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Nasdaq, Inc. (NASDAQ: NDAQ)
Q2 2018 Earnings Call
Jul. 25, 2018, 12:00 pm ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Nasdaq Second Quarter 2018 results conference call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session and instructions will follow at that time. If you require any assistance during today's call, please press star then zer on your touchtone telephone. 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.

Ed Ditmire -- Vice President Investor Relations

Good morning, everyone and thank you for joining us today to discuss Nasdaq's second quarter 2018 financial results. On the line are Adena Friedman, our CEO; Michael Ptasznik, our CFO; Ed Knight, our Global Chief Legal and policy Officer; and other members of the management team. After prepared remarks, we'll open up to Q&A. The press release and presentation are on our website. We intend to use the website as a means of disclosing material, non-public information, and complying with disclosure obligations under SEC regulation 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 will turn the call over to Adena.

Adena Friedman -- CEO

Thank you, Ed. Good morning everyone and thank you for joining us. I will focus my remarks today on three important areas: our current business performance, our progress on the strategic transformation of our business, and the latest regulatory developments in the capital markets. I'm very pleased to report Nasdaq's solid financial performance for the second quarter of 2018. We delivered strong organic revenue growth of 7% during the quarter, with 8% across market technology, information services, and corporate services segments that make up the bulk of our recurring revenues, and 6% in market services segment where the majority of the revenue is transactional.

Undoubtedly, this organic growth reflects in part positive beat up from healthy market and activity levels and the scale inherent in our business model. However, importantly, our growth this quarter also reflects our clients view of the Nasdaq value proposition and its ability to serve their evolving needs. We put ourselves in a position to deliver most effectively for our shareholders when we help our clients succeed in new ways by solving new kinds of challenges they are facing.

These includes our advancements and adaptations of our market technology offerings and our high-quality data index and analytics products. Equally important to our success this past quarter, is that our core trading and corporate services businesses are operating with the resiliency, efficiency, and profitability we need to support our strategic direction and are maximizing the opportunity presented by the favorable trading and new listing backdrop with a 74% U.S. IPO win rate and our improving U.S. and Nordic equity trading market share as compared to the second quarter of 2017.

Taking a step away from the second second results, and the various factors that contributed, I would like to talk a bit about our efforts to improve and advance the positioning of the company to benefit our clients, shareholders, and other stakeholders over the longer term. We're building for Nasdaq's future, as we execute our strategic repositioning of the company and continue to make the investments that we believe will advance key capabilities of our business to fully realize our potential as a capital market technology and analytics provider, while maintaining our core strength running world-leading marketplaces.

First, in terms of our strategic repositioning, a significant early step occurred in mid-April when we completed the sale of our public relations solutions and digital media services businesses to West Corp. This enabled us to shift more resources, people, and capital to areas we've identified as growth opportunities across the company. It also allows us to focus our ongoing efforts within corporate services on the strategic C-suite solutions in the areas of investor relations, board collaboration, and governance that are most critical to our corporate clients.

Meanwhile, our late 2017 acquisition of investment is continuing to perform at strong level with $24 million in second quarter revenues excluding the non-cash temporary impact of the purchase price adjustment on deferred revenues. While still early in our plan to maximize the capabilities and synergies that lead us to acquire investment, the team's achievement of mid-teens organic growth in the first nine months is very encouraging. In terms of organic investment, we continue to be a leader in our industry with regard to incorporating new technologies across our businesses, driving product innovation in a variety of areas.

This includes our work to develop and deploy our next-generation market technology platform to Nasdaq financial framework, our work to enhance our smarts surveillance technology for all of our clients and to extend it to new customer groups in particular the buy-side, the expansion in the number of offerings in our analytics hub, and building new data and analytics functionality into our flagship investor relations platform Nasdaq IR Insight. Let me address in more detail the investments and developments in our market technology business where we're investing in particular transformational strategies. In June, I was fortunate to address over 100 delegates from the global exchange industry at our bi-annual and largest ever technology of the future conference in Stockholm.

Questions and Answers:

Operator

Ladies and gentlemen please standby your conference call will resume momentarily. Watson Kim, please standby, your conference call will resume momentarily. You may resume your conference.

Adena Friedman -- CEO

Well, sorry about that. So, I'm going to continue, I believe that I was talking about our technology, the future conference in Stockholm, so I'm going to continue our remarks from there. In terms of the conference, the feedback from our clients and prospects coupled with our success in attracting new clients confirms our conviction that we're executing against sizable opportunities with a thoughtful and strategic approach. From our legacy clients looking to upgrade and expand their technology to new clients from within and outside of the traditional capital markets industry.

Our story, strategy, technology road-map, and products are resonating. Second-quarter and new order intake was strong contributing to a first half 2018 total of a $109 million up to 18% year-over-year. CITI went on the second quarter were especially encouraging, one from the National Stock Exchange of India or NSE and the second with a Swiss exchange. The agreement with NSE, by far the largest exchange in India is one of the largest exchanges in the world by volume is to replace this clearing and settlement solutions with architecture using the Nasdaq financial framework to allow clearing and settlement of all asset classes in one system.

