Harbor PanAgora Dynamic Large Cap Core ETF
Q3 2017 Earnings Call Transcript

Published: 26 Sep 2017

[Operator:]

Good day ladies and gentlemen, and welcome to the Q3 2017 IHS Markit Earnings Conference Call. At this time, all participants are in a listen-only-mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to introduce your host for today’s conference, Mr. Eric Boyer, Head of Investor Relations. You may begin.

[Eric Boyer:]

Good morning. And thank you for joining us for the IHS Markit Q3 2017 earnings conference call. Earlier this morning, we issued our Q3 earnings press release and posted supplemental materials to the IHS Markit Investor Relations website. Some of our comments and discussions on the quarter are based on non-GAAP measures. Our non-GAAP or adjusted numbers exclude stock-based compensation, amortization of acquired intangibles, and other items. The non-GAAP results are a supplement to the GAAP financial statements. IHS Markit believes this non-GAAP presentation and the exclusion of these items is useful in order to focus on what we deem to be a more reliable indicator of ongoing operating performance. As a reminder, this conference call is being recorded and webcast and is a copyrighted property of IHS Markit. Any rebroadcast of this information in whole or in part without the prior written consent of IHS Markit is prohibited. Please keep in mind that this conference call, especially the discussion of our outlook, may contain statements about expected future events that are forward-looking and subject to risks and uncertainties. Factors that could cause actual results to differ and vary materially from expectations can be found in IHS Markit’s filings with the SEC and on the IHS Markit website. After our prepared remarks, Jerre Stead, Chairman and CEO; Lance Uggla, President and COO; and Todd Hyatt, EVP and Chief Financial Officer, will be available to take your questions. With that, it is my pleasure to turn the call over to Jerre Stead. Jerre?

[Jerre Stead:]

Thank you, Eric. And thanks to all of you for joining IHS Markit Q3 Earnings call. First, we want to express that our thoughts are with the people and communities impacted by the recent natural disasters. I want to personally thank our impacted colleagues in continuing to serve our customers despite facing significant personal hardships of their own. We look forward to doing what we can to continue to help these communities recover. Today, we’ll review our solid Q3 results, provide you with an update on our integration work, and discuss our acquisitions of autoMastermind and Macroeconomic Advisers. Let’s move to the high level financial results in Q3, then Lance will provide the industry highlights, integration update and details on our acquisitions. Revenue was $905 million, up 5% year-over-year on an organic basis. Adjusted EBITDA was $351 million and margins of 38.8%, representing an expansion of 170 basis points on a reported basis. Adjusted EPS was $0.57, up 27% over the prior year. Now, I’ll turn the call over to Lance.

[Lance Uggla:]

Thank you, Jerre. First, I’d like to thank the IHS Markit team for continuing to build on our merger commitments and delivering a solid set of results across the firm. Let’s get started with the short update for each of our key verticals, beginning with transportation. Transportation produced very strong organic growth of 13% for the quarter with the growth once again being led by the strong performance of our Auto’s team. We remain confident in the growth trends within the used car portion of our Auto business including continued penetration of the vehicle history report market, new products such as the used car listing and valuation services and extending our reach into the banking and insurance world. Within the new car portion of our Auto business, we continued to benefit from strong industry trends including the increasing use of digital marketing. The proliferation of new automotive technologies, global regulatory pressure to curb fuel consumption and emissions, and strong recall activity. What has impressed me the most is the strong diversity of our overall Auto growth covering all areas of our portfolio. Now in Resources, our energy business reported improved revenue trends and flat annual contract value as the upstream market continues to stabilize while our mid and downstream businesses including chemicals and OPIS continued to have solid performance. As I said last quarter, we’ve seen the formation of a new baseline to grow from and we’ve organized the team well for 2018. CMS total organic revenue was up 7% year-over-year, benefitting from the biennial Boiler Pressure Vessel Code or BPVC and 1% excluding BPVC. This division has been very focused on a return to organic growth, and we expect this positive trend to continue into Q4. Finally, Financial Services had a very good and well diversified quarter with organic revenue of 5% and strength across both recurring and non-recurring revenues. In particular, we had a strong quarter within our pricing, indices, valuation services and managed loan services businesses, to name a few of the areas. Next, I want to provide an update on our integration efforts. Since the merger closed in mid-July 2016, we have been executing against our integration plan and continue to make excellent progress against our commitments. We continue to work towards our 4% to 6% annual organic revenue growth goal and as discussed, see continued strong performance within Transportation and Financial Services as well as improvements within Resources and CMS. We have taken particular pride in doing exactly what we said we’d do. We’ll exceed the $125 million in cost synergies and we remain committed to achieving a mid-40s adjusted EBITDA margin over time, delivering a minimum of 100 basis points per year and double-digit earnings growth over the longer term. In terms of revenue synergies, we are making great progress with the buildup of our synergies and have increasing confidence in our target of $100 million of run rate, exiting 2019. We’re also committed to strong capital management and are on track to deliver on our 2017 and 2018 buyback commitments. And finally, we’ve said that we’ll acquire within our core areas of competence, and that brings me to the acquisitions of Macroeconomic Advisers and automotiveMastermind. Earlier this month, we acquired Macroeconomic Advisers, which is a relatively small, but will enhance our U.S. macro and regional economic forecasting capabilities. And then this morning, we announced the acquisition of automotiveMastermind, which is a very high growth market leader in providing automotive dealers in the U.S. with predictive analytics and marketing automation technology to help drive new vehicle purchases. Underpinning Mastermind’s offerings is an analytics engine that predicts automotive buying behavior and a marketing platform that automates the creation of one-to-one messaging and targeted offers, leading to proven higher sales and more consistent customer retention. This is an excellent business, which has been on a very substantive growth path that adds to and strengthens our overall automotive franchise. We’re extremely excited to welcome the Mastermind team to IHS Markit. Now, first, Mastermind complements the strong assets we’ve already built in the automotive marketing where we’re using a unique combination of data analytics and digital capabilities, we help OEMs target specific households to achieve better ROI on their marketing spend. Mastermind will help us extend this marketing franchise within new car dealers, which is a large and fragmented market of over 17,500 domestic dealers. This market is highly strategic for us as a large portion of the $20 billion advertising spend and the $50 billion incentive spend for new vehicles is actioned right on the dealer floor. This will also complement CARFAX as we now have the ability to sell multiple offerings into franchise dealers. Second, we expect enhanced new product development, leveraging our combined data, domain expertise, and analytic capabilities, enhancing both our existing OEM and dealer offerings. Third, over time, we believe Mastermind will be able to leverage our global footprint and we will be able to expand geographically. And finally, we believe the timing of this acquisition positions us well to benefit from our customers’ growing need for better market intelligence as competition increases for market share. I’d like to say that this acquisition is initially about entry into an exciting new car dealer market for us and adding high growth capabilities to our Auto’s portfolio. We have confidence that the higher growth rates in Mastermind’s core market will continue in the years to come and are excited about the revenue synergies we can build together. And with that, I’ll turn the call over to Todd.

