NASDAQ, INC. quarterly report, Q2 FY2020

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Nasdaq, Inc. — Q2 2020 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2020. Dollar amounts are in millions unless noted. Nasdaq operates exchange and clearing businesses and provides listing, market data, analytics, and market technology services.

Financial performance and liquidity

  • Q2 revenue: $1,398, up 31.8% from $1,061. Revenue less transaction-based expenses—a key net revenue measure—was $699, up 12.2% from $623. The difference largely reflects pass-through trading fees and rebates.
  • Q2 earnings: Operating income was $315, up 23.0%; net income attributable to Nasdaq was $241, up 38.5%; diluted EPS was $1.45 versus $1.04. Operating expenses rose 4.6% to $384.
  • Q2 segment net revenue: Market Services $276 (+21.6%); Corporate Services $126 (+2.4%); Information Services $213 (+9.8%); Market Technology $84 (+6.3%). Market Services’ growth was driven mainly by unusually high trading volumes.
  • First-half results: Revenue was $2,751 versus $2,100; revenue less transaction-based expenses was $1,400, up 11.4%. Operating income was $590 (+11.1%), net income $444 (+5.5%), and diluted EPS $2.67 versus $2.52.
  • Cash flow, first half: Operating cash flow was $821, versus $523 in 2019; investing cash outflow was $145, versus $163; financing cash outflow was $294, versus $573. Ending cash and restricted cash totaled $741, compared with $363 a year earlier.
  • Balance sheet and liquidity: At June 30, cash and cash equivalents were $711; working capital was $467, versus $63 at year-end 2019. Debt was $3,482, up from $3,387 at year-end; no commercial paper or revolving-credit borrowings were outstanding. The $1 billion revolving facility had $999 available, and separate clearing-related facilities provided $205 of unused capacity. Nasdaq reported compliance with debt covenants.
  • Shareholder returns: First-half dividends paid were $158; $152 was spent on share repurchases. The declared quarterly dividend rose to $0.49 per share from $0.47 in Q2 2019.

Material changes and unusual items

  • High U.S. and European trading activity materially lifted Market Services. Q2 U.S. equity options industry average daily volume rose to 26.6 million contracts from 17.3 million; U.S.-listed securities average daily share volume rose to 12.35 billion from 6.93 billion. Nasdaq’s total matched U.S. cash-equity exchange market share declined to 18.3% from 20.1%.
  • Information Services benefited from Index revenue growth, higher AUM in Nasdaq-indexed ETPs, and Solovis, acquired in March 2020. ETPs tracking Nasdaq indexes held $272 billion in AUM, versus $203 billion a year earlier.
  • Nasdaq issued 0.875% senior notes due 2030 and 3.25% notes due 2050, repaid its 2021 notes, and repaid its revolving-credit borrowing and commercial paper. The 2021-note early repayment generated a $36 debt-extinguishment charge in the first half.
  • Restructuring charges were $13 in Q2 and $25 in the first half. The company estimated total pretax charges of $90–$100 over two years for its technology-platform transition and organizational realignment.
  • Nasdaq recorded $17 of charitable contributions in first-half expenses, including support for COVID-19 relief and social-justice organizations. It also announced a $3 donation pledge and plans to fund the Nasdaq Foundation annually at approximately 0.25% of operating profits beginning in 2021.
  • The $36 million gain on the 2019 BWise divestiture benefited first-half 2019 comparisons; 2019 also included $36 million of additional OCC-related income recognized in Q1. Accordingly, reported period comparisons include prior-period items that did not recur.

Outlook, risks, and contingencies

  • Outlook: The filing provides no formal quantified earnings or revenue guidance. Management said trading volumes could remain elevated amid economic uncertainty and the U.S. election, but warned there is no assurance they will. Management expected available operating cash flow and credit facilities to fund near-term operations, capital expenditures, debt service, repurchases, and dividends.
  • COVID-19: Management reported minimal operational disruption and no significant negative effect on operations, liquidity, or cash flow through June 30. It cautioned that a prolonged downturn could reduce customer demand, delay purchases and technology implementations, increase credit or counterparty losses, and heighten cybersecurity and operational risks. Market Technology order intake and project schedules were affected; some Corporate Services customers cut or delayed spending.
  • Clearing and legal matters: Nasdaq remains involved in the City of Providence high-frequency-trading class action; discovery was ongoing and the company could not estimate potential liability. The 2018 commodities clearing-member default remains subject to regulatory review; Nasdaq said the outcome could include a fine but did not expect a material financial-statement impact. A court vacated SEC decisions concerning challenged market-data and connectivity fees; discretionary Supreme Court review remained possible.
  • Other exposures: Clearing operations carry counterparty and default risks; the filing describes default-fund resources, assessments, and a liability waterfall. Tax audits and other regulatory inquiries are ongoing, with outcomes and timing uncertain. Nasdaq stated it had adequately provided for likely tax assessments and did not expect material impact to its consolidated financial position.
  • Controls: Management concluded disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  • Whether trading volumes and associated Market Services revenue remain elevated, and how capture rates and market share affect net revenue.
  • Whether COVID-19-related customer spending delays, credit exposure, or operational and cybersecurity risks worsen, particularly in Market Technology and Corporate Services.
  • Debt, cash generation, and capital returns after the 2020 refinancing, including the ability to sustain dividends and repurchases.
  • Progress and final costs of the restructuring plan, against the estimated $90–$100 million pretax total.
  • Developments in the Providence litigation, commodities-default regulatory review, and challenged market-data fee proceedings.
  • How much reported earnings growth depends on unusual trading activity, OCC income, acquisitions, restructuring adjustments, and other non-GAAP exclusions.