Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Markit (NASDAQ:MRKT)

Q2 2014 Earnings Call

August 13, 2014 8:30 am ET

Executives

Matthew Kolby - Head of Investor Relations

Lance Uggla - Chairman, Chief Executive Officer and Member of Nominating & Governance Committee

Jeff Gooch - Chief Financial Officer

Analysts

Alex Kramm - UBS Investment Bank, Research Division

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

Ato Garrett - Deutsche Bank AG, Research Division

Sara Gubins - BofA Merrill Lynch, Research Division

Manav Patnaik - Barclays Capital, Research Division

Andre Benjamin - Goldman Sachs Group Inc., Research Division

Toni Kaplan - Morgan Stanley, Research Division

Ashwin Shirvaikar - Citigroup Inc, Research Division

James Justin Hughes - Philadelphia Financial Management of San Francisco, LLC

Operator

Good morning, and welcome to the Markit Second Quarter 2014 Financial Results Conference Call. [Operator Instructions]

I will now turn the call over to Mr. Matthew Kolby, Head of Investor Relations. You may begin sir.

Matthew Kolby

Thanks, Brandon, and thanks to everyone for joining us today for Markit's second quarter 2014 results conference call. I'm joined here by Lance Uggla, Chairman and Chief Executive Officer; and Jeff Gooch, Chief Financial Officer. Following their comments, we will open up the call for questions. As a reminder, this call is being webcast and a replay will be available later today on the Investor Relations section of the Markit website. The press release and supporting documents can also be found on our website.

Before we get started, I'd like to remind you that this call may include certain forward-looking statements based on our current expectations. Actual results could differ materially from those implied or expressed by our comments today. Information about the factors that could affect future performance or events is summarized at the end of our press release, as well as contained in our recent SEC filings.

And now I'll turn it over to Lance.

Lance Uggla

Okay. Thanks, Matthew, and welcome, everybody. Good morning, and good afternoon in London. Thank you for joining Markit's first analyst call, and I'm really pleased to be here. This is our first earnings release as a public company following our IPO in June, and I'm going to begin with some brief comments on our business and financial results before turning it over to my partner, Jeff Gooch, our CFO. And he'll run through all the financials in a lot more detail.

So first, let me give you a brief overview of our business. Markit provides financial information and services globally, and we're organized into 3 divisions, which you're going to get to know as we continue to work with you forward: Information, Processing and Solutions. And everything we do in those divisions is focused on our 3,000 institutional customers, and we revolve the strategy around 3 key objectives: Firstly, improving operational efficiency. You'll hear us talk often about focusing on the cost reductions needed in the industry. Secondly, reduction of risk. The benefit of reducing risk for our customer base. And thirdly, providing enhanced transparency. That's our focus. These areas of focus are always carrying a common theme, in most cases, to do with regulatory change, cost pressures and the need to manage the risks associated with operating in the complex financial markets that Markit, with an I, participates in.

I'm pleased to report today that our first half year and second quarter results reflect solid operational and financial performance with all 3 of our divisions contributing top line revenue growth. In the second quarter, we achieved record revenues, up 11% year-on-year while maintaining strong margins and profitability. We continue to benefit from 95% of our revenues being based on recurring contracts. Okay. So I'm going to talk a bit on a divisional basis for the quarter.

Our Information division, which accounts for 46% of our revenues, where I founded the company, and 49% of our adjusted EBITDA, had a steady performance with solid growth. Our Processing division, which represents 27% of our revenues and 32% of our adjusted EBITDA performed better than expected. We were anticipating a tougher first half for our OTC derivative Processing businesses due to the expected shift to electronic trading. However, once again, this did not materialize to the extent we anticipated. We do expect this shift to occur over the coming quarters, but I believe we're well prepared as a company for the new world of electronic trading in derivatives.

Finally, our Solutions division, representing 27% of our revenues and 19% of our adjusted EBITDA. Here, we saw very strong organic growth across both Enterprise Software and Managed Services with positive new business momentum. Our results highlight the benefit of our business model, which is diversified across a large number of customers and products and it's focused on long-term value creation.

So notwithstanding the challenging operating environment, particularly in the fixed income markets, we believe we are well positioned on our long-term financial goals. And to remind you, these are to deliver: Firstly, 5% to 7% organic growth; secondly, including acquisitions, overall double-digit revenue growth; and thirdly, adjusted EBITDA margin in the low- to mid-40s.

Across the business, we've made good progress in the first half of the year and we continue to advance business development in partnerships with industry participants. I'd like to highlight one big and one smaller example of those for you now.

First, in May, within our Solutions division and in keeping with our purpose and focus of driving operational efficiencies for our customers, we announced the launch of a joint venture with Genpact. They're the large business processing and operations outsourcing firm. And here, we're focusing on delivering a managed service for the collection and management of client documentation in a process that is known as Know Your Customer, and you'll hear us regularly referring to that as KYC.

I'm personally really excited about the value that this service will bring to our customers, helping them streamline their client on-boarding and reduce costs. In doing so, will also help improve the quality of this very important, inexpensive industry process.

