Good morning. Welcome to S&P Global's third quarter 2016 earnings conference call. I'd like to inform you that this call is being recorded for broadcast. All participants are in a listen-only mode. We will open the conference to questions and answers after the presentation, and instructions will follow at that time. To access the webcast and slides, go to investor.spglobal.com. That is investor.spglobal.com, and click on the link for the quarterly earnings webcast. If you need any additional technical assistance, please press star zero and I will assist you momentarily. I'd now like to introduce Mr. Chip Merritt, Vice President of Investor Relations for S&P Global. Sir, you may begin.
Thank you. Good morning. We apologize for the technical difficulties. We'll try this again. Thanks for joining us for S&P Global's earnings call. Presenting on this morning's call are Doug Peterson, President and CEO, and Rob MacKay, Interim Chief Financial Officer. This morning, we issued a news release with our third quarter 2016 results. If you need a copy of the release and financial schedules, they can be downloaded at investor.spglobal.com. In today's earnings release and during the conference call, we're providing adjusted financial information. This information is provided to enable investors to make meaningful comparison of the corporation's operating performance between periods and to view the corporation's business from the same perspective as management. The earnings release contains exhibits that reconcile the difference between the non-GAAP measures and the comparable financial measures calculated in accordance with US GAAP.
Before we begin, I need to provide certain cautionary remarks about forward-looking statements. Except for historical information, the matters discussed in the teleconference may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates, and descriptions of future events. Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements. In this regard, we direct listeners to the cautionary statements contained in our Forms 10-Ks, 10-Qs, and other periodic reports filed with the US Securities and Exchange Commission. I would also like to call your attention to European regulation.
Any investor who has or expects to obtain ownership of 5% or more of S&P Global should give me a call to better understand the impact of this legislation on the investor and potentially the company. We're aware that we do have some media representatives with us on the call. However, this call is intended for investors, and we would ask that questions from the media be directed to Jason Feuchtwanger at 212-438-1247. At this time, I would like to turn the call over to Doug Peterson. Doug?
Good morning. Thank you, Chip. Welcome, everyone, to the call. This morning, Rob MacKay, our Interim Chief Financial Officer, has joined us to cover the financial portion of our third quarter results, and you'll hear from him shortly. Let me begin with the highlights. We completed several business divestitures with the sales of J.D. Power, our two pricing businesses, SPSE and CMA, and the equity research business. This leaves us with a more focused, interrelated portfolio of market-leading businesses. Two tuck-in acquisitions were added during the quarter, PIRA Energy Group within Platts and Trucost within S&P Dow Jones Indices. Several key management additions were announced. We completed the three-year, $140 million cost reduction initiative that was announced during our Investor Day in 2014. We demonstrated continued revenue growth and productivity progress, which led to an adjusted profit margin improvement of 320 basis points, with every segment delivering organic revenue growth.
As a result of our share repurchases, we reduced average diluted shares outstanding by 3% year-over-year. Our bottom-line result was excellent, with a 17% increase in adjusted diluted EPS over the third quarter last year. We delivered year-to-date free cash flow of over $1 billion, and we increased our 2016 adjusted diluted EPS guidance to a range of $5.15-$5.25, which Rob will cover shortly. Before we turn to the results, I want to note three new appointees to our management team. Steve Kemps joined us from our Quanta Services as Executive Vice President and General Counsel. Martin Fraenkel has been promoted to President, S&P Global Platts. Martin previously led the global editorial team at Platts. Ewout Steenbergen will join us from Voya Financial as Executive Vice President and Chief Financial Officer, effective November 14th.
I'm pleased we avoided any disruptions to our businesses as we put in place an excellent leadership team. Let's take a closer look at the third quarter results. Reported revenue grew 9%, organic revenue on a constant currency basis increased 8%. In the third quarter, Forex reduced revenue by $5 million, yet contributed approximately $8 million to adjusted operating profit and approximately 60 basis points to the adjusted operating profit margin. Most of this benefit was realized in the Platts segment, which benefited from a weaker British pound. The company delivered a 320-basis point improvement in adjusted operating profit margin. Together, revenue growth, margin improvement, and share repurchases led to a 17% increase in adjusted diluted EPS to $1.43 per share. In the third quarter, every division recorded organic top-line growth.
Profit growth, however, was most pronounced at S&P Global Ratings and S&P Global Market Intelligence, with adjusted operating profit margin gains of 330 and 480 basis points, respectively. Let me turn to the businesses. I'll start with S&P Global Ratings. Despite initial uncertainty from the Brexit vote, third quarter issuance was strong, particularly in non-financial global corporates and U.S. public finance markets. This resulted in a 9% increase in revenue with a 1% unfavorable impact from Forex. Adjusted operating profit increased 17% due to strong revenue growth and cost containment, particularly through reduced legal and outside services spending. The adjusted operating margin increased 330 basis points to 51.3%. Forex had a negligible impact on adjusted operating profit. Non-transaction revenue was unchanged with growth in surveillance fees offset by lower rating evaluation services fees.
Transaction revenue increased 23% as a result of improved contract terms, growth in debt issuance, and a 21% increase in bank loan ratings revenue. I also want to note that as we work to re-enter the U.S. conduit/fusion CMBS market, there were 13 transactions in the quarter, and we re-rated two of them. If we look more closely at the largest markets, third quarter issuance in the U.S. was up 7%, with investment grade decreasing 3%, high yield soaring 49%, public finance up 16%, and structured finance increasing 11% due to a 44% increase in ABS transactions, driven especially by credit card ABS. In Europe, issuance increased 14%, with investment grade climbing 42%, driven by large M&A transactions, high yield rising 37%, and structured finance decreasing 46%, primarily due to a 59% decline in covered bonds. In Asia, issuance more than doubled.
