Harbor PanAgora Dynamic Large Cap Core ETF
Q3 2016 Earnings Call Transcript

Published: 27 Sep 2016

[Operator:]

Good day, ladies and gentlemen and welcome to the IHS Markit Third Quarter 2016 Earnings 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. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to Eric Boyer, Head of Investor Relations. Sir, you may begin.

[Eric Boyer:]

Good morning and thank you for joining us for the IHS Markit Q3 2016 guidance conference call. Earlier this morning we issued our Q3 earnings press release and some 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. 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 the 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 on IHS Markit's filings with the SEC and on the IHS Markit's website. After our prepared remarks, Jerre Stead, Chairman and CEO 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 good morning and thank you for joining us for the first official IHS Markit earnings call. We will review our Q3 results, provide you with an update on the excellent progress we've made in our integration work, and discuss some of the other highlights from the quarter. Before we proceed with our comments today, I want to recognize and thank my IHS Markit colleagues in our offices around the world. Our merger of equals builds from combined strengths, but it is not easy and causes lots of change as we create an every better, stronger combined company. Our colleagues have embraced the integration process looking for every opportunity to improve upon the way we operate to ensure that we drive the highest level of customer delight and shareholder value. I am very proud of the colleagues of IHS who are working so well together. Before we talk in more detail about the integration, let's speak to the high level financial results in the period which include revenue of $725 million, down slightly year-over-year on an organic basis when normalized for the timing of Boiler Pressure Vessel Code or BPVC. Adjusted EBITDA margins of 37.1%, representing expansion of 490 basis points with core IHS margins expansion of 380 basis points year-over-year, and adjusted EPS was $0.45 up 10% over the prior year. In terms of core industry verticals, transportation which includes our automotive, maritime, and trade and aerospace and defense teams continued to produce very strong organic growth of 9% for the quarter. Financial services organic growth, which includes our financial information, solutions, and processing businesses held steady at 3% as expected. In resources, our energy business continues to experience declining recurring revenue due to the headwinds within our markets. However, our chemicals team continues to perform well and we're very pleased with the OPIS acquisition which is growing double-digit. CMS total organic revenue excluding the impact of Boiler Pressure Vessel Code was down 4% year-over-year due mainly to the loss of a large customer by RootMetrics due to an industry merger and the continued product rationalization within TMT. Now let me provide more detail on our integration efforts. Lance is leading this effort, continues to be deeply involved in all aspects of the integration, planning, and execution. We've made fast and measurable progress and have a high level of confidence in our ability to deliver our synergy commitments. As we discussed on our mid-July merger closing call, we partnered with BCG and we began integration planning back in the spring. So we were well-positioned to start executing as soon as the merger closed. Our ability to drive quick success is based upon us establishing a strong corporate culture, one that captures the best of both legacy cultures. We will succeed on this on all levels. We've conducted an initial culture survey shortly after the merger closed with very strong participation across both companies. The results confirmed our belief that the two legacy cultures are very similar. We've introduced a new vision, mission, and values our colleagues and are building on that to further embed a strong consistent culture serving as the foundation for our future success. Our initial cost integration efforts are focused on shared service and corporate functions where we have significant overlap. We've also taken this opportunity to fine-tune spans and layers across the organization. The completion of this work will leave us with a company that is more efficient, able to make corporate decisions, and to execute even faster. It will provide our colleagues with better visibility and access to our senior leadership levels, increasing their ability to impact our company's success. We've also made good progress on revenue synergies. We've identified targeted financial customers for new revenue opportunities of IHS products including energy and economic country risks, and have launched sales enablement processes and training programs. It is early; however, we are encouraged by our progress to date. We look forward to providing you updates as we get further along with the integration. Lastly, I'm very pleased to announce IHS Markit is the name to the Dow Jones Sustainability North American Index for the fourth year in a row. I am proud of our scores. We had three measurement areas that were scored in a 100 percentile of companies. The three areas are Talent Attraction and Retention, Materiality, Corporate Citizenship and Philanthropy. We also scored in the 95 percentile for Human Capital Development. Given that we are a people-based business and that people are only sustainable competitive advantage, these scores show that we are directing our efforts and investments in the right place. My congratulations to our IHS Markit colleagues on their commitments to focus globally. With that, I’ll turn the call over to Todd.

