Ladies and gentlemen, thank you for standing by and welcome to the Nasdaq Second Quarter 2020 Results. At this time, all participants' lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. Ed Ditmire, Vice President of Investor Relations. Please go ahead, sir.

Good morning, everyone. Thank you for joining us today to discuss Nasdaq's second quarter 2020 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 SEC Regulation FD. I'd like to remind you that certain statements in this presentation and during Q&A may relate to future events and expectations and as such, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from these projections. Information concerning factors that could cause actual results to differ from forward-looking statements is contained in our press release and periodic reports filed with the SEC. I will now turn over the call to Adena.

Thank you, Ed. Good morning, everyone. And thank you for joining us. I would like to begin by acknowledging how deeply proud I am of the Nasdaq team's continued commitment to our clients and the communities in which we live during these last few months. With the second quarter being our first full period with a vast majority of our global workforce working remotely, I could not be more proud with the results that we have delivered for our stakeholders amid what is still a very unprecedented time. The executive leadership team and I are acutely aware that our colleagues, clients and so many of our stakeholders are tackling work, family and health responsibilities simultaneously. We are in the fortunate position that our business can operate in a remote working environment globally. And we've remained highly productive and available to our clients throughout this period. That said, we also recognize that some of our team members prefer the opportunity to work in an office environment. And over the long-term, we believe that there are social and creativity benefits that come from working together physically. Therefore, we are working to reopen our offices in a deliberate way as the virus subsides to specific cities and countries where we operate. And we are taking a very measured approach to the reopening of our offices that prioritizes our employees’ health and safety. In that regard, we will continue to make it completely voluntary until at least year-end 2020 for our employees to choose to return to our offices. The second quarter was marked not only by the deepening impact of the global health crisis, but by the escalation and recognition of the social injustices across many communities around us. We are committed to creating lasting, positive change and I'll highlight two examples. Last…

Thank you, Adena. And good morning, everyone. My commentary will be primarily focused 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 our press release, as well as any file located in the financial section of our Investor Relations website at ir.nasdaq.com. I will start by reviewing second quarter revenue performance as shown on Page 3 of the presentation and organic revenue growth on pages 4 and 14. The $76 million increase in reported net revenue of $699 million is a net result of organic growth of $75 million including 22% organic increase in Market Services and 6% organic growth in the non-trading segments, a $3 million positive impact from acquisitions, and a $2 million unfavorable impact from changes in foreign exchange rates. I will now review quarterly highlights within each of the reporting segments. I will start with Information Services, which as reflected on pages 5 and 14 saw a $19 million or 10% increase in revenue. Organic revenue growth during the period was 9%, primarily reflecting very strong growth in our index business and then smaller but positive contributions from each of the Investment Data & Analytics and Market Data businesses. Operating margin of 62% declined about 1 point compared to the prior year period, primarily due to the inclusion of Solovis. Market Technology revenue, as shown on pages 6 and 14, increased $5 million, or 6%, with organic growth of $4 million, or 5%. Organic growth during the period primarily reflects an increase in Software-as-a-Service surveillance revenues. As Adena noted, annualized recurring revenue or ARR rose 9% compared to the prior year period. Operating margin of 18% was up 8 points from 10% in the prior year period,…

Thank you. [Operator instructions]. Our first question comes from Rich Repetto with Piper Sandler. Your line is open.

You seem like you're in the sweet spot right now, given your exposure to equity trading and equity options as well as having the high percentage of recurring revenue. So, I guess this -- my question is, with so much volume now going into, from retail, the TRF percentage up in the low 40 percentage. Are we missing anything? I'm trying to look at the unintended consequences of having so much off-exchange volume. Your revenue capture actually went up in equity, which I didn't understand. But just trying to see how -- given that you're in the sweet spot, make sure we're catching all the reflections here or are all the possibilities?

