on continuing to scale the business and delivering improved profitability in 2020 and 2021. Turning to our Information Services segment, we delivered $194 million in net revenue during the fourth quarter, a 4% increase from the prior year period, bolstered by index licensing and investment data and analytics revenues. Over the course of the full year in 2019, Information Services rose 9%, driven overwhelmingly by organic growth with both the higher growth index and investment data and analytics businesses as well as the more mature market data businesses performing in line with their respective long-term organic growth objectives. The fourth quarter marked an interesting milestone for Information Services. For the first time, over 50% of revenue was generated by our higher growth index and investment analytics businesses. It's exciting to see this progress in the areas with clear secular growth opportunities, born out of our strategic pivot in action. And while quarterly figures can fluctuate, I expect this trend to continue over time. As we move into 2020, we're making investments to ensure these growth engines have the fuel to continue performing in the long term. For instance, we're working to bring eVestment capabilities and insights to the fast expanding private market space. Additionally, our new eVestment products, Research Management and Market Lens, give us new capabilities for our existing clientele and can provide new growth engines in 2020. Moving to our foundational marketplace businesses, our Corporate Services segment delivered revenue of $129 million in the fourth quarter, a 5% increase, boosted by particularly strong performance in our listing business and increased demand for our Investor Relations intelligence offerings. Full year organic revenue growth in Corporate Services was 3%. For the seventh consecutive year, Nasdaq led U.S. exchanges for IPOs in 2019, with a 78% U.S. win rate, welcoming 188 IPOs. We welcomed 50 IPOs in the fourth quarter alone, achieving an 82% U.S. win rate during the period. In 2019, we listed 10 of the top 15 IPOs by dollars raised. In total, the U.S. Nasdaq IPOs raised $34.5 billion in 2019, well in excess of the dollars raised by our competitor exchange. We are extremely pleased that our listing clients are demonstrating their trust in us as a true partner to them as they enter and navigate the public markets. Meanwhile, our Nordic, Baltic and First North exchanges continue to attract new companies from across Europe, adding 53 new listings, including 34 IPOs in 2019. I'm also very pleased to report that we had 16 new companies switch their corporate listings, from either the New York Stock Exchange or IEX to Nasdaq in 2019, including Exelon and the newly created ViacomCBS. Sanofi and TCF Financial also transferred U.S. components of their listings to Nasdaq, which combined with the 60 new switches resulted in an aggregate of $230 billion in global equity market capitalization coming to Nasdaq last year. On the private capital side, our Nasdaq private market business set a new record for annual volume in 2019, facilitating $4.8 billion in transaction value for private company liquidity programs. Demand for our IR intelligence offering drove growth in the Corporate Solutions sub-segment. We saw a 6% increase in the fourth quarter. I'm proud of the growing momentum in that business. It underscores the years of under-the-hood work by our team to focus and build solutions that best suit our clients' needs, like our new ESG offerings, expanding the ways we help them address the most acute challenges for our public issuers. Finally, our market services business delivered net revenue of $225 million in the fourth quarter, an 8% organic decline compared to the prior year period, reflecting in large part the lower volume and volatility comparison against a very active prior year period. For the full year, the organic decline was 3%, again, due principally to moderation in industry volumes in our largest equity derivatives and cash equities products. When I look at the factors that we have the most influence on, our competitive standing, as represented by our market share and capture trends, we deliver consistently in our lighter revenue categories, U.S. and European cash equities and equity derivatives. Our smaller FIC area continues to be a work-in-progress, where we're working to enhance our offerings to deliver the kind of performance we're looking for going forward. In the U.S., The Nasdaq Stock Market remains the largest single venue of liquidity for traded/listed cash equities, while in options we retained the largest combined market share from multiply-listed options, with fairly steady capture and share developments. In Europe, Nasdaq's Nordic List equity market share increased to 71% in 2019 versus 67% in 2018. As part of our broader commitment to engaging with our clients, I would like to highlight one regulatory development. Nasdaq introduced our total markets reform agenda last April, which outlines our ideas and proposals aimed to make the capital markets more efficient for investors and combined with our revitalized efforts, also attractive to small and medium growth companies. The blueprint also highlighted our thinking around areas where we could help our clients be more effective in the market. In that regard, we are pleased to see the SEC propose the merging of the Consolidated Tape facilities to propose and to propose governance changes to give customers more involvement in the SIP plans. As we review the SEC's proposal in detail through the comment period, we will focus our comments and recommendations on ensuring the best interest of the market and the goals of the plan are maintained going forward. Switching gears, I would like to talk now about our efforts to advance our practices in corporate sustainability, both within our own operations and as we support our clients in solving complex challenges. Nasdaq launched several ESG-focused commercial offerings in 2019 to meet demand from our clients across our respective businesses. This includes our ESG advisory program for corporate clients; the Nasdaq Sustainable Bond Network, the Nasdaq Center for Corporate Governance, as well as publishing our global ESG reporting guide. And just this past week, we announced our new ESG workflow technology to simplify the ESG reporting process for public companies. Our offering is in response to corporates seeking to bring efficiency to a process that more often than not is plagued by data management challenges and survey fatigue. We are excited to be a strategic partner to our clients in this rapidly growing area of the market. We're also very proud to have announced that Nasdaq achieved carbon neutrality across our business operations, changing our energy sources where possible to renewable energy and purchasing renewable energy certificates that offset the emissions impact of our office locations, data center usage, corporate travel and employee commuting. Nasdaq is also actively exploring ways to further reduce both its consumption of resources and resulting emissions. As I've said, 2019 represented an important year in terms of progress on our strategic journey. As we continue on that path, I'd like to share our core ambitions for the next several years. First, it is to become the most trusted and most successful market technology and regtech partner to trading firms, financial marketplaces and new nonfinancial markets worldwide. Second, is to evolve as a strategic market operator and specialized analytics partner to the investment management industry across index, active and alternative management. Third, is to serve as the destination exchange and partner of companies worldwide, with unparalleled expertise across equity markets, investor relations and governance. Fourth, to strengthen our position as a preeminent market operator in North America and Europe, by enhancing the client experience across the trading, data and connectivity aspects of our exchange complex. And fifth, to be the trusted provider of liquidity solutions for private asset classes, including private company shares, private equity funds and other traditional and digital assets. We intend to execute against these ambitions through the combination of the incredibly talented and client-focused Nasdaq team, by understanding the clear needs of our customers as we work together and lastly, by investing in and embracing the capabilities of today's most powerful technologies, in particular, cloud and machine intelligence, notably through the deployment of the Nasdaq Financial Framework to accelerate the delivery to our clients. We look forward to updating you on our progress on these ambitions in the quarters to come. As I wrap up, I will summarize by saying our fourth quarter produced solid results for Nasdaq, completing a successful 2019 for our company. Moving forward into 2020, we remain relentlessly focused on advancing our strategic pivot to maximize opportunities as a technology and data analytics provider, while maintaining segment leadership in our foundational marketplace businesses in the U.S. and Europe. I remain confident we are moving Nasdaq in the right direction this year as we capitalize on the strong momentum generated in 2019. And with that, I'll turn it over to Michael to review the financial details.