[Todd Hyatt:]

Thank you, Lance. Before we get started with the results, I want to remind you that while our Q3 and year-to-date results include IHS and Markit, prior year Q3 and year-to-date includes legacy Markit for the full reporting period and legacy Markit from July 12th through August 31st. We’ve included Markit’s year-over-year organic revenue growth and FX revenue impacts in our revenue growth rates and have included the remainder of Markit revenue as acquisitive revenue growth. Now for the Q3 results. Revenue was $905 million, an increase of 25%. Adjusted EBITDA was $351 million, an increase of 30% with margin of 38.8% and margin expansion of 170 basis points. Adjusted EPS was $0.57, an increase of 27%. Relative to revenue, we were pleased with the quarter as we continue to see very strong growth in our automotive business and Transportation segment, solid growth in our Financial Services segment, stabilization in our Resources annual contract value or ACV and improved growth in CMS. Total Q3 reported revenue growth was 25%; organic revenue growth was 5%, including BPVC and 4% excluding BPVC. Acquisitive growth contributed 20% for Markit revenue for the non-sub period and FX was a minimal impact in the quarter. Recurring organic growth was 3% and non-recurring organic was 21%, including BPVC and 14% excluding BPVC. Looking at segment performance. Transportation growth was 13%, which included 13% organic and flat FX. Organic revenue growth was comprised of 11% recurring growth and 19% non-recurring growth. We continue to see very strong growth across our entire Auto’s portfolio. This quarter we benefited from recall related offerings which were delivered in Q3 instead of Q4. We expect recurring revenue to remain strong in Q4, but non-recurring growth will be challenged due to a difficult year-over-year comparison and pull forward revenue from Q3. Moving to Resources. Revenue declined 4%, including 4% organic decline and flat FX. The organic revenue decline was comprised of negative 4% recurring offset somewhat by 1% non-recurring growth. Our resources annual ACV was flat for Q3, our year-to-date resources ACV is negative $10 million, and we expect modest ACV growth in the Q4. Our non-recurring energy consulting and software revenue was $16 [ph] million and was up slightly versus prior year. We expect positive non-recurring revenue growth in Q4 as well. We are now forecasting the annual average price of oil to be in the high 40s to low 50s in 2017 and 2018. CMS growth was 6% and included 7% organic and minus 1% FX. Organic revenue was comprised of 1% recurring growth and 48% non-recurring growth. Excluding BPVC, CMS organic growth was 1% and non-recurring organic was minus 4%. Financial Services revenue growth was 4% including organic revenue growth of 5% and minus 1% FX. Organic revenue growth was comprised of 3% recurring and 28% non-recurring. Information had a solid quarter with organic growth of 5%, led by our index and fixed income pricing and valuation businesses. As expected, our processing business moderated in the quarter with a 3% organic decline. Solutions’ organic growth was 10% due primarily to strong growth in our managed service loan business and our regulatory compliance products. Turning now to profits and margins. Q3 adjusted EBITDA was $351 million, up 30% versus the year ago. Our adjusted EBITDA margin was 38.8% with margin expansion of 170 basis points. Taking account of Markit prior year Q3 margin, normalized margin expansion for combined IHS Markit was approximately 40 basis points. Margin expansion moderated somewhat from prior quarter due in part to impact of lower margin BPVC revenue and FX including mark-to-market losses and weakening U.S. dollar, which increased revenue but also increased expense. CMS margin was negatively impacted from lower margin BPVC revenue and transportation margin was positively impacted by strong revenue growth. Our adjusted EPS was $0.57, an increase of $0.12, up 27% versus the prior year. Adjusted EPS benefited from lower adjusted taxes offset somewhat by higher interest expense and share dilution. Our adjusted tax rate was 13% and our GAAP tax rate was minus 32%. Both rates benefited from tax benefits associated with the capital structure and the release of a valuation allowance. The GAAP tax rate also benefited from merger related expenses and excess tax benefit associated with vesting or exercise of equity awards and share price increased from date of grant. We now expect a full year adjusted tax rate of 20% to 21%. We expect a full year GAAP tax rate of approximately negative 5%, excluding any future excess tax benefit related to stock-based compensation. Q3 free cash flow was $206 million. Our trailing 12-month free cash flow was $642 million and represented a conversion rate of 47%. Trailing 12-month free cash flow includes approximately $150 million of restructuring and acquisition-related cash costs. Excluding these cash costs, conversion would have been approximately 58%. We expect to return to a mid-60s conversion rate for 2018. Turning to the balance sheet. Our quarter-end debt balance was $4 billion, which represented a gross leverage ratio of approximately 2.7 times on a bank covenant basis. And our quarter-end cash balance was $154 million. In the quarter, we completed a $300 million debt offering add-on to our existing 2025 notes with an effective interest rate of 3.88%. At quarter close, our undrawn revolver balance was approximately $1.2 billion. Our weighted average diluted share count for the quarter was 414.2 million shares. In the quarter, share repurchases were $324 million or 5.8 million shares, an average share price of $45.25 excluding $60 million for shares that will be delivered at the completion of our $300 million ASR. Year-to-date, share repurchases were approximately $1.4 billion or 33.2 million shares, an average price of $40.33, excluding the $60 million for shares that will be delivered at the completion of the ASR. The year-to-date share repurchases included $1.1 billion of our $1.2 billion 2017 buyback commitment as well as $300 million from stock option proceeds. In terms of guidance. On a full year basis, we expect revenue at the upper end of our current range of $3.49 billion to $3.56 billion with organic revenue growth of 3% to 4% and negative FX impact of approximately $30 million versus the $50 million negative FX impact provided in our original guidance. Adjusted EBITDA in the low to midpoint of our guidance range of $1.375 billion to $1.4 billion. Our adjusted EBITDA has been impacted by higher expenses from several non-recurring expense items, including negative mark-to-market FX expense of $6 million and accelerated IT-related spend from the continued migration to the cloud. Adjusted EPS in the midpoint of our guidance range of $2.02 to $2.08. Adjusted EPS includes the positive benefit of lower adjusted tax rate offset somewhat by higher interest expense from higher short-term floating interest rates and from our 2017 debt offerings and also from higher share dilution. Specifically, we now expect the full year adjusted tax rate of 20% to 21% and full year interest expense of approximately $150 million. In terms of acquisitions. In the past week, we closed Macroeconomic Advisers for $12 million and we also closed automotiveMastermind. Relative to Mastermind, our automotive business has continued to deliver very high growth and we enjoy market-leading positions in the used car information services market and in the new car market, primarily with OEMs and suppliers. Mastermind provides us an anchor position in new car dealer sales and marketing analytics and support. This is a large addressable market that is complementary and synergistic with our existing automotive franchise. We acquired approximately 78% of Mastermind for a purchase price of approximately $392 million with potential to increase upto $435 million, based on business performance through January 2018. The remaining 22% of the business is owned by the Company’s founders and employees. We will acquire this interest over the next five years, based on valuation tied to underlying adjusted EBITDA performance. This earnout structure provides strong alignment between Mastermind management and IHS Markit. The Mastermind founders have focused on investing and growing the business. Mastermind is a high growth business, which is expected to more than double revenue in 2017 and finish with full year revenue of approximately $50 million. We expect significant revenue growth into the future and are targeting 2018 revenue of approximately $80 million and 2019 revenue of approximately $125 million. As the business continues to scale, we expect EBITDA margin in the single digits in 2018 and margin to significantly ramp to approximately 25% in 2019 with continued expansion from there. Looking ahead, we plan to provide 2018 guidance in November, but want to provide some context today. As Lance said, we remain committed to delivering a minimum of 100 basis points of margin expansion per year. We do however expect several non-operational items to negatively impact our adjusted EPS growth for 2018. First, our $1 billion share buyback commitment for 2018 will be less frontend loaded to 2017 due in part to the Mastermind acquisition. Second, we are planning to continue to term out our debt structure to lock in long-term interest rates at very attractive levels, but this will result in higher interest expense. Third, we have been very efficient with our tax rate in 2017 and do expect a modest increase in our adjusted tax rate in 2018, but also expect to remain in our long-term range of low to mid-20s. And finally, depreciation expense will increase over time and on a long-term basis will track in line with our annual capital spending levels. We look forward to providing more detail on our 2018 expectations on our November guidance call.

