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Edited Transcript of INFO earnings conference call or presentation 28-Mar-17 12:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 IHS Inc Earnings Call

ENGLEWOOD Mar 28, 2017 (Thomson StreetEvents) -- Edited Transcript of IHS Markit Ltd earnings conference call or presentation Tuesday, March 28, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eric J. Boyer

IHS Markit Ltd. - VP of IR

* Jerre L. Stead

IHS Markit Ltd. - Chairman of the Board and CEO

* Lance Uggla

Markit Ltd. - President and Director

* Todd S. Hyatt

IHS Markit Ltd. - CFO and EVP

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Conference Call Participants

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* Alex Kramm

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Exchanges, Ebrokers

* Andre Benjamin

Goldman Sachs Group Inc., Research Division - VP and Lead Analyst

* Andrew C. Steinerman

JP Morgan Chase & Co, Research Division - MD

* Andrew William Jeffrey

SunTrust Robinson Humphrey, Inc., Research Division - Director

* Anjaneya K. Singh

Crédit Suisse AG, Research Division - Senior Analyst

* Arthur Warren Gardiner

Evercore ISI, Research Division - Research Analyst

* Brandon Burke Dobell

William Blair & Company L.L.C., Research Division - Partner and Group Head of Global Services

* Gary E. Bisbee

RBC Capital Markets, LLC, Research Division - MD of Business Services Equity Research

* Hamzah Mazari

Macquarie Research - Senior Analyst

* Jitaek Chu

BofA Merrill Lynch, Research Division - VP

* Joseph Dean Foresi

Cantor Fitzgerald & Co., Research Division - Analyst

* Kevin Damien McVeigh

Deutsche Bank AG, Research Division - Head of Business and Information Services Company Research

* Nick James Nikitas

Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst

* Patrick Timothy Halfmann

Morgan Stanley, Research Division - Research Associate

* Peter Perry Appert

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

* Ryan C. Leonard

Barclays PLC, Research Division - Research Analyst

* Shlomo H. Rosenbaum

Stifel, Nicolaus & Company, Incorporated, Research Division - VP

* Sou Chien

BMO Capital Markets Equity Research - Associate

* William A. Warmington

Wells Fargo Securities, LLC, Research Division - MD and Senior Equity Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the IHS Markit First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Eric Boyer, Head of Investor Relations. Sir, you may begin.

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Eric J. Boyer, IHS Markit Ltd. - VP of IR [2]

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Good morning, and thank you for joining us for the IHS Markit Q1 2017 Earnings Conference Call. Earlier this morning, we issued our Q1 earnings 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, the 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 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 in the IHS Markit filings with the SEC and on the IHS Markit website.

After our prepared remarks, Jerre Stead, Chairman and CEO; Lance Uggla, President; and Todd Hyatt, EVP and Chief Financial Officer, will be available to take your questions.

With that, it's my pleasure to turn the call over to Jerre Stead. Jerre?

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [3]

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Thank you, Eric, and thanks to all you for joining the IHS Markit Q1 Earnings Call. We will review our Q1 results, provide you with an update on our integration work and discuss some of the other highlights from the quarter.

We were very pleased to start the new year as a merged company, which is combined 2 world-class organizations. Our colleagues began 2017 with a running start, having already worked together for 6 months. This provides the platform for us to deliver solid financial performance, while we continue to make great progress on our integration.

The high-level financial results in Q1 were: revenue of $844 million, up 2% year-over-year on an organic basis; adjusted EBITDA of $320 million; and margins of 37.9%, representing expansion of 515 basis points on a reported basis. Adjusted EPS was $0.45, up 15% over the prior year. This quarter's results included good contribution from synergies, and we continue to have strong additional opportunities.

In terms of core industrial verticals, Transportation, which includes our automotive, maritime & trade and aerospace & 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, also performed very well with 7% organic growth.

In Resources, as expected, our energy business experienced a decline in our annual contract value. However, we continue to expect improvement through the remainder of the year as we see signs of the upstream market beginning to stabilize. Our Chemicals and OPIS teams provided continued strong performance.

Although our CERAWeek conference fell into our second quarter this year, I did want to share that we have record breaking revenues. This year's conference was, without a question, one of our most successful, with new and innovative programs focused on new technologies in the industry. Keynotes by top executives from virtually every major oil and gas company and from the Prime Minister of Canada. Discussions with our upstream energy customers and colleagues were ones of cautious optimism for the first time in several years, which is very encouraging. CMS total organic revenue was down 2% year-over-year.

As we were preparing for this earnings announcement and call, it was remarkable to consider that we are marking the 1-year anniversary of our merger announcement. I'm so very proud of the work that our colleagues have done with the integration while continuing to focus on customers and continuing to deliver results as we're announcing today. Lance will talk more about our integration progress in a moment. And we'll be talking about future strategy and vision at our Investor Day on April 26. Lance has done a great job in driving the integration. We're now moving from our core integration work to the work of our future strategy and vision.

As we developed our 3- to 5-year plans, we reviewed our organizational leadership structure and determined that we could benefit from a further consolidation and simplification. Therefore, we will consolidate our commercial operations under the leadership of 2 of our operating executives. Jonathan Gear will continue to lead Transportation and Resources as well as our Consolidated Market segment. Adam Kansler will lead our entire Financial Services segment. In addition, Yaacov Mutnikas, Executive Vice President, Financial Market Technology, has been appointed our Chief Data Scientist. In this role, Yaacov will be responsible for the implementation of new technologies around unified data and predictive analytics. He will also continue with his operational responsibilities. Finally, we're very pleased to announce that Lisa Westlake will be joining our company as our Executive Vice President and Chief Human Resources Officer. Lisa joins IHS Markit from Moody's Corporation where she was the Chief Human Resources Officer. She also held management positions with American Express, Dun & Bradstreet and Lehman Brothers and brings that wealth of experience to our company. With these executive changes, I'm very confident we're structured appropriately to capture the vast amount of opportunities that are now in front of us.