As well as, a partnership to explore opportunities across several business areas between both companies. This agreement marks the first time that NSE has relied upon any technology providers outside of India to support their key business operations. The Swiss exchange, a long-term trading platform clients and a major international market operator has expanded their relationship with us into their post-trade business. They will leverage Nasdaq's clearing and risk management technology via the Nasdaq financial framework to clear Pan-European equities in Nordic derivatives. I've also talked about our efforts to bring our expertise in market technology to benefit enterprises outside of traditional financial markets. While still early days, we're seeing encouraging progress.

Since we went public with this strategy and what we can deliver. We have discussed the opportunities with dozens of organization and what we're learning through this process is helping us focus our efforts on industries where we believe that we will have the largest initial impact. One of these areas is the crypto-currency space where we currently have five signed clients deploying to various degrees, our transaction matching, surveillance, and clearing technology. While our new client wins across our market technology business, we'll be reflected in future periods as we move forward with the implementations. The revenue dynamics in the second quarter were also encouraging.

We saw strong organic revenue growth in the quarter with gains in each of the product areas especially strong growth in our first surveillance business and quarter-over-quarter improvement in our operating margin. Year-to-date organic revenue growth rose to 10% in line with our longer term outlook. Now, let's turn to the specific highlights from our other businesses. I'm incredibly pleased to report that Nasdaq continued to deliver solid organic growth across each and every segment of our business. I want to recognize some of the most interesting dynamics behind these results. In our information services segment, we delivered strong growth due to contributions from our market data index and investment data and analytics businesses.

I've already mentioned that investment continues to perform well against our expectations, but we've also seen strong growth in assets under management of ETPs licensed to Nasdaq indices with an increase of $40 billion or 24% year-over-year. Such growth goes well beyond the data impact of higher market. A testament to the attractive products we've worked with our partners to develop and grow over the years. Over 40% of the AUM growth year-over-year is from inflows into a diverse set of products including those tracking monastic 100, the dividend achievers fleet, and Nasdaq Dorsey Wright strategies. Our mix of smart beta or outcome oriented indices represents 42% our AUM at June 30th.

Along with our flagship Nasdaq Brandon indexes have done already at a very strong and healthy growth in assets under management. We're also pleased to see how our newer ETPs have done to contribute to growth in the business. Specifically ETPs that we've created over the last three years using Nasdaq indices now represent $30 billion in AUM. A meaningful contributor to overall AUM and the business. Our exchange data revenues has also continued to grow highlighted by strong global sales and additional usage of Nasdaq basic and last sale, as well as, our continued work with our clients to ensure that they're properly reporting their current data usage.

Turning to our corporate services segment, Nasdaq lead U.S. exchanges for IPOs in the second quarter with a 74% win rate. Specific highlights from the second quarter include: IPO wins of Docusign, Carbon Black, Greensky enusion, and exchange listing switches from New York Stock Exchange by Avnet, EW scripts and Extended Stay America, representing a total of $10 billion in market cap switched in the quarter. Meanwhile in our Nordic markets we continue to attract new companies and deliver strong growth in a number of listings.

During the second quarter, the number of listed companies on our Nordic exchanges surpassed 1,000 for the first time, and rose 7% year-over-year. A significant driver for many of our new listings is the innovation we're delivering in our corporate solutions products and services. They deliver critical capabilities and insights that are especially valuable as a company prepares to go public but are also an important component of how we're serving our broader client base of corporate globally including there's already listed on the public markets as well as those that are privately held.

We have delivered new modules to our IR services this year with passive IQ, new ESG oriented insight offerings, and other intelligence products that help companies navigate the shifting focus from investment managers. Finally, market services delivered revenue growth across the segment benefiting from improved market share in U.S. and Nordic equities. Generally stable capture dynamics in revenue benefit that NFX as we have shifted certain economics to better support improved market quality.

Lastly, I want to spend a few final minutes on the current regulatory environment. We remain very aware of our responsibility to continue thoughtful stewardship of the way our markets operate and the role they play supporting healthy economies. Thus far in 2018, we're having a successful year in terms of U.S. IPOs but we're still 35% below the number of publicly listed companies we had 25 years ago.

And despite markets recently setting all-time highs, the level of new listings that we've seen concurrent with that is well below what we've experienced during the strongest phases of past expansions. During the quarter, we recognized the one-year anniversary of our publication of Nasdaq's blueprint for market reform. In early but very public milestone in our revitalized campaign. Focusing on an holistic approach toward making the capital markets more appealing for listed companies.

This blueprint included a number of suggestions for regulatory and other reforms that we felt strongly would make public markets more attractive for innovative verses oriented companies. Create visible and accessible investment options for all investors and help ensure that the U.S. capital markets remain the deepest most liquid markets in the world. A year later as I talk to you today, we see signs of progress that are very encouraging.

For example, the House of Representatives passed jobs Act 3.0 by 406 to 4 bipartisan vote, that advances many aspects of the blueprints agenda. Importantly, part of this legislation allows for the SEC registration of venture exchanges that will allow many issuers to choose to trade in an environment with consolidated liquidity in order to reduce volatility and improve the overall market company trading experience. While there is significant work ahead for this legislation to clear in the senate, we are encouraged by the strong bipartisan support in the house.