[Jerre Stead:]

Thanks Todd. And my many thanks to our colleagues who continued to deliver excellent results with another strong financial quarter. Although, this is my last earnings call as Chairman and CEO of IHS Markit, Lance has asked me to return for the Q4 call to report the results of my last quarter as a public company CEO. So, I will say good bye to everyone in January. As I look back at how far we’ve come since we announced the merger over a year and half ago, I am filled with a great sense of pride and gratitude in having been able to lead such great people who have done such great things. We have truly built an information powerhouse, which is very well positioned for success for many years to come. I’ll be leaving IHS Markit in the great hands of Lance, who is a proven leader who shares the same passion for delighting our customer providing exciting opportunities for our colleagues and delivering strong return for our shareholders. And with that, we’re ready to open up for questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Peter Appert from Piper Jaffray. Your line is open.

[Peter Appert:]

Thank you. Good morning. So, the guidance would suggest, I think I’m computing this correctly, fairly meaningful deceleration in the adjusted EPS growth in the fourth quarter. So, could you call out any of the specific issues that might be driving that?

[Jerre Stead:]

Yes. You bet, Peter. Go ahead, Todd. We tried to do that with what Todd just talked about; let’s expand on it.

[Todd Hyatt:]

Yes. Peter, we talked about from a non-operational perspective, certainly FX and mark-to-market has been an impact really throughout the year. And then that sits in the other expense line item. So, if you look at other expense, you’ll see a negative there that’s a big chuck of it. We have frontloaded some of the IT investment as we’ve started some forward investing in the period. And the other thing that I talked about was very strong revenue growth, very strong non-recurring revenue in automotive, and we see that in Q4, a bit more challenged comp. So, I think those are probably the big things. But, in general, I think still delivering at what we said we would do and pretty solid results for the year is what we’re forecasting.

[Jerre Stead:]

And I’d just add a bit. When you look at the supplement that we’ve provided, Peter, the Q3 2017 earnings, really a remarkable performance; we’ve got our big three businesses performing at 44%, 43%, and 45%. As Todd said, CMS was pulled down with BPVC; I’ve never learned to do that, and Lance did. So, there is a good reason why he is going to be CEO very quick, and you’ve got another year to get ready for it, Lance. So, if you think about where we’re at, you heard both, Lance and Todd, recommit to the mid-40s. We’re not that far away from it. And you can do the math, but I feel really good about the operational efforts that are underway. As Todd said, it’s a non-operational and should be one-time issues, as we think about it going forward. And you should be planning, as they’ve just committed. They being Todd and Lance recommitted to what we said we’d deliver for years to come. Thanks Peter.