Second, in May, a bit smaller but equally exciting for Markit. Within our Information division, we launched a new Flash PMI in Japan. This complements our existing Flash PMIs in the U.S., Eurozone and China, completing a real global picture. We did this in partnership with the Japan Materials Management Association, our purchasing managers indices, and again, PMI will be the acronym you'll us refer to, aim to enhance transparency on the world's economies and are some of the most closely watched business surveys in the world that watch among central banks and global market participants for their ability to provide timely and accurate indicators of economic trends.

These 2 examples highlight our ability to work in partnership with other organizations in the industry to develop new products that address the needs of our customer base. It is what we have done since inception, and what we'll continue to do. Once again, improving operational efficiency, reducing risk and enhancing transparency.

As I've talked about before, one of the 2 cornerstones of our growth strategy is targeted acquisitions. In line with this, in June, we announced the acquisition of Compliance Technologies International, another acronym, CTI, as it's known. They are a leading provider of tax compliance services to the financial services industry, and this business is going to effectively complement both our counterparty manager and our Know Your Client or KYC offerings and will provide our customers with valuable tools to help them manage the changing regulatory environment, which is a key focus for Markit. We continue to see good acquisition opportunities and we'll look to transact where we identify strategic fit and the potential to create long-term shareholder value.

So now let me hand over to Jeff Gooch, who will take you through the financial details of our firm. Jeff, over to you.

Jeff Gooch

Thanks, Lance. I'd like to take about 15 minutes to highlight the key trends and drivers of results for the quarter and to provide some additional color on the operational performance behind the numbers.

Before I start, as you know, we ran the business against the full year plan. So where appropriate, I might point you to our half year results to provide context. I will start with the overall group results, and then give you some further color on each of the business segments in turn.

As Lance mentioned, in the second quarter, revenue increased 11% to approximately $265 million, which is a quarterly record, driven by top line growth in all of our business segments. I will discuss the drivers of that growth over the next slide in a moment.

We continue to see strong recurring revenues comprising about 95% of our business with over 50% from fixed recurring revenue contracts. Renewal rates for recurring fixed revenue contracts across the business were approximately 90% and showed an improving trend from last year. Our profitability metrics remained strong. Adjusted EBITDA grew 7.7%. I will discuss this in further detail later in my presentation.

Moving onto revenue growth on Slide 6. We achieved organic revenue growth of 4.3% compared to the second quarter of 2013, and organic growth of 6.2% compared to the prior half year.

Strong performance in Solutions across both Managed Services and Enterprise Software were the main drivers of growth. Acquired revenue growth of 2.8% year-over-year resulted from the acquisition of thinkFolio and Markit Corporate Actions, both in Solutions.

Large moves in the dollar sterling exchange rate resulted in above average impact on revenue from foreign exchange movements, increasing revenues by 3.9%. However, this currency movement also increased our expenses, primarily due to personnel costs in sterling. So our bottom line exposure to FX rates is mitigated. As a reminder, we hedged certain net cash flows using forward agreements.

Beyond revenue, let me now talk about the key performance indicators of profitability on Slide 7 for the quarter and first half. I would like to explain briefly the specific factors, which impact the quarterly comparison.

Firstly, looking at the adjusted EBITDA. Adjusted EBITDA increased 7.7% for the quarter and 17.1% for the first 6 months. A key part of this difference in growth rate is the noncontrolling interest in our Q1 2013 numbers prior to our acquisitions of minority share in Markit shares at the beginning of Q2 last year. Adjusted EBITDA margin for the second quarter decreased year-on-year, driven by new product initiatives in Solutions and compensation changes.

Secondly, looking at adjusted earnings. Whilst adjusted earnings for the half year increased by 19.4%, for the quarter, they decreased 3.5% or $2.5 million to $68.3 million. However, the year-on-year comparison is distorted by a favorable tax adjustment of approximately $5 million in the second quarter of 2013 relating to prior periods, which increased the adjusted earnings comparison for Q2 2013. While talking about tax rates, we estimate our effective tax rate for the medium term to be in the range of 26% to 29%.

Finally, for the half year, diluted adjusted earnings per share was up 14.7%. For Q2, at $0.37 per share, this was down 9.8% compared to $0.41 in the prior year, due to both the tax impacts on the adjusted earnings number, I just talked about, and because the average number of diluted shares for the period increased due to the IPO.

We calculate our average diluted number of shares based on the average dilution each day for the last 12 months. Our IPO process has significantly increased the share price due to this calculation. This negative impact of increased dilution is expected to continue to build for the remainder of 2014 at the weighted average calculation on 1s.

On the next slide, I'll focus on revenue mix. In Q2, recurring fixed revenues were $134.5 million or 50.8% of total revenue compared to 49.9% in the same period last year. This $15.7 million increase year-on-year was a result from proactively moving a number of existing customers from variable to fixed revenue contracts in the Information segment and from new business wins both in Information and Solutions. For the 6 months, recurring fixed revenue increased to 51.3% of total revenue compared to 50.2% in the prior year.

Nonrecurring revenue for the quarter increased from 3.8% last year to 5.3% this year, principally due to higher consulting revenues as associated with new business wins in our Solutions segment.

Slide 9 summarizes the movements in operating expenses. For the quarter, operating expenses increased by $17.7 million or 13.9% from the prior year quarter. The largest driver of this increase was personnel costs, which were up $11.7 million year-over-year due to a number of factors, including currency impacts, new hires, the acquisition of Markit Corporate Actions and thinkFolio, as well as cash compensation changes we implemented at the end of last year.

