Nasdaq Inc

NASDAQ:NDAQ

Earnings Call Transcript 2019-Q2

[Operator]

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. [Operator Instructions]. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Ed Ditmire, Vice President of Investor Relations. Sir, you may begin.

[Ed Ditmire, VP, IR]

Good morning, everyone, and thank you for joining us today to discuss Nasdaq's second quarter 2019 financial results. On the line are: Adena Friedman, our CEO; Michael Ptasznik, our CFO; Ed Knight, our Chief Legal and Policy Officer; and other members of the management team. After prepared remarks, we'll open up to Q&A.

The press release and presentation are on our website. We intend to use the website as a means of disclosing material non-public information and complying with disclosure obligations under SEC regulation update.

I'd like to remind you that certain statements in this presentation and during Q&A may relate to future events and expectations, and as such constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from these projections. Information concerning factors that could cause actual results to differ from forward-looking statements is contained in our press release and periodic reports filed with the SEC.

I will now turn the call over to Adena.

[Adena Friedman, CEO]

Thank you, Ed. Good morning everyone and thank you for joining us.

My remarks today will focus on the following areas. First, we will review the company's second quarter 2019 results; second, we will review the segment level trends and update you on our important initiatives and recent acquisitions; and lastly, I will review some organizational changes and touch upon an early initiatives related to total markets, our comprehensive market structure blueprint before turning it over to Michael to review the financials.

Turning to our results, I'm pleased to report Nasdaq's solid financial performance for the second quarter of 2019. We delivered net revenues of $623 million including 4% organic revenue growth. After taking into consideration the net impact of the divestitures and recent acquisitions as well as an unfavorable change in the FX rates, our total net revenue grew 1% for the quarter. Our achievements in the period were driven by 10% overall revenue increase in the non-trading segments with 8% organic growth driven by our Market Technology, Index, and Investment Data & Analytics businesses.

Our foundational marketplace businesses, Market Services and Corporate Services delivered a steady quarter in aggregate as we maintained a strong competitive position in our largest U.S. and European market and the forward businesses delivered moderate organic growth. Notably in both the second quarter of 2019, and in the first six months of 2019, the organic revenue growth rate in our non-trading segments remains consistent with our longer term expectations of 5% to 7%.

Turning to the segment specific highlights from the second quarter, our Market Technology segment delivered strong growth in the second quarter with net revenue of $79 million, a 20% increase 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 projects as well as continued strong growth in our SaaS surveillance solution.

New order intake during the quarter was $46 million including new customers like Caja de Valores Argentina's Central Securities Depository as well as signing significant new enterprise contracts with the 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 products and client verticals.

Earlier this week, we announced a partnership with Football Index, a UK based sports marketplace to deploy our cloud-based matching engine, an exciting milestone for our markets everywhere strategy.

Additionally after the quarter closed, we signed a fourth U.S. broker dealer to implement our trading platform as a hosted solution.

This quarter, we began disclosing a new metric for market technology, Annualized Recurring Revenue or ARR intended to help the investing community better understand the growth of the recurring software support, licensing, and SaaS to subscription revenues which make up the majority of the market tech revenue.

In the second quarter of 2019, Market Technologies ARR rose 16% compared to the prior year.

Our Information Services segment delivered growth across all of its businesses with revenue of $194 million, up $19 million or 11% from the same period in 2018. Market data growth reflected higher U.S. case revenues due to equity market share gains and also benefited from partnership wins with Microsoft, Yahoo Finance, and Robinhood announced during the quarter.

With Microsoft, they now rely on Nasdaq last sale to provide real time market data across all of their online platforms as well as embedded within Excel making our real time equity -- U.S. equity market pricing available to millions of users worldwide.

Yahoo Finance launched a new premium offering with access to original and in-depth market information such as a supply chain data set from our alternative data platform to help MainStreet better identify investment opportunities.