Sure. Well, I would agree that retail participation in the markets, but the equities markets and the equity options markets has been -- certainly has been elevated this year. And you are right, that it is resulting in more off-exchange volume occurring. I think that what we've been really focused on is, for the volume that does, that come to the exchanges, what can we do to maximize our position? And so we've been working really hard right on a few fronts. One is, certainly just overall customer service and availability. Second is, just the scalability of our business and ability to handle these really large volume days, particularly like the Russell and the S&P 500 rebalance days. Third is that we continue to improve the performance of our systems with tech improvements and things that we're doing to make sure that we optimize the performance of our markets. And then the last thing is making sure that we really educate our customers on how to use all the elements of our markets, like our M-ELO orders and other things like that to capture as much volume as we can, but the retail volume generally gets internalized. And then of course turns into secondary volume that comes to the exchanges. So we do benefit from the overall elevated environment, but we do find that the level of internalization is something that we watch pretty carefully. Because you don't want there to be a diminishment of the price discovery that's occurring in the market by having too much of the volume go [off-exchange]. So it's something that we certainly are focused on. I think the one thing that we are focused on, Rich, is just making sure retail investors are educated as they're coming into the markets. The online retail brokers do a really good job of that. FINRA does a really good job of that. So we're just partnering with them to make sure that we're helping them with their educational efforts with the retail investors.

Anything on the revenue capture, that was part of the question -- the one question.

So the revenue capture, it's really a function of a lot of things. So one is just which markets are they leveraging to come into the market and therefore what's our capture rate. I think we also are -- we're very careful in looking at how much volume is coming into the auctions. We did have two very large auctions in the quarter -- at the end of the quarter with the S&P500. I think that was 1.2 billion shares. And the Russell rebalance was 1.5 billion shares. And there's obviously Craigslist as well in terms of the options versus the intraday trading.

Thank you. Our next question comes from Alex Kramm with UBS. Your line is open.

Hey, good morning, everyone. Quick one on COVID and the current pandemic. You talked about how -- obviously there's some negative impacts on the revenues, but also positive on expenses. Anything to note positive on the revenues? I mean, are there new business wins or anything that have come out, new use case that your clients have seen where you may be benefiting coming out of this? Or is it too early to tell?

No, actually, I think a couple of areas, Alex, I think it is actually relevant. So the first is how the demand for more of our SaaS-based technology is actually elevated during this period, because I think more and more the clients are realizing that to have the scalability and the flexibility they want to be able to have what I would take has to be on demand, to be able to manage their infrastructure remotely. All of those things really benefit from a SaaS market structure, SaaS market technology. And certainly as they've moved a lot of their compliance and surveillance teams remotely, there's even more demand for our surveillance solutions, because they want to make sure that they're able to propagate this across the firm. So I think those things actually have benefited from the need for people to be more flexible about where people work and having less reliance on their kind of homegrown infrastructure. And so all five of the new clients in the market operators that we signed in the quarter of were SaaS based solution to their all our next generation solutions, both in surveillance and market -- and upgrading. And I think that, in general, our overall demand for those types of services has gone up. I think the second thing is on the index side. We are continuing to have a lot of great dialogue with our index partners about new products that we can bring to market that do play into the long-term changes in the economy, and making sure that we deliver indexes that investors feel like they can invest in over the coming decades, that will have a positive trend around them. So I think that's another area that we're really focused on Alex that's more COVID related. And then I guess the last thing is on our data analytics platform of Quandl. We are seeing more demand for certain elements of alternative data, because they're trying to get ahead of government data, for instance. So there's really trying to get much better insights into demand and how it's changing and shifting in the world. And I do think that a lot of our Quandl products are relevant there. So those are the things that we're seeing Alex.

Our next question comes from Ken Hill with Rosenblatt. Your line is open.

Hi, good morning. I was hoping to ask about Nasdaq Marketplace Services Platform. So I know you guys launched this at the end of June. You have some detail on the website. And I was hoping you could help me kind of narrow the focus a little bit because it seems to have all -- a lot of great buzzwords in there and have a huge focus which can do a lot of things that a lot of fintechs and exchanges want to do. So I'm hoping to understand maybe how you see it specifically positioned within there? Secondly, you mentioned some early months with LEX there, but then may be who the natural customer base is for this and maybe the addressable market for it here over time?