Nonpersonnel costs for the second quarter increased approximately 12% year-over-year. A large part of our nonpersonnel costs are technology-related. These grew 9.2% for the quarter, largely driven by the acquisitions. However, we continue to focus on driving operational efficiency across our technology base on existing businesses, and have been successfully mitigating cost growth in the period by restructuring numerous vendor contracts. Overall, about 30% of our expenses are in sterling, mainly in personnel costs.

A few words on exceptional items on Slide 10. Exceptional items during the second quarter was $31.3 million, primarily related to the IPO. The largest impact was the recognition of the liability for Social Security costs on future option exercises of $20.1 million due to the completion of the IPO. This reflects the future estimated Social Security taxes payable by the company and profits made by employees and stock options and restricted shares are exercised in future periods. This liability will be reassessed each reporting date. It's also important to point out that this is a noncash charge that will be cash-settled over time. Finally, IPO preparation and execution costs were $8.4 million, consisting of legal and other professional fees.

On Slide 11, the strong operating cash flows, which were $158.4 million for the first half excluding interest and taxes, enabled us to reduce our balance sheet leverage despite having funded the acquisition of thinkFolio in the first quarter of 2014. Overall, leverage levels continued to remain low at 1.07x last 12 months' adjusted EBITDA. We also showed tight controls on capital expenditure in the first half of 2014, which totaled $64 million, down $1 million from the prior year.

To provide some additional color on company performance, I will now make a few comments on each of the operating segments. Starting on Slide 12, revenue in the Information segment was up -- was $122.2 million, up 5.7% compared to the prior year quarter, bolstered by favorable exchange rate movements and new business wins. For the 6 months, revenue was up similarly, 5.6%.

We experienced revenue growth in pricing and reference data from new business wins across a broad range of products. In our Index business, the increase was largely driven by new business wins in our iBoxx and PMI products. But this growth was offset by some pricing pressures in valuation and Trading Services. As I mentioned earlier, customer retention and renewals remained strong at approximately 90% for the group and showed an improving trend on the first half compared to last year. This has been a particular focus for the Information management team.

Turning now to Processing. We are very pleased with these results, which were driven by strong volumes in loans and across derivatives. Reported revenue showed an increase of 1.7% to $72.1 million compared to the prior year quarter. However, excluding the impact of FX, revenue will be slightly down compared to the second quarter of 2013. The comparative quarter last year was very strong due to unprecedented levels of primary issuance in the loan market.

For the 6 months, Processing increased by $8.1 million or 6% to $144.2 million compared to the same period in 2013. In the quarter, we did not experience any significant impact from the move to electronic trading across the credit and rates asset classes. As at today, we haven't seen any indication of a near-term change. However, we remain cautious about volumes and the price point across credit and rates associated with electronics trading and still anticipate headwinds for the future.

More generally for Processing, we maintain our positive outlook for the performance of this business with new opportunities arising. For instance, our recently announced initiative on FX options.

Finally, on Slide 14, Solutions again turned in a strong performance. Revenues were up 36% for the quarter compared to 2013, largely driven by organic growth through new business wins in both Managed Services and Enterprise Software. The remainder of revenue increase was primarily due to the acquisitions of thinkFolio and Markit Corporate Actions.

First half revenue in Solutions was up $37.5 million compared to the prior year period to approximately $140 million. The CTI acquisition, which we recently announced, will form part of our Managed Services group and will start impact revenue in the third quarter. As Lance mentioned, we also announced the launch of our KYC service partnership and we gained strong, solid momentum with both buy and sell side.

We remain excited about the opportunity in this space as financial institutions continued to face cost pressures and look to invest in improving their operational efficiency.

Now I hand back to Lance for some closing remarks before we open the queue for Q&A.

Lance Uggla

Okay. Thanks, Jeff. Hopefully, everybody heard Jeff's -- started off with the fire trucks and police cars in the background, which is a great start in how I love to see things happen at Markit.

As I look back over the last couple of months, the transition to a public company has been very smooth. But really, as you get to know Markit, it's just how we expect things. We've got a great -- an amazing team. It's really one of the things that defines the company, but also a great board, expert advisors. We always really set a high bar for ourselves. And as I look through what's been done and prepared today, I really feel positive, both with management and really employees more broadly. So I definitely see a genuine excitement about what being public means for us and the opportunities it's going to bring. It really hasn't been a tough job. It's been really straightforward. I know a lot of people advised me I was going to wake up at different time and change my ways, but it really does seem that everything is the same. Except we've got to talk to 40 or 50 of you on the phone that -- and disclose more broadly, but we always had a practice of doing that with our board. And we've got a great board, some of them on the call today, I hope.

It's great, too, that we delivered solid Q2. Our first half year results makes this presentation a bit easier, and I'm pleased about that. As I've said before, we don't really run the firm on a quarterly basis, but it's nice when the numbers are good on a quarter.

As I look forward to the second half of the year, I believe we're in a strong position. The trends that have fueled our growth more recently really hasn't abated. There's been a change year-over-year. We do see some headwinds in the OTC derivative processing. I think we've beat that one regularly in terms of making sure that message. And as Jeff mentioned, we continue to have a cautious outlook in that division. However, the ongoing focus on cost efficiency in the financial industry and regulatory change continue to generate demand for our products and give us a great tailwind. I believe we're well positioned to meet that demand.

