Business context and reporting period
Nasdaq, Inc. filed this Form 10-K for the fiscal year ended December 31, 2016, with unaudited quarterly data for Q4 2016. Nasdaq operates trading and clearing markets, listing and corporate services, market-data and index businesses, and market technology services. In 2016 it reorganized reporting into four segments: Market Services, Corporate Services, Information Services, and Market Technology.
Major 2016 acquisitions included ISE, acquired June 30 for $1.07 billion, and Nasdaq CXC, Marketwired, and Boardvantage. Results include acquired businesses only from their respective acquisition dates, limiting direct year-over-year comparability.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Total revenue | $3.705 billion | $3.403 billion |
| Revenue less transaction-based expenses | $2.277 billion | $2.090 billion |
| Operating income | $839 million | $720 million |
| Net income attributable to Nasdaq | $108 million | $428 million |
| Diluted EPS | $0.64 | $2.50 |
| Operating cash flow | $722 million | $682 million |
| Cash and cash equivalents | $403 million | $301 million |
| Long-term debt obligations | $3.603 billion | $2.364 billion |
- Revenue less transaction-based expenses grew 8.9%; operating income grew 16.5%. Operating income was 36.8% of revenue less transaction-based expenses, versus 34.4% in 2015.
- Net income fell 74.8%, chiefly because Nasdaq recorded a $578 million non-cash impairment of the eSpeed trade name. Non-GAAP net income was $621 million, or $3.68 per diluted share, compared with $581 million, or $3.39, in 2015. These company-defined non-GAAP measures exclude specified items and are not GAAP results.
- Interest expense rose to $135 million from $111 million, primarily reflecting 2016 debt issuance. The effective tax rate was 20.6%, compared with 32.2%.
- Cash flow from investing was negative $1.657 billion, primarily reflecting $1.460 billion of net cash paid for acquisitions. Financing provided $1.002 billion, including debt and credit-facility proceeds; Nasdaq paid $200 million in dividends and repurchased $100 million of shares.
- Working capital was $478 million, up from $340 million. Cash plus financial investments totaled $648 million; restricted cash was a further $15 million. The balance sheet includes $3.301 billion of clearing-member default funds and margin deposits recorded as both current assets and current liabilities, which are not ordinary corporate liquidity.
- Nasdaq had $3.603 billion of debt at year-end and $749 million available under its $750 million revolving facility. It reported compliance with debt covenants. Most debt was fixed-rate; the $400 million term loan was variable-rate.
- Quarterly dividends declared totaled $1.21 per share in 2016, versus $0.90 in 2015. The board declared a $0.32-per-share dividend in January 2017, subject to the stated record and payment dates.
Material changes versus prior period
- All four segments grew in 2016: Market Services revenue less transaction-based expenses increased 7.3%; Corporate Services revenue increased 13.0%; Information Services increased 5.5%; and Market Technology increased 12.2%.
- Market Services growth included the acquired ISE and Nasdaq CXC businesses. U.S. equity-options matched market share rose to 31.6%, partly reflecting ISE; U.S. cash-equity exchange matched share declined to 17.4% from 18.8%.
- Corporate Solutions benefited from Marketwired and Boardvantage acquisitions. Listing Services revenue rose 3.0%, with European listings contributing to growth.
- Market Technology order intake was $276 million, versus $271 million; total order value awaiting revenue recognition was $777 million, versus $788 million. The filing estimates $224 million of that order value will be recognized in 2017.
- Debt increased substantially, principally to fund ISE and other acquisitions. Cash provided by operations rose 5.9%, while acquisition spending drove a much larger investing cash outflow.
Q4 2016, outlook and material risks
In Q4 2016, revenue was $973 million, revenue less transaction-based expenses was $599 million, and operating income was $213 million. Nasdaq reported a net loss attributable to Nasdaq of $224 million and diluted loss per share of $1.35, reflecting the impairment charge.
Management gave qualitative, not quantified, 2017 outlook. It expected continued growth opportunities in non-trading segments, continued intense competition, and possible benefits to trading and data businesses if elevated volatility persisted. Management highlighted regulatory change, including European MiFID II/MiFIR implementation, as both a challenge and an opportunity. It also pointed to the Nasdaq Financial Framework, machine-intelligence applications, smart-beta products, and continued technology investment as growth initiatives. The filing does not provide a clear numerical 2017 revenue or earnings forecast.
- Impairment and strategy: The $578 million eSpeed trade-name write-off followed weaker eSpeed performance and the decision to combine U.S. and European fixed-income offerings under Nasdaq Fixed Income. Management also approved winding down Nasdaq NLX in January 2017.
- Regulatory matter: Swedish regulators imposed a $6 million fine over governance findings from a cybersecurity-process investigation; Nasdaq appealed the decision and amount. The filing said the findings concerned governance, not systems or platform security.
- Tax uncertainty: An adverse Finnish court ruling resulted in $28 million of tax expense in 2016. Swedish interest-deduction disputes remained pending; an adverse outcome could result in a stated $38 million tax expense, before related U.S. tax benefits.
- Business and operating risks: Nasdaq cited trading-volume and market-share volatility, intense pricing and venue competition, market-data fee regulation, technology outages and cyberattacks, acquisition integration, foreign exchange exposure, clearing-counterparty risk, and leverage.
- Controls and audit: Management and Ernst & Young reported effective internal control over financial reporting, but ISE was excluded from the assessment following its acquisition; it represented 9% of consolidated assets and 3% of revenue less transaction-based expenses. The auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Reconcile the $578 million eSpeed impairment and the reported GAAP-to-non-GAAP earnings adjustments; assess the underlying performance of the fixed-income business after its rebranding.
- Review ISE acquisition integration, realized synergies, acquisition-related costs, and the effect of the added debt and interest expense.
- Monitor trading market share, transaction pricing and rebates, data-fee regulatory developments, and the implementation and competitive effects of MiFID II/MiFIR.
- Track the outcome of the appealed Swedish fine and pending Finnish and Swedish tax matters, including any effect on tax expense or cash payments.
- Assess available corporate liquidity separately from clearing-member collateral, and monitor leverage, refinancing needs, variable-rate exposure, and covenant headroom.
- Consider that Q4’s loss and full-year GAAP earnings were materially affected by a non-cash impairment, while non-GAAP results exclude that and other items.