納斯達克交易所 (NDAQ) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Nasdaq Fourth Quarter 2017 Results Conference Call.

(Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Ed Ditmire, Vice President, Investor Relations.

Sir, you may begin.

Good morning, everyone, and thank you for joining us to discuss NASDAQ's fourth quarter 2017 financial results.

On the line are Adena Friedman, our CEO; Michael Ptasznik, our CFO; Ed Knight, our General Counsel; and other members of the management team.

After prepared remarks, we'll open up to Q&A.

The press release and presentation are on our website.

We intend to use the website as a means of disclosing material, nonpublic information and complying with disclosure obligations under SEC Regulation FD.

I'd like to remind you that certain statements in this presentation and during Q&A may relate to future events and expectations and, as such, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from these projections.

Information concerning factors that could cause actual results to differ from forward-looking statements is contained in our press release and periodic reports filed with the SEC.

And now I'll turn the call over to Adena.

Thank you, Ed, and good morning, everyone.

Thank you for joining us.

I want to use our time together to discuss our strong 2017 financial performance, update you on the actions we've taken to drive forward the new strategic direction for Nasdaq that we unveiled last year, detail our execution priorities for 2018 and lastly, address the latest developments on macro and regulatory backdrop for us and our clients.

Q4 2014 featured strong results with non-GAAP EPS of $1.05, up 11% year-over-year, exhibiting particularly strong momentum across key areas of our business.

Turning to the full year 2017, we generated total net revenue of $2.4 billion, an increase of 7%.

Non-GAAP operating income rose 9% on higher margins, and we increased our non-GAAP diluted EPS by 10% year-over-year.

Free cash flow from operations, excluding Section 31 fees, rose 18% to $756 million.

Subscription and recurring revenues increased 7% in 2017 compared to the prior year to over $1.8 million, driven in large part from organic growth and represented 76% of total net revenues.

We continue to invest where we have conviction that we can bring value to our clients in new ways, both through our organic initiatives and through our eVestment and Sybenetix acquisitions.

We complemented this with strong capital returns to shareholders.

Dividends and share repurchases totaled 65% of our non-GAAP net income for the year.

The net result was another year of delivering on our double-digit total shareholder return ambition, driven through a combination of great positioning we've established to help our clients respond to important industry trends and technological advancements, gains from our improving competitive position and continued focus on execution and efficiency.

Turning to the specific highlights from our businesses in the quarter and across the year.

In our Information Services segment we saw 19% increase in index licensing and services revenue in 2017, with assets under management and exchange-traded products linked to Nasdaq indexes rising 35% to a record $167 billion at year-end.

I'd note, in particular, that smart beta indexes today comprise over 40% of our total AUM, which positions us especially well for the future.

Market Technology generated a 10% increase in revenues in 2017.

More importantly, new business is strong with $292 million in total order intake for the year, a reflection of the increasing demand for the partnership approach we take with our clients and offering world-class market infrastructure and surveillance technology to the industry.

Order intake in the fourth quarter reflected new and deeper client relationships, including an expansion agreement with Tadawul, the Saudi Arabian exchange, to deliver new cash and derivatives clearing, central securities depository and post-trade risk management technologies as well as an agreement with SIX Group for the provision of an index system.

Additionally, the Singapore Exchange is adopting the Nasdaq Financial Framework technology for their securities markets.

Importantly, over the course of 2017, Nasdaq also signed a record 6 new exchange clients across core trade matching, risk management and post-trade systems, including BVP in Panama, STRATE, the South African CSD and Astana International Exchange in Kazakhstan, while also experiencing growth in its SMARTS surveillance and BWise enterprise risk management businesses.

Turning to our foundational marketplace businesses starting with Corporate Services, we completed the year with strong trends across the business.

Nasdaq continues to be the U.S. listings leader, winning 69% of U.S. IPOs in the fourth quarter and 63% for the full year with 136 IPOs and 62 new ETP listings.

Some highlights for the fourth quarter include CarGurus, Mongo DB, National Vision and Stitch Fix.

Nasdaq's Nordic markets delivered a record-breaking 108 new listings in the year, including Terveystalo, Rovio Entertainment and Munters Group.

The total number of Nordic listings increased 9% to 984 and our Nordic markets continue to lead Europe in SME listings.

Nasdaq also attracted an especially strong number of listing transfers in 2017, with 21 ETP switches and 11 corporate switches, including PepsiCo, the largest exchange switch ever, Principal Financial, Visteon, Xcel Energy and Workday.

The switches represent companies across 6 major industry categories, making it our most diverse year for companies choosing to join Nasdaq from our key U.S. competitor.

In total, $358 billion of market capitalization switched to Nasdaq during 2017, bringing the aggregate market of capitalization switch to over $1.2 trillion over the past 12 years.

In our Corporate Solutions business, we continue to enhance our flagship Nasdaq IR Insight product by rolling out 2 new analytic supplements in 2017.

Insight360, which uses machine learning to help companies quantify and benchmark the effectiveness of their IR program and passive IQ, which delivers unique insights to our corporate clients on the increasingly important passive portion of the investment universe.

In Market Services, we gained market share in 2017 across our 3 biggest revenue categories: U.S. options, U.S. equities and European equities, while trade management services continued to deliver consistent growth.

In Europe, we have positioned ourselves to deliver for our customers and earn more of their business as a result of the new regulations and requirements resulting from MiFID II.

We've adapted and innovated around changing regulations with the launch of a periodic auction feature called Auction on Demand.

We've seen good initial momentum since the start of the year, and we believe that momentum will continue to pick up as the double cap restrictions are placed on European dark pools in the spring.

Stepping back to look at the broader organization's performance, I'm pleased to report significant achievement against our execution priorities for 2017.

