Business context and reporting period
Nasdaq reported results for the three and six months ended June 30, 2015, compared with the same periods in 2014. The company operated trading and clearing, listing, information, and technology businesses. It announced a change of corporate name to Nasdaq, Inc., expected to take effect in the third quarter of 2015.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $807 million | $865 million | $1,666 million | $1,762 million |
| Revenue less transaction-based expenses | $518 million | $523 million | $1,025 million | $1,052 million |
| Operating income | $217 million | $191 million | $244 million | $375 million |
| Net income attributable to Nasdaq | $133 million | $101 million | $142 million | $205 million |
| Diluted EPS | $0.77 | $0.59 | $0.82 | $1.18 |
| Operating cash flow | Not reported separately for Q2 | $406 million | $383 million |
- Q2 revenue declined 7% year over year, while revenue net of transaction-based expenses declined 1%. The latter included a $29 million unfavorable foreign-exchange impact, partly offset by $24 million of operational growth.
- Q2 operating expenses fell 9% to $301 million, contributing to higher operating income and net income. For the first half, expenses rose 15% to $781 million, chiefly because of $152 million in restructuring charges.
- Reported six-month net income included $13 million of OCC-related income, including $13 million recognized for Nasdaq’s share of OCC’s 2014 earnings. Non-GAAP six-month net income was $282 million and diluted EPS was $1.63; these company-defined measures exclude specified items, including restructuring, legal costs, and intangible amortization.
- Cash and cash equivalents were $324 million at June 30, down from $427 million at year-end 2014. Working capital was $300 million, compared with $420 million at year-end. Operating cash flow was $406 million; investing activities used $418 million and financing activities used $88 million. The first-half cash decrease was $103 million.
- Debt obligations were $2.281 billion at carrying value. The company had $587 million available under its $750 million revolving facility; $163 million of principal was outstanding at June 30. Nasdaq reported compliance with debt covenants. It also had $206 million of available liquidity in separate Nordic clearing facilities, none utilized.
- Total assets were $12.104 billion and total liabilities were $6.388 billion. The filing does not provide a consolidated gross-margin figure; revenue less transaction-based expenses was $518 million in Q2.
Material changes and management commentary
- Market Services revenue fell 11% in Q2 and 9% in the first half. Weakness included U.S. options market share and trading volumes, fixed-income and commodities activity, and foreign exchange; cash-equity revenue net of transaction costs increased.
- Listing Services revenue rose 10% in Q2 and 11% in the first half, supported by U.S. listing fees and a larger listed-company base. Information Services revenue increased 4% in Q2, reflecting index licensing growth and the Dorsey Wright acquisition. Technology Solutions revenue fell 6% in Q2, with declines in Corporate Solutions and Market Technology.
- Management described the outlook for the global recovery as cautiously optimistic, while noting low volatility through much of Q2, ongoing competition and pricing pressure, regulatory change, and the possibility of renewed market instability. U.S. cash-equity and options volumes weakened year over year; Nordic and Baltic trading activity and IPO activity improved.
- The company estimated restructuring charges of $182 million pre-tax, including a $119 million non-cash impairment of the OMX trade name. It expected approximately $19 million of savings in 2015 and $23 million in annualized savings; the remaining charges were expected through June 2016. The initiative included workforce reductions of 220 positions.
- Nasdaq acquired Dorsey, Wright & Associates for $226 million in January. In July 2015, it launched Nasdaq Futures (NFX), an energy derivatives market. The filing provides no quantified full-year earnings or revenue guidance.
Risks, contingencies, and unusual items
- Facebook IPO-related matters resulted in a $31 million reserve for settlements; the principal class settlement remained subject to final court approval. Nasdaq expected some or all payments to be reimbursed by insurance. Other litigation included high-frequency-trading claims and an appeal of dismissed market-data claims; Nasdaq said it could not estimate potential liability in certain cases.
- Tax positions in Finland and Sweden remain contested. If the Finnish court rules against Nasdaq, the company said it would record $33 million of tax expense, or $0.19 per diluted share. Nasdaq also reported $38 million of tax benefits since 2013 related to the Swedish interest-deduction matter and expected recurring quarterly benefits of $3 million to $4 million while the matter continued. A Swedish VAT benefit of $12 million was reversed in Q1 2015 following an unfavorable court decision; Nasdaq planned to appeal.
- The OCC capital plan and related $30 million Nasdaq contribution faced a suspension pending reconsideration by the SEC; the contributions could be returned if the plan’s approval is reversed or the suspension is not lifted in a timely manner.
- Foreign exchange is a material exposure: management estimated that a 10% adverse currency movement would reduce first-half operating income by $24 million, before specified non-GAAP adjustments. Other stated risks include trading-volume and market-share losses, technology reliability and security, regulation, acquisition integration, credit exposure, and the ability to generate cash and manage debt.
Important facts for investors to verify
- Whether underlying revenue and market-share trends improve, particularly in U.S. options, cash equities, fixed income, and Technology Solutions.
- Actual restructuring costs, timing of the projected savings, and whether savings offset the one-time charges.
- Final outcome and insurance recovery for Facebook-related settlements, and developments in other litigation.
- Rulings and cash consequences in the Finnish and Swedish tax matters, including the VAT appeal.
- OCC capital-plan status and any additional capital requirements; also monitor cash generation, debt, revolver usage, and shareholder returns.