Also in the context of regulatory initiative, we've seen the SEC affirm how important transparency is to well-functioning markets. The new transparency requirements for APS's more closely aligned lit versus dark disclosure requirements. Additionally, Nasdaq applauds the SEC for hosting a round table on thinly traded securities consistent with our revitalized agenda and we appreciated the opportunity to participate and represent Nasdaq issuers.

Nasdaq separately continues to discuss the need to support thinly traded exchange traded products. On the other hand, there is one SEC initiative that may be inconsistent with the revitalized agenda, the proposed access fee pilot. We have fundamental concerns about the impact the initiative could have on market quality, with particular negative impact on smaller companies where there is a broad agreement that there is a special need to improve not hamper liquidity and where market makers today play a vital role in providing that liquidity.

Fortunately, the SEC's processes encourage feedback and debate and so we've weighed in on behalf of our clients including our listed companies and we have considered the long-term economic interests of the U.S. through our detailed comment letter to the SEC. Which we encourage you to read alongside corporates and other market participants who voice their concerns. We will continue to argue vigorously for our issuers and in the best interest of investors.

As I wrap up, let me summarize by saying that the second quarter produced strong results for Nasdaq particularly regarding our organic revenue growth. We're making solid progress against our 2018 execution priorities and we look to build on that momentum going into the second half of the year as we continue working hard on behalf of our clients to make the most of the dynamic market environment. Our investment and our strategic pivot are proceeding and performing well and we look forward to keeping you apprised on how we will deliver on this large opportunities that we see ahead of us. With that I'll turn it over to Michael for a few to review the financial detail.

Michael Ptasznik -- CFO

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 will start by reviewing second quarter revenue performance as shown on page three of the presentation and organic growth on pages four and 14. The 3% or $19 million increase in reported net revenue of $615 million, consisted of organic growth of $40 million, including 8% organic growth in the non-trading segments and 6% organic growth in market services.

A $6 million favorable impact from changes in foreign exchange rates and a net $27 million negative impact from the combination of the divestiture of public relations solutions and digital media services businesses which had a negative $44 million impact on the GAAP of revenue comparison, and the inclusion of $17 million of revenues from the acquisition of investment. I'd note here that the investment revenue recognized in the quarter of $24 million was reduced by $7 million related to the purchase price adjustments on deferred revenue associated with the closing of the transaction.

I will now review quarterly highlights within each of our reporting segments. I will start with information services, which is reflected on pages five and 14. So, if $31 million or a 22% increase in revenue, consisting of $12 million or 8% organic growth, the growth was primarily the result of index revenues which were up 16% in the second quarter of 2018, market data revenues which increased 9%, and the aforementioned $17 million revenues from the acquisition of investment. Regarding the remaining deferred revenue adjustment, the impact should reduce to about $4 million in the third quarter of 2018 and $1 million in the fourth quarter of 2018. Market technology revenue as shown on page six and 14, increased $8 million or 14%.

The increase primarily reflects higher delivery in support revenues and higher software-as-a-service revenues with the latter growing 21% year over year. In the second quarter, the operating income margin for market technology was 14% up from an unusually low level and in the first quarter of 2018, but below the 24% in the year-ago quarter. We said last year that we expect the 2018 year-to-date and eventually full-year margin to develop positively as the year progresses and we continue to expect that. As we mentioned on the last quarterly call and during Investor Day, on a year-over-year basis, we are seeing the impact of investments we're making to upgrade our technology for the next generation Nasdaq Financial Framework.

Therefore, we expect lower margins in 2018 and 2019 versus the 20% to 25% level seen in 2016 to 2017. But over the medium term, we expect to unlock both higher revenue and higher margin potential in the business as you move more clients to the managed solutions model. Turning to corporate services on pages seven and 14, revenues increased $9 million or 7%. In our listings business, revenues were up $7 million or 11% primarily due to higher U.S. listings revenue from the all-inclusive offering becoming effective for all U.S. issuers on Jan one, 2018. For the corporate solutions business, revenues increased $2 million or 4%, primarily due to organic growth in both boarding leadership products as well as favorable change in foreign exchange rates.

The corporate services operating margin was 28% versus 30% in the prior-year period. The decrease primarily reflects the overhead costs related to the divestiture that we expect to eliminate over the 12 months from the close of the transaction. Market services net revenues on pages eight and 14, saw a $15 million or 7% increase including a $13 million organic increase and a $2 million positive impact from changes in foreign exchange. Market services, operating income margin totaled 57%, that's two percentage points from the prior-year period. Turning to pages nine and 14 to review expenses. Second Quarter non-GAAP operating expenses increased $14 million to $325 million with a $20 million expense increased from acquisitions. A $16 million organic increase, and a $4 million unfavorable impact from changes in foreign exchange rates partially offset by $26 million decrease due to the divestiture of the public relations solutions in digital media services businesses.

Turning to the year-to-date period, our 5% to 6% organic expense increase in the first six months of 2018 reflects increased spending on new initiatives as well as higher compensation expense. The higher compensation costs include the impact of higher incentive compensation driven by the especially strong organic growth performance. To put this in perspective, our 8% year-to-date organic revenue growth, reflects a 9% increase in our non-transactional segments and an 8% increase in our market services segment.

