Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of operations of Nasdaq should be read in conjunction with our condensed consolidated financial statements and related notes included in this Form 10-Q.
Impact of COVID-19 on Our Business
We continue to closely monitor developments related to COVID-19 and to assess its impact on our business. COVID-19 has caused significant economic and financial turmoil both in the U.S. and around the world. We have implemented risk management and contingency plans and have taken preventive measures and other precautions to maintain normal business operations. As COVID-19 spread across the world, we moved quickly to transition our global workforce to a remote operating environment, through a combination of work-from-home and split teams for critical on-site employees.
As of June 30, 2020, the vast majority of our global team remain working from home. For the limited staff around the world who are performing critical on-site functions in our offices, we have deployed extra precautions to protect their safety. We are working to reopen certain offices in a deliberate manner. The majority of our re-opened offices are located in countries or, in certain cases, cities with favorable health data. We will monitor conditions, guidance from health officials, and local regulations in these locations and, if circumstances change, we may close these offices again if necessary in order to safeguard our employees and stakeholders. We have reiterated to our global workforce that, through at least the end of 2020, an employee's return to the office from remote work is entirely voluntary.
During the second quarter of 2020, our operations have continued with minimal disruption. As of June 30, 2020, COVID-19 did not have a significant negative impact on our business operations, employee availability, financial condition, liquidity or cash flows.
As further discussed in Note 8, “Debt Obligations,” to the condensed consolidated financial statements and Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources,” given the market uncertainties posed by COVID-19 and related economic impacts, in March 2020, we took actions to strengthen our liquidity and cash position and address refinancing risks and borrowed $799 million under the revolving credit commitment of the 2017 Credit Facility. In April 2020, we further enhanced the strength of our balance sheet and issued the 2050 Notes. We used the net proceeds from this offering to repay a portion of amounts previously borrowed under the 2017 Credit Facility, and in June 2020 the remaining outstanding amount under the 2017 Credit Facility was repaid using cash on hand. Additionally, during June 2020, we repaid all of our outstanding commercial paper borrowings.
Although we have not experienced any significant negative impacts to our operations as a result of COVID-19, due to the continuing effect of the pandemic, particularly in the United States, it is possible that the outbreak may impact our results of operations for the remainder of the year and possibly beyond as an economic downturn could adversely impact the demand for our services. The current, and potential, impact to each of our segments is discussed below.
Market Services
We believe that it is difficult to predict trading volumes from quarter to quarter. Trading volumes, particularly in equity and equity-linked derivatives, were unusually high during the second quarter of 2020. We believe that this increased volume was due to the implications of the pandemic and significant sector rotations in the market, such as increased demand for technology and healthcare. We continue to believe that the combination of continued global economic uncertainty, and the upcoming U.S. election, may lead to elevated volumes for our markets in the months ahead. However, there is no assurance that volumes will continue at this level during the remainder of 2020.
Corporate Services
In Listing Services, we experienced increased demand for IPOs in the second quarter of 2020 compared with the first quarter of 2020. We remain positive regarding our listed issuer base due to the increase in IPOs and the pipeline for new offerings, but we cannot predict investor demand for new IPOs for the remainder of the year, and we believe investor demand may be reduced in the period prior to the U.S. election due to macroeconomic uncertainties.
In Corporate Solutions, we have seen increased demand for our investor relations advisory services, which assist our corporate clients in analyzing their investor bases and understanding buy-side priorities, as well as rising demand for our ESG solutions. However, we have experienced reduced demand from certain customers that have been significantly adversely affected by COVID-19, including our customers in the travel, retail, and energy sectors. We have observed that sales cycles with customer prospects are longer as a result of operating in a virtual environment. We continue to work with our affected customers regarding their payment obligations to ensure the long-term success of these customer relationships.
Information Services
In our Information Services segment, we continue to experience varied implications of the current environment on each of our businesses.
Our Market Data business has demonstrated resilience and a stable performance, but is not completely immune when economic downturns are more protracted.
Our Index business continues to demonstrate strong resilience and growth. This business has benefited from inflows into Nasdaq-licensed ETPs, continued growth in the volumes of Nasdaq-listed futures, and from the market rebound. In particular, we have observed strong net inflows to our flagship index, the Nasdaq 100. While this business is sensitive to reversals in exogenous market beta and futures volume trends, we believe that the second quarter's positive results may result in continued positive results for the remainder of the year.