[Operator:]

Thank you. Our next question comes from Bill Warmington from Wells Fargo Securities. Your line is open.

[Bill Warmington:]

Good morning, everyone. Congratulations on the automotiveMastermind acquisition. I wanted to ask about what gives you the confidence in the high growth rate that you’re looking for in the business. And maybe as part of that you could talk about the overlap on the dealer base with CARFAX and maybe that’s part of it.

[Jerre Stead:]

I’ll start, Bill, and have Lance pick up on it. I’ve, over the years, done probably 200 acquisitions. I always make sure that we’ve got a very, very strong probability of delivering. This one, I must say we probably worked harder than any we’ve worked on for a long time to have a great deal of confidence of what Lance is going to tell you about in just a minute. I feel really good about this one. This one will be my last one, on my watch, if you -- so to speak. And I feel what it’s done for us and what it will do is really outstanding. The last quick comment and then turn it over to Lance. Remember what Todd just told you, like the 25% EBITDA in 2019; that does not include the synergies that we’re going to pick up with the other parts of the business. So that’s a very strong one. Lance?

[Lance Uggla:]

Sure, thanks. Hi, Bill. So, I guess the first thing is when I first met Marco and Johannes, the co-CEOs of Mastermind, I have to say, super strong entrepreneurs, started their life moving from Germany to New York City doing car sales for Mercedes, really understand the business well. These are two very, very sharp individuals and great asset to our team. They really impressed all the team here and we immediately saw their depth and knowledge of the business, and the model that they’ve developed was very complementary to us. That’s the first point. And their accolades in terms of awards, I think they came number 7 out of 5,000 in the Inc awards, and these -- many other accolades which you can check out online, but top individuals with the top team. The second thing I’d like to say is the digitization of the entire automotive marketplace. This is a growth area that we’ve been calling out from with respect to our IHS Markit Automotive franchise. We’ve seen it through the CARFAX franchise, and the dealer floor is a critical third component of that that we will be expanding and filling out with the Mastermind acquisition. The third thing I’d say is that regardless of SAARs, the spend of $20 billion advertising, $50 billion incentives, these are driven regionally, locally right down to the individual franchise. And the growth that we’ve seen as well as what we see from the Mastermind side provide both synergies as well fuels the additional growth in Mastermind. So, you should look at IHS Markit going deeper in an automotive franchise that we are already at the winning position – we’re with the leading position. And this is complementary and gives us strong growth as we look forward and a full suite that’s penetrated to the best of the Markit’s opportunities.

[Operator:]

Thank you. Our next comes from Jeff Silber from BMO Capital Markets. Your line is open.

[Jeffrey Silber:]

Hey, good morning. It’s Henry Chien. I was wondering if you could just touch a little bit upon your thinking for acquisitions for the next year, just sounds like automotive is an attractive space, especially with the digital trends that you mentioned. But just more broadly, how you’re thinking about acquisitions, whether you’re looking for more, additional tuck-ins or any verticals that you are particularly interested in? Thanks.

[Jerre Stead:]

Yes. No, I’ll just start and have Lance pick it up, because he’ll be telling what’s going on next year. We said at the time of the merger announcement and when we closed, and I believe we said it every quarter that any acquisitions we do would complement the existing business lines and that we would focus on our capital return to share owners that continues the commitment that was just maid of at least $1 billion in 2018 of share buyback. So, Lance?

[Lance Uggla:]

Yes. Well, I think you kind of said it, Jerre. When we said out at Investor Day, it was all about establishing a baseline of creditability, doing what we say we’re going to do and sticking to the program. And I really think that the leadership team that Jerre and I have put together is fully committed to that. So, from an acquisition perspective, we said some bolt-ons, people ask us what would be the size of that, we said sub-500, and we would be committing to our margin expansion; we’d been committing to our growth profile; we’d be investing additional dollars from synergies into a go-forward plan, and acquisitions would be minimal. And so, you shouldn’t expect a slew of acquisitions in anyway, but small tuck-ins that make sense that fit into what we said we’re going to do, you may see, but they’ll always be deepening our franchise. Don’t expect the diversification move from us but expect us to own the markets we’re in and to continue to be the leading player.

[Jerre Stead:]

And I’d just add one thing to that which as last just completed several months with our team of 67, what we call deep dives into our different businesses. And I think we come out of their feeling that we’ve got a better handle on internal opportunities than probably we’ve ever had as we’ve made the merger. So, I think our ability to provide organic growth that we’ve committed to is strong, clearly with the acquisition we just made, it will enhance that. So, I think the need for acquisitions is not to gain organic growth we said we’d get. Thank you. Next question?

[Operator:]

Thank you. Our next question comes from Gary Bisbee from RBC Capital Markets. Your line is open.

[Gary Bisbee:]

Hey, guys. Good morning. I guess a two-part here on margins. The year-to-year improvement flow sharply is as you clearly forecast, the comps are getting tougher. But, can you give us some color at the segment level, in particular Resources turning down quite a bit and financials actually quite strong. How do we think about it going forward? What’s impacting, particularly Resources? Thank you.

[Jerre Stead:]

Gary, Resources margins were 43.8% for the quarter, which is the second highest in history with the continued downturn going on from a revenue standpoint. So, 43.8% is a very good performance. And if you think about us going into 2018, as we flatten out on a revenue basis. I think, go ahead Todd.