[Todd Hyatt:]

Thank you, Jerre. Before we get started with the results, I want to remind you that IHS was the accounting acquirer [ph]. Reported results include Markit from the date of the close, July 12, so Q3 includes approximately 1.5 months of Markit. We have included Markit's year-over-year pro forma, organic FX, and acquisition revenue for the Q3 stub period in our financial services revenue growth calculations and have included the remainder of Markit's stub period revenue as acquisitive revenue growth. We believe this is a useful way to show the true performance of the overall business. For transparency purposes, we have provided supplemental material that includes historical market organic growth on its legacy calendar year basis and on the IHS November 30th fiscal year basis. Now for the results. Revenue was $725 million, an increase of 30% on a reported basis. Adjusted EBTIDA was $269 million, an increase of 50% and margin expansion of 490 basis points, and adjusted EPS was $0.45, an increase of 10%. Relative to revenue, we continue to see trends similar to those discussed on the last few calls. Total revenue growth was 30%. Organic revenue was down 1% for the combined company normalized for the prior year $8 million BPVC revenue. Acquisitions contributed 35% and FX was negative 2%. The organic revenue decline of 1% includes core IHS organic of minus 2% normalized for BPVC and core market organic growth of 3% for the stub period. Recurring fixed organic was minus 1%, recurring variable organic was 3%, and non-recurring organic was minus 5% normalized for BPVC. Looking at segment performance. Transportation growth was 17%, which included 9% organic, 9% acquisitive, and minus 1% FX. Organic revenue growth was comprised of 9% recurring growth and 9% non-recurring growth. We continue to see very strong growth in our automotive business and stable growth in the other transportation businesses. We remain confident in our auto businesses' ability to continue its high single to low double revenue growth rate due to the numerous growth drivers that we discussed in our Q2 earnings call. These drivers include continued penetration and new products within the used car portion of the auto business, and within the new car portion we expect to continue to benefit from innovation around a number of key trends, including new automotive technologies, global regulatory pressure to curb fuel consumption and emissions, the increasing use of digital marketing and recall activity. Moving on to resources, revenue declined 3%, including minus 12% organic, 10% acquisitive and minus 2% FX. Organic revenue was comprised of minus 10% recurring and minus 21% non-recurring. Our non-recurring revenue continues to be impacted by lower software sales. Energy consulting revenue was $11 million which was down $2 million versus the prior year. However, we are encouraged by the increasing level of bookings late in Q3 and near term opportunities in our pipeline. In Q3, on a constant currency basis, our resources organic subscription base, which represents the annualized value of subscription contracts, declined $19 million and through the first three quarters, the sub bases declined 8% on a base of $700 million. The Q3 subscription-based decline was primarily from customers reducing their geographic coverage, the long tail of America’s smaller independents experiencing a higher than normal cancellation rate and customers deferring to renew software maintenance. We continue to expect to see losses in our resources sub base in Q4, albeit at a lower rate than Q3. Despite oil prices beginning to stabilize, companies continue to operate in a budget constrained environment and recent global events have caused additional market uncertainty. As we discussed in our Q2 call, there continues to be volatility in demand requirements for oil, and earlier this month the IEA announced a slight reduction in their 2017 demand forecast. We are now forecasting the annual average price of oil in the low 50s in 2017, which is down several dollars per barrel from our prior forecast. We do believe that a more stable price environment will lead to a slight increase in capital spending budgets in 2017 primarily in the U.S. We believe this dynamic should allow our sub base growth to be flat in 2017 and organic revenue declines to modestly improve from 2016 levels. We expect organic revenue growth to return in 2018. CMS revenue adjusted for the negative impact of BPVC declined 6%, which included minus 4% organic, 0% acquisitive and minus 3% FX. Financial services which is comprised entirely of the legacy market business had pro forma revenue growth for this stub period of 4% including 3% organic, 5% acquisitive and negative 4% FX. Organic revenue growth was comprised of 3% recurring fixed, 3% recurring variable and 10% non-recurring. Organic growth for the Information business was 3%. The growth in the quarter was impacted by the movement to IHS fiscal reporting as June 2015 had very strong growth due to higher levels of non-recurring revenue within our indices and pricing and reference state of businesses. We expect improved growth in Q4 and for the fiscal year we expect to finish within our 4% to 6% long-term growth target range. Solutions growth of 6%, benefited from double-digit growth in the enterprise software and a number of our managed service businesses including tax solutions and regulatory compliance and corporate actions. Growth in our WSO franchises slowed as loan AUMs have stabilized following healthy growth in 2015. Our processing business delivered