In our Investment Data & Analytics business, while growth in eVestment has been impacted by reduced customer demand, the addition of the Solovis offerings provides us with additional opportunities to expand our solutions and usage for our eVestment customers.
Market Technology
In our Market Technology segment, our large, diverse, and well-established customer base across market infrastructure operators and banks and brokers, with long-term contracts, has helped support this business during the current environment.
During the second quarter of 2020, our technical support teams have continued to adapt to a remote work environment to support our customers. We have observed increased interest from customers in our next-generation technology, particularly the SaaS capabilities we have developed for our market infrastructure and surveillance products, which assist our customers with the challenges of scalability and flexibility concerns arising from the effects of COVID-19.
However, implementation projects and new order intake levels have been affected and we continue to face short-term, logistical growth challenges for this business that may moderate the revenue growth of the Market Technology business in 2020.
Our Community Initiatives
The second quarter was marked not only by the widespread impact of the global COVID-19 health crisis, but also by the increased focus on inequality and social injustice in communities throughout the United States. We are committed to creating lasting, positive change within our company and the communities we serve. In June 2020, we announced actions to strengthen our continued commitment to diversity and inclusion. We pledged $3 million in cash donations to organizations serving underserved, minority communities in fighting the impact of the health crisis, and we increased our resources devoted to our internal programs, which include programs focused on diversity-oriented professional development, the employee experience, and talent acquisition, as we continue to foster a diverse and inclusive corporate culture. Additionally, we contributed $10 million to support the Nasdaq Foundation and plan to annually fund the Nasdaq Foundation with approximately one quarter of one percent of our operating profits beginning in 2021.
Nasdaq’s Operating Results
Key Drivers
The following table includes key drivers for our Market Services, Corporate Services, Information Services and Market Technology segments. In evaluating the performance of our business, our senior management closely evaluates these key drivers.
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| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | | | |
| | 2020 | | 2019 | | 2020 | | 2019 | | |
Market Services | | | | | | | | | | |
Equity Derivative Trading and Clearing | | | | | | | | | | |
U.S. equity options | | | | | | | | | | |
Total industry average daily volume (in millions) | | 26.6 | | | 17.3 | | | 26.0 | | | 17.3 | | | |
Nasdaq PHLX matched market share | | 11.4 | % | | 16.0 | % | | 12.1 | % | | 16.0 | % | | |
The Nasdaq Options Market matched market share | | 10.4 | % | | 8.9 | % | | 10.5 | % | | 9.1 | % | | |
Nasdaq BX Options matched market share | | 0.2 | % | | 0.2 | % | | 0.2 | % | | 0.3 | % | | |
Nasdaq ISE Options matched market share | | 8.3 | % | | 9.3 | % | | 8.3 | % | | 8.9 | % | | |
Nasdaq GEMX Options matched market share | | 5.6 | % | | 3.9 | % | | 4.7 | % | | 4.0 | % | | |
Nasdaq MRX Options matched market share | | 0.5 | % | | 0.2 | % | | 0.5 | % | | 0.2 | % | | |
Total matched market share executed on Nasdaq’s exchanges | | 36.4 | % | | 38.5 | % | | 36.3 | % | | 38.5 | % | | |
Nasdaq Nordic and Nasdaq Baltic options and futures | | | | | | | | | | |
Total average daily volume of options and futures contracts(1) | | 292,551 | | 384,692 | | 377,201 | | 368,561 | | |
Cash Equity Trading | | | | | | | | | | |