First, we increased our competitive position across the majority of our businesses, best exemplified by our market share gains in the 3 largest trading revenue categories, our exceptional performance in index services, market-leading new listings in the U.S. and Nordic markets and our landmark wins in new applications of our Market Technology.

Second, we completed the integration of the ISE acquisition 6 months ahead of schedule, while maintaining market share and customer momentum, delivered on the full $60 million in targeted cost synergies and identified additional cost opportunities along the way.

And third, we saw a meaningful progress commercializing the important disruptive technologies where we have developed deep internal expertise, including sales of the Nasdaq Financial Framework, which puts blockchain and cloud capabilities in the hands of market operators as well as the Analytics Hub and Insight360 products, which levers machine learning to develop new insights to our investor and corporate customer client bases.

As we focused on those execution goals, we also spent the year reviewing our broader strategy to determine the best way forward for our company.

Specifically, in September of 2017, we communicated to you the results of the strategic review and articulated a renewed strategic direction to maximize the resources people and capital allocated to our biggest growth opportunities, particularly in our Market Technology and Information Services businesses.

We also affirmed our commitment to sustaining the special marketplace platform businesses that are core to Nasdaq and said that we will be reducing capital and resources in areas that are not as strategic to our clients and do not have the significant growth potential within Nasdaq.

We immediately went to work to begin executing against our strategic plan.

In terms of putting more resources behind our biggest opportunities, we closed the acquisition of eVestment in late October adding their unique and high-growth institutional investment data and analytics and with it, the potential to catalyze higher growth, not only in our Information Services business but also to unlock bigger opportunities across several buy-side-focused organic initiatives where eVestment's great client relationships could open new doors.

We've been very pleased to see eVestment's strong momentum continued for the fourth quarter.

eVestment's top line stand-alone results in the fourth quarter of 2017 grew 13% year-over-year to $23 million.

And in terms of metrics that drive future periods, new subscription sales in the fourth quarter rose 77% and the retention rate was 5 percentage points higher versus the prior year fourth quarter.

In addition to our eVestment acquisition, we are reaffirming some key ongoing internal strategic growth initiatives, notably our investments in the NASDAQ Private Market, NFX and Ocean.

We also decided to continue to increase our investment in our Analytics Hub data initiative, our buy-side market surveillance offering supplemented by the acquisition of Sybenetix and the Nasdaq Financial Framework as the foundation for our next-generation market infrastructure platform for both our own markets and for those clients we serve with our Market Technology expertise.

On the other hand, in terms of where we are reducing capital, we announced on Monday that we completed the review for strategic alternatives for our Public Relations Solutions and Digital Media Services businesses, resulting in the sale of those assets to West Corporation.

As part of the terms of the transaction, we've agreed to an exclusive, multiyear partnership with West to provide our eligible Nasdaq-listed clients seamless access to certain products and services included in the transaction.

This will allow us to concentrate our investments going forward on our core high-value investor relations intelligence and board collaboration solutions, along with our leading listing franchises and pioneering private market solutions, which have been critical in terms of our strategic positioning with our corporate clients.

To sum up our progress on implementing our new strategic direction, with the eVestment experiencing strong postclosing momentum, our decisions to move resources more decisively behind our most promising growth opportunities and our agreements to put the press release and Multimedia businesses in the hands of a high-quality partner, we are taking strong early actions to get our business position to reach its full potential.

Building upon our momentum and executing against our strategic pivot, we have developed our tactical priorities for 2018, specifically, first, maximize our opportunities as an innovative analytics and technology partner to the capital markets industry.

This includes: one, enhancing our culture to attract and retain creative talent across our technology and business organizations; two, investing our capital and innovations, such as the Nasdaq Financial Framework, behavioral surveillance analytics and Analytics Hub to carry our clients into the future of trading and investing; and, three, on the flip side, completing the Multimedia and PR divestiture to free up time and resources to focus on growth.

The second priority is developing and deploying our marketplace economy technology strategy, which is intended to broaden the set of applications for our world-leading capital markets technology to include a wide range of sophisticated nonfinancial markets.

And lastly, advancing our competitive position across our core businesses, which is obviously a continuation of the 2017 goal, because I see opportunities to continue to build on our momentum in some areas that we saw gains last year.

I look forward to updating you on our progress on these goals as the year progresses.

Now I want to spend a few minutes on the current state of the backdrop we operate in, encompassing both macroeconomic conditions as well as the regulatory environment.

On the macroeconomic backdrop, we remain positive on the potential impact of synchronized global economic growth.

Economies as well as equity markets have considerable momentum across the U.S., European and Asian regions, which are all important in different ways to our core client groups.

We continue to experience a relatively low-volatility environment, although we are seeing some early signs of increasing volatility as we enter 2018.

Moving to the political and regulatory environment, almost a year ago, we saw an opportunity in Washington as the new administration was getting started and took action by releasing our blueprint to revitalize U.S. capital markets.

It is intended to spark a dialogue about making sure we're doing all we can to foster an attractive public environment for growing companies.

In many ways, the administration's agenda and priorities, as it relates to the market as well as various legislative initiatives, have lined up closely with the proposals in our blueprint.

This includes regulations for proxy advisory firms proposed by Congressman Sean Duffy of Wisconsin that recently passed by the House.

The new SEC Chair Jay Clayton's views on activist investors' use of the proxy system and his actions to allow firms to keep parts of their IPO or registration filings confidential, regardless of their size.

These early initial steps towards improving the U.S. public markets to make them more attractive will thereby spur further job growth and -- job creation and economic growth.

Switching gears to specific market structure proposals at the SEC.

In our strong view, the recent CBOE market on closed proposal risks destabilizing the market close, harming our listed companies and their shareholders.

