Nasdaq, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; comparison is with the corresponding 2016 periods. Amounts are in U.S. dollars. Nasdaq operates Market Services, Corporate Services, Information Services and Market Technology businesses.
Financial results and key metrics
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Total revenue | $1,000 million | $897 million | $1,971 million | $1,803 million |
| Revenue less transaction-based expenses | $602 million | $559 million | $1,185 million | $1,093 million |
| Operating income | $244 million | $174 million | $492 million | $393 million |
| Net income attributable to Nasdaq | $147 million | $70 million | $317 million | $202 million |
| Diluted EPS | $0.87 | $0.42 | $1.87 | $1.20 |
| Operating income / revenue less transaction-based expenses | 40.5% | 31.1% | 41.5% | 36.0% |
- Q2 revenue grew 11.5%; revenue less transaction-based expenses rose 7.7%; operating income increased 40.2% and net income 110.0%. First-half growth was 9.3%, 8.4%, 25.2% and 56.9%, respectively.
- Segment revenue less transaction-based expenses in Q2: Market Services $222 million (up 14.4%); Corporate Services $164 million (up 1.2%); Information Services $144 million (up 7.5%); Market Technology $72 million (up 4.3%).
- Q2 operating income benefited from lower merger and strategic initiative costs and no restructuring charges, compared with $33 million of restructuring charges in Q2 2016. Q2 interest expense rose to $36 million from $32 million.
- First-half operating cash flow was $514 million, versus $429 million. Investing activities used $104 million, versus $1.573 billion in 2016, when acquisitions used $1.460 billion. Financing activities used $464 million, compared with $1.152 billion provided in 2016.
- Cash and cash equivalents were $356 million at June 30, down from $403 million at year-end; restricted cash was $18 million. Working capital was negative $66 million, compared with positive $478 million at year-end. Clearing-member default funds and margin deposits are largely matched by corresponding liabilities and are not general-purpose liquidity.
- Total debt was $3.552 billion, including $494 million of commercial paper and $3.058 billion of long-term debt. Nasdaq reported $489 million remaining available under its $1 billion revolving facility, after liquidity support for commercial paper and a letter of credit. Separate clearing-related facilities of $182 million were unused. The company said it was compliant with debt covenants.
Material changes and operating drivers
- Market Services growth was led by equity derivatives, including the contribution of acquired ISE operations. Nasdaq’s total matched U.S. options market share increased to 41.4% in Q2 from 24.5% a year earlier; the comparison reflects ISE’s inclusion in 2017 and only one trading day of 2016 ISE data.
- Cash equity trading revenue declined year over year in the first half, primarily reflecting lower U.S. industry volumes; higher market share and European activity partly offset this. FICC revenue declined, mainly due to lower European commodities volumes.
- Corporate Solutions and Market Technology benefited in part from 2016 acquisitions. Information Services growth included higher proprietary data revenue and increased assets in ETPs tracking Nasdaq indexes.
- The 2016 acquisitions of ISE, Boardvantage, Marketwired and Nasdaq CXC affect comparability. Management also cited very low market volatility in Q2 2017 and a modest improvement in IPO activity.
Outlook, risks and unusual items
- No specific numerical earnings or revenue guidance is provided in the supplied filing text. Management expected continued modest annual growth in non-trading segments and said operations and available credit and commercial-paper capacity should fund near-term expenses, capital expenditure, debt repayments, repurchases and dividends.
- Nasdaq redeemed its 5.25% notes in May and repaid $300 million of its 2016 term loan in June, using cash and commercial-paper proceeds. Debt extinguishment and related costs were about $10 million pretax.
- The effective tax rate fell to 31.0% in Q2 from 52.1% and to 26.5% for the first half from 40.8%. Drivers included excess tax benefits on share-based awards, recognition of $4 million in prior-year tax benefits, and an unfavorable Finnish tax ruling in 2016.
- A Swedish tax dispute remains unresolved. Nasdaq has recorded $53 million in tax benefits since 2013; if the courts reject its position, the company said it would record $44 million of tax expense, or $0.26 per diluted share, before related U.S. tax benefits. Nasdaq continues to pay assessments and expects a favorable decision.
- Other risks include trading-volume and market-share changes, intense pricing competition, technology and cybersecurity reliability, regulatory developments, foreign-exchange and interest-rate exposure, and clearing-counterparty risk. A 100-basis-point rate increase was estimated to add about $6 million to interest expense on variable-rate borrowings and commercial paper. The filing describes securities-market class actions that were dismissed but remain on appeal; management could not estimate potential liability.
- The board raised the regular quarterly dividend from $0.32 to $0.38 per share in 2017 and adopted a policy intended to support regular, growing dividends, subject to future board approval. A further $0.38 dividend was declared in July, payable in September 2017.
Important facts for investors to verify
- How much reported growth reflects durable organic performance versus the acquired ISE and other businesses, and how transaction rebates and pass-through Section 31 fees affect underlying Market Services economics.
- Whether the improvement in operating income and EPS persists after lower prior-year restructuring and acquisition-related costs, and how elevated interest expense affects earnings.
- The outcome and potential cash or earnings effect of the Swedish tax dispute and anticipated tax-audit settlements.
- Debt refinancing and liquidity capacity, including commercial-paper maturities, variable-rate exposure, and the company’s ability to sustain repurchases and dividends.
- Trading volumes, volatility, competitive pricing, regulatory changes and clearing exposures; clearing-member collateral and default-fund balances should be distinguished from Nasdaq’s own available cash.