Nasdaq, Inc.

Good day, ladies and gentlemen, and welcome to the NASDAQ second quarter 2019 results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero, on your touchdown telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Ed Dittmeier, Vice President of Investor Relations. Sir, you may begin.

Good morning, everyone, and thank you for joining us today to discuss NASDAQ's second quarter 2019 financial results. On the line are Adina Friedman, our CEO, Michael Potasnik, our CFO, Ed Knight, our Chief Legal and Policy Officer, and other members of the management team. Also, after prepared remarks, we'll open up to Q&A. The press release and presentation are on our website. We intend to use the website as a means of disclosing material, non-public information, and complying with disclosure obligations under SEC Regulation FD. I'd like to remind you that certain statements in this presentation and during Q&A may relate to future events and expectations, and as such constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from these projections. Information concerning factors that could cause actual results to differ from forward-looking statements is contained in our press release and periodic reports filed with the SEC. I will now turn the call over to Adina.

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'll 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 an early initiative 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 10% overall revenue increase in the non-trading segments with 8% organic growth, driven by our market technology, index, and investment data and 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 markets, and the corporate 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-training 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 from the same period in 2018, including both organic expansion and the impact of the Sunova 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 security suppository, as well as signing a significant new enterprise contract with a Tier 1 investment bank for trade surveillance. Along with continued momentum in these more established areas serving the market infrastructure operators and the sell-side surveillance clients where we lead, we also saw important progress in some of our newer product and client verticals. Earlier this week, we announced a partnership with Football Index, a UK-based sports marketplace, to deploy our cloud-based matching engine, an exciting milestone for our markets everywhere strategy. Additionally, after the quarter closed, we signed a fourth U.S. broker-dealer to implement our trading platform as a hosted solution. This quarter, we begin 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 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. tape 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 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 ETP 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 and 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 multiyear highs, while pricing trends remain within our typical quarterly variation. Our U.S. equity options complex exhibited 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 FIC products to get them to be where we want them to be. We saw revenue declines in both of our larger FIC revenue contributors, which are our NASDAQ U.S. fixed income treasuries platform and our Nordic 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 offering 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 trade web 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 issuer count 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 boards of 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 and Method 2 specific 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 build-out 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 Sunober. eVestment has continued to delivering on the double-digit organic revenue growth opportunity we envisioned when we acquired them in late 2017 through both expanded use from existing clients, particularly 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 it and investment have begun to benefit from sales opportunities open through other NASDAQ relationships. Yahoo's agreement to deliver analytics for its premium offering is one such example. With the Synova 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 Whitman, 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 Chiax 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. Treasury's business as well as have more broadly contributed 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 and 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 of 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 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 nonprofessional data user definitions. 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, corporates, 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 the second quarter results served as further evidence and encouragement that we can deliver for both clients and shareholders on our still early but now well-established strategic direction. We want to continue executing 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, Deanna. Good morning, everyone. My commentary will primarily focus on our non-GAAP results and all comparisons will be to the prior year period unless otherwise noted. Reconciliations of U.S. GAAP to non-GAAP results can be found in the attachments to our press release and in the presentation that's available on our website at ir.nasdaq.com. I will start by reviewing second quarter revenue performance as shown on page three of the presentation and organic revenue growth on pages four 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 Sonoba and Quandle. This was partially offset by a $17 million negative impact from the April 2018 divestiture of the public relations solutions and digital media services businesses and the divestiture of BYs 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 pages 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 primarily reflects an increase in the size and number of software delivery projects, as well as continued strength in our SaaS surveillance solutions. As Adina mentioned, we introduced a new market technology metric called ARR, which is total annualized revenue of active software support and SaaS subscription contracts, representing the vast majority of segment revenues. Please see slide 19 of the presentation for historical ARR figures. In the second quarter, the operating market 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, 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 you 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 Synover. 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 contribution 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 LAS or listing of 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 a negative impact from unfavorable changes in foreign exchange of $4 million. Our larger U.S. and European cash equities and equity options businesses saw relatively stable year-on-year organic trends, while our smaller FIC franchise, as Adina 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 are 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 as spending on several product and operational initiatives ramp up, as well as certain other factors. I would also note that while historically expenses typically 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 timings. Moving to operating profit and margins, 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 Euro 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 on slide 11, debt decreased by $78 million versus Q1-19, 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 to the first quarter of 2019, fulfilling our capital plan's objective to delever to the mid two times leverage ratio by mid 2019. During the second quarter of 2019, the company returned $50 million to shareholders through its share repurchase program and paid a dividend in the aggregate amount of $77 million. In the first six months of 2019, We return $200 million to shareholders through dividends and our share repurchase program. And with that, I'll turn it back to the operator for the Q&A.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, that's star, then one to ask a question. In the interest of time, we ask that you please limit yourselves to one question and one related follow-up. Our first question comes from Richard Rapetto with Sandler O'Neill. Your line is now open.