And with Robinhood their focus is to increase informed investing across their client base with more in-depth data and they now offer Nasdaq's full depth of books data to all Robinhood Gold clients. All of these positive developments in the distribution of our market data and the new unique data sets are making the U.S. markets more accessible to millions of MainStreet investors in the United States and worldwide. We're very proud of the partnership approach we take with our media and online broker clients.

Revenue in our Index business set a new quarterly record driven by licensing revenues from our futures trading linked to the Nasdaq 100 Index and EPP AUM the latter of which increased 9% year-over-year to $203 billion as of the end of the second quarter while our Investment Data & Analytics business continues to deliver against this double-digit organic revenue growth expectation.

Moving to our foundational businesses, our Market Services segment delivered $227 million in revenue in the quarter, a moderate decline of 4% from the same period in 2018. In our U.S. equities and options markets as well as our European equities and equity derivatives markets, we continue to maintain a strong competitive position in share and capture. Our U.S. and Nordic equity marketplaces each delivered quarterly market share figures that were near the top of the recent multi-year highs, while pricing trends remain within our typical quarterly variation.

Our U.S. equity options are complex due to stable share and pricing and continues our established leadership in multi-listed contracts. While we are pleased with the competitive position of our larger equity and equity derivatives marketplaces, we continue to have more to do with our fixed products to get them to be where we want them to be. We saw revenue declines in both of our larger fixed revenue contributors which are our Nasdaq U.S. Fixed Income Treasuries platform and our Nordics commodities platform. While each market and their respective ecosystems is relatively distinct and face their own set of specific challenges, our focus and our efforts to address them share some common themes. In both, we have more closely engaged with our clients about ways to enhance the product offerings to better meet their needs and we are exploring with them the most promising avenues to bring additional participants and to deepen liquidity. We are committed to keeping you updated appropriately as we work to stabilize and ultimately return these businesses to growth.

Turning to our Corporate Services segment, our listings franchise remains the leader for IPOs with a win rate of 80% year-to-date buoyed by strong demand from 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 second quarter, we continue to lead the U.S. market for IPOs with a 75% win rate extending our IPO leadership to 22 consecutive quarters and helping companies raise a combined $11.4 billion in total proceeds.

Of the 81 new listings that we 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 issue account rose 2% from the prior year. We continue to see a robust new issue environment as we progress through 2019.

Additionally, during the first half of 2019 the Nasdaq private market facilitated 35 private companies sponsored secondary transactions, a new record high for the period, with total transaction value of $2.3 billion.

And lastly, regarding Corporate Services and in line with our renewed strategic focus on the products and services most critical to the C-Suite and to the board to public and private companies we continue to work to unlock more potential from our IR Intelligence and Governance Solutions businesses.

We have added more research and insights for our users via the launch of the Nasdaq Center for Corporate Governance. While in IR, we're seeing increased demand resulting from our ESG admitted two 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 and strong long-term organic opportunities including the Nasdaq financial framework buildout and deployment, the expansion of our market infrastructure technology into our sell-side clients, our buy-side smart surveillance solution, the Nasdaq private market, and new alternative investment data products. Our goal with these investments is to advance our leadership position in the evolving capital markets as a trusted technology and analytics partner as our clients seek new ways to manage their liquidity and make ever smarter trading and investment decisions.

We're also seeing encouraging progress in early results from our acquisitions of eVestment, Quandl, and Cinnober. eVestment has continued to 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 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 and eVestment have begun to benefit from sales opportunities open through other Nasdaq relationships. Yahoo's agreement to deliver analytics for its premium offering is one such example.

With the Cinnober acquisition, we've brought together our business and technology teams into common locations and we're working well together to win new client mandates and to begin the technology integration.