Excluding domestic China issuance, which we do not rate, Asia issuance increased 64%. Investment grade surged 166%. Excluding domestic China, it increased 67%. Japan was the country with the largest increase due to the Bank of Japan's negative interest rate policy. Finally, structured finance increased 2%. Two weeks ago, S&P Global Ratings released its latest global issuance forecast. In the three months since the Brexit vote, debt markets have reacted very positively, with unexpected levels of new issuance, especially in the non-financial corporate financial sectors and international public finance sectors. We now expect global issuance to increase 24% in 2016. This compares to the July forecast issued on the heels of the Brexit vote, which anticipated a decline of approximately 4%. If we remove sovereign issuance from the forecast, however, we anticipate issuance 2016 to increase approximately 10%.
Looking ahead to 2017, we expect an overall increase in global issuance of 5%, driven by the ECB extending its quantitative easing policies longer than currently anticipated and further growth out of China. Excluding sovereign issuance, we anticipate issuance 2017 to increase 3%-6%. Let me turn to S&P Global Market Intelligence. In the third quarter, revenue increased 21%, primarily due to the addition of SNL. Excluding SNL, organic revenue growth was 7%. Adjusted operating profit increased 43%, and the adjusted operating margin advanced 480 basis points to 31.4%. This improvement was due to progress on SNL integration synergies, operating leverage from strong organic revenue growth, and continued efficiency gains. Forex had a negligible impact on revenue and adjusted operating profit in the quarter. As we have stated before, in 2016, successful integration of SNL and delivery of synergies is a top priority for the company.
We've made tremendous progress, as evidenced in the margin improvement, and remain committed to achieving our integration synergy targets and deliver on our expected return on investment in SNL. Let me add a bit more color on third quarter revenue growth in Market Intelligence. In financial data and analytics, S&P Capital IQ Desktop and Enterprise Solutions revenue increased 6%, with high single-digit growth in S&P Capital IQ Desktop. In addition, on a comparable basis, which includes revenue prior to our acquisition, SNL revenue increased 12% over the third quarter 2015. SNL and S&P Capital IQ Desktop experienced year-over-year user percentage growth in the low teens and high single digit, respectively. Risk services revenue increased 10%, led by double-digit RatingsXpress growth. In the smallest category, research and advisory, revenue decreased 8% due to declines in equity research.
With the sale of equity research, the only remaining asset in this category is investment advisory. In the future, we will report investment advisory as part of financial data and analytics. Let's turn to S&P Dow Jones Indices. Revenue increased 6%, adjusted operating profit increased 1%, and adjusted operating margin declined 320 basis points to 66.2%. This is a sizable decline as the third quarter of 2015 benefited from a sharp increase in exchange-traded derivative volume that did not repeat this quarter. I also want to point out that the adjusted margin this quarter is comparable to the 66% figure we reported last quarter. During the third quarter, revenue increased primarily due to mutual funds and ETF license fees and steady data license growth. Operating costs increased to support revenue growth and business initiatives as well as increased costs for purchased data.
One notable example is connectivity expenses, as we recently started up a third data center to provide additional backup capabilities. Often on our earnings calls, I cite new products that we have launched. Last quarter, I highlighted the launch of the JPX S&P CapEx and Human Capital Index in Japan. The new ETF that was launched based on this index has turned out to be one of the fastest-growing new ETFs this year. It already has over $700 million in AUM. Asset-linked fee revenue increased 10% during the quarter. The exchange-traded products industry recorded massive inflows of $126 billion in the third quarter, almost triple the inflows in the second quarter. Of the $126 billion of industry inflows, $58 went into U.S. equity products with S&P Dow Jones Indices capturing about 60% of those inflows.
Average ETF AUM associated with our indices increased 15% year-over-year, with inflows of 10% and the remainder from market appreciation. The quarter-ending ETF AUM associated with our indices reached a new record of $914 billion. Transaction revenue from exchange-traded derivatives decreased primarily due to a 14% decrease in average daily volume of products based on our indices. The E-mini S&P 500 futures, Cboe Volatility Index options and futures VIX, and CME equity complex contracts all decreased 10%-25% compared to the volatile third quarter of 2015. Subscription revenue, which consists primarily of data subscriptions and custom indices, increased due to growth in data subscription revenue and the timing of subscription revenue. During the quarter, the company launched 161 new indices, and our partners launched 11 new ETFs based on our indices. Now on to the S&P Global Platts segment, which included J.D.
Power results for July and August. Because this quarter has one less month of J.D. Power revenue than the third quarter of 2015, segment revenue declined 8%. Segment organic revenue, though, increased 4%. Adjusted operating profit increased 4%, reflecting one less month of J.D. Power, and adjusted operating margin increased 170 basis points to 40.9%. Organic revenue increased 4% due to growth in subscriptions, partially offset by decline in Global Trading Services. The core subscription business delivered mid-single-digit revenue growth led by the petroleum sector. The Global Trading Services double-digit revenue decreases primarily due to the timing of license fees. Gas and power revenue is flat with modest gains in subscriptions offset by lower GTS service revenue. Metals, agriculture, and petrochemicals revenue declined low single digit primarily due to lower revenue from SGX-listed TSI iron ore contracts.
We continue to expect modest growth in the remainder of 2016 as many customers continue to face pressure from low oil prices. On the business development front, we are building a world-class capability in energy supply and demand information. The acquisition of PIRA Energy Group and the added capabilities of commodity flow and rig data, which we acquired earlier this year. PIRA is a leader in the worldwide energy market analysis and a great complement to our existing benchmarks. PIRA offers research and analysis in oil, gas, power, natural gas liquids, biofuels, coal, environmental, and agricultural markets. They also provide data tools to help customers analyze prices, supply, demand, trade flows, product balances, and refining activities. I'm pleased that Executive Chairman and Founder of PIRA, Dr. Gary Ross, has joined our team and is already generating new product ideas.
