Right?
Yeah.
Okay. We were just talking about these chairs, you know, high chairs that are not so easy on the ladies. But, just want to say thank you all for joining. Good afternoon. I'm Diane Ferguson, Managing Director and Head of Financial Institutions Banking Group at Mizuho Americas, based in New York. Today, I have the pleasure to be joined by Sarah Youngwood, who has been the Executive Vice President and Chief Financial Officer at Nasdaq since December 2023. With over 25 years of leadership experience in corporate finance, financial reporting, and investor relations, Sarah has been a key player in driving financial institutions' growth strategies and modernization. She joined Nasdaq from UBS Group, where she was most recently Chief Financial Officer and Group Executive Board member.
Prior to UBS, Sarah spent more than two decades at JPMorgan Chase in a number of executive roles, including Chief Financial Officer for Consumer and Community Banking and Global Technology Businesses. Sarah, thank you very much for joining us this afternoon.
Thanks.
Shall we get started?
Yeah, thanks for having me. Delighted to be here.
Excellent. A new joiner to Nasdaq just over six months ago. Can you talk a bit about your motivation to join Nasdaq, and how has the experience matched up to your expectations?
So I'll start with the conclusion, which is that, Nasdaq has delivered everything I was looking for and more. And so if you backtrack, to what you just described, I had been at JP Morgan, which I would say is the number one U.S. and global bank, and at, UBS, which is the number one international bank. And so from there, I wanted to be very intentional about where to go next, and I wanted a tech company with financial excellence and with a great team. So tech company, it's a very innovative, and I'm sure we'll talk more about that, technology platform company with a lot of data, and that is really number one in what it does, so like that. Financial excellence, I'm sure we'll talk about that, too. For a CFO, that's very important. And it's,
We'll talk about one in 15, but we are one in 15 within the S&P 500 that actually have the rule of 60, with our level of growth being 5% or more, and our level of scale being $4 billion and $1.6 billion. And so when you take that, it's a very short list. And we actually exceed the 5%, but that was the filter that we did. And then the third thing was the team. When we think about the team, it's a really nice group of people, and what I think is particularly interesting is everybody roots for everybody.
Everybody is aligned to the same goals, which is to add value to shareholders, and it's also a just very, very strong culture, which I'm very pleased to be part of. So, so far, so great.
That's, that's terrific, and I like that culture bit. Kind of sounds like Mizuho, too. You touched on this. I imagine the Nasdaq brand was an important factor behind your decision to join the company, and then at Investor Day, you called Nasdaq's financial profile exceptional, which you said is a word you don't typically use. Can you talk about the importance of the brand to the strategy and how the business model drives your financial performance?
Yeah, so I'll start with the brand, since that's where you start. The brand is one of being a trusted partner, and what's extraordinary is that we made our brand on being an exchange. And what is an exchange? It's a trusted place where you can actually trade, and that has actually translated into a very innovative, because we did it for technology companies at the beginning, and we did it in a novel way. And it has become such a strong brand that it is now valued as one of the top 100 brands globally. So Nasdaq, everybody has heard of Nasdaq, but not just here, globally, top 100 brand in terms of its value.
In terms of the financial performance, which, by the way, also constitutes part of the brand, I talked a little bit about this excellence. And so if I dig a little bit more into what I meant there, you guys here, technology investors, software investors, understand rule of 40, and in general, it's actually quite good to get to rule of 40. But at Nasdaq, I really aim to be at rule of 60, and in fact, the acceleration that we just did with the Adenza transaction was adding a rule of 70 business, and there are not too many of those. So if you take a filter in the S&P 500 of just rule of 60, it's 48 companies, just one filter.
Now you add one more, and you start looking at the list, which I did, and you say, "Okay, well, all of those things that are not growing or decreasing or growing at 2%, the rule of anything was not made for them." So let's start by eliminate all of the ones that are below 5%. And then all of those tiny, little things, not very interesting either, nobody will recognize those names. Why don't we actually focus on the ones that have our scale? And so if you take $4 billion of revenue, $1.6 billion of free cash flow as our scale and you add the filters I just mentioned, and just that, you get to 15.