I'd like to talk now about some changes in the management team and structure. In June, Tom Wittman who has led our Market Services division for the past three years announced his decision to retire. Over the course of his remarkable career, Tom has made considerable contributions that have benefited both Nasdaq and the industry as a whole. Tom joined Nasdaq through our acquisition of the Philadelphia Stock Exchange in 2008. I speak for everyone at Nasdaq. When I say that we view Tom's leadership as instrumental in building the U.S.'s leading equities options complex at Nasdaq, enhancing the effectiveness of our U.S. equities markets, helping us expand into Canadian equities and meticulously integrating both TSX Canada and the International Securities Exchange. His stewardship and track record in the options and equities markets are known throughout the industry. Tom will continue to oversee our U.S. Treasuries business 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 option, commodities, and trade management services in the U.S. and Canada and will add U.S. Treasuries to his responsibilities at the start of 2020. This is an exciting evolution for how we manage Nasdaq's marketplace core and I'm excited to have Bjorn and Tal in place to drive these foundational markets forward.

To round out our management changes, in June, we were thrilled to welcome Lauren Dillard to the executive team as Executive Vice President of Global Information Services. We're especially excited about how she will leverage her extensive experience on the buy-side coming from the Carlyle Group as we continue our strategy of delivering an expanded set of solutions to the investment and management industry during a period of profound change.

Before I conclude, I want to spend a moment on a new regulatory initiative. At Nasdaq we strongly believe that we differentiate ourselves by our expertise and ideas on market structure and other public policy issues. Our total markets blueprint which we launched during the second quarter outlines the steps regulators and exchanges together with the broader investing community should take to modernize market structure.

As a very first step of the total markets initiative, this quarter we announced a detailed proposal to reform the professional and non-professional data user definition. We're starting with public outreach including an appeal for public comment. Our top priority with this proposal is to ensure that individuals investing their hard earned money for long-term wealth creation are not paying data fees that are meant for market professionals.

Taken together, our total markets and revitalized campaigns provide a comprehensive framework of reform that will improve the market experience for investors, corporate, and critical market intermediaries.

Many of the priorities that we have set for the U.S. markets have been embraced by the legislative and regulatory communities as we remain focused on ensuring our markets continue to drive economic growth, job creation, and wealth creation for all.

As I wrap up, I will summarize by saying that second quarter results served as further evidence and encouragement that we can deliver for both clients and shareholders are still early but now well-established strategic direction.

We want to continue to executing on our key priorities and are focused on building our momentum going into the second half of the year. I look forward to keeping you updated in the coming months and quarters.

And with that, I will turn it over to Michael to review the second quarter financial details.

[Michael Ptasznik, CFO]

Thank you, Adena. Good morning everyone.

My commentary will primarily focus on our non-GAAP results and all comparisons will be for the prior year period unless otherwise noted. Reconciliations of U.S. GAAP to non-GAAP results can be found in the attachments to our press release and in the presentation that's available on our website at ir.nasdaq.com.

I will start by reviewing second quarter revenue performance as shown on Page 3 of the presentation and organic revenue growth on Pages 4 and 14. The $8 million increase in reported net revenue of $623 million was a net result of organic growth of $24 million or 4% including 8% organic growth in the non-trading segments and an $11 million positive impact from the inclusion of revenues from the acquisitions of Cinnober and Quandl. This is partially offset by $70 million 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 billion unfavorable impact from the changes in foreign exchange rates.

I will now review quarterly highlights within each of our reporting segments. I'll start with Information Services which as reflected on Page 5 and 14 saw a $19 million or 11% increase in revenue. This was driven by $19 million or 11% organic growth, $7 million of which was the result of investments purchase price adjustment on deferred revenues in Q2 2018. Excluding this adjustment, organic growth would have been $12 million or 7% primarily due to continued organic development of Investment Data & Analytics as well as Index revenues.

The operating margin was down one point year-over-year at 63% due to certain product and operational investments that we've made to support future growth.

Market Technology revenue as shown on Pages 6 and 14 increased $13 million or 20% including organic growth of $6 million or 9%. Organic growth during the period reflects an increase in the size and number of software delivery projects as well as continued strength in our SaaS Surveillance Solutions. As Adena mentioned, we introduced a new market technology metric called ARR which is total annualized revenue of active software supported SaaS subscription contracts representing the vast majority of segment revenues. Please see Slide 19 of the presentation for historical ARR figures.