This proposal generated unprecedented protest, including negative comment letters from dozens of issuers, the largest U.S. equity indexer, trading firms and asset managers that rely on the critical market closing auctions to value trillions of dollars of investors' assets every day.

While we see the financial impact to Nasdaq is likely immaterial, we feel strongly that the proposal carries a significant risk of harming issuers and investors.

Therefore, we are actively responding by filing a petition, highlighting the potential [impact] and asking SEC commissioners to review the decision.

We will look to continue our leadership as a voice in Washington for our clients in 2018.

Turning to tax reform.

We've been active and enthusiastic supporters of tax reform as a mechanism to spur investment and growth and to make the U.S. corporate environment more competitive globally.

Therefore, we are very pleased with the outcome of the bill.

Specifically to Nasdaq, assuming the tax reform bill was applied to normalize 2017 results, it would have resulted in approximately $60 million in additional free cash flow for the year.

Going forward with the additional cash flow, we intend to focus our investments on our largest growth opportunities, where we expect to generate the highest returns for shareholders, while also providing increasing capital returns to shareholders, all of which is consistent with the capital allocation priorities we put in place.

In conclusion, we are coming off a strong year and will continue to be guided by our new strategic direction.

As I enter my second year as CEO, I see evidence of an expanding potential for this organization in terms of how we solve increasingly advanced client challenges as well as deliver for our shareholders.

I could not be more excited about the future of our company.

I'm convinced that Nasdaq has unique skills, experience and vision to continue generating tremendous value and importantly, the relentless drive to continue innovating and disruptive -- disrupting as we've done since our founding.

And with that, I'll turn it over to Michael to review the financial details.

Thank you, Adena, and good morning, everyone.

My commentary will primarily focus on our non-GAAP results and all comparisons will be to the prior year period unless otherwise noted.

Reconciliations of U.S. GAAP to non-GAAP results can be found in the attachments to our press release and in the presentation that's available on our website at ir.nasdaq.com.

I'll start by reviewing fourth quarter revenue performance as shown on Page 3 of the presentation and organic growth on Pages 4 and 15.

The 6% or $36 million increase in reported net revenue of $635 million consisted of organic growth of $17 million, including 5% organic growth in the nontrading segments, a $12 million favorable impact from changes in foreign exchange rates and a $7 million impact from acquisitions, which is net of an $11 million purchase price adjustment on deferred revenue associated with the closing of the eVestment acquisition.

I will now review quarterly highlights within each of our reporting segments.

I will start with Information Services, which as reflected on Pages 5 and 15 saw a $21 million or 16% increase in revenue, including $12 million or 9% organic growth.

Index licensing and services revenues were up 23% in the fourth quarter of 2017, primarily due to higher assets under management and exchange-traded products linked to Nasdaq indexes.

Data product revenues increased 13%, primarily due to the inclusion of revenues from our acquisition of eVestment, which closed in late October, net of the $11 million deferred revenue purchase price adjustment.

This adjustment was approximately $2 million higher than the estimated guidance we provided last quarter.

This does not reflect a change in the total adjustment, just the shift in timing of recognition.

For the full year of 2017, Information Services organic growth totaled 7%.

Market Technology revenue, as shown on Pages 6 and 15, increased $10 million or 13% with organic growth totaling $8 million or 10%.

Organic growth totaled 9% during the full year of 2017.

The period-end backlog finished at $847 million, record high and an increase of 9% from the prior year quarter.

The operating income margin for Market Technology was 24%, down 6 percentage points from 30% in the prior year period, primarily due to the impact of investments we are making to upgrade our technology for the next-generation Nasdaq Financial Framework and to enhance and grow our surveillance offering, two initiatives that we believe can help move the Market Technology margin to higher levels as they scale in future periods.

Turning to Corporate Services on Page 7 and 15.

Revenues increased $3 million or 2%.

In our Listing segment, there was a positive $2 million impact from changes in foreign exchange, while revenue growth in the Nordics was offset by lower U.S. listings revenues from the runoff of listing of additional share fees due to the adoption of the all-inclusive annual and listing of additional share fee package.

We expect a moderate boost to U.S. listing fee revenues in 2018, as its all-inclusive offering became effective for all U.S. issuers on January 1.

For the Corporate Solutions segment, revenues increased $1 million or 1% due to favorable changes in foreign exchange rates.

The Corporate Services operating margin was 30% versus 25% in the prior year period with operating income increasing 24%, reflecting increasing efficiencies and achievement of synergies.

Market Services net revenues, on Pages 8 and 15, saw a $2 million or 1% increase with $5 million positive impact from changes in foreign exchange, partially offset by $3 million organic decline.

The organic decline was due to lower revenues in U.S. options, partially offset by organic growth in European cash equity trading and trade management services.

The decline in U.S. options was due to lower average net revenue capture, driven by shifting mix factors as well as our deliberate actions to share a portion of cost synergies related to the acquisition of ISE with market participants.

This was partially offset by higher market share and industry volumes.

We have put in place pricing refinements intended to stabilize pricing as we move into 2018.

Market Services operating income totaled 55%, up 1% from the prior year period and operating income increased 3%.

Turning to Pages 9 and 15 to review expenses.

Non-GAAP operating expenses increased $17 million to $341 million with a $16 million expense increase from acquisitions and a $7 million unfavorable impact from changes in foreign exchange rates, partially offset by a $6 million organic decrease.

The organic decrease was $6 million compared to the prior year quarter, principally reflected changes in variable compensation accrued in the period as well as lower provision for bad debt.

Turning to Slide 10.

I'd like to discuss our expectations for 2018 non-GAAP operating expenses.