Turning to slide 10, we're raising the low end of our full-year 2018 non-GAAP operating expense guidance by $15 million, for revised range of $1.31 billion to $1.335 billion. The increase of the bottom end of the range, reflects principally the impact of the Aforementioned Higher Variable Compensation associated with the company's strong organic revenue performance. As we've indicated previously, while we expect expense growth to average about 3% over the medium term.

It will vary in periods of higher or lower revenue growth. Moving to operating profit and margins, non-GAAP operating income on an organic basis increased 8% year-over-year, but when including acquisition inclusive of the purchase price adjustments on deferred revenue, as well as the divestiture during the period, total operating income increased 2%. The corporate actions we undertook limited the year-over-year change reflects the $7 million non-cash impact from the investment purchase price adjustments on deferred revenue, and approximately, $78 million, in overhead costs that had been allocated to the divested businesses.

As we have stated previously, the purchase related deferred revenue adjustments, will be complete by the end of the year and we have specific plans to eliminate the overhead costs over the 12-month period post divestiture by the end of Q1 2019. The non-GAAP operating margin totaled 47%, down one percentage point versus the prior-year period with a two percentage point impact to margin from the above-mentioned items.

Moving forward, both of these headwinds will be significantly behind us as we think about 2019 and beyond. Net interest expense was $35 million in the second quarter of 2018, an increase of $1 million versus the prior-year period primarily due to debt issued in connection with the investment acquisition. Other investment income totaled $8 million due to in part an outsized $7 million dividend received on an equity security.

The non-GAAP effective tax rate for the second quarter of 2018 was 26.1%, for the full year of 2018 are non-GAAP tax rate guidance is a range of 24.5% to 26.5%. non-GAAP net income attributable to Nasdaq for the second quarter of 2018, was $198 million or $18 per diluted share compared to a $170 million or 101 per diluted share in the prior-year period. The change in the tax rate associated with the tax cut and jobs act drove a $0.12 in increase in diluted EPS year-over-year.

Turning to capital on slide 11, debt decreased by 268 million versus Q1 of 2018. Primarily, due to a $193 million net debt repayment and a $76 million decrease in Eurobond book values caused by a weaker Euro. Our total debt to EBITDA ratio ended the period at 3.1 time versus three 3.2 time at the first quarter of 2018. As mentioned previously, we continue to plan to de-lever to a mid two times leverage ratio by mid-2019. Share repurchases in the second quarter totaled 241 million, as we returned a significant amount of the after-tax proceeds from the divestiture in the period.

Together with dividend payments we returned $476 million for shareholders through the first six months of 2018. In the first half of 2018, we executed the majority of the repurchases plan to both fulfill the ongoing commitment, to offset the impact of issuances of shares for employee compensation and other purposes, and in the interest of maintaining a flat share count , as well as those repurchases designed to return the proceeds of our divestiture to shareholders.

As we enter Q3, we continue to have some additional authority against those two objectives, but we expect the pace of repurchases to diminish to more moderate levels in the second half of the year. We intend to continue to use our capital to optimize returns to shareholders, through focused investment in organic growth opportunities, carefully considered M&A and continue to grow the dividend as earnings and cash flow increase. Thank you for your time. I will turn it back to the operator now for Q&A session.

Operator

Thank you. Ladies and gentlemen if you wish to ask a question at this time, please press star then one or touchstone telephone. If your question has been answered or you wish move yourself in the queue, please press the pound key. We ask that you please limit yourself to one question and one related follow-up. To prevent any background noise, please press your line on mute once your question has been stated. Our first question comes from Rich Repetto with Sandler O'Neill your line is open.

Rich Repetto -- Sandler O'Neill -- Analyst

Yes. Good morning Adena, good morning Michael.

Adena Friedman -- CEO

Yes. How are you?

Rich Repetto -- Sandler O'Neill -- Analyst

I'm doing fine. So, the first question, I hate to use a question on this but it is this $8 million of investment income that you talked about briefly, Michael Peed, that did have an impact on EPS this quarter. Just trying to understand what wasn't from equity, I didn't quite catch where it came from, and I guess just a onetime thing I assume.

Michael Ptasznik -- CFO

Well, I would say it's necessary a onetime thing but we did typically get some dividends from our equity-based investments. This was an outsized one. So, normally, we had a couple of million dollars or so on an annual accrual basis but this seven million, it's about a seven million, I would say that it was unusual for this period that was a special dividend that we received in the quarter. So, that was what that difference was.

Rich Repetto -- Sandler O'Neill -- Analyst

Got it. Okay. Thank you. Then, I guess I'll take a step back and ask a broader question at the end. It seems like the strategic pivot and the strategy have been well accepted by the investment community. It seems like we certainly executed it as you divest the PR and DMS business. I guess the question is, are there any updates on it now? They're audibles is a pure just executing on that plan now or after seeing what the business looks like, and how it's performing and you're growing in all categories here. But are there any audibles, any updates compared to the initial plan that you announced almost a year ago?

Adena Friedman -- CEO

Yes. So, it's a great question. So, we are definitely in execution mode right now against this rise that we communicated it back in the fall, and we highlighted at Investor Day. However, we're always looking at assessing all of our businesses, making sure they're performing to the level that we would expect them to perform at, and making sure that we're looking at our investments and our new initiatives and making sure that they're also driving to the results that we ultimately expect from them.