In the second quarter, the operating margin for Market Technology was 10% versus 14% in the year-ago quarter. However if you look past some of the quarter-to-quarter variation in this business in the first six months of 2019, operating margin for Market Technology was 10% versus 9% in the first half of 2018. As we have communicated in prior quarterly calls, investment spend in the Market Technology segment remains elevated in 2019 as we continue to invest in a number of growth initiatives including most notably our multi-year implementation of the Nasdaq Financial Framework.

We do continue to expect margin expansion in 2020 and beyond as we progress the NFF deployment and customer adoption of the more scalable service model as well as benefit from the scale and synergies of a more fully integrated Cinnober.

Turning to Corporate Services on Pages 7 and 14, revenues increased $3 million or 3%, organic revenue growth was $5 million or 4% increase with contribution from both the Listing Services and Corporate Solutions businesses. Listing Services organic revenue growth was primarily due to an increase in the number of listed companies partially offset by the runoff of previously deferred revenue recognized from LAS or listing of additional share fees.

Corporate Services organic growth was primarily due to an increase in revenues from Governance Solutions. The operating margin improved to 36% versus 28% in the prior year period.

Market Services net revenues on Pages 8 and 14 saw a $10 million or 4% decrease. Organic revenues declined $6 million or 3% and we experienced the negative impact from unfavorable changes in foreign exchange of $4 million.

Our larger U.S. and European cash equities and equity options businesses are relatively stable year-on-year organic trends, while our smaller fixed franchises that Adena mentioned earlier saw organic declines in the period. The operating margin in Market Services was resilient in the period; it declined only one point to 56% compared to the prior year period despite the year-over-year revenue contraction.

Turning to Pages 9 and 14 to review expenses. Non-GAAP operating expenses decreased $3 million to $322 million. The change reflects a $7 million or 2% organic increase more than offset by an $8 million favorable impact from changes in foreign exchange rates and a $2 million decrease from the net impact of acquisitions and divestitures.

Turning to Slide 10, we're updating our 2019 non-GAAP operating expense guidance range from $1.295 billion to $1.32 billion. Embedded in the updated 2019 expense guidance is a moderate pickup in expenses in the second half of 2019. While last quarter we suggested quarterly expenses would likely see a sequential step-up beginning in the second quarter, the combination of FX impacts, earlier realization of acquisition synergies, and timing of recognition of certain expenses temporarily offset the expected increase and resulted in second quarter expenses coming in line with the first quarter.

As exhibited by the midpoint of our revised expense guidance range, we now expect to see a sequential pickup in each of the remaining two quarters of 2019 expanding on several products and operational initiatives ramp-up as well as certain other factors.

I would also note that while historically expenses typically exhibited seasonal lows in the third quarter of each year due in part to non U.S. vacation accruals, we've now changed our accounting methodology around these accruals to eliminate seasonality in our vacation expense recognition timing.

Moving to operating profit and margin, non-GAAP operating income increased $11 million in the second quarter of 2019; a 4% increase from the second quarter of 2018 and the non-GAAP operating margin was 48%, up one percentage point from the prior year period.

Net interest expense was $28 million in the second quarter of 2019, a decrease of $7 million versus the prior year period due to lower debt balances and refinancing the 5.55% $600 million U.S. denominated bond with a new 1.75% €600 million bonds.

The non-GAAP effective tax rate for the second quarter 2019 was 26% and for 2019 the non-GAAP tax rate is expected to be between 26% and 27%.

Non-GAAP net income attributable to Nasdaq for the second quarter of 2019 was $203 million or $1.22 per diluted share compared to $194 million or $1.16 per diluted share in the prior year period representing a 5% increase.

Turning to capital on Slide 11, debt decreased by $78 million versus Q1 2019 primarily due to paying down commercial paper, net issuances, and payment on debt obligations partially offset by an increase in Eurobond book values caused by changes in FX rates. Our total debt-to-EBITDA ratio ended the period at 2.7 times down from 2.8 times in the first quarter of 2019 fulfilling our capital plans objectives to delever to the mid two times leverage ratio by mid 2019.

