Nasdaq, Inc. (Nasdaq:NDAQ) today reported financial results for the third quarter of 2017. Third quarter 2017 net revenues were $607 million, up $22 million or 4% from $585 million in the prior year period.
The third quarter increase in net revenues included a $15 million, or 3%, increase due to organic growth and a $7 million favorable impact due to changes in foreign exchange rates.
“We achieved strong results in the third quarter due in large part to success in delivering on our 2017 execution priorities, including successfully integrating the 2016 acquisitions, improving our competitive positioning across the franchise and commercializing key technologies," said Adena Friedman, President and CEO, Nasdaq. "Additionally, we completed a strategic review and initiated a business pivot to move more of our resources behind our most sizable growth opportunities.
Initial actions supporting this new direction include organic investment in our Market Technology and Information Services businesses. Additionally, we completed the acquisitions of eVestment and Sybenetix, and made the decision to explore strategic alternatives for our Public Relations Solutions and Digital Media Services businesses within our Corporate Solutions business."
Mrs. Friedman continued, "We also remain very focused on advancing capital markets reform and to that effect, were pleased to see the U.S. Treasury supporting many of the proposals put forth in our May 2017 blueprint to revitalize the U.S. capital markets,4 which champions reforms and initiatives that we believe improve the public company experience and advance the U.S. economy. We look forward to continue advocating on behalf of our clients in this area.”
1 Represents revenues less transaction-based expenses.
2 Refer to our reconciliations of U.S. GAAP to non-GAAP net income, diluted earnings per share, operating income and operating expenses, included in the attached schedules.
3 In the first quarter of 2017, we adopted new accounting guidance which requires us to recognize the tax effect related to the vesting of share-based awards in income tax expense in the statements of income rather than in equity.
4 For more information, please see http://business.nasdaq.com/revitalize
GAAP operating expenses were $343 million in the third quarter of 2017, down $9 million from $352 million in the third quarter of 2016. The decrease primarily reflects lower merger and strategic initiatives expense.
Non-GAAP operating expenses were $317 million in the third quarter of 2017, unchanged compared to the third quarter of 2016. This reflects a $4 million organic expense decrease offset by a $4 million unfavorable impact from changes in foreign exchange rates.
“During the period, the company delivered growth in our subscription and recurring revenue businesses as well as margin expansion through achievement of synergies related to our 2016 acquisitions, combining to drive a 12% year-over-year increase in non-GAAP diluted EPS, excluding the impact of changes in share-based tax accounting," said Michael Ptasznik, Executive Vice President and Chief Financial Officer, Nasdaq.
Mr. Ptasznik continued, "Additionally, we have refined our framework for deploying capital and internal resources to support the growth objectives of our fastest growing businesses, while remaining committed to continuing our strong capital return track record. These actions are expected to bolster our ability to deliver on our double-digit total shareholder return target."
On a GAAP basis, net income attributable to Nasdaq for the third quarter of 2017 was $171 million, or $1.01 per diluted share, compared with net income of $131 million, or $0.77 per diluted share, in the third quarter of 2016.
On a non-GAAP basis, net income attributable to Nasdaq for the third quarter of 2017 was $181 million, or $1.06 per diluted share, compared with $154 million, or $0.91 per diluted share, in the third quarter of 2016.
At September 30, 2017, the company had cash and cash equivalents of $530 million and total debt of $3,743 million, resulting in net debt of $3,213 million. This compares to net debt of $3,200 million at December 31, 2016. As of September 30, 2017, there was $255 million remaining under the board authorized share repurchase program. Share repurchases totaled $18 million during the third quarter of 2017.
2017 EXPENSE GUIDANCE1 - The company is updating its 2017 non-GAAP operating expense guidance to $1,275 to $1,290 million, versus prior 2017 expense guidance of $1,260 to $1,290 million. The increase primarily relates to the closing of the acquisitions of eVestment and Sybenetix.
1 U.S. GAAP operating expense guidance is not provided due to the inherent difficulty in quantifying certain amounts due to a variety of factors including the unpredictability in the movement in foreign currency rates, as well as future charges or reversals outside of the normal course of business.
Market Services (36% of total net revenues) - Net revenues were $219 million in the third quarter of 2017, up $6 million when compared to the third quarter of 2016.
Equity Derivatives (10% of total net revenues) - Net equity derivative trading and clearing revenues were $62 million in the third quarter of 2017, down $5 million compared to the third quarter of 2016. The decrease primarily reflects lower net revenue capture, partially offset by higher U.S. industry trading volumes and higher U.S. market share.
