Nasdaq, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Nasdaq is a global technology and capital-markets company with four segments: Market Services, Corporate Platforms, Investment Intelligence, and Market Technology.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $1.652 billion | $1.353 billion | +22.1% |
| Revenue less transaction-based expenses | $851 million | $701 million | +21.4% |
| Operating expenses | $486 million | $426 million | +14.1% |
| Operating income | $365 million | $275 million | +32.7% |
| Net income attributable to Nasdaq | $298 million | $203 million | +46.8% |
| Diluted EPS | $1.78 | $1.22 | +45.9% |
| Cash dividends declared per share | $0.49 | $0.47 | +4.3% |
Operating margin was approximately 22.1% of reported total revenue, versus 20.3% a year earlier; measured against revenue less transaction-based expenses, it was approximately 42.9% versus 39.2%. The effective tax rate was 24.6%, compared with 25.6%.
Segment revenue less transaction-based expenses: Market Services $338 million (+20.3%); Corporate Platforms $155 million (+21.1%); Investment Intelligence $258 million (+22.3%); Market Technology $100 million (+23.5%). Growth reflected elevated U.S. trading activity, listing and index-related revenue, analytics growth, and Verafin’s inclusion in Market Technology.
Cash flow: Operating activities provided $394 million, versus $380 million. Investing activities used $2.505 billion, chiefly reflecting $2.430 billion for acquisitions, net of acquired cash. Financing activities provided $152 million, including net commercial-paper proceeds; the company also repurchased $162 million of shares and paid $81 million in dividends. Cash and restricted cash ended the quarter at $812 million, down from $2.782 billion at year-end 2020.
Debt and liquidity: Total debt obligations were $5.890 billion, including $435 million of commercial paper and $5.455 billion of long-term debt. Cash and cash equivalents were $774 million; restricted cash was $38 million. The $1.25 billion revolving credit facility had no borrowings outstanding, with $815 million available excluding commercial-paper support. Working capital was $98 million, down from $2.736 billion at December 31, 2020, primarily because cash was used to fund Verafin. Nasdaq reported compliance with debt covenants.
Material changes and notable developments
- Nasdaq completed its February 2021 acquisition of Verafin, a cloud-based anti-financial-crime software provider, for an aggregate purchase price of $2.75 billion, subject to adjustments. The preliminary allocation included $1.873 billion of goodwill and $815 million of acquired intangible assets. Acquisition financing included commercial paper and cash; the purchase-price allocation remains subject to revision.
- Operating expenses rose 14.1%. Merger and strategic initiatives expense increased to $45 million from $7 million, while depreciation and amortization rose to $63 million from $48 million, primarily reflecting Verafin-related costs. Compensation and benefits increased to $239 million from $195 million.
- Net income from unconsolidated investees rose to $57 million from $17 million, primarily from higher OCC equity earnings associated with elevated U.S. industry trading volumes.
- Nasdaq agreed to sell its U.S. Fixed Income business to an affiliate of Tradeweb, subject to regulatory approvals and other customary conditions; closing was expected later in 2021. The assets and liabilities were classified as held for sale, with no impairment recorded.
Outlook, risks, and contingencies
- No specific full-year earnings or revenue guidance is provided. Management stated that operating cash flow and available revolving-credit and commercial-paper capacity were expected to be sufficient in the near term for operating costs, capital expenditures, debt repayments, repurchases, and dividends. Nasdaq said COVID-19 had not materially affected liquidity or results in the quarter.
- In April, the board approved a quarterly dividend of $0.54 per share, a 10% increase from $0.49, payable in June 2021, subject to the stated terms.
- Nasdaq identified risks including trading-volume and market-share changes, technology performance and cybersecurity, acquisition integration, foreign-exchange and interest-rate movements, credit and clearing exposures, regulatory developments, and the ability to generate cash and manage debt.
- The Swedish Financial Supervisory Authority imposed an approximately $34 million administrative fine on Nasdaq Clearing related to its review of a 2018 commodities-market member default. Nasdaq Clearing appealed; no accrual was recorded because the outcome could not be reasonably estimated.
- OFAC advised Nasdaq that it was considering a civil monetary penalty concerning historical activity involving the Armenian Stock Exchange and a sanctioned market participant. Discussions were ongoing; the company could not estimate a potential loss and recorded no accrual.
- Nasdaq is a defendant in the City of Providence high-frequency-trading litigation and said it could not estimate potential liability. Discovery ended in April 2021, with potentially dispositive motions scheduled for May. The company also disclosed ongoing tax examinations, for which it believes reserves are adequate.
- Nasdaq’s clearing operations face counterparty and liquidity risks. Clearing-member cash and non-cash default-fund contributions and margin deposits totaled $10.283 billion; most are held or managed for clearing purposes and are not unrestricted corporate liquidity.
Most important facts to verify
- Whether Verafin’s integration, recurring-revenue growth, and realized benefits support the acquisition price and goodwill balance.
- The final terms, regulatory approvals, closing date, and net proceeds from the planned U.S. Fixed Income sale, including the expected acceleration of approximately 6.2 million share issuances and planned offsetting repurchases.
- The eventual outcomes and financial impacts of the SFSA appeal, the OFAC matter, and the Providence litigation; no loss estimate is provided for the first two matters.
- Cash generation and liquidity after the acquisition, the commercial-paper balance and refinancing needs, and the effect of working-capital changes.
- Whether strong trading-driven results and index-related growth persist, given the sensitivity of some revenue and OCC earnings to market activity.