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'll start by reviewing fourth quarter revenue performance as shown on page 3 of the presentation and organic revenue growth on pages 4 and 14. The $1 million increase in reported net revenue of $646 million is a net result of 6% organic growth in the non-trading segments and a $5 million net positive impact from acquisitions and divestitures. This is largely offset by the 8% organic decline in market services as compared to last year's active Q4 and a $5 million unfavorable impact from the changes in foreign exchange rates. I will now review quarterly highlights within each of the reporting segments. We start with Information Services, which is reflected on pages 5 and 14, saw a $7 million or 4% increase in revenue. Organic revenue growth during the period was 4%, reflecting growth in the investment, data analytics and index businesses. Excluding investments purchase price adjustment on deferred revenues in Q4 2018, organic growth would have been 3%. For the full year of 2019, Information Services organic revenue growth was 9% or 6% excluding the investment purchase price adjustment with the growth coming primarily from non-regulated sources. Market technology revenue as shown on pages 6 and 14, increased $22 million or 29%, including organic growth of $9 million or 12%. Organic growth during the period primarily reflects an increase in change request revenues and Software as a Service surveillance revenues as well as an increase in the size and number of software delivery projects. Annualized recurring revenue totaled $260 million, up 17% year-over-year and represented 66% of annualized fourth quarter segment revenues, down from 76% in Q3 2019 primarily due to the increase in change request and software deliveries revenues during the fourth quarter. For the full year 2019, market technology organic revenue growth was 11% and the operating income margin totaled 16%. As previously stated, in 2020 we expect to begin to see year-over-year margin improvement in the segment as we leverage our investments in the Nasdaq Financial Framework over a larger recurring revenue base and experience the benefits of the run rate synergies achieved from the Cinnober acquisition. Turning to Corporate Services on pages 7 and 14, revenues increased $6 million or 5% due to organic revenue growth reflecting an increase in the number of listed companies and higher revenues from our IR intelligence offerings. Market services net revenues on pages 8 and 14, saw a $24 million or 10% decrease. Excluding the negative $3 million impact from unfavorable changes in foreign exchange, the organic revenue decrease was $21 million or 8%. The organic decline during the period reflects decreases in cash equities, equity derivatives and FIC trading revenues, primarily due to the lower industry trading volumes compared to the particularly active Q4 2018 period. Turning to pages 9 and 14 to review expenses, non-GAAP operating expenses increased $5 million to $335 million. While expenses came in at the high-end of our range, the year-over-year increase reflects only a 2% or $8 million organic increase. In addition, there was a $1 million increase from the net impact of acquisitions and divestitures, partially offset by a $4 million favorable impact from changes in foreign exchange rates. During 2019, the company's organic expense increase totaled 2%. Turning to slide 10, we're initiating our 2020 non-GAAP operating expense guidance range of $1.31 billion to $1.36 billion. Adjusting for foreign exchange rates, the midpoint of the expense range represents an approximate 3% organic increase year-over-year consistent with our medium-term 3% expectation. Moving to operating profit and margins, non-GAAP operating income increased $4 million in the fourth quarter of 2019 and the non-GAAP operating margin was 48%. During the full year 2019, the non-GAAP operating margin increased 1 percentage point to 49% versus 48% the prior year. The increase in the full year margin reflects in part the benefits from a business model that is becoming more scalable as we evolve. We strategically pivoted to reorient our product and business portfolio towards more SaaS offerings and we continue to make investments in our technology platform that we expect to provide for even greater operating leverage in the future. Net interest expense was $26 million in the fourth quarter of 2019, a decrease of $9 million versus the prior year due to lower debt balances and refinancing the 5.55% US$600 million denominated bond with a new 1.75% €600 million notes. The non-GAAP effective tax rate was 25% for the fourth quarter of 2019 and 26% for the full year 2019. The 2019 tax rate came in at the lower end of the full year guidance, primarily due to reduction in U.S. taxes associated with certain foreign-derived income. For the full year 2020, we expect the non-GAAP tax rate to be between 25.5% and 27.5%. Non-GAAP net income attributable to Nasdaq for the fourth quarter of 2019 was $215 million or $1.29 per diluted share, compared to $207 million or $1.24 per diluted share in the prior year period. Turning to capital on Slide 11. Debt decreased $91 million versus Q3 2019 primarily due to net payment of $148 million of commercial paper, partially offset by a $56 million increase in Eurobonds book value caused by the stronger euro. Our total debt-to-EBITDA ratio ended the period at 2.6 times unchanged from the third quarter of 2019. During the fourth quarter of 2019, the company paid a dividend in the aggregate of $77 million. And during 2019, the company returned 505 million to the shareholders through dividends and our share repurchase program with the latter achieving objective of keeping our diluted share count flat. With that, I thank you for your time, and I'll turn it back to the operator for the Q&A.