We expect non-GAAP operating expenses of $1,375 million to $1,415 million in 2018, which based on our current projections includes approximately $170 million of full year costs related to the Public Relations Solutions and Digital Media Services businesses that we announced that we've agreed to sell.

The increase from our 2017 expense base of $1.270 billion, which is restated for the impact of revenue recognition accounting changes, is composed of about 3% organic increase, most of which is due to spending in our growth initiatives, about 1.5% from FX changes and the remainder due to the full year impact of our late 2017 acquisitions of eVestment and Sybenetix.

Assuming a midyear 2018 close to the transaction, we expect our expenses will decline by approximately $65 million to $70 million from our 2018 expense guidance.

We expect to achieve a full annualized run rate savings of approximately $170 million within 12 months of closing of the transaction.

We will update our official guidance to reflect the exact closing date and any updates to the expense elimination timing after the transaction is closed.

Moving to operating profit and margins.

Non-GAAP operating income increased 7% in the fourth quarter of 2017 and the non-GAAP operating margin totaled 46%, unchanged versus the prior year period, a reflection of margin expansion in the core business, being offset by the impact of the eVestment acquisition, who's profitability is temporarily impaired by the purchase price adjustment on deferred revenues as well as compensation and other expenses associated with our acquisition.

Net interest expense was $34 million in the fourth quarter of 2017, a decrease of $2 million versus the prior year period, primarily due to refinancing to lower cost debt partially offset by the increased debt due to eVestment.

The non-GAAP effective tax rate for the fourth quarter of 2017 was 32%, which excludes the impact of excess tax benefits related to employee share-based compensation.

We've made the decision to exclude the excess tax benefits from our non-GAAP results presented for the fourth quarter and full year 2017 as well as going forward due to the volatility, the fact that they are not reflective of current period operations because management does not consider the excess benefits when evaluating or allocating resources to our businesses.

For the full year 2018, our non-GAAP tax rate guidance is a range of 24.5% to 26.5%, a decrease of 7 to 9 percentage points from our 2017 non-GAAP tax rate of 33.3%, reflecting principally the Tax Cuts and Jobs Act enacted on December 22, 2017.

Non-GAAP net income attributable to Nasdaq for the fourth quarter of 2017 was $179 million or $1.05 per share -- diluted share compared to $161 million or $0.95 per diluted share in the prior year period.

On Slide 11, we discussed revenue and expense impacts under adoption of ASU 2014-09, which impacts the timing but not the amount of revenue and expense recognition.

This accounting change will go into effect beginning Q1 of 2018, and we'll be restating 2017 results at that time to ensure results are presented on a comparable basis.

While this change will lower our 2017 GAAP and non-GAAP results modestly, it does not affect our cash flows in the period, nor change our expectations for the organic growth that we expect in the coming periods.

Turning to capital.

Debt increased by $464 million versus 3Q '17, primarily due to $441 million net debt issuance to fund the eVestment acquisition and a $22 million increase in eurobond book values caused by a stronger euro.

Our debt-to-EBITDA ratio ended the period at 3.3x versus 3.1x at the third quarter of 2017.

As mentioned previously, we continue to plan to delever to a mid-2x leverage ratio by mid-2019.

Share repurchases in the fourth quarter totaled $29 million, bringing total 2017 repurchase to $203 million.

Together with dividend payments, we returned $446 million to shareholders during 2017, representing 65% of our non-GAAP net income in the period.

In addition to considering our regular stock buyback activity with intention of maintaining a stable share count, we anticipate using after-tax proceeds of the sale of the Multimedia and PR businesses to repurchase additional shares, which is expected to lower our share count modestly and largely offset the EPS impact of the elimination of the annualized net income associated with the divested businesses.

As of December 31, 2017, there was $226 million remaining under the board authorized share repurchase program.

And our Board of Directors recently approved an increase to our share repurchase authorization of an additional $500 million.

We plan to continue to use our capital, including the enhancements due to lower tax rates to optimize returns to shareholders, to focus the investment in organic growth opportunities, carefully considered M&A, continuing to grow the dividend as earnings and cash flow increase.

Thank you very much for your time.

And I'm going to turn it back to the operator now for the Q&A session.

(Operator Instructions) Our first question comes from Rich Repetto with Sandler O'Neill.

I guess my question is on the strategy and the strategic pivot.

And it looks like you took up the R&D spending by $20 million or more than 50% compared to last year.

And I guess the question is, how do we think about like the return on that -- return on the ROIC and as you invest more, I guess, in the Analytics Hub buy-side surveillance and Nasdaq Financial Framework?

Michael, why don't you start by saying what that comprises of?

That would be great.

Yes.

So Rich, thanks for noting that.

So the increase in the R&D expense, it was $65 million to $75 million.

Now this does appear higher than previous years for 2 reasons.

First of all, it's in line with the new strategic approach that we've been outlining and it reflects the reallocation of resources from the businesses that we will sustain or deemphasize towards those initiatives that are reflective of the longer-term growth opportunities, those like NFF that Adena spoke about earlier.

So it's a reallocation from those businesses into the new areas and the new.

So it's not an increase in the overall spend, it's reallocation of resources.

That's number one.

Secondly, the previous numbers that we used to provide excluded certain initiatives that were included in normal operating expense and now have been reclassified and grouped with our R&D program, and that really allows us to manage these investments in a manner that's more conducive to their growth nature versus operational nature.

And in terms of the return potential and how we manage and measure these investments, Rich, a couple of things.

By putting all of those initiatives into what we're now calling Nasdaq Next, which is our internal program name, we have a way -- and we basically require a lot of visibility around the programs.

We do regular meetings with the teams that are implementing the different initiatives.