We will continue to reassess that on a regular basis. Now, every year we do have a strategy session with our board and we have a strategy session with management, and those are good opportunities for us to continue to refine our execution plan, and continue to find our strategy. So, that's a regular part of our playbook at this point, Enrich. But right now, we're really focused on execution against what we communicated over the last nine months.

Rich Repetto -- Sandler O'Neill -- Analyst

Got it. Thank you for the updates.

Adena Friedman -- CEO

Sure. Thank you.

Operator

Our next question comes from Michael Carrier with Bank of America, Merrill Lynch, your line is open.

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

Thanks a lot. Maybe one for you, just being on the organic growth, things are kind of coming in much better than maybe expected in historical rates. You mentioned some of that, you get the market backdrop, maybe on the transaction side. From the non-transaction side, where are the areas that maybe surpassing your expectations or you're seeing better interest from the client base in terms of acceptance of some of the changes that you're putting in place?

Adena Friedman -- CEO

Well, I could say they're kind of two areas where I would just point to the market backdrop being a helpful tailwind in the non-transaction businesses. One is certainly in our AUM growth. Although frankly, a lot of our AUM growth is coming from TSO, meaning people are actually putting inflows into EPPs, and derived from our indexes. So, it's not just market value improvements but it really is an interest in investing in those strategies, but that is helped by a healthy market environment. I think the other thing is just the IPO environment is very healthy and obviously our win rate is our effort.

The fact that we have had more IPOs this year than we've had in prior years, is a testament to also the market backdrop. So, I would say both of those things have been really positive for us and it's really a combination of our effort, and the positive environment, and taking advantage of that positive environment. I think in the Market Technology business, to be honest with you, I hate to be nullified, I'm not surprised by our success but I'm extremely pleased with our success. I think that we worked incredibly hard for our customers. These two deals that we announced this quarter in particular were-

Years in the making, right? So they're based on the back of long-standing relationships, based on the back of a lot of work that our team has done to prove ourselves as the right partner and really based on the path that we have a technology today that will carry our clients into the future. So, I'm not surprised by it but I'm extremely pleased to see how many of our clients and new clients coming onto the platform as we continue to build out the Nasdaq Financial Framework.

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

Okay thanks. Michael just real quick on the margin. So, I know you're in this transition phase and you pointed out some of the items that I know you said weighed on the margin by 2%. So, as we get into 2019, should we see like all else equal that lift or are there the investments in the technology business that will continue to maybe mute that? I'm just trying to understand that transition versus the investments when you're talking about mid-term margins versus short-term.

Michael Ptasznik -- CFO

Yes. So, the two key things that are weighing in the margin that reflect that 2% is the investment deferred revenue writedown and the second piece is the overhead costs related to the sale of the business. So, that's really where that's driving that 2%. We will continue to invest in the business that we did talk about that with respect to the Market Tech business that is a multiyear program that we are investing in the Nasdaq Financial Frameworks and some of the other areas that we're looking to build that out. But the 2% was really related to the specific items.

Obviously, as the intention is that as we look to continue to grow the revenue toward the medium-term targets that we've identified and if we continue to see good volume in the transactional side of the business, then we should see that revenue growth exceed the expense growth. I know we talked about that during the Investor Day. So, that would generate additional margin. Again, there's maybe certain segments where their margin is more muted as we do some of that investment period but over the medium term, we do a lot to continue to grow the margin of the business depending on the Nasdaq business.

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

All right. Thanks a lot.

Operator

Our next question comes from Ben Herbert with Citi. Your line is open.

Ben Herbert -- Citi -- Analyst

Hi. Good morning. Thanks for taking my questions.

Adena Friedman -- CEO

Sure.

Ben Herbert -- Citi -- Analyst

Just wanted to follow up on the market tech side and the investment cycle. I guess looking into 2019, we expect low to mid-20s margin as the ceiling there. But as you look beyond that into 2020, can we expect to see the bulk of that investment phase behind us and margin uptake there?

Adena Friedman -- CEO

I'm sure. So, we said in the past, we're trying to communicate this at Investor Day two that we do have this couple years of significant investment in the business and we do expect that on the back of that, we will end based on the growth rate in that business that we hope to sustain over the long term, that we should start to show the ability for that business to scale over time.

Now, we're not giving guidance or outlook related to specific segment margins because we are one business and we want to make sure we're investing appropriately across the business but we do anticipate and we did communicate at Investor Day that the scalability of that business should improve as we get through an investment phase that's relatively significant. At the same time, we'll always be looking to make sure we're making enhancements and we're serving our customers and we have deliveries and other things that have some temporary impact on margins but we definitely think that the scalability should improve as we get past this particular investment period.

Ben Herbert -- Citi -- Analyst

Thanks. Then maybe just a quick follow-up would be on investment and you talk about some of the cross-sell and is that driving a lot of the success there either? Then also cross-sell into the prior existing U.S., the customer base.

Adena Friedman -- CEO

Sure. Well, I think that we're very early days on the cross-selling. So, the main impact of the business so far has really just been the growth and expansion of the business as we bought it. So it's been, it's a great company, the product that they offer their clients are very high-value, the clients are continuing to buy more from the companies, they're expanding into Europe and Asia and that's having success as well. So, really just the business itself is a high-growth business on which is a first why it was very attractive to us to begin with. The cross-selling though is starting to happen but it's early days, where the sales teams have gotten together, they've been looking at their joint pipeline. We've been looking at and we've had some very specific wins there but it's not a huge contributor to the revenue growth at this stage, that's definitely longer incoming.

