Business context and reporting period
Nasdaq, Inc. filed this Form 10-K for the fiscal year ended December 31, 2015. Nasdaq operates trading and clearing markets, listing services, market data and index businesses, and corporate and market technology solutions across six continents. Its four segments are Market Services, Listing Services, Information Services, and Technology Solutions. Figures are in U.S. dollars unless stated otherwise.
For the requested 2015 Q4 context, unaudited fourth-quarter results are summarized below; the filing principally reports full-year results.
Financial performance and key metrics
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Total revenues | $3.403 billion | $3.500 billion | Down 2.8% |
| Transaction-based expenses | $1.313 billion | $1.433 billion | Down 8.4% |
| Revenues less transaction-based expenses | $2.090 billion | $2.067 billion | Up 1.1% |
| Operating expenses | $1.370 billion | $1.313 billion | Up 4.3% |
| Operating income | $720 million | $754 million | Down 4.5% |
| Net income attributable to Nasdaq | $428 million | $414 million | Up 3.4% |
| Diluted earnings per share | $2.50 | $2.39 | Up 4.6% |
| Operating margin on revenues less transaction-based expenses | 34.4% | 36.5% | Down 2.1 percentage points |
Total revenues include transaction-based expenses reported gross; revenues less those expenses increased despite lower reported total revenue. FY 2015 non-GAAP net income was $581 million, or $3.39 per diluted share, versus $542 million, or $3.13, in 2014. These non-GAAP measures exclude specified items and are not substitutes for GAAP results.
| Unaudited Q4 metric | Q4 2015 | Q4 2014 |
|---|---|---|
| Revenues less transaction-based expenses | $536 million | $517 million |
| Operating income | $246 million | $173 million |
| Net income attributable to Nasdaq | $148 million | $87 million |
| Diluted EPS | $0.88 | $0.50 |
At December 31, 2015, cash and cash equivalents were $301 million, restricted cash was $56 million, and financial investments were $201 million. Working capital was $340 million, down from $420 million a year earlier. Operating cash flow was $685 million, versus $687 million in 2014; investing cash outflow was $441 million and financing cash outflow was $362 million. Cash declined $126 million during the year.
Debt obligations were $2.364 billion, compared with $2.297 billion at year-end 2014. The $750 million revolving facility had $258 million drawn and $490 million available; Nasdaq also reported $202 million of available liquidity under clearing-related facilities, none utilized. The company said it was in compliance with debt covenants. Total assets were $11.861 billion and total equity was $5.609 billion.
Dividends declared totaled $0.90 per share in 2015, up from $0.58 in 2014. Nasdaq repurchased $377 million of shares during 2015. No formal 2016 earnings or revenue guidance is provided in the supplied filing text.
Material changes versus the prior comparable period
- Listing Services revenue rose 10.9% to $264 million; Information Services rose 8.2% to $512 million. Market Services revenue less transaction-based expenses fell 3.1% to $771 million, while Technology Solutions revenue declined 3.0% to $543 million.
- Within Market Services, cash equity trading revenue less transaction-based expenses increased 13.5% to $253 million. Equity derivatives declined 9.6% to $188 million, and fixed income, currency and commodities declined 27.8% to $91 million.
- U.S. options market share fell to 25.2% from 26.9%; Nasdaq’s U.S. cash equity exchange matched share fell to 18.8% from 20.2%. U.S. IPOs on Nasdaq declined to 143 from 189, while Nordic and Baltic IPOs increased to 78 from 47.
- Operating expenses included $172 million of restructuring charges in 2015, versus none in 2014. The restructuring program included a $119 million non-cash OMX trade-name impairment, $25 million of severance, asset impairments and other costs. Management estimated total pre-tax charges of $190 million, with the remainder expected through June 2016.
- Foreign exchange reduced 2015 revenues less transaction-based expenses by $100 million, partly offsetting $123 million of operational growth. Net income included $17 million of income from unconsolidated investees, principally OCC-related, including $13 million attributable to OCC’s 2014 results recognized in 2015.