Cash Equities (10% of total net revenues) - Net cash equity trading revenues were $62 million in the third quarter of 2017, up $3 million from the third quarter of 2016. This increase primarily reflects higher European cash equities revenues as well a favorable impact from changes in foreign exchange rates.
Fixed Income and Commodities Trading and Clearing (4% of total net revenues) - Net fixed income and commodities trading and clearing revenues were $20 million in the third quarter of 2017, up $2 million from the third quarter of 2016, primarily due to higher volumes and pricing changes at NFX and a favorable impact from changes in foreign exchange rates.
Trade Management Services (12% of total net revenues) - Trade management services revenues were $75 million in the third quarter of 2017, up $6 million compared to the third quarter of 2016, primarily due to an increase in customer demand for third-party connectivity, co-location and test facilities as well as a favorable impact from changes in foreign exchange rates.
Corporate Services (26% of total net revenues) - Revenues were $161 million in the third quarter of 2017, down $1 million compared to the third quarter of 2016.
Corporate Solutions (15% of total net revenues) - Corporate solutions revenues were $94 million in the third quarter of 2017, unchanged from the third quarter of 2016.
Listing Services (11% of total net revenues) - Listing services revenues were $67 million in the third quarter of 2017, down $1 million from the third quarter of 2016. The change reflects a decrease in U.S. listings revenues due to the run-off of listing of additional shares fees, which is the result of the implementation of our all-inclusive annual fee, partially offset by an increase in European listing services revenues.
Information Services (25% of total net revenues) - Revenues were $150 million in the third quarter of 2017, up $13 million from the third quarter of 2016.
Data Products (19% of total net revenues) - Data products revenues were $116 million in the third quarter of 2017, up $7 million compared to the third quarter of 2016, primarily due to growth in shared tape plan revenues as well as higher audit collections.
Index Licensing and Services (6% of total net revenues) - Index licensing and services revenues were $34 million in the third quarter of 2017, up $6 million from the third quarter of 2016 primarily due to higher assets under management in exchange traded products linked to Nasdaq indexes.
Market Technology (13% of total net revenues) - Revenues were $77 million in the third quarter of 2017, up $4 million from the third quarter of 2016. The increase primarily reflects higher change request revenues, organic revenue growth in software as a service revenues, and a favorable impact due to changes in foreign exchange rates, partially offset by lower software, licensing and support revenues. The decline in software, licensing and support revenues reflected in part the shift in BWise revenues from a perpetual license model to a subscription revenue model. New order intake totaled $66 million in the third quarter of 2017 while total order value was a record $805 million at September 30, 2017, up 9% from September 30, 2016.
Executing evolution of strategic direction. During the third quarter of 2017, the company completed a strategic review and initiated a focused pivot in its long-term strategy to better align the business with its most meaningful growth opportunities, as well as refine the way it allocates capital to support these objectives. Resulting from these actions, in October 2017, Nasdaq closed the acquisition of eVestment, a preeminent data, content and analytics platform to the global institutional investment industry with more than 2,000 clients, including 92% of the top asset managers, 76% of the top consulting firms and 70% of the top 20 pension funds. The acquisition is expected to deliver attractive shareholder returns over the medium term with a combination of recurring, predictable revenue, a strong track record of growth and attractive cash flow dynamics. Additionally, Nasdaq announced the exploration of strategic alternatives for the Public Relations Solutions and Digital Media Services businesses within our Corporate Solutions business.
Market Technology order intake totaled $66 million in the third quarter of 2017. Order intake of $66 million in the third quarter of 2017 included a new client contract with a Tier 1 bank to deploy Nasdaq matching technology to support global trading of FX. Additionally, Nasdaq announced a major machine learning technology deployment in collaboration between SMARTS and Nasdaq Nordic for market surveillance efforts, a blockchain project with SEB to improve efficiencies in Sweden’s fund market, and a new memorandum of understanding with Taiwan Stock Exchange. Nasdaq also closed its acquisition of Sybenetix in September 2017.
Nasdaq saw strong growth and record ETP assets under management tracking Nasdaq indexes. Overall assets under management (AUM) in ETPs benchmarked to Nasdaq's proprietary index families increased to a record $154 billion as of September 30, 2017, up 31% compared to September 30, 2016. The September 30, 2017 total AUM included $65 billion, or 42%, tracking smart beta indexes. Also as of September 30, 2017, the number of ETPs tracking Nasdaq-licensed indexes rose to 314 compared to 289 at September 30, 2016.
