Q3 2022 Forge Global Holdings Inc Earnings Call
22 financial results conference call.
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Thank you very much and thank you all for joining us today for <unk> third quarter 2022 earnings call.
Joining me today are Kelly Rodriguez Porges.
CEO and Mark Li gorgeous.
They will share prepared remarks regarding the quarterly results and then take your questions again.
Just after market close today.
We issued a press release announcing <unk> third quarter financial results.
A discussion of our results today is complementary to the press release, which is available on the Investor Relations page of our website.
This conference call is being webcast live and will be available as a replay for 30 days beginning.
Beginning one hour after the conclusion of the call.
There also will be.
Accompanying investor supplemental on our IR page.
During this conference call. We may make forward looking statements based on current expectations forecasts and projections as of today's date.
Any forward looking statements that we make are subject to various risks and uncertainties and there are important factors that could cause actual outcomes to differ materially from those included in the statements.
We discuss these factors in our SEC filings.
Including our quarterly report on Form 10-Q for the quarter, which continue to be found on the IR page of our website and the SEC's website.
<unk>.
As a result, we are not required to update our forward looking statements.
In our presentation today, unless otherwise noted we will be discussing adjusted financial measures.
Which are non-GAAP measures that we believe are meaningful when evaluating the company's performance for detailed disclosures on these measures and the GAAP reconciliations you should refer to the financial data contained within our press release, which is also posted to the IR site.
Today's discussion will focus on the third quarter's results as always we encourage you to evaluate <unk> performance on an annual but also on a quarterly.
<unk>.
While hopeful to gauge our performance.
With that I'll turn it over to Kelly.
Thanks, Tom.
And thanks to everyone for joining this afternoon.
We appreciate your interest in porch.
Similar to my remarks on the previous earnings call I'll begin with some brief commentary about what we're seeing in the broader markets.
And then I will move into our operating results and business highlights for the third quarter.
As many of you already know Ford is committed to increasing liquidity.
Transparency and efficiency in the private markets.
Progress towards this commitment is apparent in our third quarter results.
Despite this challenging market we.
We made headway in international expansion in.
In growing our data business and in product innovation to deliver future profitable growth.
We are building for the future and focused on becoming a global category leader in the private market.
But before we go into the details let me talk about the world we are experiencing.
I think it's fair to say the capital markets continue to be volatile.
And just one proxy the number of down weeks for the S&P 500, as a percent percentage of this year is nearing a record at 63%.
At the start of Q3, there were signs that market started to find their footing.
Even amidst the seasonally slow summer months for securities trading.
However in August with inflation still at the highest level in more than three decades.
<unk> share Pal indicated the need for continued interest rate hikes.
This was followed by worsening inflation data and ultimately dampen the tepid signs of market recovery.
In both the public and private markets have felt the impact.
Through the first three quarters of this year, we witnessed an 81% decline in the number of Ipos compared to the same period last year.
Roughly 92% decline in capital raised by Ipos in the U S.
From $217 billion raised in the period last year to just $18 billion. This year.
From a venture capital perspective, it was a more it was more of a mixed bag.
On one hand, VC funds raised $151 billion year to date across 593 funds for Pittsburgh, making it a record setting period.
But on the other hand they.
Have slowed putting that capital to work.
The lack of deal activity has increased the already record high levels of dry powder in part due to a lack of acceptance of lower valuations from unicorn companies and start ups.
Now despite these data points we are encouraged.
After all history shows us that many of the largest and most successful companies are created during downturn.
Which we believe over the longer term will become the next generation of private companies traded on <unk>.
Amidst the volatility.
And facing persistent exit delays the number of unique companies with sell side indications of interest on the <unk> platform remained above historic averages and in fact reached an all time high for any Q3 in <unk> history.
Yet we continue to see widening of the bid ask spread during the quarter, peaking above 25% in August before beginning to narrow back down to 22% in September .
The bid ask spread is still a far cry from our historic median of about 12%, which is the level, where we feel the market achieved price discovery equilibrium.
Where PD as we referred to in prior earnings calls.
Price expectations continued to decline during the third quarter.
We saw trades cross on average at 41% discount to companies last primary routes.
Year to date companies listed on <unk> markets traded 44% lower between Q4 dollars 21 in Q3 dollars 22.
Now if you compare that to where we stand with headline losses and public tech indices year to date.
The Q2 Qs have declined 32% the.
The IPO ETF has fallen 51%.
The widely watched technology, our ETF has dropped 61%.
The main takeaway here.
Is that the magnitude of the decrease in the private markets.
Now appears to be roughly in line with that of the public markets.
And while it's good to see more congruent behavior between the private and public markets. The key question is around whether we're reaching trough valuation levels.