flat organic revenue growth driven largely by strength within the loans processing business as the leverage finance and syndicated loans market was very strong. Our derivatives processing business experienced revenue declines with lower rate volumes due to uncertainty over central bank policies. Overall for our financial services segment, we continue to expect our organic growth for the year to be 3%. Turning now to profits and margins, Q3 adjusted EBITDA totaled $269 million, up 50% versus a year ago. Our adjusted EBITDA margin was 37.1% and represented margin expansion of 490 basis points. Margin expansion included core IHS expansion of 380 basis points, an additional benefit of 110 basis points from inclusion of Markit's stub period results. Regarding segment profitability, core IHS has strong margin improvement in Q3 as we entered the year at a lower cost base due to the transition to our business line operating model and simplification and reduction of our centralized marketing, sell support and shared services cost structures. Transportation's adjusted EBITDA was $89 million with a margin of 39%, up 160 basis points versus prior year due primarily to the margin flow-through from high revenue growth. Resources adjusted EBITDA was $94 million with the margin of 44.9%, up 300 basis points versus prior year due to segment cost reductions over the last four quarters, aligning resources to current business opportunities. CMS adjusted EBITDA was $33 million with the margin of 25.6%, up 580 basis points last year due to cost reduction efforts and margin lift versus prior year due to BPVC in Q3, 2015. Financial services adjusted EBITDA was $65 million with a margin of 41.4%. In the quarter, we recorded a $105 million of acquisition related expenses including $80 million of advisory and banker fees. As a reminder, when we announced the deal, we noted that the cost to achieve synergy expense reductions would be approximately 1.5 times the synergy expense amount. Our effective GAAP tax rate was negative 44% and our adjusted tax rate was 25%. The GAAP tax rate and tax benefit was driven by the GAAP net loss in the quarter which was impacted by acquisition related costs, higher stock-based compensation and the tax efficient capital structure. The adjusted tax rate benefited from the tax efficient capital structure and declined approximately two to three percentage points versus our prior adjusted tax rate. Q3 weighted average diluted share count for adjusted EPS was 349 million shares, which included approximately 1.5 months of market diluted weighted share count. We expect that 2016 fully weighted average share count of $319 million and the year end diluted share count to be 440 million shares. Please refer to page seven of the supplement for additional detail. Turning to adjusted EPS, Q3 increased to $0.45 per diluted share, a $0.04 or 10% improvement over the prior year. The GAAP net loss of $32 million or EPS of negative $0.09 was primarily the result of $105 million of acquisition related costs consisting primarily of deal-related fees as well as the higher level of stock-based compensation expense. Q3 free cash flow was $100 million and represented a conversion rate of 37%. Our trailing 12-month free cash flow was $467 million and represented a conversion rate of 56%. Cash flow was negatively impacted by merger-related fees paid in the quarter of approximately $60 million. Excluding these fees, the trailing 12-month conversion would have been 63%. Going forward, we are expecting free cash flow conversion in the mid-60s, excluding deal-related fees and merger related restructuring expense. Turning to the balance sheet, our quarter end debt balance was $3.3 billion, and we closed the quarter with $201 million of cash. Our gross leverage ratio was 2.5 times and our net leverage ratio was 2.3 times. We repurchased approximately 4.5 million shares in the quarter for $157 million at an average per share price of $35.06 and expect to continue to purchase shares in the open market while continuing to operate in our targeted two to three times gross leverage ratio. Our Board recently authorized the $1.5 billion share repurchase program, which will be used to meet our previously communicated capital return commitments in 2017. Relative to 2016 guidance, we are reiterating our previously communicated guidance with the following revisions to our stock based compensation and GAAP tax rate. For stock based compensation, we are now expecting a range of $195 million to $205 million, which is $25 million greater than our previous range due to higher than anticipated additional expense from revaluation of market outstanding stock options and acceleration of certain share awards associated with severance activities post merger, as well as the conversion of legacy IHS PSUs caller SUs [ph]. In terms of tax rate, we are now expecting a GAAP tax rate of approximately 5%. This is lower than our previous rate due to the now higher anticipated stock compensation expense and the timing of merger-related expenses. We expect an adjusted tax rate of 25% to 26% consistent with the July call. In terms of 2017, we plan to provide guidance in November. However, when we announced the deal in March, we provided financial expectations for the combined company including 2017 adjusted EPS growth of 20% over the midpoint of IHS' 2016 adjusted EPS guidance given on our Q1 call of this year, and a share buyback of $1 billion in each of 2017 and 2018. We are still committed to delivering to these targets. With that, I will turn the call back over to Jerre.

