Good day,
ladies and gentlemen, and welcome to the Nasdaq Second Quarter 2017 Results Conference Call. At this time, all participants are in a listen only mode. Later, there will be a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Ed Dittmeier, Vice President, Investor Relations.
Sir, you may begin.
Morning, everyone, and thank you for joining us today to discuss Nasdaq's Q2 2017 financial results. On the line are Adena Friedman, our CEO Michael Ptasznik, our CFO Ed Knight, our General Counsel and other members of the management team. After prepared remarks, we'll open up to Q and 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 and 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 now will turn the call over to Adena.
Thank you, Ed. Good morning and thank you for joining us this morning. I am pleased to have the opportunity today to report our strong Q2 2017 results, update you on our progress regarding our 2017 execution priorities and discuss our long term strategic initiatives and importantly how we are progressing with them. The company's 2nd quarter results were strong particularly in our non GAAP diluted EPS growth of 12% year over year. Additionally, we set new quarterly records including total net revenues of $602,000,000 and non GAAP operating income of $287,000,000 up 8% and 11% respectively year over year.
We achieved this despite a lackluster backdrop in terms of the beta for the capital markets industry with respect to volatility and trading volumes. The average daily VIX in the second quarter was near all time lows and about 25% below the prior year period. That said, when I look closely at the quarter and more broadly at the company's progression during my 1st 6 months as CEO, I continue to be encouraged by the consistently high level of execution I see from our team as well as the enormous potential and possibilities for this firm. During those 1st 6 months of 2017, we achieved record revenues up 8% year over year, while our margin expansion drove non GAAP operating and pre tax income up 10%, also setting new highs. Organic revenue growth in the first half of the year has been 4% across our non trading businesses led by 10% in Market Technology, 4% in Information Services and 1% in Corporate Services, while our market services segment is improving after industry volume headwinds starting the year off with a negative 1Q growth.
The balance in our business allows us to grow in a wide variety of underlying macroeconomic and business circumstances. Our results were achieved from a combination of our relentless focus on our clients and shareholders, our confident commitment to hold a long term view of the opportunities we see on the horizon and our strong conviction in our ability to realize them. With respect to the Q2 of 2017 in particular, I'd like to review some highlights. On the revenue side, our information services business delivered record revenues of $144,000,000 with 7% organic growth, particularly driven by our index business, the growth in proprietary data revenues were also solid. While market technology grew 4% organically in Q2, we think it is especially important to view its progress in terms of the annual cycle.
And to this point, our year to date growth has been 10% and we continue deliver material growth in the coming periods. Market Services achieved positive organic growth of 2% despite the lackluster volume environment due to strong market share performance across its largest trading categories along with continued positive organic growth in Trade Management Services. As with the last quarter, across our largest equity derivatives and equity cash equity marketplaces, we're very pleased with our performance in the areas under our control, notably market share, pricing and the implementation of performance and functional enhancements. Corporate services saw revenues increase 1%, but produced a 10% increase in operating income as margins expanded meaningfully in the Corporate Solutions business. Looking at our broader profitability, we realized significant benefits during quarter from the disciplined approach to operating efficiency that you have come to expect from this firm.
Our 48% non GAAP operating income margin in the Q2 of 2017 was at multiyear highs. I want to provide you with an update on the key execution priorities that we outlined for 2017, which were which are completing the acquisitions I'm sorry, the integrations of our acquisitions, increasingly commercializing our expertise and key disruptive technologies and improving our competitive position across all of our businesses. In terms of the work we're doing to complete the integration of our 2016 acquisitions, we have completed the transition of CX Canada and we are well underway with the ISD transition to the NASDAQ technology platform. We completed one market earlier in the spring. We are mid rollout of the largest ISC market now and we will complete the 3rd in the fall.
We have already reached our original cost synergy targets 12 months after the closing of the last of the 4 acquisitions completed in 2016, which is a full 6 months ahead of the 18 month target that we set originally. And we've identified additional synergies that Michael will detail later. The next priority we outlined at the beginning of the year is focused on putting an innovative solutions in our clients' hands through the commercialization of disruptive technologies where we've invested and partnered to develop special areas of expertise. To that end, we continue to be encouraged with the progress of the Nasdaq Financial Framework, our next generation market tech platform that is fully cloud and blockchain enabled. Building on the NFF sales we announced last quarter, this quarter we signed agreements with AIFC Exchange, which is Kazakhstan's newest stock exchange Deposito Centrale de Valores, the Chilean CSD and an agreement with the SIX Swiss Exchange to implement a distributed ledger technology based on sorry, distributed ledger technology based solution for SIX's structured product business.
We also launched the Nasdaq Analytics Hub in the Q2, which has a number of robust proprietary and third party datasets as well as analytics layer leveraging machine intelligence. This product expands how we serve the buy side in their investment decision making process and has generated significant interest since its announcement earlier this year. Our initial launch has generated widespread interest and has led to 20 firms formally trialing the product so far. The feedback from the trial users has been encouraging and in the second half of twenty seventeen, we have opportunities to turn those users into subscription paying customers as well as expand the product to include new datasets and functionality further expanding its appeal. As we have said before, this is a long term growth opportunity for us and we are just at the beginning of the journey.
