Nasdaq, Inc. — Q1 2018 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2018, compared with Q1 2017. Nasdaq operates trading and clearing, corporate and listing services, information services, and market technology businesses. Amounts below are in millions of U.S. dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $1,151 | $969 | +18.8% |
| Revenue less transaction-based expenses | $666 | $581 | +14.6% |
| Operating income | $273 | $246 | +11.0% |
| Net income attributable to Nasdaq | $177 | $168 | +5.4% |
| Diluted EPS | $1.05 | $0.99 | +6.1% |
| Operating cash flow | $375 | $244 | +53.7% |
- Transaction-based expenses rose 25.0% to $485 million, faster than net revenue growth. Approximate operating margin on revenue less transaction-based expenses was 41.0%, versus 42.3% in Q1 2017.
- Operating expenses increased 17.3% to $393 million, including compensation and benefits of $197 million (up 22.4%) and depreciation and amortization of $53 million (up 17.8%). Management cited acquisitions, higher performance incentives, foreign exchange, and acquired intangible amortization as contributors.
- Cash and cash equivalents were $405 million at March 31, 2018; restricted cash was $24 million. Total debt was $4.115 billion, including $960 million classified as short-term. The $500 million floating-rate notes due March 2019 were reclassified to short-term debt. Net debt against cash and cash equivalents was approximately $3.71 billion.
- The $1 billion revolving facility had $537 million of remaining availability after commercial-paper support and a letter of credit. Nasdaq reported compliance with debt covenants. Working capital was negative $398 million, versus positive $276 million at year-end; the filing cites debt reclassification and changes in deferred revenue and other balances among the drivers.
- Cash from operations of $375 million, less $8 million of investing outflow, supported $337 million of financing outflows, including $99 million of share repurchases, $63 million of dividends paid, and debt repayments. Cash and restricted cash increased $30 million to $429 million.
- Quarterly dividend declared was $0.82 per share, including a March declaration of $0.44 per share, 16% above the prior quarterly rate. The board added $500 million of repurchase authorization; $627 million remained authorized at quarter-end.
Material changes and segment performance
- Market Services net revenue increased 14.7% to $250 million. Higher U.S. and European trading activity and improved cash-equity market share contributed; lower U.S. options market share and average net capture partly offset gains. Reported exchange revenue includes SEC Section 31 pass-through fees, which have a corresponding expense and do not increase net revenue.
- Corporate Services revenue rose 7.5% to $172 million, led by corporate solutions and listing services. Information Services revenue rose 26.1% to $174 million, reflecting eVestment, proprietary data growth, higher index-linked assets, and futures licensing. Market Technology revenue increased 7.7% to $70 million.
- eVestment, acquired in October 2017, affects year-over-year comparability and contributed to higher costs and headcount. Total order value for Market Technology was $735 million, versus $709 million.
- Net income grew more slowly than operating income, in part as the effective tax rate rose to 25.9% from 21.9%. The filing attributes the higher rate mainly to lower excess tax benefits from share-based compensation, partly offset by the lower U.S. corporate tax rate.
Outlook, risks, contingencies, and unusual items
- Management did not provide a quantified earnings or revenue forecast in the supplied filing text. It said operating cash generation and available revolving-credit and commercial-paper capacity were expected to fund operating costs, capital spending, debt repayments, repurchases, and dividends in the near term.
- In April 2018, Nasdaq completed the sale of its Public Relations Solutions and Digital Media Services businesses for approximately $335 million, subject to adjustments. Management expected to recognize a gain in Q2 and intended to use proceeds for share repurchases. The sale was not classified as discontinued operations.
- A securities-market class action, City of Providence v. BATS et al., was remanded for further proceedings after an appeals-court decision. Nasdaq said it believed the claims were without merit, would defend them vigorously, and could not estimate potential liability.
- A Swedish tax dispute concerns disallowed interest deductions for 2013–2015. An appeal was denied at the lower court and Nasdaq planned a further appeal. If the company loses, it estimated $39 million of tax expense, or $0.23 per diluted share, net of related U.S. tax benefits and currency effects; it had paid $34 million in assessments through March 31.
- Nasdaq adopted revenue-recognition guidance retrospectively; management said it did not materially affect consolidated statements. It also reclassified $142 million of stranded tax effects from accumulated other comprehensive loss to retained earnings. Foreign-currency translation contributed to a $198 million other comprehensive loss and negative $21 million comprehensive income for Q1.
- Key exposures include trading volumes, market share and fee competition, technology performance and cybersecurity, regulation, interest rates, foreign exchange, clearing-counterparty defaults, and successful integration of acquisitions. A 100-basis-point rate increase was estimated to add about $11 million to annualized interest expense on the specified variable-rate debt and commercial paper, based on quarter-end balances.
Important facts for investors to verify
- Whether revenue growth translates into sustained net-revenue and operating-margin growth as transaction costs, compensation, and acquisition-related expenses evolve.
- eVestment’s ongoing contribution to growth and profitability, and the extent to which acquisition-related cost increases persist.
- The final sale proceeds and Q2 gain from the divested businesses, and how sale proceeds are allocated to repurchases or other capital needs.
- Debt refinancing and liquidity plans for the $500 million notes due March 2019, commercial paper, and the term loan due November 2019.
- Developments in the Providence litigation and Swedish tax appeal, including any change in estimated exposure.
- Trading volumes, options and cash-equity market share, capture rates, and index-linked assets, which drive important revenue streams.