[Jerre Stead:]

Thanks Todd. I am pleased with our Q3 performance given the energy industry challenges and continue to feel very positive about our leading assets and market position. Our transportation segment continues its strong results led by our auto business performance which we believe will continue to produce strong results through market cycles, and we are comfortable with the outlook of our financial services business. Finally, we are off to a very strong start with the integration of two companies. With that, operator, we are ready to take questions.

[Operator:]

Thank you. [Operator Instructions] Our first question is from Peter Appert with Piper Jaffray. You may begin.

[Peter Appert:]

Thanks, good morning. So the margin performance at legacy IHS has been very impressive. And I'm wondering Todd or Jerre, how far along in the process are we in terms of getting the benefit from these changes you've made, and I am thinking that maybe margins are going to be a little bit more difficult going into 2017 in the context of the revenue performance you're seeing?

[Jerre Stead:]

I'll start. Peter, great question. Thank you and Todd will pick up. We are very proud of the progress we've made. The 370 basis points improvement in Q3 puts us at a record margin on EBITDA. We’ve still got a lot going on and we may not see 370 basis points improvement, but we'll continue to see strong improvement as we go forward. Also keep in mind because we will report of course the segments, so that you could see the changes as we make them. Keep in mind that part of our commitment into 2017 is the beginning of the dollars of synergy expense reduction that we'll enjoy in 2017, 2018, and then into 2019. Todd?

[Todd Hyatt:]

Yes. When we look at 2017, Peter, we do see continued margin levers that are available to the company. Certainly, on top of the list we talk about the synergies and initially focused on corporate insured services in those areas and really moving forward very aggressively with those and actioning that toward the latter end of Q4. When we look at the commercial areas, a number of levers that have continued to be available relative to best cost to consolidation of data centers, we now with this deal have more data centers, more consistency in terms of the technology framework within the two companies, continued synergies in terms of or opportunities from a sales force efficiency perspective. And then you hit on the revenue growth certainly in a lower revenue growth environment, important that we're really managing those levers very aggressively. We also -- when we look at the parts of the business that are growing at a very high level, those are areas that we have opportunity to deliver incremental margin and we made investment decisions that we'll continue to evaluate the trade-off between investment and margin delivery.

[Jerre Stead:]

Thanks, Peter. Next question.

[Operator:]

Our next question is from Bill Warmington with Wells Fargo. You may begin.

[Bill Warmington:]

Good morning, everyone.

[Jerre Stead:]

Hi, Bill.

[Bill Warmington:]

So I was just going to ask you to give us an update on the revenue synergies. You've talked about $100 million potential there and you've talked also about some of the buckets that would potentially would go into, three buckets in terms of some unique IHS content that you could sell into market and a couple of other buckets, and I'm particularly interested in hearing about how KY3P is progressing?

[Jerre Stead:]

Okay, Great. Bill, thanks. I'll start, Todd can pick up again. We now get actually daily and weekly updates of the revenue that's in the pipeline that is being, as I said, focused on moving our - particularly our energy products and also our economic country risk products into the financial community and very pleased with those. We'll see those - they're actually ahead of the plan that we put together. The $100 billion is an exit number in 19 as you know. We'll see the other two pieces pick up as we move into early 2017. Todd, you want to pick up on the last piece of this question?

[Todd Hyatt:]

Yes. Well, as you said Jerre, the initial focus is really primarily cross-sell of IHS products into financial services, teams are driving a pipeline that we review daily. We also see opportunities, Markit products entire IHS customers, the enterprise data management, the analytics product offerings, when you ask specifically about KY3P, I mean that’s a business where the Markit team continues to add customer accounts to that and we certainly see opportunity from bringing industry customers into that platform, to date that has not been a primary focus area at this stage.

[Jerre Stead:]

Yes we are trying to get the quick thoughts. Thanks Bill, next question.

[Operator:]

Our next question is from Jeff Silber with BMO Capital Markets. You may begin.

[Jeff Silber:]

Thank you so much. I know it’s early, but you didn’t mention any impact of Brexit in your comments and I am specifically wondering if you’ve seen any impact on Markit’s business or any of your legacy IHS business as well? Thanks.

[Jerre Stead:]

And I know, a great question Jeff. The answer is no, with one exception. Obviously the pound is down about $0.08, it is in fact I think it was under 130 yesterday. If you look at the guidance we gave at the July announcement, we were anticipating about $10 million revenue hit because of currency, it was actually about $15 million this last quarter. Other than that, no we have seen nothing that would have any impact on our business going forward. Thanks Jeff, next question.

[Operator:]

Our next question is from Gary Bisbee with RBC Capital markets. You may begin.

[Gary Bisbee:]

Hi, guys good morning. I guess a question on the resourced business, that business the organic growth rate subscription overall deteriorated sequentially again and I guess, what are you hearing from customers, Todd? You expressed the view that you could likely see the sub space flatten out next year, I guess what gives you the confidence data, what are the prospects that you see a wide number of customers again renew for less in the key upcoming season? Thanks.