Ben Herbert -- Citi -- Analyst

Great. Thank you.

Operator

Our next question comes Alex Kramm with UBS. Your line is open.

Alex Kramm -- UBS -- Analyst

Hey, good morning everyone. I wanted to start on the Index business. Adena you highlighted the strong growth and big portion of smart beta here a couple of times, I think in your prepared remarks. Just wondering on that business in particular. I think that's a premium business for you in terms of pricing but there seems to be increased debate about smart beta pricing in general, and that gets more, I guess commoditized, if that's the right word to use. So maybe just a little bit of a highlight, what you're seeing out there if this pricing pressure potentially coming more. Where the business differentiate itself to other smart beta offerings.

Adena Friedman -- CEO

Sure. Well, the first thing I would say is as you know the way that the contracts work as you enter into an agreement with an ETP provider and you establish what the share of the revenue is going to be based on a certain fee per basis-point. That then sustains itself through the life of that partnership and the life of the product. But as we look at launching new products, and we've gone out and worked with our clients to make sure that we're finding things that are interesting and unique in the marketplace, we continue to find our ability to charge appropriate rates, I wouldn't say that I don't consider them premium rates, but appropriate rates for the products that we're launching, and we're mindful of making sure that we are coming up with strategies that are different and differentiated so that we can get an appropriate benefit from that.

We have not seen very significant compression, but it doesn't mean that we're also getting the rates we got 10 years ago. I think that it's an evolving industry and we are very mindful and thoughtful on how we partner with our clients.

Alex Kramm -- UBS -- Analyst

Okay, thank you, helpful and then just secondly real quick, with the CME next acquisition now a few months ago, still pending but the announcement a few months behind us now. Just curious if on your fixed income business, you've had increased discussions with clients that you could share anything about, I think they're a little bit muted on their end because of takeover laws, but just wondering if you having increased discussions with your clients of how this could benefit will work against you and how this is being received.

Adena Friedman -- CEO

Sure. Well, so majority of the conversations we've been having with our clients and in treasuries business so far has really been about our replatforming and the work that we're doing to to get them ready for the new platform which obviously we believe will accrue to their benefit and ours because of the performance of the platform. So really we've been focused on that, but to the extent that the conversations turns to the overall landscape, I would say that they see that there is a lot of dynamic, there are dynamic moves going on. I think that they don't really have a lot of clarity as to what it's going to mean for them in terms of that particular merger.

Our job is really to make sure that we make the most of the transition and the potential disruption to make it so that we put ourselves in the best competitive position possible. So that tends to be what we focus on. Part of that strategy is the announcement that we are relaunching that treasury features later in the quarter because of the fact that we think that we have great pricing coming off of our fixed income platform that we can use as a benchmark. We have real interest coming from the clients and our futures. Our future is instrument and they really are excited about having that through an alternative. So we are looking forward to having that as part of what we offer in the fixed income based going forward.

Alex Kramm -- UBS -- Analyst

All right. Very good. Thank you.

Operator

Our next question comes from Brian Bedell with Deutsche Bank. Your line is open.

Brian Bedell -- Deutsche Bank -- Analyst

Great. Thanks very much. Adena maybe just to focus back on some of your comments earlier on the progress in the Market Technology wins in the non-financial [inaudible] . So maybe just talk a little bit deeper now, you've given us an example of the crypto clients. I think that is relatively new since Investor Day and then also you mentioned the two agreements with India and the Swiss exchange. Maybe if you can talk about and others are futuristic, but if there is sizable enough to create a material uplift in revenue versus sort of what we'll have in our models.

Adena Friedman -- CEO

Well, I would say that they support the growth rates that we anticipated and we provided to you at Investor Day. So that's kind of part of an example of why this is a higher-grade part of our business is because we do see these types of opportunities.

Clear and present and before us over the next several years as well, so you cut across three different things; one is having the National Stock Exchange of India which I know all of you know is the largest exchange in India. They've never worked with a provider outside of India before, and so, that is a brand new client for us and I would say that set a good example where even in our core business, we still have an opportunity to grow and expand our client base.

The second one with the Swiss exchange is a good example of what I call the land and expand strategy where we develop a great partnership in one area, and we're able to expand it to others and both of them are sizable agreements. They'll take some time to implement, but we now get to capture some of the revenue associated with that implementation as opposed to waiting until it's fully implemented. And we are excited about the fact that they support our growth.

When you look into the non-financial markets of the non-traditional markets, the crypto currency is based, these are smaller opportunities because their state is still nascent and the exchanges aren't nearly as large as the ones that I just mentioned, but there are more of them and there's more opportunity for us to demonstrate our capabilities across a broader range of exchanges there. And then as we're just starting down the journey of saying, well, how is our technology relevant outside of the traditional markets? We are gaining lot more intelligence on that as we've been engaging in a lot of different industries. But there I would say it's still too early to be able to demonstrate or talk about a term or anything like that.