Yeah, hi, Adina. Hi, Michael. I guess first one quick thing, just wanted to shout out to Tom Whitman. You forgot to mention, Adina, besides being a skilled market practitioner, he was a straight shooter as well, so we'll miss Tom.

And he's here, so he got to listen to that, so that's awesome. Thank you.

I'm sure he has a smile on his face right now.

He does.

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 of the revenue, then the $247, if you look at most estimates, the $320 expectations for this year are higher than that for next year. So what's the gap between the $247 million recurring revenue, ARR, and sort of the, whatever, 320 to 350 estimates annualized for the next couple years?

Yeah, so it represents about 70% of the market technology revenues in the second quarter. The differences will be things like change requests. and implementation or delivery of new build-outs. So really what this is, it becomes the service revenue, the maintenance fees, and also the SaaS revenue that we receive from the smarts business is another example.

In our ongoing license fees.

In the ongoing license fees, yeah.

So in a build period, Rich, we have certain delivery fees that we charge, but that also, of course, has costs associated with it. So those fees are not included. And then the change request fees, which are kind of shorter-term changes that we make to the software to support our clients, those are not included. But 78%, as you said, we would say vast majority, yeah.

Okay, that helps. Thank you. And my follow-up, semi-related, is on a regulatory question. And, you know, we appreciate or I think the market appreciates the total markets initiative. But I was just trying to see if you could give us, like, at least your status update. You know, it looks like things are quiet and we're giving a lot of attention to U.S. equities. But it looked like Chairman Clayton, you know, offered a pretty balanced statement in regards to sort of the fee guidance at the trading and markets division. And it seems like the access fee pilot and, you know, you know, the sort of the litigation things have everything on pause. Has there been any movement? Would you say that the relationship, say, you know, with the SEC and the trading and markets head has been more open recently? Or how would you characterize, you know, the status, I guess?

Sure. I think overall, I think it is important to recognize, and 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. We have been expressing our views and also making sure that they have data to support our views. They've been asking a lot of really good questions. I think that the total markets 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 to understand their point of view around some of the key elements of market structure that we outline in total markets. 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, you know, 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.

Great. Thanks, Adair.

Thank you. And our next question comes from Michael Carrier with Bank of America. Your line is now open.

Good morning, and thanks for taking the question. You guys have made good progress in certain areas, like the market tech, the index, the 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 to $95 million you and the R&D spend, can you maybe provide – like an update on what's in there, maybe some of the details, you know, which ones, you know, you've seen some revenue, you know, traction, you know, associated with the initiatives, which ones are still at losses, and maybe like an average time, you know, of the initiatives that have been in place. Just kind of an update on, you know, some of the new things that are taking place.

Sure, yeah. So it is a combination of things, and I kind of rattled them off quickly and So you've got the investment we're making in the NASDAQ financial framework included in there. That's at least the amount that's expensed. And then the other that you have in there is NASDAQ private market. As we mentioned, we're continuing to see it pick up an activity there. And we have new initiatives to go into the private equity space, private equity funds. And so we continue to see very, very big opportunity in the NASDAQ private markets and good growth in that business. But that does continue to be an investment area for us. And then additionally, the banks and brokers strategy that we have with applying some of our market technology beyond surveillance but applying trading technology, post-trade technology into the banks and brokers, we now just signed our fourth client to provide them a hosted trading solution. So that's picking up steam, but that area of investment is also in there. The fourth area is in the buy-side surveillance. That one is in very early days. We did do a very small acquisition to supplement that, and that also is included in the ongoing costs now in that area. And we definitely see very good momentum, but it is a very small, kind of a small and upstart type of model of starting with essentially four clients and moving into a much bigger space, and we have good sales in that area to continue to develop And then another area is Quandl and the whole analytics hub integration, the alternative data space. That is also an early days that we've said that in terms of really, frankly, understanding the overall demand for alternative data, continuing to find new supply, and then finding demand for that data across the industry. The Yahoo Finance implementation of some of the supply chain data does come out of Quandl. and we have continued growth in some of the other data streams that they've created. So we feel good about the growth, but all of those areas remain investment areas. As they graduate, they graduate out of that program once they become kind of self-sufficient, at least break even to profitable endeavors. And so that's why we'll always give you that R&D number so that you kind of know which areas are major areas of investment for us.

