Nasdaq, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unless otherwise noted, amounts are in U.S. dollars; financial statement amounts are in millions. Nasdaq operates Market Services, Corporate Services, Information Services and Market Technology businesses.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $969 | $929 | $2,941 | $2,732 |
| Revenue less transaction-based expenses | $607 | $585 | $1,792 | $1,678 |
| Operating income | $264 | $233 | $756 | $626 |
| Net income attributable to Nasdaq | $171 | $131 | $488 | $333 |
| Diluted EPS | $1.01 | $0.77 | $2.88 | $1.97 |
- Year-over-year, revenue less transaction-based expenses grew 3.8% in Q3 and 6.8% for the first nine months; operating income increased 13.3% and 20.8%, respectively. Net income increased 30.5% in Q3 and 46.5% year to date.
- Operating margin on revenue less transaction-based expenses was approximately 43.5% in Q3 2017 versus 39.8% in Q3 2016, and 42.2% versus 37.3% for the nine-month periods.
- Q3 segment revenue: Market Services $581; Corporate Services $161; Information Services $150; Market Technology $77. For the first nine months, respective revenue was $1,808, $486, $432 and $215.
- Management-reported non-GAAP diluted EPS was $1.06 for Q3 and $3.18 for the first nine months, compared with $0.91 and $2.71 in 2016. These measures exclude specified items and are not U.S. GAAP results.
Cash flow, debt and liquidity
- Cash from operating activities was $609 for the first nine months, up from $492 in 2016. Investing activities used $73, compared with $1,591 used in 2016, which included $1,460 of acquisition spending. Financing activities used $418, versus $1,017 provided in 2016.
- Cash and cash equivalents were $530 at September 30, 2017; restricted cash was $21. Working capital was $723, up from $478 at December 31, 2016. Clearing-member default funds and margin deposits are recorded as matching current assets and liabilities and should not be treated as freely available operating liquidity.
- Total debt obligations were $3,743, including $154 of commercial paper and $3,589 of long-term debt. The company had $845 remaining available under its $1 billion revolving credit facility; separate clearing-related facilities provided $188 of unused liquidity. Nasdaq reported compliance with debt covenants.
- Interest expense was $107 for the first nine months, versus $98 in 2016. A 100-basis-point increase in rates on variable-rate borrowings outstanding at quarter-end was estimated to increase interest expense by approximately $8 annually.
- Cash dividends declared were $0.38 per share in Q3, up from $0.32 a year earlier. The company repurchased $175 of shares in the first nine months, with $255 of authorization remaining at September 30.
Changes, outlook and notable items
- Growth reflected several drivers: Information Services revenue increased 9.5% in Q3, supported by data products and index-linked ETP assets; Market Technology revenue rose 5.5%; and Market Services revenue rose 4.3%. Market Services growth included higher options volumes and share, while cash-equity and fixed-income trading conditions were mixed. Corporate Services revenue was nearly flat in Q3.
- Operating expenses declined 2.6% in Q3 and 1.5% year to date. Year-to-date comparisons benefited from the absence of 2016 restructuring and acquisition-related costs; expense increases included technology, occupancy and acquired-intangible amortization. The 2017 nine-month results included a $10 debt-extinguishment charge.
- Management described expected continued modest annual growth in non-trading segments, but noted economic and political uncertainty, low market volatility, subdued IPO activity and competitive pressure. The filing does not provide a clear quantitative full-year 2017 earnings or revenue guidance figure.
- In October 2017, after the reporting date, Nasdaq acquired eVestment for a stated purchase price of $705; the filing reports aggregate cash consideration, net of cash acquired, of $744, including $39 of estimated tax benefits. The transaction was funded with cash and commercial paper. Nasdaq had issued $498 of floating-rate notes in connection with the planned acquisition. Sybenetix was acquired in September for an immaterial amount.
- Nasdaq began evaluating strategic alternatives for its public relations solutions and digital media services businesses, classifying $300 of assets and $49 of liabilities as held for sale. No impairment was recorded; the businesses were not classified as discontinued operations.
- Tax matters include a Swedish dispute over interest deductions: Nasdaq has recorded $54 of tax benefits since 2013 and estimates a potential $47 tax expense, or $0.28 per diluted share, if the courts rule against it. Separately, it recognized $8 of previously unrecognized tax benefits in Q3. The filing says tax examinations are ongoing.
- The filing cites risks from trading volumes and market share, competition and pricing, technology performance and cybersecurity, regulation, foreign exchange and interest rates, acquisition integration, credit exposures and the ability to generate cash and manage debt. It reports the Rabin case dismissal was affirmed on October 25, 2017; the City of Providence matter remained on appeal. Management stated it did not believe other disclosed litigation or regulatory matters would materially affect results, while noting outcomes can be uncertain.
Important facts for investors to verify
- Whether trading volumes, market share and transaction pricing sustain Market Services growth, particularly given weak IPO activity and low volatility.
- The funding, integration costs and post-acquisition leverage effects of eVestment, including the differing $705 purchase-price and $744 aggregate cash-consideration figures stated in the filing.
- Progress and potential proceeds from the proposed sale of the public relations and digital media businesses, and whether their carrying values remain supportable.
- Outcomes of the Swedish tax dispute and other tax audits, along with the potential effects of tax-law changes.
- Debt and liquidity trends, including commercial-paper refinancing, variable-rate exposure and the distinction between corporate liquidity and clearing-related funds.