Yesterday's announcements of the Fibonetics acquisition, a small London based technology company, is another good example of how we are applying disruptive technologies, in this case machine learning to benefit our clients. This company has pioneered a behavioral science based approach incorporating machine learning, which originally applied to serve the buy side surveillance needs and which will further our buy side initiatives, but we will also plan to incorporate it into the Smart's regulatory exchange and sell side offerings as well. Lastly, in terms of our 2017 execution priorities, is our goal to improve our competitive position across all of our businesses. In market services, we're focused on sequential progress. So I'll compare the first half of twenty seventeen to the preceding 6 month period or the second half of twenty sixteen.
In our three largest trading areas, we improved U. S. Options share to 42% from 39%, U. S. Equities to 18% from 17% and European equities to 65% from 63%.
I attribute these gains quite simply to our effective engagement with our clients. And as a result of finding new opportunities to bring our broad array of marketplace solutions to bear to solve their most important challenges. Along those lines, we've decided to unify management of all of our market services businesses under Tom Whitman, our Executive Vice President of Global Market Services, as a reflection of the way many of our customers are bringing their electronic trading across multiple asset classes into a more holistic management and organizational structure. We want to thank John Shea, who managed our FICC businesses previously for his work over the recent periods in helping to bring that business enhanced client focus and energy and we wish him very well as he moves on to new endeavors. Another area of strong progress has been in our index business.
AUM and licensed exchange traded products tracking Nasdaq Indices reached $147,000,000,000 at the end of June, up 36% year over year, far outpacing the market gains of 19% for the NASDAQ composite or 10% for the S and P 500. One of the most interesting drivers of how we've outperformed is that we've added $7,000,000,000 in AUM from new products introduced over the last 3 years. Therefore, our innovation and deep relationships with our key ETF sponsor partners have enhanced our growth potential in our index business and we're very proud of our progress. To this point, in this quarter, we were pleased to partner with First Trust on the launch of a new suite of ETFs called NASDAQ Riskalyze and with Victory Shares, which launched its first ETF tracking the NASDAQ Multifactor Minimum Volatility Index. In addition to the very clear ways our market services and index businesses have made share advances, the competitive position of our market technology business continues to advance.
The investments we continue to make to upgrade our offering with the next generation capabilities of the Nasdaq Financial Framework are moving the needle in terms of what is required to compete and have materially improved, our already strong competitive position. Clients that can benefit from next generation capabilities such as blockchain and cloud have become exceptional candidates for the Nasdaq offering. As I pointed to in my opening remarks, there's nothing more important to me and this management team right now than satisfying our client needs and ensuring that we identify and execute on opportunities to drive organic growth across this firm. I believe the recipe for this success in this endeavor will always center on our people and our culture. And to this end, I'm focused on making sure we continue to develop a world class collaborative team that enables Nasdaq to innovate effectively and execute on growth opportunities and the competitive challenges we face.
Our R and D program, which we've communicated as totaling $40,000,000 to $50,000,000 of annual investment spend encompasses several initiatives that we believe will create long term client and shareholder value. Over recent quarters, we've communicated our plans and progress to you across these important growth initiatives, including NFX, our U. S. Futures exchange, where our open interest now stands at over 3,000,000 contracts and volumes in participate continue to be developing well. MPM Alt, our liquidity solution for alternative asset management, which we announced in April Analytics Hub, which we launched in May and have discussed on the call today and several smart surveillance growth initiatives.
The Nasdaq Financial Framework is being funded through our core Market Tech and Market Services businesses as a more foundational investment to drive those businesses and our entire business forward. We also launched our ventures program earlier this year and we have 1 new investment so far. More broadly, our new initiatives have given us an opportunity to engage more with our clients and then concentrate our investments and resources to focus on the opportunities that can best help us grow over the long term. We also continue to adapt and respond to the regulatory the evolving regulatory and geopolitical backdrop, working closely with regulators. We are on a mission to ensure that the regulatory framework in the U.
S. Supports much needed reform to increase the appeal of the public markets and benefit innovative and growing companies that will lead our economy forward. In May, we released a blueprint for revitalizing the U. S. Capital markets, including recommendations we see as essential for the U.
S. To retain its preeminence in the global capital markets. This blueprint encapsulates Nasdaq's view for the public company's critical and invaluable role in the capital markets ecosystem and our desire to leverage our unique position as the exchange that is invested to deliver the most comprehensive set of solutions to corporate issuers to advocate on their behalf and in doing so support entrepreneurs, innovation and job growth in all of their positive forms for our economy. To close my commentary, I feel that this year so far demonstrate is demonstrating the balance and resiliency of our model and being able to achieve meaningful progress in growth despite a volume environment that remains challenging. The profitability this delivers allows us to continue to invest in our future through our growth initiatives as well as deliver strong capital returns to our shareholders.
Now, I'll turn it over to Michael to review the financial details.
Thank you, Adena, and good morning, everyone. My commentary will primarily focus on our non GAAP results. 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.nasbax.com.
I will start by reviewing 2nd quarter revenue performance relative to the prior year quarter as shown on Page 3 of the presentation and organic growth on Pages 4 14. The 8% or $43,000,000 increase in reported record net revenue of $602,000,000 consisted of $34,000,000 in net revenues from our 2016 acquisitions of Viassee and BoardVantage and organic growth of $15,000,000 with 3% organic growth in the non trading segments and 2% growth in market services. This was partially offset by a $6,000,000 unfavorable impact from changes in foreign exchange rates. I will now review highlights within each of our reporting segments and all comparisons will be to the prior year period unless otherwise noted. I will start with Information Services, which as reflected on Pages 5 and 14 saw a $10,000,000 or 7% increase in revenue consisting of $9,000,000 or 7% organic growth as well as a $2,000,000 increase related to the ISE acquisition.