Cross the markets.
One trend we are watching closely.
Is right of first refusal or rope for trades.
And on this front, we have seen some indications.
Companies are exercising their right of first refusal at slightly higher rates over the quarter.
Although it's too early to draw conclusions here.
We start to see additional acceleration of company's growth re trades that could be a sign that existing capital table investors.
Or are increasing their positions at current prices and could be an early indicator about trough valuations. So we will continue to monitor that.
Now I'll briefly touch on the financial highlights of <unk> third quarter 2022, and then Mark will do a deeper dive.
I will discuss our results and comparisons to our prior quarter.
In the third quarter total revenues less transaction based expenses were $15 8 million compared to about $16 5 million last quarter.
Total custodial revenues were up quarter over quarter to $7 7 million from $5 7 million last quarter, reflecting the rising interest rate environment.
Total custody accounts also increased quarter over quarter to $1 8 million from $1 7 million last quarter.
Assets under custody were essentially flat at $15 billion in Q3 versus $15 3 billion in Q2.
Now I would like to highlight some notable initiatives during the third quarter, which demonstrate meaningful progress towards some of the goals and objectives that we previously described.
We are building towards as a truly global marketplace and to that end in September we were proud to announce the introduction of Ford Europe and <unk>.
Partnership with Deutsche Boerse.
We anticipate a market launch in mid 2023 subject to obtaining the requisite regulatory approvals.
Towards Europe will establish a digital platform for private European companies and investors that also ties seamlessly in the forged as U S liquidity network.
Combination affords us innovative technology platform and private market expertise with Deutsche Boerse. This brand and local market knowledge will help us build the regulated private market infrastructure needed to operate in that region.
Towards Europe will deliver to European participants the benefits of a liquid transparent and efficient global private market.
Through Ford Europe , we're moving forward on our commitment to expand internationally and becoming a truly global private market.
We continue to see traction in our data business since day viewing forge intelligence a year ago.
We've added new enhancements, including introducing a new comparison feature which now enables investors to easily compare similar private companies through metrics, such as train frequency and price change since last funding round.
We also gained traction with new file based offerings to distribute our data in different ways to accommodate our customers' needs.
This quarter <unk> also began aggregating third party private market trade data, we believe incorporating robust third party datasets that give our customers deeper insight in a broader view of the private markets is what makes our offerings so attractive.
Sets us apart from competitors.
We're excited not only by the growth in <unk> intelligence as recurring revenue stream, but also by the strong pricing power.
Sell opportunities and positive net dollar retention, we're seeing due to increased features and use cases.
We also began for the first time in Q3, providing custodial services from Forbes market's trading customers.
The aim is to continue to drive synergistic effects that not only make trading more efficient.
But that will allow us to create long term sticky relationships with our customers.
It goes without saying the diversification of revenue sources across markets.
Data and custody is an advantage in unstable markets like the one we find ourselves in today.
In October we launched the pilot of our first lending product.
Which offer stock option exercise bridge loans.
These short duration loans enables employees to borrow funds to exercise their best and options and then sell their shares on the force platform.
We're being deliberate about the rollout.
Starting small and with a long term strategy of working with banking partners to provide the capital this product requires.
We believe our lending offering can help unlock sell side inventory.
And generate additional revenue.
The product gains traction.
Yes.
Switching topics to what is top of mind for the investment community.
Our executive team and board is capital allocation.
During this period of market instability, we've been conscious about cost containment and reduction of cash burn.
And we have instituted a hiring freeze.
<unk> continues to build for the future and we will do so with an expected flat head count in 2023.
We will continue to consciously manage spend while investing for growth.
But we're committed to lowering our overall cash burn in 2023 compared to 2022.
Despite the challenging macroeconomic environment, we are building for the future.
Excited about the progress we've made the viewing our first lending product unlock new inventory, increasing the value delivered to customers through our data products.
And expanding internationally through Ford Europe .
All of which accelerates the network effects of our unique model.
I've said this before but it's worth reiterating.
With a strong balance sheet.
And a growing need for private markets infrastructure.
We believe we are well positioned to extend our category leadership.
And returned to revenue growth when the market stabilize.
Now.
I'll turn it over to Mark Lee our CFO .
Thanks Kelly.
Given the economic environment at this time I will also be focusing my Q3 remarks in comparison to the prior quarter.
The third quarter of 2000 Q4 at this point of the revenue less transaction based expenses were $15 8 million down from $16 5 million last quarter.
Of that amount.
Placement fee revenues reached $8 2 million.
Down from 11 million last quarter.
Transaction volume in this quarter was $226 million versus $332 million in the second quarter. The ongoing result of inflationary.