I'll let you discover what those 15 are, that we would be delighted with any of those, whichever you like, EV to EBITDA, price to revenue, price to earnings, you name it, it's NVIDIA, Microsoft, Oracle, Visa, Mastercard. I'm not gonna name them all, but excellent names.
Exceptional. Exceptional. You mentioned Nasdaq starting as a stock exchange.
Yeah.
Now, the business has evolved to include software and solutions for corporations, investors, and banks, covering activities from capital formation to risk management. Can you walk through the evolution of Nasdaq's portfolio of businesses, and what it means for your financial performance?
Yeah, so if you hear Nasdaq, you think exchange. And if you think exchange, you're actually thinking about our market services business, which is a quarter of our business. And so we operate 20 exchanges, both in North America, as well as in the Nordics. And those are exchanges across equity, options, and in Europe, we also do a little bit of fixed income. Then, once you know how to own and operate an exchange, you can do exchange in a box. It's a bit more complicated than that, but we power 130 marketplaces, including the 20 that we own, and 110 that we don't, and that is everywhere.
What's amazing about having the perspective from Europe and the U.S., which are very different perspective, Nordics and North America, is that we are able to adapt to the needs of marketplaces in APAC, in the Middle East, and we've been there for a very, very long time, in Latin America, all over Europe, not just in the Nordics. And that's like a very, very good business to effectively, as part of our solutions, provide a solution which is exchange in a box, and that's a SaaS business if you want. And then you have, once you are a marketplace, you are also, of course, gonna do the taking companies public. And that's actually a recurring business in some ways, because it's a subscription that you pay every time you are public.
We've done more than that, because we've added an ecosystem of all of the things that you might need, whether it's a board, whether it's an IR service, whether it's an ESG service, so we've added that in our cap as part of our solutions.
And then we got to the point where we had the right to win, we had that trusted brand that I talked about, we had scale to a good degree already, we had financial excellence, and we said: "What's next?" And we said, "Okay, if we want to be the trusted fabric of the financial system, we're gonna need the banks." Right now, we touch the banks in a very specific way, but we would like to touch them in many ways, so that we elevate ourself to be not just a trusted vendor, but a partner of choice, somebody that, the C-suite of banks is connected to. And that is the play now, where the acceleration that we have with, financial crime management, that's a company called Verafin, and then AxiomSL Reg, RegTech.
That's like all of the regulatory needs of banks, which is very important to banks, and I can attest to that coming from that. As well as the I would call trading in a box, which is Calypso, and that's pre-trade, trade, post-trade, collateral management, all of the things that you would do around the trading. And so now you have a continuum of things that you do, and you do them all extremely well, which enables us to be that trusted partner to banks, and participate into the trend of consolidation of vendors, which banks are going through. Because we are trusted, because we protect data well, because we are doing what we do extremely well. So with that, of course, that gives you a $31 billion sum, the ability to grow 8%-11% in solutions.
Solutions ends up being three-quarters of what we do at that 8%-11% medium-term outlook. And we have still that margin that I talked about earlier, being 56% EBITDA margin.
Fantastic story. This is a very popular theme. So Nasdaq has a history as an early adopter of new technologies, including cloud, algorithmic AI, and generative AI.
Yeah.
Can you talk about how Nasdaq is leveraging AI today, or will be leveraging it in the future to create new growth opportunities?
Yeah, so if you backtrack and you say, like, "What's our brand?" Our brand is to be innovative, and it's not just a brand. And so we started cloud 10 years ago. We started AI seven years ago. That's super important, because if you want to do gen AI, you need to do both cloud and structured data. And the, the algorithm is so much better now that we have gen AI, but the structure of the data, and the data allocation in the cloud, and the leverage ability of what you can do with that, is exactly the same. So we're super well-positioned, because we didn't just wake up a year ago saying, "Hey, there's a thing called gen AI," which is what everybody is doing, waking up to that. We had 10 years in the cloud, seven years in gen AI, in non-algorithmic AI.