Market Technology revenue as shown on Pages 6 14 increased $3,000,000 or 4 percent with organic growth primarily driving the change. As Adena noted, organic growth totaled 10% for the first half of twenty seventeen as organic growth in Market Technology tends to fluctuate quarter to quarter more than other segments. The growth was driven by increased revenues from software, licensing and support, software as a service, particularly smart surveillance subscriptions, as well as higher change request revenues. New order intake was $64,000,000 in the second quarter and the period end backlog finished at $799,000,000 a record high and an increase of 4% from June 2016. The operating margin for market technology was 22%, down 3% from 25% in the prior year period, reflecting the investments we've made to upgrade our technology for the next generation Nasdaq Financial Framework and enhance and grow our surveillance offering.
Turning to corporate services on Pages 7 of 14, revenues increased $2,000,000 or 1% due to the inclusion of revenue from the Board Vantage acquisition. While listings activity in the Nordic region is robust and related revenue increased as compared to the year ago period, revenue growth in the Nordics was offset by lower U. S. Listings revenues from the runoff of listing of additional share fees and an unfavorable impact due to changes in foreign exchange rates. Reflecting the progress we've achieved in our synergy targets, the corporate services operating margin was 27% versus 25% in the prior year period.
Market Services net revenues on Pages 8 14 saw a $28,000,000 or 14% increase, reflecting the inclusion of $27,000,000 of revenue from the acquisition of ISE and $3,000,000 of organic growth, partially offset by a $2,000,000 adverse impact from the changes in foreign exchange. Market services operating income increased 1 percentage point to 55% versus 54% in the prior year period. Turning to Pages 9 to 14 to review expenses. Non GAAP operating expenses increased by $15,000,000 This increase reflects a $9,000,000 or 3 percent organic increase at a $26,000,000 impact from our acquisitions, partially offset by $15,000,000 in synergies and a $5,000,000 favorable impact from changes in foreign exchange. Synergies achievement from our 2016 acquisitions rose to $60,000,000 on a run rate basis in the 2nd quarter, hitting our original target within 12 months of the closing of the last deal, 6 months ahead of the original schedule.
We've also identified $10,000,000 to $20,000,000 in additional synergies, which will be realized as we complete various platform transitions. Rather than update you on this specifically going forward, this progress will reflect it in our overall operating expense and profitability measures. Now turning to Slide 10, our revised 2017 non GAAP operating expense guidance is a reduced range of $1,260,000,000 dollars to $1,290,000,000 The updated guidance does reflect our higher planned investment spending in the second half of the year as well as current exchange rates and the adverse $10,000,000 to $15,000,000 estimated impact of the depreciation of the U. S. Dollar against both the Swedish krona and euro.
So another way to review this is the reduction would have been larger if the foreign exchange rates have been unchanged. Non GAAP operating income increased 11 percent in the Q2 of 2017 and the non GAAP operating margin totaled 48%, an increase from 46% in the prior year period. Net interest expense was $34,000,000 in the Q2 of 2017, an increase of $3,000,000 versus the prior year period, reflecting the additional interest expense from the financing of our 2016 acquisitions, but also reflecting $1,000,000 of partial quarter impact of the late May balance sheet restructuring that we did, which I'll review in more detail in just a minute. The non GAAP effective tax rate for Q2 of 2017 was 33%, at the low end of the 33% to 35% range we provided during the last quarterly call, and there was no material benefit from the adoption of accounting standard ASU 20 sixteen-nine, which added $0.13 to our Q1 results. We continue to expect the 2017 non GAAP effective tax rate to be in the range of 30% to 32%, and for the Q3 of 2017, we expect the tax rate to also be between 30% 32%, with the 4th quarter expected to be between 33% 35%.
Non GAAP net income attributable to Nasdaq for the Q2 of 2017 was $172,000,000 or $1.02 per diluted share compared to $153,000,000 or $0.91 per diluted share in the prior year period. There was negligible impact from the change in tax accounting during the period. Turning to capital, as we indicated last quarter, we redeemed the 5.25 percent January 2018 bond with a face value of $370,000,000 using a combination of cash on hand and proceeds from the sale of commercial paper issued through Nasdaq's newly established commercial paper program. Additionally, we utilized our CP program to make a $300,000,000 repayment on our term loan. During the Q2, our outstanding debt decreased versus March 31, 2017 due to our refinancing activity with $160,000,000 of net debt repayment, partially offset by a $91,000,000 increase due to FX from a stronger euro, impacting the value of our euro denominated debt.
This resulted in our debt to EBITDA ratio ending the period at 3 times unchanged compared to the Q1 of 2017. We continue to expect to delever to the mid-2s leverage level by mid-twenty 18. We didn't execute any share repurchases in the 2nd quarter. However, as a reminder, we executed $156,000,000 in buybacks during the Q1 and together with dividend payments, including a 19% increase we announced last quarter, we have returned $272,000,000 to shareholders in the first half of the year. This is double the $139,000,000 return in the first half of twenty sixteen and represents 76% of our non GAAP net income for the first half of the year.