They provide us future forecasts and other ways for us to measure how they're progressing against certain targets.

But as we have made the decision to either approve or reapprove those programs, we do look at the long-term ROIC characteristics of these opportunities.

And each one of them has probably a slightly different time frame for that, because if it's relatively -- if it's kind of an extension of an existing business, we might put a shorter time frame on when we expect to see a nice return from that.

But if it's a brand new thing that we've never done before, we usually give it a longer runway to continue to try to grow.

In terms of the ROIC though, I think that it -- these are the things that we can do that if we can scale them on an organic basis.

The ROIC is significantly higher than if you're using your capital for acquisitions and other things.

So it's worth taking the risk to try to get a really attractive return over the long term.

And we do believe these are the things that will also strategically carry us forward with our clients, and so they're very important to the way that we're running our business going forward.

But they do have different -- each one of the investments kind of has a different profile to them.

Okay.

And then my one follow-up would be, I guess, closely related to the first question here is, but when you look at the margins of Information Services as well as Market Technology, they were down year-over-year and Information Services quarter-over-quarter materially.

And I guess, can you help us understand, I guess, from the first question the extra investment that's going in there and the impact on margins, I guess, going forward in these areas that you're prioritizing?

Sure.

Yes.

So on Information Services, the margin's really down because of the eVestment acquisition and especially given the fact we have some deferred revenue that we have to -- the purchase price adjustment on the revenue in the fourth quarter also brings it down even further than it otherwise would on a normalized basis.

But the eVestment acquisition does have a lower margin profile than the overall Information Services business, so that will have somewhat of an impact.

The Analytics Hub initiative within the data business has been an ongoing initiative for a while, so that's kind of been baked into our margins over the last few periods.

And even if we increase investment there, it's still going to be modest in comparison to the overall business there.

On the Market Tech side, though, that is more a reflection of organic growth -- I mean organic investment in both our surveillance for buy side and our Nasdaq Financial Framework initiatives.

And those are areas of relatively heavier internal investment and organic investment because we see the profile of those being very high return over the long term.

And the one thing I would say is, when we first took on the Market Tech business, it really was -- frankly, it was actually a money-losing business, but we've been marching it up to the margin it started the year at over time.

But there were periods of time where it either flattened out or even declined a little bit as we invested in integrations or invested in new technologies to try to drive it to a higher margin.

And I do believe that with the Nasdaq Financial Framework investment, that's a period of investment that will drive us to a higher margin and much higher growth over time because we'll be able to scale that business, hopefully provide a deeper relationship with our clients and make it so that we can deploy more clients faster over the long term.

So there are a lot of benefits that come from that investment right now.

And that's what's really driving down the margin this year.

Our next question comes from Chris Allen with Rosenblatt.

Just wanted to touch a little bit on Market Technology.

It seems like it was another very strong quarter, nice broad-based growth in the order backlog.

Last quarter, you talked about that moving to more of a SaaS recurring business model and order backlog not as representative as it has been in the past.

I'm just trying to interpret how to think about the growth we're seeing in the order backlog and just the ongoing trends here.

It seems to me you're building a nice stable recurring business revenue on, but now you're seeing some accelerated growth on top of that.

So any color there would be helpful.

Sure, and you are right.

We are doing 2 things.

One, is we want to move more of our implementations towards a recurring model.

We want to move more of our product base to more towards a kind of a Platform-as-a-Service or a Software-as-a-Service model, and that is frankly part of that Nasdaq Financial Framework investment.

So there are parts of our business, certainly Surveillance and increasingly BWise, where it really is more of a Software-as-a-Service.

The core Market Tech business continues to be primarily deployed solutions business, but with the Nasdaq Financial Framework, the whole notion is to move it more towards a Platform-as-a-Service model.

But we have said in the past that we are looking towards new metrics to measure this business by, and that order intake is becoming kind of less relevant as the only way to look at the business.

So we will be -- as we go into Investor Day, we will be looking at new metrics or additional metrics that we want -- we'll want to provide you so you get a better sense of how to measure the growth.

But I would say, overall, you are correct that the overall characteristics of the business, there's just a lot of demand for what we do.

And it's really great to see that our clients see us as the best partner for them.

I think the investments we're making in the Nasdaq Financial Framework are giving them even increasing confidence that if they invest in us now, we'll be able to carry them into the future because these are really long-term investments that the clients are making.

But they know that we're investing in their future by investing in the Nasdaq Financial Framework.

And then just a quick follow-up.

I mean, you noted some nice exchange wins this quarter.

I think last quarter, you talked a little bit of penetrating some of the Tier 1 banks.

You see any further opportunity with the bank penetration?

Because that seems to be to me like one of the bigger opportunities from the longer-term perspective within this business.

Yes, we do see continued opportunity in the banks.

And those sales cycles just take a while.

So we are in active dialogue with several banks, and we hope to, obviously, continue to drive that growth in new bank deals as well.

Our next question comes from Kyle Voigt with KBW.

Just a follow-up on some of the color earlier around CBOE's market on close.

I think you said it was likely immaterial to results.

Is there any way you could help kind of quantify like a percentage of a cash equities revenue that comes from market on close orders today?

So we don't provide that level of detail in terms of the financial performance of our equities business.

But I think that it's been widely stated, and I think it's out there that about 5% of our volume in Nasdaq-listed issues comes from the closing activity, but that's a combination of a lot of different order types that all come together, so you get the market on close, limit on close, imbalance only and then regular market orders that are regular way orders that come in.

So it's really a combination of a mix of things.

And so we don't break out the very specific areas.

But as I said before, we really do believe that assuming we manage through this issue successfully, frankly, we believe that we should continue to have all of those orders come into Nasdaq, and we believe very strongly about that, as witnessed by our petition, to the extent that there's a competitive environment that develops.