Total U.S.-listed securities | | | | | | | | | | |
Total industry average daily share volume (in billions) | | 12.35 | | | 6.93 | | | 11.67 | | | 7.22 | | | |
Matched share volume (in billions) | | 142.7 | | | 87.7 | | | 269.9 | | | 178.2 | | | |
The Nasdaq Stock Market matched market share | | 16.8 | % | | 17.5 | % | | 16.8 | % | | 17.2 | % | | |
Nasdaq BX matched market share | | 0.9 | % | | 1.8 | % | | 1.1 | % | | 2.0 | % | | |
Nasdaq PSX matched market share | | 0.6 | % | | 0.8 | % | | 0.6 | % | | 0.7 | % | | |
Total matched market share executed on Nasdaq’s exchanges | | 18.3 | % | | 20.1 | % | | 18.5 | % | | 19.9 | % | | |
Market share reported to the FINRA/Nasdaq Trade Reporting Facility | | 31.5 | % | | 29.9 | % | | 30.9 | % | | 29.8 | % | | |
Total market share(2) | | 49.8 | % | | 50.0 | % | | 49.4 | % | | 49.7 | % | | |
Nasdaq Nordic and Nasdaq Baltic securities | | | | | | | | | | |
Average daily number of equity trades executed on Nasdaq’s exchanges | | 937,245 | | 581,987 | | 980,637 | | 577,963 | | |
Total average daily value of shares traded (in billions) | | $ | 5.6 | | | $ | 4.6 | | | $ | 6.0 | | | $ | 4.8 | | | |
Total market share executed on Nasdaq’s exchanges | | 76.4 | % | | 70.3 | % | | 75.5 | % | | 68.6 | % | | |
FICC | | | | | | | | | | |
Fixed Income | | | | | | | | | | |
U.S. fixed income volume ($ billions traded) | | $ | 1,246 | | | $ | 2,921 | | | $ | 3,313 | | | $ | 5,636 | | | |
Total average daily volume of Nasdaq Nordic and Nasdaq Baltic fixed income contracts | | 116,057 | | 126,323 | | 115,586 | | 121,128 | | |
Commodities | | | | | | | | | | |
Power contracts cleared (TWh)(3) | | 184 | | | 170 | | | 475 | | | 420 | | | |
Corporate Services | | | | | | | | | | |
IPOs | | | | | | | | | | |
The Nasdaq Stock Market | | 42 | | | 60 | | | 69 | | | 97 | | | |
Exchanges that comprise Nasdaq Nordic and Nasdaq Baltic | | 9 | | | 14 | | | 16 | | | 18 | | | |
Total new listings | | | | | | | | | | |
The Nasdaq Stock Market(4) | | 55 | | | 81 | | | 111 | | | 140 | | | |
Exchanges that comprise Nasdaq Nordic and Nasdaq Baltic(5) | | 13 | | | 19 | | | 22 | | | 28 | | | |
Number of listed companies | | | | | | | | | | |
The Nasdaq Stock Market(6) | | 3,156 | | | 3,080 | | | 3,156 | | | 3,080 | | | |
Exchanges that comprise Nasdaq Nordic and Nasdaq Baltic(7) | | 1,042 | | | 1,029 | | | 1,042 | | | 1,029 | | | |
Information Services | | | | | | | | | | |
Number of licensed ETPs | | 323 | | | 341 | | | 323 | | | 341 | | | |
ETP AUM tracking Nasdaq indexes (in billions) | | $ | 272 | | | $ | 203 | | | $ | 272 | | | $ | 203 | | | |
Market Technology | | | | | | | | | | |
Order intake (in millions)(8) | | $ | 38 | | | $ | 46 | | | $ | 116 | | | $ | 100 | | | |
Annualized recurring revenue, or ARR (in millions)(9) | | $ | 268 | | | $ | 247 | | | N/M | | N/M | | |
____________
(1) Includes Finnish option contracts traded on Eurex for which Nasdaq and Eurex have a revenue sharing arrangement.
(2) Includes transactions executed on The Nasdaq Stock Market’s, Nasdaq BX’s and Nasdaq PSX’s systems plus trades reported through the FINRA/Nasdaq Trade Reporting Facility.
(3) Transactions executed on Nasdaq Commodities or OTC and reported for clearing to Nasdaq Commodities measured by Terawatt hours (TWh).
(4) New listings include IPOs, including issuers that switched from other listing venues, closed-end funds and separately listed ETPs.
(5) New listings include IPOs and represent companies listed on the Nasdaq Nordic and Nasdaq Baltic exchanges and companies on the alternative markets of Nasdaq First North.
(6) Number of total listings on The Nasdaq Stock Market at period end, including 410 ETPs as of June 30, 2020 and 374 as of June 30, 2019.
(7) Represents companies listed on the Nasdaq Nordic and Nasdaq Baltic exchanges and companies on the alternative markets of Nasdaq First North.
