Business context and reporting period
Nasdaq, Inc.’s Form 10-K covers the fiscal year ended December 31, 2018; the filing also reports unaudited fourth-quarter results. Nasdaq operates trading and clearing markets and provides listing, market data, corporate, investment analytics, and market technology services. Its four reportable segments are Market Services, Corporate Services, Information Services, and Market Technology.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Total revenue | $4.277 billion | $3.948 billion | +8.3% |
| Revenue less transaction-based expenses | $2.526 billion | $2.411 billion | +4.8% |
| Operating income | $1.028 billion | $991 million | +3.7% |
| Net income attributable to Nasdaq | $458 million | $729 million | -37.2% |
| Diluted EPS | $2.73 | $4.30 | -36.5% |
| Net cash from operating activities | $1.028 billion | $909 million | +13.1% |
Operating income was 40.7% of revenue less transaction-based expenses in 2018, versus 41.1% in 2017. Net income and GAAP EPS fell primarily because the income-tax provision rose to $606 million from $143 million; the 2018 effective tax rate was 57.0%, including a $290 million non-cash charge from finalizing Tax Cuts and Jobs Act accounting and $41 million of Swedish tax-related expense. Management’s non-GAAP measures were $811 million net income and $4.84 diluted EPS, versus $681 million and $4.02 in 2017; these exclude specified items and are not GAAP measures.
Fourth-quarter 2018 revenue was $1.136 billion, revenue less transaction-based expenses was $645 million, and operating income was $241 million. Nasdaq recorded a $44 million net loss attributable to the company and diluted loss per share of $0.27 in the quarter.
At year-end, cash and cash equivalents were $545 million, restricted cash $41 million, and financial investments $268 million. Working capital was negative $200 million, compared with positive $276 million a year earlier, affected in part by clearing-related balances. Total debt was $3.831 billion, including $875 million classified as short-term; long-term debt was $2.956 billion. The $1 billion revolving facility had $723 million available after liquidity support and a letter of credit; the company reported compliance with debt covenants. Dividends declared were $1.70 per share for 2018, and share repurchases totaled $394 million.
Material changes versus the prior comparable period
- Information Services revenue increased 21.4% to $714 million, led by Investment Data & Analytics, including a full year of eVestment, and growth in Index.
- Market Services revenue less transaction-based expenses grew 8.7% to $958 million, supported by higher trading volumes and U.S. cash-equity market share; transaction-based expenses also increased.
- Corporate Services revenue increased 5.4% to $528 million; Market Technology revenue rose 9.3% to $270 million.
- Operating expenses increased 5.5% to $1.498 billion, including higher compensation and amortization. General, administrative and other expense also rose, partly due to the clearing default.
- Operating cash flow increased to $1.028 billion. Investing activities provided $196 million, compared with $890 million used in 2017, reflecting divestiture and investment-sale proceeds and lower acquisition spending. Financing activities used $1.027 billion, including repurchases, dividends, and debt repayments.
Outlook, commentary, risks and unusual items
- The filing does not provide a clear numerical 2019 revenue or earnings guidance value. Management described leading indicators as signaling a slowdown and noted that 2019 U.S. and Eurozone growth forecasts had declined to 2.5% and 1.3%, respectively, late in 2018.
- Nasdaq’s strategy prioritizes investment in Market Technology and Information Services while sustaining its marketplace businesses and redirecting resources from slower-growth areas. It acquired Quandl in November 2018; the Cinnober offer closed in January 2019. Nasdaq sold its Public Relations Solutions and Digital Media Services businesses in April 2018 and its 5% LCH interest in December 2018. A February 2019 agreement to sell BWise was expected to close in the first half of 2019.
- A September 2018 commodities clearing-member default caused a $133 million loss allocated under the clearinghouse liability waterfall: Nasdaq absorbed $8 million initially, with the remainder allocated pro rata to member default funds. Nasdaq recorded $31 million of expense, including an $8 million loss and a $23 million capital-relief-program charge. Recovery from the defaulting member remained uncertain; Nasdaq also increased margin levels and commenced risk-management enhancements.
- Other notable items include a $118 million pre-tax gain on the LCH investment sale and a $33 million pre-tax net gain on the business divestiture. Nasdaq’s 2018 goodwill impairment test found no impairment; goodwill was $6.363 billion at year-end.
- Key risks include market-volume and pricing competition, cybersecurity and technology outages, regulation of market-data fees, clearing-member credit and liquidity exposures, acquisition integration, foreign-exchange movements, and litigation and tax uncertainty. Nasdaq appealed an SEC decision on certain data fees and related remand actions; the company estimated an approximately $1 million revenue impact from the challenged decision. The City of Providence high-frequency-trading litigation remained ongoing, with potential liability not estimable in the filing.
Important facts for investors to verify
- Reconcile the $290 million tax charge and $41 million Swedish tax item to the effective tax rate, deferred tax balances, and non-GAAP adjustments.
- Track the clearing default’s recovery process, the $23 million capital-relief program, and the effect of enhanced collateral and risk controls.
- Assess the maturity and refinancing of $500 million of floating-rate notes due March 2019 and the $100 million term loan due November 2019.
- Monitor SEC and court outcomes on market-data and connectivity fees, including any revenue or compliance impact beyond the estimated $1 million.
- Evaluate integration and returns from Quandl and Cinnober, and the completion and proceeds of the BWise sale and proposed Oslo Børs VPS offer.
- Review the full financial statements and notes for clearing-related exposures, litigation, tax audits, liquidity, and the effect of negative working capital. The auditor issued an unqualified opinion, and management and the auditor reported effective internal control over financial reporting.