Okay. Thanks a lot. Thank you. And our next question comes from Ken Worthington with JP Morgan. Your line is now open.

Hi, good morning. Presidium received approval for non-transparent ETFs. Fidelity and T. Rowe have refiled their offerings for active funds. Can you talk about how you feel you're positioned versus ARCA and BATS to sort of win listings and trading of new ETFs as they're launched? And are you taking any special steps to cater to 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 be able to list those types of ETFs. 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.

Okay, great. Thank you.

Thank you. And our next question comes from Ben Herbert with Citi. Your line is now open.

Hey, good morning. Thanks for taking the question. Just wanted to get additional information. thoughts on the pipeline into the sell side on market tech? You mentioned, I think, the surveillance win this last quarter and on the recent fourth broker-dealer, but just, you know, how's that pipeline shaping up and kind of where you feel penetration is at this point? Thanks.

Sure. So, well, the first thing to mention is that in our surveillance business, we've done, I think, a great job of working with broker-dealers to expand that that product to be able to support all asset classes as well as both exchange listed and OTC. And so that's been a great area of expansion for us as we've gone from firm to firm to take them from maybe they only use it for equities and then they move to fixed income and then they move to commodities, et cetera. We also have global penetration in that business and we have a global sales force that supports it. So we've continued to see very strong demand characteristics. But it's We have over 150 clients who use that service today. In terms of the matching technology, post-treat technology, we're at the very beginning of that strategy. And that's why that effort sits within our R&D initiatives, because we've built out a sales organization and we've continued to adapt our technology, as well as kind of doing it on a hosted basis. So in some instances, we also bring in market surveillance expertise to support them. And so we continue to make sure that we have a good pipeline of opportunity there. As I've mentioned on the last call, it does take time to get some of these contracts signed. The banks definitely go through a very thorough contracting process, as you probably know. But we are very, very excited about the level of opportunity and demand that we see. It's just a matter of making sure we systematically get our clients from interest to signing a contract. And as I mentioned, we do have a fourth client that just signed up.

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, a growth rate of 16%. But we're happy to make sure we provide you more information on the growth rate.

All right. Thank you.

Okay. Great. Thanks.

Thank you. And our next question comes from Alex Cram with UBS. Your line is now open.

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 this is spitting 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 flesh 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?

So I think the number is going to fluctuate, and it's going to depend on the types of installations that we have in any specific quarter, the change requests, et cetera. So you will see fluctuations over a longer period of time as we continue to build out more of a SaaS platform and a platform as a service with NFF. The intention and the idea would be that more of the business would continue to become part of the annualized recurring revenue base. So over a longer period, you will see that. You won't necessarily see that next quarter or the quarter thereafter. It depends on the specific fluctuations of those individual quarters. With respect to the organic growth rate, we're not going to break out the organic growth rate. The focus of this measure really is to try and provide some information that people have asked us with respect to what is that recurring revenue revenue base of the business going forward, and it's to say on what percentage of the business is reflective of recurring revenue as opposed to these more one-offs or change request type revenue. So I think, you know, this is the new measure for us that we've been, you know, we just launched today. We'll continue to take a look at it. We think it sends some good positive information because it does talk about the fact that the recurring revenue in the business does continue to grow, and as our model continues to to change more towards a platform as a service or a SaaS-type model. And the fact that it does represent, as we mentioned earlier, 78% or 80% of the revenue is, I think, the key metrics that we want to focus on for now.

Okay. Fair enough. Thank you. And then secondly, obviously, a few weeks ago, a big client, 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 in 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.

Okay. Well, I do think that the first thing I would say is it's pretty early days in understanding the impact that 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 it will 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 those 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, as you know, hundreds of clients that we serve both with our trading, with thousands of clients we serve with our data and connectivity services. So we don't feel that this is going to have an outsized impact. It's just something that we're managing through.

Very good. Thank you. Thank you. And our next question comes from Dan Fannin with Jefferies. Your line is now open.

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 know 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 more transparency into some of the drivers of our business with the ARR. 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 with getting into new industries with our technology, as well as into the broker-dealers, and 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 gonna be a step function from one quarter to the next. It's gonna be over time.

Okay, thank you.

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

Hi, good morning, everyone. So thanks for additional disclosure on AR. 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 with kind of what's organic versus non-organic, but on a forward basis, as we think about this kind of 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 buy-side, sell-side, and market operators, so kind of like other exchanges, that would be helpful just to provide some more context behind it.