Brian Bedell -- Deutsche Bank -- Analyst

Yeah, it sounds consistent with the organic growth outlook that you've telegraphed, and then if we just look at the near term the Swiss exchange has, the more near-term revenue benefits in maybe 2018, but India is more like 2019?

Adena Friedman -- CEO

Well, both of the projects will kick-off in 18, but they'll take a little time for the revenue to start to demonstrate itself and then recognize that during the delivery period, the margins are lower because we've got the cost of delivery associated with the revenue, whereas once it's live then basically you don't have as much cost associated with that revenue, the profit off those deals will be more backdated.

Brian Bedell -- Deutsche Bank -- Analyst

Then just to go back to the SEC pilot with the debate, just maybe your view of the timing of that as the SEC gathers all of the industry comments. If you have a view when they may still kick this off or they still do it as initially proposed?

Adena Friedman -- CEO

So, we don't have any insight into either one of those questions, I think that they're, the commentary is coming to a close in the initial commentary. They'll have to respond to the comments and understand how the accuracy pilot operates within the construct of the comment and may choose to amend it, they may choose a different, we don't really have any special insight into that right now. Well, we obviously don't support the pilot in general, but were they to choose to address the comments into the construct of the pilot, we would say that it requires very material changes for it to be something that we believe is in the best interest of the issuers investors. So, we'll have to see, but we don't have any special insights into how they're going about their process there.

Brian Bedell -- Deutsche Bank -- Analyst

Fair enough, thank you.

Adena Friedman -- CEO

Thank you.

Operator

Our next question comes from Kyle Voigt with KBW, your line is open.

Kyle Voigt -- KBW -- Analyst

Hi, good morning. If I just try one more on that transaction fee pilot and then move somebody else, but just in terms of just the potential impact to your business if it does go through as currently proposed, I know you've argued and others in the industry have argued for many changes so that we'll see what happens. But if it does go through I suppose, I guess are you focusing on the potential for more volume to shifting toward off-exchange trading as a potential risk or is there something else that you're focused on as a business impact from the implementation of the pilot?

Adena Friedman -- CEO

Sure yeah, I would say that the first thing to mention just in general is, if the rebates shift down and the fees shift down, then it usually goes in unison. So, our net capture is likely not to be materially changed. But, it does then have an impact of for instance, general liquidity in the markets across all venues and the ability and the motivation that market makers have to commit their capital into the markets. But then also, the fact that the pilot as currently constructed only affects exchanges and doesn't affect APS's, which the phrase is, strange two-tiered system that would then have the potential to drive some of the flow off exchange.

So, I think that is the more material concern but it is not something that we look at as being an overall material change to our revenue base. It's just that's the one area that we would say, could have an impact. We've seen some of that in the tick pilot. So, you can see that tick pilot has had some impact in one of the tiers of moving some of the volume off exchange and again, it has not had a material impact on our financials. But it does impact price discovery and price formation and the things that we think are really important for the health of the markets and the ability for particularly small companies. That's the fact where we do think that the most impact occur is in the small companies not so much in the larger ones.

Kyle Voigt -- KBW -- Analyst

Okay that's really helpful, thank you. Then just a follow-up, I guess for Michael on the Capex. Looks like you've been running the past few years heading into $130 million to $145 million range you did $45 million in the first half. I know that ramped a bit from 1Q to 2Q but just wondering, if you expect some elevated spend in the back half of the year just to get closer to that historical range? Thanks.

Michael Ptasznik -- CFO

Yes, that's right. We will be having increased spending in the back half of the year. Part of it on some of our real estate moves that we announced a while ago where we're moving to Times Square, so there'll be some of that expense and some of the other capital investment behind our initiatives will also be occurring in the back half of the year. So, we expect to be closer to the range where we've historically been in that 130 to145 range that you've talked about.

Kyle Voigt -- KBW -- Analyst

Okay, thank you.

Operator

Thank you, once again ladies and gentlemen. If you wish to ask a question at this time, please press star then one on your telephone. Our next question comes from Alex Blostein with Goldman Sachs your line is open.

Alex Blostein -- Goldman Sachs -- Analyst

Hi, good morning everybody. A question for you guys, just wondering if you give an update on what's going on in the corporate solutions business. Revenues have been a little soft in the last couple of quarters, after seeing I guess a little bit of recovery last year. So maybe, just an update of what's been driving the near-term decline over the last two quarters and what's sort of the drivers you expect to see in this business from here?

Adena Friedman -- CEO

Sure, well the businesses that we have retained our growing, but it's a relatively low growth rate. I think that what we had told the investors at Investor Day, is we would expect a mid-single digits growth rate across our corporate solutions business.. So, I don't think that we're at the lower end of that mid-single digit. So, it's definitely showing some level of growth, but we definitely want to see it grow faster.

So, what are we doing to make sure that we are tuning our products and tuning our client relationships toward growth? A couple of things: One is concentrating the team. So, having our ability to concentrate on the strategic products that we really believes are fundamental to the ability for companies to navigate the capital markets successfully, has been on the big focus and that hasn't do with the divestiture of the two businesses that went to west.

That allows the senior team as well as the sales team and everyone else to really just focus on what we're really good at. So, that's going to take a little time to show through in terms of ability for us to ramp the growth. The second thing is making sure that our products are really addressing the clients needs and that's why we've been launching new products into the IR Insight suite. So we have the Passive IQ which really helps companies understand and navigate their passive investors, we have something related to ESG investments, we have something related to activist investors and etc.