And then we went. If you look at, for example, financial crime management, which is this company that we have, and which I'm sure we'll talk about again, is that's a company that was founded in the cloud 15 years ago, and founded on AI, 'cause they're based in St. John's, so they figured out that there was not much of a clientele to serve with data centers in St. John's, Newfoundland. No, but it's like, it's, it's a real story. But when you are situated there 15 years ago, you think, "The cloud is my thing, and, AI is gonna enable me to do, something that's important for the world, which is financial crime management, which today is a $3.5 trillion market, but even then, seemed like it was a big problem.
And so we are well-positioned at the start, and we're also viewed as innovative with, for example, the NVIDIAs and the Microsofts and AWS, and they view us as an early adopter, which enables us, in turn, to always be at the cutting edge. And when you have all of that, and that enables us to already come out with things. So, for example, in markets, we have the first order powered that is AI-powered, and so this one is not gen AI, it's AI, and that's called Dynamic M-ELO. We have a strike optimization, which optimizing the options, the strikes. Again, those are not gen AI.
If you go gen AI, Financial Crime Management, which is, that company I was mentioning as part of Nasdaq, is already doing gen AI, and that reduces for client that doesn't use us. When you combine that with other things we were doing, it reduces the time for the person who wants to analyze in AML, notice by 90%. So if you're thinking about it from the point of view of the client, I can put one reviewer and the small fee that we pay Nasdaq or 10 reviewers. Pretty easy to make that decision. So we are having very strong growth, and that's a business that's in the mid-20s in terms of our medium-term outlook.
And then, for example, Boardvantage, many of you may know, this, that's how we communicate through boards, and we have thousands of companies that use that, and now we have a pilot to actually do, for example, the board summarization. If you had 500 pages of an audit SOX report, might you want to know what a two-page summary could be? Many board members would like to have that efficiency. So, I just gave you a few examples, but across the place, in the products, we are doing it, and then of course, on the business. So in finance, we have our use case, in legal, we have the use case-
Mm.
I could go on and on, so lots.
That sounds amazing. You know, you touched on this, but I'm gonna focus on the Verafin acquisition. It's been a clear success.
Yes.
Congratulations. Can you talk about your right to win in financial crime management technology, and where you see that growth coming from?
Yeah. So if you think about financial crime, $3.5 trillion problem. So we like, the problem, the size of the problem. We don't like the problem itself, but we are happy to participate in fighting it. The other thing that's nice about it is that with Patriot Act, and there are acts like that in other countries, this is one of the very rare place where people would like to cooperate, because fighting bad guys, pretty acceptable. Even the regulators will tell you that, it is a very valid exception. So when they got set up 15 years ago, they applied for this Patriot Act exception to be able to, put together the data of different financial institutions, of course, with all of the right segregation, et cetera.
We have today 2,500 banks that enable us to access their data through 70 core banking systems. We don't care which banking system you use; we know how to read them all. So you don't need to move to the cloud, you don't need to do anything, just give us effectively the fee. And then I will do an implementation for you that's actually not that hard to do, especially for the small banks, and we can see your data, we can look at your transactions and compare them to not just what we know about your transaction set, but what we know from 2,500 banks that represent $8 trillion in assets. So that little leg up, it's pretty hard to replicate.
Therefore, we have this advantage that enables us to continue to grow with our clients, and so we've got a net retention of 112%, so we like that. And we also have a lot of new logos, both in the small and medium-sized banks, and now with the Tier one banks, which really Nasdaq has been part of unlocking, and that's just getting started, but Citi, for example, is one of our clients there.
It's wonderful. Going back a year ago today, Nasdaq announced the acquisition of Adenza. Can you talk about how the acquisition fits within Nasdaq's strategy, how Axiom and Calypso compete in their respective markets, and generally, how integration is going?