And with that, I'll pass the call to Lance.

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Lance Uggla, Markit Ltd. - President and Director [4]

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Thanks, Jerre. Let me say it's great to be speaking with you again, and I look forward to seeing many of you at our upcoming Investor Day. This morning, I want to provide you a quick update on our integration efforts. Since the merger closed in mid-July, we've been executing against our integration plan and continue to make good progress. As you recall, we accelerated the amount of cost synergies that we expect to achieve in 2017 from our original guidance at the time of the merger announcement. Our initial cost integration efforts are focused on areas where we had some of the most significant overlap such as shared services, corporate functions and facilities. We are confident in our line of sight to achieve a total cost synergy amount greater than our $125 million estimate through 2019. We plan to reinvest these additional savings back into our business around a number of key initiatives in the areas of technology, product development, customers and colleagues. We believe these investments will better position us to achieve our long-term financial objectives on a consistent basis of a mid-single-digit organic revenue growth and an adjusted EBITDA margin in the mid-40s with at least 100 basis points of expansion annually. I look forward to providing more detail on these future investments at our Investor Day.

We've also made progress on revenue synergies, identifying a substantive set of financial market participants that have interest in our deep industry expertise and insights within Resources, Transportation and Consolidated Markets. Additionally, we have validated the potential to sell our enterprise data management technology into our Resources customers, and have had early success. We're off to a good start, and I look forward to providing you future updates.

Leading the integration effort has allowed me the opportunity to work closely with colleagues across the legacy businesses. I was able to take a step back from the day-to-day operations and to spend time better understanding the state of where our businesses are today, where we need to go as an organization in the future and to plan how we'll get there. I'm more convinced in the potential from this combination today than when we announced it last year. We have an incredible foundation built upon our market-leading assets, our colleagues and our customer base. We'll use some of the future financial benefits afforded to us by the merger to make measured investments to improve the productivity of our assets and colleagues to better serve our customers and to provide strong and consistent returns to our shareholders. I look forward to laying out our future path with you next month in New York.

And with that, I'll turn it over to Todd.

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Todd S. Hyatt, IHS Markit Ltd. - CFO and EVP [5]

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Thank you, Lance. Before we get started with the results, I want to remind you that while Q1 results include IHS and Markit, prior year Q1 results only include legacy IHS. We've included Markit's year-over-year organic revenue growth and FX revenue impact in our revenue growth rates and have included the remainder of Markit revenue as acquisitive revenue growth. Our Q1 absolute and organic revenue growth rates have also been normalized to take account of the movement of CERAWeek from Q1 2016 to Q2 2017 and movement of our annual maritime event from Q2 2016 to Q1 2017.

Now for the Q1 results. Revenue was $844 million, an increase of 54% on a reported basis. Adjusted EBITDA was $320 million, an increase of 78%, with margin of 37.9% and margin expansion of 515 basis points on a reported basis. Adjusted EPS was $0.45, an increase of 15%.

Relative to revenue, we continue to see trends similar to those discussed throughout 2016. Total Q1 reported revenue growth was 54%. Organic revenue growth was 2%. Acquisitions contributed 55%, and FX was minus 2% headwind. Recurring organic growth was 2%, and nonrecurring organic was 4%.

Looking at segment performance. Transportation normalized growth was 11%, which included 9% organic, 2% acquisitive and minus 1% FX. Organic revenue growth was comprised of 9% recurring growth and 10% nonrecurring growth. We continue to see very strong growth in our automotive business and stable but lower growth in the other Transportation businesses. We continue to expect all-in and recurring Transportation organic growth in the high single digits but also expect nonrecurring growth to moderate due to difficult year-over-year comparisons in our recall business.

Moving on to Resources. Revenue declined 2%, including minus 8% organic, 7% acquisitive and minus 1% FX. The organic revenue decline was comprised of minus 8% recurring and minus 13% nonrecurring.

In Q1, on a constant currency basis, our Resources annual contract value, or ACV, which represents the annualized value of recurring revenue contracts, declined approximately $12 million, which was in line with our expectations. We expect flat ACV in Q2 and flat ACV growth on a full year basis. This is due in large part to more stable price environment and more favorable capital spending budgets in 2017 than in the past 2 years.

Our nonrecurring energy revenue declined $3 million versus prior year, normalized for CERAWeek timing shift. This decline was primarily due to consulting decline of $1 million versus prior year base of $12 million and software and 1x decline of $2 million versus prior year base of $8 million. We expect positive nonrecurring revenue growth in Q2 due to the strong performance of our CERAWeek event and improved consulting performance. We are now forecasting the annual average price of oil to be in the mid- to high 50s in 2017.

CMS declined 5%, which included minus 2% organic and minus 3% FX. Organic revenue was comprised of 1% recurring growth and minus 20% nonrecurring. The nonrecurring declines were in part due to the continued product rationalization within our TMT business. We expect positive CMS organic revenue growth in Q2 due to lapping of the loss of a significant customer contract in our RootMetrics business in late Q1 2016.

Financial Services revenue growth was 4%, including organic revenue of 7% and negative 3% FX. Organic revenue growth was comprised of 6% recurring and 30% nonrecurring. Information organic growth was 4%, in line with the previous quarter. We saw steady growth across products, with particular strength in both our index and bond pricing businesses.

Our processing business delivered 12% organic revenue growth. This was driven by increased market activity in the loans market and mixed activity in the derivatives market, with the volume in rates steady and volume in credit markets lighter.