Good morning, Adena. Good morning, Mike. My first question is about market structure. There seems to be a lot happening, including your comments on the SIP, the SEC proposals, and the recent approval of the CBOE market close order. Adena, what is your plan if the SIP proposal gets approved? What are your thoughts on implementing that plan? Do you believe these changes will have a positive impact on Nasdaq?

Well, I think that as you all know the way that the SEC process works is they're putting out a proposal for rulemaking. And there actually really was a pre-proposal before the proposal for rulemaking. So that is the start of a pretty long and comprehensive process to consider changes in the governance and composition of the securities information processor plans. And so there will be ample opportunity for us and all of our clients and peers to comment and provide recommendations to the SEC along the lines of their proposals. And I think that that will ultimately kick off most likely a multi-year process for determining the future of that part of the market structure. And we are pretty encouraged by some of the things that they have in their proposal and other things that we certainly will have an opinion about, as we think through what is best for the markets. How do you leverage the securities information process in the right way? If you think about it, it is a regulated, in our opinion, kind of monopoly component to the industry. So how do you make sure that you're governing it the right way? And how do you make sure that you also are giving our clients proper choice and alternatives with proprietary products in the market? So we have a lot to think about as we go forward. But we are pleased that the SEC is taking it on and considering it. We do think there's some elements that need to be modernized and as we had laid out in total market's proposal.

