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. 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. Thank you for joining us today to discuss Nasdaq's Q2 2019 financial results. On the line are Adena Friedman, our CEO Michael Ptasznik, our CFO Ed Knight, our Chief Legal and Policy Officer and other members of the management team. Also, prepared remarks after prepared remarks, we'll open up to Q and A. The press release and presentation are on our website, and 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 will now turn the call over to Adena.
Thank you, Ed. Good morning, everyone, and thank you for joining us. My remarks today will focus on the following areas. First, we will review the company's Q2 2019 results. 2nd, 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 Q2 of 2019. We delivered net revenues of $623,000,000 including 4% organic revenue growth. After taking into consideration the net impact 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 Q2 of 2019 and in the 1st 6 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 level segment specific highlights from the Q2.
Our Market Technologies segment delivered strong growth in the 2nd quarter with net revenue of $79,000,000 a 20 percent increase in the same period in 2018, including both organic expansion and the impact of the Cinnober acquisition. Results reflected an increase in both the size and the number of software delivery as well as continued strong growth in our SaaS surveillance solution. New order intake during the quarter was $46,000,000 including new customers like Caja de Valores, Argentina's central securities depository, 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 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 U.
K.-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 4th U. S. Broker dealer to implement our trading platform as a hosted solution. This quarter, we began disclosing a new metric for market technology, annualized recurring revenue or ARR, intended to help the investing community better understand the growth of the recurring software support, licensing and SaaS subscription revenues, which make up the majority of the Market Tech revenue.
In the Q2 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 $194,000,000 up $19,000,000 or 11 percent 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 equity U. S. Equity market pricing available to millions of users worldwide. Yahoo Finance launched a new premium offering with 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 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 new quarterly records 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 $203,000,000,000 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 expectations. Moving to our foundational businesses, our Market Services segment delivered $227,000,000 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 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 our larger FIC 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 BC 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 Q2, we continued 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 $11,400,000,000 in total proceeds. Of the 81 new listings that we welcome to the Nasdaq stock market during the quarter, 60 were IPOs, led by Tradeweb Markets, Zoom Video Communications, Change Healthcare, Beyond Meat and CrowdStrike. Meanwhile, our Nordic and Baltic exchanges added 19 new listings for the quarter and our total Nordic listed 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 twenty nineteen, private market facilitated 35 private company sponsored secondary transactions, a new record high for the period, with total transaction value of $2,300,000,000 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 MiFID II 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 and early results from our acquisitions of eVestment, Quandl and Cinnober.
EVestment has continued 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 in 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 eVestment have begun to benefit from sales opportunities open through other Nasdaq relationships. Yahoo! Agreement to deliver analytics for its premium offering is one such example. With the Cinnober acquisition, we have 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 3 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 2,008. I speak for everyone at Nasdaq when I say that we view Tom's leadership as instrumental in building the U.
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. Treasuries business as well as have a more broadly contribute as an executive advisor until the end of the year. We extend our sincere gratitude for his numerous contributions to our success. We also announced a new management structure for Market Services with distinct responsibilities for each of the North American and the European marketplaces.
Specifically, Bjorn Sibbern has been appointed Executive Vice President of European Market Services, where he'll be responsible for all of our European marketplaces as well as associated market data and connectivity. And Tal Cohen has been elevated to Executive Vice President of North American Market Services and will be responsible for driving the strategy and success of our trading businesses across all of equities, equity options, commodities and trade management services in the U. S. And Canada and will add U. S.
Treasuries to its 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 Q2, outlines the steps regulators and exchanges together with the broader investing community should take to modernize market structure. As a very first step of the total markets initiative, this quarter we announced a detailed proposal to reform the professional and non professional data user 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 revitalize 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 2nd 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 Q2 financial details.
Thank you, Adena. 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 2nd quarter revenue performance as shown on Page 3 of the presentation and organic revenue growth on Pages 414. The $8,000,000 increase in reported net revenue of $623,000,000 was a net result of organic growth of $24,000,000 or 4%, including 8% organic growth in the non trading segments and an $11,000,000 positive impact from the inclusion of revenues from the acquisitions of Cinnober and Quando. This was partially offset by a $17,000,000 negative impact from the April 2018 divestiture of the Public Relations Solutions and Media Digital Media Services businesses and the divestiture of BWise in March of 2019 and a $10,000,000 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 $19,000,000 or 11 percent increase in revenue. This was driven by $19,000,000 or 11 percent organic growth, $7,000,000 of which was the result of the investments purchase price adjustment on deferred revenues in Q2 2018. Excluding this adjustment, organic growth would have been $12,000,000 or 7%, primarily due to continued organic development of investment data analytics as well as index revenues. The operating margin was down 1 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 14, increased $13,000,000 or 20%, including organic growth of $6,000,000 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 Adena 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 AIR figures. In the Q2, the operating margin for Market Technology was 10% versus 14% in the year ago quarter. However, if you look past some of the quarter to quarter variation in this business, in the 1st 6 months of 2019, operating margin for Market Technology was 10% versus 9% in the first half of twenty eighteen.