Solutions organic growth was 10%, a significant improvement on the previous quarter. As indicated during our Q4 earnings call, this was driven by improved levels of nonrecurring software license revenue. Our managed service business had another solid quarter and delivered double-digit organic revenue growth.

Turning now to profits and margins. Q1 adjusted EBITDA totaled $320 million, up 78% versus a year ago. Our adjusted EBITDA margin was 37.9% and represented margin expansion of 515 basis points. Taking account of Markit prior year Q1 margin, normalized margin expansion for the combined IHS Markit was approximately 200 basis points. Margin expansion benefited from our shared service cost synergies, which were allocated across all segments. In addition, our Transportation and Financial segments benefited from margin flow-through from strong revenue growth.

Regarding segment profitability. Transportation's adjusted EBITDA was $90 million with a margin of 39.9%, up 317 basis points. Resources adjusted EBITDA was $80 million with a margin of 40.6%, up 17 basis points. Year-over-year Resources EBITDA declined $7 million due to the CERAWeek timing shift. CMS adjusted EBITDA was $29 million with a margin of 22.6%, up 190 basis points. And Financial Services adjusted EBITDA was $129 million with a margin of 43.7%, up approximately 200 basis points.

In the quarter, we recorded $32 million of acquisition-related expense, including severance, retention and contract termination costs related to merger integration activities.

Stock-based compensation expense was $75 million and included additional expense from revaluation of market outstanding grants and acceleration of certain share awards associated with severance activities post merger as well as conversion of IHS PSUs to RSUs. We are expecting full year stock-based compensation expense toward the high end of our $200 million to $220 million guidance range.

Our GAAP tax rate was minus 6%, and our adjusted tax rate was 24%. Our effective GAAP tax rate benefited from excess tax benefit of $14 million associated with vesting or exercise of equity awards and share price increase from date of grant. This benefit is due to the accounting change, which reflects the excess tax benefit from share price increases as income tax benefit. Our GAAP ETR also benefited from merger-related expenses. Neither of these items impacted our adjusted tax rate, which excludes tax benefits from merger-related expenses and equity awards.

Our adjusted EPS was $0.45, an increase of $0.06, up 15% versus the prior year. Q1 free cash flow was $179 million. Our trailing 12-month free cash flow was $542 million and represented a conversion rate of 48%. Trailing 12-month free cash flow includes approximately $170 million of restructuring and acquisition-related cash costs. Excluding these cash costs, conversion would have been approximately 63%, in line with our long-term objective of the mid-60s.

Turning to the balance sheet. Our quarter-end debt balance was $3.7 billion, which represented a gross leverage ratio of approximately 2.6x on a bank covenant basis. And our quarter-end cash balance was $155 million. In the quarter, we increased our bank credit facility with the addition of a $500 million, 1-year term loan, and we completed a $500 million, 8-year note offering at a 4.75% coupon rate. These proceeds were used to pay down our revolver, and at quarter close, our undrawn revolver balance was approximately $1.2 billion, which provides sufficient liquidity to execute our share repurchase commitments. Our weighted average diluted share count for the quarter was 422 million shares.

In the quarter, share repurchases were $592 million or 15.8 million shares, an average price of $37.50. The share repurchases included $492 million of our $1.2 billion buyback commitment as well as approximately $100 million from stock option proceeds. We also executed a $200 million ASR on March 1. We will continue to use a combination of ASRs and open market share repurchases to execute against our repurchase target.

We are reaffirming our 2017 guidance, which we provided on our November 14 guidance call. In terms of highlights, this guidance provides for revenue in the range of $3.49 billion to $3.56 billion. This represents 2% to 4% organic revenue growth, negative FX impact of approximately $50 million and acquisitive revenue of slightly less than $20 million from the CARPROOF and OPIS acquisitions. Adjusted EBITDA of $1.375 billion to $1.4 billion, which represents margin of 39.4% at the midpoint; and adjusted EPS of $2.02 to $2.08.

As a reminder, to help you with modeling, CERAWeek has moved from Q1 in 2016 to Q2 in 2017, and the Boiler Pressure Vessel Code will be in our second half results this year. Prior year CERAWeek revenue was approximately $15 million at relatively high incremental contribution margin. Boiler Code revenue is approximately $10 million and is relatively low margin.

As discussed at the time of the merger announcement, IHS Markit is well positioned to drive attractive shareholder returns given our financial scale, substantial cash generation, return on capital strategy and revenue, expense and tax synergy opportunities. This combination creates a very attractive financial lens.

And with that, I will turn the call back over to Jerre.

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [6]

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Thanks, Todd. I want to thank our colleagues who worked tirelessly over the past year in getting us to this point, where we hit the ground running. Moving forward, we expect to benefit from improved energy markets and are focused on investing for profitable top line growth of our business to provide continued shareholder value creation. We very much look forward to sharing our strategy for IHS Markit's exciting future at our Investor Day on April 26 in New York City.

Now Lance, Todd and I are ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Peter Appert with Piper Jaffray.

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Peter Perry Appert, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [2]

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So Jerre, I was hoping you might just give us a little more color on what you're seeing within the Resources business, maybe some specific metrics possibly on what you're seeing in terms of pricing, renewal rates, et cetera. And I'm asking this in the context of CapEx within the industry looking better, and I'm wondering if you're seeing any flow-through benefit in terms of your (inaudible) your businesses.

