Nasdaq, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. Nasdaq operates trading and clearing, listing and corporate services, market information, and market technology businesses. Results include contributions from acquisitions completed in 2016, notably ISE, which limit comparability.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $971 million | $905 million | +7.3% |
| Revenue less transaction-based expenses | $583 million | $534 million | +9.2% |
| Operating income | $248 million | $219 million | +13.2% |
| Net income attributable to Nasdaq | $169 million | $132 million | +28.0% |
| Diluted EPS | $0.99 | $0.78 | +26.9% |
| Operating cash flow | $244 million | $255 million | −4.3% |
- Operating expenses rose 6.3% to $335 million. Operating income was about 42.5% of revenue less transaction-based expenses, compared with about 41.0% a year earlier.
- Revenue by segment: Market Services $606 million (+5.9%); Corporate Services $160 million (+11.9%); Information Services $138 million (+3.8%); Market Technology $67 million (+17.5%). Segment operating income was $119 million, $43 million, $102 million, and $13 million, respectively; corporate items were a $29 million loss.
- Q1 investing cash flow was a use of $8 million, versus a $294 million use in 2016, when acquisitions consumed $213 million. Financing cash flow was a $192 million use, primarily reflecting $156 million of share repurchases, $53 million of dividends, and $47 million for employee-share tax withholding.
- Cash and cash equivalents were $386 million and restricted cash was $78 million at March 31. Total debt obligations were $3.621 billion, including $379 million classified as current. Nasdaq reported $749 million available on its then-existing revolving facility and $172 million in additional clearing-related facilities, none drawn. It was in compliance with debt covenants.
- Working capital was $61 million, down from $478 million at year-end, largely reflecting the current debt classification and increases in clearing-related balances and deferred revenue. Clearing-member default funds and margin deposits are largely matched by corresponding liabilities and are not equivalent to freely available liquidity.
Material changes and unusual items
- Growth reflected acquisitions as well as operating changes. Equity derivatives revenue rose 89.1%, primarily with the inclusion of ISE; cash equity revenue fell 16.2% amid lower U.S. and European trading volumes. Market Technology growth reflected software, licensing, support, surveillance, and BWise advisory revenue.
- The effective tax rate declined to 22.1% from 32.3%. Adoption of share-based compensation accounting guidance resulted in a $23 million excess tax benefit recognized in Q1 earnings, a significant contributor to the lower tax provision. Non-GAAP net income was $187 million and non-GAAP diluted EPS was $1.10, excluding specified amortization, merger, and restructuring items and related tax effects.
- Nasdaq repurchased 2.22 million shares for $156 million under its repurchase program; $273 million of authorization remained at quarter-end. The board later declared a quarterly dividend of $0.38 per share, a 19% increase from $0.32, and adopted a policy intending regular, growing dividends over the long term.
- In April 2017, Nasdaq announced redemption of its 5.25% notes due 2018, planned for May 26, using cash and commercial-paper proceeds. It also arranged a new $1 billion, five-year revolving facility, replacing the former $750 million facility, and created a commercial-paper program.
- Q1 comprehensive income was $161 million versus $226 million, reflecting an $8 million after-tax other comprehensive loss, compared with $94 million of other comprehensive income in Q1 2016, principally due to foreign currency translation.
Outlook, risks, and contingencies
- Management described expected modest annual growth in non-trading segments, while noting that market and political instability could return. U.S. IPO activity remained muted in Q1; management expected it to pick up in the second half of 2017. The filing does not provide a clear quantified full-year earnings or revenue guidance figure.
- Key business risks include trading volumes and market share, competitive pricing, regulatory and market-structure changes, technology reliability and cybersecurity, acquisition integration, foreign exchange and interest rates, and the ability to generate cash and manage debt.
- Nasdaq has recorded $51 million of tax benefits since 2013 relating to Swedish interest deductions that are being challenged. If the Swedish courts rule against Nasdaq, it expects a $40 million tax expense, or $0.24 per diluted share, before related U.S. tax benefits. Nasdaq said it expects a favorable decision and continues to pay assessments while the matter is pending.
- Two disclosed securities-related class actions had been dismissed by lower courts and were on appeal. Nasdaq said it believes the claims are without merit; the filing does not provide a clear estimate of potential liability. Other tax examinations and guarantees are also disclosed; management said it had adequately provided for assessments considered probable and did not record certain guarantee liabilities because payment was viewed as unlikely.
- Nasdaq Clearing’s role as central counterparty exposes it to member-default risk. Its performance-guarantee liability was estimated as nominal, with no liability recorded at quarter-end. The filing describes default funds, collateral, committed capital, and assessment rights that form its risk protections.
Most important facts for investors to verify
- How much of reported revenue and earnings growth is organic versus attributable to the 2016 acquisitions, particularly ISE?
- Whether trading volumes, market share, and the expected second-half IPO recovery support management’s outlook.
- The cash and debt effects of the planned 2018-note redemption, commercial-paper issuance, and new $1 billion revolving facility.
- The sustainability of Q1’s lower effective tax rate, including the share-based compensation tax benefit and outcome of the Swedish tax dispute.
- Potential changes to reported revenue, expenses, and retained earnings when Nasdaq adopts the new revenue recognition standard in 2018.