NASDAQ, Inc. (formerly The NASDAQ OMX Group, Inc.) — FY 2014 Form 10-K
Reporting period: Year ended December 31, 2014; quarterly figures below compare the fourth quarter of 2014 with the fourth quarter of 2013. Amounts are in U.S. dollars unless stated otherwise.
Business context
Nasdaq operates trading and clearing markets, listing services, market data and index businesses, corporate services, and exchange technology solutions globally. Its four reportable segments are Market Services, Listing Services, Information Services, and Technology Solutions. Market Services contributed 39.4% of FY 2014 revenues less transaction-based expenses; Technology Solutions contributed 26.2%, Information Services 22.9%, and Listing Services 11.5%.
Financial performance
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Total revenues | $3,500 million | $3,211 million |
| Revenues less transaction-based expenses | $2,067 million | $1,895 million |
| Operating expenses | $1,313 million | $1,207 million |
| Operating income | $754 million | $688 million |
| Net income attributable to Nasdaq | $414 million | $385 million |
| Diluted EPS | $2.39 | $2.25 |
| Operating margin on revenues less transaction-based expenses | 36.5% | 36.3% |
| Cash provided by operating activities | $687 million | $574 million |
FY 2014 revenues less transaction-based expenses increased 9.1%; operating income rose 9.6%, and diluted EPS rose 6.2%. The effective tax rate declined to 30.5% from 36.0%. Approximately 33.6% of net revenues and 26.9% of operating income were generated in currencies other than the U.S. dollar.
Segment revenues less transaction-based expenses were: Market Services $814 million, up 4.9%; Listing Services $238 million, up 4.4%; Information Services $473 million, up 8.5%; and Technology Solutions $542 million, up 19.1%. Technology Solutions growth primarily reflected the 2013 Thomson Reuters corporate businesses acquisition. Market Services benefited from U.S. cash equity activity and eSpeed, partly offset by weaker equity derivatives.
Fourth-quarter results and material changes
| Metric | Q4 2014 | Q4 2013 |
|---|---|---|
| Revenues less transaction-based expenses | $517 million | $520 million |
| Operating expenses | $344 million | $282 million |
| Operating income | $173 million | $238 million |
| Net income attributable to Nasdaq | $87 million | $141 million |
| Diluted EPS | $0.50 | $0.81 |
Annual performance benefited from increased U.S. cash equity market share and stronger IPO activity: Nasdaq recorded 189 U.S. IPOs versus 126 in 2013, and 47 Nordic and Baltic IPOs versus 14. Conversely, U.S. options market share declined to 26.9% from 27.9%, and lower volatility continued to constrain trading conditions. FY 2014 operating expenses included higher acquisition and strategic initiative costs. Nasdaq recorded $49 million of impairment charges, versus $14 million in 2013, and a $30 million investment-sale gain in 2013 did not recur.
Liquidity, debt, and capital allocation
- At year-end, cash and cash equivalents were $427 million, restricted cash $49 million, and financial investments $174 million. Working capital was $420 million, compared with $363 million a year earlier.
- Debt obligations were $2.313 billion, down from $2.634 billion. The company repaid its 2015 notes and former term loan and issued $500 million of 4.25% notes due 2024. It reported compliance with debt covenants.
- A new $750 million revolving facility matures in November 2019; $627 million was available at year-end. Management said operating cash and available borrowing capacity should fund expected near-term needs.
- Investing cash outflow was $155 million, including $140 million of property and equipment purchases. Financing cash outflow was $485 million, including $970 million of debt repayments, $178 million of repurchases, and $98 million of dividends, partly offset by $735 million of debt proceeds.
- The board authorized an additional $500 million of repurchases in late 2014; $537 million remained authorized at year-end. FY 2014 dividends declared were $0.58 per share.
Outlook, risks, and unusual items
Management gave qualitative, not quantified, 2015 commentary. It described a cautiously optimistic but uncertain economic backdrop and said Nasdaq believed its diversified businesses and cost focus positioned it to compete if conditions remained difficult. The company expected continued IPO demand, while identifying competitive pressure, regulatory change, market fragmentation, and technology investment as significant factors. MiFID II/MiFIR implementation in Europe and U.S. market-structure regulation were expected to bring both challenges and opportunities.
- FY 2014 included $81 million of merger and strategic initiatives expense, an $11 million sublease loss reserve, and an $11 million loss on debt extinguishment. The $49 million impairment charge comprised $38 million relating to acquired customer relationships and $11 million relating to technology assets.
- Foreign currency translation produced a $615 million net-of-tax other comprehensive loss, primarily reflecting the weaker Swedish krona; Nasdaq reported a total comprehensive loss of $202 million despite net income of $413 million.
- Nasdaq completed its $225 million acquisition of Dorsey Wright & Associates in January 2015 and expected to contribute $30 million to OCC in the first quarter of 2015, with conditional further replenishment commitments. eSpeed consideration also includes contingent annual issuances of 992,247 shares through 2027 if annual gross revenue meets the stated threshold.
- Risks include intense competition and transaction pricing pressure; trading-volume and market-share volatility; cyberattacks, system outages, and technology failures; regulatory change; acquisition integration and impairment risk; foreign exchange exposure; leverage; and clearing-counterparty credit risk.
- Material proceedings include litigation related to the 2012 Facebook IPO, high-frequency trading allegations, and claims concerning market-data dissemination. Nasdaq stated it could not estimate potential liability for certain pending matters. The filing also describes tax disputes, including a Finnish tax appeal; an adverse outcome there could result in $34 million of tax expense.
Most important facts for investors to verify
- Whether recurring revenue growth and operating performance can offset acquisition-related costs and the decline in Q4 earnings.
- Whether U.S. options market share and trading economics stabilize, and whether cash equity gains persist amid low volatility and pricing competition.
- Progress in integrating eSpeed and the Thomson Reuters businesses, and whether acquired customer relationships or other assets face further impairment.
- Current status and potential financial exposure from the Facebook IPO, market-data, high-frequency trading, and tax proceedings.
- Debt reduction, repurchase and dividend plans, OCC capital commitments, and the effect of foreign exchange movements on earnings and equity.