During the second quarter of 2019, the company returned $50 million to shareholders through a share repurchase program and paid a dividend in the aggregate amount of $77 million. In the first six months of 2019, we returned $200 million to shareholders through dividends and our share repurchase program.

And with that, I'll turn back to the operator for the Q&A.

[Operator]

Thank you. [Operator Instructions].

Our first question comes from Richard Repetto with Sandler O'Neill. Your line is now open.

[Richard Repetto, Sandler O'Neill]

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

[Adena Friedman, CEO]

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

[Tom Wittman, Head, Market Services]

Thank you.

[Richard Repetto, Sandler O'Neill]

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

[Adena Friedman, CEO]

He does.

[Richard Repetto, Sandler O'Neill]

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

[Michael Ptasznik, CFO]

Yes, so the 70% -- it represents about 78% of the Market Technology revenues in the second quarter. The differences will be things like change requests and implementation or delivery of new build-outs. So really what this is it becomes the service revenue, the maintenance fees, and also the SaaS revenue that received from the smart business is another example.

[Adena Friedman, CEO]

In our ongoing licensees.

[Michael Ptasznik, CFO]

In the ongoing licensees, yes.

[Adena Friedman, CEO]

So in a build period, Rich, we have certain delivery fees that we charge but that also of course have cost associated with it. So those fees are not -- 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 -- those are not included but 78% of -- as you said --

[Michael Ptasznik, CFO]

Vast majority, yes.

[Adena Friedman, CEO]

We would say vast majority, yes.

[Richard Repetto, Sandler O'Neill]

Okay, that helps. Thank you. And my follow-up, semi related. It's a regulatory question and we appreciate, I think the market appreciates the total Markets Initiative. But I was just trying to see if you can give us like at least your status update, now looks like things are quiet and we're given a lot of attention to U.S. equities but it look like Chairman Clayton offered a pretty balanced statement in regards to sort of the fee guidance that 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 would you say that the relationship say with the SEC in the trading and market side is been more open recently or how would you characterize the status, I guess?

[Adena Friedman, CEO]

Sure. I think overall, I think it is important to recognize that I think we've said this before that we have a very good and comprehensive relationship with the SEC. We submit 100s of rule filings every year to them and they approve 100s of rule filings every year. And we work with almost every division within the SEC on a regular basis. I think that we do however as we all know have certain areas of debate with the SEC around market structure. And I would say, Rich, that there has been a lot of dialogue with the SEC both at the commissioner level and at the staff level and we have been expressing our views and also making sure that they have data to support our views.

They have been asking a lot of really good questions. I think that the total market roadmap or blueprint does help frame out some of the larger market structure issues that we are hopeful that the SEC will start to tackle. And it also I think put 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 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.

[Operator]

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

[Michael Carrier, Bank of America]

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

[Adena Friedman, CEO]

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 amounts as expense.

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 applying trading technology, post rate technology into the banks and brokers, we now just signed our fourth client to provide them a host of trading solutions, so that's picking up steam but that area of investment is also in there.

The fourth sorry the fourth 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 also was 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 upstarting with essentially four clients and moving into a much bigger space and we have good sales in that area to continue to develop.

And then another area is Quandl and the whole analytics hub integration, the alternative data space that is also early days as we have said that in terms of really frankly understanding the overall demand for alternative data, continuing to find new supply and then finding demand for that data across the industry. The Yahoo Finance implementation of some of the supply chain data does come out of Quandl and we have continued growth in some of the other data streams that they've created. So we feel good about the growth but in all of those areas remain investment areas as they graduate, they graduate out of that program once they become kind of self-sufficient at least break-even to profitable endeavors. And so that's why we will always give you that R&D number, so that you kind of know which areas are our major areas of investment for us.

[Operator]

Thank you. And our next question comes from Ken Worthington with JPMorgan. Your line is now open.

