Nasdaq Inc - 144A (NDAQ) — Q2 2019 Earnings Call Transcript

Good morning, everyone, and thank you for joining us today to discuss Nasdaq's second quarter 2019 financial results. On the line are: Adena Friedman, our CEO; Michael Ptasznik, our CFO; Ed Knight, our Chief Legal and Policy 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 update. 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 the call over to Adena.

Thank you, Ed. Good morning, everyone, and thank you for joining us. My remarks today will focus on the following areas. First, we will review the company's second quarter 2019 results; second, we will review the segment level trends and update you on our important initiatives and recent acquisitions; and lastly, I will review some organizational changes and touch upon early initiatives related to total markets, our comprehensive market structure blueprint before turning it over to Michael to review the financials. Turning to our results, I'm pleased to report Nasdaq's solid financial performance for the second quarter of 2019. We delivered net revenues of $623 million, including 4% organic revenue growth. After taking into consideration the net impact of the divestitures and recent acquisitions as well as an unfavorable change in the FX rates, our total net revenue grew 1% for the quarter. Our achievements in the period were driven by a 10% overall revenue increase in the non-trading segments with 8% organic growth driven by our Market Technology, Index, and Investment Data & Analytics businesses. Our foundational marketplace businesses, Market Services and Corporate Services delivered a steady quarter in aggregate as we maintained a strong competitive position in our largest U.S. and European market and the forward businesses delivered moderate organic growth. Notably, in both the second quarter of 2019 and in the first six months of 2019, the organic revenue growth rate in our non-trading segments remains consistent with our longer-term expectations of 5% to 7%. Turning to the segment specific highlights from the second quarter, our Market Technology segment delivered strong growth in the second quarter with net revenue of $79 million, a 20% increase compared to the same period in 2018, including both organic expansion and the impact of the Cinnober acquisition. Results reflected an increase in both the size and the number of software delivery projects as well as continued strong growth in our SaaS surveillance solution. New order intake during the quarter was $46 million, including new customers like Caja de Valores, Argentina's Central Securities Depository as well as signing significant new enterprise contracts with a Tier 1 Investment Bank for Trade surveillance. We also signed a fourth U.S. broker dealer to implement our trading platform as a hosted solution. This quarter, we began disclosing a new metric for Market Technology, Annualized Recurring Revenue or ARR intended to help the investing community better understand the growth of the recurring software support, licensing, and SaaS to subscription revenues which make up the majority of the Market Tech revenue. In the second quarter of 2019, Market Technologies ARR rose 16% compared to the prior year. Our Information Services segment delivered growth across all of its businesses with revenue of $194 million, up $19 million or 11% from the same period in 2018. Market data growth reflected higher U.S. case revenues due to equity market share gains and also benefited from partnership wins with Microsoft, Yahoo Finance, and Robinhood announced during the quarter. With Microsoft, they now rely on Nasdaq last sale to provide real time market data across all of their online platforms as well as embedded within Excel, making our real time U.S. equity market pricing available to millions of users worldwide. Yahoo Finance launched a new premium offering with access to original and in-depth market information such as a supply chain data set from our alternative data platform to help Main Street better identify investment opportunities. And with Robinhood, their focus is to increase informed investing across their client base with more in-depth data and they now offer Nasdaq's full depth of books data to all Robinhood Gold clients. All of these positive developments in the distribution of our market data and the new unique data sets are making the U.S. markets more accessible to millions of Main Street investors in the United States and worldwide. We're very proud of the partnership approach we take with our media and online broker clients. Revenue in our Index business set a new quarterly record driven by licensing revenues from our futures trading linked to the Nasdaq 100 Index and EPP AUM, the latter of which increased 9% year-over-year to $203 billion as of the end of the second quarter while our Investment Data & Analytics business continues to deliver against this double-digit organic revenue growth expectation. Moving to our foundational businesses, our Market Services