[Todd Hyatt:]

Good question Gary, Todd picked it up, I’ll close it. We see the primary correlation to us is really the spending of the energy companies and the capital spending on projects. And really what we have seen in energy, we’ve seen in Asia, EMEA, we have seen improvements in those markets and feel like there is a clear path to bring those into a flat sub base territory. Americas has been more challenged, but we do see forecasts for a small uptick in spend next year, a more stable environment, companies having cycled through this for a couple of years and so, for us the key will be to really be able to move Americas into that flat territory. And we think it’s not going to be a perfect market, but we think it will be improved enough and customers have made enough strategic changes at this point that they are in a lot more that they will be able to make as we move into 2017.

[Jerre Stead:]

Only thing I would add is actually what Todd said, will give you that indication hopefully in the Q4, into Q3 our non-sub consulting pipeline was active. That will be a very good indicator for us that it’s starting to ship. And then as we’ve said with our bookings we will, when we see them flatten out and hopefully move positive that will be the indication that says, we’re starting to move back. We said that and Todd mentioned that looking at probably $52 a barrel next year which is down four or five from what we said last time. It is interesting as you probably saw IEA reduced $100 million barrels a day by 100,000 in their forecast and they hit the oil market by I think three bucks the next day a barrel. So, still very volatile, but the critical point is what Todd said. Yet this industry is driven by annual budgets and as we see that evolving, we’ll do our best to give you the color of what we expect to see as it flattens out in 2017. Thanks Gary, next question.

[Operator:]

Our next question is from Sarah Gubbins with Bank of America. You may begin.

[Sarah Gubbins:]

Good morning, thank you. In financial markets you recently signed PIMCO 2, your customer offering and I’m wondering if that started to lead traditional buy side clients making them to move and also I believe that Markit had started to raise pricing particularly in the Information segment and I'm wondering if we should expect that to be much of a contributor to growth in 2017?

[Jerre Stead:]

Yes, and I mean Todd, yes, please...

[Todd Hyatt:]

On the pricing Sarah, Markit talked about a 3% price increase, it is really a muted benefit this year because many of Markit's contracts are longer term in nature. So that will really cycle in over the next couple of years. But we do see it on a long-term basis as being an opportunity to drive further market growth. On KYC, I mean the program continues to have a number of good operational wins, so there are now 13 banks signed up on KYC and announced a strategic partnership with Dow Jones, 700 clients at the top co levels. So operationally we're happy with the progress that Michelle and team continue to make on the KYC platform. Thank you.

[Jerre Stead:]

Thank you, Sarah. Next question?

[Operator:]

Our next question is from Andrew Steinerman with JPMorgan. You may begin.

[Michael Cho:]

Hi this is Michael Cho for Andrew. It's a question around the Engineering Workbench product, can you give us some update on if there is new sales coming on or what are you seeing for this product? Thank you.

[Jerre Stead:]

No good question, I will start and Todd will pick up. The answer is yes, we set out 3.5 years ago to evolve a business to where we were, and ever smaller piece of our total revenue was based on royalty and that's – this is the year of the introduction of the Engineering Workbench with the new product offerings. The new product offering is early yet, but very strong and it will continue to be strong in the months and years ahead. So we feel good about that. Todd, do you want to add more?

[Todd Hyatt:]

Yes, I would add Jerre. I mean there are – there is a good pipeline. We had several good wins particularly in Q2. Q3 we didn’t have the same level of activity, but we do like the way the Q4 pipeline is shaping up and for us it's about getting the customers on to the Workbench and selling them the additional products and services that Jerre talked about.

[Jerre Stead:]

Thank you, great question, next.

[Operator:]

Our next question comes from Manav Patnaik with Barclays. You may begin.

[Manav Patnaik:]

Thank you, good morning gentlemen. I just wanted to talk a little bit more about the visibility you guys have on the energy business, so you pushed the recovery out to 2018 from 2017 and maybe just going to next quarter, I think it is one of your bigger renewal quarters and maybe some color there? And just on the non-recurring business, the software sales I guess that's understandable. What I'm trying to get at is, is that something that will come back, meaning do they have to use your product or are they finding alternate ways to use other products?