Thank you. My follow-up question is that you already touched on your strategy going forward after implementing the strategic pivot over the last couple of years. I'm trying to understand how this strategic pivot and the divestment of underperforming assets have been perceived positively. Can you highlight the differences between what you've been doing over the past three years and the five things you've outlined?

That's a great question, Rich. I believe the five goals we have set for the upcoming years align with the strategic pivot we've established. We are making progress on this front. When we initially announced the pivot, we focused on identifying the long-term trends our clients are navigating, specifically over the next decade. Looking back to 2017, we assessed what changes could potentially impact our clients and how we should align ourselves accordingly. Now, three years into this long-term journey, our ambitions for the next several years are more of a continuation rather than a shift in direction. We have gained confidence in our ability to meet these ambitions, striving to be the most trusted market tech and regtech provider in the industry. Our Nasdaq Financial Framework, technology implementations, and cloud-based services all enhance our confidence in expanding and accelerating our business. Additionally, in our Data Analytics division, we have developed a deeper understanding of the investment management industry that we lacked when we started this pivot. eVestment has provided us with valuable insights and expertise, allowing us to consider how to broaden our offerings and become a more strategic partner. These are just a few examples that reinforce our belief in our strategic direction. I outlined five ambitions, with the fifth being private markets, which is still a small business for us, but we're noticing positive momentum in private asset liquidity solutions. We've received encouraging feedback on our private equity fund and core private shares offerings, and we plan to further expand in that area, making it one of our key focuses.

Got it. Thank you very much, Adena.

Thanks.

Good morning. This is actually James Steele filling in for Dan.

Hi, James.

My question is in the info services segment just on the sequential decrease in market data revenue. I think you mentioned FX is a driver of that but I was just hoping you can maybe elaborate if there's anything else that drove that sequential decrease.

On the sequential side, one of the key factors was a drop in the reported revenue from unreported revenue usage. In Q3, that was $9 million, and this quarter it was about $5 million. So, that was one of the other key drivers quarter-to-quarter.

Okay. That helps. And then my follow-up is just sticking with the same segment 400 bps decrease in operating margins sequentially. Was that $9 million also a factor there?

Yes, so that was a part of it. And there was also some increased investments both in infrastructure and the new initiatives that Adena referred to earlier as well as there's some timing around some of the compensation in there as well. So that was some of the key drivers on why the expenses were up higher in the quarter.

Great. Thank you.

Hey. Good morning, everyone.

Hello.

So just on market tech, this was another strong quarter even after accounting for some seasonality. Adena, could you provide us with an update on the customer mix and revenue contribution from non-financial sectors and some of the newer markets where you're gaining traction? Also, could you give us an update on the competitive landscape in this business, including in-house client initiatives or newer FinTech entrants in the space, as your total addressable market continues to evolve?

Sure, I think we view our business's revenue success and growth through four main areas. The first is our core marketplaces business, which includes exchanges and financial markets as key revenue sources. The second area is our regtech offerings, particularly our smart surveillance tools for banks and brokers. The third area involves providing trading technology solutions to banks and brokers, and the fourth area is new market spaces. Most of our revenue still primarily comes from the first two areas, our core marketplace and regtech, both of which are demonstrating strong growth, with client contracts being renewed, expanded, and new customers being added, especially in the post-trade sector where demand is robust, along with ongoing growth of our SMARTS technology. One notable progress I want to highlight is the increase from one bank and broker client at the start of 2019 to six by the end of that year. These opportunities are intriguing because they're frequently offered as either a managed service or software as a service, providing a more holistic service that goes beyond just software delivery, including hosting and surveillance for clients. Additionally, as we enter 2020, we’re focusing on expanding our client base in the sports betting and gaming sectors, having launched two new clients in horse racing in Australia and Sweden this year, and engaging in European football through the football index. We've also ventured into insurance with Cinnober's risk modeling tool, enhancing our capabilities in that industry. Lastly, there's the transportation sector, highlighted by our partnership with Airbus. This area is still quite small but has significant growth potential as we delve deeper into these industry verticals. From a competitiveness viewpoint, I believe this sector is largely about scale, particularly in core market tech and trading solutions. We consider ourselves the leading scaled provider of comprehensive trade lifecycle solutions for the marketplace and financial institutions. In the surveillance domain, while some niche players continue to emerge, we've made substantial investments in machine intelligence and have introduced the Nasdaq Data Discovery platform for surveillance, allowing us to stay ahead of new entrants. Overall, I see this as a major opportunity for us, especially as the total addressable market grows with our expansions in banks, brokers, and new markets.