segment delivered $227 million in revenue in the quarter, a moderate decline of 4% from the same period in 2018. In our U.S. equities and options markets as well as our European equities and equity derivatives markets, we continue to maintain a strong competitive position in share and capture. Our U.S. and Nordic equity marketplaces each delivered quarterly market share figures that were near the top of the recent multi-year highs, while pricing trends remain within our typical quarterly variation. Our U.S. equity options are complex due to stable share and pricing and continues our established leadership in multi-listed contracts. While we are pleased with the competitive position of our larger equity and equity derivatives marketplaces, we continue to have more to do with our fixed products to get them to be where we want them to be. We saw revenue declines in both of our larger fixed revenue contributors, which are our Nasdaq U.S. Fixed Income Treasuries platform and our Nordics commodities platform. While each market and their respective ecosystems is relatively distinct and face their own set of specific challenges, our focus and our efforts to address them share some common themes. In both, we have more closely engaged with our clients about ways to enhance the product offerings to better meet their needs and we are exploring with them the most promising avenues to bring additional participants and to deepen liquidity. We are committed to keeping you updated appropriately as we work to stabilize and ultimately return these businesses to growth. Turning to our Corporate Services segment, our listings franchise remains the leader for IPOs with a win rate of 80% year-to-date buoyed by strong demand from VC-backed private companies from a diverse range of industries including technology, healthcare, and consumer. This strong pace is reflective of the powerful value proposition that we offer our listed clients as we constantly enhance our listing services. Specifically, in the second quarter, we continue to lead the U.S. market for IPOs with a 75% win rate, extending our IPO leadership to 22 consecutive quarters and helping companies raise a combined $11.4 billion in total proceeds. Of the 81 new listings that we welcomed to the Nasdaq stock market during the quarter, 60 were IPOs led by Tradeweb Markets, Zoom Video Communications, Change Healthcare, Beyond Meat, and CrowdStrike. Meanwhile, our Nordic and Baltic exchanges added 19 new listings for the quarter, and our total Nordic listed issue account rose 2% from the prior year. We continue to see a robust new issue environment as we progress through 2019. Additionally, during the first half of 2019, the Nasdaq private market facilitated 35 private company sponsored secondary transactions, a new record high for the period, with total transaction value of $2.3 billion. And lastly, regarding Corporate Services and in line with our renewed strategic focus on the products and services most critical to the C-Suite and to the board to public and private companies, we continue to work to unlock more potential from our IR Intelligence and Governance Solutions businesses. We have added more research and insights for our users via the launch of the Nasdaq Center for Corporate Governance. While in IR, we're seeing increased demand resulting from our ESG-admitted products including our recently announced Connect IR Tool that helps corporate customers engage more effectively with the buy-side. In summary, the collective organic revenue growth across our non-trading segments continues to serve as a positive data point that when we create sustainable value for our clients, we can continue to drive accelerated growth for the company and its shareholders. Let me now highlight the focus areas of our new organic business investment and provide a brief update on recent acquisitions. With our renewed strategic direction as our guide, we have been consistently focused on expanding our services to our core clients by leveraging the rapid technological changes that are bringing new potential benefits to the industry. After all, our mission is to reimagine markets to realize the potential of tomorrow. In that regard, we continue to make targeted investments in strong long-term organic opportunities including the Nasdaq financial framework buildout and deployment, the expansion of our market infrastructure technology into our sell-side clients, our buy-side smart surveillance solution, the Nasdaq private market, and new alternative investment data products. Our goal with these investments is to advance our leadership position in the evolving capital markets as a trusted technology and analytics partner as our clients seek new ways to manage their liquidity and make ever-smarter trading and investment decisions. We're also seeing encouraging progress in early results from our acquisitions of eVestment, Quandl, and Cinnober. eVestment has continued to deliver on the double-digit organic revenue growth opportunity