- Cash flow from investing increased substantially versus 2014, reflecting the $226 million Dorsey, Wright & Associates acquisition, investment purchases and a $30 million OCC capital contribution. Share repurchases and dividends also used significant cash.
Outlook, commentary, risks and contingencies
Management described the global outlook as cautious, citing downward revisions to growth forecasts and continued economic and political uncertainty. It expected modest growth in non-transactional businesses, with Market Services and Listing Services growing roughly in line with GDP over the next five years, while Information Services and Technology Solutions were expected to outperform traditional exchange businesses. These are directional expectations, not quantified earnings guidance.
Management noted that higher 2015 market volatility supported U.S. and European cash equity activity and European equity derivatives, but U.S. options volumes declined. It highlighted weak U.S. Treasury activity and competitive pressure at eSpeed, as well as the potential for slower growth and market volatility to constrain IPOs, listings and demand for corporate and technology products. Nasdaq launched the U.S. energy derivatives market NFX in 2015 and pursued blockchain initiatives; it also completed the Dorsey, Wright acquisition and acquired SecondMarket through Nasdaq Private Market.
- Key operating risks include intense competition and pricing pressure, fluctuations in trading volumes and market share, market-data fee regulation, and changes to U.S. and European market structure, including MiFID II/MiFIR implementation.
- Technology reliability, cybersecurity, and business continuity are material risks. Nasdaq disclosed the 2013 market-wide trading halt associated with its securities information processor and planned migration to its INET platform, scheduled for late 2016.
- Clearing operations expose Nasdaq to counterparty and default risk. Nasdaq Clearing reported $7.263 billion of member default-fund and margin contributions, including $5.035 billion in non-cash pledged contributions; Nasdaq also maintains its own clearing capital and a default-loss waterfall.
- Foreign currency exposure is significant: a hypothetical 10% adverse currency move was estimated to reduce revenues less transaction-based expenses by $49 million and GAAP operating income by $34 million. Nasdaq reported $2.4 billion of goodwill and intangible assets combined impairment-sensitive balance sheet exposure was substantial; goodwill was $5.395 billion and net intangible assets $1.959 billion.
- The filing identifies litigation and tax uncertainties. Facebook IPO-related settlements were supported by a $31 million reserve, offset by an insurance recovery in the second half of 2015. Other suits remained pending or on appeal, and Nasdaq said it could not estimate potential liability in certain matters. Swedish and Finnish tax positions were under dispute; adverse outcomes could result in tax expense, including an estimated $35 million potential Finnish impact and $36 million Swedish impact for the specified matters.
- After year-end, Nasdaq completed its previously announced $110 million acquisition of Chi-X Canada in February 2016 and acquired Marketwired for C$150 million. Future dividends remain subject to board approval. The eSpeed acquisition also includes conditional annual issuances of 992,247 shares through 2027 if annual gross revenue thresholds are met.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective as of year-end.
Important facts for investors to verify
- How much of 2015’s earnings growth is sustainable after separating the $172 million restructuring charge, foreign-exchange effects, OCC income and other non-GAAP adjustments.
- Whether the declines in U.S. options market share, U.S. cash equity exchange share, IPO activity and eSpeed performance stabilize or continue.
- Actual restructuring costs and savings versus management’s $190 million charge estimate and reported annualized savings of $23 million.
- Cash generation and liquidity after acquisitions, share repurchases, dividends and debt service; confirm availability and conditions under the revolving and clearing facilities.
- Progress and financial returns from NFX, blockchain initiatives, Dorsey, Wright, SecondMarket, Chi-X Canada and Marketwired.
- Developments in market-data regulation, MiFID II/MiFIR, clearing requirements, cybersecurity and the securities information processor migration.
- Outcomes of the pending litigation and tax disputes, including whether additional provisions or payments become necessary.