Looking forward in respect to our capital deployment and return priorities, while in the near term our actions in part will reflect our commitment to deleverage moderately over the next four quarters, we are looking to optimize returns to shareholders over the following ways the following ways. 1, continued investment in organic growth initiatives such as the analytics hub that Adena referred to in her remarks. 2, carefully considered M and A, especially tuck in acquisitions that have great fit with our strategy and meet stringent investment return profiles such as the 2016 acquisitions and our Cybernetics acquisition announced yesterday. 3, continuing to grow our dividends as earnings and cash flow increase. And 4, buybacks that principally offset the impact of share issuance and when opportunistic can additionally return larger amounts of capital.
With that, I'm going to turn things back over to Adena.
Thank you, Michael. We are very pleased that our offerings continue to resonate with our clients and our business continues to perform well for our shareholders. We're very focused on executing on our goals to drive our competitive position, optimize the benefits of our acquisitions and innovate with new technologies that meet and exceed our clients' expectations. So with that, we're really excited to turn it over to questions.
Thank Our first question comes from Richard Repetto with Sandler O'Neill. Sir, you may begin.
Yes. Good morning, Adena. Good morning, Michael. And first, congrats, Adena. You certainly carried on the focus on efficiency from your predecessor.
So I guess the first question is on getting away from the efficiencies, but on the top line and the organic growth of the non trading segments. Market Technology was huge in the Q1 and you acknowledge it's going to be volatile. But I guess what's the outlook on the top line? I know you're making margin improvement from Corporate Services, but it seems like these other segments are still below that mid single digit number that you sort of put out there as guidance prior?
So what I would say with market technology as we've been saying and I said it in the Q1 even with that strong growth in that 1 quarter that we have outlook long range outlook of mid to high single digits for the market technology business and we continue to support that. So as we look at the first half of the year and because of the volatility, we do tend to look at as the year progresses as opposed to each quarter alone. We have had 10% growth in that business and we continue to feel that that supports our mid to high single digit overall outlook for the business. I think with regard to our information services business, as you've seen that has obviously had a nice growth this quarter with the growth in our AUM, as well as just continued growth in our proprietary products. And overall, we're at 4% so far this year, and we continue to find opportunities to grow and expand that business.
So, I would feel very comfortable with our mid single digits outlook for that business as well. And then for corporate services, we have said that that's a low single digits grower as a general matter. And with the 1% so far this year, we continue to see opportunities to expand the bottom line and we obviously continue to find ways to grow that business, but it is a lower grower in general. And then on market services, which we do not give outlook for because volumes can be so volatile and changing over time, We are starting to see a recovery of volumes in the markets, which has definitely helped the market services business in the Q2. But what I focus on as CEO is those areas that we can control, which are market share and capture rates as well as functional enhancements and things that can drive those businesses forward.
And I really do feel that everyone in the team has really been focused on that and we've been executing well against those goals.
Okay. Thank you. And then my one follow-up would be, I know this is a small part of your revenue and prior to your, I guess, return. But the fixed income, you did mention that you had some turnover at the leadership after very short period. And we can you continue to have to put out 1,000,000 shares to acquire.
So I guess what's the outlook for fixed income? Is this it seems like a weak area, I guess, the share has been lost, but can you turn that around? Is it things that can rebound here on the U. S. Fixed income?
Yes. So when we look at our fixed income or fixed business more generally, we have the U. S. Fixed income or treasuries business. We have our U.
S. Futures exchange, which is focused on commodities. And then we have our Nordic fixed income business in clearinghouse as well as our Nordic power business. I would say that the macro backdrop across our FICC platform in terms of volumes in general has been low. I think that's been reflected across the industry.
So that's definitely a challenging backdrop. In terms of our competitive position specific to our U. S. Treasuries business, we continue to find ways to enhance that platform and try to drive more volume back into the platform. It has been our biggest area of challenge, I would say, within NASDAQ.
And I think that as we move all of those, all of our trading businesses under Tom's leadership and into a single organization, we feel that we're going to be able to take all of the talent that really frankly has been extremely successful across our equities and options businesses, our derivatives businesses in Europe and apply that to those areas of challenge within the fixed income business. And I think that we will continue to work with our customers. And one of the great things that John did coming in was really bring a client orientation to that business. So we want to continue that and to try to drive progress. We had an enhancement that we brought in June that basically created new functionality around off the runs as well as creating more functionality in our elect offering.
And we do hope that that will drive more volume back onto the platform in the coming quarters.
Okay. Thank you very much.
Thank you. Our next question comes from Chris Harris with Wells Fargo. You may begin.
Thanks. Just a clarifying question on the expenses. Does the updated guide for this year incorporate any of the $10,000,000 to $20,000,000 of incremental synergies you guys have identified?
Yes, it does. That $10,000,000 to $20,000,000 won't all necessarily be realized this year. It will be realized over the following periods as well. But yes, it does include that.
Okay. But we're not quantifying how much potentially this year versus 2018, I guess?
No. Like I said, we're just including it in the overall guidance that we're now providing and we've hit the $60,000,000 We think there's additional that we can achieve, but we'll achieve it over future periods instead of continuing to track that separately. It gets harder as we start to integrate these parts of the business and just starting specifically split out the synergies related to different aspects of it. So it's in the plans and we have additional things that we're going to do. But as you start to try and suss it out, it gets a little more difficult.
So we're just going to include it in our overall guidance.
Okay, great. Thank you.
Thank you. Our next question comes from Vincent Hung with Autonomous. You may begin.