we envisioned when we acquired them in late 2017 through both expanded use from existing clients in particular in the United States as well as seeing continuous progress in international adoption of the platform. Quandl has now been fully integrated with Nasdaq's organic alternative data initiative, the analytics hub, and both eVestment and Quandl have begun to benefit from sales opportunities opened through other Nasdaq relationships. Yahoo's agreement to deliver analytics for its premium offering is one such example. With the Cinnober acquisition, we've brought together our business and technology teams into common locations and we're working well together to win new client mandates and to begin the technology integration. I'd like to talk now about some changes in the management team and structure. In June, Tom Wittman, who has led our Market Services division for the past three years announced his decision to retire. Over the course of his remarkable career, Tom has made considerable contributions that have benefited both Nasdaq and the industry as a whole. Tom joined Nasdaq through our acquisition of the Philadelphia Stock Exchange in 2008. I speak for everyone at Nasdaq when I say that we view Tom's leadership as instrumental in building the U.S.'s leading equities options complex at Nasdaq, enhancing the effectiveness of our U.S. equities markets, helping us expand into Canadian equities and meticulously integrating both TSX Canada and the International Securities Exchange. His stewardship and track record in the options and equities markets are known throughout the industry. Tom will continue to oversee our U.S. Treasuries business and will contribute more broadly as an executive advisor until the end of the year. We extend our sincere gratitude for his numerous contributions to our success. We also announced a new management structure for Market Services with distinct responsibilities for each of the North American and the European marketplaces. Specifically, Bjorn Sibbern has been appointed Executive Vice President of European Market Services where he'll be responsible for all of our European marketplaces as well as associated market data and connectivity. And Tal Cohen has been elevated to Executive Vice President of North American Market Services and will be responsible for driving the strategy and success of our trading businesses across all equities, equity options, commodities, and trade management services in the U.S. and Canada and will add U.S. Treasuries to his responsibilities at the start of 2020. This is an exciting evolution for how we manage Nasdaq's marketplace core and I'm excited to have Bjorn and Tal in place to drive these foundational markets forward. To round out our management changes, in June, we were thrilled to welcome Lauren Dillard to the executive team as Executive Vice President of Global Information Services. We're especially excited about how she will leverage her extensive experience on the buy-side coming from the Carlyle Group as we continue our strategy of delivering an expanded set of solutions to the investment and management industry during a period of profound change. Before I conclude, I want to spend a moment on a new regulatory initiative. At Nasdaq, we strongly believe that we differentiate ourselves by our expertise and ideas on market structure and other public policy issues. Our total markets blueprint which we launched during the second quarter outlines the steps regulators and exchanges together with the broader investing community should take to modernize market structure. As a very first step of the total markets initiative, this quarter we announced a detailed proposal to reform the professional and non-professional data user definition. We're starting with public outreach including an appeal for public comment. Our top priority with this proposal is to ensure that individuals investing their hard-earned money for long-term wealth creation are not paying data fees that are meant for market professionals. Taken together, our total markets and revitalized campaigns provide a comprehensive framework of reform that will improve the market experience for investors, corporate clients, and critical market intermediaries. Many of the priorities that we have set for the U.S. markets have been embraced by the legislative and regulatory communities as we remain focused on ensuring our markets continue to drive economic growth, job creation, and wealth creation for all. As I wrap up, I will summarize by saying that second quarter results served as further evidence and encouragement that we can deliver for both clients and shareholders are still early but now well-established strategic direction. We want to continue to execute on our key priorities and are focused on building our momentum going into the second half of the year. I look forward to keeping you updated in the coming months and quarters. And with that, I will turn it over to Michael to review the second quarter financial details.