So in summary, with our strong pipeline and our potential to deepen our customer relationships with both existing and new products, I feel confident in our ability to deliver on our long-term business and financial objectives.

Thank you. Let's open up for some questions.

Question-and-Answer Session

Operator

[Operator Instructions] And from UBS, we have Alex Kramm on the line.

Alex Kramm - UBS Investment Bank, Research Division

So anyways, maybe starting with the Processing business because that obviously is a big focus, as you mentioned yourselves. So curious if you could give us a little bit more color on why and where you see -- or what do you see -- do you still have that cautious outlook? And maybe specifically, talk about what's happening in the U.S. with some of the staff [ph] trading being pushed out. And then maybe more detail on the breakout of Europe and U.S. in that business because it seems like Europe continued to get pushed out and I don't know, I think expectations of something like 2016 right now. So it seems like there's a very, very long drag. Maybe you can flesh it out just a little bit more.

Jeff Gooch

Okay, Alex. It's Jeff Gooch here. Let me pick that one up. I think you're right. Earlier in the year, we were certainly had the belief that electronic trading would pick up some -- more quickly in the U.S. than it had. As you know, the CFTC passed a number of rules and modification, so far, this year, none of which have really resulted in a big increase in electronic trading. On the European side, as those rules are being developed, the timescales had been extending. I think it's pretty clear there will not be mandatory trading in Europe for some time at this point. It's worth cautioning, though, that I think our general belief is if the U.S. market does substantially move, we would expect on a voluntary basis large chunks of the European market to follow suit. It doesn't really make sense to have mixed-mode execution, where you click on the screen for dollar trade, pick up the phone for euro. So I'm not sure that you will see no movement ahead of the regulations but, as we made mention in that comment, so as of today, the movement has been somewhat limited. We don't see any -- we're not aware of everything that happened in that couple of months that will change that. But we do think in the U.S., it will happen and Europe following. So for corporate [indiscernible] we need to be more accurate than that, but our fast-track record in the last 18 months to try to anticipate this has not been great. We've kind of always saw this is going to happen, and one day we'll be right.

Alex Kramm - UBS Investment Bank, Research Division

Okay. And maybe just in terms of Europe and U.S., can you break that out? I know you said this might move together but still just for our sense?

Jeff Gooch

I don't know the precise number, but if you think about the 2 asset classes that are impacted, just rates and credit. But the majority of our other businesses, loans, FX, equities, there's no impact to worry about. Credit is obviously a U.S.-centric business. Rates is more of a European-centric business. So I would -- I don't have the precise numbers in front of me, but I would say probably for credit, it's over half in the U.S.; for rates, Euro situation, just over half in Asia -- in Europe. Also worth mentioning, there's a big Asian continuing -- contingent to the rates business. Not much credit out there, but Asia also similarly does not have an electronic trading venue and makes up probably 10% to 15% of the rates market.

Alex Kramm - UBS Investment Bank, Research Division

Okay, that's great. And then just shifting gears, maybe talk about M&A, because I think you mentioned there's obviously a big part of the story here, too. So maybe give us an update about the pipeline there, where exactly you're looking, what kind of product groups or in what segment you think you're going to be adding the most. And maybe any thoughts of how the pipeline has changed since you went public and maybe how the discussions have moved along.

Lance Uggla

Okay. Maybe I'll take that one, Alex. It's Lance. Well, we closed the CTI acquisition, so that's public. Our pipeline -- I think ever since I've set up market, there's always been 2 or 3 things we're looking at, and that hasn't changed. I would say that assets seem to be expensive in today's market environment, so there's no bargain. That's for sure. But we don't have anything to disclose in terms of particular things that we're working on. But we are always looking at 2 or 3 ideas at any one time.

Operator

From JPMorgan, we have Andrew Steinerman on the line.

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

What was the organic constant currency growth of the Information division in the second quarter? And remind me, I remember, A, there was first quarter or fourth quarter of '13, there were some transition on the Totem contracts and changing how clients came. And is that behind us and what should be driving the Information growth division going forward?

Jeff Gooch

Yes, let me take the second part of the question first, Andrew. Then yes, as we -- as I highlighted in my comments, we had some characterized as pricing pressure in trading valuation services. About half of that was at transition. We've now largely completed the process of signing up contracts and for those of you not familiar with the process, we took the decision to offer customers a discount if they move from a 1-month contract to a 3-year contract in that business. Many of our last customers took us up on that, and that's the short-term revenue impact. But yes, in the long term strategically, the right commercial decision for the firm. I think we're through that process of signing those contracts and those numbers are probably in the full year, in the Q2 institution numbers. More generally, if you look at -- yes, we haven't disclosed organic growth rates by division but if you look at the growth rate in Information, clearly, we had some beneficial FX impacts within that. Otherwise, it was down to a good strong performance in pricing and reference data. Good performance index offset by poorer performance in trading and valuation services, largely due to those pricing pressures.

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

So Jeff, what was just the FX impact? Is it also 3.9% on Info?

Jeff Gooch

I think, we haven't given those precise numbers out. But Information is -- does have some sterling impact, roughly percentage off the top of my head is probably...