[Ken Worthington, JPMorgan]

Hi good morning. Proceeding the receipt approval for non-transparent ETF Fidelity and T. Rowe have refiled their offerings for active funds. Can you talk about how you feel you're positioned versus Arca and Bats to sort of win listings in 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?

[Adena Friedman, CEO]

Sure, no problem. So we actually have -- we have been a leader from the very beginning as these new what I would call actively managed ETFs are being formed. We partnered with a firm several years ago to develop a program to support these non-transparent ETFs. And so we do understand them well, we understand that they do require some specific market maker support and we do believe our market is well-positioned to lift those types of ETF.

We continue to have very good growth overall in our ETF listings and we're very proud of the fact that we have well over 300 ETFs, I think it's at least probably in the high 300s listed on Nasdaq today. And so we do feel Ken that we're really well-positioned competitively to be able to bring those types of ETFs to Nasdaq.

[Ken Worthington, JPMorgan]

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

[Adena Friedman, CEO]

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.

[Operator]

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

[Ben Herbert, Citi]

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

[Adena Friedman, CEO]

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 exchanges OCX 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 -- maybe they only use that for equities and then they move to fixed income and then they move to commodities et cetera.

We also have global penetration in that -- in that business and we have a global sales force that supports it. So we continue to see very strong demand characteristics. But we have over 150 clients who use that service today.

In terms of the matching technology, post stream technology that we're at the very beginning of that strategy and that's why that that effort fits within our R&D initiatives because we've built out 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 very thorough contracting process as you probably know but we are very, very excited about the level of opportunity and demand that we see. It's just a matter of making sure we systematically get our clients from interest to signing a contract. And as I mentioned we do have a fourth client that just signed up.

[Ben Herbert, Citi]

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

[Adena Friedman, CEO]

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

[Operator]

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

[Alex Kramm, UBS]

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

[Michael Ptasznik, CFO]

So I think the number is going to fluctuate and it's going to depend on the types of installations that we have in any specific quarter, the change requests et cetera. So there you will see fluctuations. Over longer period of time as we continue to build that 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 and to say and what percentage of the business is reflective of recurring revenue as opposed to these more one-offs or change request type revenue. So I think 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 doesn't 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.

[Alex Kramm, UBS]

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 as a service provider, I think historically you have said on the market data side that banks are actually the largest payer of market data and related services. Also you struck a deal with them; I think it was on March on some outsourcing of some trading solutions. So maybe a little bit too specific. But just wondering how you view that as clearly not a good sign for the industry as a service provider for yourself?

[Adena Friedman, CEO]

Sure. Well I do think that the first thing I would say is it's pretty early days in understanding the impact that the changes in Deutsche Bank is going to have in general within the U.S. In terms of the way that they trade, they tend to trade on behalf of customers, so that trading will either be transferred to another firm, if there is ultimately an acquisition of the business from Deutsche Bank or probably move over to other clients, I mean other service providers.

I think in terms of some of the recurring revenues or kind of the other parts of our business, we're still working actually pretty closely with Deutsche Bank to understand, how they're going to continue to take certain services, how they might transition their services to other service providers. And so it's very early days for us but we are working very closely with them to understand the overall impact.

I also would say we have as you know hundreds of clients that we serve with our trading, thousands of clients we serve with our data and connectivity services. So we don't feel this is going to have an outsized impact. It's just something that we're managing through.

[Operator]

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

[Dan Fannon, Jefferies]

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

[Adena Friedman, CEO]

Well I think that we are trying to give you some view into our overall long-term view of the business. And I think we also are trying to give you a little bit more transparency into some of the drivers of our business but they are I also as Michael has been saying, we have a period of investment, we want to make sure we're investing in our future. It's not just the investment in the Nasdaq financial framework itself but it's also investing in some new verticals like the new markets like I mentioned with getting into new, new industries with our technology as well as into the broker/dealers as well as into the buy-side for surveillance.