Thank you, Adena. Good morning everyone. My commentary will primarily focus on our non-GAAP results and all comparisons will be for the prior year period unless otherwise noted. Reconciliations of U.S. GAAP to non-GAAP results can be found in the attachments to our press release and in the presentation that's available on our website. 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 $8 million increase in reported net revenue of $623 million was a net result of organic growth of $24 million or 4%, including 8% organic growth in the non-trading segments and an $11 million positive impact from the inclusion of revenues from the acquisitions of Cinnober and Quandl. This is partially offset by a $70 million negative impact from the April 2018 divestiture of the public relations solutions and digital media services businesses and the divestiture of BWise in March of 2019 and a $10 million unfavorable impact from the changes in foreign exchange rates. I will now review quarterly highlights within each of our reporting segments. I'll start with Information Services which as reflected on Page 5 and 14 saw a $19 million or 11% increase in revenue. This was driven by $19 million or 11% organic growth, $7 million of which was the result of investments purchase price adjustment on deferred revenues in Q2 2018. Excluding this adjustment, organic growth would have been $12 million or 7%, primarily due to continued organic development of Investment Data & Analytics as well as Index revenues. The operating margin was down one point year-over-year at 63% due to certain product and operational investments that we've made to support future growth. Market Technology revenue, as shown on Pages 6 and 14, increased $13 million or 20%, including organic growth of $6 million or 9%. Organic growth during the period reflects an increase in the size and number of software delivery projects as well as continued strength in our SaaS Surveillance Solutions. As Adena mentioned, we introduced a new market technology metric called ARR which is total annualized revenue of active software-supported SaaS subscription contracts representing the vast majority of segment revenues. In the second quarter, the operating margin for Market Technology was 10% versus 14% in the year-ago quarter. However, if you look past some of the quarter-to-quarter variation in this business in the first six months of 2019, the operating margin for Market Technology was 10% versus 9% in the first half of 2018. As we have communicated in prior quarterly calls, investment spend in the Market Technology segment remains elevated in 2019 as we continue to invest in a number of growth initiatives including most notably our multi-year implementation of the Nasdaq Financial Framework. We do continue to expect margin expansion in 2020 and beyond as we progress the NFF deployment and customer adoption of the more scalable service model as well as benefit from the scale and synergies of a more fully integrated Cinnober. Turning to Corporate Services on Pages 7 and 14, revenues increased $3 million or 3%. Organic revenue growth was $5 million or a 4% increase with contributions from both the Listing Services and Corporate Solutions businesses. Listing Services organic revenue growth was primarily due to an increase in the number of listed companies, partially offset by the runoff of previously deferred revenue recognized from listing additional share fees. Corporate Services organic growth was primarily due to an increase in revenues from Governance Solutions. The operating margin improved to 36% versus 28% in the prior year period. Market Services net revenues on Pages 8 and 14 saw a $10 million or 4% decrease. Organic revenues declined $6 million or 3% and we experienced the negative impact from unfavorable changes in foreign exchange of $4 million. Our larger U.S. and European cash equities and equity options businesses are relatively stable year-on-year organic trends, while our smaller fixed franchises that Adena mentioned earlier saw organic declines in the period. The operating margin in Market Services was resilient in the period; it declined only one point to 56% compared to the prior year period despite the year-over-year revenue contraction. Turning to Pages 9 and 14 to review expenses. Non-GAAP operating expenses decreased $3 million to $322 million. The change reflects a $7 million or 2% organic increase more than offset by an $8 million favorable impact from changes in foreign exchange rates and a $2 million decrease from the net impact of acquisitions and divestitures. Turning to Slide 10, we're updating our 2019 non-GAAP operating expense guidance range from $1.295 billion to $1.32 billion. Embedded in the updated 2019 expense guidance is a moderate pickup in expenses in the second half of 2019. While last quarter, we suggested quarterly expenses would likely see a sequential step-up beginning in the second quarter, the combination of FX impacts, earlier realization of acquisition synergies, and timing of recognition of certain expenses temporarily offset the expected increase and resulted in second quarter expenses coming in line with the first quarter. As exhibited by the midpoint of our revised expense guidance range, we now expect to see a sequential pickup in each of the remaining two quarters of 2019 expanding on several product and operational initiatives ramp-up as well as certain other factors. I would also note that while historically expenses generally exhibited seasonal lows in the third quarter of each year due in part to non-U.S. vacation accruals, we've now changed our accounting methodology around these accruals to eliminate seasonality in our vacation expense recognition timing. Moving to operating profit and margin, non-GAAP operating income increased $11 million in the second quarter of 2019; a 4% increase from the second quarter of 2018 and the non-GAAP operating margin was 48%, up one percentage point from the prior year period. Net interest expense was $28 million in the second quarter of 2019, a decrease of $7 million versus the prior year period due to lower debt balances and refinancing the 5.55% $600 million U.S.-denominated bond with a new 1.75% €600 million bond. The non-GAAP effective tax rate for the second quarter of 2019 was 26% and for 2019, the non-GAAP tax rate is expected to be between 26% and 27%. Non-GAAP net income attributable to Nasdaq for the second quarter of 2019 was $203 million or $1.22 per diluted share compared to $194 million or $1.16 per diluted share in the prior year period, representing a 5% increase. Turning to capital, debt decreased by $78 million versus Q1 2019 primarily due to paying down commercial paper, net issuances, and payment on debt obligations, partially offset by an increase in Euro bond book values caused by changes in FX rates. Our total debt-to-EBITDA ratio ended the period at 2.7 times, down from 2.8 times in the first quarter of 2019 fulfilling our capital plans objectives to deleverage to the mid-two times leverage ratio by mid-2019. During the second quarter of 2019, the company returned $50 million to shareholders through a share repurchase program and paid a dividend in the aggregate amount of $77 million. In the first six months of 2019, we returned $200 million to shareholders through dividends and our share repurchase program. And with that, I'll turn back to the operator for the Q&A.

