Nasdaq, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; unaudited. Nasdaq operates trading, clearing, listing, market-data, corporate-solutions and market-technology businesses.
Financial performance
| Metric | Q2 2018 | Q2 2017 | H1 2018 | H1 2017 |
|---|---|---|---|---|
| Revenue | $1.027B | $994M | $2.178B | $1.963B |
| Revenue less transaction-based expenses | $615M | $596M | $1.281B | $1.177B |
| Operating income | $269M | $242M | $541M | $488M |
| Net income attributable to Nasdaq | $162M | $146M | $339M | $314M |
| Diluted EPS | $0.97 | $0.87 | $2.02 | $1.85 |
| Operating margin on reported revenue | 26.2% | 24.3% | 24.8% | 24.9% |
Q2 revenue grew 3.3%, while revenue after transaction-based expenses rose 3.2%; operating income increased 11.2% and net income 11.0%. H1 revenue after transaction-based expenses increased 8.8%, operating income 10.9%, and net income 8.0%. H1 GAAP results included significant tax expense described below.
- Segment trends, Q2: Market Services revenue was $649M (+4.7%); Corporate Services $131M (+7.4%); Information Services $175M (+21.5%); and Market Technology $66M (+13.8%). Information Services benefited partly from the eVestment acquisition; the divested businesses’ revenue was reported separately.
- Cash flow, H1: Operating cash flow was $654M, versus $514M. Investing activities provided $151M, including $294M net proceeds from the divestiture. Financing used $835M, including $340M of share repurchases, $136M of dividends and $211M net commercial-paper repayments. Cash and restricted cash ended at $356M, down $43M from year-end.
- Debt and liquidity: Total debt was $3.847B at June 30, down from $4.207B at year-end; $768M was classified as short-term. Cash and cash equivalents were $322M and restricted cash $34M. The $1B revolving facility had $729M remaining available; Nasdaq reported compliance with debt covenants. Working capital was negative $421M, versus positive $276M at year-end, with clearing balances and short-term debt among the drivers.
Material changes and unusual items
- Nasdaq sold its Public Relations Solutions and Digital Media Services businesses in April for a stated $335M, subject to post-closing adjustments. The sale generated a $41M pretax gain, or $19M after tax. The businesses contributed $6M of Q2 revenue before sale, compared with $50M in Q2 2017.
- Q2 income tax expense was $126M and the effective tax rate was 43.8%, versus 30.8% a year earlier. Nasdaq recorded a $41M tax expense after concluding it could no longer assert success in its Swedish interest-deduction appeal; it expects approximately $1M of additional quarterly net tax expense related to the matter. H1 effective tax rate was 35.7%.
- Foreign currency translation losses reduced comprehensive income by $131M in Q2 and $329M in H1, net of tax; accumulated other comprehensive loss was $1.191B at period-end.
- H1 share repurchases totaled $340M (3.93M shares). The board authorized an additional $500M in January; $386M remained authorized at June 30. The quarterly dividend was increased from $0.38 to $0.44 per share in March; a further $0.44 dividend was declared in July.
- Company-defined non-GAAP diluted EPS was $1.18 for Q2 and $2.42 for H1; adjustments include acquired-intangible amortization and selected transaction, tax and other items. These are supplemental, non-GAAP measures.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management said operating cash flow, revolving-credit availability and the commercial-paper program were expected to provide sufficient near-term funding for operations, capital spending, debt repayments, repurchases and dividends. Management cited elevated Q2 volatility and trading volumes versus Q2 2017, but lower than Q1 2018, and a strong U.S. IPO quarter. Business sensitivities include trading volumes and market share, fee competition, technology and cybersecurity, customer demand, regulation, interest rates and foreign exchange.
Material exposures include the City of Providence securities-market litigation, for which Nasdaq said potential liability could not be estimated and the claims lacked merit; ongoing tax audits; clearing-counterparty risk; and a commitment to contribute up to $80M under the OCC capital plan if specified thresholds are breached. A 100-basis-point rise in rates was estimated to increase interest expense by about $9M on variable-rate borrowings outstanding at June 30. A 10% adverse currency move was estimated to reduce H1 operating income by $11M. Nasdaq also reported $666M in minimum net operating-lease commitments.
Investor verification priorities
- Reconcile reported growth with the sale of the PR and Digital Media businesses and eVestment’s contribution, including the treatment of divestiture proceeds and gain.
- Assess the sustainability of earnings excluding the $41M Swedish tax charge and $41M divestiture gain, and review the assumptions behind non-GAAP adjustments.
- Review short-term debt maturities, commercial-paper refinancing needs, available revolving liquidity and the negative working-capital balance.
- Monitor trading volumes, market share, fee economics, Information Services growth and Market Technology contract execution.
- Track the Swedish tax appeal, Providence litigation, OCC capital obligations and clearing-risk disclosures for developments.