We definitely believe that we'll be able to manage that very successfully with -- as we said, like the immaterial outcome for us.

Okay.

And then just one follow-up for me would be on really the strategic pivot.

And I know at the time the eVestment acquisition, you kind of laid out what the idea was for investing in different segments and we got the divestments since then.

I guess is this strategy -- going forward, is this going to be a continued kind of looking at lower growth, lower margin businesses that may be within different segments across the firm on an ongoing basis?

And I guess, is that process still going on, and I guess if you could share if there's anything else that you're thinking about in certain segments that you'd potentially divest going forward?

Sure.

Yes, it is a continuous process and it will be going forward.

So I think that it's something where our leadership team is always considering how we are best serving our clients and making sure that everything we do is strategic to them, strategic to us and it's something we're really good at.

And so we will continuously look at our -- on the suite of things that we offer to the capital markets and make determinations as to whether or not they continue to be -- we continue to be the right place for them.

We do not have any other specific things that we are currently contemplating.

We, obviously, have to focus on completing the sale to West and making sure that, that partnership gets off to a great start.

That's a critical next step for us, and it will take some time to do that.

And Kyle, just the other part to add to that is part of that allocation process doesn't necessarily mean that there's going to be an acquisition or divestiture per se every time.

It could also just reflect the reallocation of the resources and capital as we have talked about earlier with respect to the increase in the Market Tech area as well on an organic basis.

So it's really a combination of those things that we're going to be looking at regularly.

Our next question comes from Brian Bedell with Deutsche Bank.

Let me just start out with the sale of the Public Relations and Digital Media Services.

I assume that's all in Corporate Services and that would reduce that revenue run rate by almost half.

But from the long-term perspective, the 3- to 5-year revenue growth outlook, assuming that was a lower growth business, wouldn't that make you more confident that you could bring up that low single-digit target to something a little higher?

Or is it just a matter of time?

Or should we still be thinking of that business in the low single-digits?

So I mean, in terms of the sale, yes, it's in the Corporate Services segment and specifically in the Corporate Solutions part of the Corporate Services segment.

In terms of the long-range outlook, we will continue to assess that as we complete the acquisition -- or divestiture, sorry, to understand our views on to -- in terms of the long-term growth of the remaining assets and make sure that we feel confident in our ability to deliver against the growth profile there, but we're currently assessing that.

Okay.

And maybe it's just the listings that's holding it down right now?

Well, historically, what we have said about listings in the past is that it's low single digits because of the fact that price increases and other changes are episodic and it depends on the IPO environment.

So we'll continue to have that as part of our assessment.

Okay.

And then just -- and I guess in the spirit of reallocating to faster growth, can you talk about NFX, is that still losing $0.02 a quarter?

And that's been going on for a while.

Is there any view of reassessing whether you want to stay in that business?

We remain very committed to the NFX business.

We continue to look at ways to bring new products onto that platform.

Our clients remain very focused on it and dedicated to making it work.

I would say for -- in terms of an investment from that, it's about $0.01 to $0.02 a quarter, so it continues to be a pretty modest investment, but one that we believe that has -- continues to have a very bright, long-term future for us.

And would a bitcoin futures product be a part of that potential from a long-term prospective?

Yes, if we were to choose to launch a bitcoin future, we would launch it on NFX.

Our next question comes from Chris Harris with Wells Fargo.

Another question on the tech business.

Where do you think this business is in the context of the potential addressable market?

That's a great question, and I would say, again, we'll probably provide a little more color and details on that as we get into our Investor Day in March.

But we definitely see an expanding addressable market with the fact that we are looking at the exchange base in itself as we've always kind of looked that as the potential for kind of a $2 billion addressable market.

You go into the banks and you start to look at market infrastructure at the bank level, you've got many billions more of opportunity.

You go into the surveillance business and if we're purely in the market surveillance, market oversight space, that's actually got a large addressable market.

The exact size, I don't remember but it's large, certainly much larger than what we're achieving so far.

But then you also can then look at how do you move and expand that into more of the compliance side and then into the buy side.

So it's kind of in the billions range on each of those, billions of dollars in each of those addressable markets.

It's a matter of how we make sure that we execute against that, and we deliver the technology and the service they need to be able to succeed.

But we're really excited about how we can continue to find new opportunities.

And then the market's economy concept is one, where ad hoc we get requests from nonfinancial markets to use our markets technology.

And it's just been kind of like inbound over time.

What we're doing in 2018, which is why I made a business priority, is to become much more structured in how we approach the nonfinancial markets with our technology and recognize that specifically if we can deliver our market in the cloud, have blockchain as an integrated part of that, have a really integrated data layer and allow for markets to be able to deploy faster and new markets to emerge faster, we believe that we can really address the nonfinancial markets economy outside the financial markets with our technology, and so that's yet another area of opportunity for us that we're just starting to understand.

Our next question comes from Alex Kramm with UBS.

Just shifting to the Market Services side for a second.

I think, Michael, you mentioned the options business as, obviously, a shrinking business from a revenue perspective and I think you ran through pricing as well.

Can you just flesh out those comments again, in particular as we think about the strong equity options activities before -- put before in the first quarter?

I mean is pricing going to take another step down?

Or how you -- how are you looking at the run rates right now of pricing given the strong volumes?

Well, first of all, I don't think we said that it's a shrinking business.

I think we -- it was lower in the quarter, but that's not a comment about the future of the business.

And in fact, there has been strong activity so far at the beginning of this year, which in contrast to where it was at the end of last year.

So from a pricing standpoint, as I mentioned on -- in my remarks, it was a reflection of a bit of a mix shift.

