LSEG Q2-2022 Earnings Call

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Paul Froud

IR

Good morning. Thank you for joining us, and welcome to London Stock Exchange Group's First Half Presentation. I'm pleased to be joined by David Schwimmer, the Group CEO; and Anna Manz, the Group CFO. As usual, David and Anna will provide some comment and insight on the financial and operational performance of the Group, and then we will open up to Q&A. So as a reminder, there are two ways to ask a question.

You can send in writing by following the instructions on the webcast page. Alternatively, you can ask a question over the telephone line using the number provided in today's release. We have provided some slides that will accompany this webcast, and they are available through the Investor Relations section of the Group's website.

And so with that, let me hand you over to David.

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David Schwimmer

Group CEO

Good morning, everyone. Let's get started on Slide 3. LSEG has delivered a strong first half performance with continued revenue growth across our businesses. Simply put, our strategy is working. We're making great progress in realizing the benefits of the integration, and we are making it easier for our customers to work with us across different parts of the trading life cycle. Customers who know us in one part of their business are seeing the benefits of working with us more broadly. And there is plenty more opportunity ahead. When I say our strategy is working, the numbers we are delivering back that up.

As you can see on Slide 4, we continue to hit all of our financial targets. Total income grew 7% or over 10% on a headline basis. We're on track to meet our EBITDA margin. We have realized £44 million of run rate revenue synergies in the first half, and we continue to deliver ahead of plan on cost synergies.

I've talked in the past about the great cash flow generation of this business. That strong cash generation is allowing us to deploy capital across organic and inorganic investments, grow our dividend by 27% in the first half and confirm the start of a £750 million share buyback program with the first tranche to begin immediately.

Turning to Slide 5, there's a lot of uncertainty in the markets about the current macro environment, including inflation, rising rates, recession risk, geopolitical challenges. Given that uncertainty, I do want to spend a minute talking about how well positioned LSEG is to navigate an environment like this. First, we are highly diversified across geography and products with over 40,000 customers in 190 countries.

Second, we provide critical services to our customers. Many of our products or offerings sit deep within customer workflows, and over 70% of our revenues are recurring. I would suggest that our customers need us even more in an environment like this as we provide the data and services they need to help them navigate the uncertainty.

Third, interest rate volatility is driving growth in our transactional businesses such as Tradeweb and SwapClear. And last few points, we have multiple levers to manage costs with our people spread geographically and a, strong track record of managing technology spend. And as I have said, we remain highly cash generative with strong credit ratings and a balance sheet light business model.

Turning to Slide 6, the combination of our strategy and our business model makes LSEG a very compelling proposition. We have highly recurring subscription revenues diversified across customers, products, activities and geographies. And we have strong customer retention. We're driving higher growth in a number of our businesses. And we are investing for further growth while building a more agile, scalable and efficient business, particularly in data and analytics.

Let me pause there and hand over to Anna to provide more details on our strong first half. I'll then give more color on how we are benefiting from the growing linkages among our businesses. Anna, over to you.

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Anna Manz

Group CFO

Thanks, David, and good morning. Starting on Slide 8 as David said, we've had another strong half with 7% growth in total income. All of our divisions are performing well with progress continuing into the second half. We're seeing a growing contribution from revenue synergies, and cost synergies are ahead of expectations. And that firmly puts us on track to deliver our 5% to 7% revenue target and our margin guidance of at least 50% on an exit basis at the end of next year.

Cash generation continues to be robust, supporting both investment and shareholder returns. But the message is clear, we're both investing and improving execution, and we're making good progress on building a sustainably stronger business that delivers high-quality, broad-based growth. And I'll share more detail on this over the next few slides.

I'm going to focus on constant currency performance, excluding the actions we've taken around the Ukraine-Russian conflict, as this gives you the best view of the underlying strength of our business. As you've heard, we're well positioned for the current environment, and you can see that on Slide 9. All of our divisions grew strongly. I'll unpack the 5% growth in Data & Analytics in a moment.

Capital Markets revenues grew over 13% with new trading functions and services driving double-digit growth at both Tradeweb and FXall. Post Trade was up 9% with continued growth in repos and record volumes in interest rate swaps. We saw an impact from the Ukraine-Russia conflict. In the full year, it's still expected to be around £60 million, which is roughly one point of revenue growth. And we saw some benefit from FX moves in the half.

Let's turn to the strong performance in Data & Analytics on Slide 10. Over 90% of our Data & Analytics revenues are from recurring subscriptions, and these continued to accelerate, growing 5.1% in the first half. Price growth is broadly consistent over the period shown. So the acceleration reflects the improvement we've delivered in sales, both retention and new sales, the balance of our Data & Analytics revenues are transactional.

The growth here was lower in the first half due to the market environment and the timing of acquisitions in the prior year. We expect the second half to be similar coming back to the 90-plus percent of subscription revenues. The best lead indicator for these is ASV growth. And you can see how this continues to accelerate on Slide 11. I love this slide. It's the visual representation of a lot of hard work. Price growth has been consistent over the period.