Concern compounded by geopolitical instability, which continues to be created market.
<unk>.
The average net take rate for the quarter was up to three 6% versus three 2% in Q2.
And as a reminder, net take rates are directly related to the mix of institutional versus individual volume on any given period.
Although custodial and administration fees were up in Q3 quarter over quarter to $7 7 million from $5 7 million last quarter.
This gain was largely driven by our ability to increase cash administration needs in a rising interest rate environment.
For this custodial cash balances totaled $685 million at the end of the third quarter.
The flat from $680 million at the end of last quarter.
While our custody accounts increased quarter over quarter to $1 8 million in Q3.
$1 7 million last quarter.
And as Kelly previously stated.
Assets under custody were essentially flat at $15 billion in Q3 up from two <unk>.
Is $15 3 million in Q2.
Stock based compensation was up to $26 7 million versus $10 7 million last quarter.
Our third quarter GAAP net loss was $16 2 million compared to a GAAP net loss of $5 1 million last quarter.
This $16 2 million in the quarter included an incremental $10 7 million in non cash expenses.
Due to an increase in stock compensation and offset by the change in the fair value of our private lives.
Yes.
Okay.
EBITDA is another key measure of our operating results in the third quarter adjusted EBITDA loss was $13 3 million compared to adjusted EBITDA loss of $12 3 million last quarter.
We've included a reconciliation of adjusted EBITDA for the most recently comparable GAAP measure both in the press release and our SEC filings.
Net cash used in operating activities improved to $11 4 million in the quarter.
Net cash used by operating activities at $18 2 million last quarter.
Quarter over quarter improvement was driven by onetime costs related to being a public company and the timing of annual insurance payment in Q2.
The current macroeconomic environment, we continue to actively manage expenses to mitigate our cash burn.
Let me spend a minute on the structure of <unk> Europe .
The driver behind the $8 1 million and net cash provided by financing activity in the three months ending on in 'twenty two.
As Kelly you highlighted.
Pivot market in Europe has demonstrated tremendous growth in recent years boards and Deutsch Marissa are formed a strategic partnership that was funded with $14 1 million.
$4 6 million from Orange and $9 5 million from Biosimilars.
Europe financial results are now consolidated under force level.
With floor cabin the controlling interest.
2023 will be the year of building towards Europe , and evangelizing, our private market vision throughout the EU and the UK.
Cash and cash equivalents ended the quarter at approximately $203 million.
<unk> $205 million last quarter, highlighting a well fortified balance sheet.
The housekeeping perspective, our weighted average basic number of shares used to compute net loss was 169 8 million shares and our fully diluted outstanding share count as of September 30 was 184 million shares.
For the fourth quarter, we estimate $171 million weighted average basic common shares for EPS modeling purposes, while in a loss position.
We ended the quarter roughly flat and total head count at 350.
As Kelly has stated or is that institute instituted a hiring freeze.
Except for a small number of critical positions our intent is to maintain total head count.
Current levels until there is greater stability in the overall market.
Yes.
As responsible stewards of capital, we and the board are monitoring the market, our resource allocation and capital spending on a regular and ongoing basis.
We are committed to lowering our overall cash burn in 2023 compared to 2022.
Okay.
We continue to focus on managing our expenses, while balancing the need and the opportunity to invest for the growth of this platform products and services and.
In keeping with our vision and strategic plan.
And delivering and executing on our commitment to shareholders.
Thank you Kelly Mark how much can we please open it to questions.
Thank you as a reminder, if you would like to ask a question today Press Star followed by the number one on your telephone keypad.
Your first question today comes from the line of Devin Ryan with JMP Securities. Your line is now open.
Okay, Great. Good afternoon, Kelly, Mark and Tom how are you.
Thanks.
<unk>.
Good.
Maybe you want to start on.
The bid ask equilibrium and I appreciate the update there until my comments.
Love to just dig in and when you think about some of the improvement that youre seeing and hopefully.
That continues I'm, assuming some of the names are getting closer than others and so.
There can be names that are within kind of an average and so you're just trying to think about that to the larger named larger companies, where there's probably more liquidity on both sides are they you.
<unk> been getting maybe quite a bit closer than that.
Does the spread.
Tightened around company events or.
But ultimately you kind of think about what other drivers we should be watching from the outside.
To think about kind of that tightening even further from here.
I mean I'll start with this.
That's an overall view of the.
The question relative to what we've put forth, where we've been speaking and averages.
Yes.
I'd say, even in this time of disruption.
There are still companies that are performing well.
And what are the key indicators of.
The bid ask spread is is there a new financing is there a company that has demonstrated their ability to raise capital in this period.
Their performance relative to the broader macroeconomic trends. So if a company has successfully raised capital.