I'll start by repeating, when you are a rule of 60 business, and by definition, there are only 68 things you can buy, 48 things, sorry, that you can buy, that are accretive to you at your scale, or at any scale, because 48 is without any filters. Adenza actually didn't happen to be public, but even in private companies, you don't have too many that have rule of 60 and therefore are gonna be accretive to your financial profile. This happens to be a rule of 70 business. But it's not just financially attractive. What is really attractive to us is that it completes the picture in terms of serving banks.
I mentioned that as part of our history, it is incredibly logical to think that you need to be a strong partner to banks if you are gonna be the trusted fabric of the financial system. It's not because I was at banks before, that I think that banks might be important to the financial system. We already had relationships with banks, relationships through Verafin that we already used, but I was just getting started with the large ones. So that was more on the smaller end. We dealt with the large ones on the IB side, with the market services, the trading piece, or their equity capital markets, if they wanted to take companies public. But now you can tell that those things are in very different places. So when we are distributing our services, we are speaking at the MD/ED level.
We are not speaking at the C-suite level, other than in some cases for market services, and Adena has very, very strong relationships. But then you leverage those very strong relationships that Adena, Tal, by the way, I have, and others have on the leadership team, and now you complete it by going in all of the other places, and suddenly you're doing regulatory for them, you're doing some of the-- for some of the geographic expansion. So in Europe, you have a lot of Calypso. In the U.S., you have a lot of Axiom. So there was a tremendous synergy plan based on how the things mapped.
Integration, we announced in the Q1 that we were already 40% actioned out of the $80 million of net synergies, and that we will be at 70% by the end of the year. We also announced that we had said we would start at the end of the acquisition or just after the acquisition, at 4.7x, and that we would de-lever as fast as we could. But that put us with markers at 4x and at 3.3x. We've accelerated those markers, the 4x by 9-12 months, and the 3.3x by 6 months at least. When we announced earnings, we were already at 4.1, so just a few months after the acquisition.
We're going extremely fast in the de-leveraging story, in the integration story, as well as in the cross-sell story. We have announced that there will be $100 million of cross-sales, and we have a lot of like both infrastructure and pipeline that is associated with it.
It's great performance. Now, shifting to the macro setup for capital markets, what's your expectation for activity levels into the end of the year, and what could that mean for listing and market services revenues? And if you don't mind, tell us what you think the impact of the U.S. presidential election could have on capital markets activity.
So, I'll start by acknowledging that literally a few minutes ago we got a Fed I would say set of messages that were probably generally acceptable by the market. Not like great news and not bad news. And so where we are is probably where we thought we were, which is that we have an IPO pulse for us, which represents a leading indicator of whether there will be IPOs. And so it's looking at data. Data, like, for example, do we have rates that are elevated, and what is the change in rate that is expected year on year? We're looking at the performance of recent IPOs. We're looking at all of the things that you guys are looking at as investors.
We're looking at the engagement of business. We're looking at a lot of data sets, and with all of that data, we are definitely not at the levels where we were in 2021, but we are the best place where we have been since then, generally. So that will look even better once you start having a clear rate cut. So what I thought was helpful about the language was that we progressed a little bit on the characterization of inflation, and we progressed a little bit in terms of like, you know, one rate cut is not a lot, but it is directionally what we would want to see for this year.
In any case, you're not going to have all of the activity coming this year, because when you look at the window, we are not yet in the summer, and people are still going, and there is a lot of very high quality companies that want to go right now and can go. And so, I would say we are starting to see some momentum. Then, to your point of elections, elections could bring volatility. Volatility is actually quite good for market services, but not as good for the environment associated with being a public company, and so you could see a slowdown associated with that. So you could see September be a very good month, October still being okay, but usually you've got December being a weak month, and you could see that starting in November.
And we're also hearing, just to be honest, that there are some companies that are already lining themselves up for 2025 because windows are a bit more tricky this year. But there are companies that are going this year, and I would say that it's a reasonable environment, but it's going to have short windows because of the election, as you just mentioned, despite the fact that the fundamentals are looking really good. But beta is actually one of the other indicator we look at, so right now it's looking good, but who knows in November?