Very helpful. And then just a quick related follow-up on the margins in the business. Again, like following the heavy investment phase, the improvement has been solid over the last couple of quarters. Now I appreciate that this can be lumpy. But should we expect some of these margin benefits in the business to play out more in 2020 or think of more of a sustained level at a 2021 event? Again, thinking of it as a year-over-year improvement. Thanks so much.

Yes. We evaluate that from a year-over-year perspective. As mentioned, quarterly results can fluctuate. However, on an annual basis, we anticipate being able to demonstrate growth in our margins along with our revenue growth as we progress through 2020 and into 2021. We've consistently communicated this expectation and are confident in delivering on it.

Great. Thank you, very much.

Hey, thanks. With the Airbus and I'm going to butcher this but Skytra deal...

That's right. Skytra. You got it.

I was just hoping to get a little bit more detail on what that opportunity looks like. Like maybe first, what exactly air travel price derivatives might look like. And is there any way for us to think about the size of that potential market?

Airbus approached us with a creative idea focused on enhancing revenue stability for airlines and travel agencies. Their goal is to enable airlines to plan further ahead with greater confidence in their revenue, which would facilitate larger capital investments, including new aircraft. This initiative led to the establishment of a new subsidiary named Skytra, which aims to leverage extensive data on ticket prices from both sales and actual passenger travel. They analyze various routes, such as from New York to London or from the Eastern U.S. to Europe, identifying pricing trends. By creating an index based on this data, they can develop futures that serve as a hedging tool for airlines and travel agencies to mitigate revenue risk and adopt a longer-term perspective. Our role involves delivering the trading solutions, surveillance, and various other services throughout the trade life cycle, offered as a SaaS-based solution that utilizes our advanced technology. We are very excited about this collaboration.

Interesting, interesting. And then just, I guess, on the follow-up and this is similar to your answer to Ari on the last question, but can you just remind us for market tech wins can you remind us of the typical ramp time line from signing to kind of P&L contribution for something either like this in non-financial markets or more traditionally like the two new sell-side execution venues you guys signed in 4Q?

Yes. The longest timeline for trading solutions is the time it takes to get a signature. From the initial meeting to signing can take a while. After signing, launching a simple system typically takes about six months, while a more comprehensive system might take nine to twelve months, depending on the client's complexity. Clients often need to integrate the solution into their existing systems as well. Generally, nine to twelve months is average from signing to production. For more complex post-trade systems, the timeline can range from eighteen months to two years to deliver a full end-to-end solution for larger clients. We currently have several of these projects in progress.

From a revenue recognition perspective, as we begin to develop the platforms over a period of six to twelve months, we will recognize revenue during the platform construction phase. This delivery phase typically incurs higher costs. As we transition more towards SaaS, costs will decrease in the future. Currently, there are elevated costs, and after the twelve-month mark or post-implementation, we will see more stable revenue streams.

Yes, the margins do improve as we go into production after we've been able to complete the development phase.

Perfectly. Thanks so much you guys.

Thank you.

Yeah. Hey, good morning, everyone. Wanted to stay on market tech, but want to bring it back to the numbers for a second. I mean Mike you went through kind of the growth numbers here. And I think you said the organic growth was primarily driven by the nonrecurring portion. So maybe you can also tell us how organic was on the recurring side given that's how we are supposed to measure you? And then related to that maybe just dimensionalize like how we should be thinking about the nonrecurring portion because that obviously was up more than 50% this quarter. So is this going to be more balanced? Is Cinnober making it more balanced? Or as we think about the 2020 how do I think about the trajectory of those kind of like more onetime-ish items or both items?

Yes. As you know, there is usually more activity in the fourth quarter regarding change requests and other factors. If you examine the annualized recurring revenue slide, you'll notice that the ARR increased from $255 million to $260 million during the quarter. This suggests a positive trend in recurring revenue within the business. You can monitor this regularly to understand the recurring revenue changes in relation to the change requests and similar factors.

And I wouldn't say Cinnober necessarily changes the composition of that. No. I think that we are finding that their revenue was generally consistent with the way that we look at it in terms of both the recurring and non-recurring revenue.

Okay. Fair enough. And then –oh sorry.

And that's slide 19, you can kind of see the sequential quarter-over-quarter increase.