In addition, Platts worked with CME to launch a new futures contract. Alumina FOB Australia futures will be a 100-metric-ton contract and will be financially settled each month against the daily price index published for Alumina FOB Australia by S&P Global Platts. Alumina is aluminum oxide, a white granular material, a little finer than table salt, that's transformed into aluminum metal in the smelting process. This new futures contract is an addition to the three existing CME aluminum futures contracts based on Platts benchmarks. Finally, Brazil's Cetip, Latin America's largest depository of private fixed income securities and Brazil's largest private asset clearinghouse, is going to make Platts benchmark price assessments available as settlement mechanisms for the development of domestic derivative contracts. Historically, Brazil's only hedging tools tend to be similar, but not necessarily matching commodity indices, or they were international rather than domestic contracts.
Investors are increasingly seeking new insights into environmental, social, and governance factors. Both our index and ratings businesses are taking action to address these needs. First, our S&P Dow Jones Indices acquired Trucost. Trucost has become a leading brand in the ESG information sector. They provide the gold standard carbon and natural capital investment metrics that financial institutions need to assess the risks and opportunities presented by climate change and capitalize on the transition to a low carbon, resource efficient economy. The complementary nature of our two businesses allow us to combine Trucost industry leading environmental impact data with our world class benchmarking capabilities to develop new ESG solutions. Second, Ratings is developing a green bond evaluation tool to provide an analysis and estimate of the environmental impact of projects financed by a bond's proceeds.
Our proposed approach would address mitigation, such as reducing negative environmental impact and adaptation to look at resiliency to the impact of climate change. The output of the green bond evaluation would include scores from the categories listed here, amalgamated into an overall financial final green bond evaluation. I'm encouraged by the innovative thinking underway in the company to help tackle increased ESG needs of investors. Before I conclude, I need to point out a reporting change. Beginning in the fourth quarter, we'll report our results under three segments, Ratings, Indices, and Market & Commodities Intelligence. We are doing this to be consistent with how we manage our businesses. In summary, we completed sales of J.D. Power, two pricing businesses in equity research. We had consistent results with all segments delivering organic revenue growth. Bond issuance was robust in the third quarter despite the Brexit vote.
Our focus on revenue growth and productivity performance led to continued margin improvements. Integration of SNL is progressing well and remains a top priority in 2016. Our adjusted diluted EPS guidance is increased to a range of $5.15-$5.25, and includes dilution from the sale of J.D. Power, the pricing businesses, and equity research. With that, let me turn the call over to Rob.
Thank you, Doug, and good morning to everybody on the call. This morning I will recap key financial results, discuss the impact from adjustments to earnings. I will update you on the balance sheet, free cash flow, and return of capital. I'll discuss the completion of our $140 million productivity program, the financial impact of our recent divestitures, and update our 2016 guidance. Before wrapping up, I will explain the new segment reporting that will be effective beginning in the fourth quarter and the data we will provide. Let's start with the consolidated third quarter income statement. There are just a couple of items I want to highlight. As you've just heard from Doug, all of our segments delivered top line organic growth. Collectively, that led to an increase in reported revenue of 9%, with organic growth on a constant currency basis of 8%.
The difference is largely due to the SNL acquisition. Foreign exchange rates reduced revenue by $5 million and had a favorable impact of $8 million on operating profit. Our adjusted operating margin increased 320 basis points. Approximately 60 basis points was due to Forex. The balance was primarily due to outstanding top line growth and margin improvement at S&P Global Ratings and S&P Global Market Intelligence. The adjusted tax rate in the third quarter was 31.3%, an increase of 220 basis points over the third quarter of 2015 due to one time benefits recorded in the prior period. Share repurchases over the past year have resulted in a 3% decline in average diluted shares outstanding. Taken together, top line growth, margin improvement, and share count reduction combined to deliver a 17% increase in adjusted diluted earnings per share.
Let me turn to adjustments to earnings to help you better assess the underlying performance of the business. Pre-tax adjustments to earnings totaled to a gain of $732 million in the quarter. The largest item is a gain on the sale of J.D. Power. The next item is a net gain from insurance proceed recoveries. The last item includes net acquisition and disposition related costs, primarily related to the sale of our SPSE and CMA pricing businesses to ICE and J.D. Power to the XIO Group. As we discussed earlier this year, our adjusted results now exclude deal related amortization, which totaled $23 million during the quarter. All adjustments are detailed on exhibit five of today's earnings release. Let's turn to the balance sheet.
At the end of the quarter, we had $2.4 billion of cash and cash equivalents, of which approximately $1.6 billion was held outside of the United States. We also had $3.6 billion of long-term debt and $400 million of short-term debt. The short-term debt is the value of the 2017 notes that were redeemed in October. One other item that I want to point out is that the cash proceeds from the sale of J.D. Power were recorded in the quarter. The tax on the gain will not be paid until later in the fourth quarter. Free cash flow during the first nine months was approximately $1 billion. To get a better sense of our underlying cash generation from operations, it is important to exclude the after-tax impact of legal and regulatory settlements and related insurance recoveries.
On that basis, free cash flow from the first nine months was approximately $1.1 billion. I will review our return of capital. During the quarter, the company initiated a $750 million accelerated share repurchase plan. This resulted in the repurchase of 5.3 million shares during the quarter. The final share count reduction will not be determined until the ASR is completed. The company paid a dividend of $95 million during the quarter. Year to date, the company has returned $1.4 billion to shareholders through share repurchases and dividends. In March of 2014, we initiated a productivity target of greater than $100 million in cost reduction initiatives during 2014 to 2016. We subsequently increased the target to $140 million. Today, we are pleased to announce the successful completion of this program. We delivered slightly more than the $140 million in savings.