We believe that that is.
Likely to be a company that would have a lower bid ask spread to the extent that traded I think we're also seeing the data product being a critical factor in determining.
Were bid ask spreads are on individual names. So remember we put out this.
<unk> every quarter, which is meant to give the market a broad sense of what's happening, but I think if you have data subscriber affords you can zoom into one name and take a look at.
What's actually going on in mandate and so as you could imagine there are names that continue to trade in and trade with lower bid ask spreads and others.
So.
But look I think everyone's affected in some way.
By the condition that we're in right now you want to add anything.
Yeah, Devin I would add that.
While looking at the existing bid ask spreads as an important and helpful indicator.
The other thing that we mentioned during this call was the fact that the transactions that we are closing are being completed.
Greater and greater discounts to the last round as well.
The 44% decrease this from valuations that were created back in Q4 of 2021.
So you can take a given name where there could be a widespread.
But ultimately what happens is that the seller.
Access to bid and close the transaction is that the mid priced at a significant discount to either the last round.
That stock traded in 2021 and our <unk>.
Penetrate gets completed despite there being a widespread at the time right and so I think the important kind of kind of data <unk>.
To incorporate in addition to the spreads is kind of where are those trains being closed.
We've mentioned in the last call.
And then more public visible markdowns that private companies are taking you recall, Florida.
Raising capital at an 85% discount into the class two or three rounds out valuation.
Evaluation decrease of 57% decline in portal.
Stripes.
Dropping their valuation 64%.
After the evaluation that T Rowe.
But on their strength holding and then recently mobilized and all of that neighborhood.
Anticipating a range.
$50, a share and ended up issuing at $16.
Down, 60% kind of where the expectations were so.
I do think that.
Yes.
Positive information that we're taking from all of this is that we are seeing valuation suggests.
The private market.
If in fact.
Isn't that than that.
That leads to.
More transactions that I think that could be that could very much be the outcome.
Okay great.
Great. Thanks for the color there.
Follow up here on the lending product.
It sounds like that could be a nice ancillary revenue stream I appreciate it's going to take time to scale.
Get more adoption, there, but just remind us on.
How to think about kind of when this product will be applicable.
And then just how youre thinking about the potential opportunity for the product as it scales.
Oh well.
Yes.
We're really excited about this.
Start thinking about.
Lending with a range of different applications.
We fundamentally have a view.
Net employees that become owners and not just stock option holders.
Really serve broadly the private market and companies that are participants that are trying to change the world realizing particularly in difficult times, but employee retention is.
Is a big deal.
And so the idea that we started with.
Something that was relatively small and relatively low risk now on an enterprise basis.
It's it's conceivable that you could see companies.
In the global Unicorn.
<unk>.
Today.
Want to broadly institute programs to convert their option holders into owners.
And so we thought this is a logical place to start because the loan sizes are small.
The loan term was very small because we identified with our data and with our platform buyers.
The same name the companies or employees, we're looking to get loans.
So our ability to match.
A buyer with the stock and to pay off a stock option bridge loan. We think is uniquely qualified in the market. We think we could do this better than anyone else that at scale. So we started the year, but we recognized that over time this could expand in under lending other lending products.
And that we will meet capital partners.
So it shouldn't be a surprise to anybody that to <unk>.
<unk> backed by some of the most.
<unk> and interested banks in the world in the private markets, we've announced partnerships and we will.
Look at our banking partners as sources of capital as this scales and gets bigger over time, but.
We thought this is the place to start it serves employees.
Company's interests and it really creates a.
Unique opportunity for forge to enter the market.
And be competitive.
And Kevin I would add.
I would add that in.
The current environment. Unfortunately, you are reading about.
Many unicorn companies, reducing reducing their staffing.
And for those affected by this.
They typically have a short window to exercise their stock options.
Many of which would be in the money and so on.
That would be an opportunity to work with orange to be able to monetize kind of their approach to their labor.
The wealth of data generated while working at the company.
I am sure Devin you've seen some of the companies modifying those plans.
To help assist with.
Employees, who have been part of a rep or essentially looking at the work they've put into our company thus far.
And so we think there is a particular acute opportunity here at this moment in the market.
Couple of balance sheet liability do you anticipate or.
Any risks associated with forward.
Yeah.
Thanks, you guys.
And then here's a question that was it.
It was kind of the amount of capital that we envision.
Putting to work.
And and trend the loan business. So initially.
Expect that the amount of capital will be funded off our balance sheet. We don't think it's going to be.
Because these are short term loans.
Typically 30 to 60 day loans, we think that.
The amount of capital that we need in our initial pilot.
<unk> will be relatively minimal.
And that as Kelly mentioned.