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 multiyear implementation of the NASDAQ Financial Framework. We do continue to expect margin expansion in 2020 beyond as we progress the NFF deployment and customer adoption of the more scalable service model as well as benefit from the scale and synergies of a more fully integrated Cinnober. Turning to Corporate Services on Pages 7 and 14, revenues increased $3,000,000 or 3%. Organic revenue growth was $5,000,000 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 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 $10,000,000 or 4% decrease. Organic revenues declined $6,000,000 or 3%, and we experienced a negative impact from unfavorable changes in foreign exchange of $4,000,000 Our larger U. S.
And European cash equities and equity options businesses saw relatively stable year on year organic trends, while our smaller FICC franchise, as Adena mentioned earlier, saw organic declines in the period. The operating margin in Market Services was resilient in the period. It declined only 1 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 $3,000,000 to $323,000,000 The change reflects a $7,000,000 or 2 percent organic increase, more than offset by an $8,000,000 favorable impact from changes in foreign exchange rates and a $2,000,000 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 $1,295,000,000 to $1,320,000,000 Embedded in the updated 2019 expense guidance is a moderate pickup in expenses in the second half of twenty nineteen. While last quarter, we suggested quarterly expenses would likely see a sequential step up beginning in the second quarter, a combination of FX impacts, earlier realization of acquisition synergies and timing of recognition of certain expenses temporarily offset the expected increase and resulted in 2nd quarter expenses coming in line with the Q1. 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 Q3 of each year due in part to non U.
S. Vacation accruals, we've now changed our accounting methodology around these accruals to eliminate seasonality in our vacation expense recognition timing. Moving to operating profit and margins. Non GAAP operating income increased $11,000,000 in the Q2 of 2019, a 4% increase from the Q2 of 2018 and the non GAAP operating margin was 48%, up 1 percentage point from the prior year period. Net interest expense was $28,000,000 in the Q2 of 2019, a decrease of $7,000,000 versus the prior year period due to lower debt balances and refinancing the 5.55 percent, US600 million dollars denominated bond with a new 1.75 percent, €600,000,000 bond.
The non GAAP effective tax rate for the Q2 2019 was 26% and for 2019, the non GAAP tax rate is expected to be between 26% 27%. Non GAAP net income attributable to NASDAQ for Q2 of 2019 was $203,000,000 or $1.22 per diluted share compared to 194,000,000 dollars or $1.16 per diluted share in the prior year period, representing a 5% increase. Turning to capital on Slide 11. Debt decreased by $78,000,000 versus Q1 2019, primarily due to paying down commercial paper, net issuances and payment on debt obligations, partially offset by an increase in euro bond book values caused by changes in FX rates. Our total debt to EBITDA ratio ended the period at 2.7 times, down from 2.8 times for the Q1 of 2019, fulfilling our capital plans objectives to delever to the mid-two times lane two times leverage ratio by mid-twenty 19.
During the Q2 of 2019, the company returned $50,000,000 to shareholders through its share repurchase program and paid a dividend in the aggregate amount of $77,000,000 In the 1st 6 months of 2019, we returned $200,000,000 to shareholders through dividends and our share repurchase program. And with that, I'll turn it back to the operator for the Q and A.
Thank Our first question comes from Richard Repetto with Sandler O'Neill. Your line is now open.
Yes. Hi, Adena. Hi, Michael. I guess first one quick thing, just wanted to shout out to Tom Whitman. You forgot to mention Adena, 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 $247,000,000 and it covers the vast majority I think you said vast majority of the revenue, then like the $247,000,000 if you look at most estimates, the $320,000,000 expectations for this year and higher than that for next year. So what's the gap between the $247,000,000 recurring revenue ARR and sort of the whatever $320,000,000 to $350,000,000 estimates annualized for the next couple of years?
Yes. So the 70 it represents about 78% of the market technology revenues in the Q2. 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, then also the SaaS revenue that we receive from the smarts business is another example.
In our ongoing license.
In the ongoing license fees, yes.
So in a build period, Rich, we have certain delivery fees that we charge, but that also is, 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% is, as you said, pretty we would say vast majority, yes.
