Nasdaq, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; filed November 6, 2018. Unaudited results are compared with the corresponding 2017 periods. Nasdaq operates trading and clearing markets, listings, market data and index services, corporate solutions, and financial-market technology businesses.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $964 million | $965 million | $3,141 million | $2,929 million |
| Revenue less transaction-based expenses | $600 million | $603 million | $1,882 million | $1,780 million |
| Operating income | $246 million | $262 million | $787 million | $750 million |
| Net income attributable to Nasdaq | $163 million | $170 million | $502 million | $483 million |
| Diluted EPS | $0.97 | $1.00 | $2.99 | $2.85 |
For Q3, reported revenue was essentially flat, while revenue net of transaction-based expenses fell 0.5%, operating income declined 6.1%, and net income declined 4.1%. For the first nine months, those measures rose 5.7%, 4.9%, and 3.9%, respectively. Q3 operating expenses increased 3.8% to $354 million; nine-month expenses increased 6.3% to $1,095 million.
- Segment trends: Q3 revenue less transaction-based expenses rose 1.4% in Market Services to $222 million; Corporate Services revenue rose 4.0% to $131 million; Information Services rose 19.3% to $179 million; and Market Technology rose 9.7% to $68 million. Information Services growth included eVestment, acquired in October 2017. Market Services’ nine-month net revenue rose 7.6%.
- Cash flow: Operating cash flow was $668 million for the first nine months, versus $609 million in 2017. Investing activities provided $227 million, including $286 million net proceeds from the business divestiture; financing activities used $906 million. Cash and restricted cash ended at $376 million, down from $399 million at the start of the period.
- Debt and liquidity: Total debt was $3.880 billion at September 30, versus $4.207 billion at year-end 2017, including $808 million of short-term debt. Cash and cash equivalents were $324 million; restricted cash was $52 million. The $1 billion revolving facility had $689 million remaining available, and additional clearing-related facilities provided $219 million of unused liquidity. Nasdaq said funding remained healthy and expected operations, its revolver and commercial-paper program to cover near-term needs. It was in compliance with debt covenants.
- Capital returns: The company repurchased $394 million of shares and paid $208 million in dividends during the nine months. The quarterly dividend increased from $0.38 to $0.44 per share. The board declared another $0.44 dividend payable in December 2018.
Material changes and unusual items
- Nine-month results include a $33 million pretax gain on the April sale of Public Relations Solutions and Digital Media Services; the businesses contributed $143 million of revenue in the 2017 comparison period and $56 million before sale in 2018. The sale also affects period comparability.
- Q3 and nine-month results include an $8 million Nasdaq Clearing commodities-default loss. A clearing member’s default generated a total $133 million loss: $8 million was allocated to Nasdaq Clearing junior capital, with the remainder allocated to clearing-member default funds. The funds were replenished; Nasdaq also supplied approximately $22 million of temporary capital. A $56 million liability and matching collateral asset were recorded for settlement of certain defaulted-member contracts.
- The nine-month effective tax rate was 31.8%, compared with 26.9% in 2017, primarily reflecting a $41 million tax charge reversing previously recognized Swedish tax benefits and tax on the divestiture. Q3’s effective rate was 22.0%, versus 27.4%, reflecting the lower U.S. corporate tax rate and deferred-tax remeasurement effects.
- In October 2018, Nasdaq agreed to sell its 5% interest in LCH for approximately $171 million, subject to regulatory non-objection, with closing expected in Q4. Nasdaq also made an approximately $190 million all-cash offer for Cinnober, expected to close in Q4 subject to customary conditions.
- An October SEC decision concerning certain market-data fees is estimated by Nasdaq to reduce revenue by approximately $1 million; Nasdaq appealed. The SEC also remanded other market-data and connectivity fee challenges for further consideration.
Outlook, commentary and risks
The filing discusses a 2018 outlook but the provided filing text does not state a clear numerical company-wide revenue, earnings or cash-flow forecast. Management described the near-term funding position as sufficient. It noted stronger U.S. IPO activity in Q3 (52 Nasdaq IPOs versus 34 a year earlier), while Nordic and Baltic IPOs fell to three from ten. U.S. market volatility and trading volumes increased after quarter-end, according to management.
Key exposures include trading volumes and market share, competitive pressure on transaction and market-data pricing, regulatory decisions, technology reliability and cybersecurity, acquisitions and integration, interest rates, foreign exchange, and clearing-member credit risk. The City of Providence high-frequency-trading litigation was remanded for further proceedings; Nasdaq said it considers the claims without merit but cannot estimate potential liability. Tax audits and other regulatory matters also remain subject to uncertain outcomes.
Investor verification priorities
- Review the commodities clearing default allocation, recovery efforts, replenished resources, and any subsequent financial or regulatory developments.
- Track the SEC market-data fee proceedings, appeal, and potential revenue effects.
- Confirm completion, funding, and integration outcomes for the Cinnober offer and LCH stake sale.
- Assess underlying earnings and cash generation separately from divestiture gains, the Swedish tax charge, acquisition-related amortization, and the clearing loss; compare GAAP with management’s non-GAAP measures.
- Monitor the 2019 floating-rate notes, commercial-paper refinancing needs, available revolver capacity, and continued covenant compliance.
- Evaluate market-share, trading-volume, foreign-exchange, and litigation developments alongside the stated risks.