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [3]

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Great question, Peter. Thank you. As Todd said, and I did, we had a $12 million downturn that we expected in Q1. We also expect that to be flat in Q2 and for the year, flat, so you can think about second half positive. Pricing is where we continue to be. As you know, we don't cut prices during that period of time. Certainly, a lot of our customers have reduced their usage of the regional pricing model, but that'll come back with time. Renewals are running very strong, as we would expect them to as we go forward. We had a very deep dive a week ago Investor Day with Q2, Q3 and Q4. I'm feeling bullish. If you saw the press release, I'll let Todd take the credit for this being the bottom of the barrel and on the way back up, but we feel quite positive about it. It's been almost 3 years, as you all know, and very much look forward to showing improvement as we come out of 2017 to positive organic growth in 2018. Thanks, Peter.

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Operator [4]

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Our next question comes from Gary Bisbee with RBC.

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Gary E. Bisbee, RBC Capital Markets, LLC, Research Division - MD of Business Services Equity Research [5]

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Yes, if I can just follow up on that, can you give us a little color about what's going on within the base? A quarter ago, you'd talked about some of the multiyear contracts that were going to renew around year-end and -- but that a lot of the base then had renewed down. Are you seeing pockets that are growing their spend? Some pockets that are still shrinking? Is it stabilization across the base? Just any incremental color to help there.

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [6]

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Good question, Gary. The minus $12 million was specifically those 3-year agreements that we talked about in Q4 results year-end, hit exactly as we expected. We've mentioned historically, and we'll -- I'll turn it over to Todd in just a minute with some specifics, but we haven't, indeed, seen increases, including on both pricing and usage, on a regional basis geographically in Q4 and certainly in Q1. Todd, you want to pick up, including Texas, for sure.

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Todd S. Hyatt, IHS Markit Ltd. - CFO and EVP [7]

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Yes. So Gary, when we evaluate this, we stratified the accounts and looked at the accounts above $0.5 million account by account and then all the way down to accounts below $100,000. I think a couple of things that we're seeing. One, on the large accounts, these strategic changes that we talked about on prior calls going back last year where large customers were dropping coverage, strategically shifting their operations, we really see that we've cycled through most of that at this point. So a couple of things out there that -- but we don't see those as being hugely impactful. I think the bigger thing is in the smaller accounts, the less than $100,000. We're actually seeing very good growth coming from our inside sales business. That's largely a U.S.-based business. And in the U.S., certainly, capital spending is increasing in the U.S. this year. The Permian is a very hot area. So we do see -- when we've really been impacted by the smaller accounts over the last couple years, we actually see very good traction in this tail of the business. So really, the large accounts stabilizing, strategic changes having been largely made by the big companies and then the smaller companies' good growth, really, in our inside sales group.

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [8]

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Thanks, Gary. And for those of you that were able to attend CERAWeek a couple weeks ago, the difference in attitude with all of our customers was noted very positively.

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Operator [9]

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Our next question is from Bill Warmington with Wells Fargo.

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William A. Warmington, Wells Fargo Securities, LLC, Research Division - MD and Senior Equity Analyst [10]

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So I wanted to ask a question on the Transportation business. You'd mentioned strength there. Automotive had historically been about 3/4 of the segment. And I wanted to ask, how is CARFAX and CARPROOF doing versus the vehicle registration or park info? And any change in demand in products for new versus used vehicles?

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [11]

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Great question, Bill. Todd, do you want to pick those up? That's a good question.

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Todd S. Hyatt, IHS Markit Ltd. - CFO and EVP [12]

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Yes, the Automotive, as you said, Bill, it's a bit north of 75% of transport, continued to perform very well in both the used car and the new car parts of that market. In the used car, the new products, the used car listing product, continues to perform well. The business insurance area is a very strong grower. And even the core advantage business is growing at a strong rate. In the new car business, we talked about the big growth drivers in the past. Digital marketing had been very strong. The emissions product that we released last year has been a very good grower. We continue to feel very good about all pieces of automotive. The thing I called out on the call is the nonrecurring -- we had points where we were hitting teens growth rates in nonrecurring last year. We don't expect that to continue. We see some tough comps, particularly in recall. Recall continues to be good. But we do see the nonrecurring still being a mid-single-digit grower, but that will back down just a little bit this year.

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Operator [13]

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

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Sou Chien, BMO Capital Markets Equity Research - Associate [14]

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It's Henry Chien calling for Jeff. I just had a question on the reorganization or the consolidation, some of the leadership changes you mentioned. Is this more of a cost kind of move? Or is there a strategic shift? And any kind of color you can provide, whether you're changing how you're going to market or your sales team or any kind of changes there.

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [15]

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No, thanks, Henry. Good question. It's, for sure, not a cost move. It's to streamline our organization. One of the things Lance and I have worked on, actually for a year now, is to make sure that as we exit 2017 and we go into '18, we've got exactly the right organization for years to come. And in this case, you think about the big businesses, that's what we've lined up. But pick up on it, Lance.

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Lance Uggla, Markit Ltd. - President and Director [16]

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Yes. I think, Jerre, you said it's in the release in terms of simplification. And so these moves really do simplify the overall organization and give us the right operating structure to take the company forward for the next 5, 10 years.

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [17]

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That was our target. And I think we're right on that. Thank you.

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Operator [18]

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Our next question comes from Brandon Dobell with William Blair.

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Brandon Burke Dobell, William Blair & Company L.L.C., Research Division - Partner and Group Head of Global Services [19]

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Maybe some, I guess, further color on how you guys think about the revenue synergy opportunities playing out here and whether or not the changed administration has you think any differently about what -- or how to sell some of the things in the Financial Services.

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [20]

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I'll start, Lance will pick up. We feel very good as we move forward on the cross-selling brand. And for sure -- where we're at today is we'll give you -- and I hope you're there. I hope everybody in the call is there at our Investor Day. We'll actually give you examples of -- including customer names, of the cross-sell that we're feeling really good about. Give a little color, Lance.