If you look at the chart on the right, you can see that our adjusted operating margin has increased by 900 basis points since 2013. The successful achievement of this $140 million productivity target was a key contributor to this improvement. While we are pleased with our recent divestitures, we want to make sure all of you understand the loss of revenue and profitability associated with these transactions. J.D. Power, the SPSE and CMA pricing businesses, and Equity Research combined to generate $310 million of revenue, $108 million of pro forma adjusted EBITDA, and approximately $0.25 of pro forma adjusted diluted EPS to our 2016 results before they were sold. This equates to approximately $100 million of revenue and $0.08 of adjusted diluted EPS that will be foregone each quarter. The recently announced ASR should help offset some of this dilution.
We estimate that the ASR will increase diluted adjusted earnings per share by about $0.10 over the next year. We hope these figures will help you with your modeling of our future results. Based upon our strong results year to date and the expectation that debt issuance remains strong for the remainder of the year, we are increasing our adjusted EPS guidance to a range of $5.15-$5.25. We've also made changes to other components of guidance as follows. Adjusted unallocated expense is reduced to $135 million, due primarily to reduced professional fees. The adjusted operating margin increase over 2015 is now expected to be approximately 200 basis points. This is largely due to the excellent performance in Ratings and Market Intelligence. The adjusted tax rate is increased to approximately 31.5%, primarily due to the timing and size of past year's tax settlements.
Free cash flow, excluding the after-tax legal and regulatory settlements and insurance recoveries, is increased to $1.4 billion due to strong financial results. Overall, this guidance reflects our expectation that 2016 will be another strong year for the company. The final item I want to discuss is the upcoming change to our reporting segments. Beginning in the fourth quarter, S&P Global Market Intelligence and S&P Global Platts will be included in a new segment called Market and Commodities Intelligence. Both fourth quarter results and full year 2016 results of both businesses will be reported in this new segment. To facilitate analysis, in the next few weeks, we will provide a pro forma schedule with results of this new segment for all quarters of 2015 and 2016 as if it had existed this way. This should help investors model 2017 appropriately.
With that, let me turn the call back over to Chip for your questions.
Thanks, Rob. Just a couple of instructions for our phone participants. Please press star one to indicate that you wish to enter the queue to ask a question. To cancel or withdraw your question, simply press star two. I would kindly ask you to limit yourself to two questions. That's two questions per call in order to allow time for other callers during today's Q&A session. If you've been listening through a speakerphone but would now like to ask a question, we ask that you lift your handset prior to pressing star one and remain on the handset until your question has been answered. This will ensure better sound quality. Operator, we'll now take our first question.
Thank you. This question comes from Ashley Serrao from Credit Suisse. You may ask your question.
Good morning. First question is, when you think about the integration of other consolidation of segments of Platts into Market Intelligence, and you consider recent divestitures, does this change the mid 30% margin target discussed on the last call for that segment?
Good morning. Thanks, Ashley. As we were looking at the sale of J.D. Power and then how we were going to manage the company, it was clear that one of the largest opportunities for the Platts business is in the data and analytics space, where we've made recent acquisitions and see a lot of opportunity for growth in that area.
By putting these businesses working together between Market Intelligence and having them both report to Mike Chinn, we feel there's opportunities for us there. We will send out further information in the next couple of weeks about how this segment is going to look when we put these businesses together, but we will be targeting a blended margin that's in the high 30s range.
Okay. Thanks for that. As you continue to shape the company's portfolio and also execute on SNL integration, can you just talk about the kinds of assets you find attractive on the M&A front? Should we just expect more tuck-ins in ESG or in energy? Just also some thoughts on how you're thinking about using M&A as a tool to drive growth in the fixed income indexing arena today.
You should consider that we have a disciplined approach to our capital allocation, which starts with investing in our businesses in organic growth. We're obviously going through our year-end review and our 2017 to 2019 strategic planning process, where we're evaluating ways that we can invest in the business. Investing in organic growth, which could be expansion of regional areas, of new products, of technology investments, et cetera, is very important for us. Following that, obviously, would be ways that we can accelerate growth or expand into new regions or new capabilities through M&A. Obviously finally come our approach to dividends and share repurchase. When it comes to your question around M&A, we would be looking at many ideas and many options coming in. Tuck-ins could be attractive for us.
It's something that we would do business by business, opportunity by opportunity, look at them separately as they arise. We have seen, as you know, tuck-in acquisitions have been a way for us to grow our portfolio of products and Platts. It's given us opportunities with different areas and services in Market Intelligence. Last quarter, we had purchased a very small rating agency in Thailand in our S&P Global Ratings area. We would continue to look selectively at areas, but we need to ensure that they also meet our parameters for growth and returns.
Great. Thank you for taking my questions.
Thank you.
Thank you. The next question comes from Manav Patnaik from Barclays. You may now ask your question.
Yeah. Hi, good morning, gentlemen. The decision to roll Platts into Market Intelligence under Mike, I think that makes sense. I guess what I'm curious about is, I think when we've asked this question over the last couple of months, it seemed like the answer was there would be more work done over the next couple of years. I was just curious if there was any change there. Were you guys being conservative, or is this just tucking Platts away into that division?
Manav, can you clarify the question? What do you mean by more work being done? I'm not sure what the question is.
As in what changed, because I guess my understanding was based on your response that, yes, it could be an opportunity, but it would be two to three years down the road. It sounds like things are changing much quicker than that.
Are you talking about the opportunity for SNL and Platts to work together?
Yes, correct.
Oh, okay.
Okay. Thanks.
Yeah, I didn't understand. Thanks.
Yeah.
Yeah. When we look at the areas that we have the largest opportunities in this company, we try to find areas where there are still large needs in the markets or areas that are unfulfilled. We see that the customers have maybe an avalanche of data they need to make, somehow they can make decisions around it. One of the areas that is a very fragmented business, and there's high growth that relates to data and analytics on the energy markets. SNL has a small energy business, and Platts obviously is a very large energy business. We wanted to accelerate the integration of those two businesses, but more importantly, take advantage of the expertise that we have in the Market Intelligence data machine and how they can work together with Platts on building out that data analytics business.