Hi. So what is the driver of the delta in the $10,000,000 to $20,000,000 of additional synergies? So what would lead you to be at $10,000,000 versus $20,000,000 dollars
Well, I would just say, I think that when we look at the opportunities for us to continue to drive costs out of from a technology integration perspective as well as certain, I would say, agreements that we had with the sellers in terms of transitions, we have the opportunity to find additional efficiencies in the way that we drive the operations forward, but also making sure that we're meeting certain criteria that allow us to roll off of certain agreements early.
Okay. And just follow-up on Smart. What is it as a percentage of revenues and order backlog right now?
So we don't disclose Smarts separately from the rest of the Market Technology business, but we are very pleased with the general, obviously that we have said that smarts is, a double digit grower and it continues to be a very strong part of the overall market technology business. And we also would say that it is a subscription business, so it's a nice driver within in terms of the margins of that business as well. But it is something that we look at as holistically part of what we offer with our market infrastructure business and we will continue to look at it that way.
Thanks. Thank you. Our next question comes from Kyle Voigt with You may begin.
Hi, good morning. First question, I guess, is on market structure. It seems like there's going to be a very least a pilot program that's going to be proposed to help understand the impact of lower access fee caps in the cash equities market. Just wondering if we could get updated thoughts on the potential impact to your business if access fee caps were eventually reduced or eliminated over time?
Well, so I would say that, we don't see this as having a material impact on the net capture that NASDAQ or the exchanges in general are received because the goal of lowering the access fees is to lower the rebates. So I think that that's at the end of the day what the SEC and certain participants are trying to achieve. We've been pretty clear in our position on establishing an access fee pilot. We attempted to do that on our own a couple of years ago, but the rest of the industry didn't follow. So as we look at what the SEC or what the industry is trying to achieve with lower rebates, which would come from a lower access fee.
I think that we just want to make sure that we're cautiously going into that and saying, well, what is the problem that we're really trying to solve for? And are we really going to be able to use this access seat pilot to really study and solve any specific market structure problems that exist? The other area that of most concern to us is with small to medium sized companies and the liquidity in those companies. If we think about what rebates are for, rebates were established after decimalization because the spreads narrowed so dramatically that market makers were finding that they were not motivated to post liquidity as openly and available for everyone to access and to see. So rebates were there to drive to motivate market makers to post passive liquidity onto the market.
And I believe that in less liquid stocks, those rebates are an important driver of nice tight spreads and market maker liquidity. So we believe that we have to be very, very mindful and cautious as we walk into any sort of access to the pilot as to what problem we're solving and what potential unintended consequences could result. So we'll see how it progresses. But as I said, we don't see this as having a material impact on the exchanges net capture. The purpose of it is to lower the rebates.
Okay, thanks. And then just one follow-up on the Cybonetics deal. It really grows the compliance offering that you have, but also seems to expand the offering more into the buy side. Just wondering if you could help us understand the strategy and whether you think the client that client base, that buy side client base is a significant opportunity for NASDAQ going forward and maybe also an area of focus for inorganic growth? Thanks.
Sure. So, well, I think that it's good to point out when we bought Smarts back in 2010, that business was really primarily driven by providing surveillance solutions to exchanges and regulators. And we started to realize that market participants or the sell side also have very sophisticated trading that they do and they could leverage the exact same alerting and same capabilities to look at their own internal trading behavior and the trading behavior of their clients. And so we started and we embarked on a program to bring smarts into the sell side. And today we have 140 market participants that use smart surveillance as their core surveillance system.
So it's been a very successful strategy over the last 7 years. And when we then look at how the buy side is becoming more and more sophisticated in terms of their interactions with the markets and their own regulatory obligations have been increasing over the last several years. Our view is that the same surveillance and frankly the behavioral analytics approach to surveillance that cybernetics brings is also going to have increasing demand within the asset management industry. So it does open up a new avenue for us to continue to grow and expand our surveillance offering. So we actually identified this as a strategy for NASDAQ about a year and a half ago.
We've been building out the smart surveillance buy side solution. We have clients in the buy side already using it, but cybernetics really helps catalyze that growth and brings an orientation to that surveillance that we think is very relevant to them. So we're very excited about that. I think in general, the asset management industry is clearly an area of focus for us right now with our analytics hub and with our smart surveillance offering as well as other things that we'll continue to look to do, and obviously our index business and data business to continue to drive demand there.
Thank you.
Thank you. Our next question comes from Alex Blostein with Goldman Sachs. You may begin.
Hey, good morning everybody. I want
to actually pick up on
the last point you mentioned around Analytics Hub. Clearly, the growth area within asset management has been around quants recently. I'm assuming obviously that's kind of the area where you guys are trying to tap into. So could you spend a couple of minutes just discussing the opportunity you see there for NASDAQ? How are you guys thinking about partnering versus acquiring capabilities in this area?
And I guess more importantly, where are the synergies that you guys see between kind of that kind of customer base versus your existing customer base?
Sure. Well, it's been I would say that we do have a strategy internally to look at how we can expand the value added data that we provide to the entire industry, both the sell side and the buy side, as well as to brokers that service the retail audience. And what we want to make sure of is we look at leveraging our own data that we have internally and finding signals within that data using machine intelligence in addition to bringing in other third party data that provides what I'll call more driver information that would be relevant for a quantum mental shop or a pure quant shop that's looking at ways to find used data to make a fundamental decision or using data to make a technical decision in terms of their investments. We want to make sure we build out this hub. We definitely like the idea of partnering with other exchanges, partnering with our clients to find the signals to bring in the data that they're looking for and to serve their needs.
