Ato Garrett of Nasdaq's Investor Relations welcomed participants to the Nasdaq Second Quarter 2023 Results Conference Call and introduced Adena Friedman, the Chair and Chief Executive Officer, and other members of the management team. He reminded participants that certain statements may constitute forward-looking statements and that actual results may differ from these projections. Adena then took over the call.

Nasdaq has made significant progress in its strategic transformation since 2017 by allocating capital to their biggest growth opportunities, reorienting their businesses, and strategically divesting non-core assets. They have also recently announced the acquisition of Adenza, which is a key step in becoming a leading technology provider to the global financial system. They are dedicated to helping their clients manage the risks of new regulations and reforms.

The Adenza acquisition will increase Nasdaq's serviceable addressable market by 40%, and Adenza has maintained strong ARR growth in the high teens. In the first half of 2023, Calypso and AxiomSL both saw strong growth in new logo-wins and client up-sells, validating the acquisition thesis. Nasdaq's focus upon closing the acquisition will be to maximize the benefits for clients and shareholders.

Nasdaq reported $925 million in net revenues in the second quarter of 2023, an increase of 4% from the prior year period. The Solutions businesses saw a 6% increase in reported and organic revenues, and the Capital Access Platforms division saw a 4% increase. The Index business saw an increase of 4% organically due to strong market performance and inflows. The company plans to delever, increase dividends, and buy back stock over the next three years in order to offset employee and deal related equity dilution. The transaction is expected to close within five to eight months, subject to regulatory approval and customary closing conditions.

Nasdaq experienced 5% growth in their Workflow and Insights revenue, driven by a sustained demand for IR and ESG solutions and analytics solutions sales to asset managers. Data & Listing Services revenues grew 2%, with 5% growth in data revenues and stable listings revenues. Nasdaq has welcomed 48 new operating company IPOs year-to-date and has a strong pipeline of companies committed to listing. Additionally, there have been six new listings across their European markets.

In the second quarter, the Market Platforms division delivered $397 million in total revenues, a 2% organic increase from the prior year period, driven by an increase in Marketplace Technology revenues. Nasdaq's Closing Cross successfully executed 2.6 billion shares representing $62 billion in market value in 8/10 of one second. The company also announced an agreement to sell its European power trading and clearing business to the European Energy Exchange, which is expected to close in the first half of 2024. Additionally, the company is investing in opportunities that will deliver the most value to clients and shareholders, including expanding leadership in providing sustainability solutions with Puro.earth.

Nasdaq has decided to halt the launch of their US digital asset custodian business, but they are continuing to build and deliver technology capabilities to the global industry. They are also engaging with regulators, delivering comprehensive technology solutions, and partnering with potential ETF issuers. During the quarter, they expanded their partnership with Chile's DCV and signed a partnership with Brazil's B3 Exchange to deliver a new clearing platform.

Nasdaq delivered seven major market infrastructure projects in the second quarter, including powering the launch of the Stock Exchange of Thailand's new trading system. The Anti Financial Crime division saw a 19% increase in revenue, and signed 51 new financial institutions to their FRAML solutions. Additionally, the Surveillance solutions saw 13% revenue growth with 10 new clients and several large clients signing long-term renewals.

Adenza's strong customer wins and cross-selling activity, combined with Nasdaq's client-centric culture and diversified business model, have enabled the company to perform well in different market environments and set them up for faster growth in the future. Nasdaq also recently announced the sale of their power trading business in Europe, which is expected to reduce annual revenues and expenses by approximately $35 million and $20 million, respectively. Adenza has achieved year-over-year ARR growth in the high teens with both Calypso and Axiom each delivering solid double-digit ARR growth over the past year.

Nasdaq has secured financing for the Adenza acquisition through a successful bond issuance and is investing the proceeds in highly liquid and low-risk investments. The estimated weighted average cost of debt is just under 5.5%. Going forward, Nasdaq will use their free cash flow to generate return for shareholders, with 26% of free cash flow being returned in dividends and $230 million being used to offset employee-related dilution.

The company plans to increase their dividend to a 35-38% payout ratio over the next three to four years, and Adenza is expected to generate $300 million in unlevered pre-tax cash flow in 2023. The company's priority is to reduce their leverage ratio to 4.0 times within 18 months and 3.3 times within three years, and they have the flexibility to pay down $2 million between now and 2026 without any prepayment penalties. The excess annual free-cash flow beyond dividends and employee-related buybacks is expected to grow commensurately with earnings growth over the next three years.

Nasdaq reported a 4% increase in net revenue of $925 million for the second quarter of 2023, primarily due to a 6% organic increase in the Solutions businesses and stable Trading Services revenue. Non-GAAP operating income increased 1%, while the non-GAAP operating margin of 52% was down approximately 140 basis points from the prior year period. Non-GAAP net income attributable to Nasdaq was $350 million or $0.71 per diluted share. The company plans to use the majority of its free cash flow to execute share buybacks and maximize the client and shareholder benefit from the Adenza acquisition.

In the second quarter of 2023, ARR totaled $2.1 billion, an increase of 6.5%, and SaaS revenues totaled $755 million, an increase of 11%. The Market Platforms division saw an organic increase of 2% in revenue, with Trading Services flat and Marketplace Technology seeing 5% growth. ARR for the division totaled $516 million, an increase of 5%, with a decrease in operating margin of 200 basis points due to lower European trading activity and investments in new growth opportunities.

Capital Access Platforms saw an increase in revenues of 4% or $16 million, with organic growth of $15 million, driven by a 4% increase in Index revenue and higher pricing per contract. Data revenue increased 5%, Workflow & Insights revenue increased 5%, and Anti-Financial Crime revenue increased 19%. ARR totaled $1.2 billion, and the division operating margin was 55%.

The Anti-Financial Crime division saw a growth in revenue and operating margin in the second quarter of 2023. Specifically, their Fraud Detection and AML solutions revenues grew 23% and Surveillance revenues grew 13%. The operating margin was 36%, which was an increase of 9% from the prior year period due to a one-time adjustment to the incentive compensation program. Non-GAAP operating expenses increased by $28 million due to higher compensation and benefits, technology spend, and the timing of annual merit adjustments and equity grants. The company is narrowing their 2023 non-GAAP operating expense guidance by $30 million.

Nasdaq's second quarter results reflect the company's ability to perform well in a variety of operating environments. The company's expense guidance range now represents an annual expense increase of just below 5% for 2023, with expenses expected to be near the middle of the range. The company has no long-term debt maturities until 2026 and has a strong balance sheet and cash flow generation. During the second quarter of 2023, the company paid common stock dividends of $109 million and has an aggregate of $491 million remaining under the Board authorized share repurchase program.

Adena Friedman provided an update on the implementation and revenue of the two new Tier 1 and Tier 2 clients signed in Anti-Fin Crime in the second quarter. She said the implementation period would likely be six to nine months and they should be online before the end of the year or early next year. She also mentioned the encouraging pipeline of larger banks that are working with them in either contracting or proof of concepts. Lastly, she highlighted that the Index AUM has recovered a lot and that the revenue was much stronger than expected due to pricing on certain contractual milestones.

Adena Friedman is excited about the acquisition of Adenza into Nasdaq and believes that it will help the company serve financial institutions more holistically. She is surprised by the negative reaction from investors since the announcement.

Adenza is a private company that seeks to provide investors with education and insight into its products and services. It has seen 15% growth, 98% gross revenue retention, 115% net retention, and has been signing on new clients worldwide. The company is excited to help banks solve their most challenging operational problems and simplify complexities with technology, especially with the new proposed rules from the Fed.

Adena Friedman discussed the success of Nasdaq's Capital Access Platforms in expanding globally, with particularly strong demand from China, Korea, and Southeast Asia, as well as Latin America. The Data Link platform is also growing nicely, offering unique data sets to clients.

Adena Friedman explains that Data Link offers a range of data sets through a modern API structure, making it easy for clients to integrate the data into their internal systems. She then goes on to discuss the sales strategy of Calypso and Axiom, which have two separate technology platforms that they use to cross-sell to clients. They are also starting to demonstrate the power of the business by sharing data through APIs.

Nasdaq has a go-to-market strategy that includes a product team with product marketing and product sales, an enterprise sales team that is regionally focused, a client success team and an implementation team. The client success team is matched up with specific enterprise sales people for consistency and the goal is to provide an umbrella go-to-market and client service capabilities across multiple products. This strategy allows Nasdaq to explain their complete solution suite and deploy their product teams to meet customer needs.

Adena Friedman answered a question from Alex Kramm regarding Verafin's ARR, stating that the business is generally healthy with 47 new small to medium bank clients signing on in the quarter and 10 new clients in the Surveillance business. Additionally, she mentioned that there was a 20% growth in signed ARR year-over-year. Friedman also mentioned that there had been a divestiture during the quarter as part of the strategic pivot.

Adena Friedman explains why OMX, which is now part of the Nasdaq family, is a core component of the Nasdaq strategy. She states that the Nordic markets have great retail participation, financial ecosystems, and listing environments, and that the OMX team in Europe works alongside the Market Technology team to help develop other markets around the world. Additionally, there is a strong data sales component to the Nordic markets.

Adena Friedman discussed the role of the Market Tech team in helping Nasdaq expand its technology across the world, integrating ESG culture, and creating a carbon removal marketplace. They have also been working on making their technologies more consistent between the US and European markets, and have deployed their Fusion platform in the Nordic market. The combination of AxiomSL and Calypso has been successful in driving revenue synergies.

Adena Friedman explains that Adenza is just beginning to demonstrate the potential of their cross-sells and revenue synergies. They have had five cross-sells and two more recently, and the hope is that this will shorten sales cycles. Additionally, the revenue composition of Calypso and Axiom varies by bank tier, and the combination of their platforms and ASC capabilities and Market Tech can help them expand in tiers where they are less penetrated.

Adena Friedman explains that Adenza is gaining market share by winning mandates from companies that have competitors. They have a modular approach that allows them to penetrate clients by demonstrating their value, reducing their internal spend, and replacing their competitors. This strategy has been successful for Verafin, where they initially penetrated a client with their alerting capabilities and then showed them their superior workflow.

Adenza is experiencing high revenue growth due to new clients and upsells, as well as existing clients. The existing clients have contracts with a volume component, which allows Adenza to take a larger share of wallet and become a managed service provider. This is allowing them to expand their market opportunity and become more sustainable.

Adena Friedman explains that Adenza does not have volume-driven contracts and that their revenue profile is more traditional. She also states that Nasdaq has halted their efforts to deploy a custody solution and become a custodian in the US crypto marketplace due to the lack of clarity and evolving regulatory environment.

Adena Friedman explains that the Verafin business has seen year-over-year growth rates in the 20% plus area, however, there have been ebbs and flows in the growth due to the combination of Surveillance and Verafin. She also states that while she won't give a projection, Verafin has seen great strength in the second quarter.

Adena Friedman, Chair and CEO, closes the call by thanking the participants and expressing excitement to continue updating them on progress in the business. She also mentions the upcoming merger with Adenza as part of the Nasdaq organization. Brian Bedell then asks Ann Dennison to clarify the revenue and expense impact of the Power business, to which she responds that there will be a reduction in revenues of around $35 million and approximately $20 million reduction in expenses. She also adds that they plan to reclass the decline out of the Market Platforms business into the Corporate and Other segments.

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This summary was generated with AI and may contain some inaccuracies.