[Todd Hyatt:]

Yes. I mean, we’ve talked about resources coming in for the year. We’ve maintained on a full year basis a 43% margin, which is actually up a bit from last year, down a little bit in the quarter. But, I think in general, what I said coming into the year was we thought that we could maintain a flattish type margin in Resources. I mean, we do have revenue decline in Resources. And so, I think we’ve done an effective job of managing cost structure and certainly have gotten some benefit, from some of the synergy reductions in shared services. Transport, good strong margin, and when we look year-to-date, we’re up 250 plus points and that’s area we continue to invest in and we’ve talked about that. I mean, we are continuing to invest in what has been a very strong area and driving significant margin. I think CMS in the quarter, you have the Boiler code and we’re very transparent about the code. But if we look year-to-date, up a little bit, and certainly that’s an area where we’ve done a lot of things strategically in terms of consolidating products in TMT and I think in the specs and standards area with the work bench that will allow us to take more revenue and more margin flow through. And Financial Services has had a very solid year and very strong performance. If we look, what we’re seeing about the guidance, to Peter’s earlier question, it’s not a deceleration. If you look at where we’re at on the guidance, we’re -- and you cancel it out, you’re looking at a Q4, which is 351 to 364 range, so in line with what we’re seeing. We typically expect Q4 to be up a bit sequentially. We did call out the fact that transfer -- we did get a benefit by pulling in some revenue on recall related to Ducati in this quarter. And so, I think that, probably dampens the seasonal strength that we would typically expect to see in Q4.

[Operator:]

Our next question comes from Kevin McVeigh from Deutsche Bank. Your line is open.

[Kevin McVeigh:]

Hey, Todd or Jerre, I wondered, could you frame -- you talked about some of the delta in the EBITDA being, it sounded like FX and then a step up in the IT. Is there any way to size what the total impact from the IT was and just how you’re thinking about delta in EBITDA overall?

[Jerre Stead:]

That’s great. Go ahead, Todd. Good question.

[Todd Hyatt:]

Well, I mean, I went through the list. The code and you can run the code, I mean it’s $9 million of revenue and relatively low margin. So, we end up with probably 30 points when we look at the code. I think on talking about the mark-to-market, that’s another 30 points, some of the IT investment, 25 to 30 points. So, I think those are really the big items. I mean, the other one -- FX as dollar weakens, we now have more revenue but we end up with more expense. And we talk about the natural offsetting, hedges that we tend to have at the P&L level, but weakening dollar does have a bit of an impact on FX -- on the margin.

[Operator:]

Thank you. Our next question comes from Andrew Steinerman from JP Morgan. Your line is open.

[Andrew Steinerman:]

Hi. Todd, on the Resources ACV, you said flat third quarter and modest growth in fiscal fourth quarter. I assume those are sequential comments. And so, if we have that, fourth quarter ACV will still be down year-over-year by my view. And with that, is Resources subscription revenue poised to be up in 2018?

[Todd Hyatt:]

Well, we’re at $10 million negative year-to-date and I said modest growth in Q4. So, may not get all the way to flat, but I think essentially you can call it a flat sub-base that we’re growing off of as we’re moving into 2018. And then, the math is really the sales growth. If you look at a ratable model, the sales growth will get 50% of that. So, if we can just simple -- the math behind it, if we can grow sales of 4% in 2018, that would convert into a 2% organic revenue grower.

[Jerre Stead:]

Thanks, Andrew.

[Andrew Steinerman:]

Total question?

[Todd Hyatt:]

It’s just the sub part of the business. And the other thing I should add is on the sub base, we talk about the sub-base but we don’t include OPIS in that sub base. So, we would expect to get additional lift from OPIS, 100 millionish asset that’s been growing very high single digit. And then of course the non-sub part of energy, we would expect to improve in 2018 as well.

[Operator:]

Thank you. Our next question comes from Manav Patnaik from Barclays. Your line is open.

[Manav Patnaik:]

Yes, thank you. Good morning, gentlemen. My question is a little bit more topical, and maybe referring to what Todd mentioned in there around IT investments. And I guess I was just -- wanted a little bit more color on what those investments are and maybe tied to that, if you could just talk about your spend on cyber security and your efforts and how you fill positioned there?

[Jerre Stead:]

Yes. That’s a good one. Pick it up, Lance. It’s been a lot of time on.

[Lance Uggla:]

Yes. So, part of these deep dives that Jerre mentioned, there were 67 dives into all of our different business lines; so, from the four divisions, broken down to 67 subareas. And those deep dives included people, technology, customers and product innovation or debt or tech innovation or tech depth. So, we really, really did a thorough look at all the businesses over the course of a past three months. And so, within there of course, things like info security penetration testing, business recovery testing, really looking at our platforms and building out a solid enterprise risk management approach to how we run our company is very, very important. And of course some of that requires a little bit of investment ongoing to make sure that we are at a benchmark level that puts us in the place we want to be. So, we have increased a little bit of investment on the back end of that in terms of platforms, info security and making sure that we feel we’re in a really good spot. The second thing is, is the world shifting to the cloud. And the fact is, is as we shift to gain operating leverage and to improve performance and create more customer opportunities, the cloud is an important tool for us. But, of course, when you take an existing installed customer base and you start offering a cloud offering adjacent to it, one doesn’t go away when the other one starts. And we’re going to have a small overlap of that, but that to me is money well spent and is important to our go forward revenue growth. And so, well done, team. And then the final one, I would say is that we have two companies coming together and we want to have one data science platform as we said with one capability to fuel our revenue growth. And we’re fueling a lot of good strong revenue synergies which we called out. We see confidence in taking that forward, but again, those platform investments, they’re not free, they’re ones that we want to make, and they’ve showed up a little bit here in the quarter. And the team has done a great job. Thanks.

[Operator:]

Thank you. Our next question comes from Alex Kramm from UBS. Your line is open.