And one of the things that we're really proud of is how we've architected the solution because it's completely in the cloud. It allows for us to allow the client to come in with multiple types of interfaces. It could be fixed or it could be APIs or it could be we can multicast the data They can provide data into the platform. They can get as much data or as little data as they want out of the platform. They can do it in real time or at end of day.
It's an extremely flexible platform and it allows us to grow and expand what we're doing in multiple ways. So it is meant to be for the entire industry, but certainly the quantitatively oriented buy side strategies we think are a good starting point for us to focus our energy.
Thank you. And then just a follow-up around, again, some of the newer initiatives around the index business. It seems like competition in the space is definitely heating up and I guess not surprising given kind of pricing pressures on ETF managers. Can you guys discuss the pricing in your index business versus some of the larger incumbents and how much of a driver I guess has that been in you guys picking up some share recently?
We actually are really good at partnering with ETF sponsors to make sure that we're both happy. And it kind of depends on the type of index that we're creating. So if it's a very advanced, I would say, smart beta index like we get we have from our Dorsey Wright business, we actually we do tend to see that that's got higher value and there's more IP that we're bringing to the table that tends to have a higher price point versus a benchmark index, where we really do try to partner to be a low cost provider to our ETF sponsors. And so it really just depends on the type of index that we're calculating on behalf of our clients or that we're generating and then partnering with our clients to bring to market. And we do have a wide range and we're very partnership driven.
Got you. Great. Thanks very much.
Thank you. Our next question comes from Alex Kramm with UBS. You may begin.
Hey, good morning. Just wanted to come back to the beginning. I think it was Richard's question on the organic growth, particularly on the market technology side. I appreciate kind of your comfort level with the overall full year outlook of high single digits. Just wondering a little bit more near term in the Q3, if I look at typical seasonality, I think the growth will be roughly in line with the Q2 again.
So just wondering, is there anything else you would point out that may swing this a little bit higher or lower? Any new business wins that might come in the Q3 that we should be thinking about as we think about our model? Thanks.
Well, we won't predisclose business wins, but we definitely have we are working with a lot of clients right now to make sure that they understand the value of our offerings. We have some clients that are frankly in what I'll call pre development mode. But we all I can say, Alex, is we do continue to see really high demand for our services across the entire spectrum of what we do, whether it's risk management, trading, clearing, settlement. Those clearing and settlement continue to be very strong growth drivers for us in addition to the surveillance offering. So, we I can't give you any sort of specific things, but I could say that, we continue to have very high demand across the suite of what we offer.
In terms of the Q3, I mean, you are right that from a, what I would call, change request perspective, that tends to be a lower quarter for us because not only do really our clients have more vacation time, so they tend to demand less in terms of enhancements and that the 4th quarter tends to be our strongest quarter in that. So that is some of that seasonality that you do see. But in terms of general our general view is that we continue to see very high growth drivers overall, but we're not going to speak specifically to the Q3.
All right. Fair enough. And then just maybe stepping back for just a minute, last time I spent time with the management team, I kind of sense that in addition to spending more time on capital allocation, you also thought thinking a little bit more about resource allocation. I guess, I mean, hey, you have several different businesses here. Some may benefit and actually have an opportunity for acceleration and growth if you throw more resources at them, where some are a little bit more in, let's maximize the returns or the margin mode.
Any new thoughts you're having as you've now spent a few more quarters here at the helm where you may want to change a little bit of where you're spending more time or less time Well
Well, I think our general approach is for those businesses that are strong incumbent businesses, we try to drive it to the greatest efficiency that we can to make sure that while we're still optimizing the business and its opportunities. But then as we look at really specific growth initiatives and ways for us to invest our resources, as you said, our people resources and our capital resources, we try to make sure that we give you some disclosures around those areas where we're really investing a lot of time and capital. So what we've been discussing with you in terms of you can kind of see that in terms of which initiatives we've been highlighting to you. So the Nasdaq Financial Framework is clearly an investment area. Surveillance is clearly an investment area.
The data business is clearly an investment area, Nasdaq Private Market is clearly an investment area and then NFX is our trading investment area. So I think that those are where we try to make sure you know where we're kind of moving resources into those areas to drive growth and we're trying to make sure that the rest of the franchise is as efficient as possible.
All right. Very helpful. Thank you.
Thanks.
Thank you. Our next question comes from Michael Carrier with Bank of America Merrill Lynch. You may
begin. All right. Thanks. Hi. Hey, Michael, just first on the technology side of the business, obviously, the trends there have been favorable.
I think 2016, you had a bit of a tough comp, just given some of the timing of some of the projects that came on like Istanbul. But yet your pipeline is at a record. So I'm just trying to understand and this isn't for the like a quarter or anything, but if I'm looking over the next like 4 quarters, has anything changed on the timing of sort of the revenue recognition of the current pipeline? Meaning as things shift to be maybe a little bit more regulatory driven, does the timing shorten versus lengthen? Or should we continue to expect kind of the same pace of revenue recognition on that pipeline?