As we start to scale of this product and move beyond our pilot, we envision bringing in capital partners to help with.
The capital requirements for those products.
No.
Yeah.
Okay, great. Thanks, so much guys have actually maybe more.
Yes, as we're talking about the balance sheet you ended the quarter with a strong cash position.
We expect to reduce cash burn.
From here, which is which is great.
I'm, assuming that doesn't assume any improvement in the operating environment.
So just what are some of the levers to do that and then just interrelated based on the comments for kind of flat head count into next year, how does that impact growth plans and priorities if at all thanks.
Well I'll start with just the.
The growth plans and priorities.
Yes.
We think that this is a time.
When.
Our competitors.
And this funding environment.
And anybody that's investing.
In this environment is really.
A cautious time for forge, we think the market needs critical infrastructure. So we will continue.
To put engineering resources against developing the next generation of market.
Infrastructure.
And while we haven't given forward guidance.
On revenues.
For 2023.
We're working on the assumption that the conditions that we're in right now will continue to persist until we start to see that price discovery Calabrian.
<unk> reached so we are watching very carefully in Q4, but.
But we believe through a combination.
Careful management of our costs.
And being really focused in 'twenty three as the market recovers, we've got the potential to both lower our cash burn.
Going to do that we have going on record in saying we're doing that.
And also be ready.
As the revenue opportunities for the transaction part of our business returns, but let me make it clear we talked about if you didn't hear it the inverse relationship between our interest rate.
Sensitive business around custody.
And the relationship between that.
And the relative volatility of both public and private markets and you can see in the data already.
And in our Q3.
Part of our performance was buoyed by.
<unk>.
Better than expected.
Cash administration fees from the interest rate environment, we think we're uniquely positioned to benefit from those things and with lending coming online and the uptake of data.
We have the quality of revenue and our relative performance in 2023 to other competitors that don't have that composition will serve us.
I'll, let you talk about any other specifics I think Kelly covered covered.
My follow that Devin I would just add that.
We are looking at other opportunities too.
To improve our markets revenue, even in a challenging environment, our data business and that we're not breaking that out separately. We continue to see a strong pipeline interests and Kelly mentioned strong high level of renewals upsell opportunities.
So we think that will contribute in 2020.
To get in place.
We expect lending to kind of start to improve.
So the bottom line and then Kelly mentioned of course.
Our custodial revenues.
Obviously, there was another rate increase in November another expected in December .
And so that will continue to also help contribute towards our ability to lower it.
Bernie.
Understood well thanks for all the detail I appreciate it guys.
Thank you Kevin.
We can take our next question.
Next question comes from the line of Patrick <unk> with Piper Sandler Your line is now open.
Yes, hi, guys.
Just wondering if you could maybe expand a little bit more.
Partnership with Deutsche Boerse.
And then maybe how you guys look at the size of that opportunity relative to the U S.
And then I think in the press release, you guys said that you were going to be first movers in Europe . So maybe you could just talk about the competitive landscape over there.
More competitors there are if any.
Yes, So let me talk first about the structural part of the question.
We took a lot of time.
To consider and enter.
The European market and we view it.
Bob.
As a market that currently is pretty concentrated in the UK, France and Germany.
We've been watching some of the data around growth of European Unicorns and for years have been doing business with both European companies and European investors that are working primarily through our U S regulated operation and we could see an opportunity.
Emerge.
Get a bigger piece of that market as it as it came to be a reality by having regulated entities on the ground in Europe .
And while we entered into a partnership with one of the most respected market operators in the world.
We also work naive about the fact.
The joint ventures, often don't work.
So this is structured.
And I would say will be executed in the lead.
And the same founder led mentality that we built forge.
And so some of the critical talent.
Required to run the standing up of that entity and the first trades are coming from our forge U S operation.
And we've started to staff positions in market.
With local folks and.
So we think we've got the right mix of a partner.
And Deutsche Boerse it.
The capital as you heard from Marc.
Mostly Deutsche <unk> capital, but we retain a controlling interest in the entity. So we think it's going to be nimble.
Execution really savvy entity.
But we also think we've got the right balance of local talent and people that have come from the years of expertise that we've built here.
And Deutsche Boerse, It will be very active and I will just tell you as market operators go they are true believers in the private market.
And so as far as competitors go.
It's super fragmented it looks like the U S market six or seven years ago.
Nobody was doing more than.
$10 million of revenue.
It may be even smaller than that and then you've got the whole issue.
Companies in Germany versus companies and in the UK.
And just generally.
The fact that trying to do transactions within the region and across European entities requires a regulatory structure that.
That we could that we could see was going to be complicated and take some time debt to invested but.