This was not something that I really felt we should wait. I felt it wasn't something we should wait for a couple of years for, that we needed to move now. The opportunities are going to start cropping up, and we wanted to be positioned to take advantage of them as quickly as possible.
Clearly it took second place after the initial integration. The number one priority for 2016 was getting SNL and Market Intelligence integrated. This is, if you will, kind of step two, but perhaps this come quicker than you might have thought. Okay. All right. May I just ask in the ratings business, your subscription growth was flat. Just some color there. I know you had some tough evaluation services comps maybe, but curious on how we should think about modeling that piece of the business.
That was one of the areas that we had a little bit of a flat growth. It was on the subscription side. Rating evaluation service was not growing during the quarter. That was one of the areas. In addition to how we're managing the business now, looking at the way that we manage our contracts. The non-transaction business was flat at $343 million during the quarter. It usually grows around 3%-4% over time. As you can see, it was offset by a transaction revenue growth of $55 million from $244 to $299. There was a very robust growth in the transaction side. We do continue to value highly this non-transaction side, but the main factor was related to lower rating evaluation services fees.
Got it. Thanks for the color and congrats on the solid quarter.
Thank you.
Thanks, Manav.
Thank you. The next question comes from Toni Kaplan from Morgan Stanley. Your line is now open.
Hi, good morning.
Good morning.
I wanted to ask about the index business. Doug, I think you mentioned the increased cost of purchasing data there. Is that exchange data or data from other providers? Basically, how much of an impact did this have, and are you expecting this trend to continue?
It was a very minor repurchase of external data. It was one of the very small factors, but the main factor which drove the drop in the margin was the lower volumes of exchange traded derivatives on the CBOE and with CME, the VIX and the S&P 500 Mini. That was where the main factor was that drove the margin difference. We also put in place a third data, a backup center to run our data center. There was a small investment in data and operations that we think provides us with a more stable market approach. We wanted to have that redundancy in how we run our operations. It's really a combination of a couple things that expenses rose, but these were kind of step functions. None of these, the cost isn't something that's going to be increasing going forward.
It was a one-time approach.
Okay, terrific. Just thinking about index growth in general, it sort of stepped down a little bit from low double digits in a number of years past to now mid-single. It could be a mix shift, I know, especially just related to what you just mentioned in terms of these derivatives. Just trying to think about longer term, how you think about the growth in the index business. Can you sort of get back to a double-digit range there? What would be sort of the primary drivers that we should be thinking about in terms of long-term index growth?
Yeah. There's obviously a few components to the revenue. One of them we just mentioned has been very strong in the last few quarters here and there, which is the volatility aspect of our revenue, which relates to the exchange traded derivative trading volume that goes through. There's that aspect to it. There's another aspect, which is the core businesses that relate to AUM growth, and AUM growth, which could be a combination of the fees that we get for the actual underlying components of a fund or an ETF or the actual growth in AUMs over time. That's a very important factor for us. We have our data feeds and data business. Generally, we're seeing growth in all of those.
I think that the drop of the exchange traded derivative income is what impacted this quarter and also had very positively impacted the third quarter last year. That's a little bit about what you see there and the difference between last year and this year. Let me just give you a couple of data points about the growth in the AUMs. If I go way back, I go back almost five, six years ago. If you go back into the end of 2013, the overall AUMs was only $585 billion. It's now $914 billion as the end of this quarter. And through that time, there's been a combination of factors that have driven that growth. One is the increase in market value. As the market itself and the indices themselves go up, that is a positive for our revenue.
The other is flows into the funds. You saw that last week in The Wall Street Journal, there was a series the entire week about the shifting needs of investors and the changes in the investment management industry, which have been benefiting firms like ours that are in the passive and index field. We're not giving you any specific projections today. We'll provide guidance for 2017 at our next earnings call, we do continue to see the trends for this industry to be very positive.
Thanks a lot.
Thank you. The next question comes from Alex Kramm from UBS. Your line is now open.
Yeah. Hey, good morning, everyone. Just wanted to get back to the guidance, which I believe nobody's asked about. When I look at the midpoint here at $1.12 for the fourth quarter, it doesn't really fit with a lot of the things that you've said. For example, you expect the debt issuance environment to remain good. I know you also gave some of the impact from the businesses that you're divesting, but I think it's like $0.04 or $0.05 maybe. You're still arriving at a EPS for the fourth quarter that's basically below or around the first quarter, which I think we all would agree it was a pretty tough environment. Can you flesh this out a little bit more? What am I missing here? Are you just being very conservative?
Sorry, one more thing, you have raised your guidance like $0.05 each quarter. Is there any sort of technicalities in how you approach guidance, or what's going on there? Thanks. Sorry for the long question.
I'm going to start and then hand it over to Rob. From the point of view of the factors, you actually gave most of the factors which were included in our calculation or understanding of our guidance, which have to do with what could be a very difficult environment. On the one hand, we've seen a very strong third quarter in issuance. It was almost unprecedented, the strength that we saw after the Brexit. We do project based off of the M&A pipeline and what we see for being some pull forward of issuance and what we see looking at the investment banking calendar and the debt capital markets of desks of the big banks. We do see a strong issuance in the fourth quarter. On the other hand, as you saw with the Brexit that happened last quarter, this could turn on a dime.
You could see there's still a lot of volatility. There's still a lot of factors, which we're very cautious about. You've got the interest rate discussion in the United States. You still have Brexit. You have the elections in the United States, which have been quite volatile. There's still a lot of factors out there that are impacting our external view, and that external view is then driving our approach to where we ended up with guidance. Let me hand it over to Rob.
Alex Kramm, your math is similar to ours, where there's about a $0.05 going away from what you'd expect because of the divestitures offset by the ASR. We did take the bottom up $0.10 and the top up $0.05. We're heading up closer. Yeah, the $0.05 going away for divestitures, and we're cautiously optimistic of what's going to happen in the fourth quarter.