[Jerre Stead:]

Thanks Manav. I'll start and Todd will pick up. I think two or three things, one on the software sales there is two pieces, one is the licensing and that has been postponed eventually. Customers are going to have to make the decision and will, we see early indications of that. The bigger short term return is that some of the smaller customers have actually cancelled the annual maintenance fees and that will come back and in fact the way to think about that is, those come back will end up picking a couple of years of the maintenance fees up because they can't go too long without that. So that part will come, that is a small piece of the total though. Todd, you want to pick up the...?

[Todd Hyatt:]

As far as visibility, we do look at energy on a customer basis, so we have visibility as we look out in Q4 and on into Q1. I had said in my comments that we will see improvement in the sub-base reduction in Q4. We do see a path to move this business into a flat sub-base range in 2017, but it does continue to be a volatile and a challenging environment, but certainly our sales teams we're managing this thing at a customer level in a very granular fashion.

[Jerre Stead:]

All right, two additional comments, one I think you all saw the 44.5% EBITDA margin on resources, our highest in history. I look forward very much to the day that the revenue turns positive which it will, particularly in upstream in the future. And when you've got that kind of margin base, we're going to see a great couple of years. I just want to clarify, we did not push out recovery into 2018. In fact what Todd said is, we're stable and expected to be flat or marginally up in 2017. Thanks Manav.

[Operator:]

Our next question is from Jeff Meuler with Baird. You may begin.

[Jeffrey Meuler:]

Yes thank you. On CMS how are you viewing the growth rate organically both in terms of normalized once we get past the consolidation at a RootMetrics customer and the product rationalization? So what is the normalized organic growth rate and then what is the growth rate over the next year or so, while you're facing those headwinds?

[Jerre Stead:]

I will start and Todd will pick up. Historically the key D&D business has been 5% to 5.5%, 6% organic growth business even in downturns year-over-year, so that is a solid base. What we have gone through this year with TMT has been and we've talked about it before as we moved from 1200 products to 300 products, moved from about 35% subscription base to about 65%. So, we look forward to seeing that improvement move into 2017. We are in the process of finishing the integration with TMT and RootMetrics, feel good about that. It was a significant 500 basis points of improvement year-over-year from a margin standpoint, not to where we want to be in total CMS, but improvement. Then finally ECR, I'm very positive about as we integrate that into the historical business and strength of the Markit business under Adam Kansler. So I feel good about those and I think we will see the progress in 2017. Todd anything?

[Todd Hyatt:]

On the normalized, we see a normalized sub growth in CMS of 3 to 4 adjusted for RootMetrics, the all-in because of the code becomes more difficult to look through, but all in low single digit growth. Longer term as Jerre said, product design historically has been a 5% type business and we don’t see any reason that, that as we get through the TMT product transformation that we can't get back to that level.

[Jerre Stead:]

Thank you, good question. Next?

[Operator:]

Our next question is from Andrew Jeffrey with SunTrust. You may begin.

[Andrew Jeffrey:]

Hi guys, good morning, thanks for taking that.

[Jerre Stead:]

Hi Andrew.

[Andrew Jeffrey:]

I wonder if we look at the Info business, your financial services segment, given puts and takes from sort of macro and volume considerations as well as pricing moved and then also possible synergies, can you speak to what you would view as the long-term structural organic revenue growth in that business?

[Jerre Stead:]

I will start and in Todd's script today he talked about returning to a 4% to 6% organic growth level. I think we feel very good about that at this point. Todd, you want to add?

[Todd Hyatt:]

Yes, what I think my answer and Jeff talked about and we're certainly committed to having a business that will deliver at that level.

[Jerre Stead:]

Thank you, next question.

[Operator:]

Our next question is from Ato Garrett with Deutsche Bank. You may begin.

[Ato Garrett:]

Hi, good morning guys.

[Jerre Stead:]

Good morning Ato.

[Ato Garrett:]

Just one question thinking about the business overall in terms of what the impact might be from a interest rate hike, whether that might drive a spike in process revenue is the greater trade volumes due to price changes and whether that might impact the CapEx budgets a little bit within the resourced division or even within transportation with a lot of manufacturers, can you help us just think about, if we did see a rate hike this year and possibly for the one next, where do you think the biggest puts and takes be across the business?

[Jerre Stead:]

It's a great question, therefore Todd gets to answer.

[Todd Hyatt:]

I think in financials, I think it would probably a net positive because probably at some level of volatility and improve overall volume levels and I think that is probably the biggest driver that we would see in financials. In the core legacy IHS businesses, I don’t see a big impact from interest rates going up. I just, I don’t see that a rate hike would flow through to the business in a material way.

[Jerre Stead:]

No, I agree Todd that, especially if you think about upstream and energy because as that’s gone through the cycle, the interest rate is insignificant compared to supply and demand, that’s primary cost. Thank you, good question. Next?