So I think the way to think about the overall revenue growth, the overall revenue growth for the business is in that 8% to 11% target for the three- to five-year period, and that's the way to think about it. And as I said, the mixed should change over time where more of that will be coming from annualized recurring revenue as we continue to convert the platform over. What's built into this now with respect to what's driving it relative to the overall mix of the business, because it's typically in our market infrastructure operator business or the core exchange and clearinghouses, etc., That's where we will have more of that change requests or delivery type contracts where you'll see more of those fluctuations, which wouldn't be necessarily analyzed recurring revenue. So if you look at the overall mix of the business relative to the mix of the ARR revenue, more of that will be coming from our smarts business, which is a SaaS business. And so from a relationship standpoint, More of that – less of that will be coming from the MIOs and more will be coming from the SaaS when you compare it to the overall mix of the total business, which I think we provide in another slide. Does that help answer the question?

Yeah, it does. And just like the contributions by bucket, I don't know what that sort of looks like today, buy sets, sell sets, exchange operators. Okay.

So we're not giving that level of granularity to that figure. I think that we're looking at how we can grow across all of our clients, and so we do see this as kind of a broader metric to help you just understand overall how we're bringing the business forward, but we don't provide that level of disclosure.

And let's remember, part of this is the change from what we used to have, which was that backlog, which at one point in time when the business was all about the market infrastructure operators and building out that client base, which was these large contracts. As we've 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.

Got it.

Thanks.

Thank you. And our next question comes from Chris Allen with CompassPoint. Your line is now open.

Morning, everyone. Thanks for taking the question. I was wondering if you could give a little bit more color just on the impact on the change in the 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 is, say approximately $3 million or so 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 potentially ramp up certain areas or 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.

Thanks. That's it for me.

Thank you. And our next question comes from Ken Hill with Rosenblatt Securities. Your line is now open.

Great. Hey, good morning, everyone. I wanted to ask about the listing services business. You know, during the quarter, we saw the NYSE make some changes aimed at some of the smaller companies, particularly biotech stocks where you guys do pretty well. I was hoping you could talk a little bit about the overall environment here in the U.S. and from a competitive standpoint, but also what you're hearing from companies today in the market.

Sure. Well, I think that we are extremely pleased that about 97% of all new healthcare companies do list on NASDAQ. And 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 very competitive, and we are always looking for ways that we can compete better in 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 that pipeline of companies to NASDAQ. And we definitely see a pretty, I mean, at least, you know, 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 about a record first half for NASDAQ private markets. I think we're kind of six years in now on that one. So I think you could 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.

Great. Thank you. So with private market, it has been, I would say, an evolution, not a revolution. And so it is several years in, and we are continuing to see a real evolution of how companies are managing their liquidity in the private market. So when we first launched, we only today We only cover company-sponsored tenders. So the job of MPM is to make sure we partner with the company to understand how they want to manage their liquidity. There is liquidity that occurs outside the confines of a company-sponsored tender, and that's not the area that we've historically played in. So when we look at company-sponsored tenders, historically they also really only – they usually set the price, found the investors, and then just asked us essentially to facilitate – that transfer of ownership in an electronic mechanism as opposed to spending a lot of dollars on lawyers and a lot more time trying to get paperwork to be signed and pushed across. So we have electronified that transfer process. We've electronified the data room, made more information available, et cetera. However, what we're seeing today is some continued evolution. Number one, we've been launching some auction price discovery events and processes with some of our clients today. So they actually are using the platform to find the right price for that private company transaction. And that's a really new phenomenon that we're starting to see pick up in the market. The second is they're starting to use us to help them find investors, and that's also a new phenomenon. And then the third is to understand that companies over time may be want to have a more, I would say, a high-integrity way to allow their investors to transact with each other, and that's another opportunity that we're considering. So there are ways that we can evolve that. I think the other area that's also been kind of a long investment, and it will have a long tail to it, though, is the development of liquidity and private equity funds. We announced our partnership with iCapital a few months ago to allow for broker-dealer partnerships distributors of private equity funds to use our platform to facilitate secondary transactions there. And we have also been working with GPs to start to think about using our platform for GP-sponsored secondaries as well. So there are some really interesting developments there, but it's a long-term play, which is why it sits in our R&D bucket.

Okay. Thanks for all the detail there. Thank you.

Thank you. And our next question comes from Kyle Voigt with KBW. Your line is now open.

Hi. Good morning. It may be that the Oslo deal is behind you. Just wondering if we can get 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 frosty valuations in the private markets. And then if you could 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?

