NASDAQ, Inc. (formerly The NASDAQ OMX Group, Inc.) — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet amounts are as of March 31, 2015. The filing was signed May 6, 2015. Nasdaq operates trading and clearing markets, listing, information and technology businesses across four segments.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $858 million | $898 million |
| Revenue less transaction-based expenses | $507 million | $529 million |
| Operating expenses | $480 million | $345 million |
| Operating income | $27 million | $184 million |
| Net income attributable to Nasdaq | $9 million | $103 million |
| Diluted EPS | $0.05 | $0.59 |
| Operating cash flow | $231 million | $183 million |
| Capital expenditures | $24 million | $31 million |
Revenue less transaction-based expenses declined 4.2%; operating income fell 85.3%. The operating margin on revenue less transaction-based expenses was approximately 5.3%, versus 34.8% a year earlier, reflecting substantial unusual charges. Management reported non-GAAP net income of $138 million and diluted EPS of $0.80, compared with $136 million and $0.78, respectively; these non-GAAP figures exclude specified items and are not substitutes for GAAP results.
Net cash used in investing was $326 million, principally including the $226 million Dorsey, Wright & Associates acquisition and a $30 million contribution to The Options Clearing Corporation (OCC). Financing activities provided $4 million. Cash and cash equivalents declined $99 million to $328 million. Working capital was $248 million, down from $420 million at year-end; clearing default-fund and margin balances are substantially matched by related liabilities and are not generally available for corporate use.
Total debt obligations were $2.306 billion, compared with $2.313 billion at December 31, 2014. Debt included $198 million drawn on a $750 million revolving facility, leaving $552 million available. Nasdaq reported compliance with debt covenants. The filing states that operations and revolving-credit availability were expected to fund operating costs, capital spending, debt repayments, repurchases and dividends in the near term.
Changes versus the prior comparable period
- Total revenue declined 4.5%; revenue less transaction-based expenses fell 4.2%, including an adverse $29 million foreign-exchange effect and a $7 million operational increase.
- Market Services revenue less transaction-based expenses fell 9.6% to $188 million, mainly due to weaker U.S. equity derivatives and fixed income, currency and commodities activity. Listing Services increased 10.3% to $64 million; Information Services rose 1.6% to $125 million; Technology Solutions declined 7.1% to $130 million.
- GAAP operating expenses rose $135 million, including $150 million of restructuring charges, a $31 million legal reserve and a $12 million reversal of Swedish VAT receivables. The prior-year quarter included $28 million of merger and strategic initiative costs, but no restructuring charge.
- Foreign-currency translation losses were $314 million before tax, producing a $201 million after-tax comprehensive loss, versus a $4 million comprehensive loss in Q1 2014.
Outlook, management commentary and notable items
- A company-wide restructuring is expected to total $182 million pre-tax, with $150 million recognized in Q1 2015 and the remainder through June 2016. It includes a $119 million non-cash impairment of the OMX trade name related to the planned rebranding, workforce reductions affecting 199 positions, facility costs and asset impairments. Management expects approximately $17 million of savings in 2015 and $19 million in annualized savings.
- Management described the economic outlook as cautiously optimistic, while noting low volatility, competitive pricing pressure, regulatory change and the possibility of renewed market instability. U.S. IPOs on Nasdaq declined to 27 from 47; Nordic and Baltic IPOs increased to 17 from 5.
- In April, the board declared a quarterly dividend of $0.25 per share, a 67% increase from $0.15; payment was scheduled for June 26, 2015. Q1 dividends paid were $25 million. Nasdaq repurchased $30 million of shares during the quarter, with $507 million remaining authorized.
- The $31 million reserve for Facebook IPO-related settlements was established in Q1; agreements to settle were reached in April, subject to court approval where applicable. Nasdaq expects some or all settlement payments may be reimbursed by insurance.
- Nasdaq recorded $14 million of income from unconsolidated investees, including $13 million attributed to OCC’s 2014 earnings. OCC’s capital plan and Nasdaq’s $30 million contribution were subject to regulatory proceedings; the plan could be reversed and contributions returned.
- Tax matters include a Finnish interest-deduction dispute: an adverse outcome could result in $30 million of tax expense. Nasdaq also reversed a $12 million Swedish VAT benefit after an adverse lower-court ruling and plans to appeal. U.S., state and non-U.S. tax examinations are ongoing.
- Other risks include foreign-exchange sensitivity, clearing-counterparty exposure, market-volume and market-share changes, technology and cybersecurity risks, regulation and litigation. Nasdaq reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether restructuring savings materialize on schedule and whether the remaining charges stay within the $182 million estimate.
- How much of the $31 million Facebook-related reserve is ultimately paid and recovered through insurance.
- Outcomes of the Finnish tax appeal, Swedish VAT appeal and ongoing tax audits; the filing’s stated Finnish downside is $30 million.
- Whether OCC’s capital plan remains effective, and the status of Nasdaq’s contribution and potential future replenishment obligations.
- Trends in trading volumes, market share, pricing and foreign exchange, particularly in Market Services and European operations.
- Debt, liquidity and capital-return capacity after acquisitions, repurchases and the higher declared dividend; distinguish corporate cash from clearing-related balances.