It was part of the reason why we saw the reduction in capture and then more of the volume is going through the Philex floor, which has a bit of a different capture rate there as well there was some changes to some of the fees, so that effects that as well, but we did maintain and actually grew our overall market share in that business.

Again, in my comments, we did talk about some of the changes that we're making that with the intention to stabilize the pricing there.

And so that will be the intent.

We do try to optimize a combination of market share and pricing, trying to ultimately optimize the revenue.

Yes.

And I'd say, Alex, one of the great things about having the 6 venues we have now is it does allow our clients to have a lot of choice, all within the kind of umbrella of Nasdaq.

And so if they're looking at new strategies that they are undertaking, and they might say that those Philex floors are better way to execute their strategies or maybe the ICE complexes or maybe NOM, it allows them to have that flexibility all within Nasdaq, but that each one of those venues has a different fee characteristic to it.

And so it really is a matter of how they're spreading and managing their strategies.

But we get the opportunity to have all of that within our umbrella.

I think that in terms of going into 2018, we will always be looking at those kind of incremental things that we can do to drive market share, maintain capture and serve our clients.

And as volume comes up, also you've got the potential for some volume caps to hit.

But we are very confident that we have a good strategy here and there's not a -- there's no concern within Nasdaq around how we're managing this.

I think it's just a natural way for -- to manage our client relationships.

Okay.

Great.

And then just on the Market Technology side for a second.

This might be a little bit nitpicky, sorry, but you talked about all these business wins and being like a strong partner to clients and new technologies.

The one thing that I noticed at the end of last year is that ASX, which has been a partner since the late '90s, went with somebody else digital assets on some things related to blockchain.

So maybe you can flesh those out a little bit considering that you're talking about blockchain and new technologies a lot and it's a strong part from the past.

So it looks like a business -- well, not a business lost, but something that's just been a new win.

So maybe you can flesh that particular one out, if it's meaningful?

Sure.

No, that's not a problem.

Yes, so ASX has been a really great partner to us over the years, and they continue to use us for new things.

They signed a new SMARTS agreement.

They continue to work with us on clearing, we are -- but in the derivative side.

We have never actually been a clearing technology provider to them on the cash equity side.

That's always been an internal system that they've had.

So clearing and settlement of Cash Equities has been this very internal build called Chess that they've had as very esoteric to the Australian markets, very different from what you'd see in other markets.

And what they've been trying to figure out over, frankly, several years is how to upgrade or replace or advance that technology.

And so they've made a decision a couple of years ago actually to partner with Digital Asset Holdings.

And it was at the very beginning of the whole discussion around blockchain, and we were really, really early in our internal work there.

So I think had they made a decision a year ago, perhaps it would have been a different decision.

But they were making a decision right when everyone was getting started and Digital Asset Holdings was a little further along than we were very early on.

I think that at this stage, particularly with the integration of the blockchain into the Nasdaq Financial Framework, I think people are recognizing that what we can offer is a much more integrated way to use the blockchain end to end, whereas what they are working on with Chess is a pure settlement depository solution, and they still have yet to implement it.

They still have work to do to get to the implementation stage.

But it is -- we're not going to win every single bit of business from every single one of our clients.

What we want, though, is for us, them to see us as a partner, so that maybe they move forward and ultimately integrate what they've built on the blockchain into what we have across the rest of the platform.

So we still have lots of things we can do together with them.

Our next question comes from Alex Blostein with Goldman Sachs.

A question for you guys around eVestment first.

So just a couple of clarifications.

So it sounds like $23 million in run rate revenues in Q4.

Is that inclusive of any purchase price adjustment?

Or is that mostly going to hit you guys in the first quarter?

And then just kind of broader, it sounds like subscriptions are up nicely.

Where's the demand coming from?

And I guess, what are the areas of potential cross-selling opportunities you guys see for this business now that you've had it for a few months now?

Sure.

The $23 million was kind of -- when we say run rate, it's because it doesn't include the purchase price adjustment.

That's just kind of within the eVestment financials when we look at it as a business.

That's what they delivered in Q4.

So that doesn't include a purchase price adjustment.

In terms of -- and so -- but in terms of how that fit into the Nasdaq overall financials, there was an $11 million purchase price adjustment off that $23 million as it kind of came into Nasdaq.

And so going into 2018, we still have a few quarters of that purchase price adjustment to play out and consistent with what we told you when we closed on the deal.

So I think that you just -- that $23 million is a run rate number.

In terms of cross-selling, I think that -- and not only cross-selling, but just synergy opportunities from a run rate perspective, there are several that we're working on with them.

I think some of the opportunities are the relationships they have within the institutional investment space does give us a chance to look at how we work with them on the surveillance side.

So the Sybenetix buy-side surveillance platform that we have an opportunity to use some of the relationships that eVestment has to get there.

We also are integrating the Nasdaq indexes into eVestment.

We're also bringing some eVestment data onto the Analytics Hub and making that on an aggregated level more available.

We are also looking at how we can leverage those relationships around selling some of our board and leadership tools into the asset management space.

So there are a lot of areas of collaboration and work together that we're focused on right now.

Got it.

And then just a quick follow-up for Michael around capital return priorities.

So as we think about the buyback of the incremental $500 million authorization, is the timing of that really kicks in once the sale closes or kind of in the back half of the year?

And as we think about, I guess, the implications for, sort of, the share count over the course of the year.

So is the goal to still keep it flattish?

Or because of the incremental buyback, we could actually see overall share count go down for 2018 versus '17?

Yes.

So the incremental buyback that would occur would be with the proceeds from -- the after-tax proceeds of the transaction.

And so that could result in a reduction in the overall share count.

So again, the primary use of our normal buybacks would be to maintain the share count flat.