The Nasdaq Stock Market led U.S. exchanges for IPOs in the first nine months of 2017. In the U.S. market, The Nasdaq Stock Market welcomed 78 new listings during the third quarter of 2017, 34 of which were IPOs including Redfin and Roku, in addition to 3 NYSE switches most notably Workday, the HR and Financial Management ERP provider. The Nasdaq Stock Market won 77% of IPO listings during the third quarter of 2017 and 60% over the first nine months of 2017. Nasdaq's Nordic exchanges welcomed 11 new listings during the third quarter of 2017.
In addition to disclosing results determined in accordance with U.S. GAAP, Nasdaq also discloses certain non-GAAP results of operations, including, but not limited to, net income attributable to Nasdaq, diluted earnings per share, operating income, and operating expenses, that include certain adjustments or exclude certain charges and gains that are described in the reconciliation table of U.S. GAAP to non-GAAP information provided at the end of this release. Management uses this non-GAAP information internally, along with U.S. GAAP information, in evaluating our performance and in making financial and operational decisions. We believe our presentation of these measures provides investors with greater transparency and supplemental data relating to our financial condition and results of operations. In addition, we believe the presentation of these measures is useful to investors for period-to-period comparisons of results as the items described below do not reflect ongoing operating performance.
These measures are not in accordance with, or an alternative to, U.S. GAAP, and may be different from non-GAAP measures used by other companies. Investors should not rely on any single financial measure when evaluating our business. We recommend investors review the U.S. GAAP financial measures included in this earnings release. When viewed in conjunction with our U.S. GAAP results and the accompanying reconciliations, we believe these non-GAAP measures provide greater transparency and a more complete understanding of factors affecting our business than U.S. GAAP measures alone.
We understand that analysts and investors regularly rely on non-GAAP financial measures, such as non-GAAP net income attributable to Nasdaq, non-GAAP diluted earnings per share, non-GAAP operating income and non-GAAP operating expenses to assess operating performance. We use these measures because they highlight trends more clearly in our business that may not otherwise be apparent when relying solely on U.S. GAAP financial measures, since these measures eliminate from our results specific financial items, such as those described below, that have less bearing on our ongoing operating performance.
Amortization expense of acquired intangible assets: We amortize intangible assets acquired in connection with various acquisitions. Intangible asset amortization expense can vary from period to period due to episodic acquisitions completed, rather than from our ongoing business operations. As such, if intangible asset amortization is included in performance measures, it is more difficult to assess the day-to-day operating performance of the businesses, the relative operating performance of the businesses between periods and the earnings power of Nasdaq. Management does not consider intangible asset amortization expense for the purpose of evaluating the performance of our business or its managers or when making decisions to allocate resources. Therefore, we believe performance measures excluding intangible asset amortization expense provide investors with a more useful representation of our businesses’ ongoing activity in each period.
Merger and strategic initiatives expense: We have pursued various strategic initiatives and completed a number of acquisitions in recent years which have resulted in expenses which would not have otherwise been incurred. These expenses generally include integration costs, as well as legal, due diligence and other third party transaction costs. The frequency and the amount of such expenses vary significantly based on the size, timing and complexity of the transaction. Accordingly, we exclude these costs for purposes of calculating non-GAAP measures which provide a more meaningful analysis of Nasdaq’s ongoing operating performance or comparisons in Nasdaq’s performance between periods.
Other significant items: We have excluded certain other charges or gains that are the result of other non-comparable events to measure operating performance. For the three months ended September 30, 2017, other significant items include recognition of previously unrecognized tax benefits associated with positions taken in prior years. For the three months ended June 30, 2017, other significant items include loss on extinguishment of debt, wind down costs associated with an equity method investment which was previously written off, and recognition of previously unrecognized tax benefits associated with positions taken in prior years. We believe the exclusion of such amounts allows management and investors to better understand the financial results of Nasdaq.
Foreign exchange impact: In countries with currencies other than the U.S. dollar, revenues and expenses are translated using monthly average exchange rates. Certain discussions in this release isolate the impact of year-over-year foreign currency fluctuations to better measure the comparability of operating results between periods. Operating results excluding the impact of foreign currency fluctuations are calculated by translating the current period’s results by the prior period’s exchange rates.