Look the valuation of European Tech and unicorns over the last seven years have gone from $50 billion to 625 billion. So this is a market that's growing faster than the U S market right now.
Very helpful. Thanks.
Your next question comes from the line of Jeff Schmitt with William Blair. Your line is now open.
Hi, good afternoon.
Question on the custody client cash balances could you maybe discuss the dynamics there.
Our suite vehicles like what does that what type of securities are those invested in the.
<unk> yield that you're that you're earning there.
Yes, I'm just going to start with one point just to make it.
Really clear and then Mark I'd like you to talk about.
The yield and regulatory.
The dynamics of that business.
So.
Our custodial enterprise holds.
Private securities investors.
The asset class that we're all talking about familiar with.
There are periods when.
Those investments have a component of the account that is in liquid cash that sits.
In idle cash.
Those balances and the experience that Mark and I have both here and in our previous.
Company that specialized in this type of custody grow over time, it may even grow through periods of market volatility that we see here.
And so we think that that's a real value to our business model in terms of both the balances itself.
And the fact that they grow over time, particularly as people start to liquidate assets that may have the liquid assets if they need cash so some of that cash stays idle in our accounts Mark I'll, let you talk to the specific dynamics in terms of the yield.
And how we manage it.
Hey, Jeff just for the benefit of all the others on the call let me get on really high level summary.
On the call as.
As you recall foreign capacity earns revenue by providing administrative services.
Charged quarterly account and asset fees transaction fees and cash administration fees and you're asking specifically about the cash administration. So.
And we've said this previously but during periods of lower interest rates right are catching inefficiencies are compressed and then during rising rate environment that we're currently in.
We're able to increase our cash administration fees now your specific question is what about the mechanics.
How that structured and I think specifically when you read reports of other firms brokerage firms and the like you read about cash sorting issues and.
That affecting brokerage firms revenue for us our client cash is typically very small amounts held for each account as Kelly described typically tends to be transitional pass, they're selling them between an investment or.
That have residual.
Dividends or income flows from their investments, it's not typically large amounts of cash so we havent been subject to the same impact on cash soybean issue.
Smaller accounts amounts of cash across.
A lot there.
Its accounts the cash balances are placed in depository banks.
Depository banks paying interest debt that is related to kind of the movement in fed funds.
And it's from that interest them.
<unk> received interest and we're able to earn on our cash administration fees.
Okay.
Yes.
Yes, and I was just curious does that sort of fed funds rate plus a small spread or are you looking to invest that in kind of locking in higher rates or is there anything you can kind of speak to on the type of yield that you are seeing on a gross basis.
Yeah no we.
This is client cash right.
And demand deposit accounts at banks.
And it's really straightforward gap.
The interest earned on these accounts customers earn.
Hey, Adam.
Amount of interest on their balances and cash administration fees or the benefits from.
From that interest and this is very similar by the way.
All of the similar custodial firms.
That are similar to two important trust.
Okay.
And then on the head count.
It was up.
28% year over year, you had mentioned hiring freeze.
Just when we think about so if you keep you the current head count when we think about 2023, what should we expect from sort of wage inflation.
Just because I look at it now when you include stock comp I mean, it's over 100% of revenue. So what should we think about in terms of growth of that.
Upfront inflation side.
The stock comp component frankly.
Okay.
Yes.
Let me, let me start with the stock comp.
We we mentioned this in the prior call and in fact in our supplemental.
That's all we were providing additional information on compensation.
Given the unique unique nature of kind of what we're going through.
But to recap.
When we went through.
When we went public.
We approved a certain amount of retention.
Its use for our employees.
But due to that.
The timing of vessel improve.
But we have to amortize them for accounting purposes.
Thanks.
Loan side.
Based on our price at the time that they were granted so what youre seeing in stock compensation is.
The amortization of the various amounts that restricted stock stock options.
That are granted to our employees and our board.
And we're providing use specific insight into.
Stock compensation and how it shifted from Q2 to Q3 and Q4. So I think you have a lot of visibility with regard and deep.
Decreased significantly.
In Q4, and then further in Q1.
With regard to compensation with a flat head count I mean as you as you have described given that we are maintaining a flat level. As you look forward you would have to look at the full year impact of those head count.
2023, and any kind of increase that you had modeled in.
We would have to offer to our employees year on year.
Mhm.
And any indication of what type of inflation that is wage inflation.
708 quarter.
That we're in the process of kind of going through that plant plant, new planning process with our confidence in our board desktop happened do you have any guidance on that at this point.
Okay.
Great. Thank you.
And Jeff just keep in mind, a lot has changed in the labor market, even within the last 24 hours. So.
Right right Okay.
Okay. Thanks.
