Nasdaq, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. Nasdaq operates Market Services, Corporate Services, Information Services and Market Technology businesses.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Total revenue | $1,061 | $1,027 | $2,100 | $2,178 |
| Revenue less transaction-based expenses | $623 | $615 | $1,257 | $1,281 |
| Operating income | $256 | $269 | $531 | $541 |
| Net income attributable to Nasdaq | $174 | $162 | $421 | $339 |
| Diluted EPS | $1.04 | $0.97 | $2.52 | $2.02 |
| Operating margin on revenue less transaction-based expenses | 41.1% | 43.7% | 42.2% | 42.2% |
- Q2 reported revenue rose 3.3% year over year, while revenue net of transaction-based expenses increased 1.3%. First-half reported revenue fell 3.6%, and net revenue fell 1.9%.
- Q2 operating income declined 4.8% despite higher net revenue, as operating expenses increased 6.1% to $367 million. First-half operating income decreased 1.8%.
- Q2 net income increased 7.4%; first-half net income increased 24.2%. Lower tax expense and higher equity-method income supported earnings; comparisons also reflect divestiture gains in both periods.
- Segment net revenue, Q2 year-over-year: Market Services $227 million, down 4.2%; Corporate Services $123 million, up 2.5%; Information Services $194 million, up 10.9%; Market Technology $79 million, up 19.7%. Market Technology growth included Cinnober and higher software delivery and surveillance revenues.
Cash flow, debt and liquidity
- First-half operating cash flow was $523 million, down from $654 million. Investing cash flow was a $163 million outflow, including $193 million for Cinnober, partly offset by $108 million of BWise sale proceeds. Financing cash flow was a $573 million outflow, including debt repayments, $150 million of dividends and $50 million of share repurchases.
- Cash and cash equivalents were $333 million at June 30, 2019, with restricted cash of $30 million and financial investments of $259 million. Cash plus restricted cash declined to $363 million from $586 million at year-end 2018.
- Total debt obligations were $3.489 billion: $467 million of commercial paper and $3.022 billion of long-term debt. Nasdaq issued €600 million of 1.75% notes due 2029 and used proceeds primarily to retire its 5.55% 2020 notes; it also repaid the 2019 floating-rate notes and its $400 million term loan facility. The 2017 revolving credit facility had no borrowings and $531 million remaining availability; separate clearing-related facilities provided $211 million of unused liquidity. Nasdaq reported compliance with debt covenants.
- Working capital was negative $168 million, versus negative $200 million at December 31, 2018. Clearing member default funds and margin deposits are recorded as matching current assets and liabilities and materially affect balance-sheet totals.
- First-half dividends declared were $0.91 per share. In July, the board approved a $0.47 quarterly dividend payable in September, subject to the stated record date.
Changes, outlook and material matters
- Revenue trends were mixed: Information Services and Market Technology grew, while Market Services net revenue declined, reflecting weaker first-half trading volumes, capture rates and FICC activity. The company cited market-share gains in U.S. cash equities and strong Nordic market share.
- Market Technology annualized recurring revenue was $247 million in Q2, up 16% year over year; order intake was $46 million. Management cautioned ARR is not a forecast and may not be comparable with similarly titled measures at other companies.
- Nasdaq acquired Cinnober for $219 million in January and sold BWise in March, recording a $27 million pretax gain. The proposed sale of Nordic Fund Market was expected to close in the second half of 2019, subject to approvals and customary conditions. Nasdaq withdrew its offer for Oslo Børs VPS after another bidder secured the necessary commitments and approvals.
- No specific quantified full-year 2019 financial guidance is provided in the supplied filing text. Management said near-term operations, the commercial paper program and revolving credit availability were expected to provide sufficient cash for operations, capital spending, debt payments, repurchases and dividends.
- The effective tax rate was 27.2% in Q2 and 23.7% for the first half, versus 43.8% and 35.7%, respectively, in 2018. The comparisons primarily reflect the 2018 reversal of Swedish tax benefits; first-half 2019 also benefited from an OCC-related tax deduction and reversal of a Finnish tax penalty.
- OCC-related equity-method income was $55 million for the first half, including $36 million recognized in March for Nasdaq’s share of OCC’s 2018 income. The SEC disapproved OCC’s capital plan; OCC suspended rebates and dividends and began returning contributed capital. Nasdaq received $44 million in February and was released from future capital-replenishment obligations under that plan.
- Key risks and contingencies include market and trading-volume changes, foreign exchange and interest-rate exposure, cybersecurity and technology reliability, clearing counterparty risk, and regulatory or litigation outcomes. A 10% adverse currency move was estimated to reduce first-half net revenue by $26 million and operating income by $11 million. The SEC market-data fee decision was estimated to reduce revenue by approximately $1 million; appeals were pending.
- The City of Providence high-frequency-trading lawsuit remained in litigation; Nasdaq said it could not estimate potential liability and intended to defend itself. Nasdaq was cooperating with Swedish regulators concerning the 2018 commodities clearing-member default, but did not expect a material financial-statement impact. Swedish tax deduction litigation and ongoing tax audits also remain relevant; management did not expect tax audit outcomes to materially affect consolidated financial position or results, though period earnings and tax rates could be affected.
- Nasdaq adopted the new lease standard in 2019, recording $365 million of operating lease assets and $404 million of lease liabilities at June 30. The standard did not affect income or cash flows. The company implemented a new ERP system on April 1 and reported disclosure controls as effective.
Investor verification points
- Reconcile reported revenue growth with net revenue trends and review the impact of transaction rebates, pass-through SEC fees and changing trading volumes.
- Assess recurring earnings apart from divestiture gains, OCC income, tax-rate changes and the $11 million debt-extinguishment charge; compare GAAP and non-GAAP measures and their adjustments.
- Track cash generation, commercial paper balances, debt maturities and liquidity availability, while accounting for clearing-related matched assets and liabilities.
- Monitor Cinnober integration and Market Technology ARR and order intake, and verify progress or changes in the Nordic Fund Market sale process.
- Follow developments in OCC capital returns, market-data fee appeals, the Providence litigation, the commodities-default regulatory review and the Swedish tax dispute.