[Alex Kramm:]

Just wondering if you could talk a little bit about the Financial Services, tech and in particular as it relates to MiFID II. I know the question has come up in the past and I know you’re working on some new products. But, in terms of just spending going up for everyone, are you seeing hesitance to spend on your existing products with clients already as we get closer? And then most importantly, any updated thoughts on the -- what it means for over the counter processing services and interest rate swaps et cetera?

[Lance Uggla:]

Thanks, Lance -- multifaceted, Alex. So, the first thing is I think shareholders in IHS Markit are looking for us to take advantage of financial market changes. And our team are exceptional at positioning our products to meet regulatory change. It’s a key tenant of what we do and continue to do and therefore bringing up and highlighting MiFID II and many of the regulations surrounding that. IHS Markit is the leading, well-positioned firm to access new revenues with respect to MiFID II and what it brings on for the marketplace. And the teams have shown excellent progress quarter-over-quarter. But regulatory change is a -- it’s a marathon, it’s not instantaneous that dates move, dates change, but what I can tell you is the team is doing what they’re supposed to do and the revenue will come when it’s supposed to come. So, that’s all I can say on MiFID II. But, we’re well-positioned and that hasn’t changed. The second thing I’d say is that in terms of OTC derivative processing, it is a very small amount, small part of our overall business now. You’re talking single-digit revenues overall. And then that’s broken down in terms of electronic, non-electronic, loans versus credit versus rates versus FX and there is a lot of growth engines in any one quarter and there is many volume decreases in any quarter. But the absolute amount is very manageable and we see ourselves very well-positioned. I think two things we like. We like businesses where we’ve got a core underlying strength in data and from that, we can produce our competitive products across the firm, research, analytics, insights, consulting, valuations, pricing indices and we also like where we have a network. And a network gives you the strength to connect your customers and take advantage of market opportunities as they arise and process into variable. It’s a small variable, you deal with it when market is standalone, it’s less prominent when we’re together, but nothing’s changed on that side.

[Operator:]

Our next question comes from Jeff Meuler from Baird. Your line is open.

[Jeff Meuler:]

On the early 2018 margin commentary, I just want to make sure I have it right. Are you saying, is a 100 basis points the right framework or is that the right floor level, given that you had good underlying margin expansion plus you’re still layering on incremental net OpEx synergies? And then, Todd, could you just be a little bit more clear on the expected impact from the non-operating items. Do you expect those to impact reported adjusted EBITDA and/or reported adjusted EPS, what are those?

[Todd Hyatt:]

Yes. I mean, the 100 basis points is really the framework that we provided on a long-term basis relative to margin expansion. That’s certainly a level we expect to achieve in all forward years. On the non-operational items that I went through, those are really the items, the low adjusted EBITDA to adjusted EPS. And so, what I talked about is some of the headwinds that we’ll face on those items as we continue to term out our capital structure or our underlying debt structure, the fact that the comparison on the tax rate will be challenged, but still within the longer term guidance. So, we’ll provide specific numbers, when we get to the November call. But certainly expect some headwind at the adjusted EPS level. But as I said, I would characterize those as non-operational. And on a longer term basis, when we cycle through those items, when we cycle through the completing the term out of the debt structure, we wouldn’t expect those to be impactful to the longer term ability to drive to the double-digit earnings growth.

[Jerre Stead:]

Do you want to wrap that up, Lance?

[Lance Uggla:]

Yes. I just want to add one point. I think the key thing about the team and Jerre and I laying out Investor Day with the team last year. The first and we really wanted you to shift and understand the journey that we’re taking as a information services company. So first thing is we’ve given you renewed confidence on mid-40s. That’s what we’ve said, that was an adjustment upwards at investment day -- Investor Day and we reaffirmed it today and really want you to look in your forward models that this is a company that can hit mid-40s. But of course, the other size of that is, are you going to get there next year, are you going to get there the following year, is it going to take you five years. And what we’ve given you is a baseline of 100 basis points a year. Those two things you can model very conservative, take 100 basis points a year and go one-by-one sequentially; or two, you can put in hill, valley, whatever you want in terms of your planning, but our view is we’ve got the operational leverage to mid-40s and we’re going to deliver a 100 basis points. That’s all we’re saying and we’re not put in timeframes on that. But it’s very important that we keep doing what we say we’re going to do.

[Jerre Stead:]

Lance, just to add to that organic growth too, because that’s the other piece of that equation.

[Lance Uggla:]

100%. 4 to 6, we want to get solidly into 4 to 6, so we can start saying we’re there. And then, like I said before, we’re not going to be sat at 3 and we’re not going to brag at 7, but 4 to 6 is a range that we feel confident as a leadership team that we can operate in and that produces the long-term earnings per share growth that we want.

[Operator:]

Thank you. Our next question comes from Shlomo Rosenbaum from Stifel. Your line is open.

[Shlomo Rosenbaum:]

Hi, good morning. Thank you for taking my question. I just want to go back to the margin question that was asked before. Jerre, I’m not used to seeing you guys point to the EBITDA margin at the lower end of the guidance range. And I just want to get a little bit more understanding of the breakdown of that. Like, how much of that is accelerating IT, how much of that is probably we’re going to see from every company reporting increased cyber security costs. To the extent that you are accelerating some investments, does that mean that they’re going to have a payoff that’s near-term in 2018? Just if there is a way to just break some of this stuff down for us?

[Jerre Stead:]

Yes, good question. Todd?

[Todd Hyatt:]

I went though, in the script, I talked about first, we have what I’ll just non-operational item. And so, we do have impact from mark-to-market impacting in the other expense. So, you can look at other expense, and it’s primarily that amount. And you can see what that looks like I think year-to-date $6 million. But it’s certainly in the world of margin every dollar counts. We talked about some of the investments we made. Lance talked about on IT. And that has been an area that we have done some level of investment. And we’ve accelerated the movement to the cloud. And we’ve done a bit of investment in the data, science area as we look to the forward view of the company and strategy of the company. And so, I think those are probably the primary things that I would call out. But I think as I said, we’re delivering a solid year. We’ve driven some level of improvement in revenue and certainly pushing revenue to the high end of the guidance range, we feel good about pushing up towards the higher end of the organic growth range. And that’s allowed us to make some trade; we continue to invest heavily in automotive. We talked about that. And we have very strong growth when we look at both the new car and the use car parts of that portfolio. So, I think a bit of investment in some of the MiFID II areas that Lance talked about. So, there is some level of investment. And at the end of the day, we’re in this for the long-term and we’re not going to ring out the last dollar of margin in any given quarter if we see opportunity to continue to grow the business.