Your next question comes from the line of Ken Worthington with Jpmorgan. Your line is now open.
Hi, Thanks for taking the question.
Okay, beating the dead horse on cash and custody fees.
Other 15 billion of AUC, how much is in cash.
What is the normal percentage that is in cash and are the fees. The cash admin fees are those standardized across clients.
And if if they are can you just sort of give us what you're charging on cash and how that can fluctuate as rates change.
Yes, Ken.
The supplemental schedule.
We filed and embark on our website.
Closing our level of cash balances.
So you can look at kind of our total assets under custody or you can look at the cash balances to to see the relationship.
To see the relationship there.
I kind of commented earlier I think I think it was.
Jeffs question.
We have not been subject to the same tax cash certain initiatives that you see at other firms.
And let's see what was part two of your question.
Okay.
Sure.
Yeah.
So the fees are uniform.
Across our accounts.
And.
As we go through.
Different round of.
Increasing <unk>.
Increasing rates.
It's a it's an evaluation by.
The management team at the company too.
<unk> evaluated to determine.
The appropriate level of cash administration needs relative to kind of current rates.
Okay. Okay. Thank you.
But Ken I think I think we did report.
And at $680 million.
On the $15 billion.
Just to speak to specifically the percentage of the <unk>.
That's.
But.
It's in cash.
Perfect. Thank you.
You mentioned in the prepared remarks, the right of first refusal.
Comments around that is based on what you are seeing it could be signaling signaling a trough. So can you just.
Walk us through again, what the right of first refusal is and just the logic behind.
The signaling in your interpretation.
Yes, sure so structurally.
In previous calls we've talked about the different ways.
That trades happen within companies.
One way.
Is.
His employees.
I want to sell.
And they are bound by a transfer restriction within those cap tables that requires them to provide typically a 30 day notice.
IRA to sell.
And the company then has within its own private market bylaws.
Extended the right for existing investors.
To purchase those.
Those shares.
And.
While this isn't the case in every structure, we have certain SPV structures that sit on cap tables.
That have approvals or are allowed to trade without brokers.
There is a roper in place and we track it.
There is an indication that we can read into this which is that the insiders who are on the cap table already.
Who see.
The Rover being tendered they see.
The potential for a sale.
They get to elect whether or not they want to step in front and by the shares themselves and our view of this.
Is it if you have more knowledge of the company because you are already on the cap table you may be a board member you may have information rights.
Your purchase of those shares at that price is an indication that it's a deal that's.
That is worth at getting additional exposure.
And so we see that more ropers.
Are being are being executed.
By existing cap table participants.
We could interpret but that's a price based on knowledge.
It could be equivalent to a price setting.
Fundraising.
Because that's an indication that someone with knowledge and disclosure is willing to buy the company at that broker price.
And so when we see that.
Systematically across the company over some duration of time.
That could tell us.
Uh huh.
Im thing about a trough.
And so I think what we reported was starting to see signals of this.
And in parts of our quarter in Q3.
And that trough and obviously that data could indicate a market bottom and now it could be a market bottom for a name.
And not the whole market in general, but when you see it across companies you can start to draw broad trend.
Insights from that.
That makes sense.
Great. Thanks, I appreciate the color.
Okay last for me.
Stock prices at 150.
What are your listing requirements.
And how are you thinking about.
The stock price here and.
Anything you need to do to make sure you continue to fulfill your requirements.
Yeah, when we look at listing requirements on the NYSE, we're pretty lucky because we have a lot of primary NYSE people working with us to help build out the product.
At the end of the day, it's a function of the denominator.
And the listing requirements or dollar per share core net NYSE standards, but.
Yes.
Our very accommodating.
Given.
The current state of the World I would say and then at the end of the day to essentially do a reverse split we just it's just math.
Yes.
I would add that.
We did look at it specifically.
You have to make sure.
We understand the specific rules.
Reiterated.
Don't really see kind of an issue there at this point in time.
And so.
And.
What I'm sure you've heard from us before.
While while we obviously monitor our stock price is very closely in trading volumes.
We don't focus on while we can't control and so we are focusing on what we can do with it.
Just to execute kind of all in it's everything Kelly just described.
We've been working on in this last quarter European expansion in our.
Our data products.
In lending.
Thanks, Daniel services trading clients and obviously much much more.
We all have we all have both in this room and.
In the company, Matt conviction about.
About this market.
And there's just no doubt in our minds that while this may be a difficult.
Environment and Theres, a lot going on out in the world that we don't control.
Everything that we've said that we are the foundations for why this company was formed division of it and the size of the market.
Our continuing to be very exciting for people here.
And nobody likes to see the stock down where it is but we continue to be focused on that bigger bolder opportunity.