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Lance Uggla, Markit Ltd. - President and Director [21]

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Okay. So I think, again, in our discussion, we talked a little bit about 2 things. One, about financial market participants have a propensity to acquire data and use it to make decisions. And we're providing our content in its raw form as well as in a -- in a service around research, valuations, insights. And financial market participants have been hungry to learn about the data sets of the combined company but have also started to acquire those data sets in the services that we have available for them. So that, we see a nice runway for a long time to come, and the pipeline continues to build. The other one we talked about and I gave -- mentioned in the early part of this call was the use of our data management technology, which has been used for many years by financial market participants to organize their data sets in order to create providence and cleanliness of the data sets they use to do their business. When we reached out into the energy companies, we found that they as well, dealing in multiple different data sets across the commodities markets, had similar issues and challenges, and we've had early successes with taking our data management products and adapt them -- adapting them to the energy markets. So those are 2 good examples, but as Jerre said on the Investor Day, we'll get into some real examples, real demos and show you some of the products that we're creating together.

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Operator [22]

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Our next question comes from Andrew Steinerman with JPMorgan.

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Andrew C. Steinerman, JP Morgan Chase & Co, Research Division - MD [23]

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Todd, I want to ask you about your ACV prepared comments. After saying ACV should be flat for 2017, you went on to indicate that the IHS oil projection should be in the mid- to high 50s for 2017. Obviously, oil prices right now are in the high 40s, having dropped during CERAWeek while we were there together. Do oil prices need to meet the IHS forecast of mid- to high 50s for ACV to be flat this year?

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Todd S. Hyatt, IHS Markit Ltd. - CFO and EVP [24]

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Andrew, it's -- the primary driver is the spending, the capital spending, the budget cycles of the energy companies. And we don't see high 40s versus mid-50s as being impactful to our projection around sub-base for the remainder of the year.

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Operator [25]

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Our next question comes from Jeff Mueler with Baird.

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Nick James Nikitas, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [26]

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This is Nick Nikitas on for Jeff. Just looking at the Financial Services segment and the organic growth improvement there, obviously, information is pretty steady, and you saw some nice improvement within solutions and processing. Can you just talk about the sustainability for both of those subsegments over the back half and the remainder of '17?

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [27]

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Yes, it's a great question. Todd, you start. Lance will wrap up.

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Todd S. Hyatt, IHS Markit Ltd. - CFO and EVP [28]

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Well, information we see as being very sustainable in this 4% to 6% long-term growth rate area. There's a great set of pricing reference data, economic indices, valuation services. We have always liked that part of the portfolio. So we do feel good about the ability to continue growth the way it's tracked historically, even in the legacy market world. Processing is driven by activities in the marketplace. And so there is more variability around processing from a market activity standpoint. And it's been a relatively strong loan market in the last quarter, and we'll all see how the market goes over the remainder of the year.

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [29]

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Lance?

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Lance Uggla, Markit Ltd. - President and Director [30]

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No, that's -- I agree that what Todd said was perfect in that I do think that, as I mentioned a bit earlier, the propensity for financial market participants to consume information is high and has grown throughout the -- our lives since the financial crisis. So spending on information is a core strategic component of the bank's strategy to do their job better, and we see that staying. We're -- that 4% to 6% range we see as a performance level that's available to us in the market. And we expect to -- as a long-term objective, to be within that. Processing is volume related. We have the connectivity. So the big infrastructure spend to connect to us is there, but the volumes are variable on top of that. And so 12% is a great organic growth number, coming from a lower base a year ago. But with low interest rates, one, the propensity for loan market participants to lock in, that's a positive. And two, when there's currency market and interest rate volatility, you find the derivatives processing volumes to pick up, and our charging mechanism is a per trade, and so it's not about the absolute size in dollar value but the propensity for those institutions to trade. And we see that -- we saw good strong organic growth in the processing from derivatives. And then on -- the final thing on solutions, the industry continues to look for ways to reduce their costs. We're active in and around document management, tax, KYC, vendor compliance, digital services, all great areas to be in and collectively back to 10% organic growth, which is good to see.

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [31]

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That's excellent. There's a really good article in The Wall Street Journal on that very subject that Lance just covered this morning. So it just even justifies more of what we're doing. Thank you.

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Operator [32]

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Our next question comes from Manav Patnaik with Barclays.

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Ryan C. Leonard, Barclays PLC, Research Division - Research Analyst [33]

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This is Ryan filling in for Manav. Just wanted to touch on the synergies comment. I guess, Lance, you made it sound like $125 million is now the minimum. And I guess maybe what have you seen so far that gives you confidence that, that can be exceeded? And is there any type of -- is that the initial bar and you see another leg starting in -- after 2019? Or do you think there is more upside within that time frame?

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [34]

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I'll start, and Lance will pick up. What we feel very good about is that we've laid out, we actually measure by week what we're doing and what we said we were going to do. And what Lance was trying to say was that the $125 million, we have high degree confidence. Lance, pick up on the second part of this question of the future and where we're going.

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Lance Uggla, Markit Ltd. - President and Director [35]

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Yes. I think -- great, Jerre. We're -- our comments earlier were that we felt the $125 million is in hand and that as we exceed that, we'd look to reinvest strategically in the 4 areas in the firm. All that would give us a higher propensity to move our organic -- move stronger into our organic growth ranges, and those areas were technology. So one key strategic area that we focused on throughout this merger period is looking at all our technology assets and how we can rationalize those as well as improve them for future product offerings and growth. Two was around colleagues in terms of learning and development and training and leadership. Three was with respect to our customer experience and online and inside sales. And then finally, the four, the last one was incremental product investments. And so we're looking to invest with any over-performance, and we feel confident that we've done a great job to be able to do that.

