Nasdaq, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unless otherwise noted, financial amounts are in millions of dollars. Nasdaq operates Market Services, Corporate Services, Information Services and Market Technology businesses.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Change | First nine months 2020 | First nine months 2019 |
|---|---|---|---|---|---|
| Total revenue | $1,414 | $1,096 | 29.0% | $4,165 | $3,197 |
| Revenue less transaction-based expenses | $715 | $632 | 13.1% | $2,115 | $1,889 |
| Operating expenses | $389 | $406 | (4.2)% | $1,199 | $1,132 |
| Operating income | $326 | $226 | 44.2% | $916 | $757 |
| Net income attributable to Nasdaq | $264 | $150 | 76.0% | $708 | $571 |
| Diluted EPS | $1.58 | $0.90 | 75.6% | $4.25 | $3.42 |
| Operating cash flow | — | $817 | $624 |
Q3 operating income was 45.6% of revenue less transaction-based expenses, compared with 35.8% a year earlier; for the nine-month periods, the corresponding calculated ratios were 43.3% and 40.1%. Total revenue includes substantial transaction-related amounts that are offset by transaction-based expenses; revenue less those expenses is a useful measure of the underlying revenue base.
Segment trends
- Market Services: Revenue less transaction-based expenses rose 14.6% to $259 in Q3 and 18.9% to $817 for the first nine months. Elevated U.S. and European trading activity drove much of the growth; transaction rebates and exchange fees also increased. Lower U.S. options market share partly offset higher volumes.
- Corporate Services: Revenue increased 6.5% to $132 in Q3 and 4.9% to $386 year to date, supported by listing activity, IPOs and corporate solutions.
- Information Services: Revenue increased 20.2% to $238 in Q3 and 13.0% to $661 year to date. Index revenue growth was particularly strong, reflecting higher average assets in Nasdaq-linked ETPs and futures licensing; Solovis acquisition and eVestment growth supported investment data and analytics.
- Market Technology: Revenue rose 2.4% to $86 in Q3 and 5.0% to $251 year to date. SaaS surveillance growth was partly offset by weaker software delivery, support and change-request activity.
Balance sheet, debt and liquidity
- At September 30, 2020, cash and cash equivalents were $584; restricted cash was $33; and financial investments were $177. Working capital was $649, versus $63 at December 31, 2019.
- Total debt obligations were $3,571, compared with $3,387 at year-end 2019; all was classified as long-term at quarter-end. Nasdaq had no commercial paper outstanding and no borrowings under its $1 billion revolving credit facility, which was fully available. It also reported $214 of available liquidity under other credit facilities, none utilized.
- During 2020 Nasdaq issued €600 million of 0.875% notes due 2030 and $500 million of 3.25% notes due 2050, repaid its 2021 notes and repaid temporary revolving-credit and commercial-paper borrowings. Management reported compliance with debt covenants.
- Operating cash flow was $817 for the first nine months, versus $624 in 2019. Investing used $157 and financing used $408. Cash and restricted cash increased by $255 to $617 over the period.
- Dividends declared were $0.49 per share in Q3, versus $0.47 a year earlier. Nasdaq repurchased $186 of shares during the first nine months; $446 remained authorized at September 30.
Changes, outlook and notable items
- Q3 earnings benefited from unusually high trading volumes and a $39 increase in income from unconsolidated investees to $54, primarily reflecting Nasdaq’s OCC investment and elevated trading volumes. The nine-month comparison also reflects the absence of a $27 BWise divestiture gain recorded in 2019.
- Operating expenses were lower in Q3, including reduced merger and strategic initiative, restructuring and general and administrative costs. Year-to-date expenses increased 5.9%, including higher compensation, restructuring, debt-extinguishment costs and $17 of charitable donations. A $6 regulatory fine was reversed in 2020 after a favorable final court decision.
- Nasdaq said COVID-19 had not significantly harmed Q3 operations, financial condition, liquidity or cash flows, but cautioned that impacts could emerge. Elevated trading volumes and Q3 IPO demand might not persist; the company cited delayed Market Technology projects and customer purchasing decisions, and potential longer-term effects of economic weakness.
- Management expected continued global economic uncertainty and the U.S. election could support trading volumes in the remainder of 2020, while expressly noting no assurance that volumes would remain elevated. Market Technology growth was expected to be moderated in 2020 by implementation and logistical challenges. No numerical earnings or revenue guidance was provided in the filing text.
- The 2019 technology and organizational restructuring was expected to generate approximately $100 of pre-tax charges over two years. Nasdaq recognized $36 in restructuring charges in the first nine months of 2020.
Risks and contingencies
- COVID-19 could affect trading, IPO demand, customer spending, project timing, credit quality, liquidity and operations; remote work also heightens cybersecurity and operational risks.
- Nasdaq Clearing’s central-counterparty role exposes it to clearing-member defaults. A 2018 commodities-market default produced an initial $133 loss; recovery efforts and related regulatory review remained ongoing. Nasdaq said it could not predict the review’s outcome but did not expect a material financial statement impact.
- The Providence securities-market litigation remained in discovery; Nasdaq said it could not estimate potential liability and considered the claims without merit. Other regulatory inquiries and tax audits also carry uncertain timing and outcomes.
- Nasdaq’s $6.6 billion goodwill balance and substantial acquired intangible assets are exposed to impairment risk if economic weakness or business performance deteriorates.
Most important facts for investors to verify
- Whether trading volumes, IPO activity and related Market Services and index revenues remain elevated after Q3.
- Whether Market Technology order intake, implementation schedules and recurring revenue support durable growth; Q3 order intake was $84 and reported annualized recurring revenue was $278.
- How much of earnings growth reflects recurring operations versus OCC equity-method income, unusually high market activity and other unusual items.
- Debt maturity, interest-rate and refinancing exposure, and continued compliance with credit-facility covenants.
- Developments in COVID-19 impacts, the commodities-clearing default review, litigation and tax matters, and any resulting charges or capital requirements.