NASDAQ, INC. quarterly report, Q3 FY2019

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Nasdaq, Inc. — Q3 2019 Form 10-Q

Reporting period: Three and nine months ended September 30, 2019; filed November 6, 2019. Nasdaq is a global capital-markets technology company operating Market Services, Corporate Services, Information Services and Market Technology. Unless noted, amounts are U.S. dollars in millions.

Financial performance

  • Revenue: Q3 total revenue was $1,096, up 13.7% year over year. Revenue less transaction-based expenses—the company’s net revenue measure—was $632, up 5.3%. For the first nine months, total revenue was $3,197, up 1.8%, and net revenue was $1,889, up 0.4%.
  • Segment net revenue: Q3 Market Services $226 (+1.8%); Corporate Services $124 (+2.5%); Information Services $198 (+10.6%); Market Technology $84 (+23.5%). Nine-month results were $687 (-3.1%), $368 (+1.1%), $585 (+10.8%) and $239 (+23.2%), respectively.
  • Profit and margins: Q3 operating income was $226, down 8.1%, and net income was $150, down 8.0%; diluted EPS was $0.90 versus $0.97. Nine-month operating income was $757, down 3.8%, while net income was $571, up 13.7%; diluted EPS was $3.42 versus $2.99. Operating income as a share of net revenue was approximately 35.8% in Q3 (41.0% in Q3 2018) and 40.1% for nine months (41.8% in 2018).
  • Cash flow: Nine-month operating cash flow was $624 versus $668 a year earlier. Investing used $131, including $193 for Cinnober and $88 for property and equipment, partly offset by $108 of divestiture proceeds. Financing used $729, including debt repayments, $228 in dividends and $200 in share repurchases. Cash and restricted cash ended at $333, down from $586 at year-end 2018.
  • Debt and liquidity: Debt obligations totaled $3,478, including $539 of commercial paper and $2,939 of long-term debt. Cash, restricted cash and financial investments totaled $534. The $1 billion revolving facility had no borrowings; $459 remained available after amounts supporting commercial paper and a letter of credit. Nasdaq reported compliance with debt covenants. Working capital was negative $193, with clearing-member funds materially affecting current assets and liabilities.
  • Shareholder returns: Dividends declared were $0.47 per share in Q3; nine-month dividends were $1.38 per share. Nasdaq repurchased $200 of stock during the first nine months. In October, the board authorized an additional $500 for repurchases.

Material changes and unusual items

  • Q3 net revenue growth was led by Market Technology and Information Services; Market Services net revenue grew only 1.8% despite higher reported segment revenue, as transaction-based expenses rose. Nine-month Market Services net revenue declined 3.1%.
  • Operating expenses rose 14.7% in Q3, including $30 of restructuring charges and a $20 provision for CAT-related notes receivable. These items, along with higher merger and strategic initiative costs, weighed on operating income.
  • Nine-month results included a $27 gain on the BWise sale and $71 of income from unconsolidated investees, primarily OCC, versus $13 in the prior-year period. Q3 OCC-related investee income was $15 versus $6.
  • Nasdaq acquired Cinnober for $219 in January 2019 and sold BWise in March. It issued $665 net proceeds from 2029 notes and used proceeds primarily to retire its 5.55% notes due 2020; it also repaid the 2019 floating-rate notes and its 2016 term loan. Interest expense declined 13.4% for the first nine months.
  • Foreign currency translation reduced nine-month comprehensive income by $303, net of tax. The company adopted lease accounting in 2019, recording $346 in operating lease assets and $387 in lease liabilities at September 30; the adoption did not affect income or cash flows.

Outlook, management commentary and risks

  • Management said operating cash flow and available revolving-credit and commercial-paper capacity should fund near-term operating costs, capital spending, debt repayments, repurchases and dividends. The filing provides no quantified earnings or revenue guidance.
  • Market Technology ARR was $255 in Q3, up 17% year over year, with $62 of new order intake. Management cautions ARR is not a forecast and may not be comparable across companies. Nasdaq reported 325 ETPs tracking its indexes, with $207 billion in assets under management.
  • A restructuring plan begun in September is expected to generate $65–$75 of pretax charges over two years, primarily asset impairments, accelerated depreciation and consulting costs. Q3 included $30, mainly asset impairments.
  • Risks include trading-volume, market-share and customer changes; technology reliability and cybersecurity; regulatory and market-data fee challenges; foreign-exchange and interest-rate exposure; and clearing-counterparty risk. Nasdaq estimated a $1 annual revenue reduction from an SEC market-data fee decision and appealed it. The Providence high-frequency-trading case remains pending; the company said it could not estimate potential liability.
  • The 2018 Nasdaq Clearing commodities-member default initially caused a $133 loss, allocated through the clearinghouse waterfall. The filing says substantially all of a $23 capital-relief program had been disbursed by September 30; recovery of assets from the defaulted member remained in progress. Management did not expect the related regulatory audit matter to materially affect the financial statements, but could not predict its outcome.
  • In October 2019, Nasdaq acquired Center for Board Excellence and completed the sale of Nordic Fund Market. The Swedish court of appeal upheld disallowance of certain interest deductions in November; Nasdaq stated the decision did not affect its financial statements because the benefits had not been recognized and assessments had been paid.

Most important facts for investors to verify

  • Whether growth in Information Services and Market Technology can offset softer Market Services net revenue and continued operating-cost pressure.
  • The nature, recoverability and remaining exposure of the $20 CAT-related notes-receivable provision, and the total cost and execution of the restructuring plan.
  • Commercial-paper balances, liquidity availability and debt maturities, alongside planned dividends and expanded repurchase authorization.
  • Developments in market-data fee appeals, the Providence litigation, tax examinations and the Nasdaq Clearing default-related recovery and regulatory review.
  • How recurring Market Technology ARR translates into recognized revenue, and the contribution of acquisitions and OCC income to reported results.