[Operator:]

Our next question is from Anj Singh with Credit Suisse. You may begin.

[Anjaneya Singh:]

Hi, thanks for taking my question. I realize you guys a little bit away from giving guidance, but I wanted to get your high level thoughts on some of the strong margin expansion that we’ve been seeing particularly in resources. Todd, I think you had said that this level of margin expansion probably wouldn’t continue at Q2, but we saw even stronger margins this quarter. As some of the revenue starts to stabilize or starts to grow and as you look ahead will resources margin expansion be more limited or pressured, just wanted to get your thoughts there? Thanks.

[Todd Hyatt:]

Well, I mean Peter hit on this earlier. You certainly, long term you need to have the revenue growth to continue to expand margin long term, but we have done a good job in resources of rebalancing the resourcing to the revenue levels that we have particularly in the non-subs part of the business. And I think and really from the time that the Jerre came back, well over a year ago we’ve been very focused on operational efficiency. And for me probably, the primary contributor to the margin that we've been driving is tied back to the commercial operating model. And it is this efficient aligned model that allows business leaders to make resourcing decisions with sales, marketing, product development, product management and really aligns the incentive structures around that. So, we at a corporate level we’ve certainly identified the levers that are available to the business leaders and I went through those in answering Peter’s call. We see continued opportunity to drive improvement in margin from those initiatives.

[Jerre Stead:]

And the only thing I’d add to that is, remember that we had committed publically to a $125 million of synergy cost savings as we go out of 2018. So, you will see a piece of that each year and that’s a significant number if you think about the cost base that revolving from it. And lastly, we’ve committed that we'll continue in the legacy IHS to develop the 100 basis points improvement year-after-year and the same thing is true in Markit. So, not the 490 basis points or 370 basis points this quarter, but significant upside improvement for years to come. When we announced the deal, we said we expected to see us evolve into, after adjustment for the accounting changes, evolve into a low to mid 40s all in way out in the future, so we’re committed to that and expect to see it. Thank you, next question.

[Operator:]

Our next question is from Shlomo Rosenbaum with Stifel. You may begin.

[Shlomo Rosenbaum:]

Hi, good morning. This question is for Todd. Todd, can you talk a little bit about the cash tax ex benefit for the Markit deal, what kind of cash tax rates should we expect and then over next several years, when does the company finish using the tax related benefits and which are helping the conversion ratio from EBITDA the free cash flow?

[Todd Hyatt:]

So that the lens that we provided is that the adjusted tax rate would be in the low to mid 20s and that’s what we provided at the time we did the deal. GAAP tax rate will be well below that and I talked about the reasons for that on the call. We do look at cash taxes in the near term being at the lower level than the income statement tax rate. So, what I will say is, we will provide more color on cash flow and cash conversion in November, but we certainly expect to have a cash tax level in 2017 that will be at a level that on a percentage basis is below what we’ve seen in the current year.

[Jerre Stead:]

Thank you, next question.

[Operator:]

Our next question is from Joseph Foresi with Cantor Fitzgerald. You may begin.

[Joseph Foresi:]

Hi, you talked about maintaining your earnings outlook that you originally talked about when you announced the merger, but its sounded like resources is going to take a little longer to recover. So, what should we think about as the main driver of that growth, is it margins or the buyback?

[Jerre Stead:]

Well, there is a whole series and I’ll have Todd comment on them, but let’s not that - I just said our margin for resources is 44.5% historical high last quarter. So, the great job we’ve done with cost control and also the commitments we’ve made publically to the synergy revenue and synergy cost savings is a big piece of it. Certainly, the buyback that Todd reconfirmed today, $1.17 billion and $1.18 billion and the fact that we’re currently buying will also pick up the tax piece Todd.

[Todd Hyatt:]

Yes, that I mean the levers that we have I think we've detailed these in the past. So we’ll certainly be aggressive around the synergies, and for couple of reasons. One, financial benefit, but I think the other one is operationally, it's much better to execute and get that behind so that we can focus on running the business. So, there is the synergy lever. There is also a more efficient cash structure from a capital perspective. There is flexibility around share buyback. And operationally we have a level of confidence that commercially we will be able to improve the underlying margins in the business, so those are really the big things.

[Jerre Stead:]

Thank you, next question.

[Operator:]

Our next question is from Toni Kaplan with Morgan Stanley. You may begin.

[Toni Kaplan:]

Hi, good morning.

[Jerre Stead:]

Good morning, Toni.