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [36]

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And I'd just add 2 things to that because you'll see that in Investor Day, one, we're spending and built into our plans, in delivery and guidance, a lot of money this year and creating the backroom. We'll be 100% when we exit the year on a common Salesforce.com system. We've put our SAP systems together. We've got an entirely new human resources then going into place as well as integrating all of our backroom communications. So that's a big deal. That's built in. So the second comment that you'll hear more about in our Investor Day is that we expect that to deliver a situation that will allow us to provide 100 basis points of margin improvement for years to come, year after year as we deliver going forward. Thank you. Great question.

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Operator [37]

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Our next question comes from Kevin McVeigh with Deutsche Bank.

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Kevin Damien McVeigh, Deutsche Bank AG, Research Division - Head of Business and Information Services Company Research [38]

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In terms of the 2% to 4% range, nice job on getting the 2% in Q1. What are the puts and takes to get you kind of from the low end to the high range? And just to follow up on that, what is the overinvestment due to the longer-term organic growth? Like is there a way to think about how much it should boost your organic growth as you pull some of these overinvestments on the cost synergies and put it back into the business?

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [39]

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Great question. I'll start on the second part and have Todd pick up. When we look, you just heard Lance talk about a target of 4% to 6% organic growth. The beauty of a subscription-based business where 85% of our revenue is recurring is that when you get north of 5% and you control the costs as well as our teams are and will continue to, that generates basis points for years to come. And I think we feel very good about that. What Lance was talking about and we are going to do, again, you'll see it much more in a few weeks, is invest in opportunities that allow us to get to the upper end of that 4% to 6%. When we hit that, get north of 5%, we'll see lots of returns coming. And Todd, do you want to pick up?

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Todd S. Hyatt, IHS Markit Ltd. - CFO and EVP [40]

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Well, the things that get to the higher end of the revenue -- organic revenue growth are really the positive things that we talked about on this quarter. The stability in energy, improving energy through the year, good performance, very strong performance from financials, transport continuing at this high single-digit level and then the CMS starting to turn the corner and move up, I mean, those are all positive signs. Now we have to continue to operate well as we go through the year, but those are certainly things that we wanted to see at an early stage to the year. Relative to the second part of the question, which is really this trade-off between revenue growth and margin and investment, for us, obviously, the revenue growth makes margin easier. We talked about that in the past. And so this 4% to 6% range that we talked about as a longer-term objective for the company, operating in that range, we believe, allows us the ability to deliver the type of margin expansion that Lance referenced on the call, this 100 points a year as well as also making investment in the business.

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Operator [41]

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Our next question is from Andrew Jeffrey with SunTrust.

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Andrew William Jeffrey, SunTrust Robinson Humphrey, Inc., Research Division - Director [42]

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Jerre, I'm thinking back to a couple years ago in the context of some of the workflows you talked about and were designing in Resources. How do you think about those workflows in greater integration into your customers' day-to-day functionality in terms of the growth in Resources and market demand notwithstanding? In other words, is that now -- would you think now about those in terms of cross-sell and revenue synergies? How does that all fit into the go-to-market strategy?

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [43]

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Yes. Those are the investments we made in new products; actually, products that would pull us into the financial world that we had not been in previously. Feel very good about those. You'll see demos, as Lance talked about, at our Investor Day of those products being sold. In -- we've had -- both Lance and I have had the pleasure of being part of some of the sales of those going into financial institutes. Feel very good about those. As you remember, our last Investor Day, which was actually October 2015, we moderated the expectations of what we thought the -- those new products would be. I'd say today that we're on track with those and feel very good about the cross-selling as we go forward. Todd, anything?

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Todd S. Hyatt, IHS Markit Ltd. - CFO and EVP [44]

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Right. I think the platform investments that we've made historically position us for what we plan to do in the future.

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [45]

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And I'd just add one thing because Lance has had a chance, as Yaacov, for instance, to see the biggest platform, and we put a lot of additional information there. Economic country risk is now on there. We've got -- if you think about the Connect platform, it serves a purpose that will continue to expand for years. Two things it does do is give us a much easier entrée for our customers. Equally important is it reduces our cost to maintain all of those separate products significantly. We announced today the critical move of Yaacov becoming our Chief Data Scientist. That's a place that you'll see us investing in years to come that'll create predictive analytics, that nobody else has done, at the same time reduce our infrastructure costs. Great question. Thank you.

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Operator [46]

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Our next question is from Alex Kramm with UBS.

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Alex Kramm, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Exchanges, Ebrokers [47]

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Just wanted to come back to the comments you made earlier on Transportation or particularly around autos. Sounded pretty positive what you're seeing out there. There were a few headlines in the last few weeks here about used car price indices dropping various -- the biggest drop we've seen, I think, since 2008. So just wondering, has that changed anything in terms of the outlook? Do used car prices at all have an impact, positively or negative, on your business? How would you be thinking about it?

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [48]

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That's a good question. I'll start, Todd will pick up. Anything that is out of the normal is good for us. And you're right, I saw the article where used cars -- this is U.S. only, as you'll remember, and probably going on in Canada, too. Used cars prices have varied. What that does is drive an appetite for people, when they read that and understand it, to come online and use our information with CARFAX to make even better decisions. Todd?

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Todd S. Hyatt, IHS Markit Ltd. - CFO and EVP [49]

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Yes. The used car market in North America in terms of number of vehicles sold doesn't vary a lot. I mean, it sits around this $42 million -- or 42 million-unit level. What we do is we allow dealers to more effectively participate in that market, and we provide information to consumers to make good informed decisions. So the market pricing doesn't -- as I see it, doesn't really have an impact on the underlying business and the services that we provide.