Keith we're going to keep focused on that for 2023.
Okay, great. Thank you very much.
Okay.
And we'll take our last question from online.
Certainly your last question will come from the line of on Lau with Oppenheimer. Your.
Your line is now.
Thank you for taking my question could you. Please add more color on your data and analytics product and also when we should expect your data revenue could become more material. Thank you.
Yeah.
Well I'll start with the.
The product we launched last September .
It's fundamentally today.
And institutional products.
Okay, and institutional can mean, a lot of things to a lot of people, but we focused primarily.
On our institutional buyers, but increasingly.
Youre seeing.
Hedge funds, you're seeing capital markets desks.
And asset managers enter the private markets.
Levels that you hadn't seen before.
And all of them need.
Data.
And insights.
So the product was meant and price initially last September .
At a starting price in the low mid $20000 per seat annually.
And it went up depending on the number of seats you held or if you wanted access to what we talked about.
Has the.
As the data feed version.
Or the file based version so you get essentially take our product raw data, including all historical data and use. It. However, you want to to drive product decisions or.
Essentially generate your own.
Sort of mechanism for passive or passive active trading.
We see this as an incredibly important part of the market future.
We see that we have gotten product market fit.
Both in terms of the response that we've gotten over the year that it's been out.
And now it's really just a matter of us.
Executing on the distribution and broad based.
Marketing and sales of the product, we're going to continue to evolve it.
And I think I said on the road show a year ago that we saw in the next four to five years that this could be a material piece of our revenue NASDAQ and Ise get between 36 and 38% of their revenues from data.
And I think I talked about this being a.
25% of our revenue over the next five years I think there is a world.
Where the relationship to trading and trading.
Volumes becomes increasingly reliant on data.
And the more data that we put out and the more people use it we think it will increase.
The decision, making power of the market. So this is really strategic and Owen I think we're going to look at this in 'twenty, three and we talked about not.
Giving certain forward.
Our guidance during this particularly difficult time that doesn't mean, we're never going to give forward guidance and I'd say one of the things is particularly interesting about data.
Is as you look at.
Data products that have a subscription component.
When you look at SaaS based software products. There is the booking dynamic that builds over time.
And we're just now reached our first anniversary so I'd say look for us to get better.
No insight into how this is performing in the future.
But right now we're really excited about the product market fit.
<unk> intelligence.
Mark I'll, let you add any color you want on it.
On the model.
So as you know we're not we're not at this point in time breaking out data.
And so I can't give you specifics for now.
What I will kind of reiterate daily mentioned previously in our discussion, but I just want to repeat.
We rolled out the product.
A year ago now.
We have very very high levels of retention.
Very high level upsell, where our exist.
Existing clients are interested in expanding the types of products and features that they can.
<unk> use and we're able to upsell them and provide a higher level of service and.
In addition to kind of the basic subscription.
That we talk about we also provide a data feed.
On it where people can get this information that to them.
Electronically, while we also have a product where people can.
Acquire.
History.
Kind of kind of a database.
Our information and our historical database of information. So we're finding a lot of different.
<unk>.
Banded uses.
For the information that we have.
When I thought the data team.
And this level of excitement and optimism.
And in terms of what they're seeing in countering instruments in the market.
And so we're feeling quite good about.
Of that about data intelligence and also it also as we talked about and this is inclusive of our of our custody.
<unk> product as well I think custody services and data are both predictable.
Recurring revenue in the.
Case of the data product is very high margin at scale.
And it really is low cost to serve incremental customers and to Mark's point, if we up sell someone from one.
Seat.
10 seats.
It's just an incredibly attractive model and look we think that theyre going to be others that and the competitive set.
That will try and come into this space.
And we firmly believe that our position as the market leader.
In a marketplace that provides.
Difficult liquidity for this space will put us in a position to continue to octave occupy a competitive advantage in.
The range of data that we put out and it should not be lost on anybody on the call that our ability to go out now aggregate third party data sources.
Also key to our scaling of bis and that started to happen. This year actually in this last quarter, yes, I mean.
I think we hope that eventually towards retail it can become like the private market.
But one more thing I was going to add was that our sales team is going out there and talking to clients. I mean, we're discovering that there are other channels and segments that we then originally.
Fully anticipate for example, benzene venture lending is turning out to be a very.
<unk>.
An area, where there's a lot of opportunity a lot of people are interested in our data products and so I think there are use cases that are expanding beyond how we originally envisioned.
Where we would sell this product so thats another path.
Four before the intelligence approach data.
Maybe one last question before we conclude.
There are no further questions at this time.
Thank you Emma and thank you all for joining US today, we look forward to the conversations over the next quarter.
Thank you for attending today's conference call you may now disconnect.