Yes, no problem. So I think it was funny, we always joke with our marketing department on the buzzwords. So -- but I think that -- let me just kind of break it down. As we think about what we've been investing in over the last several years in market tech, the first thing is, is what we call Nasdaq financial framework, which is really the platform, the core platform that allows for micro service architecture. And what that means is you have this like common data layer, common data management capability, common security layer, a common code based across everything you're building. And that's kind of the core platform regardless of what functionality you put on top of it, and what capabilities you build, it's the common platform that all of our market tech solutions now are built on top of. And then on top of that, you then build capabilities like functionality, trading, prepaid risk management, post trade, processing, settlement, surveillance, things like that. What we've done with the Marketplace Services Platform is essentially completed the trade life cycle in a micro service architecture, so that you can basically deploy a market much faster in the cloud. So everything is fully cloud-native. And you can go and it's a much more kind of a turnkey solution for new markets. So the primary clients for the marketplace services platform are new markets. They could be existing clients that want to launch new markets, they want to launch a resource market or they want to launch something that's in the financial instruments themselves, crypto markets and things like that as well, or it can also be used for these -- kinds of new market concepts that we've been talking about in terms of outside the traditional capital markets. LEX Markets is a real estate securities platform, it’s a really a new construct. And we think that their marketplace services platform is kind of a perfect use case for that. And so it's just really creating a full trade life cycle. Our first iteration of it was the matching engine itself. And now we have a full trade life cycle in that micro service architecture. So, hopefully that helps kind of break down a bit.

Thank you. Our next question comes from Brian Bedell with Deutsche Bank. Your line is open

Let me just shift gears to the expense outlook and appreciate your comment on that Mike. Just kind of -- yes, obviously a very good performance with the operating margin, either continuing to grow and higher here and it looks like the -- about 300 basis points of operating leverage so far, halfway through the year with 6% non-trading revenue growth and 3% op expense. So, maybe as we move into the second half of the year, do you think we can still have that type of operating leverage? And maybe just to throw in a comment on the non-trading revenue growth side, new market technology with a little bit of a [spin] on the new order intake, does that mostly depend on that sales trajectory improvement a little bit in second half? Sorry for all the bundled questions.

That’s okay. So, we’ve got discuss of operating leverage and the discussion of order intake and market tech. So, I just want to make sure Michael, do you have any comments on operating leverage that you want to start with?

Well, I think we’ve covered it to some degree in the remarks, Adena, so obviously, the operating leverage is getting the benefit from the additional revenue that we’re receiving on the trading activity and that side of the business. And we continue to, as we said in my remarks, invest in the business. And so we do think that there -- for the full year the overall expense guidance is around that 3% range. So, that's what we're targeting and that's what -- when you look at that, in my remarks we said sort of the mid to the upper end of the range with respect to that expense guidance. That's where we come in around 3% for the full year. And then on the revenue side it's really with respect to what happens with respect to the operating or the revenue activities we have on the trading side, which is what the real driver as to whether it's in a -- stay where it is, increases or decreases, it’s dependent somewhat in the short-term based on the trading activity.

Yes, and then on the order intake question from market tech, I think the question is, are we dependent on the same kinds of order intake for us to thrive our year -- our current year results. And I would say Brian that we certainly continue to see a good pipeline of opportunity with order intake. As I said before, I think that we are seeing a little bit more moderated order intake this year because of the fact that bigger technology decisions are taking longer. So, that kind of chunky big order intakes that we tend to get from our larger clients are taking longer as they're managing through their own situation before making significant changes to their system or launching new things within their markets. But I would say that we do continue to see a healthy pipeline. And as we said before, we do see some risk to our ability to reach the lower end of the growth target for our market tech business this year, just because of some of the challenges in terms of time to sales and the way that we're implementing in a remote environment. But overall, the overall health of that business continues to be really strong and demand for our services continue to be really strong. So, I don't have a specific answer to your question about order intake relative to revenue. I'm hoping that we've given you guys enough understanding of the dynamics we're seeing, for you to look at, to get at the right conclusion there.

