Nasdaq, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Nasdaq operates trading and clearing markets and provides listing, information, corporate and market-technology services. Unless noted, amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $1,039 million | $1,151 million | -9.7% |
| Revenue less transaction-based expenses | $634 million | $666 million | -4.8% |
| Operating income | $275 million | $273 million | +0.7% |
| Operating margin on revenue less transaction-based expenses | 43.4% | 41.0% | +2.4 percentage points |
| Net income attributable to Nasdaq | $247 million | $177 million | +39.5% |
| Diluted EPS | $1.48 | $1.05 | +41.0% |
| Net cash from operating activities | $337 million | $375 million | -$38 million |
- Segment revenue less transaction-based expenses: Market Services $233 million (-6.8%); Corporate Services $131 million (-0.8%); Information Services $193 million (+10.9%); Market Technology $77 million (+28.3%). Q1 2018 included $50 million of revenue from businesses divested in April 2018.
- Operating expenses declined 8.7% to $359 million. Interest expense was $37 million, versus $38 million; income tax provision was $66 million, with a 21.1% effective rate versus 25.9%.
- Cash from operations was $337 million; investing activities used $74 million and financing activities used $302 million. Cash and restricted cash ended the quarter at $539 million, down $47 million from the start of the period.
- At March 31, 2019, cash and cash equivalents were $472 million, total debt was $3.567 billion ($1.239 billion short-term), and the fair value of debt was $3.7 billion. The $1 billion revolving facility had $459 million available after liquidity support allocations; separate clearing-related facilities had $210 million available and unused.
- Working capital was negative $905 million, compared with negative $200 million at year-end, primarily reflecting movements in clearing-related default funds and margin deposits and other current balances. Those clearing assets and liabilities are largely matched.
- Cash dividends paid were $0.44 per share. In April, the board approved a quarterly dividend of $0.47 per share, a 7% increase.
Material changes and unusual items
- Net income included a $27 million pretax gain ($20 million after tax) from the March sale of BWise and $45 million of income from unconsolidated investees, versus $2 million a year earlier. The investee income primarily reflected OCC: $36 million relating to OCC’s 2018 results and $9 million for Q1 2019.
- Excluding specified items, Nasdaq reported non-GAAP net income of $204 million and diluted EPS of $1.22, versus $207 million and $1.22 in Q1 2018. The company’s non-GAAP adjustments include acquired-intangible amortization, strategic costs, OCC income and certain gains and tax items.
- Nasdaq acquired Swedish financial-technology provider Cinnober in January for $219 million, funded with cash. Preliminary purchase accounting included $137 million of goodwill and $79 million of acquired intangible assets.
- Nasdaq repaid its $500 million floating-rate notes in March. In April it issued €600 million of 1.75% notes due 2029, with net proceeds primarily intended to redeem the $600 million 5.55% notes due 2020; the redemption was scheduled for May 1, 2019.
- Effective January 1, 2019, Nasdaq adopted the new lease standard prospectively. At quarter-end, it recorded $378 million of operating lease assets and $418 million of lease liabilities; adoption did not affect income or cash flows.
Outlook, commentary and risks
- The filing provides no specific numerical earnings or revenue guidance. Management said operating cash flow and access to the revolving facility and commercial-paper program should provide sufficient near-term funding for operating costs, capital spending, debt repayments, dividends and potential repurchases.
- Management attributed weaker Market Services results mainly to lower U.S. industry trading volumes and lower European trading activity; growth in Information Services reflected index and investment-data businesses, while Market Technology benefited from project deliveries, surveillance services and Cinnober.
- Nasdaq’s offer for Oslo Børs VPS valued the company at approximately $795 million, subject to customary conditions and regulatory clearances. In April, Nasdaq acquired approximately 2% of its shares; more than 37% were owned by Nasdaq or subject to commitments to accept the offer.
- Clearing risk remains material. A September 2018 commodities clearing-member default caused a $133 million loss; at March 31, 2019, Nasdaq recorded a $99 million liability and matching collateral asset related to settlement of certain defaulted-member contracts. Nasdaq also disclosed substantial member margin and default-fund balances and its own capital commitments to the clearing waterfall.
- Other matters include securities-trader litigation whose potential liability Nasdaq could not estimate; SEC challenges to market-data and connectivity fees, including a decision Nasdaq estimates will reduce revenue by about $1 million and which it appealed; and Swedish tax litigation over interest deductions. Nasdaq said it could not predict certain proceedings’ outcomes and timing.
- Key risks identified include trading-volume and market-share changes, technology reliability and cybersecurity, integration of acquisitions, foreign-exchange and interest-rate movements, clearing-member defaults, regulatory actions, litigation, and the ability to generate cash and manage debt. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much Q1 earnings growth is repeatable after the BWise gain and unusually high OCC-related income; compare GAAP results with the company’s non-GAAP reconciliation.
- Whether Market Services trading volumes, market share and net capture rates stabilize, and whether Information Services and Market Technology growth continues organically apart from acquisitions and currency effects.
- Debt repayment and refinancing execution, commercial-paper usage, cash availability, and the effect of the 2029-note proceeds and 2020-note redemption on interest costs and maturities.
- Developments in the Oslo Børs VPS offer, SEC fee proceedings, Swedish tax appeal and trader litigation, including any changes to estimated financial exposure.
- Clearinghouse exposures and the status of the commodities-default recovery and capital-relief process, including any future losses, collateral changes or regulatory requirements.