Yes, hi Adena, hi Michael. I guess first one quick thing just wanted to shout out to Tom Wittman. You forgot to mention, Adena, besides being a skilled practitioner, market practitioner he was a straight shooter as well. So we'll miss Tom.

And he is here, so he got to listen to that, so I will pass it to him, thank you.

Thank you.

I'm sure he has a smile on his face. Anyway, so first question on this ARR, the new metric for Market Technology. So if it's $247 million and it covers the vast majority, I think you said the vast majority of the revenue then like the $240 million, if you look at most estimates though, the $320 million expectations for this year and higher than that for next year. So what's the gap between the $247 million recurring revenue ARR and sort of whatever $320 million to $350 million estimates annualized for the next couple of years?

Yes, the 70% represents approximately 78% of the Market Technology revenues in the second quarter. The differences include factors such as change requests and the implementation or delivery of new build-outs. Essentially, this comprises the service revenue, maintenance fees, and SaaS revenue generated from the smart business, serving as another example.

In our ongoing licensees.

In the ongoing licensees, yes.

In a build period, we have certain delivery fees that we charge, which also have associated costs. Those fees are not included. Additionally, we have change request fees for short-term changes made to support our clients, and those are also not included.

Vast majority, yes.

Thank you for the clarification. For my follow-up, which is somewhat related, I have a regulatory question. We appreciate the total Markets Initiative, and I wanted to see if you could provide an update on the current status. It seems like there has been a lot of focus on U.S. equities recently. Chairman Clayton made a fairly balanced statement regarding fee guidance in the trading and markets division, but it appears that the access fee pilot and related litigation have everything on hold. Has there been any progress, or would you say that your relationship with the SEC on the trading and market side has become more open recently? How would you describe the current status?

Sure. I think overall it is important to recognize that I think we've said this before that we have a very good and comprehensive relationship with the SEC. We submit hundreds of rule filings every year to them and they approve hundreds of rule filings every year. And we work with almost every division within the SEC on a regular basis. I think that we do, however, as we all know, have certain areas of debate with the SEC around market structure. And I would say, Rich, that there has been a lot of dialogue with the SEC both at the commissioner level and at the staff level and we have been expressing our views and also making sure that they have data to support our views. They have been asking a lot of really good questions. I think that the total market roadmap or blueprint does help frame out some of the larger market structure issues that we are hopeful that the SEC will start to tackle. And it also, I think, puts some of the initiatives that they've been seeking to do into a broader context. And then we've also been engaging very extensively with our customers and with the industry in general to understand their point of view around some of the key elements of market structure that we outlined in the total market. So the dialogue has definitely picked up. I think that there has been much more of a back and forth in terms of really trying to understand each other. But at the same time, we will continue to manage these debates as we see fit in terms of making sure that the markets are as accessible and successful as possible for investors and that's our number one goal.

You guys have made good progress in certain areas like the Market Tech, the Index and Analytics, there's obviously some areas that you guys mentioned like fixed income that's been a bit more challenging. I guess just looking at the $85 million to $95 million in the R&D spend, can you maybe provide like an update on what's in there; maybe some of the details which ones you've seen some revenue traction associated with the initiatives, which ones are still at losses? Maybe like an average time of the initiatives that have been in place, just kind of an update on some of the new things that are taking place?

Sure, it involves several factors that I've briefly mentioned. We're investing in the Nasdaq Financial Framework, which is reflected in our expenses. We've also noted an increase in activity in the Nasdaq private market, where we have new initiatives targeting private equity funds, showing significant opportunities and growth in that area. Additionally, we're expanding our banks and brokers strategy by applying our market technology, including trading and post-trade technology. We've recently signed our fourth client for various trading solutions, indicating progress in that sector. Another focus is on buy-side surveillance, which is still in its initial stages. We made a small acquisition to bolster this area, and although it's just starting with four clients, we see positive momentum and ongoing sales efforts to grow this segment. We've also integrated Quandl into our analytics hub, which is also in early development as we seek to understand the demand for alternative data while identifying new supply sources. The implementation of supply chain data through Yahoo Finance is part of Quandl, and there's continued growth in other data streams as well. We’re optimistic about our growth in these areas, but they remain investment-focused until they reach break-even or profitability. This is why we consistently share R&D figures so you can keep track of our key investment areas.

Hi good morning. What is the status of the non-transparent ETF market? Are you taking any special steps to cater to these firms that are listing these new products?

Sure, no problem. So we actually have been a leader from the very beginning as these new, what I would call actively managed ETFs are being formed. We partnered with a firm several years ago to develop a program to support these non-transparent ETFs. And so we do understand them well, we understand that they do require some specific market maker support and we do believe our market is well-positioned to lift those types of ETF. We continue to have very good growth overall in our ETF listings and we're very proud of the fact that we have well over 300 ETFs; I think it's at least probably in the high 300s listed on Nasdaq today. And so we do feel, Ken, that we're really well-positioned competitively to be able to bring those types of ETFs to Nasdaq.

Okay. And are you doing anything special on the non-transparent side versus the transparent side.

As I mentioned several years ago, we actually worked with a firm that was developing a new construct for non-transparent ETFs and we did work with them specifically to build-out a market maker sponsorship program to support them, so yes.

Just wanted to get additional thoughts on the pipeline into the sell-side on Market Tech, you mentioned I think the surveillance win this last quarter and the recent fourth broker dealer. But just how is that pipeline shaping up and kind of where you feel penetration is at this point? Thanks.