Sure. And then just coming back to Rich I think at the beginning of the call you mentioned the CBOE, I guess closing cross but then I think there was not really a question about it. So I guess coming back to it for a second. Now that we're a little bit closer to this, I know you commented on it a couple of years ago when this was first envisioned but any updated thoughts on kind of like the addressable market there? I mean, clearly some of this pre-cross already exists in the brokerage world. So what is really the addressable market? Maybe dimensionalize a little bit more? And it would be great if you could actually give us some of the economics that you're deriving from that maybe at risk portion of the closing option?

Sure. Well, I think – first of all, we don't separately disclose kind of different components of the U.S. equities trading business. But I would say that, generally, we don't expect this to be a material change to our financials in terms of how we're going to address it. I think what we've been focusing more on Alex over the last couple of years is enhancing the functionality of the close. We've been making some changes and really working very closely with the buy side and the sell side to implement changes that really continue to make the close, as I would say as functional and as useful as possible in generating a true reflection of supply and demand at the close. If you think about it several trillion dollars of assets under management are tied to that price. So having it be a really comprehensive supply-and-demand price discovery event is critical. We were quite disappointed to see that the SEC ultimately approved that rule filing not from a financial perspective, but really frankly from a market perspective and investor perspective. We had issuers ride in. There were indexers who rode in. There were investors, who expressed concern and yet the SEC really didn't address a lot of their concerns in the approval order, but rather just decided that exchange competition is more important in our opinion than the quality of the closing price. So we're pretty disappointed in that, but having said that, we've been working with our clients for the last couple of years. We expect to be able to address any concerns they have with regard to this new entrant and make sure that we continue to have a very vibrant close. And we don't see any material impact on that on our financials from that.

Fair enough. Thank you.

Morning, everyone. I wanted to dig into actually the new order intake and market tech a little bit. It's obviously a very big number. I wonder if that was concentrated – if you think color in terms of the concentration in terms of not specific needs was it just one or two deals that drove that? And then just what type of deals they were just so we can think about the revenue realization.

We were very pleased with the number. We've been working on these new contracts for many months, and they all came together in the fourth quarter. We have some significant existing clients, such as the Japan Exchange Group and FINRA, which are large-scale, long-term contracts that we have been focused on to expand our agreements. In addition to these key clients, we also signed two new banks and finalized several smaller new deals in the fourth quarter. As we have noted, order intake can be quite irregular, and this year has been particularly so. However, this has positioned us well for securing and growing our revenue within our existing client base as well as acquiring new customers. While there were definitely more names in the fourth quarter compared to earlier quarters, some of the larger names notably contributed during that period.

Thanks. And just – just on the change request. I believe you mentioned in the last quarter you pulled forward $2 million to $3 million. So I mean just kind of going back to Alex’s question a little bit. Is this just increasing just in overall magnitude? It seems out – a little bit outsized relative to what we've seen in the past.

Yeah. There were a couple of other deals that – specific requests that came through, specific transactions both on the change request and also on some of the software deliveries that were higher this quarter than we typically see in Q4. So we had both last quarter and this quarter that we continue to see the increase in that business. So you're right, there were a couple of other specific situations, where we had some additional requests being done.

Thanks.

I want to clarify Alex's question regarding the recurring revenue. The $255 million to $260 million I mentioned actually refers to the Q3 to Q4 period. This has been progressing in terms of the annualized recurring revenue rate. Looking back at last year’s $222 million, which included Cinnober, we expect the structure of their business to remain quite similar. We are indeed experiencing the benefits as our recurring revenue continues to grow, along with the change requests we discussed.

Great. Thanks very much. Good morning, folks. Maybe just go back on to the ramp-up in market technology. Adena, can you frame how many non-financial clients you have now? I know that was just a handful way back when you were starting this effort and how large that contribution is. You mentioned the four different elements of market tech as being the fourth. Just want to get a sense of how big that is. And when you think about the new air travel price derivatives, is that something that can be rolled out do you think potentially to many carriers? And then, as we look at the growth trajectory in this business, it was 12% in the fourth quarter. It's above your 8% to 11% guide. If you combine that with pretty good growth in the other segments, are you looking at a potential of even exceeding once again the 5% to 7% growth for the target for 2020 in recurring revenue?

There's a lot to discuss. Let's begin with the non-financial markets. I think we're estimating around 15 clients in that sector, although that's not a precise figure. Among those clients, at least five to seven are new clients we acquired this year, indicating growth in this area for us. We have gained new clients in sports and transportation, along with others in non-financial markets. While it's still a small part of our business, it is growing, and the total addressable market continues to expand. Regarding our overall growth rate in market technology, we still feel that the 8% to 11% range is the best way to assess the business going forward. We will keep evaluating this as we progress. We're pleased to see that the growth characteristics align with that rate. It's important to us to continue delivering on that target, which is why we are investing in the business. We believe that the increase in our investments will be outpaced by revenue growth, allowing us to show some margin expansion heading into 2020 and 2021. You also mentioned the non-trading businesses overall.

