Nasdaq, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Nasdaq operates Market Services, Corporate Services, Information Services and Market Technology, providing exchange, listing, data, analytics and technology services. Results reflect unusually high trading activity during the COVID-19 market turmoil.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $1,353 million | $1,039 million | +30.2% |
| Revenue less transaction-based expenses | $701 million | $634 million | +10.6% |
| Operating income | $275 million | $275 million | Flat |
| Net income attributable to Nasdaq | $203 million | $247 million | -17.8% |
| Diluted EPS | $1.22 | $1.48 | -17.6% |
| Operating cash flow | $380 million | $337 million | +$43 million |
Operating margin on revenue less transaction-based expenses was approximately 39.2%, compared with 43.4% a year earlier. Reported revenue growth was driven chiefly by higher trading volumes and includes pass-through transaction fees; those fees are largely offset by transaction-based expenses. Non-GAAP diluted EPS was $1.50, versus $1.22, reflecting adjustments including debt-extinguishment and restructuring charges and acquired-intangible amortization. These non-GAAP figures are supplemental, not GAAP results.
Segment revenue less transaction-based expenses: Market Services $281 million (+20.6%); Corporate Services $128 million (+5.8%); Information Services $211 million (+9.3%); Market Technology $81 million (+5.2%). Market Services growth reflected stronger U.S. and European trading volumes. Index revenue rose, while Market Data revenue declined 3.0%.
Liquidity, debt and capital
- Cash and cash equivalents were $1.015 billion at March 31, versus $332 million at year-end; cash, restricted cash and financial investments totaled $1.298 billion.
- Total debt was $4.108 billion, up from $3.387 billion at December 31. The increase primarily reflects a $799 million draw on the revolving credit facility as a precaution amid COVID-19-related commercial-paper market uncertainty. Remaining facility availability at March 31 was $200 million, excluding a letter of credit.
- In February, Nasdaq issued $644 million net proceeds of 0.875% notes due 2030, primarily to repay the 3.875% notes due 2021. In April, it issued $485 million net proceeds of 3.25% notes due 2050 and used them to repay part of the credit-facility borrowing; facility availability was approximately $700 million at April 30.
- Working capital was negative $180 million, versus positive $63 million at year-end, largely reflecting higher short-term debt and deferred revenue. Default funds and margin deposits of $3.241 billion are recorded equally as current assets and liabilities.
- Cash flow from investing was negative $154 million, including $157 million for acquisitions and $26 million for property and equipment. Financing cash flow was positive $468 million, including debt and credit-facility proceeds, offset by repayments, $122 million of share repurchases and $78 million of dividends.
- Quarterly dividend declared was $0.47 per share. In April, the board approved a $0.49 dividend, payable in June. Nasdaq repurchased 1.18 million shares for $122 million during the quarter.
Material changes and unusual items
- Net income fell despite higher net revenue and flat operating income. The prior-year comparison included a $27 million gain on the BWise divestiture and higher equity-method income, including a significant OCC-related amount. Q1 2020 included $17 million of income from unconsolidated investees, versus $45 million a year earlier.
- Q1 2020 expenses included a $36 million charge for early extinguishment of the 2021 notes, $12 million of restructuring charges and COVID-19 relief contributions within general and administrative expense. A $12 million non-cash retained-earnings adjustment was recorded upon adoption of the expected-credit-loss accounting standard.
- Foreign-currency translation losses were $223 million, contributing to comprehensive loss attributable to Nasdaq of $20 million despite net income of $203 million.
- Solovis was acquired in March 2020 and added to Information Services. Management began winding down Nordic broker services in January, with the process expected to continue through Q2 2021. Nasdaq reported no material impairment charges for the quarter.
Outlook, commentary and risks
Nasdaq provided no quantified earnings or revenue guidance. Management said operations had continued with minimal disruption and COVID-19 had not significantly harmed Q1 operations, liquidity or cash flows as of March 31. Approximately 98% of the global workforce was working remotely.
Management cautioned that unusually high Q1 trading volumes may not persist, though U.S. equity and options volumes remained strong in April. IPO candidates were delaying offerings; some Corporate Solutions customers were postponing purchases or reducing discretionary spending; and Market Technology customers were extending implementation schedules and delaying decisions. Index business performance remains sensitive to market values and AUM. The pandemic could also increase customer credit risk, clearing-counterparty risk, cybersecurity and operational risks, and impair demand or liquidity.
Other exposures include clearinghouse default risk, foreign-exchange and interest-rate risk, tax audits, and litigation. Nasdaq disclosed an ongoing securities-market class action in which potential liability could not be estimated, and regulatory disputes over market-data and connectivity fees; the company estimated one SEC decision could reduce annual revenue by approximately $1 million. The company said it was in compliance with debt covenants and did not expect the disclosed commodities-clearing default matter to have a material financial-statement impact, though regulatory outcomes remain uncertain.
Investor verification priorities
- Assess how much Q1 Market Services growth depended on unusually elevated, potentially non-recurring trading volumes and pass-through fees.
- Reconcile GAAP earnings decline with the $1.50 non-GAAP diluted EPS and review the adjustments and tax effects.
- Track debt, commercial-paper access and credit-facility availability after the April refinancing, including variable-rate exposure.
- Monitor COVID-19 effects on listings, customer spending, Market Technology implementations, AUM and receivable-credit losses.
- Review clearinghouse exposures, litigation and regulatory proceedings, and the potential effects of foreign-currency movements.