Business context and reporting period
Nasdaq, Inc. filed this Form 10-K for the fiscal year ended December 31, 2017. It operates trading, clearing, listing, information, corporate-solutions and market-technology businesses through four segments: Market Services, Corporate Services, Information Services and Market Technology. The filing also provides unaudited quarterly results, including fourth-quarter 2017.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $3.965 billion | $3.705 billion |
| Revenue less transaction-based expenses | $2.428 billion | $2.277 billion |
| Operating income | $999 million | $839 million |
| Net income attributable to Nasdaq | $734 million | $108 million |
| Diluted EPS | $4.33 | $0.64 |
| Operating cash flow | $909 million | $776 million |
| Cash, cash equivalents and financial investments | $612 million | $648 million |
| Total debt obligations | $4.207 billion | $3.603 billion |
| Working capital | $267 million | $478 million |
Revenue less transaction-based expenses increased 6.6%; operating income increased 19.1%. Reported net income and EPS rose sharply from 2016, which included a $578 million non-cash impairment charge. 2017 also included an $87 million reduction in tax expense from the U.S. tax-law change. Non-GAAP net income was $688 million and non-GAAP diluted EPS was $4.06, compared with $621 million and $3.68, respectively, in 2016.
2017 investing cash outflow was $890 million, including $776 million for acquisitions and $144 million for property and equipment. Financing cash outflow was $53 million, including $243 million of dividends, $203 million of share repurchases and $708 million of long-term debt repayments, partly offset by debt and commercial-paper proceeds. Cash and restricted cash ended the year at $399 million. The $3.988 billion of clearing-member cash margin and default-fund deposits is recorded with an equal liability; it is not equivalent to unrestricted corporate liquidity.
Debt included $480 million of commercial paper and $3.727 billion of long-term debt. Nasdaq reported $404 million remaining under its $1 billion revolving credit facility after facility usage and commercial-paper support. It was in compliance with debt covenants at year-end. Dividends declared per share rose to $1.46 from $1.21.
Material changes versus comparable periods
- All four segments grew on a revenue-less-transaction-expenses basis: Market Services $881 million (+6.5%); Corporate Services $656 million (+3.3%); Information Services $588 million (+8.9%); and Market Technology $303 million (+10.2%).
- Market Services growth reflected a full year of ISE results, higher U.S. options volumes and market share, partly offset by lower U.S. cash-equity volumes. U.S. options matched market share increased to 41.6% from 31.6%; U.S. cash-equity total market share, including reported trades, rose to 52.6% from 50.5%.
- Information Services benefited from proprietary data growth, eVestment (acquired in October 2017) and higher assets under management in licensed Nasdaq-index ETPs. Market Technology growth reflected higher change-request and software-as-a-service revenue.
- Operating expenses were nearly flat at $1.429 billion versus $1.438 billion; lower restructuring and merger-related costs were partly offset by higher technology, occupancy and depreciation/amortization expenses.
- Year-end debt increased by $604 million, while cash and cash equivalents declined by $26 million. Working capital decreased by $211 million, partly reflecting higher clearing-related balances and short-term debt.
Fourth-quarter 2017 revenue was $1.024 billion, revenue less transaction-based expenses $635 million, operating income $243 million, and net income $246 million (diluted EPS $1.45). Fourth-quarter 2016 included a $224 million net loss, largely reflecting the eSpeed impairment; the filing does not provide a clean recurring-earnings comparison for that quarter.
Outlook, commentary, risks and unusual items
- Management provided strategic and segment commentary, but no specific consolidated 2018 revenue, earnings or EPS guidance. It expects the Nasdaq Financial Framework to contribute meaningfully to Market Technology order intake in 2018 and beyond; order value at year-end was $847 million, including $173 million of deferred revenue.
- Strategy prioritizes investment in Market Technology, data analytics and Nasdaq Private Market, while maintaining core trading and listing businesses and optimizing less-strategic operations. Nasdaq agreed in January 2018 to sell its Public Relations Solutions and Digital Media Services businesses for $335 million, subject to closing conditions, with proceeds expected to fund share repurchases.
- Management described low volatility during 2017 and higher volatility in early February 2018. It expects continued intense exchange competition, uncertain effects from European MiFID II/MiFIR, and possible migration of trading to broker-operated or other venues. Persisting volatility could benefit some Market Services and data businesses, but results remain sensitive to volumes, market share and pricing.
- Key risks include cyberattack and technology outages, regulatory change and enforcement, competition and fee pressure, integration of acquisitions, clearing-counterparty defaults, foreign-exchange exposure, leverage and refinancing costs, and potential impairment of goodwill and acquired intangibles. Nasdaq’s $6 million Swedish regulatory fine relating to governance findings was under appeal; the outcome was unresolved.
- The Swedish tax dispute over interest deductions remained unresolved. Nasdaq reported that an adverse decision could result in $48 million of tax expense, before related U.S. tax benefits. The $87 million tax benefit from U.S. tax reform was a provisional estimate subject to refinement.
- Nasdaq adopted the new revenue standard effective January 1, 2018. The company said the overall adoption impact was not material, but recognition timing changes for listing and Market Technology contracts; comparative periods shown in the filing include adoption adjustments in the related disclosure.
Important facts for investors to verify
- Separate recurring operating performance from the 2016 impairment and 2017 tax-reform benefit; review the company’s non-GAAP reconciliations and exclusions.
- Monitor the closing, final proceeds and use of proceeds for the $335 million divestiture, as well as the expanded $726 million repurchase authorization.
- Review debt maturities, commercial-paper refinancing needs, variable-rate exposure and available revolving-credit capacity; reported debt was $4.207 billion at year-end.
- Track the Swedish tax appeal and the appeal of the SFSA fine, along with the high-frequency-trading class action remanded for further proceedings; the filing does not quantify a likely liability for that litigation.
- Assess acquisition integration and the sustainability of segment growth, especially eVestment, Market Technology order conversion, trading volumes and data-fee regulation.
- Note that management and the auditor excluded eVestment from the 2017 internal-control assessment; integration into the company’s control assessment was planned for 2018.