Yeah.

The overall growth rate we believe is around 5% to 7%, which we see as the appropriate way to assess our mid- to long-term outlook. We continue to think this is the best approach to evaluate our business.

Okay, great. Thank you.

Good morning. I wanted to discuss the ESG offering a bit more. I know this has been important for your team for quite some time, especially within your European operations. Could you elaborate on how this offering is different from some competitors, particularly in the exchange space that we've seen recently, and share your thoughts on sizing for this category moving forward?

It is still an emerging commercial area for us, with two main focuses. One focus is on investable products, which include sustainable bonds, particularly those in our European market, and our newly launched Sustainable Bond Network in the United States, led by our European team. We are also looking at ETFs and ESG-related indexes as part of this category. The other focus is on supporting our corporate clients. We distinguish ourselves from many peers by emphasizing our role as a valuable partner to companies facing increasing demands from investors regarding ESG management and reporting. This landscape is complex, with numerous standards and metrics involved, and companies require our assistance. We are committed to being that partner, particularly in Europe, by encouraging ESG reporting and providing tools, advice, and consulting services to support this growing area. This has proven to be an intriguing commercial opportunity for us. As we move into 2020, you can expect to hear more about this as we plan to enhance our consulting services with technological solutions. However, I want to emphasize that this area is still quite small and represents a new frontier for everyone.

Okay. Thanks for taking the question.

Hey, good morning, everyone. Just wanted to touch base on capital priorities as you guys look out into 2020. So I saw you paid down a little bit of commercial paper in the fourth quarter. It feels like the leverage level is, kind of, where you want it to be. So maybe some updated thoughts around the buyback in particular as you guys are looking out in 2020? Thanks.

Thank you for the question. We plan to continue with our capital strategy as previously outlined, focusing on great opportunities for investment and prioritizing growth for the business. Additionally, we aim to increase the dividend as our earnings and cash flow increase. Regarding share buybacks, we will use them to mitigate the dilution from our equity programs. If there is extra cash available after considering our debt levels, which are currently within our targeted leverage, we will maintain our investment-grade rating. If there are no specific investment opportunities in the near term, we may consider additional buybacks, but this will be assessed over a longer timeframe rather than on a quarterly basis, aligning with our previous capital plans.

Good morning. Thank you for taking my question. I would like to revisit the Skytra deal. I have never considered that Nasdaq could partner with an airplane manufacturer. Adena, you mentioned that Airbus contacted Nasdaq for this partnership. Was there a competitive bidding process involved? Additionally, can you discuss what other initiatives Nasdaq is undertaking to enhance the potential for inbound deals like this and how Nasdaq is expanding its outreach to explore new markets in different industries? Thank you.

Sure. The process of becoming partners with Airbus is something that you would need to ask them about. Generally, we want to ensure that people are aware of our collaborations with companies like Airbus to encourage more inbound interest. Simultaneously, we have been enhancing our sales organization in new market spaces, which is an area we are investing in within market technology. We aim to have the right expertise to cater to industries where we see the most interest and adopt a market-driven approach. This includes sectors like transportation, insurance, and sports, where we've been investing in sales alongside ensuring our technology remains relevant. We are also developing modules within our technology to showcase our capabilities to these new non-financial markets, which often require further education. Furthermore, we are exploring additional partnerships to facilitate quicker and easier deployment of these technologies to our customers. All of these efforts contribute to the expansion and growth of this part of our business. While inbound interest is welcome, it is crucial for us to actively identify and surface opportunities as well. Therefore, our sales initiatives have significantly ramped up.

That's very helpful. A related question is that I want to go back to slide 19. I'm trying to understand the numbers a little bit better. You mentioned that the third quarter new order intake was $62 million, and the fourth quarter was $204 million, which is three times higher. However, the Annual Recurring Revenue remained fairly flat. How should we interpret these numbers? Should we expect that the first quarter of 2020, or the second quarter of 2020, will show higher ARR? What is the best way to reconcile these two figures?