And so, the acceleration you see is driven by better retention of our customers combined with incremental sales to both new and existing customers. We've achieved this by focusing on our performance culture, using data to drive customer-centric execution. To bring that to life, we've used data to describe who is using our products and how and are aligning our sales force to that with clear goals and incentives.

We're shifting from product sales to selling customer solutions. And for all of our bigger customers, we have a single lead to work strategically with them. We're relatively early in this journey, and there is much more we can do, which David will get into later.

Turning to Slide 12, you can see we're making good progress against our revenue synergies. We ended the first half with £44 million of run rate synergies, driven by using the Refinitiv enterprise data in our index products, by the strong demand for that enterprise data from our index customers and by purchases of Yield Book analytics by our Data & Analytics customers. We expect to be at the top end of our £40 million to £60 million range for the year and are on track to deliver a total target of £225 million.

Now let's look at costs and margins on Slide 13. We had a good margin performance in the first half, 48.8%, and we're on track to deliver our low single-digit organic cost guidance for the year. We're executing well on our cost synergy program and are increasing our full year guidance to a cumulative delivery of £250 million run rate savings. That's over 60% of our £400 million target.

Looking to 2023, we're continuing to make investments to drive future growth. And while we're not immune from the inflationary environment, we're well practiced at managing our cost base. And we're on track to meet our target margin of at least 50% on an exit basis next year.

Slide 14 shows our first half operating expenses in a little bit more detail. Aside from FX moves, there's, three elements of our cost growth in the first half growth in ongoing operating costs, the investments we're making to accelerate growth in our business and the benefit from cost synergies in the period. You should continue to expect low single-digit organic cost growth for the full year.

Slide 15 shows the improvement in our EBITDA margin. We delivered a first half EBITDA margin of 48.8%, a further improvement on our 2021 performance, and we've done this while continuing to invest in our business. We're practiced at managing our cost base and have levers to pull. And the increasing strength of our customer relationships positions us well to manage our pricing. So we're confident in delivering our exit 2023 margin target of at least 50%.

Let me talk you through some of those cost levers on Slide 16. We're making the business simpler, more agile for our customers and easier for our people and in doing so, we're driving cost efficiency. Our global footprint gives us flexibility in where we locate our people. More than 65% of new hires this year have been made in lower-cost locations. And as we build a scalable tech platform, we're systematically tackling every aspect of our cost base.

We're consolidating our low-latency data products onto a single efficient platform. And we're increasing the efficiency of our cloud estate with our new standard efficiency metrics that are identifying areas of improvement application by application. We continue to deliver well against our £400 million synergy program, and we expect to have reached £250 million of those run rate benefits by the end of the year. So while it's not possible to predict the inflationary environment in 2023, we are able to mitigate the impact on our cost base.

Let's turn to CapEx on Slide 17. This is the same slide I showed you a year ago, but we're 12 months further along in delivery, and we're making good progress. We've broadened - the cloud distribution of our Data & Analytics services, meeting our customers where they want to be and providing more data sets, faster data processing and more efficient storage and greater flexibility of analytics.

We started moving service onto our software-defined network and will be halfway done by the end of the year. This is a big step forward towards cost savings. We're making great progress in modernizing and digitizing our data ingestion, rolling out new intelligent filtering and tagging tools and increasing the automation of our data sourcing. Our new FX matching platform is being tested by some of our customers ahead of full launch towards the end of next year.

And we're also making good progress on the rollout of Workspace, which David will cover in more detail later. We expect to generate over £1 billion of post-dividend free cash flow this year, plus proceeds from the sale of BETA in July.

As Slide 18 shows, this will be second half weighted due to the phasing of our dividend, investments and variable comp. We're putting the cash we generate to work consistent with our capital management framework, as you can see on Slide 19. We're actively managing our capital to create value. I've already talked about some of the CapEx investments we are making to accelerate the business and increase scalability.

And we're also pursuing inorganic growth where it meets our strategic and financial criteria. We closed two acquisitions in the first half. We're increasing shareholder returns. Our interim dividend is up 27%. And today, we announced the start of a share buyback, which I will get into in a minute.

Slide 20 shows the progress we've made in deleveraging our business in the last 18 months. Our growth and cash generation naturally reduce leverage over time, and we've disposed of non-core assets. Leverage is within our target range. And consistent with our framework, we're now in a position to return surplus capital to shareholders by our £750 million buyback. This will take around 12 months to complete.

I don't intend to go through Slide 21 on full year guidance, but it gives you the specifics you need for your models. One thing I would draw your attention to is that we expect a slightly lower tax rate this year, between 21% and 22%.

So to end where I started, on Slide 22, I'm really pleased with our performance this half. We've seen high-quality, broad-based growth, which should continue into the second half. Our run rate on both revenue and cost synergies is ahead at the half year stage. And we are firmly on track to deliver our 5% to 7% revenue target, and our margin guidance is unchanged.