Yes. So I think the one thing that you'll start to see is that as more of the business moves to more of a SaaS based model and those contracts are more annual based contracts or shorter periods as opposed to some of the 5 to 7 year type contracts that you would see in the core business. And as we continue to build out the things that Adena has been talking about with respect to the smart surveillance business and the whole SaaS business, that those contracts are that does change the nature to some degree of that backlog that we're looking at. So we are actually looking at are there alternative ways of presenting some of that information to you guys going forward. But so some of it is more of an on recurring basis, when it's a recurring on a shorter term recurring basis as opposed to longer term contract.
So that will change the nature of that a little bit and how we recognize it. In addition, looking into next year, we are looking at what the implications are of the new GAAP requirements. We don't think that there's going to be a material impact overall in the way that the information is reported, but it will have a bit of an impact. So there'll be more information coming out in the next couple of quarters as to how you start to recognize that in the back half of the year.
Okay, thanks. And then, Deane, just a quick follow-up on some of the stuff on strategy. Maybe like 2 areas, just in terms of the paper that you guys put up in terms of improving the capital markets, just wanted to get a sense on what's the reception been particularly on the political regulatory side if some of it's driven on that angle? And then just given your guys' focus on blockchain, artificial intelligence, just wanted to get your sense when you're working with the clients, it seems like there's a lot of interest. But when do you see that kind of conversion versus interest versus like a more meaningful revenue opportunity?
Okay, great. So on revitalize, I think that we have had a very, very positive reception across many aspects of our client base and as well as the lawmakers. What I really like about the fact that we took a leadership position in coming out with our views on the capital markets and what we can do to improve the capital markets is that we've been able to elevate the discussion to the bigger picture issues that are really facing the country and the economy as it pertains to getting more companies to want to enter the public markets and what are the benefits of the public markets to investors and to companies. So we like this. There is one step that we have in the revitalized blueprint that talks about the fact that in the last decade, 76% of all job growth has come in these companies after they've gone public.
So going public is a job creator. It is a growth driver for the economy. And so we want to make sure that lawmakers, regulators, issuers, investors and market participants are all engaged appropriately on those issues that actually matter. And what's been great is that it has elevated the discussion and debate on those topics that are bigger picture topics like proxy access, disclosure obligations, tax reform, litigation reform, as well as market structure. So market structure isn't the only thing on the agenda anymore.
It's looking holistically at the system. And we have been heavily engaged with lawmakers and with regulators on the topic. It's gotten a very positive reception. I think that there's also some elements of there are certain areas that not everyone agrees on, but what we really wanted to do was get an active and open debate on the topics. And I think we've been successful in that.
So we do hope that we're going to see progress on some of these core initiatives. We are really pleased to see that Chairman Clayton took as one of his very first acts to allow for confidential filings at every level of the company size. That's a perfect example of a change in disclosure obligations that we support. So we are hopeful that we can actually drive positive change there. In terms of the blockchain and AI commercialization, those new technologies are going to take time to seep into the financial fabric of the economy.
But we have seen what I really like about the blockchain is that I think that it kind of came to market as a solution looking for a problem. And then there are some problems that were identified. So particularly in illiquid OTC instruments where there are bespoke trades that are done and they take forever to settle. And so you're standing out there with a lot of risk waiting for those trades to settle and there is just not an efficient system to support that. In the blockchain, whether it's the Nasdaq private market and our Alts initiative or whether it's the distributed ledger technology that Styx is looking to bring into their OTC markets.
The whole purpose of it is to create a more efficient and effective way to settle out trades that then lowers the risk of doing those trades, which then lowers the capital requirements. So we've definitely keyed in on problems that are solved with the blockchain and we are moving forward with commercialized business opportunities with the blockchain and the Nasdaq Financial Framework. On AI, as you can tell, we obviously think that there's a lot of opportunity there across our data products, our surveillance products and our IR products. And we are actively working with machine intelligence and bringing those products to market. It just takes time for the clients to trial them, to back test them to make sure that they are in fact doing what they hope that they will do.
And it's just a time issue of working with the clients to get adoption, but we're highly confident that the solutions we're bringing to market are valuable to the customers. So that's just a matter of time, I think, Mike, to get that adoption up.
Okay. Thanks a lot.
Sure.
Thank you. Our next question comes from Brian Bedell with Deutsche Bank. You may begin.
Great. Thanks. Good morning. Adena, if you can just expand a little bit on the revenue opportunities from NASDAQ Analytics. I appreciate all the color on this.
It does sound like sort of an exciting new area. But if you can talk about I know it's early, but if you can talk about what you envision as the revenue expectations, maybe it's too early for the second half this year, but certainly coming into 2018, and if that alters your long term mid single digit growth outlook in Info Services at all?
Well, I would say, I think we need to have more experience with it and working with the clients very extensively to understand the total breadth of the opportunity. It is in a way, it's kind of an interesting project for us because when you're going into a highly competitive space where you kind of know what the total addressable market is and you're trying to grab at it, it's easier for you to come up with projections as to if I progress this way, I will get this money. In Analytics Hub, it's a whole new thing. It's something these are products that clients have never had access to before. It's a very it's a new space.
There's a total addressable market in a way it's kind of unknown. And so what we are looking at is how do we just obviously we have our own internal targets, but in terms of our expectations and how quickly those targets will be met, we are not providing those publicly because we do want to have more experience with the technology and with our customers to know what fits their needs and how they're going to be adopting it before we give you any sort of true clear guidance or outlook on that particular part of the business. We are doing this as a subscription. And as they so the way it's priced is you pay a monthly fee for either a 3rd party data set or you pay a different monthly fee if you want to take analytics on that data set. And so there are there's established pricing that we're working on and making sure that the clients are seeing it as a subscription service, but we don't yet have targets that we're able to communicate to you.