So there are investment areas that are ongoing. I also believe that we see very good demand characteristics across the business and we do see scalability in what we're creating. And so over time those things should generate the benefits for shareholders as we've been mentioning. But it is an evolution and it's not something that is going to be a step function from one quarter to the next, it's going to be over time.

[Operator]

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

[Alex Blostein, Goldman Sachs]

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

[Michael Ptasznik, CFO]

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 three to five year period and that's the way to think about it. And as I said the mix should change over time or more of that will be coming from Annualized Recurring Revenue as we continue to convert the platform over which 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 et cetera, that's where we will have more of that change requests or delivery type contracts. We'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 of it will be coming from the SaaS when you compare it to the overall mix of the total business which I think we provided in another slide. Does that help answer the question?

[Alex Blostein, Goldman Sachs]

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

[Adena Friedman, CEO]

So we are 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 are bringing the business forward. But we're not -- we don't provide that level of disclosure.

[Michael Ptasznik, CFO]

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

[Operator]

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

[Chris Allen, Compass Point]

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

[Michael Ptasznik, CFO]

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

[Adena Friedman, CEO]

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

[Operator]

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

[Ken Hill, Rosenblatt Securities]

Hey good morning everyone. I wanted to ask about the listing services business, I know during the quarter we saw the MIC make some changes in some of the smaller companies particularly like the biotech stocks where you guys did 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?

[Adena Friedman, CEO]

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.

[Ken Hill, Rosenblatt Securities]

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

[Adena Friedman, CEO]

Great, thank you. So with private market, it has been I would say an evolution not a revolution. And so, it is several years in and we are continuing to see a real evolution of how companies are managing their liquidity in the private markets.

So when we first launched, we only today -- we only cover company-sponsored tenders. So the job of NPM 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, they usually set the price found the investors and then just asked us essentially to facilitate that transfer of ownership and 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 that transfer process. We've electronified the data room, made more information available et cetera. However what we're seeing today is some continued evolution. Number one, we've been launching some auction price discovery events and processes with some of our clients today. So they actually are using the platform to find the right price for that private -- that private company transaction. And that's a new, new phenomenon that we're starting to see pickup 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 in private equity funds. And we announced our partnership with iCapital 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 long-term play which is why it is in our R&D bucket.

[Operator]

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

[Kyle Voigt, KBW]

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

[Adena Friedman, CEO]

Sure. Yes, so I think 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 were 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 where 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.

[Operator]

Thank you. [Operator Instructions].

Our next question comes from Chris Harris with Wells Fargo. Your line is now open.

[Chris Harris, Wells Fargo]

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

[Michael Ptasznik, CFO]

So we're 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, we are 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 in dilution that we have from any of our equity programs.

So that's the way we plan on the debt. And the debt will fluctuate depending on the situations that we're looking at with respect to investment opportunities et cetera. But the investment grade status will be sort of the guiding factor that that sets that.

With respect to other opportunities, so we are pleased that we are able to take advantage of the lower interest rates. We also have our -- have our commercial paper program which has provided us with some benefits as well. And we'll continue to take a look at our debt going forward. We 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 2021 and the other opportunities we'll assess those in future periods but there's no immediate plans I can talk of or mention right now.

[Operator]

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

[Patrick O'Shaughnessy, Raymond James]

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

[Adena Friedman, CEO]

So we are looking at that very closely, Patrick. And I think that there are a couple things. We are sitting in a business in the U.S. Treasuries at least that has been subject to a lot of competition over many years. Whereas if you look at some of the other asset classes in fixed income, they're 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 the broker/dealers wanting to have more control over how orders get routed or where they get routed as opposed to an anonymous central them in 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 Cloud 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 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 commodity -- in trading Nordic Power frankly weather trends can impact a quarter like they did this quarter. I think there is a predominant thought on this quarter is just that it was a very low volatility quarter because the weather was cool and wet and doesn't carry 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 Nordics 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, our power business going forward.

So it is definitely an area of real focus for us, Patrick, but we don't have 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.

[Operator]

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.

[Adena Friedman, CEO]

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.

[Operator]

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.