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Operator [50]

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Our next question is from Shlomo Rosenbaum with Stifel.

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Shlomo H. Rosenbaum, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [51]

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Lance, I just wanted to get a sense of your commentary about investing the excess of $125 million to drive better organic growth. Is this something that you're looking at in the interim? In other words, you've seen through the target years of fiscal year '16 that you're going to exceed those cost savings, and therefore, in the near term, you have more money to invest in that? Or is this kind of over a longer period of time? I'm just trying to understand that set of organic growth.

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [52]

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Pick that up, Lance. Thank you.

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Lance Uggla, Markit Ltd. - President and Director [53]

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Okay. So -- well, first off, in terms of our strategic priorities, we've given you a little hint of those today in terms of the 4 areas that we've looked very closely at. I've had a great opportunity where -- with Jerre running the company, I've had the opportunity to spend a lot of time with the teams globally. And really, the excitement from the merger to now is really about the opportunity set of the great assets we have in terms of people and product and customers. And so we looked globally at the 3 or 4 areas where we felt we could put some incremental dollars to work that would give us a higher propensity to hit higher ends of organic revenue growth as we look forward into '18, '19, '20. So that's what we're doing. What you'll see in terms of detail on that will come out at Investor Day, and so let's not jump the gun because the teams have put in a lot of great work where together, we'll be presenting and talking in detail those strategic initiatives. And we'll give you a lot more insight then. But we're on track on the synergy side. We're creating room to invest, and we're excited about that combination.

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [54]

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It's a great example of what a merger of equals really does. Thank you.

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Operator [55]

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Our next question is from David Chu with Bank of America.

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Jitaek Chu, BofA Merrill Lynch, Research Division - VP [56]

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Maybe a question for Lance. Can you just provide an update to the timing of electronification in Europe? Just wanted to see if this is still expected to be a 2018 event and maybe you can share the potential impact.

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Lance Uggla, Markit Ltd. - President and Director [57]

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You're talking electronification in terms of...

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [58]

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Processing.

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Lance Uggla, Markit Ltd. - President and Director [59]

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In terms of processing, okay. Sorry. So, no. So we -- so processing is -- as you know, is diversified across the loan markets and then within the derivative markets and FX. So quite a well-diversified suite. The -- we've seen little impact to date in terms of the electronification of markets. And in terms of a percentage of our overall business and revenue, it's very small.

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Operator [60]

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Our next question is from Hamzah Mazari with Macquarie.

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Hamzah Mazari, Macquarie Research - Senior Analyst [61]

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Just a question, if you could maybe frame for us the extent to which the nonrecurring business is a good indicator of your reoccurring or sub-business coming back. And is there still an opportunity to shift to a larger subscription mix from moving business from nonrecurring to recurring? I know you mentioned some product rationalization in TMT.

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [62]

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Yes, great. I'll start, Todd will pick that up. Yes, TMT is in the process and has done that last year and this year, small part of our business but has done a very good job of moving from a transaction base to an annual subscription base. I said a few minutes ago, we're north of 85% of recurring revenue. That's remarkable. And if we can keep it at that level and still get the kind of non-subscription-based business, we'd be very happy. Indicator-wise, so just give a thought on that, Todd, because there's really not much indicator difference, but nonsub versus sub.

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Todd S. Hyatt, IHS Markit Ltd. - CFO and EVP [63]

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Yes. A lot of the nonsub products, I guess the transactional orientation of those products provides -- in an up market, probably get a bit of a lift, and in a down market, we probably would see the transactions start to drop in advance of the subscription. But I don't know that there's a perfect correlation in that. I think when we look at energy, we see consulting is improving, pipelines are improving, backlogs are improving. We would expect to see improved nonsubs in energy and start to lead the way out of energy through the remainder of the year. We talked about this the CERAWeek event. We were happy with the performance of that event on multiple counts. So not a perfect correlation but certainly indicative at times of what's happening in the larger markets.

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Operator [64]

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Our next question is from Anj Singh with Crédit Suisse.

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Anjaneya K. Singh, Crédit Suisse AG, Research Division - Senior Analyst [65]

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Had a follow-up on the nonrecurring resources piece. It seems like the normalized organic growth worsened a little bit. Realizing it's small dollars, hoping for some more granularity there. With consulting, it seems like a small decline this Q versus flat last Q. Is this a little bit of choppiness in line with your expectations considering the stability in oil prices on a relative basis? Are the software maintenance fees taking more time to normalize than you had thought? And then finally, Todd, I think on your expectations of positive growth in this nonrecurring resources piece, is that also positive if we were to normalize for CERAWeek?

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [66]

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Great question. Pick that up. The answer to that last part is yes. But just pick up the software and the consulting.

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Todd S. Hyatt, IHS Markit Ltd. - CFO and EVP [67]

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Well, the first point, as you said, the numbers are relatively small. So consulting was down $1 million year-over-year. We do have a good strong pipeline as we look at the next 3 quarters. And we do expect to see some improvement of consulting as we go through the year. The software, a little bit longer sales cycle around the software. Certainly, our expectation is that we can have some success in software as we go through the year. But I think that is an area that has lagged, and we do see that software has been -- year-over-year, the software, the other one times have been down a bit. On balances, we look across nonsubs for energy. We still do expect a positive grower for the year.

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Operator [68]

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Our next question comes from Joseph Foresi with Cantor Fitzgerald.

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Joseph Dean Foresi, Cantor Fitzgerald & Co., Research Division - Analyst [69]

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I wanted to revisit Financial Services. I think we talked a little bit last quarter about getting some uplift from a better bank outlook. Did that happen? Will it continue? And any noticeable shifts in budgeting there?