Lance Uggla

It's probably about 16% [indiscernible].

Jeff Gooch

Yes, it's probably. I'll come back to you, Andrew, on the precise number there.

Operator

From Deutsche Bank, we have Paul Ginocchio online.

Ato Garrett - Deutsche Bank AG, Research Division

This is Ato Garrett on for Paul Ginocchio. Just looking at the Processing division, you mentioned that you hadn't seen too much of an impact yet from electronic trading, but could you speak a little bit about what are some of the things that could have driven the change in the reported revenue growth in 2Q versus 1Q on a year-over-year basis? Just came in significantly lighter, so...

Jeff Gooch

Okay. So we're talking about -- make sure I've got the questions right. We're talking about Q2 versus Q1 this year or Q2 this year versus last year?

Ato Garrett - Deutsche Bank AG, Research Division

No, just looking at the reported revenue, growth decelerated. So looking at what could have driven that for Processing. Since we didn't see as much of impact from the electronic trading, just wanted to get a sense whether that was driven by volumes or something else.

Jeff Gooch

Okay. I think that's primarily because if we -- we had a pretty good start to the year in terms of volumes. I think those levels remained similar to the second quarter, so were probably a good number. If you do the comparison to last year, generally, we had, I think, a strong performance in the secondary loan market, but we did have last year a very big impact from very large amount of primary issuance from the loan market, which is a bit of a one-off. At least for the beginning of last year, we expected rates to increase as we financed the low loans, had a big negative impact on this quarter, where we had a more normal level of primary loan issuance. So if we look this year to last year, I would say it was a good growth quarter, but with a negative impact, flattened out those results out from primary loans. If we look at Q1 versus Q2 numbers are very much in line. I think very good set of Q1 numbers and we are very pleased to maintain that level for Q2.

Ato Garrett - Deutsche Bank AG, Research Division

Okay, great. And then also looking at the Solutions division, we -- x acquisition we calculate the growth per division to be around 23%. And do you feel that's a sustainable level for the back half of the year for Solutions?

Jeff Gooch

I think we certainly see Solutions as a high-growth part of the business. I think we had acquisitions in the number, but I think organic growth in that sort of circa 20% range is what we achieved. I think for the second half of the year, I'm not going to give precise statements, but I think we still remain excited about the opportunities in that space, particularly given the focus on financial institutions reducing cost.

Operator

From Bank of America, we have Sara Gubins online.

Sara Gubins - BofA Merrill Lynch, Research Division

With the centralized Know Your Product -- Know Your Customer product launching, you mentioned strong solid momentum. Could you just give us some more color in terms of what you're seeing for a client reaction and the competitive landscape there as well?

Lance Uggla

Okay. I'll take that one, Sara. It's Lance. I'm very excited about that initiative. There are competitors. The competitors are a DTCC-led consortia, which I believe is behind us, and a Thomson Reuters initiative. What I like is the growing pipeline of interest in some of the announcements that we're going to be able to make going forward, both on the product development and new customers joining. So I feel we're well advanced. We've moved nicely over the quarter. We announced the design partners Citibank, Morgan Stanley, Deutsche and HSBC, and we've launched the product in beta, so we have a real product. We've got people now in place at Genpact globally working on the entity scrubbing and remediation. So I really do feel we're well positioned relative to our competition. And that as we move into the fall, September, we're going to increase the PR and marketing, and you'll be, hopefully, seeing some nice announcements to support the statements I just made. So I feel very positive. But there is competition and key for us is to stay ahead of that competition. And the way you do that is by having the best product, which I believe we do.

Sara Gubins - BofA Merrill Lynch, Research Division

Great. And then separately, can you provide any updates to the pending legal proceedings with the European Commission?

Lance Uggla

There's nothing really to update. What we disclosed in the S-1 is what I've disclosed now and there's been no changes.

Sara Gubins - BofA Merrill Lynch, Research Division

Okay. And then just last question. I know you're not giving specific guidance. But is there anything worth calling out in the second half as we think about modeling, anything that's unusual that we should just make sure we're aware of?

Lance Uggla

You want to take it, Jeff?

Jeff Gooch

Nothing particular, Sara. I think we'll have to keep an eye on exchange rate movements in terms of that the contribution's top line numbers. Obviously, we're not fully unaware in terms of those sterling movements that happened last year into the numbers, so we'll keep an eye on that. In terms of Processing, obviously, as of today, we're halfway through Q2. We've not seen impact from electronic trading. I don't see anything in the next couple of months, but we can keep an eye on that and maybe there'll be more action in Q4. So at the moment, I think other than those 2 factors, I think nothing particular to flag. Also, if I can come back to Andrew's earlier question about FX exposure in terms of the Information division. I would say if you look at the growth for Information in Q2, about 75% of that came from FX movements and about 25% from organic growth.

Operator

From Barclays, we have Manav Patnaik on the line.

Manav Patnaik - Barclays Capital, Research Division

Just a follow-up on your commentary on the M&A pipeline. Can you help us maybe characterize the opportunity there by division? I mean, are you going to see most to if in the solutions side of the business or is it basically pretty broadly spread out?