Our cash generation continues to be robust, supporting investment and returns. And most importantly, we are making great progress in building a faster-growing, more agile and efficient business.

And now let me hand back to David.

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David Schwimmer

Group CEO

Thank you, Anna.

Turning to Slide 24, I'm going to spend the next few minutes on how we're improving our strong current positioning through better execution and investments and the benefits we're seeing from the ongoing integration. We are a critical partner to our customers around the world including almost all top global banks and the vast majority of the world's top asset managers.

We have strong leadership positions across the financial markets value chain. And crucially, our open approach is a model that our customers prefer as we partner with them to deliver the solutions that they need.

Turning to Slide 25, this is the virtuous circle I've talked about before: data providing the insight that drives trading executions and those executions generating new data and so on. But it's more than that. Customers who have known and trusted us for decades in our markets businesses are now, in many cases, very receptive to the benefits we can bring to them through our data and analytics offerings. We are also serving our data customers better, improving our content and capabilities.

Slide 26 sets out our three strategic objectives integrating our business, driving growth and building an efficient and scalable platform. We are executing on this strategy, and this strategy is working.

Let me break that out in more detail, starting on Slide 27. Our focus on improving the customer experience and bringing rigor to how we run the business day in and day out enables us to partner more closely with our customers. We're simplifying our offering in Data & Analytics, distilling more than 240 individual products down into nine customer solutions centered on core industry themes.

We've also brought our sales functions together with better aligned incentives, and our customer service teams have a greater focus. Within our large customer segment, this has led to improved product retention, up over 350 basis points since 2020.

Turning to Slide 28, I want to give you a great example of LSEG's unique positioning and how it helps us serve our customers better. There are important bank capital rules known as FRTB or Fundamental Review of the Trading Book that will be implemented over the next couple of years under Basel III. FRTB creates challenges for banks looking to manage their capital efficiently.

To oversimplify, the better the quality of the data the banks have on the positions in their trading books, the less capital they will have to hold against those positions. We've worked with our customers to develop a valuable new FRTB solution that aggregates proprietary data from Tradeweb, Yield Book and SwapClear. We're the only provider bringing together this range of data, and our ability to deliver the solution to customers in a flexible way is a key differentiator.

Let me give another great example of what we're doing to create a more seamless customer workflow on Slide 29. In June, we announced that FXall and Tradeweb are collaborating to link trading workflows in emerging markets bonds and emerging markets currency swaps. This will allow market participants to buy or sell emerging market bonds and hedge their currency exposure on the same system simultaneously with efficient, straight-through processing.

This is a powerful example of the opportunities LSEG and Tradeweb have to create value for financial market participants. We're also investing for the future to build more efficient, scalable platforms.

Turning to Slide 30, in May, we announced plans to launch a new non-deliverable forward or NDF Matching venue in Singapore to support strong demand from the Asian market. This represents the first phase of LSEG's plans to implement NDF and spot matching based in Asia. I should add that the integration of clearing into the design of NDF Matching will also enable easier access to the full book of liquidity in the venue for all participants.

The venue will be open for integration testing later this year with a full production launch in mid-'23 and is the first stage of LSEG replatforming our FX venues to our world-class trading technology.

Turning to Slide 31, we're making excellent progress on the rollout of Workspace, our next-generation desktop solution. We are ahead of plan with over 50% of users now migrated. The beta version of Workspace for FX trading launched at the end of last year, and all remaining user types will be live or in beta form by the end of this year.

While there's still plenty more to do, Workspace is a part of the turnaround we are seeing in trading and banking, which is now growing for the first time in years. Importantly, customer satisfaction with Workspace is up more than 10% compared to prior offerings based on search functionality, ease of use and value for money.

Turning to Slide 32, we also continue to create shareholder value through strategic acquisitions. We completed the acquisition of GDC, which globalizes our digital identity and fraud prevention capabilities; and MayStreet, which expands our enterprise data offering into ultra-low latency services. We're beginning to see the benefits of these transactions. For example, MayStreet has already onboarded eight new customers since the acquisition was announced in May.

We expect to close on our acquisition of TORA shortly, while Quantile should complete by the end of the year, subject to regulatory approval. Each of these is a relatively small acquisition. But by combining their capabilities with our connectivity to and relationships with customers all over the world, we can create substantial incremental value. You should expect us to continue to make strategic investments to strengthen our customer offering.

In conclusion, on Slide 33, we have delivered a strong first half performance, and LSEG is well positioned. We're continuing to invest in growth to build a more agile, scalable and efficient business. We generate a lot of cash with a strong balance sheet and an active approach to capital allocation, including the announcement of the £750 million share buyback. Our strategy is working. I'm pleased by the great progress we're making and excited by the opportunities ahead.

With that, I'll open it up for your questions. And while the questions come through, let's hear from some people across our business.

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