With regard to the new order intake, some of it is recognized within the quarter, but a significant portion of the $204 million will convert into annual recurring revenue over time. The conversion depends on certain contracts included in that $204 million that are renewals of existing agreements. For instance, if we renew a client’s contract for another five years and there’s an increase in their payment, that would positively impact the annual recurring revenue. Continuing to add new clients and contracts will also drive this growth. It's important to note that the new order intake figure is not annualized; it reflects multi-year commitments, meaning the $204 million could represent a five-year total or vary based on contract size. This amount captures the full value of the order intake over the entire contract duration.

I believe the progress of our ARR from quarter to quarter throughout 2019 has been quite strong. As Michael mentioned, most of the $204 million will contribute to either the continuation or growth of ARR. However, it's important to note that there are many factors involved in these figures. We are still adapting to reporting ARR, which is new for us, and we will strive to enhance our explanations so that you can better understand how to interpret it in relation to our order intake moving forward.

Thank you.

Good morning. This is actually Sameer Murukutla on for Michael Carrier. Thanks for taking my questions. Just a question related to the expense guide. And I think you announced the divestment of NFX to EEX I think. So when is that expected to close? And I guess how much of the benefit are you seeing from that divestment, in the 2020 expense guide? And I guess just with the R&D guide, I think that's up around 20% year-over-year. Can you provide some details on, what's flowing into R&D guidance in 2020?

We expect the NFX to continue transitioning to EEX through the first quarter of 2020, and it will start to be reflected less in our financials as we move into the second quarter. This was an R&D initiative, which has been included in our R&D numbers. So, essentially, we are reallocating funds that were previously spent on NFX towards higher growth opportunities. We are focusing our R&D efforts on areas with significant market potential and real growth prospects. The increase in R&D investments correlates with rising revenues, particularly evident in our work with banks and brokers as we enhance our trading solutions for them. The growth in our client base is leading to higher revenues in that sector, and consequently, we are also increasing our investment in that business to support this revenue growth. When we present our cost guidance and R&D expenditures, we are only showing one side of the equation, but revenues are also on the rise, keeping the net cost of that program relatively stable year-over-year.

Good morning. Thank you. Is strategic M&A still a priority for Nasdaq? Or do you feel like, the focus at least for 2020 will be more centered on your organic growth opportunities?

We constantly assess potential acquisitions as part of our strategy. Our focus is on whether these acquisitions can help us achieve our goals in specific segments, such as broadening our client base or enhancing our capabilities to serve clients in new ways, particularly in technology, data, and analytics. Last year, we made a small acquisition in corporate services, and we remain open to pursuing acquisitions in market services as long as they align with our financial criteria. It's worth noting that the current environment has made acquisitions quite expensive, so we are very deliberate in ensuring we have a strong financial model and clear strategic advantages before proceeding with any M&A activities. This has instilled a discipline at Nasdaq, as we evaluate many opportunities but have only moved forward with a select few.

I think if you look at the priorities and strategic ambitions that Adena outlined in her comments with the five that we mentioned earlier, those are organic pursuits that we are engaging in. And if there are opportunities to accelerate that with the M&A, then we will look to do so as long as that obviously meets the strategic and the financial criteria that we're looking at. But those additions are ones that we're pursuing organically.

Hi. Maybe just a follow-up on a prior question related to this Consolidated Tape proposal. Obviously, it's still really early days. But the SEC seems to want to develop this new governance committee to develop fair and reasonable fees for this new SIP. Do you have any idea what the SEC would view as fair and reasonable? Would it be a certain maximum operating margin or some other metric? And if that language makes its way into the final rule, do you see some risk to this overall SIP revenue pool? Or do you see that even being stable through the transition?

The first thing I would mention is that the fees in the SIP have always undergone a thorough regulatory process since the establishment of the SIP committees years ago. Therefore, there is already significant regulatory oversight whenever there is a proposed fee change. They have not specified what they mean by fair and reasonable. Our perspective is that the governance of the SIP and its structure will ensure client involvement in these decisions, while also acknowledging the substantial value generated by the products created. Additionally, the fees not only cover the creation of the product but also fund the regulatory oversight that exchanges need to maintain a fair market environment. All these factors are taken into account. However, I don't believe the SEC has clearly outlined their goals in this regard. We will have to see how things develop in the near future.

Understood. Thank you.

Great. Thank you. In closing, Nasdaq's fourth quarter and full year of 2019 was a solid performance and we are starting off 2020 with strong momentum. Our leadership team remains focused on executing our technology-led strategy to deliver for our stakeholders and I look forward to our continued discussions throughout the year on the progress we aim to make against our strategic priorities. Thank you very much for your time today.