I like that. I know we're getting close on time, so before we open it up to questions from the audience, let's talk about your capital allocation priorities. As you've mentioned, you're de-levering faster than you expected... What are the chances we see outperformance continue? And then what will you look to do with that capital once you get back down closer to 3.3 x?
Yeah, so, we're very focused on it. I, we are gonna deliver on all of the promises that we have given to investors, so you can take for granted that we wouldn't have accelerated those targets to decelerate them. I will just say that. So we, we have very good visibility because we have a lot of recurring revenue in our cash flows, and based on that, we have already paid down our term loan, which was our most, most expensive tranche. And we already, as of the first quarter, in four - at 4.1. We're gonna continue to do that, and we're prioritizing that.
In addition, because we have $1.6 billion of free cash flow that I was talking about, with cash flow conversion, that's 100% or above, not just this year or last year, but literally for the last seven years. We are doing more than one thing with our capital, and so we believe in a progressive dividend, and we're gonna continue to do that. We believe in doing employee de-dilution in terms of share repurchase, and we are gonna give ourself the optionality to do that. As far as doing more share repurchases than that, today, and based on tranches, that would be at the 5%-6%, you would delever, 'cause the EPS dilution is neutral, the free cash flow is accretive, and the multiple impact is much better if you have a lower leverage.
We don't believe we are being paid for our growth. I should have mentioned that despite our excellent financial performance today, if you look at where we're trading, we are exactly average S&P 500. So, like, how do you reconcile that we are? It's because we are at a higher leverage and because people are asking us to execute and to prove the thesis that we just announced a year ago. But it's starting to be a few quarters of executions, and hopefully we will resolve that. And so, clearly we do believe that we have an attractive story, and that deleveraging, as well as the removal of an overhang that we have today with a private equity owner over time, will certainly help us to address that.
After that, we'll do what we do best, which is continue to be good stewards for shareholders and always look at the alternative of doing something-
Mm-hmm
... versus not doing it, in terms of, like, whether it adds more value to shareholders.
That's wonderful. I'm really looking forward to watching Nasdaq. So with that, we do have a couple of minutes if the audience has a question. We can go to the audience, otherwise, I can always ask my last question. Anybody? I just wanted to ask about your index business. It's performing very well, and I'd like to know a little bit about your growth, growth initiatives, especially because, the Nasdaq indices have historically been viewed more at retail, and how you're making that more institutional.
Super great question. Thank you for that. So this little index business grew 38% in the first quarter, so we like that business. And when you look at it alpha versus beta, there was tremendous alpha in that story. And so if you remove all of the beta, it's still growing above its medium-term outlook, which we love. And the reason why it's that is, over the last five years, we've added $198 billion to be accurate, of organic inflows. And we've done it. Of course, everybody knows Nasdaq 100. It's a fantastic performance story, it's a fantastic group of companies, but it's also a very immature complex. Mature is good because it provides growth.
So for example, when you think about, the options that are associated with it and the trading of that, that has grown at, like, 83%, last year. And so, like, all of those things are, like, very nascent in some ways. You've got a complex that is, and you mentioned it, very retail-oriented. We can increase our distribution through geography, through new products. We have 30% that is non-NDX. Of the total flow, $86 billion of the $198 I gave you is non-NDX, so new products is a big thing. We do that, like, ESG products, AI products, thematics, yield. You name it, we have it. And we do it by country. We have some very nice success stories like, for example, in Australia or many other places.
We have a lot of geographic expansion we can have. Pension funds, retirements, and there is a very big annuity pool of $700 billion, where we have a 6% penetration, which is entirely under-penetrated. So we have a business that is really growing very well, obviously has been supported by a good beta, but is growing on alpha equally and more.
That's great. Well, thank you so much for joining us today.
Thank you.
Thanks, Sarah.