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [70]

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The question that you referred to was what did we expect to see with the Trump regime, if you will, and we said any change is good and uncertainty is great. And if you're wondering about uncertainty, I think what goes on every day today. But pick it up, Lance.

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Lance Uggla, Markit Ltd. - President and Director [71]

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Sure. So we definitely -- I think part of the positive results come from the election. And that's given the steeper yield curves. So that's given some -- a flow of profitability into financial market participants here in North America. In Europe and Japan, getting away from a negative rate environment, it's positive for banks. A view that there might be a tax shift in the U.S., positive for banks. So there's a general optimism for the North American participants post that election. And I think that gave some rise to additional loan processing volumes, which we've seen come through in terms of revenue. People thinking that rates might rise have a higher likelihood of walking in lower rate, so we saw that. We took advantage of that ourselves in terms of our issuance. The second thing is that you've got some volatility also in the world with uncertainty in terms of commentary coming out of Europe and North America, and that creates trading volatility, which plays well into our processing business as well. So a general kind of additional revenue, incremental revenue in processing on the back of the election.

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Operator [72]

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Our next question comes from Toni Kaplan with Morgan Stanley.

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Patrick Timothy Halfmann, Morgan Stanley, Research Division - Research Associate [73]

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This is Patrick in for Toni. I'm wondering if you can give us a bit of color around Resources margins during the quarter. It looked they were pretty much unchanged year-over-year.

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [74]

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Happy to do that. I'll start, Todd can pick up. If you look, we now have our 3 largest businesses all delivering 40% margins or better. If you think about Resources, when the revenue has been down consistently for 11 quarters now and delivering north of 40% margins, you can think what will happen as we predict the positive revenue growth coming into 2018.

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Todd S. Hyatt, IHS Markit Ltd. - CFO and EVP [75]

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Yes, I did call this out. We normalized the organic revenue growth to take account of the CERAWeek timing shift. But when you look at the reported numbers, obviously, Q1 of this year does not have CERAWeek. Q1 of last year had CERAWeek. That's a -- CERAWeek's a relatively good incremental contribution margin, so as a result, we were down on EBITDA year-over-year and didn't have as much margin as we -- margin expansion as we would have otherwise had. So that is an impact. Now I also said that we don't expect Resources to be a significant margin -- to have significant margin growth this year. It is negative revenue growth on a reported basis. And so basically, the 2 forces we'll see in Resources, on margins for the year are -- we'll see benefit from flow-through of the synergies that are benefiting all of the segments, and then we'll see lower revenue growth having some impact in the other direction.

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [76]

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And as I -- it's a great question, as we wrap that up. Like I said, you'll see then the margins, as we see the growth turn positive in 2018, we'll enjoy the margin recovery. I'm very, very proud, we all are, of what the Resources team have done in total during this very, very difficult time, managing costs very well in preparing for the uplift. Thanks.

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Operator [77]

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Our next question comes from Andre Benjamin with Goldman Sachs.

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Andre Benjamin, Goldman Sachs Group Inc., Research Division - VP and Lead Analyst [78]

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I guess just a question on processing, some combination of Todd and Lance. I was wondering what you've observed, the change in pricing and margin for the customers and business you retained on the electronic exchanges. And have you seen the anticipated pickup in volume? So I'm talking about in the U.S. business, those that have gone on to exchanges. In the past, you talked about the low oil prices driving some additional volume.

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [79]

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Yes, great question. Please, Lance.

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Lance Uggla, Markit Ltd. - President and Director [80]

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Sure. Well, the electronic trade cost us less to execute and is a lower revenue for us, and it -- it's priced for the customer to be able to do more volume in an electronic market. We haven't seen huge impacts in terms of that business, but the mix of the business has shifted somewhat. We'll expect that to continue to shift, but I think the volume impact -- the revenue impact across the group is negligible.

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Operator [81]

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Our last question is from Warren Gardiner with Evercore.

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Arthur Warren Gardiner, Evercore ISI, Research Division - Research Analyst [82]

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Lance, I guess just for you again. Really nice rebound in organic growth for solutions this quarter. Imagine some of the industry trends for WSO helped there. But can you just kind of give us some of the puts and takes there, maybe kind of flow through that 10% organic growth?

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [83]

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Good question, good wrap-up question. Thank you.

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Lance Uggla, Markit Ltd. - President and Director [84]

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Okay. So on the positive side, our managed services around WSO, as you mentioned, tax, our document exchange, these are all strong -- is the amend release. These are all strong contributors to the growth. Slower market digital where large managed service is also positive in and about double digits. When you get into the ones that haven't added to the growth, KYC has been slow, slow for implementation, slow to establish, the utility as a single source of use across the industry. When I probably spoke to you last, there were 3 platforms. Now there's 2. And so that put some improving thoughts in place in terms of the future, but it has been slow and much slower than we would have liked. Our KY3P, which is the vendor managed service, that's up and running now with good customer statistics, and we'll show you some of the product live and working with our customers and vendors at the Investor Day. So those are the pluses and minuses.

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Jerre L. Stead, IHS Markit Ltd. - Chairman of the Board and CEO [85]

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Thank you so much. (inaudible)

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Operator [86]

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I would like to turn the call back to Eric Boyer for closing remarks.

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Eric J. Boyer, IHS Markit Ltd. - VP of IR [87]

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Thanks for your interest in IHS Markit. The call can be accessed via replay at (855) 859-2056 or international dial-in (404) 537-3406, conference ID 85066825, beginning in about 2 hours and running through April 4, 2017. In addition, the webcast will be archived for 1 year on our website at www.ihsmarkit.com. Thank you, and we appreciate your interest and time.

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Operator [88]

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