Sure. The first thing to mention is that in our surveillance business, we have done an excellent job collaborating with broker/dealers to expand our product to support all asset classes and both OCX and OTC exchanges. This has been a significant area of growth for us, as we have progressed from working with firms that only use our services for equities to those that have moved into fixed income and then commodities. We also have global reach in this business and a dedicated sales force to support it. Demand remains very strong, with over 150 clients currently using the service. Regarding the matching technology and post-stream technology, we are just at the initial stage of that strategy, which is why it aligns with our R&D initiatives. We have built a sales organization and continued to adapt our technology, often providing hosting services. In some cases, we also incorporate market surveillance expertise to assist our clients. We are committed to ensuring a steady pipeline of opportunity in this area. As I mentioned in the last call, it does take time to get some of these contracts signed, as banks undergo thorough contracting processes. However, we are very excited about the level of opportunity and the demand we see. It’s just a matter of systematically guiding our clients from expressing interest to signing contracts. Additionally, we have recently acquired a fourth client.

Great, thanks. And then maybe just one quick follow-up would be on Slide 19, we can see the dollar amount on the ARR but would you be able to provide maybe the last four quarters of the growth rate?

Sure. I think that we know that year-over-year, it was at a growth rate of year-over-year, second quarter our growth rate of 16%. But we're happy to make sure we provide you more information on the growth rate.

Hey, good morning everyone. Just actually following-up on this ARR number for a second. You just mentioned the 16% again but I think that's not an organic number, so maybe you can give me an organic number if you have it handy? And then related to that, if you look at the year-over-year and maybe just splitting hairs a little bit but the percentage of recurring is actually down year-over-year which doesn't seem consistent with the story you want to be telling in terms of more SaaS-based growth. So maybe you could just flush it out, a little bit I know the numbers are small but if you think about it over time, do you think this recurring percentage is going to be approaching 90, 95 or is this kind of the range it's going to be in?

The number is likely to vary based on the types of installations in any given quarter, including change requests and similar factors. Therefore, fluctuations are expected. Over a longer time frame, as we develop more of a SaaS platform and a service platform with NFF, we intend for a larger portion of the business to become part of the annualized recurring revenue base. Thus, you will see growth over time, though not necessarily in the next quarter or the one after that; it will depend on the unique variations of those individual quarters. Regarding the organic growth rate, we won't provide a breakdown of it. The aim of this measure is to give some insights that have been requested concerning the recurring revenue base moving forward and to indicate what percentage of our business is attributed to recurring revenue, as opposed to one-off or change request revenue. This is a new metric for us, which we've just introduced today. We will continue to monitor it, as it provides positive information about the ongoing growth of recurring revenue in our business, especially as our model shifts further towards a service-oriented or SaaS model. Notably, as we've stated before, 78% or 80% of the revenue is a crucial metric we want to emphasize for now.

Okay, fair enough. Thank you. And then secondly, obviously a few weeks ago a decline Deutsche Bank announced some restructuring. So just wondering how you view that as a service provider, I think historically you have said on the market data side that banks are actually the largest payer of market data and related services. Also you struck a deal with them; I think it was on March on some outsourcing of some trading solutions. So maybe a little bit too specific. But just wondering how you view that as clearly not a good sign for the industry as a service provider for yourself?

Sure. Well I do think that the first thing I would say is it's pretty early days in understanding the impact that the changes in Deutsche Bank is going to have in general within the U.S. In terms of the way that they trade, they tend to trade on behalf of customers, so that trading will either be transferred to another firm if there is ultimately an acquisition of the business from Deutsche Bank or probably move over to other clients, I mean other service providers. I think in terms of some of the recurring revenues or kind of the other parts of our business, we're still working actually pretty closely with Deutsche Bank to understand, how they're going to continue to take certain services, how they might transition their services to other service providers. And so it's very early days for us but we are working very closely with them to understand the overall impact. I also would say we have hundreds of clients that we serve with our trading, thousands of clients we serve with our data and connectivity services. So we don't feel this is going to have an outsized impact. It's just something that we're managing through.

Thanks. Good morning. I know you talked about the multi-year change in the Tech margin or the Market Tech margin. I guess given you do have an acquisition and maybe some synergies coming out, can you talk maybe near-term about if we've seen the bottom and we should kind of be building from here or any kind of path towards we no longer-term higher? But I guess any kind of roadblocks or any kind of milestones as we think about more in the intermediate time period?

Well I think that we are trying to give you some view into our overall long-term view of the business. And I think we also are trying to give you a little bit more transparency into some of the drivers of our business but they are I also as Michael has been saying, we have a period of investment, we want to make sure we're investing in our future. It's not just the investment in the Nasdaq Financial Framework itself but it's also investing in some new verticals like the new markets like I mentioned regarding getting into new industries with our technology as well as into the broker/dealers as well as into the buy-side for surveillance. So there are investment areas that are ongoing. I also believe that we see very good demand characteristics across the business and we do see scalability in what we're creating. And so over time those things should generate the benefits for shareholders as we've been mentioning. But it is an evolution and it's not something that is going to be a step function from one quarter to the next, it's going to be over time.

