Business context and reporting period
Nasdaq, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. Its four segments are Market Services, Listing Services, Information Services and Technology Solutions. Results include Nasdaq CXC and Marketwired from February 2016, Boardvantage from May 2016, and ISE from its June 30, 2016 acquisition date.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $897 million | $807 million | $1,803 million | $1,666 million |
| Revenue less transaction-based expenses | $559 million | $518 million | $1,093 million | $1,025 million |
| Operating income | $174 million | $217 million | $393 million | $244 million |
| Net income attributable to Nasdaq | $70 million | $133 million | $202 million | $142 million |
| Diluted EPS | $0.42 | $0.77 | $1.20 | $0.82 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $392 million | $406 million |
Q2 GAAP operating income and net income were pressured by higher merger and strategic initiative costs ($35 million), restructuring charges ($33 million), increased compensation and benefits, higher interest expense, and a $28 million Finnish tax-related charge. The effective tax rate was 52.1% for Q2 and 40.8% for the first half, versus 31.3% and 31.2%, respectively, in 2015. Management’s non-GAAP diluted EPS, which excludes specified items, was $0.91 for Q2 versus $0.83, and $1.81 for the first half versus $1.63.
For the first half, cash used in investing was $1.573 billion, principally reflecting acquisitions; financing provided $1.223 billion, including debt proceeds used to fund acquisitions. Cash and cash equivalents were $344 million at June 30, up from $301 million at year-end. Working capital was $288 million, down from $340 million; the filing notes that default funds and margin deposits materially affect current assets and liabilities and are largely matched.
Debt obligations were $3.731 billion carrying value, compared with $2.364 billion at December 31, 2015. The increase primarily reflects acquisition financing, including new 2023 and 2026 senior notes and a $400 million term loan. The $750 million revolving facility had $690 million available at June 30; separate Nasdaq Clearing facilities provided $182 million of unused liquidity. Nasdaq reported compliance with all debt covenants. Contractual debt payments, including interest, totaled $4.544 billion.
The filing does not present a single explicit consolidated margin measure. Revenue less transaction-based expenses increased 7.9% in Q2 and 6.6% for the first half.
Material changes versus prior comparable periods
- Q2 revenue rose 11.2%, but revenue less transaction-based expenses rose 7.9%; operating income fell 19.8% and Nasdaq-attributable net income fell 47.4% year over year.
- First-half revenue less transaction-based expenses increased 6.6%; operating income rose 61.1% and net income attributable to Nasdaq rose 42.3%. The comparison benefited from much lower restructuring costs than in 2015, when first-half charges included the $119 million OMX trade-name impairment.
- Technology Solutions revenue grew 20.7% in Q2, including acquired businesses. Market Services revenue grew 11.3%, while its revenue less transaction-based expenses grew only 2.6% as transaction costs rose.
- U.S. cash-equity matched market share on Nasdaq’s exchanges declined to 17.4% in Q2 from 18.6%, despite higher industry volume. U.S. equity options matched share increased to 24.5% from 24.0%.
- Q2 U.S. IPOs on Nasdaq declined to 25 from 49; Nordic and Baltic IPOs declined to 25 from 31. U.S. fixed-income notional trading volume fell 36.5%.
Outlook, commentary, risks and unusual items
- Management said near-term operations and revolving-credit availability were expected to fund operating expenses, capital expenditures, debt repayments, share repurchases and dividends. The supplied filing text provides no clear numerical 2016 earnings or revenue guidance.
- Nasdaq completed its 2015 restructuring plan in June 2016, recording total net pre-tax charges of $214 million since March 2015 and expecting annualized pre-tax savings of $36 million.
- Management described cautious global growth expectations and noted that late-Q2 volatility lifted trading volumes in certain U.S. and European cash-equity and European equity-derivatives businesses. It cited competition, pricing pressure, regulatory change, technology demands, and possible market instability as business risks.
- The Finnish Supreme Administrative Court ruled against Nasdaq’s tax position in May 2016. Nasdaq recorded a Q2 tax expense of $28 million and expects approximately $1 million of additional net tax expense per quarter. A separate Swedish interest-deduction dispute remains unresolved; an adverse outcome could result in $38 million of tax expense, before related U.S. tax benefits.
- Several exchange-related class actions were on appeal after dismissal at the district-court level; Nasdaq said it could not estimate potential liability. The filing also discusses ongoing tax audits and contingent obligations, including eSpeed-related future share issuances subject to revenue conditions.
- Market, interest-rate, foreign-exchange, credit, cybersecurity, technology-reliability, acquisition-integration and indebtedness risks could affect results. A 100-basis-point interest-rate increase was estimated to increase annual interest expense by about $5 million on variable-rate borrowings outstanding at June 30.
Important facts for investors to verify
- How much of revenue and earnings growth is organic versus attributable to acquisitions, and whether the acquired businesses meet expected integration and synergy targets.
- Whether the $36 million annualized restructuring savings are realized, and how recurring operating costs compare with the substantial Q2 merger and restructuring charges.
- Developments in the Swedish tax dispute, other tax audits, and the effect of the Finnish ruling on future tax expense and cash taxes.
- Debt repayment capacity and covenant headroom after the increase in debt, including the distinction between corporate liquidity and clearing-related resources.
- Trading-share trends, IPO activity, and sensitivity to market volumes, pricing competition, foreign exchange and volatility.
- Progress and conversion timing for the $769 million Market Technology order value; the filing cautions that revenue timing depends on factors outside Nasdaq’s control.