So, we're growing the cadre of what we can offer to catalyze growth in IR. Then in the board and leadership tools, there we've been doing more work to segments our clients and make sure that we're starting to add content into those products in addition to workflows, so that they could become more relevant for specific client segments. That's a little bit of product work that we need to do, but we believe that that will continue to catalyze growth and that has been a grower for us all along but we definitely want to see more growth in that business. We think there is a lot of greenfield opportunity there. So, those are the things that we're focused on to catalyze more growth in the corporate solutions business.

Alex Blostein -- Goldman Sachs -- Analyst

Got it, thanks, that's helpful. Then Michael just a cleanup question for you. I think I heard you talk about overhead expenses still running through the P&L and I think you mentioned that going to phase out in Q1 of '19. I was just wondering how much of a drag can that create a quarterly run-rate basis today and when do you guys expect for that to phase out? What would be the benefit?

Michael Ptasznik -- CFO

So, we talked about there being about $40 million on an annual basis, $10 million on a quarter roughly that's attributed to the Corporate Solutions Business that will need to be eliminated over that period of time and so, we talked, this quarter there because it was a partial quarter, there was 79 or so. So, that's the amount that we will need to continue to eliminate through next year.

Adena Friedman -- CEO

We're seeing most of that show up in the Corporate Services P&L. Not all, but most of it shows up in the Corporate Services P&L?

Michael Ptasznik -- CFO

Yes, and that's why you can see there was growth overall in the corporate services earnings. It was about $9 million of growth, but the bottom line didn't grow as much less because most of that is due to that overhead allocation now going back to the remaining businesses.

Alex Blostein -- Goldman Sachs -- Analyst

Got you. Yeah. That's fully out by the, by the end of 19, right?

Michael Ptasznik -- CFO

Yes. It should be out by the end of Q1 of 19.

Alex Blostein -- Goldman Sachs -- Analyst

Q1. Got it. Great, thanks.

Operator

Our next question comes from Vincent Hung with Autonomous. Your line is open.

Vincent Hung -- Autonomous -- Analyst

Hi. Just on the index revenues. Looks like it's flat on last quarter, yet, I think AUM increased 8%. Is that because derivatives revenues was lower?

Adena Friedman -- CEO

Yes. The derivatives revenue, that's a great point. Yes, the derivatives revenue was lower in the second quarter than it was on the first quarter because services revenue was significantly, as we mentioned, it was elevated in the first quarter. But generally speaking, I think that also, the average AUM versus quarter-end AUM is also a little bit different. So, the average came up year-over-year was a little bit better quarter-over-quarter, but the quarter-end AUM was quite elevated, and I think we mentioned it in the prepared remarks. But I also think that the volume driven revenue in the index business that's why the primary cause of is not quarter, but Q1 to Q2, not having as much of impact.

Vincent Hung -- Autonomous -- Analyst

Got it. On market data and trade management services, there's a small two million sequential decline in first. Is that just driven by small novelty items like lower audit collections?

Adena Friedman -- CEO

Yeah. On market data, that is definitely the impact actually in particular. So, and then, on the TMS business, it has to do with the fact that in the first quarter, you also had elevated volumes in the trader printing facility. More volumes there than in the Q2 and then they're also was some work that we did with Missad. So, a lot of clients were using our testing facility in the Nordics to support their massive testing. And so, that also is not recurring. So, they pay for that time but that wasn't recurring. So, those two things have the exact impact that you just mentioned on the trade management solutions quarter-over-quarter change.

Vincent Hung -- Autonomous -- Analyst

Great. Thanks.

Adena Friedman -- CEO

Thank you. I'm currently showing no further questions at this time, I'll turn the call back over to Adena Friedman for closing remarks.

Thank you very much. Thanks very much for your time today. We're pleased just to see all of our businesses delivering strong top-line growth in the quarter. And we intend to continue to be disciplined in how we manage our expenses while also capturing opportunity to drive to sustain long-term growth across our strategic areas. We are very pleased to see that our clients are reacting well to our value proposition as a premier U.S. listing market.

Our ongoing commitment to our U.S. and Nordic markets through functionality to bring benefits to institutional buy side customers. Our investments from the Nasdaq Financial Framework and our Smarts Surveillance Platform in our index franchise and in our acquisition of investments. So, our focus and dedication to our global client base is through our global client base and we will continue to deepen those relationships and innovate across our key offerings in order to enhance our value to them in the months and years to come. So, thank you very much for your time today and we appreciate the questions. Have a great day.

Operator

Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day.

Duration: 56 minutes

Call participants:

Ed Ditmire -- Vice President Investor Relations

Adena Friedman -- CEO

Michael Ptasznik -- CFO

Rich Repetto -- Sandler O'Neill -- Analyst

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

Ben Herbert -- Citi -- Analyst

Alex Kramm -- UBS -- Analyst

Brian Bedell -- Deutsche Bank -- Analyst

Kyle Voigt -- KBW -- Analyst

Alex Blostein -- Goldman Sachs -- Analyst

Vincent Hung -- Autonomous -- Analyst

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