Okay, that helps. Thank you. And my follow-up, semi related, is on a regulatory question. And 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.
Now it looks like things are quiet and we've given a lot of attention to U. S. Equities, but it looked like Chairman Clayton 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 the sort of the litigation things have everything on pause. Has there been any movement or do you would you say that the relationship say with the SEC and the trading and markets head has been more open recently?
Or how would you characterize 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. So we 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 the 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 road map or blueprint does help frame out some of the larger market structure issues that we are hopeful that the SEC will start to tackle. And it also, I think, puts some of the initiatives that they've been seeking to do into a broader context.
And then we've also been engaging very extensively with our customers and with the industry in general to understand their point of view around some of the key elements of market structure that we outlined in the total market. So the dialogue has definitely picked up. I think that there has been much more of a back and forth in terms of really trying to understand each other. But at the same time, we will continue to manage these debates as we see fit in terms of making sure that the markets are as accessible and successful as possible for investors. And that's our number one goal.
Great. Thanks, Adena.
Thank you. And our next question comes from Michael Carrier with Bank of America. Your line is now open.
Hi, good morning and thanks for taking the question.
Hi, Mike.
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 $85,000,000 to $95,000,000 in the R and D spend, can you maybe provide an update on what's in there, maybe some of the details, which ones you've seen some revenue traction associated with the initiatives, which one there's still losses and maybe like an average time of the initiatives that have been in place. Just kind of an update on some of the new things that are taking place.
Sure. Yes. So it is a combination of things and I kind of rattled them off quickly in my script. So you've got the investment we're making in the Nasdaq Financial Framework included in there. That's both 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 a pickup in 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 trading solutions. So that's picking up steam, but that area of investment is also trading solution. So that's picking up steam, but that area of investment is also in there. The 4th area is in the buy side surveillance. So that one is in very early days.
We did do a very small acquisition to supplement that and that 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 4 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. And that is also an early days that we've said that in terms of really frankly understanding the overall demand for an alternative data, continuing to find new supply and then finding demand for that data across other data streams that they've created. So we feel good about the 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 so that's why we'll always give you that R and D numbers 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 JPMorgan. Your line is now open.
Hi, good morning. Good morning. Precidian 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 Batch to sort of win listings and trading of new ETFs as they're launched? And are you taking any special steps to cater to these firms that are listing these new products?
Sure. No problem. So we actually have we were 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 it's 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 an additional thoughts on the pipeline into the sell side on Market Tech. You mentioned, I think the surveillance win this last quarter and then the recent Ford broker dealer, but just how is 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, that's we've done, I think, a great job of working with broker dealers to expand 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 their fixed income and then they move to commodities, etcetera. We also have global penetration in that business and we have a global sales force that supports it. So we continue 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 free technology, that we're at the very beginning of that strategy. And that's why that effort sits within our R and 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 we 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 4th client that just signed up.
Great. 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 last 4 quarters of the growth rate?
Sure. I think that we know that year over year, it was at a growth rate year over year Q2 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 Kramm with UBS. Your line is now open.
Yes. 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, you look at the year over year and maybe this is splitting hairs a little bit, but the percentage of recurring is actually down year over year, which doesn't seem consistent with the story you want to be telling in terms of more SaaS based growth.
So maybe you could just flush it out a little bit. I know the numbers are small, but if you think about it over time, do you think this recurring percentage is going to be approaching 90%, 95% or is this kind of the range it's going to be in?
So I think that 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, etcetera. So there you will see fluctuations. Over 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 of 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 we've been that people have asked us with respect to what is that recurring revenue base of the business going forward it's the same what percentage of the business is reflective of recurring revenue as opposed to these more one offs or change request type of revenue. So I think this is the new measure for us that we've been 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 change more towards a platform as a service or a SaaS type model. And the fact that it does represent, as we've 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 decline, Deutsche Bank, announced some restructuring. So just wondering how you view that as a service provider.
I think historically you have said on the market data side that banks are actually the largest payer of market data and related services. Also you struck a deal with them, I think it was 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?
Sure. Well, I do think that the first thing I would say is it's pretty early days in understanding the impact that the changes in Deutsche Bank is going to have in general within in the U. S. In terms of the way that they trade, they tend to trade on behalf of customers. So that information that trading will either be transferred to another firm if there is ultimately an acquisition of the business from Deutsche Banker, we'll probably move over to other clients I mean, other service providers.