[Jerre Stead:]

And drive up into the organic growth range that we’ve committed too. Thank you, great question. Next?

[Operator:]

Thank you. Our next question comes from Andrew Jeffrey from SunTrust. Your line is open.

[Andrew Jeffrey:]

Hey, guys, good morning. Thanks for squeezing me in here. Lance and Jerre, as you look at the Auto footprint and the franchise which is showing impressive growth and obviously strong results. Can you talk about I guess two things, one, the competitive environment. And who you see as your primary competitors, both in the CARFAX and also the Polk, and if that’s changed at all? And then, two, from an technological capability perspective, it feels like the solutions suite is well built, would CRM be something you’re focused on? Just a little bit more color on the strategic thoughts would be awesome. Thanks.

[Jerre Stead:]

Yes, great question. I’ll just start with a reminder of everybody. IHS was not in the automotive business until October of 2008, zero revenue. When we acquired Global Insight that was our beginning and it was $25 million. Today, you can see the numbers, we’re exiting with and with the addition that of the acquisition we just made with autoMastermind, that’s going to take us another significant step forward. So, feel really good about the progress with that. And I’ll have Lance comment on your question because it’s a really important one. Strategically, we now have a business that is a leader, as Lance said when we’re covering the acquisition earlier and this going continue to be a leader and outpace the competition that Lance will talk about.

[Lance Uggla:]

Right. So, I guess mentioned that a little bit earlier, this whole digitization of the servicing of that automotive franchise. And as a long-term data player, if you look at IHS Markit automotive or you look at CARFAX, CARPROOF in Canada, CARFAX building in Europe and now Mastermind, these are at their core are leveraging data and analytics to build out a products suite. And that product suite serves both, OEMs and the dealer franchises. So, I feel that we’re very diversified. And actually there isn’t a single competitor that takes us on an automotive. There might be a few of them in each of the segments but we’re clearly the automotive information services leader globally. There is no question about that. So, what have we done here? We wanted to go deeper and we want to go deeper when we acquire, not just for high growth of the asset but for the synergies that the combination provides. That’s very important for us. And I think Todd’s called out, over the whole firm on the acquisition about 1% of acquired growth which will flow through into 2018 on the back of Mastermind. And that’s very important because it’s deepening that dealer franchise. And the dealer franchise is actually participating with the OEMs in the $20 billion advertising spend, big number; and two, the $50 billion incentive spend. And what’s important for us is that we’re a market leader in terms of the data and analytics and the predictive analytics that extracts value from that relationship. And again, we feel a market leadership position in that and one that we can grow for many years. So, very well-position, very well-diversified; we were deep, now we’re deeper. And we’ve got the prongs, whether it’s our regulatory franchise around emissions, whether it’s our CARFAX and CARPROOF franchises, whether it’s our Mastermind franchise, but what’s most important is bringing those together and producing incremental synergies and building those out with just a world-class team as we look forward into 2018 and beyond.

[Operator:]

Our next question comes from Anj Singh from Credit Suisse. Your line is open.

[Anj Singh:]

I wanted to ask question on the Automotive Mastermind acquisition. What does the customer set here look like in the future to you? Do you see an opportunity to expand out of the dealer network for sales perhaps, the OEMs or Financial Services or is that really just the opportunity penetrating the dealers? And anything you can share on the competitive landscape?

[Jerre Stead:]

No. Great question. Go.

[Lance Uggla:]

Okay. So, again, the piece of the puzzle that we’ve called out historically and we’ll continue to call out is digital marketing. And this is a world that’s changing every day, and it’s driven by data and the predictive analytics applied to the data. We were already doing that, we do it in all of our automotive franchise businesses now and Mastermind complements that. We see the digital marketing, if you take this $20 billion advertising spends historically and think about print and Super Bowl and many of the other historical ways of advertising, assume that that’s changing going forward, because of targeted advertising, whether it’s television, whether it’s print, whether it’s direct mail. The digitization of that spend is going to companies we never heard of years ago Pinterest, Facebook, Google and the likes. And we need to continue to build out our franchise to make sure that we’re participating to the maximum level in that change. And that’s what we’re doing. That’s the shift that you have to start thinking about. I know SAARs is interesting overall. But for us, it’s the spend and leveraging our data into the spend; that’s what our team is doing a great job and will continue to do so.

[Todd Hyatt:]

Well, the other thing I would add when we talk about the customer set, Mastermind, really focused today on dealer market in the U.S. And so, if we look at our automotive franchise, CARFAX, used car dealer market in the U.S., Mastermind, new car dealer market and then Polk, very heavy with the OEMs and suppliers. And what we see with Mastermind is we see the ability to use data across those different markets. So, we see the ability to use some of the Polk information to better support Mastermind. Today, Mastermind is a Polk customer, Mastermind can use more and more of the Polk information and the CARFAX information. But we also see ability to ultimately expand internationally. So, if we look at CARFAX, today CARFAX Europe, and we’ve talked about this in the past, but we’re at a point now in CARFAX Europe where Dick and team have done a really good job of building out of data asset in Europe. Now, it’s still relatively small, but moving to breakeven level of profitability. And we see now a position where we can use Mastermind and we can take advantage of some of the infrastructure that we’ve build in Europe. And certainly Mastermind solution is something that is very transferable into other market. So, we do see this really extending our reach and extending our ultimate addressable market and longer term revenue growth opportunities.