Lance Uggla

I think what I'd say is that I think the best opportunities for us in terms of our acquisition strategy would be within our Information and Solutions division. And we continue to look at entities that could add to our strategy and add to, to me, means that we acquire something and we can grow it better than anybody else that might acquire it, so we're willing to pay the best price, and we can produce that growth over time. So we add value from cross-selling or new product development or bringing -- giving a better global reach to the entity. Those are a lot of the reasons we become interested relative to a competitor for that asset. But most important for us is that, that asset then fuels organic growth within the company with cross-product development or cross-selling opportunities that become natural. And we see that in any -- across any of our divisions. If you look, historically, at the types of acquisitions we do. So the pipeline has potential targets in it. We have a team led by Stephen Wolf that's focused on that landscape, and we look at ideas regularly. But if they don't add long-term shareholder value, we're not going to be interested. And I think having an employee base that has 30% of the upside of this firm makes sure that people think the right way. We're not interested in something that is a trophy for us. It has to produce long-term value.

Manav Patnaik - Barclays Capital, Research Division

Okay, fair enough. And then just jumping to the indices business, can you help us understand the organic pipeline and sort of your visibility there in terms of the growth driver there? And also, I guess, from an M&A perspective, there's some notable assets out there, just your general thoughts on those.

Lance Uggla

Right. I really like the index business. It's a great recurring revenue business. It plays well with our data assets, so we do like it. We've got great relationships. We're a leading player in the -- where the largest independent fixed income player in the index space. So it's a space that we watch, where aware. We've seen the UBS Australia index trade to Bloomberg, along with their commodities Index. So we watch that closely. We're aware of the assets that are for sale in the space. And if they make sense for us, definitely things that we would consider. But we're not going to comment on acquisitions unless we're at a stage we feel we should be commenting.

Jeff Gooch

Why don't I add a little bit color, Lance? So on the current operational performance of the business, we do -- I mean in the indices. I think if you look at that growth in the second quarter, we do -- the 2 strong performance are iBoxx, which have bond index franchise. We saw great growth in that from index licenses and underlying data sales. Also the PMI products are economic indices, Lance gave you an example of that in his opening comments, were also good growth drivers. I think away from that, the derivative index business did well, but didn't show a lot of growth. And in terms of ETS, AUMs, there was no particular growth in the quarter in terms of the ETS side of fixed income. But certainly, bright points for us were bond indices and economic indices.

Manav Patnaik - Barclays Capital, Research Division

And just last question, Jeff. Can you help us with what share count we should be thinking about in the third quarter just to make sure we're all on the same page.

Jeff Gooch

Okay. So I think in terms of the number of shares, I think nothing in particular will change since our disclosures. I mean, the big impact is we've been working out from an accounting perspective diluted EPS. As you know, from accounting perspective, we have to look at the average dilution per value for the last 12 months, which means as of the Q2, we had 9 months’ worth a private company where our share price is valued using all those illiquidity discounts and other things that are normal for private company. 2.5 months we did the [ph] IPO process. We're able to use the midpoint of the range, and then a couple of weeks -- or 10 days or so of an actual public company, and we could use a real share price. So that has a small impact because of that quarter in terms of our numbers for Q2. Obviously in Q3, then we'll have 2 quarters as a private company. We have one that's in-process. Two -- one a bit as a public -- that will slowly unwind over the next 9 to 12 months. So from an accounting perspective, you'll see that EPS calculations will get more and more dilution feeding through, but it's not really of impact from number of shares or anything else. It's just the way the calculations work. But I know most of you guys would be willing to use that number, you use the current dilution number for it.

Operator

From Goldman Sachs, we have Andre Benjamin on the line.

Andre Benjamin - Goldman Sachs Group Inc., Research Division

First question, in Processing, given the move to electronic trade has been more muted than expected. Can you give a little more color on what the growth would be in the second half of the year if nothing, indeed, does happen? Is the 2Q run rate the right one or something else? And when the changes do start to show up, are you still assuming that the price impact would be 25% to 30% decline with no volume change or should we be thinking about it differently?

Jeff Gooch

Okay. I think in terms of the pricing impact, yes, nothing's really changed in terms of our view since we discussed that in the IPO. I think in terms of volumes for Q2 -- Q3, sorry. That's hard to predict in terms of what market volumes will be. We always get, as you know, a little bit of quarterly noise up and down. During the first 6 months of the year, Processing revenues overall grew 6%, I think. So I think it's very strong position to be building up from. So I think we'll need to see how market conditions move out. Q3, obviously, have some summer months in it, where should nothing's happening in the market can be a little bit quieter. And then Q4 is a bit stronger. But it all depends on -- Greece events, Ukraine and other things can change that seasonality picture very quickly.

Andre Benjamin - Goldman Sachs Group Inc., Research Division

And any updated thoughts on competition in the market for investors and solutions to financial institutions. We know there's been some discussion of the bench that you do with Thompson, and then there was another deal that some of the sell side firms did to potentially purchase a stake in a firm called Perzo. I just didn't know if you have any update on how that venture -- to get involved in messaging is going and how we should think about the financial impact on your firm.