I think in terms of some of the recurring revenues or kind of the other parts of our business, we're still working actually pretty closely with Deutsche Bank to understand how they're going to continue to take certain services, how they might transition their services to other service providers. And so it's very early days for us, but we are working very closely with them to understand the overall impact. I also would say we have, 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 Fannon 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 bit more transparency into some of the drivers of our business with ARR. I also as Michael has been saying, 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 going to be a step function from 1 quarter to the next. It's going to 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, call it, 80 ish percent of Market Tech revenues, should we think of that growth being at the upper end of the kind of 8% to 11% target that you set out for the segment overall? And then maybe if you guys could help us understand the
underlying customer base of that bucket today by
revenue contribution maybe between that would be helpful just to provide some more context behind
it. Thanks.
So I think the way to think about the overall revenue growth, it's the overall revenue growth for the businesses in that 8% to 11% target for the 3 to 5 year period. And that's the way to think about it. And as I said, the mix 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, etcetera. 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 annualized 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 more of 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?
Yes, it does. And just like the contributions by bucket or no, what that sort of looks like today by sell side exchange operators?
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're not we don't provide that level of disclosure.
Got it. And let's remember the part of this is the change from what we used to have, which was that backlog, which at one point in time when the business is 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 of nature of the business going
forward.
Got it. Thanks.
Thank you. And our next question comes from Chris Allen with Compass Point. Your line is now open.
Good morning, everyone. Thanks for taking the question. I was wondering if you can give a little bit more color just on the impact on the change in accounting for vacation accrual, just how much that's been historically? And just from an R and 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?
On the first question the first part of the question, it's I'd say approximately $3,000,000 or so in for Q3 would have been the impact.
And then on the second question, Chris, I'd say we've been operating under a relatively steady level of investment and we try to make sure we're we review those investments every 6 months in a very deep dive and we continue to look at how we're going to potentially ramp up certain areas or moderate certain areas to try to make sure that we stay relatively consistent. But we do want to give ourselves the flexibility if we see a great opportunity to continue to invest and grow certain investments if we
need to.
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. Hey. I wanted to
ask about the Listing Services business.
During the quarter, we saw the MIC make some changes into some of the smaller companies, particularly maybe biotech stocks, 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 how you 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 that continued. If you look at the first half of the year, that number is consistent. I think that as a result, we're always we are very competitive, and we are always looking for ways that we can compete better and listings that are maybe traditionally going to the other guys and they are obviously always looking at ways they can compete as well. We do feel like we provide a pretty unique value proposition for healthcare companies in particular because of the Nasdaq Biotech Index in addition to some very deep IR intelligence capabilities we have to support that segment.
And those types of things in addition to the great marketing and the great market itself are the reasons why we think that we will continue to be the home to the vast, vast majority of healthcare companies. In general, the listing environment continues to be very robust as we look at the pipeline of companies that have filed S-1s, as well as our success in attracting those pipeline of companies to NASDAQ. And we definitely see a pretty I mean, at least it's always subject to market conditions, things could change. But at least as of right now, I would say we see a very robust calendar going through the fall.
Okay. On a related basis, I think yesterday you guys had an announcement out about a record first half for NASDAQ Private Markets. So I was hoping I think we're kind of 6 years in now on that one. So maybe 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 an 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 the data room, made more information available, etcetera.
However, what we're seeing today is some continued evolution. Number 1, 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 new 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 maybe 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. And we announced our partnership with I Capital a few months ago to allow for broker dealer 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 and 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. Maybe that the Oslo deal is behind you, just wondering if we can get an update on the M and A environment. In the public markets, we're seeing continued increase in asset valuations within the sector. Just wondering if you're seeing similarly frothy valuations in the private markets. And then if you could just give us an update on M and 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. Yes, 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 I think we would have been able to provide enormous amount of benefit to our clients in the Nordics. So for that reason, we are disappointed.
I think that, however, it does 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 Cinnober deal or expand our capabilities in certain areas that we have strategic focus and that would be something like Quandl or eVestment. And so we will continue to evaluate those types of opportunities.
In terms of you said scale opportunities, I think that we 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 we're not hunting for those. We're finding those occasionally as we manage through an organic strategy.
Great. Thank you.
Thank you. 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 percent Eurobond seems expensive given where interest rates are in Europe. So are there additional opportunities for you to potentially refinance debt early given how low interest rates are?
Yes. So from 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 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 many 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, etcetera.
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 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 have we feel pretty good about the maturity curve that we have right now in front of us as we get as we start to think about our 2021s and the other opportunities, we'll assess those in future periods.
But there is no media 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 of 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 hitting they're facing the idea of electronification for the first time or they're starting to see an evolution into electronic more electronic trading and there are fewer platforms out there that really serve that function.
In the U. S. Treasuries 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 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 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 club 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 the 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 so 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 it's 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. I would now like to turn the call back over to Adena 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.