And then in addition to that, we would use the proceeds from the transaction, which would result in reduction in the overall shares.

And from a timing standpoint, yes, it'll start after the closing of the transaction.

(Operator Instructions) Our next question comes from Michael Carrier with Bank of America Merrill Lynch.

Maybe one more question on just the strategic review and then like the revenue outlook.

If I look at '17, I think you guys did around 7% total and then I think it was 2% inorganic.

And just when I think about it, like from where you are from a leverage standpoint, it seems like on the inorganic side, that will be a little bit less at least in '18, '19.

So on the organic front, given that you're repositioning some of the businesses, where do you see kind of those opportunities for that 2% to be moving higher?

There's, obviously, some clear things that you mentioned on the listing side and the changes, but just wanted to maybe stack some of those up.

Sure.

I mean, as we look at the strategic pivot and the orientation that we have around the business, clearly, we see the Market Tech and Information Services businesses is driving a fair amount of growth into the business and we want to make sure that we're positioning it to continue to drive growth.

Because if we can continue to accelerate that growth or at least get it to the point where it's really driving the rest of the organization, then we, obviously, have the opportunity to bring the whole organization up.

And that's why we've been pivoting our investment dollars there, so that we can make sure that we can continue to kind of push that revenue growth up to a more -- a sustainable level that we're really excited about.

In terms of Market Services, the issue there is that we can control, we can control.

And from a market share perspective and from a pricing and the way that we manage our client relationships, I think we're feeling really good about the largest revenue pools in terms of how we're managing those.

If there is better beta in the market in terms of higher volumes that, obviously, creates a lift, but we just can't rely on that.

So we're not counting on that as being a driver of growth, but it certainly could deliver it.

Instead what we're focused on is how do we make sure we're optimizing our markets, so that we can take advantage of that if and when it happens.

And then on the Corporate Services side, as we said, we are -- we will be assessing the growth characteristics of that business post close on the PR and DMS businesses, because we believe that West actually has a much better opportunity to focus on those businesses, focus on areas that we weren't focused on, drive -- kind of invest in those businesses and drive growth there, but that was not our focus.

So now we get to look at how do we take the capital that we invest into that business and drive it towards things that grow at higher rates.

And again, Mike, this is something that we'll try to lay out probably more detail as we get into the Analyst Day in March.

And that organic growth number that you quoted that is really being held down because of the reduction that we've seen on the volatility and the activity that we've seen in the Market Services side, as you know.

We still believe that mid-single-digit growth opportunity on the subscription recurring revenue side is there.

And with some of the pivots we're making, we're, obviously, looking to try and accelerate that as much as possible.

So that -- if you break out the 2 pieces of the business, we are seeing higher growth in the subscription and recurring revenue side.

Our next question comes for Jeremy Campbell with Barclays.

Just wondering within the context of your strategic plan, how do you guys think about the implications from the big announced Blackstone deal to acquire the Financial and Risk business from Thomson Reuters?

And whether that might -- whether that shake up may yield any opportunities for Nasdaq to either grow faster organically or inorganically?

Or perhaps even look to monetize some pieces?

We are reading the news at the same time you are.

So we're just trying to make sure we understand the contours of that partnership that they've announced and understand kind of the implications.

Thomson Reuters is a great partner to us, actually, in the Corporate Solutions business and in our data business, and we would certainly expect them to continue to serve those roles to us going forward.

But we're digesting the news at the same time you are right now.

Well, it's funny because they're a partner but they're also a little bit of a competitor in some areas too.

I'm just wondering like big picture if there's a jump all like this if it's happened before, does that usually -- does it tend to yield any opportunities that are -- that might be interesting on your guys' side?

Yes.

Generally speaking, we don't view Thomson Reuters as a competitor to us.

They are a great distributor to us.

They partner with us.

They actually -- I mean, we do things like we've put our DWA data onto their platform for a rev share type of model.

I mean, we do a lot with them.

So we don't see -- we don't kind of view them in the same way that maybe you do.

But obviously, we'll kind of look through what's happening there and understand whether there are opportunities.

Our last question is from Ben Herbert with Citi.

Just wanted to follow up again on the Public Relations and Digital Media sale.

And having those marked as held for sale, that $335 million acquisition price, what those adjustments might be?

And then the potential to take a gain in the second quarter as it closes?

So we had -- last quarter, when we announced that we were, look, doing a strategic review, we put the assets on the books and -- on available-for-sale basis, so there's $250 million that it shows on the books as the book value of that.

So obviously, $335 million less whatever cost part of the transaction and the 2 will net off.

So it's premature for us to tell you what the final number is, but there will be some gain.

We will non-GAAP that, obviously, because we wouldn't show that through the non-GAAP earnings, but that's -- those are roughly the numbers that you will be looking at.

Does that help?

Yes.

Thank you.

I'd now like to turn the call back over to Adena Friedman for closing remarks.

Thank you.

Well, Nasdaq's fourth quarter performance was solid.

The team is definitely energized and focused on delivering for our clients and exploring opportunities that will shape who we are as an organization and what we will be coming in the years to come.

As you can tell, that's a big area of focus for us.

And it really is an exciting time to be leading Nasdaq, as the industry and technology world continues to evolve.

So we continue to work with the industry and other key stakeholders on a regulatory framework that we believe will provide maximum support to our clients, while preserving critical investor protections.

And that would benefit the broader investment community and the broader economy it serves.

And also internally, we are focused on making sure that the clients come first every day and that we can make -- we bring the most innovative and creative solutions to them today and in the years to come.

So thank you very much for your time today.

Ladies and gentlemen, this concludes today's conference.

Thanks for your participation.

Have a wonderful day.