Lance Uggla

Right. So first, just to make clear, so the Perzo announcement is about the creation of a new closed network that, like the Bloomberg messaging platform, would be similar except that it would be owned and operated with a consortia of dealers, I believe, led by Goldman Sachs, with that making an investment in that company. That's a messaging platform. We don't have a messaging platform. What we have is a collaboration and federation tool, and what we create, really if you think of a phonebook, that's the directory; and a switchboard, that's the collaboration in technology. And we continue to add participants to that. In fact, most of the institutions mentioned involved in -- are potentially involved in the Perzo transaction are federating and collaborating with the market solution. We're about creating the ability for any messaging platform, including Bloomberg, including potentially another new closed platform to connect together through our switchboard to access a common directory in the industry. And so at the present time, it's a very small piece of Markit's vision, but one that's intact and will continue to develop. The most recent announcement was that we added Jefferies to that platform. They rolled out in 24 hours. It was a very great piece of business, and actually, reconfirming the interest in the platform. I think there's some 32 buy and sell side now signed up to that federation and collaboration. So it's a small part of our vision but one that's intact. And I think the creation of other messaging platforms we will offer for them to federate to us, and it's something that I'm sure they're considering.

Operator

From Morgan Stanley, we have Suzi Stein on the line.

Toni Kaplan - Morgan Stanley, Research Division

This is Toni on for Suzi. So when you think about your customer base, asset managers, hedge funds, banks, et cetera, are there any specific types of customers that are expanding their relationships with you more than others? And any that are sort of cutting back or buying less than others?

Lance Uggla

Yes, well, what's interesting is that the themes of cost efficiencies and regulatory change, which are driving new product development, are fueling us. There really are tailwinds. Well, these are headwinds in the general market that people face. But we don't really -- we don't have things that are per seat or per person. We don't sell a desktop, we sell a solution to help reduce cost. That's good business. We sell our products that are a subscription for an entire bank or asset manager, hedge funds, insurance company, government. And these aren't impacted by the size of the institution, but rather if they're in business or not. So if people aren't in business, of course, that's bad. But as long as they're in business, our services are generally required. I -- if you look over the years, of course, buy side is a big, growing -- the most customers we have are on the buy side and it's -- I would think Jeff can back me up with some numbers in a moment. I'd say our fastest-growing segment definitely in terms of number of customers and increasingly the numbers of things we do with them is growing and we see a lot of cross-sell opportunity in the buy side because that boasts 3,000 customers. A lot of them only buy 1 or 2 of our products. So there's a lot of room to sell into the buy side, and it's a very key focus of our sales teams. Albeit though on the sell side, our revenue growth numbers have been very strong, and I'm very pleased. And I think that's coming because of the drive for cost efficiency and some of the regulatory change that's impacting institutions. And we're a great place where people can actually use our services to more efficiently manage a process on the side of the financial institution where we're helping them reduce costs, which becomes our revenue growth, and that's a great place to be in. I'll pass it to Jeff. Maybe he's got some percentages or numbers he wants to fire at that. But I'm personally very focused on the cross-sell opportunity across the buy side and helping big financial institutions reduce cost. It's a good place for us to be.

Jeff Gooch

Yes, okay. Thanks, Lance. Two things that I would add. If you look at the major banks, ones that are our sort of former major shareholders, run rate revenues with those institutions grew 4% in the first 6 months of this year. So showing even the big institutions, which are facing some stress in the fixed income market, we're continuing to sell new products and grow the business. Having said that, they've -- the percentage of our overall business is falling. It was 43%, I think, last year. 41% for the first half of this year. So we are getting faster growth, as Lance mentioned, in buy side. Most of our regional banks are a particular focus area for us at the moment, which is a very strong opportunity.

Operator

From Citi, we have Ashwin Shirvaikar on the line.

Ashwin Shirvaikar - Citigroup Inc, Research Division

I guess I wanted to go back to the Processing business and the commentary there, especially with regards to the transition to electronic trading. And I do believe that you guys are making the right conservative assumptions about that, but do you get, from a planning perspective, any kind of a heads up from clients that they're planning a move at a particular time, that they have investments in place, that something might happen in 3Q or 4Q? Or is this just a sort of a prudent thing to do is that there's a cheaper alternative in place and people will gravitate to it. So just from a -- you're generating economic upside, for which as long as the overhang is out there, you're probably not going to get too much credit for it. So I wanted to clarify that.

Jeff Gooch

Sure. I think 2 things have to happen for us to have a financial impact from that transition. The first is that people need to use electronic trading platforms more, and that we wouldn't -- most guys do use all those platforms to a small extent, and we support their use of them on the current platforms. So they wouldn't necessarily tell us they're about to change. I think people view that trading pattern as fairly confidential. The second thing though is once they make that change, that doesn't impact our revenues. What impacts our revenues is when they take advantage of our simpler, or lower price point products to provide that connectivity. That they would give us heads up long as they need to do system testing and other things before they adopt it. We haven't seen any sign of people starting that process at the moment.

Ashwin Shirvaikar - Citigroup Inc, Research Division

Got it. I understand. And perhaps on the KYC product, could you -- since you've sort of seem to have gone out of late -- out of your way to highlight it, and there seems to be a tangible opportunity clearly, certainly based on our checks as well, could you outline what your specific assumptions are with regards to the contribution over the next several quarters?