Hi, good morning everyone. So thanks for additional disclosure on ARR, another couple of follow-ups here. But I promise they're all related, I guess how should we think about the organic growth going forward. I know you don't want to get into the specifics so it's kind of what's organic versus non-organic but on a forward basis as we think about this call it, 80-ish percent of Market Tech revenues, should we think of that growth being at the upper end of the kind of 8% to 11% target that you set out for the segment overall? And then maybe if you guys could help us understand the underlying customer base of that bucket today by revenue contribution maybe between like buy-side, sell-side and market operator. So kind of like other changes that would be helpful just to provide some more context behind it? Thanks.

I believe the overall revenue growth should be viewed within the 8% to 11% target range for the next three to five years. The mix of revenue will evolve over time, with a larger portion coming from Annualized Recurring Revenue as we continue to transition our platform. In our market infrastructure operator business, particularly with core exchanges and clearinghouses, we expect to see more change requests and delivery-type contracts, which may not necessarily contribute to Annualized Recurring Revenue. When examining our overall business mix in relation to ARR revenue, we anticipate a greater contribution from our smart business, which operates on a SaaS model. Consequently, the relationship dynamics will shift, with less revenue coming from MIOs and more from SaaS when compared to the overall business mix, which we've outlined in another slide. Does this clarify your question?

Yes, it does. And just like the contributions by bucket, what that looks like today in terms of buy-side, sell-side exchange operators?

We are not providing that level of detail for that figure. We are focused on growth with all our clients and see this as a broader metric to help you understand how we are advancing the business. However, we do not disclose that level of information.

And let's remember the part of this is the change from what we used to have which was that backlog which at one point of time when the business is all about the market infrastructure operators and building out that client base which was these large contracts as we moved the business that backlog was less of a relevant factor and we felt that this is more reflective of the type and nature of the business going forward.

Good morning everyone. Thanks for taking the question. I was wondering if you can give a little bit more color just on the impact on the change in accounting for vacation accrual just how much that's been historically and just from an R&D perspective, it sounds like the pace of investment has been pretty steady across a couple of things. Is there any specific areas going to be ramping up as we look into the back half of next year or into 2020?

So on the first question, the first part of the question I’d say approximately $3 million or so in for Q3 would have been the impact.

And then on the second question, Chris, I say we've been operating under a relatively steady level of investment and we try to make sure we review those investments every six months in a very deep dive and we continue to look at how we're going to essentially ramp up certain areas or moderate certain areas to try to make sure that we stay relatively consistent but we do want to give ourselves the flexibility if we see a great opportunity to continue to invest and grow certain investments if we need to.

Good morning everyone. I wanted to ask about the listing services business. During the quarter, we observed the MIC making some changes in smaller companies, particularly in biotech stocks, where you performed quite well. I was hoping you could discuss the overall environment in the U.S. from a competitive perspective, as well as what you're hearing from companies in the market today.

Sure. Well I think that we are extremely pleased that about 97% of all new healthcare companies do list on Nasdaq and that continued, if you look at the first half of the year that number is consistent. I think that as a result, we are always, we are very competitive and we are always looking for ways that we can compete better and listings that are maybe traditionally going to the other guys and they are obviously always looking at ways they can compete as well. We do feel like we provide a pretty unique value proposition for healthcare companies in particular because of the Nasdaq biotech index in addition to some very deep IR intelligence capabilities we have to support that segment. And those types of things in addition to the great marketing and the great market itself are the reasons why we think that we will continue to be the home to the vast, vast majority of healthcare companies. In general, the listing environment continues to be very robust as we look at the pipeline of companies that have filed S-1s as well as our success in attracting those pipeline of companies to Nasdaq. And we definitely see a pretty, I mean at least it's always subject to market conditions things could change. But at least as of right now, I would say we see a very robust calendar going through the fall.

Okay. On a related basis I think yesterday you guys had an announcement out of record first half for Nasdaq private market, so I was hoping I think we are kind of six years in now on that one. So maybe talk a little bit about how you're monetizing those efforts maybe a little bit more and maybe what services you might expect to kind of grow from those companies using Nasdaq private markets going forward?