Thank you. Our next question comes from Mike Carrier with Bank of America. Your line is open.

Good morning. And thanks for taking the question. You mentioned that you're more comfortable on the low end of the non-transactional revenue growth range this year, but expecting some client activity in corporate and tech to be slower, which makes sense. I'm just curious, if you were using this scenario for a longer time period, I think, are you seeing clients -- and obviously I think Nasdaq is but it’d would happy enough that you could eventually see a pickup in orders if we’re in some of this type of environment for a longer period of time? And then Michael if either that is the case and we don't see it pickup in activity, what areas would you have on kind of the expense side for flexibility?

Sure. So I do think that clients are adapting. It's kind of they first had to get through really a surge in volume and a complete change in their operating model. And so they obviously put certain decisions on hold. And then you have the second thing, which is, okay, now we've got to deal with this new normal. And what does it mean for our business? And so how much -- how far are we going to lean in on new enhancements or new products, new markets? I think though, however, there was just an enormous amount of kind of momentum and demand coming into the year for new markets to launch, for people to try, to put more instruments on their platforms and for them to really thrive for frankly a more flexible infrastructure. And so I don't think there's decisions that are really put on hold forever. Mike I think that a lot of them are just taking a little bit longer, so they know exactly how they're going to make that capital allocation decisions while they manage through a longer term environment. The other thing I would say is obviously the exchange world in general has done -- has performed well. And the -- obviously the markets have performed well. I think that the volume activity is not just here in the United States, but it's in other countries as well. And so the overall resilience of the business models of our customers make it so that those types of decisions might take a little longer but obviously be made because they definitely see the benefit of modernizing their infrastructure. On the broker dealer side, I think that a lot of -- some of the sales have been more on those immediate needs, and that's why our surveillance sales have been really strong. But over time, broker dealers also want to optimize their infrastructure. They're going to prioritize things that where they're making money, and they are making money in trading. So we do think that those are opportunities also in the long-term to revert back to where we were seeing demand before. And then I'll turn it over to Michael on the question on expenses.

Yes, I think, it's just a bit of an extension of what Adena was saying with respect to. We look at the expenses in the context of the revenue. And so if we're in a period where this is continuing, and then obviously along with that there's good chance for uncertainty. So we'll be seeing good revenue or activity on the transactional side of the business. So that goes through really the resiliency of the business, but obviously in an environment that we're sitting in, we are seeing the benefit of reduced levels of spending on some of the discretionary spend or things like travel, our marketing events have moved online, and so you save some of the in-person costs and the cost of hosting those events and we have moved those online, but then there are some savings that's related to that. So we obviously always look at our discretionary spend and we'll look at the non-essential initiatives that we're looking at as an organization that you do over the longer term, but we're definitely going to and I want to make sure, we're clear about this in continuation of my remarks that we're continuing to invest in the capacity and the infrastructure to meet the markets' demands. In addition to that, we will continue to invest in the long-term growth initiatives for the business. And so we will look to manage expenses where we can and where possible, but we will continue to invest for the future.

Thank you. And our next question comes from Chris Harris with Wells Fargo. Your line is open.

So there was a decent sized drop in the U.S. options capture rate in the quarter. Can you talk a little bit about what's going on there and then is this a good run rate would you say for U.S. options capture?