Alex Kramm, I'll point out one other thing. If you look at the last two years, you can see that first quarter and fourth quarter, both in 2014 and 2015, were considerably lower in EPS than our second and third quarters. It's kind of a consistent pattern that you see each year. I can't guarantee it's going to repeat, at least that's what we've seen in the past.
All right. That's helpful. Thanks for the color. Just coming back to the point of the restatements of the combining GMI and Platts. First of all, I think if you ask investors, they would argue that you're now bearing one of the best businesses you have and one of the businesses that people do not think of a lot of quality, maybe you disagree, I guess that is really my question. If you look at the new combined segment now, how much of the business in terms of revenue or EBITDA do you think is really businesses that are Platts-like and maybe have gotten lost before? Like things that are must-have, very sticky, good pricing power. Think things like the CUSIP database, ratings, reselling, versus maybe some of the things that are more discretionary, easier to cut, like the desktop businesses. Thank you.
This is a question about, for us, what we looked at was partially your question, beyond that was what are the needs of customers and where do we see the opportunities for further penetration of data and analytic services with different types of client bases? Going into the back end behind that, how do you run those to be able to deliver the fastest, the best way and take advantage of our expertise across the company? Within the segment, obviously, you're going to have the must-have products of SNL. You've got the must-have products of things like CUSIP. In our risk services area, we have products which have become very important for risk management tools that you see as people are doing CCAR modeling and liquidity planning and living wills. There's an advantage to having all of those types of products together.
You've got the Platts part of the business. You've got a combination. I don't know the numbers off the top of my head. That would be better if we talked about that after we put together the new segment information and we send it out. There is a lot of must-have data in there. Remember that the traditional Cap IQ and SNL desktops have been growing very well. They're growing somewhere in the high single-digit level for the Cap IQ desktop and over double digits for the SNL. Even though they might have some sort of discretionary component to them, they're still growing at a very good clip, and in many cases, substituting for other products which might be similar that are much more expensive.
That's very helpful. Thank you.
Thanks.
Thank you. The next question comes from Hamzah Mazari from Macquarie. Your line is now open.
Hi, this is Kahan Rabar stepping in for Hamzah. I have a question for you guys on the margin improvement related to the ratings business. There's probably some low-hanging fruit that's behind on the legal costs coming off, do you guys see any pricing opportunity remaining still?
Well, if we take a look at the margin in Ratings. In September 2015, it was about 48%, and we improved it to 51.3% this quarter. Every quarter for the last year, we've been driving towards improvement. Last quarter, at the end of June, we had a 54.1% margin. As you've heard us say before, our goal was to remove all of the first areas of things like legal expense, of ensuring that we had the right approach to managing our business when it came to compliance and control, embedding new technology tools to have more automation. We have a project going on right now called Project Simplify, which has the benefit of better control, of better workflow, and eventually, it will also bring lower costs with it as well as you have more streamlined operations. Think about our approach towards margin as continuous improvement.
We will keep striving to improve our margin. I'm not going to give you a target necessarily today, but we do have a commitment to strive to keep improving our margin. That would come with a combination of better penetration into the markets, through our sales force, through looking at how we can manage our contracts and our mix on pricing as well as discounting policies. Then on the cost side, through projects like Simplify and other ways to manage the business more efficiently and more effectively. You can see over the last few years, we have had a continuous improvement in our margins, and that's a commitment that we still have.
All right. Thanks for that. One other quick question.
Could you give us an update on where you see the upsides in the SNL synergies over next few year period? You guys spoken about a $100 million number before. Any sense of that?
Yeah. We had given you a number in the, I believe it was at the beginning of the year, it was maybe updated, which was originally $70 million. We increased it to $100 million, with an approach where we gave guidance that said that we'd get approximately half of the $70 million, which was the cost side during this year. We will update you on that, on how we are against those targets at our next call.
Okay. Thank you.
Thanks.
Thank you. The next question comes from Vincent Hung from Autonomous. Your line is now open.
Hi, good morning. On evaluation service fees, sounds like most of the weakness there is due to the.
Vincent, can you speak a little louder?
Yes. On the evaluation service fees, sounds like most of the weakness there is due to the contract reviews. How much revenue do you usually get from that?
I'm sorry, I can't hear you.
Can you repeat the question?
Can you try.
Okay, RES?
Huh?
Oh, the question is how much revenue do we get from RES? It can range from 5%-10% of ratings revenue. Ballpark.
Okay. On desktop and enterprise in Market Intelligence, looks like the growth has slowed there, compared to the last few quarters. I don't know if there's anything to highlight there.
No, nothing to highlight there. We continue to see a very good penetration, a good acceptance to the market in that area. Nothing that I'd highlight at this time.
Thanks.
Thank you.
Thank you. Our next question comes from [Lauren Gardner] of Evercore. Your line is now open.
Great. Thanks. I was just wondering if you guys could give us an update on how you're progressing in terms of regaining some market share in CMBS. It kind of seems like that market's starting to pick up a bit. I was just wondering how we should kind of expect you guys to participate there.
During the last quarter, there were 13 CMBS deals of which we were engaged on two of them. That was a beginning to, maybe I could say, get our toe in the water. We do continue to rate a large number of the single issuer CMBS transactions. We are back engaged in the market. We are engaging with investors and with issuers and continue to be out there showing what we can do. Let's hope that we keep getting more deals.
Okay. Strong growth in SNL. I think you guys noted a lot of that came from new user growth. Can you guys just give us some color where that's coming from? Maybe however you want to kind of slice it, and maybe also how much of that maybe came from price increases, if any?
What we talked about user growth, that is coming directly from users. Some of the uptick is also coming from pricing. You might know, we have an approach towards pricing, which is more of an enterprise model. We have decided to work with a sales force where we've merged the sales forces of the old SNL and the old Cap IQ businesses. What we're doing right now is working on an approach to pilot selectively enterprise-wide pricing for Cap IQ and SNL. You've seen a little bit of it, but we're actually rolling it out and phasing it out in 2017. Up until now, what we've seen continues to be mostly based on our prior approach to sales of the two product sets with their own sales forces.
