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IHS Markit is an information services company that provides information, research, analytics, and technology to customers in major industries, financial markets, and governments. The company was formed in 2016 via the merger of Information Handling Services (IHS), best known for its commodity, transportation, and energy sector analysis, and Markit, a financial data provider. The company is headquartered in London, United Kingdom.
IHS Markit's core competency lies in its ability to use its expertise to source and transform data into information and analytics that its customers use for their operational and strategic decisions. This model is based on the company’s fiscal year that ends November 30th.
We believe the Financial Services segment is more valuable than the other segments for three primary reasons:
1) Its higher revenue base (about $1.7 billion in FY'19, accounting for about 40% of the company's total revenue)
2) Stronger EBITDA margins of around 45% versus the company average of just over 40%.
3) Higher projected revenue growth rates compared to the company average.
The company primarily offers its products and services via recurring fixed and variable fee agreements, enabling it to deliver stable revenues and predictable cash flows. During FY’19, the company garnered roughly 85% of its revenues from recurring revenue streams. Many of the company's offerings are core to customer's business operations, and a lot of the company's data sets are unique and difficult to replicate, meaning that switching costs are high for customers.
The company has been steadily making niche acquisitions, as it looks to serve the needs of its existing customers better while attracting new customers. In 2018, the company acquired Ipreo, a leading financial services solutions, and data provider, for about $1.8 billion, as well as DeriveXperts, a provider of valuation services. Over 2019, while the company's organic revenue growth stood at 6%, acquisitive growth also came in at about 6%. These acquisitions not only bring in unique intellectual property and offerings but also broaden IHS Markit's base of customers.
The company has been focusing on improving its geographic and customer penetration to drive revenues, adding new customers while increasing the use of its products and services by existing customers. The company is also leveraging its existing sales channels and its wide global footprint to add new customers. The company could have a lot of incentive for cross-selling products, as its business is largely a fixed-cost operation, with significant economies of scale, enabling it to bolster margins as revenues rise. Between FY'16 and FY'19, Adjusted EBITDA margins rose by about 400 bps to 40%.
The company's financial services business has been accounting for an increasing mix of its total revenues. While the business accounted for about 34% of revenues in 2017, post the merger with Markit, we expect it to account for over 41% of revenue by the end of our review period. Some trends that could drive growth include rising financial regulation and compliance-related requirements and the increasing complexity of the financial services business and financial products.