[Toni Kaplan:]

Thanks, your commentary on resources is a little worse than you had previously communicated and CMS and financial services growth seem pretty light this quarter, but the guidance implies top line growth to reaccelerate organically in the fourth quarter and so I’m just wondering what really the main drivers are for that reacceleration?

[Jerre Stead:]

Todd?

[Todd Hyatt:]

Yes, I mean I think that Q4 will be largely in line with lot of the trends we’ve seen in Q3, but in terms of some of the non-subs we see some opportunity to accelerate growth in certain parts of the business in Q4. I referenced that the pipeline that we have in consulting around energy and we have opportunities there that we think provide a path to improve the overall revenue performance.

[Jerre Stead:]

Thank you, Toni. Next question?

[Operator:]

Our next question is from Andre Benjamin with Goldman Sachs. You may begin.

[Andre Benjamin:]

Hi, good morning.

[Jerre Stead:]

Good morning.

[Andre Benjamin:]

Yes, my question on the financial segment, I was wondering if there is any update on how the company is thinking about the anticipated shift of OTC derivatives in Europe and how you’re thinking about any discussions with regulators or proactive pricing changes with the customers?

[Todd Hyatt:]

You are talking OTC derivatives in Europe, Andre?

[Andre Benjamin:]

Assuming I would thought.

[Todd Hyatt:]

Yes, I mean I think generally speaking, we don’t see it at significant impact in 2017. We see that being a later 2017 into 2018.

[Andre Benjamin:]

Yes, 2018.

[Jerre Stead:]

Thank you, Andre. Next question?

[Operator:]

Our next question is from Hamzah Mazari with Macquarie. You may begin.

[Unidentified Analyst:]

Hi, this is [indiscernible] filling for Hamzah. I’d a question – we have a question about the for contract renewal cycles, can you give us a sense of the resource business and how much of your overall business is in multi-year contracts?

[Todd Hyatt:]

We don’t, multi-year for resources, Jerre? I would say resources multi-year maybe 20% in dollars that's what we've talked about in the past. Markit generally has a higher level of multi-year agreements than IHS Legacy has had. Automotive we have a number of multi-year as well.

[Jerre Stead:]

Correct, some three, four years. Thank you, next question.

[Operator:]

Thank you. Our next question is from Alex Kramm with UBS. You may begin.

[Alex Kramm:]

Yes, hey, good morning.

[Jerre Stead:]

Good morning.

[Alex Kramm:]

Just coming back to the financial services just for one minute, I think in the prepared remarks you talked about the third quarter and some of the reasons for the noise there, and then if you could just reiterate the four to six longer term, but can you just talk about the near term a little bit in more depth? It seems like still a lot of stress in the financial services industry, both buy side and sell side, so what should we expect in the really near term in the next couple of quarters in take? Thank you.

[Todd Hyatt:]

Well the information, legacy information part of financial services, we continue to feel very good about. And we continue to have good solid growth in pricing and reference data in the indices area, the IBOX under management has moved up to $115 million. That fiscal year movement did have an effect of making Q2 look a bit higher than it would have been on a legacy calendar quarter basis and Q3 being lower, but that we're very confident that we will see the information service growth improving Q4 over what we saw in Q3 processing very much volume driven and we did have the improved volumes in the fixed income area in Q3. So, I think, depending on volumes, we will see processing at or slightly below where it was. Solutions, particularly some of the enterprise software deals are very lumpy and in the world of financial services a lot of those are really timed for December. So we're certainly aware that, with the move to November year end, we may see a bit of an impact in that area as we report our Q4.

[Jerre Stead:]

Which says Q1 will be a great start, we hope. Okay. And thank you, next question.

[Operator:]

I'm showing no further questions at this time. I would like to turn the call back over to Mr. Boyer for closing remarks.

[Eric Boyer:]

Just before you do this Jerre, I want to close just as a reminder to everybody, Lance and I first met on December 4th. on March 21st we announced the deal. We closed it on July 12th, fastest, this is the fourth merger vehicle I've done by far the fastest. Seven weeks later we closed the quarter, we just reported on and I am tremendously proud of the progress we've gotten 80%, 90% of the noise out of the way including all the work with BCG, et cetera. So as we move into fourth quarter and into 2017 we've got great momentum. We've got great progress going on in total and I look forward to, one the guidance we will give you in mid-November for 2017 and then reporting Q4 results in 2017. So, great job, a lot of people working very hard. Jerre?

[Jerre Stead:]

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 and conference ID 76278906 beginning in about two hours and running through October 04, 2016. In addition, the webcast will be archived for one year on our website at www.ihsmarkit.com. Thank you and we appreciate your interest and time.

[Operator:]

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