More to come on that, and this will be another area we'll provide more information on at the next quarterly call.
Great. Understood.
I'll chime. It's creating confusion by talking about the 12% growth in user to SNL. To Doug's point, we don't charge on a per user basis at SNL, there's not necessarily direct correlation between user growth and revenue growth. Clearly they do charge based on usage, and new users is a part of usage. That kind of feeds into that.
Right.
Also on the earlier answer I gave on the 5%-10% of ratings revenue from RES, closer to five.
Okay, great. Thank you.
Thank you.
Thank you. Our next question comes from Joseph Foresi of Cantor Fitzgerald. Your line is now open.
Hi, good morning. Sorry if I missed this, any thoughts on the renewing of the overall productivity initiatives for the full company and maybe what's next on the agenda there?
Thanks, Joseph. This is Rob. We're continuing to really execute against the SNL targets that we set out and just continuous improvement in all of the divisions as we work through our plans. No overall announcement on a single program. We're just going to continue looking for productivity in each division as well as flawlessly execute the SNL productivity and synergy targets.
Okay. Do you expect that you may announce something after you go through your five-year plan, or is that still, I guess, being discussed? I know obviously each individual unit, you've done well in increasing the productivity there, but I'm just wondering if there's going to be an overall initiative.
It's possible. With our new CFO starting and going through the planning process into next year, that's possible.
Okay. I'm going to sneak one more in here. On issuance, can we get any early thoughts on the Ratings business for next year? I know you talked about issuance expectations for 2017, but just wondering what the underlying economic assumptions are there. Thanks.
No, sorry about that. We keep it to two questions per person.
Okay, no problem.
Thanks.
Thank you. The next question is coming from Craig Huber from Huber Research Partners. Your line is now open.
Yes. Hi there. First question, on the Ratings side, roughly the last year, you've talked about trying to move away from some of the annual pricing contracts, more to transaction-based prices. Want to hear a little bit further about how that's going, how far you think you are into that, how long you think that migration may take here.
What's most important for us is that we're reengaging with the market in an approach towards commercial relationships and relationship management that allows us to have individualized discussions with our customers about the most effective way for them to tap the markets. It allows us to show the benefits of having a rating, how much do people save by having a rating on their issuance costs. Because of that, we can have a new dialogue about our contract evaluation. It's hard for me to answer your question in a broad way, because net-net, most of our discussions with our customers are one-off, they're individual. We are trying to approach the market in a way to get better contract realization overall. Again, it's a relationship management approach, professional sales, really market by market, customer by customer.
Also, just a quick question. For 2017, for pricing across the overall portfolio at S&P, should we assume more of the same, up 3%-4% on average?
Craig, we never signal future pricing. We're happy to talk about what we've done in the past, which you're exactly right. Historically, we've kind of done about 3%-4% across the businesses per year, we never want to signal future pricing.
Very good. Thank you.
Thanks, Craig.
Thank you. The next question is coming from Peter Appert from Piper Jaffray. Your line is now open.
Thanks. Good morning. Doug, there's been some discussion of fee pressure on the index providers. I'm wondering what you're seeing in terms of any flow-through to your business because of that.
Well, we see that this is going to be an important topic in the industry. It's a complicated topic because a lot of pressure is coming at the higher-end, full service, active management funds. That seems to be where a lot of pressure is starting. Some of it is going into the lower cost mutual funds and ETF providers. One of the things that you saw in the last quarter was that BlackRock cut some of its ETF pricing. That one directly could have a small impact on our business because of the way that our pricing is embedded into that fee structure at BlackRock. The flip side is, if this leads to higher AUM, we could actually benefit from this if the AUMs go up and we see much higher volume. This is something that we're watching very carefully.
It is something for the industry to see what will be the evolution of this structure. We believe that our costs generally are a very low part of the total cost of managing an ETF or managing a fund. We're aware that this is an important issue for our customers, and we're listening to them and hoping that we can be a part of the solution as they look at how they're going to manage their fee structures.
Peter Appert, the only thing I'd like to add is that it's really nothing new. This kind of pressure on fee structures has been going on for a number of years. Fortunately, the growth in AUM that Doug Peterson said earlier from just $500 billion in AUM to over $900 billion in the last few years, it more than offsets that kind of pressure.
Understood. Doug Peterson, just quickly on the Platts business. Growth has slowed a little bit, obviously, this year for reasons which I think everyone can understand. Do some of these new product initiatives, the acquisitions, et cetera, potentially drive a re-acceleration in the growth next year, even if the oil environment remains challenging?
I don't know for sure if they will allow us to really improve our growth dramatically. What we're targeting with the data and analytics businesses is to find a new source of growth for the business. Think about it in that sense, that we think it's an area that it's fragmented. There are a lot of different players out there. We have the right and we have the opportunity to start bringing in new services, new products. We look at it as a source of growth. We look at it as a source of a new area which we already have a good grounding in. You're right to point out that it is a difficult environment in the oil patch. Prices are down. If you look at some of the major oil industry clients, their revenues are down by 50% over the last few years.
There is obviously pressure coming from the customer side. We're looking at, if you want to think of it in two ways, a diversification of our expertise into some other product areas. Also, we hope and believe it could be a source of additional growth.
Great. Thanks, Doug.
Thank you.
Thanks, Peter.
Thank you. Our next question is coming from Andre Benjamin from Goldman Sachs. Your line is now open.
Hi, good morning. Thanks for getting me in here. I guess on Capital IQ, I was just wondering if you could maybe help frame for us how much revenue comes from data feeds. I know that's a growing area that some of your competitors have spoken positively about. Any push that you're making to specifically grow that stream relative to the desktop business.