Jeff Gooch

Yes. I mean, I think obviously we're in ramp-up phase at the moment. You'll see a lot of expenses achieve that initiative in our current numbers. That's certainly one of the reasons why the Solutions margin came down. If you exclude the new initiatives, actually margins in Solutions improved in the quarter. As obviously, KYC is large expense focus for us. I think, at the moment, the view I would take is that the remainder of this year is unlikely to be a significant revenue contributor, but for next year, we would hope that to be the case. But in terms of next year, given that the ramp-up of the business, I'd be surprised if we get a positive earnings contribution next year. But obviously, we look for significant revenue contribution.

Ashwin Shirvaikar - Citigroup Inc, Research Division

Got it. And the involvement of Genpact, is that essentially -- I mean, is there a set of KYC tools? Or is this mainly, mainly sort of you're taking the process from more expensive locations and will get it done from India at a cheaper rate? Is that -- I mean, what's the pitch?

Lance Uggla

Well, first off, one of the things that I've kind of work with my team is while we're developing Managed Services and you've seen us announce in the reference data space a partner, iGATE, for the BPL piece. And here in KYC, Genpact for the BPL piece. And we really don't want to do that piece. It's much lower margins than the business we do and the likes of Genpact are experts in this space. They're already doing remediation on a global basis with many market participants. They have high standards, they have -- some of you may know, they were the -- originally founded and were the BPO for -- the internal BPO for GE, still about 1/4 or 1/3 of their revenues come from GE and the rest from other business activities. They are a phenomenally great partner. It's, to me, one of those relationships that I can see growing and extending to other Managed Services that we may think about the future. But in this case, we're locked together. We've got a great partnership and we created and launched the product together, and I'm excited about that opportunity. And I think Jeff's hit the numbers right on. It's -- ramp it up this year. In the next, start to see some revenue. And as we head into our 2016, I hope we can see some earnings as well.

Ashwin Shirvaikar - Citigroup Inc, Research Division

Understood. One last question, if I can sneak that in. I might have missed this. The FX rate assumptions, did you have it -- or might you provide that for 3Q and the rest of the year what the assumptions are?

Jeff Gooch

Okay. Third quarter is not finished yet so. It's clearly, if the rates stay as where they are today, you'd probably expect to see around about 3% contribution to the third quarter. But also rates could move either way for the remainder of quarter, so we can't give a precise number.

Ashwin Shirvaikar - Citigroup Inc, Research Division

Yes, yes, yes -- no -- I mean, that's what I was looking for. And that's on a full company basis?

Jeff Gooch

Yes, for the whole group.

Operator

From Philadelphia Financial, we have Justin Hughes on the mic.

James Justin Hughes - Philadelphia Financial Management of San Francisco, LLC

I just want to get 2 product updates that you kind of pointed out on the roadshows as some key initiatives for this year. First of all, on your TCA product, I was wondering if you can give us an update. And second of all, on thinkFolio, if you could just give us some early indications on the rollout on that.

Lance Uggla

Okay, okay. Well, I can give you -- I'll give you the customer side and again, I'll let Jeff give you the numbers. I've been told I'm not allowed to give numbers because I always exaggerate. But on the TCA side, we've added about 60 customers this year. So I'm really excited about that initiative. It's one where I feel our team is developing a competitive edge. We are close -- we really -- we've done a couple of really nice deals in the quarter, and I imagine we'll press release those. Again, these are all deals that are between $50,000 and $150,000. So they're -- but they're steady and they're -- it's a good space and it continues to have a great pipeline. It -- and again, you have to think about TCA coupled with markets both product and commission manager. And I really think the buy side, managing all of the commissions and the voting and the ensuring the transaction cost analysis is at the appropriate level. It really is an industry concern and I think that we're well positioned for that. On the second one on thinkFolio, it's -- this is a great, great asset. Here, we're looking at the cross sell across here, our EDM, Markit EDM risk-analytics business. We're working now with our Information division to look at ways to integrate our data into the OMS and portfolio management tools. And I'm excited about our progress. And we're a little bit off-pace, but I think that the pipeline looks good. I'm looking at [ph] the number.

James Justin Hughes - Philadelphia Financial Management of San Francisco, LLC

I'm sorry, are you selling that in the U.S. now? Because I think thinkFolio is primarily a U.K. product, but the plan was to bring it to the U.S.?

Lance Uggla

Yes, we -- yes, we're -- yes, definitely we've been on the road globally, not just the U.S., and we're getting some irons in the fire.

Jeff Gooch

Yes, I bet the number is slightly wrong. But I think it's -- about half a dozen customers in the U.S. So things slightly, I think.

Lance Uggla

So far.

Jeff Gooch

So far. So it's predominantly U.K. and Australian part, as you said. But we have existing footprint in the U.S., and we're looking to expand that.

Operator

Thank you. We will now turn it back to Mr. Lance Uggla for his concluding remarks.

Lance Uggla

Oh, fantastic. We actually got through that. So that's good. Thank you for all the questions, and thank you to my team, board, partners. Matt, just joining us. He's done a great job [indiscernible] folks backing him up.

So thank you to everybody. Thank you to you on the line. I know we've got a lot of -- some individual calls and visits and things to work on, but please about the first quarter going public, getting started. And I hope we've given you a good set of information today with the right tone and the right set of answers that will help you model our company going forward. So thank you very much.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Markit's (MRKT) CEO Lance Uggla on Q2 2014 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts