Good day and thank you for standing by. Welcome to the Nasdaq Second Quarter 2023 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there'll be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Ato Garrett, Senior Vice President, Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us today to discuss Nasdaq's second quarter 2023 financial results. On the line are Adena Friedman, our Chair and Chief Executive Officer; Ann Dennison, our Chief Financial Officer; John Zecca, our Chief Legal Risk and Regulatory Officer; Tal Cohen, President; and other members of the management team. After prepared remarks, we will open up the line to Q&A. The press release, earnings presentation, and supplemental Adenza information 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 would 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 on periodic reports filed with the SEC. I will now turn the call over to Adena.

Thank you, Ato, and good morning, everyone. Thanks for joining us. My remarks today will focus on Nasdaq's second quarter business and financial performance, the solid progress we're making to deliver on our strategic objectives, and how our recently announced acquisition of Adenza advances our vision to become the trusted fabric of the world's financial system. I'll then turn the call over to Ann to review -- for a review of our financial results. I'd like to begin with an update on the strategic transformation underway at Nasdaq. Since 2017, when we sharpened our focus towards becoming a leading technology provider to the global financial system, we've made significant progress on our strategic journey by allocating capital to our biggest growth opportunities and reorienting our businesses to align better with the key megatrends shaping the global economy. Over that period, we have focused on our innovation strategy on maximizing the potential of cloud computing and AI across our products and markets, while strategically divesting more than $700 million in non-core assets. We've also delivered consistent execution in our operating business through dynamic operating environments, demonstrating the power of the diversified platform we've built at Nasdaq. That execution strength is reflected in our second quarter performance, which I'll discuss shortly in greater detail. But first, let's spend a few moments on Adenza. When we announced the acquisition of Adenza on June 12, we took a seminal step in our journey to becoming a leading technology provider to the global financial system. Our consistent [growth] (ph) throughout Nasdaq's and Adenza's journeys have been our dedication to our clients. As the financial industry faces a steady stream of new regulations and reforms, that present reputational and financial risk. We are positioned to be a key partner in helping participants manage those risks. Most…

Thank you, Adena. And good morning, everyone. Before getting to our second quarter results, I would like to comment on strategic activities across the company. Starting with the divestiture of our power trading business in Europe, we do not expect the recently announced sale of the business to have a material impact on our financials, and we plan to include historical results for this business in the Corporate and Other portion of our financials starting next quarter. Once all open interest is transferred, we expect the sale to reduce annual revenues and expenses by approximately $35 million and -- $35 million and $20 million, respectively. Turning now to Adenza. We have seen Adenza continue its strong execution across both new customer wins and cross-selling activity. These new customer wins and expansions contributed to Adenza, achieving 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. We have provided a supplemental information deck that includes information about Adenza's business and recent performance to help further illustrate Adenza's continued strong momentum. As we embark on our integration planning with the Adenza team, we remain confident in our ability to deliver on the $80 million in net cost synergies by the end of year to post-closing. In order to provide our shareholders transparency into our progress in achieving our Adenza related expense synergies, we will disclose the one-time costs related to achieving our synergies separately from our existing restructuring program that we announced at the start of 2023 related to our divisional realignment. To finance the Adenza acquisition, we have secured financing for the transaction through a successful bond issuance in June, issuing $4.25 billion in US dollar denominated debt across two, five, 10, 30, and 40 year terms, as well…

Thank you. [Operator Instructions] And I show our first question comes from the line of Owen Lau from Oppenheimer. Please go ahead.

Good morning and thank you for taking my questions. So for the two new Tier 1 and Tier 2 clients signed in Anti-Fin Crime in the second quarter, could you please give us an update on the timing of the implementation and the timing you can book the revenue? And also -- could you please also give us more color on the traction and pipeline in this business? Thanks.

Sure. Thanks, Owen. So with the Tier 1 and Tier 2 clients, some of them -- we signed two of them kind of early in the quarter and signed two more of them a little bit later in the quarter. I think that each of them is going to have a slightly different time line. These are more complex implementations. But we would expect kind of a six to nine month implementation period for them. So -- and we will start to therefore be able to kind of demonstrate the revenue benefit of them as we bring them online. So hopefully, that means that we'll be able to bring at least most of them into online before the end of the year or early next year is, I think, the plan right now. In terms of the pipeline, we actually are very encouraged by the continued pipeline of larger banks that are working with us, either in contracting or on POCs. We have several that are working with us in their proof of concepts, and we have another several that are working with us in contracting. But of course, as we've talked about from the very beginning, the contracting process with banks takes a long time, particularly as you get up market. And so this will continue to be, what I would call, a slow-moving train as we continue to bring more of the larger banks online to our Anti-Fin Crime solutions.

Got it. That's helpful. And also, I recognize that the Index AUM has recovered a lot, but the revenue actually came in much stronger than our expectation. And I think you've mentioned like pricing on certain contractual milestones. But is there anything you want to highlight on this business? Thank you.

Sure. Thanks, Owen. We did update our disclosures since the beginning of the year to help you understand the average AUM for the quarter -- for each quarter. I think with regard to -- so you have to kind of look at it both on the AUM side, and we do provide a fair amount of disclosures to help you estimate that. I think then on the trading side, it's -- as we said, it's a combination of things. It's obviously combination of the pricing that CME chooses, they are combination of the volumes and then how the contract works. And as of prior quarters, we did hit a new contractual tier in the second quarter, which I think has been consistent with prior years. I don't think there's really other things to really mention there other than just we're really excited, frankly, to see the recovery of the Index AUM, the fact that it's obviously reflecting the recovery of the market. And most notably, what we can control, which is the inflows into the indexes at $25 billion over the last year.

Thank you very much.

Thanks, Owen.

Thank you. And our next question comes from the line of Patrick Moley from Piper Sandler. Please go ahead.

Yes. Good morning. Thanks for taking my question. Adena, I wanted to go back to Adenza. Your stock has reacted negatively since the acquisition. So just wondering, based on maybe your conversations with investors, what do you think investors are getting about this acquisition? And then what, if anything, if you could has maybe surprised you about the reaction since the announcement? Thanks.

Sure. Well, thanks, Patrick. So we -- as I've mentioned before, we are very excited about being able to bring Adenza into Nasdaq. And I do think that we're making a long-term conviction decision here to grow and expand our platform to be able to serve the financial institutions more holistically. The fact is that, Adenza is a private company and there was a lot for investors to learn, it's obviously also a big capital allocation decision that we're making. And so, we're trying to make sure that we continue the educational journey with investors, and we provided a supplement today that hopefully gives a little bit more color on the depth of the clientele, the nature of the products and how we look at it together in terms of how we can provide complete risk management reg-tech type solutions for our clients and how all of our solutions will fit together. I just think that it's -- as we've mentioned before, it's an exceptional asset. It's got 15% growth and we're kind of seeing the range of 13% to 16% in general. It has 98% gross revenue retention, 115% net retention. It still is signing on new clients across the spectrum of the clientele around the world, and it upsells clients really successfully. We're also seeing a lot of great tailwinds, frankly, just from the changes in regulation with -- including the Fed announcement last week in terms of new proposed rules for the US banks, that will obviously play into the capabilities. And one of the examples we provided in the supplement is from a super-regional bank in the US that has over $100 billion of assets that has kind of signed on for the Axiom solutions very quickly as they're looking at the new rules that may be coming. But we also have a whole range of new rules, obviously, across the world and that is a very dynamic environment. It's super complex. And I think also as banks also look to expand growth, expand regionally, expand asset classes, they leverage our solutions and we can expand with them. So I have to say we are clearly very excited to help them solve their most challenging operational problems. I think we also want them to be able to kind of, what I call, simplify the complexities that they're dealing with, with technology. And over time, we feel very confident that we will be able to demonstrate both to the clients and to the shareholders that this is a great business to have within Nasdaq.

Great color. Thank you.

Thanks, Patrick.

Thank you. And I show our next question comes from the line of Michael Cyprys from Morgan Stanley. Please go ahead.

Hi. Good morning. Thanks for taking the question. Maybe just circling back to the Capital Access Platforms, you mentioned seeing some increased demand internationally for data. I was hoping you might be able to elaborate on what sort of data sets and customers, which countries are you seeing that from? Thank you.

Thank you, Michael. We don't provide details on every country, but I would say, we've been very successful in expanding across Asia and Lat Am, and that continues. So it's not just -- I would say, as we started our efforts in Asia several years ago, we found a lot of great demand in China, and then we expanded into Korea and now into Southeast Asia. And so, it's just -- it's a great opportunity for investors from all over the world to gain exposure to U.S. markets and understand the data in real time. And then we also expand -- have done a really nice job of working with our colleagues that manage, for instance, listings and market tech in Latin America to kind of open up the Latin American market for data, and we continue to see really strong demand there. So it really has been kind of a global expansion of the distribution of real-time information. And then we also have our Data Link platform, and that's also growing nicely with some really unique data sets that our clients are adding to their portfolios. And so, that also has been a really nice growth pillar for us in the data business.

And sorry, which type of data is this?

I mean we've talked about Data Link being kind of a delivery mechanism for our market data, for third-party kind of what we call unique data sets that we think will help clients look at kind of underpinning, like KPIs and other things that might underpin the performance of companies. We also provide information around retail flows within the Data Link platform in partnership with the client, with the partner. I mean, so it's really kind of a full range of information or data sets that are available. Data Link, there is actually a website, if you're interested, and that provides kind of a library of all the different data sets that are available through Data Link. And it's actually -- what's really cool is, they're all offered on and out through a very modern API structure, so it's really easy for our clients to take the data in and integrate them into their internal audit systems.

Great. Thanks. And just if I could ask a follow-up question on Adenza. I was hoping you might be able to talk about the sales strategy, their approach to marketing and sales efforts. Maybe you could elaborate on how large their team is, how that's organized and how you might evolve their approach and resources.

Sure. Yes. Actually, it's one of the things we really like about how they've organized the business. So when Calypso and Axiom came together, what they did was, they still have two discrete platform -- technology platforms, and I think that they do solve different needs. So it makes sense for those platforms to be discrete. But they first of all, before I talk about marketing, they do -- they're all -- they're starting to demonstrate the power of the business by sharing data through modern APIs that they can cross over from one platform to another to service specific clients, and I think that's going to help with cross-sells going forward. But the way that they organize their go-to-market is that, they have a product team and the product team has kind of a marketing team within it, so product marketing, and then they also have specific product sales on people. And then they have an enterprise sales team. And that enterprise sales team really is regionally focused and really talks to -- kind of goes high up in the organization as possible to talk about the complete solution set to understand their needs, understand their problems, and then they'll bring in the product sales team to help with specific -- kind of [client] (ph) specific products and capabilities that the company has. And then once a client signs a contract, then they start to engage with the client success team, the client implementation team. And the way that they've been able to organize that as they try to match up the client success organization with specific sales -- enterprise sales people so that there's consistency in the experience that the clients have moving into implementation. And then they have, I think, a very good and scaled client success organization. So we like that model because it kind of creates kind of an umbrella go-to-market and client service capabilities across multiple products. And so as we bring Adenza into Nasdaq and we think about how we want to integrate that with our Market Technology business, with the Surveillance business, we think there's opportunities for us to really leverage that scaled model for the broader technology platform. And that then allows us to go in kind of towards the top of the house within the banks, explain our complete solution suite and then deploy our product teams appropriately into meeting their needs. So we're very excited about that.

Great. Thanks so much.

Sure.

Thank you. And I show our next question comes from the line of Alex Kramm from UBS. Please go ahead.

Yes. Hey, good morning, everyone. Just starting with a follow-up on Verafin and this maybe nitpicky, because we're just getting used to some of these new disclosures. But when I look at signed ARR on a quarter-over-quarter basis, which should imply net new sales, I think that was $11 million, which, if my numbers are right, is flat year-over-year. So when I think about those four bigger size wins, does that mean that -- what does it imply for the rest of the business? Does it mean slower sales to Tier 3 and beyond? Slower pricing power? Or again, these are small numbers, but just wondering if the remainder of the business is chugging along quite well as well.

Yes. No, Alex, I'm not going to be able to kind of go into all these discrete details, but I would say this, the business is chugging along quite well. I mean, we had 47 new small to medium bank clients sign on in the quarter, and then we had the four. And so kind of the composition of ARR, we'll have to kind of unpack what you're asking and make sure that we can give you a more discrete answer. But generally speaking, it's generally healthy. I mean, we have good signings of the small to medium banks. We have good signings of the larger banks, and those will come online as we get later in the year. And you're right that, it's signed ARR, so they should be reflected there. And then, of course, in the Surveillance business also, we have -- as mentioned, we had 10 new clients. So I think we'll have to kind of work to make sure that we reflect that in a way that helps you. But I think that we said basically 20% growth in signed ARR year-over-year, so we'll have to understand more of your discrete question later.

Fair enough. And then secondly, this is maybe a little bit more strategic. But clearly, you announced another divestiture during the quarter and that's been part of kind of like the strategic pivot as well. Now that you've done Adenza here, reasonably sizable deal, big leverage, the question has been coming up a little bit more, it's like, hey, could there be other bigger divestitures that actually help accelerate the pivot even further? And not surprisingly, OMX comes up a lot here. So, I know you're not going to talk specifically about that asset, I guess, in terms of any potential to sell it. But maybe you can just remind us why OMX and other related business is a core component of the Nasdaq strategy, how it fits in there? Because clearly, people are asking the question. Thanks.

Yes. And I know you're in Europe for this week, so I have a feeling you're hearing that there. But I -- first of all, we don't use the name OMX anymore, because they are -- they've been part of the Nasdaq family for 15 years. So -- but our European trading -- our European markets business is an integral and strategic part of who we are. And I think that I can say that with great conviction. And the reason is that, number one, the European business, I mean, the Nordic business and the Nordic markets are, in my opinion, the shining star of Europe. They've got great retail participation. They've got great markets. They've got a great financial ecosystem that underpin the markets there. I think we've been able to show over the last five years a very healthy listing environment. We also have great data sales of the Nordic data. And then we also had a trading business, because that business is comprised of all three of those components. We also have deep relationships across the Nordic banks and brokerage firms. We see that team that's in Europe sits right next to our Market Technology team. And so, the expertise that they have in running their own market, they are often deployed with our Market Tech team to go help and develop other markets around the world. We'll bring them out into markets all over the world and help them, let's say, develop their surveillance programs, help them understand market structure, think about auctions and things like that. So that team is integral to the Market Tech team and helping us sell and expand our technology around the world. And then also culturally, they've been obviously a leader in ESG. They've brought that ESG culture into Nasdaq. They helped us think about designing products that we now provide to our corporates to help them manage the complexities there. And then we have Puro.earth, which is our carbon removal marketplace that helps corporates meet their net zero commitment. So it is an integral part of who we are. And then the last thing I would say is, we've been on a very specific path to integrate -- to make our technologies more consistent between the US markets and the European markets. We launched our, what we call our Fusion platform, which I love that name because it is, in fact, fusing our technologies across our markets. And we've deployed that in the Nordic through this market. We're now deploying that across our US options markets. All of our surrounding systems have become consistent. And so, we're going to be able to demonstrate over time even more scalability across our markets business as we continue to combine that technology. So as you can tell, it's a big part of who we are. We're really proud and pleased to be integrated into the Nordic business as our Nordic markets as we are. So hopefully, that helps you.

Very clear, and I'll try to forget the OMX name. Thanks.

Thanks, Alex.

Thank you. And I show our next question comes from the line of Kyle Voigt from KBW. Please go ahead.

Hi. Good morning. So you noted AxiomSL added seven logos and two of those were cross-sells to Calypso clients, which really suggests they're having success in kind of driving revenue synergies from that combination. Just given those businesses haven't been integrated for that long, I think since maybe July 2021, I'm wondering how far along Adenza is in terms of driving those AxiomSL and Calypso revenue synergies and cross-sells. And I guess, is it fair to think that a majority of those revenue synergy opportunities really haven't been realized at this point?

Yes. I actually would agree with that completely. So as we've talked about, when you're selling into some of these larger banks, the process of getting sales done tends to be longer. So you're right, if they kind of came together in 2021, they then had integrations. They had their own operational integrations they were implementing. They want to educate their sales organization. They have their whole enterprise sales model, I mentioned it before. And so, they are just now really starting to demonstrate how the cross-sells can work. I think they've had five cross-sells and now they've been able to add two more. So, they are starting to show that there is real potential here to cross-sell capabilities. And hopefully, that also means the potential to shorten sales cycles. Because if you have a master services agreement and then you cross-sell another product, the hope is that you can cut down on the contracting time. But it is just beginning in terms of showing how they can open up doors. And the other thing to mention is on Page 3 of the supplement, we show you the revenue composition by bank tier or by client tier, and you can kind of see that they're different, right, from between Calypso and Axiom, but they're selling into all of those tiers, both of them. But they have certain strengths in different tiers. And so, as we think about the power of bringing those two platforms together and then the power of bringing our ASC capabilities and our Market Tech with it, you can kind of think about how we can help each other grow and expand in those tiers where they may be less penetrated. So that's obviously part of our investment thesis as well.

That's great. And then just maybe one follow-up on Adenza, if I could. In the deck, you reiterated that TAM growing 6%, the SAM is growing 8%. And I understand there's a lot of opportunity with the chop on driving higher revenue growth near term and that kind of teens growth range, especially with the regulatory changes that you cited earlier. But I was wondering if you could kind of rearticulate on a longer-term basis why this Adenza business might be able to sustainably grow faster than a 6% TAM or an 8% SAM. Whether that's gaining share competitively or how it's positioned within its subsegments within that SAM that would be really helpful.

Yes, sure. They are gaining share. So that's really exciting to see. And they are, in fact, winning -- they're winning mandates from companies that have competitors. So, that is kind of how -- obviously, how they're winning share. So I think that, that's a very -- that's an exciting part of why we really like their business. They have -- unlike some of their competitors, they're very modular. So they can go in and with one module to kind of breakthrough to a client and then demonstrate their value and then start to expand across other modules, which then allows them to say, you know what, we can do that for you instead of this competitor. We can do this for you instead of that competitor. And they start to penetrate the client by gaining share as well as reducing their internal spend. And frankly, that's a strategy that we're seeing really successfully play out within Verafin as well. So we do know that strategy can be very effective. Within Verafin, just to digress for one second, we penetrated one of the clients that we went into on the Tier 2s, we went in just showing them our alerting capabilities. And they then said, "Well, wait, your workflow is so much better than what we have. Let me actually -- we're going to use not only your learning, but we're going to use your workflows as well." And now they want to -- and that was on AML and now they want to kind of look over on the fraud side. And they have existing systems in fraud, but they realized just how, frankly, awesome our platform is. So it allows us to go in and land and then expand by potentially taking out competitors. And I think -- I also think that Calypso and Axiom, the teams, they don't stand still. They're adding new capabilities that will, obviously, continue to grow the market opportunity. And an example of that is that Calypso, in the last few years have moved into the buy side. And not just opening up a whole new segment, client segment, they went from like three to -- I don't want to say the wrong thing, but like 3% to 14% of their revenue coming from the buy side just in the last few years, so that's a growth area. And then lastly, as they're deploying their solutions in cloud, so 53% of their sales this year so far have been cloud-deployed modules. That actually allows them to be a managed service provider, which then, of course, allows them to take a bigger share of wallet as they're managing the product and not just deploying it. So those are all the reasons why we think the revenue growth is highly sustainable.

Very clear. Thank you very much.

Thank you.

Thank you. And I show our next question comes from the line of Michael Cho from JPMorgan. Please go ahead.

Hi. Good morning. Thanks for taking my question. I guess I'll just follow-up with another Adenza question as well. When we kind of think about the large recurring revenues of Adenza, I realize the new clients and upsells are driving the majority of the revenue growth here. But if we think about existing clients and kind of existing contracts, is there a volume component to any of those contracted revenues? I mean just trying to better understand the recurring nature of the revenue profile and revenue growth for Adenza. I think this may speak to more towards [indiscernible], but maybe you can elaborate there.

Sure. Yes. We have not seen any sort of volume-driven contracts like that. So it's really a -- just think of it as a licensed service maintenance and/or cloud delivered subscription. So they don't have volume kickers within their contracts as far as we know. I think it is much more of a traditional software business. Hopefully, that answers your question, your specific question.

Yes. No, great. And then just a follow-up, just to switch gears on digital assets. I realize you mentioned about the custodian initiative being halted. Is this a clean pivot away permanently or more of a delay? And I realize Nasdaq is still going to be highly involved in the digital assets ecosystem in a meaningful way. But hoping you can kind of flesh out some of the considerations here as you thought about the custodian initiative. Thanks.

Yes. I try to avoid the word forever. But I would say that what we've chosen to do is really halt our efforts in deploying a custody solution and as a custodian, I should say, like being a custodian in the US crypto marketplace. And the regulatory environment is fast changing, right? It's at least trying to evolve into something that's understandable. Let's see how it does over the next several months and so I think -- and maybe years. But we like to operate in environments that have a pretty well-known regulatory underpinning. That's just where we're comfortable. It's consistent with our risk tolerance. It's consistent with how we know we can be successful. And the regulatory nature of the business has evolved a lot. And the lack of clarity, I think, has made it to that. As we looked at the opportunity set of just being a custodian, nothing else like just that one segment of the business. Just the fundamental business opportunity changed over the last several months and then the regulatory overlay and kind of overhang changed as well. And I think that just made us decide that it's not the right time for us to enter that business. Will we ever enter that business? It's possible, but we'd likely do it in connection with other things we might want to try to do in the digital asset space. But right now, our focus is really on being a great technology provider, helping our clients with their potential for ETF listings, Bitcoin ETF listings, and continuing to provide Index solutions in the crypto currency space.

Great. Thank you.

Thank you. And I show our next question comes from the line of Brian Bedell from Deutsche Bank. Please go ahead.

Great. Thanks, good morning. Thanks for taking my questions. I can keep these quick, I think. One on Verafin, the growth -- the year-over-year growth rate has been in the 20% plus area. It's come down into the high teens, but now it's moved back up in the second quarter up to 19% year-over-year. So I'm wondering are the new sales coming in? I know there's a six to nine month time line in the Tier 1 and 2s. But with organic growth of the Tier 3s and below, do you see this business moving back into a sustainable 20% plus area of annual revenue growth over the next couple of quarters?

Well, I won't give a projection. But I would say that, obviously, as the business is going well. But recognize that AFC is a combination of Surveillance and Verafin, and Surveillance had a little bit of a slower start of the year. And so obviously, I think it's shown that really great strength in the second quarter. And so there are going to be ebbs and flows, and that's why we give you more of a range. Let me give you an absolute number. We give that 18% to 23% range because there are going to be periods of time where we may be able to speed up as we sign more of the larger deals and then we may have more of a lull within a quarter or two. So I would have to say, I think that we feel good about the range we provided you. We're very excited about the strength of showing both -- all the new sales, both within Surveillance and Verafin in this quarter. But I think, Brian, it's going to ebb and flow just a little bit. It is a SaaS business, so it's not going to ebb and flow too much, but that's why we give you the range.

Okay. That's super helpful. And then the follow-up just for Ann. I think I heard you say on the Power business that it wasn't going to be material overall, and I heard the $35 million and $20 million. Can you just restate that again in terms of the revenue impact and then the expense impact?

Yes, sure. So if we're just looking back to 2022 and you look at it on an annual basis, we'd expect once we've closed on the sale that we see a reduction in revenues of around $35 million and approximately $20 million reduction in expenses. And what we do plan to do starting next quarter is reclass that out of the Market Platforms business into our Corporate and Other segments, you'll be able to see that decline as the sales closes.

Okay. Great. Thank you.

Thank you. I'm showing no further questions in the queue. At this time, I'd like to turn the call back over to Adena Friedman, Chair and CEO, for closing remarks.

Great. Thank you, and thanks very much for your time today. We are excited to continue to update you on all of our progress in our business, while we also prepare for our next chapter with Adenza as part of the Nasdaq organization. So thanks for all your questions, and I hope you all have a great day. Thank you. Bye-bye.

This concludes today's conference call. Thank you for participating. You may now disconnect.