Yeah. The data feeds business, we talk about the Cap IQ desktop being roughly a $400 million-ish business, the enterprise feeds is another about a $400 million business. A lot of it's that same data, only sold to users, really, their computers, their back offices. Someone doesn't want to key in the stock prices at the end of every day to value their portfolio. Our mainframe feeds their mainframe. Yeah. It's historically been part of Cap IQ as we've evolved the name of that segment over time. That's the relative size, and it's been a decent grower, nothing extraordinary for us over that timeframe.
Got it. Then as you get SNL fully integrated and that's no longer the main focus, I guess if you look about growing the business going forward, is there any potential that you could look to expand your reach and capabilities beyond the traditional banking and research analysts that use the deep data? I know some of your other competitors are looking to do that.
Let me start then, Doug, but just on the premise. Today, if you look at Market Intelligence, 30% of the business or so comes from outside of Wall Street. We're talking about corporations, we're talking about consulting firms, talking about accounting firms, talking about governments, universities. A good 30% is already outside of Wall Street. I'm not sure if you want to add anything, Doug, there.
Yeah. I would say that looking at your question slightly from the total business point of view, not just SNL, Cap IQ, the Market Intelligence business, we see that there's need for more and more market intelligence and, as we call it, essential intelligence for different types of people to make decisions in various ways that require interpretation of market information. Think about all of our businesses that we have now are related to market activities, whether it's fixed income, it's equities, it's commodities, it's loans. We're a business that has the data and the information around market activities, and we provide the benchmarks, the pricing, the data tools, et cetera.
That's the way we're thinking about our business, and we're trying to drive it by going out into the world to see what's changing when it comes to do with our customer needs, with technology, with fintech, with how we see the regulatory environment evolving, what's actually happening also in growth and political and economic factors, things like the Brexit. We take all of those external factors and then hope that we can interpret them appropriately to grow our business because we're delivering the kinds of products, prices, benchmarks, data, et cetera, that the customers actually need to run their businesses.
Thank you.
Thanks, Andre.
Thank you. Thank you. The next question comes from Tim McHugh of William Blair. Your line is now open.
Hi. Good morning. This is actually Trevor Romeo in for Tim today. I just have one for you here. Just to follow up on the high 30s margin target you set for the Market and Commodities Intelligence segment, the new combined segment. What are some of the incremental changes that you guys will need to make in order to achieve that? Do you have a specific timeframe in mind?
What I would like to say is that take that as our first indication, but give us a couple of weeks to send out the more detailed information about the segments and how it's going to be put together. We'll provide some more on that, I'd prefer to also discuss this after you've seen that information on our next call.
Okay. Understood. Thank you.
Thank you. Our next question is coming from Bill Warmington.
Okay. Understood. Thank you.
Thank you. Our next question is coming from Bill Warmington of Wells Fargo. Your line is now open.
Good morning, everyone, and congratulations on the solid quarter, and welcome to S&P for Rob.
Thank you.
First question for you on the index piece of the business. The big asset owners today typically pay a fee to the asset manager that includes the fee for the management, but then also a fee for the index. I've heard the talk about potentially unbundling that fee, meaning that if you could choose any index, you might be more likely to choose a lower price index. I'm just curious if that's a realistic risk, or is it a risk to the pricing?
Today, we're seeing a lot of different models that have started cropping up in this industry. One of the areas which we believe helps our business a lot is that we hold the benchmarks, the most important global benchmarks, the S&P 500, the Dow Jones, the entire complex of the S&P family of funds and family of indices gives us an important set of indices which end up being part of almost any fund complex or investment complex that anybody ever has. We think that because of the size and scale of what we have, we end up being part of that discussion no matter what angle you come from. We wouldn't be surprised, though, given a combination of the Department of Labor, fiduciary ruling that came out and some other industry factors, low interest rates, and the low growth environment is another impact.
The shifting funds that are going into retirement and pensions, et cetera. We wouldn't be surprised if there is a active dialogue that goes on around the industry about fee structures and things like that, we would like to be an active part of that.
For my second question on the Market Intelligence piece, Capital IQ, I think offers a pretty strong lower price alternative versus FactSet and Bloomberg. Over the past few months, we've been hearing a lot of discussion about cost sensitivity or increased cost sensitivity on the buy side, the sell side, and just overall corporate America. I'm just curious if that value proposition is part of what's driving the strong growth within Capital IQ desktops.
Partially. We have great respect for FactSet and Bloomberg. They're great companies, and they deliver high value themselves. We also compete with them sometimes head to head, and sometimes they're a substitute product. Many times we're delivering to customers that don't even need or even have a Bloomberg or a FactSet. There's different sorts of customers that we deliver to, and what our approach is to show the value of being able to harness the power of so much data and so much analytics in one desktop, especially for people that don't need the trading capabilities. It's people that are analysts, risk managers, bankers, investment bankers, regulators, academics, et cetera, that need the power of the data, don't necessarily need the instantaneous, low latency information that might come with some of the other platforms. That's the way we sell it.
All right. Thank you very much.
First of all, let me make a couple of closing remarks. I want to thank Rob MacKay for having been an absolutely fabulous partner as the Interim CFO. He is our controller, so he doesn't get off the hook. He still has to hang around and sign off on the book. We're looking forward to welcoming Ewout Steenbergen to our company in about a week and a half, and we're pleased that we were able to speak with all of you today. If you have further questions, please follow up with Chip, and we will provide more of some of the answers which you asked. We will be able to answer when we issue our information about the new segment, then we look forward to speaking with you again on our next earnings call. Thank you very much.
That concludes this morning's call. A PDF version of the presented slides is available now for downloading from investors.spglobal.com. A replay of this call, including the Q&A session, will be available in about two hours. The replay will be maintained on S&P Global's website for 12 months from today and for one month from today by telephone. On behalf of S&P Global, we thank you for participating and wish you a good day.