Sure. So the U.S. options capture is really a function of the level of retail that's come into the options markets, because they -- those types of orders tend to gravitate towards the price time market as opposed to the floor-based markets or the complex markets like we have in ISE. So that -- and as you know the price time markets tend to have a lower capture. So I do think it's much more of a trend of retail. Now whether or not that trend will continue over the long-term is something that we all we'd like to see in general, because while the capture is lower, the volumes are up, right? So you have to kind of look at it, it's a balance there. And so, in general, we feel that having more participation in the market, more varied participation in the markets and more democratization of the market, these are all good things for the capital markets in general. And so I would say we just firstly just have to -- we'll have to see how much, how resilient the retail is. But I would say that you should look at it more as a function of that as opposed to concrete or discrete decisions that we've made. It's more just where the volume is going.

Thank you. Our next question comes from Alex Blostein with Goldman Sachs. Your line is open.

I was hoping to get to the Infra Services segment for a second. Could you guys talk a little bit about sources of growth particularly around the U.S. prop business this quarter as well as the pickup in investment in data products that there also seems like to be pretty nice pickup sequentially. So maybe a little bit more color there would be helpful?

Sure. Yes. Sure. So on the prop products, our proprietary products, we are continuing to find demand for our products particularly as frankly the retail investing dynamic continues to increase. I think that more and more of the retail brokerage firms and those firms that are really geared towards retail investors want to have access to real-time information and we offered in a really flexible way. And so and we worked very hard to be highly competitive with our peers, in terms of offering us superior products at a great price. So that has been an area of growth for us as we've continued to expand the usage of our data across the broader capital markets ecosystem. I think that in terms of the data and analytics business, it's been driven by couple of things. First, we still continue to have good growth in eVestment, although, it's somewhat moderated from last year, because we've been really working very hard to really solidify the core value proposition that we have for clients. We changed our pricing model last year and it's actually really benefiting the resiliency of that business this year, the usage of our data and analytics this year on eVestment. And it's kind of setting us up to really continue to drive new -- growth for new product delivery. So we've had actually a 39% increase in the usage of eVestment this year over last year and that's really because more and more of the C-Suite of the asset managers are really picking up and leveraging the eVestment data to make more strategic decisions around how they want to launch products or allocate their assets to different investment strategies. And I think that will give us a really good position to grow and expand the product base there. We also have the benefit of Solovis coming in and also driving growth. They've had, they have strong demand for their services. And we signed our first kind of Solovis client on the back of being an eVestment client. So we are opening doors through our eVestment relationships for the Solovis product. So I think all of those things are the reasons why we're seeing healthy growth in that business, but we're also shoring up the resiliency of the business with the change in the pricing.

Thank you. Our next question comes from Kyle Voigt with KBW. Your line is open.

So maybe just one on the index business. I wonder if you can update on how much of that index revenue line is driven by AUM base fees now. I think, last update was around 60%. And I'm wondering if you could help us understand the average fees on assets benchmark to that NASDAQ-100. I think primarily the Qs where the AUM is up 54% year-over-year versus the total AUM up 34%. Just wondering if there is some favorable mix shift going on there on top of the really strong growth? A - Adena Friedman So in general and I just want to make sure, we've been looking at this in terms of percentage of our revenue in the index business that comes from AUM-driven revenue versus the futures volumes and the data revenue. And about 60% to 65% of the revenue in the index business comes from AUM and that's kind of an average over the last -- or a range that we've experienced over the last few years. And somewhere in the range of kind of 10% to 20% comes from the futures volumes. It really just depends on the quarter in terms of the level of activity there. So hopefully that gives you a little bit of a sense of the scale. In terms of the fee base, we don't publish fees specifically to index businesses or our specific indexes that we launch with our clients, but I would say that the NASDAQ-100 Index program, in the way that the partners that we have with Invesco is a long standing evergreen partnership. So that the fee base within the NAS-100 has been the same for a long time.

Thank you. Our next question comes from Ari Ghosh with Credit Suisse. Your line is open.

So Adena just circling back to your comments on the index business. If I look at the recent performance, it's especially noteworthy given that even outside of market beta organic net flow growth, I believe is accelerated to around 15% range and is outpacing industry trends. So could you just talk about some of the differentiating factors and notes around your index business versus some of the larger index players in the industry? And then looking ahead just curious where you see the most room for product innovation. Is it around the smart beta, ESG or some other white space out there where you see the most opportunities? Yes, just as we think about, you're looking at avenues not to hit that medium-term growth targets in the index business.