Sure. Yeah, so I think that we were disappointed that we didn't win the Oslo deal, to be honest. I think that it was a very logical expansion of our Nordic business, and we I think we would have been able to provide an enormous amount of benefit to our clients in the Nordics. So for that reason, we're disappointed. I think that, however, there are always opportunities out there. We are very focused on organic growth as a primary driver of growth in our business, and I think you can hear that in all of the conversations we're having. But we do look at ways that we can either catalyze growth in those businesses like a or expand our capabilities in certain areas that we have strategic focus, and that would be something like Quandl or investment. And so we will continue to evaluate those types of opportunities. In terms of, you said, scale opportunities, I think that we, you know, just like with Oslo, there are always going to be things like that where there might be an opportunity for us to drive scale through a big synergy type deal. But we, again, are really not – you know, we're not hunting for those. We're finding those occasionally as we manage through an organic strategy.

Great. Thank you.

Thank you. And, ladies and gentlemen, in the interest of time, we ask that you please limit yourself to one question. Our next question comes from Chris Harris with Wells Fargo. Your line is now open.

Thanks. So you guys are now at your leverage target. So should we just be assuming now that your debt balances will remain flattish from here? And related to that, all of a sudden the 3.9% euro bond 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?

So we are pleased that we've hit our target that we had set a while ago. And it does show the cash flow that this business can generate and that we can leverage up for deals and then within a fairly short period of time be able to pay down that leverage. And so our intention is to maintain our investment grade status and continue with the other elements of our capital plan, including increasing the dividend as earnings grow over time, and using our buybacks primarily to offset any dilution that we have from any of our equity programs. So that's the way we plan on the debt. And the debt will fluctuate depending on the situations that we're looking at with respect to investment opportunities, et cetera. But the investment grade status will be sort of that guiding factor that sets that. With respect to other opportunities, so we are pleased to be able to take advantage of the lower interest rates. We also have our have our commercial paper program, which has provided us with some benefits as well. And we'll continue to take a look at our debt going forward. We feel pretty good about the maturity curve that we have right now in front of us as we start to think about our 2021s and the other opportunities. We'll assess those in future periods. But there's no immediate plans I can talk of or mention right now.

Thank you. And our next question comes from Patrick O'Shaughnessy with Raymond James. Your line is now open.

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 around its fixed income franchise?

So we are looking at that very closely, Patrick, and I think that there are a couple things. We are sitting in a business, in the U.S. Treasuries at least, that has been subject to a lot of competition over many years. Whereas if you look at some of the other asset classes in fixed income, they're facing the idea of electronification for the first time, or they're starting to see an evolution into more electronic trading, and there are fewer platforms out there that really serve that function. In the U.S. Treasury's business, it's been a highly competitive, highly electronic trading environment for a long time. And so I think that it's really, for us, it's a matter of how do we make sure that we are evolving our platform to meet the evolving needs of the broker-dealer community because right now we sit as a broker-dealer, you know, dealer-to-dealer platform. And what we're seeing is more of the broker-dealers wanting to have more control over how orders get routed or where they get routed as opposed to an anonymous central limit order book. And so we are looking at how we continue to partner with them to find ways to leverage our platform for more, I would say, targeted liquidity. And I think that's something that we have to understand, what are all the moving pieces around that, because there are certain clients who really like to use the CLOB and they want to maintain an egalitarian type of model, and there are others that want to have more control over routing. So that's an area that we're really focused on And I do think that with our new technology platform, we have a lot more flexibility to be able to understand how to meet their evolving needs. I think in the commodities business in the Nordics, we actually capture the – from a competitive perspective, we capture the business in the Nordics. I think that it has much more to do with the overall macro trends in trading Nordic power. Frankly, weather trends can impact a quarter like they did this quarter. I think that the predominant thought on this quarter is just that it was a very low volatility quarter because the weather was cool and wet, and that doesn't create a lot of fluctuation in the need for power. But I also think that, in general, we obviously are working through the aftermath of the clearing issue we had last year, and we're working very, very closely with all of our clients to understand how they want to leverage the Nordic commodities business going forward for both trading and clearing needs, and how we might be able to branch out into more parts of Europe with our power business going forward. So it is definitely an area of real focus for us, Patrick, but we don't have kind of short-term, we don't have immediate things that we think will suddenly turn things around. It's a longer-term partnership with our clients.

Great. Thank you. Thank you. And, ladies and gentlemen, this concludes our question and answer session for today's call. Oh, now I'd like to turn the call back over to Adina Friedman for any further remarks.

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.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program, and you may all disconnect. Everyone, have a wonderful day.