Thank you. Regarding the private market, it has been more of an evolution than a revolution. After several years, we're observing a real shift in how companies are managing their liquidity in the private markets. Initially, we only covered company-sponsored tenders, and our role has been to collaborate with companies to understand their liquidity management strategies. Traditionally, liquidity has existed outside of company-sponsored tenders, an area we've not typically engaged in. In the past, company-sponsored tenders were primarily focused on setting prices, identifying investors, and relying on us to facilitate the ownership transfer electronically rather than incurring high legal costs and extended paperwork processes. We have digitized that transfer process and the data room, providing more readily available information. Currently, we're seeing continued evolution. Firstly, we’ve introduced auction price discovery events with some clients, allowing them to determine the right price for private company transactions, which is a new trend gaining traction. Secondly, clients are starting to leverage our platform to identify investors, marking another new trend. Lastly, companies are recognizing the need for a more transparent way for their investors to transact with each other, presenting us with additional opportunities for evolution. Furthermore, we have been investing in creating liquidity in private equity funds. We announced a partnership with iCapital a few months ago, enabling broker/dealer distributors of private equity funds to use our platform for secondary transactions. We are also engaging with GPs to explore using our platform for GP-sponsored secondaries. These developments are promising but represent a long-term investment, which is why they are categorized under our R&D efforts.

Hi. Good morning. Maybe that the Oslo deals behind you, just wondering if we have an update on the M&A environment in the public markets we're seeing continued increase in asset valuations within the sector. Just wondering if you're seeing similarly frothy valuations in the private markets. And then, if you can just give us an update on M&A more broadly, do you think there's other scale deals like Oslo out there or is likely the near-term focus going to be on Market Tech and data?

We were disappointed that we didn't win the Oslo deal because it would have made sense for our Nordic business and we could have provided significant benefits to our clients in that region. However, there are always new opportunities available. We are concentrating on organic growth as a key driver for our business, which is evident in our discussions. We are also looking at ways to stimulate growth in our businesses, such as through the Cinnober deal, or to enhance our capabilities in areas where we have strategic focus, like Quandl or eVestment. We will keep evaluating those types of opportunities. Regarding scale opportunities, similar to the Oslo situation, there will always be chances for us to achieve scale through larger synergy-based deals. Nonetheless, we are not actively pursuing those; instead, we occasionally find such opportunities while managing our organic strategy.

Thanks. So you guys are now at your leverage target. So should we just be assuming now that your debt balances remain flattish from here and related to that, all of a sudden the 3.9% Eurobond seems expensive given where interest rates are in Europe? So are there additional opportunities for you to potentially refinance debt early given how low interest rates are?

We are pleased to have reached our previously set target, which demonstrates the cash flow this business can generate. We can leverage this for deals and quickly pay down that leverage. Our goal is to maintain our investment-grade status while advancing our capital plan, which includes increasing dividends as our earnings grow and using share buybacks mainly to counteract dilution from our equity programs. This approach will guide our debt management, which will vary based on investment opportunities. We are also taking advantage of lower interest rates and benefiting from our commercial paper program. We plan to keep evaluating our debt situation moving forward and feel confident about our current maturity schedule as we prepare for 2021, though I cannot discuss any immediate plans or opportunities at this time.

Hey, good morning. So fixed income is obviously a really interesting area right now. I think particularly when you look at the PE multiples of trading platforms that specialize in that area, what do you see as obstacles for Nasdaq to turn its fixed income franchise?

We are closely examining the situation, Patrick. There are a few key points to consider. In the U.S. Treasuries market, we have faced significant competition for many years. Conversely, other fixed income asset classes are just beginning to experience a transition to electronic trading, and there are fewer platforms available to support that shift. The U.S. Treasuries market has long been characterized by intense competition and electronic trading. Therefore, our focus is on adapting our platform to meet the changing needs of the broker/dealer community. Currently, we operate as a dealer-to-dealer platform, and there is a growing demand from broker/dealers for greater control over order routing rather than relying on an anonymous central limit order book. We are exploring ways to collaborate with them to enhance our platform for more targeted liquidity. In the Nordic commodities sector, we are performing well from a competitive standpoint. The macro trends in trading Nordic Power, particularly weather conditions, significantly impact quarterly performance. This past quarter experienced low volatility due to cool and wet weather, leading to minimal fluctuations in power demand. Additionally, we are navigating the aftermath of last year’s clearing issue. We are working closely with our clients to understand their needs in the Nordic commodities market for both trading and clearing, and how we can expand our power business throughout more regions in Europe. While this area is a key focus for us, we do not have any immediate plans that would lead to a quick turnaround.

Great, thank you. In closing, we are very encouraged by our solid second quarter and how it serves to reinforce that both the logic underlying our strategic pivot and our ability to execute on our new direction are becoming more and more clear. And we do also remain very focused on delivering against our priorities and in particular helping our clients reimagine markets to realize the potential of tomorrow. So thank you very much for your time today and we look forward to continuing the conversation in the coming months. Thank you.