Nasdaq, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; unaudited. Nasdaq operates Market Services, Listing Services, Information Services and Technology Solutions. The company changed its legal name from The NASDAQ OMX Group, Inc. to Nasdaq, Inc. effective September 8, 2015. Dollar figures are in millions unless noted.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $871 | $818 | $2,538 | $2,580 |
| Revenue less transaction-based expenses | $529 | $497 | $1,554 | $1,549 |
| Operating income | $231 | $207 | $475 | $581 |
| Net income attributable to Nasdaq | $138 | $123 | $280 | $328 |
| Diluted EPS | $0.80 | $0.71 | $1.63 | $1.89 |
- Q3 revenue rose 6.5%, operating income 11.6%, and diluted EPS 12.7% year over year. Nine-month revenue declined 1.6%, operating income 18.2%, and diluted EPS 13.8%.
- Approximate GAAP operating margin, calculated as operating income divided by total revenue, was 26.5% in Q3 2015 versus 25.3% in Q3 2014; for the nine-month period it was 18.7% versus 22.5%.
- Nine-month non-GAAP net income was $433 and non-GAAP diluted EPS was $2.52, versus $403 and $2.32 in 2014. These company-defined measures exclude specified items and are not GAAP results.
- Cash from operations was $472 for the first nine months, compared with $407 in 2014. Investing used $382 and financing used $221; cash and cash equivalents fell $137 to $290.
Segments and period-over-period changes
- Q3: Revenue less transaction expenses increased $32 to $529. Management attributed the increase primarily to cash equity trading, data products and listing services, partly offset by $23 of unfavorable foreign-exchange impact.
- Nine months: Revenue less transaction expenses increased just $5 to $1,554; operational growth of $87 was largely offset by $82 of unfavorable foreign exchange.
- Q3 segment revenue: Market Services $542 (+6.3%); Listing Services $66 (+11.9%); Information Services $132 (+15.8%); Technology Solutions $131 (-3.0%). Nine-month amounts were $1,561 (-4.0%), $196 (+10.7%), $385 (+6.9%) and $396 (-5.0%), respectively.
- Market Services benefited from higher cash-equity activity, while U.S. options market share declined and FICC revenue weakened. Technology Solutions was affected by foreign exchange and lower Corporate Solutions and Market Technology revenue. Q3 U.S. cash-equity matched share was 18.8%, down from 19.6%; U.S. options matched share was 23.4%, down from 26.6%.
Liquidity, debt and capital returns
- At September 30, cash and cash equivalents were $290, restricted cash $18, and financial investments at fair value $193. Working capital was $308, down from $420 at year-end 2014. Clearing-member default funds and margin deposits included $2,175 in both current assets and current liabilities; these are not general-purpose liquidity.
- Total debt obligations were $2,435, including $310 drawn on the $750 revolving credit facility; $437 remained available. Nasdaq also reported $204 of available liquidity under Nordic clearing-related facilities, none utilized. The company said it was in compliance with debt covenants.
- Operating cash flow funded, among other items, $310 of share repurchases and $108 of dividends during the nine-month period. The declared dividend was $0.25 per share in Q3; $226 remained authorized for repurchases at quarter-end.
- Interest expense was $83 for the first nine months, compared with $88 a year earlier. Substantially all debt was fixed rate; a 100-basis-point increase on the revolving facility would increase annual interest expense by an estimated $3 based on quarter-end borrowings.
Outlook, management commentary, risks and unusual items
- No specific quantified full-year revenue or earnings guidance is provided in the supplied filing text. Management expected operating cash generation and revolving-credit availability to be sufficient for operating costs, capital expenditures, debt repayments, repurchases and dividends in the near term.
- A company-wide restructuring and rebranding initiative is estimated to generate $188 of net pretax charges, with the remaining charges expected through June 2016. Nasdaq reported $160 for the first nine months, including a $119 non-cash impairment of the OMX trade name. Management expected approximately $20 of pretax savings in 2015 and $23 of annualized savings.
- Nine-month results also included a $26 net legal reserve for Facebook IPO-related matters, a $12 reversal of previously recognized Swedish VAT receivables, and $13 of OCC equity-method income relating to 2014. Management reported a $6 Swedish tax assessment, which it plans to appeal; it also disclosed ongoing Finnish and Swedish tax disputes with potential tax expense if rulings go against the company.
- The Facebook IPO settlement remained subject to final court approval. The Providence and Lanier matters had been dismissed, but appeals were pending; Nasdaq said it could not estimate potential liability in those cases. The filing describes the Facebook reserve as $26 net of insurance in the financial statements and elsewhere as a $31 reserve; investors should reconcile the presentations.
- The effectiveness of the OCC capital plan was suspended pending review by the SEC’s full Commission; the filing says the capital contributions could be returned if approval is reversed or the suspension is not lifted in a timely manner.
- Management cited market volatility, trading volumes and market share, intense pricing competition, regulatory developments, technology and cybersecurity, foreign exchange, integration of acquisitions, and the ability to generate cash and manage debt as key risks. In October 2015, after quarter-end, Nasdaq acquired full ownership of Nasdaq Private Market and acquired SecondMarket Solutions.
Most important facts for investors to verify
- Whether operating performance improves after the substantial nine-month restructuring, legal, VAT and rebranding charges, and whether the projected savings are achieved.
- How much revenue and profit growth is operational versus foreign-exchange-driven, particularly in Market Services and Technology Solutions.
- The status and financial consequences of the Finnish and Swedish tax disputes, Facebook-related settlements, and the OCC capital-plan review.
- Debt levels, revolving-credit availability, cash conversion and the sustainability of dividends and repurchases.
- Whether the declines in U.S. options and cash-equity market share and the weakness in FICC persist amid competitive and regulatory pressures.