Great. I'm sorry, you said that you're piloting this right now was did you say 20 clients or was that something else?
That's right. We have 20 clients who are piloting various aspects of the data. So they may be piloting one data feed, they may be piloting all the data feeds, they may be looking specifically the analytics that we're creating. And what they're doing is back testing it against their models and making sure that they those models do in fact get a positive impact from the data. That's what they're doing at the moment.
Okay. And then Michael, just on
the M and A strategy broadly, and I guess, Adena as well. The obviously, you want to be opportunistic in that. And thanks for the priority outline on the capital deployment. But as we think about opportunities going forward, do you look at debt flexibility? In other words, I know you're trying to get to 2.5 times on debt to EBITDA next year.
Would you be willing to flex that back up to 3 times if you saw more important opportunities? And maybe, Adena, if you just want to highlight again on your M and A priorities
in terms of what businesses
you'd like to try to look at?
Well, I would say from a financing standpoint, the priority is identifying if we have good opportunities, we'll look at the best ways of financing those opportunities. And if it means that you're increasing the debt for a short period of time, we would look at doing that. But the priority is getting the investment and we think it's a good strategic and financial return to the company, then we'll look at the best way to finance that.
And with that, I'll turn to Adena to
Sure. I mean, I would say that we are very committed to our investment grade status. We've been very proactive in working with the rating agencies to make sure they understand our business well. And we will I mean the purpose of having debt capacity is to use it for the right opportunities. But when we look at the opportunities that are before us right now, I think that what Michael discussed in his capital allocation outline is where we're focusing our energies right now, which are on these kind of, I would call them bolt ony type of deals where it adds a capability to technology capability to us, it expands our market presence in a certain area or in the case of the deals we did last year, which they're highly synergistic, basically doubling down in areas that we believe in that we believe can grow and expand our franchise.
So those are the areas that we're particularly focused on right now and I think that that will play out hopefully as we continue to expand our business.
Great. Thanks for all the color. Thank you.
Thank you. Our next question is from Ben Herbert with Citi. You may begin.
Hi, good morning. Thanks for taking the question. Just wondering if you could provide some context around MiFID II in Europe and where you see maybe opportunities or risks around that next year?
Well, we have been very focused on making sure that we're compliant with MiFID 2, and that's got a fair number of work streams, across our technology organization, our business organization, in the Nordics. And it is a big project, not only for us, it's a much bigger project even for our clients. But we see the auction on demand functionality that we launched in June on our Nordic market is a direct reflection or a direct reaction to MiFID II In terms of allowing people, I think the general goal of MiFID II is to bring more flow into lit venues and into the exchanges, which I think that is benefiting us. But the auction on demand allows people to execute their strategies as large institutional players and still do it within an exchange environment and make it so that the systematic internalizers that don't have as much of a motivation to take that type of activity off exchange. And so we are doing those types of enhancements to our systems.
We're also continuing to look at the disclosure obligations and whether or not there are opportunities there to enhance our disclosures and our data to help people comply with MiFID II. But I would say also MiFID II and the new MAR or MR obligations are really, really helpful, have been helpful to our smart business and its demand for surveillance in Europe over the last couple of years. And so we've seen that as a growth driver for us and that's been benefiting us.
Great. Thank you.
Thank you. Our last question is from Alex Kramm with UBS. You may begin.
Hey, just snuck in here for a follow-up. NFX, I think, Adena, you mentioned NFX at the beginning as continue to gain open interest, building open interest, etcetera. When I look at volumes, I feel like the growth over the last three quarters has stalled a little bit. And if you look at your competitors, I mean, I think their comps are looking a lot better. Obviously, different businesses.
But just wondering like you're very excited about Open Interest. It's not translating to volume, like where's the differential coming from, I guess?
Sure. So I think that when we look at how our clients are using NFX, they're using it for they're using it definitely to trade on it and they're using it to clear. And sometimes they can do internalized prints that they then just send into the system to clear and that then drives the open interest, but they may not actually be using the what we call the club or the limit order book to trade. And so but both of those things are beneficial to the health of the platform, the fact that they're willing to put their risk into the clearinghouse on long duration related contracts, we feel is very, very healthy and encouraging. And I think that that helps us to generally drive client demand to get connected and to be a part of NFX.
In terms of the volumes on the system, we have seen, we've been introducing fees and we'd introduced fees at the beginning of May. And as the market makers and other participants have been getting used to those fees, we have seen some moderation of volumes. But honestly, we continue to see new participants joining. We've had a couple of new firms joining as partners in the last couple of weeks. And definitely there still is very strong demand to continue to develop the platform and bring on new products and new activities.
So we see this as maybe a little bit of a plateauing just based on them getting used to a new fee base, but we're pretty we're still very encouraged and optimistic about the business.
Sounds good. Thank you.
Okay. Thank you. This concludes the Q and A session. I would now like to turn the conference back over to Adena Friedman for closing remarks.
Thank you very much. Well, thank you very much for your questions. And we are as I mentioned before, we are very proud of the business. We're proud of all of the opportunities we have to continue to grow the business and engage with our clients. And we hope that we were able to convey that today.
So thank you very much.
Ladies and gentlemen, this concludes today's conference.
Thank you
for your participation and have a wonderful day.