Nasdaq, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Comparisons are with Q1 2015 unless noted. Nasdaq operates Market Services, Listing Services, Information Services and Technology Solutions.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $905 million | $858 million |
| Revenue less transaction-based expenses | $534 million | $507 million |
| Operating income | $219 million | $27 million |
| Net income attributable to Nasdaq | $132 million | $9 million |
| Diluted EPS | $0.78 | $0.05 |
| Non-GAAP net income / diluted EPS | $153 million / $0.91 | $138 million / $0.80 |
| Operating cash flow | $251 million | $231 million |
- Revenue less transaction-based expenses rose 5.3%. Total revenue increased 5.5%. Operating margin on revenue less transaction-based expenses was approximately 41.0%, versus 5.3% in Q1 2015; this comparison is heavily affected by prior-year unusual charges.
- Reported operating expenses fell 34.4% to $315 million, primarily because restructuring charges declined to $9 million from $150 million. Q1 2015 also included a $119 million non-cash OMX trade-name impairment, a $31 million litigation reserve and a $12 million VAT refund reversal. Excluding the disclosed non-GAAP items, net income increased to $153 million from $138 million.
- Cash flow: investing activities used $294 million, principally reflecting $213 million for acquisitions; financing activities provided $68 million, including new borrowing and repayment activity. Cash and cash equivalents ended at $331 million, up $30 million from year-end.
- At March 31, total debt obligations were $2.565 billion, up from $2.364 billion at December 31, 2015. Interest expense was $28 million. Nasdaq reported compliance with all debt covenants.
- Current assets were $4.722 billion and current liabilities $4.429 billion; working capital was $293 million, down from $340 million at year-end. These totals include matched clearing default-fund and margin balances, which rose to $3.614 billion on both the asset and liability sides.
- Cash, restricted cash and financial investments totaled $611 million. The $750 million revolving facility had $720 million available; separate clearing-related facilities provided $209 million of unused liquidity.
Material changes and segment trends
- Market Services revenue less transaction expenses rose 6.9% to $201 million. Cash-equity contribution increased, while equity-derivatives revenue declined and fixed-income, currency and commodities contribution fell 16.7%. U.S. options matched market share dropped to 24.1% from 27.8%; U.S. cash-equity exchange matched share fell to 17.9% from 19.7%.
- Listing Services revenue rose 3.1% to $66 million; Information Services increased 6.4% to $133 million; Technology Solutions increased 3.1% to $134 million. Growth included acquired businesses and stronger data, index, corporate-solutions and software-as-a-service revenue.
- Market conditions were mixed: U.S. cash-equity matched share volume increased, but U.S. IPOs fell to 10 from 27 and Nordic/Baltic IPOs to 8 from 17. U.S. options industry volume increased, but Nasdaq’s options market share declined. U.S. fixed-income notional volume fell 28.7%.
- Q1 acquisitions: Chi-X Canada for $116 million and Marketwired for $111 million. Nasdaq also agreed to acquire ISE for $1.1 billion, subject to customary regulatory approvals, with closing expected in Q2 2016. Boardvantage was acquired May 2, 2016 for approximately $200 million net of acquired cash.
Outlook, commentary and risks
- Management described cautious investor and company expectations for global growth, with continued uncertainty, possible volatility and fluctuating trading volumes. It cited consensus 2016 GDP forecasts of 2.0% for the U.S. and 1.5% for the euro area.
- The 2015 restructuring plan was expected to conclude in June 2016. Nasdaq estimated another $15 million of charges through June, total plan charges of $196 million, and $25 million of pretax savings in 2016.
- Management said operations and revolving-credit availability were expected to fund operating costs, capital expenditure, debt repayment, repurchases and dividends in the near term. The filing does not provide a specific consolidated revenue or earnings forecast.
- Nasdaq increased its quarterly dividend from $0.25 to $0.32 per share, a 28% increase, subject to future board approval. It authorized an additional $370 million of repurchases; $500 million remained authorized at quarter-end. Q1 repurchases under the program were $29 million.
- Risks include competition and loss of trading or listing share, market and economic weakness, regulation, technology reliability and cybersecurity, acquisition integration, foreign-exchange and interest-rate exposure, and the ability to generate cash and manage debt. A 100-basis-point rate rise was estimated to increase annual interest expense by about $4 million on then-current variable-rate borrowings.
- Tax matters include appeals in Finland and Sweden. An adverse Finnish decision could result in $38 million of tax expense; an adverse Swedish decision could result in $34 million. Nasdaq stated that it expected favorable outcomes. It also disclosed pending litigation appeals, including securities-market and market-data class actions; potential liability could not be estimated. The Rabin complaint was dismissed on April 21, 2016, subject to the appeal period.
- Q1 net income included a $13 million prior-year OCC investment income catch-up in Q1 2015, contributing to the year-over-year difference in income from unconsolidated investees. Foreign-currency translation generated $94 million of after-tax other comprehensive income in Q1 2016, versus a $201 million loss in Q1 2015.
Important facts for investors to verify
- How much reported earnings growth reflects recurring operating performance versus the unusually large Q1 2015 restructuring, impairment, litigation and VAT charges; review the non-GAAP reconciliation and exclusions.
- Whether declining U.S. options and cash-equity market share, weaker IPO activity and lower fixed-income volumes persist, and how pricing, rebates and market capture affect segment contribution.
- Whether Chi-X Canada and Marketwired deliver expected results, and the financing, regulatory status and integration implications of ISE and Boardvantage.
- Debt and liquidity after acquisitions, dividends and repurchases, including variable-rate exposure and covenant headroom.
- Outcomes of the Finnish and Swedish tax disputes and litigation appeals, and the timing and realization of restructuring savings.