[Operator:]

And our next question comes from Joseph Foresi from Cantor Fitzgerald. Your line is open.

[Joseph Foresi:]

Hi. I wondered if you can give us some color on how cross-selling opportunities have progressed for IHS Markit, maybe we could quantify it. And I just wanted to confirm the Mastermind is in the your guidance as well. Thanks.

[Lance Uggla:]

So, we called out in the -- what I would call the earnings call today that we have gained confidence in our revenue synergies. And that’s really just pulling the teams together and seeing quarter-by-quarter-by-quarter incremental improvements in the absolute dollar amount of synergies. And a lot of that has come through taking IHS legacy products and bringing those into the financial markets. And that’s proved to be the low-hanging fruit that we thought it would be in terms of existing products that are already built and then bringing them into the financial markets. So, that’s step one. Step two, we made some interesting wins that we called out on Investor Day and we’ve called out before to you is where we’ve taken our data management technology, tied it together with our financial markets expertise, especially around credit and been able to provide a service into the large energy companies to help them better manage complex sets of data, to reduce costs, check; and then two, to be able to analyze the credit risk component of the private companies that they’re dealing with in what is an increasingly broad and broad market that they’re actually lending into through the goods and services they provide with their counterparties. And we have an expertise in financial markets of understanding that risk component from the credit perspective. So, those are just the couple of areas, but equally they spread across technology, automotive. They cover global regions. And I have to say this is -- it’s a great team doing exactly what Jerre and I expected them to do around revenues. And we like the progress.

[Jerre Stead:]

And every week, just so you know how important it is, we review that with our leadership team, because it’s coming. Todd, pick up the last set of the questions.

[Todd Hyatt:]

I appreciate the question on the guidance and it is not in the numbers. So, what we would expect is and talk about the full year revenue of $50 million and certainly given the growth trajectory we’ll have two months of revenue. So, you can pencil out another approximately $10 million of revenue; from an adjusted EBITDA perspective, we it’s in the release that single digit in 2018, it’s flat to slightly dilutive today. But, we would expect to accommodate that in the existing EBITDA guidance. Thanks.

[Operator:]

Thank you. Our next question comes from Toni Kaplan from Morgan Stanley. Your line is open.

[Toni Kaplan:]

Hey, good morning. Jerre, congrats on your second last earnings call. Todd, you reiterated the $1 billion buyback target for 2018. And you’re bumping up against the high end of your target leverage range right now. You’ve announced the $400 million acquisition, your free cash flow is somewhere around $900 million a year. So, at some point it seems like you’ll need to raise some cash. So, should we be thinking about a new leverage target above the two to three times gross leverage or would you just expect to stick with that for now? Thanks.

[Jerre Stead:]

Great question, Toni.

[Todd Hyatt:]

Yes. I mean, we’re at two-seven on a bank basis at quarter-end so that’s pre-AMM. So, I think AMM in the quarter will push us up slightly above three times, but we would expect to be down toward the three times by year-end. And then, when we look at the cash that you talked about, the $900 million of cash and increasing capacity that supports the $1 billion within the current target leverage. And that’s how we intend to operate. I think one of the things I did talk about in call is the timing of the buyback, and we’ll manage the timing of the buyback, probably pushes that out a bit, we’ll look at opportunity to see how much of that we can front load, but I think we are comfortable operating in the leverage target that we provided. Thanks, Toni.

[Jerre Stead:]

Thanks. Last question, please?

[Operator:]

Thank you. And our final question Hamzah Mazari from Macquarie Capital. Your line is open.

[Hamzah Mazari:]

Good morning. Thank you. As you guys look at the portfolio today, maybe you could give us a sense of how much opportunity there is on the product or platform side remaining relative to lead generation and sales force efficiencies? I know you talked about the 100-bp margin expansion each year, but just give us a flavor for that. Thank you.

[Jerre Stead:]

Yes. It’s a great question. Lance will answer that. Again reminding everybody how those 67 deep dives have given us a very good view on that. I’ll start by saying, we’ve got lots of room for years to come, but pick up on it.

[Lance Uggla:]

Right. So, part of the deep dives were around the third model and as we look forward, we’ve got to make sure that we have the best combination of account management and direct sales that supports our businesses. Beneath that, we need to have the technology. And one of the first moves that we made was a significant investment in sales force across firm, and that’s rolling out at the -- starting to the first stage of the rollout here at the end of the year and will complete in the first quarter. And that gives us a platform to share information globally that definitely supports our sales activities in a more efficient way. Coming out of the back of that, of course like all, we have different sales methodologies. We have direct sales, we have inside sales and e-sales, and the platform needs to be tuned to support each of those in a way that gives us the best operating leverage. And then, finally, I’d say that historically a combination of what we call sales ops and customer care, we’ve been focused through the integration to leverage again our operational capabilities across all three of those in a way that gives us the best cost revenue ratios as well as supports the best levers for sales growth. I’d probably stop there. I think again, the team -- these are real worked exercises, they’re ones that we have clear defined goals, plans. And having Jerre and I here together this year in the way we’ve been operating has given me a whole bunch of time to focus on next year and Jerry to focus on this year. And I have to say, the partnership is one that’s been outstanding and will be missed.

[Jerre Stead:]

And we’ll wrap up with that. By the way, great set of questions. This is number 62 of my calls I’ve made with you all, just at IHS Markit. So, I’ll do one more, and we’ll do our best to make it a great one for you, but very thoughtful questions. Thanks. Close it up, Eric.

[Eric Boyer:]

Yes. We thank you for your interest in IHS Markit. This call can be accessed via replay at 855-859-2056 or international dial-in 404-537-3406, conference ID 81775333, beginning in about two hours and running through October 3, 2017. In addition, the webcast will be archived for one year on our website, www.ihsmarkit.com. Thank you and we appreciate your interest and time.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.