Sure. So I think that first thing, I would say is, the NASDAQ-100 and the Nasdaq Biotech Indexes are just great foundational franchises for us. And then we have a very, I think, actually a great cadre of smart beta indices that also have done quite well in terms of just leaning into overall thematic trends. So I just think that we've been pretty good at selecting the types of themes that we want to launch in our index business. We're little bit more, I would say, of a niche type of player. We don't do every index that you can possibly imagine. We really do, work very closely with our partners to launch products that we think will have really strong investor demand, but also playing to trend. So the trends that we've seen has been highly successful are trends around technology, cloud indices, IT security indices, biotech indices and obviously the flagship NASDAQ-100, which is a -- which has a lot of waiting towards the technology sector in general, but it is actually a broad-based index that has a lot of sectors in there, but technology is obviously the most prevalent. So I think it's just that, our market as well as the indices that we build around our market trends are I think just playing into the next generation of our economy. And I think as a result of that we've had -- this resilience. And even you know in other down periods like in 2018 in the fourth quarter, we did not have as much reduction AUM, because even if the market performance was down for the quarter, we saw a lot of inflows coming in which offsets, obviously drops the market performance. In this particular case that's why we noted in my remarks that over 60% of the increase in AUM was actually from inflows not just market performance, because it does tell you that we're leaning into a lot of long-term trends with our indexes. So hopefully that answers your question, Ari, on that.

Thank you. And we have a follow-up from Alex Kramm from UBS. Your line is open.

Quick one, maybe -- maybe not. You mentioned -- Adena, you mentioned ESG three times in your prepared remarks today. So just curious if you can give us a little bit more color, which is obviously a super fast growing macro trend. And so any idea how big ESG is for you today, how fast it's been growing and where you see how much of an impact you can make in the future in terms of potential growth here?

Sure. Yes. And that actually goes to Ari's second question which I didn't answer, which is, where do we see the bigger trends going forward in the index business. And ESG is certainly one of the big macro trends, and it is an area that we want to make sure that we again, in a very specific way that we are also playing into the ESG trend. We're trying to make sure that we do, for instance ESG versions of the OMXS30. We have other ESG thematic indexes that we're launching with our partners. So that's one area of ESG that we're definitely focused on, but it's still very small for us, Alex. I think that -- the other is actually in our corporate services business, where we did make a very small acquisition in a company called OneReport, but that is really catalyzed demand from our corporate clients. So I think our largest near-term opportunity, but still coming off of, we just launched the ESG advisory service like 18 months ago. So this is still pretty new. It's really helping our customers navigate a very complex environment around ESG reporting, making it easier for them to report their information by putting it into one place and having one repository that we then translate and map out to all the metrics providers. Ultimately, we're going to want to expand that. So we can actually map that directly into institutional investors’ databases. And then additionally making sure that we capture this -- that information and make it so we can provide our corporate clients with more reports on their own trending, how they're trending against peers things like that. So that they can get more intelligence from all of the work they're doing around ESG. And I think that, so we…

Okay, but too early to give any sort of corporate-wide ESG metrics or revenues like some of your information services PSR are already doing.

Yes. No, I would say it's too early for us. And they are kind of embedded in different segments. So it's not something we pull together as one number.

Thank you. And there are no further questions in the queue. I'd like to turn it back to Ms. Adena Friedman for closing remarks.

Okay, great. Well thank you all very much for your time today. We are very pleased to see that our businesses are delivering strong organic revenue growth in the quarter. Guided by our strategic direction, we have a clear focus to finish 2020 strong as we re-imagine markets to realize the potential of tomorrow, and we are committing to executing our plans diligently while keeping our employees safe and set up for success while in the remote environment. So, but thank you very much and have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.