(8) Total contract value of orders signed during the period.
(9) ARR for a given period is the annualized revenue of active Market Technology support and SaaS subscription contracts. ARR is currently one of our key performance metrics to assess the health and trajectory of our business. ARR does not have any standardized definition and is therefore unlikely to be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of revenue and deferred revenue and is not intended to be combined with or to replace either of those items. ARR is not a forecast and the active contracts at the end of a reporting period used in calculating ARR may or may not be extended or renewed by our customers.
N/M Not meaningful.
* * * * * *
Financial Summary
The following table summarizes our financial performance for the three and six months ended June 30, 2020 as compared to the same periods in 2019. For a detailed discussion of our results of operations, see “Segment Operating Results” below.
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| | Three Months Ended June 30, | | | | Percentage Change | | Six Months Ended June 30, | | | | | | Percentage Change | | |
| | 2020 | | 2019 | | | | 2020 | | 2019 | | | | | | |
| | (in millions, except per share amounts) | | | | | | (in millions, except per share amounts) | | | | | | | | |
Revenues less transaction-based expenses | | $ | 699 | | | $ | 623 | | | 12.2 | % | | $ | 1,400 | | | $ | 1,257 | | | | | 11.4 | % | | |
Operating expenses | | 384 | | | 367 | | | 4.6 | % | | 810 | | | 726 | | | | | 11.6 | % | | |
Operating income | | 315 | | | 256 | | | 23.0 | % | | 590 | | | 531 | | | | | 11.1 | % | | |
Interest expense | | (26) | | | (31) | | | (16.1) | % | | (52) | | | (68) | | | | | (23.5) | % | | |
| | | | | | | | | | | | | | | | |
Net gain on divestiture of business | | — | | | — | | | — | % | | — | | | 27 | | | | | (100.0) | % | | |
Net income from unconsolidated investees | | 26 | | | 10 | | | 160.0 | % | | 43 | | | 55 | | | | | (21.8) | % | | |
Income before income taxes | | 316 | | | 239 | | | 32.2 | % | | 589 | | | 552 | | | | | 6.7 | % | | |
Income tax provision | | 75 | | | 65 | | | 15.4 | % | | 145 | | | 131 | | | | | 10.7 | % | | |
Net income attributable to Nasdaq | | $ | 241 | | | $ | 174 | | | 38.5 | % | | $ | 444 | | | $ | 421 | | | | | 5.5 | % | | |
Diluted earnings per share | | $ | 1.45 | | | $ | 1.04 | | | 39.4 | % | | $ | 2.67 | | | $ | 2.52 | | | | | 6.0 | % | | |
Cash dividends declared per common share | | $ | 0.49 | | | $ | 0.47 | | | 4.3 | % | | $ | 0.96 | | | $ | 0.91 | | | | | 5.5 | % | | |
In countries with currencies other than the U.S. dollar, revenues and expenses are translated using monthly average exchange rates. Impacts on our revenues less transaction-based expenses and operating income associated with fluctuations in foreign currency are discussed in more detail under “Item 3. Quantitative and Qualitative Disclosures about Market Risk.”
Segment Operating Results
The following table shows our revenues by segment, transaction-based expenses for our Market Services segment and total revenues less transaction-based expenses:
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| | Three Months Ended June 30, | | | | Percentage Change | | Six Months Ended June 30, | | | | | | Percentage Change | | |
| | 2020 | | 2019 | | | | 2020 | | 2019 | | | | | | |
| | (in millions) | | | | | | (in millions) | | | | | | | | |
Market Services | | $ | 975 | | | $ | 665 | | | 46.6 | % | | $ | 1,908 | | | $ | 1,304 | | | | | 46.3 | % | | |
Transaction-based expenses | | (699) | | | (438) | | | 59.6 | % | | (1,351) | | | (843) | | | | | 60.3 | % | | |
Market Services revenues less transaction-based expenses | | 276 | | | 227 | | | 21.6 | % | | 557 | | | 461 | | | | | 20.8 | % | | |
Corporate Services | | 126 | | | 123 | | | 2.4 | % | | 254 | | | 243 | | | | | 4.5 | % | | |
Information Services | | 213 | | | 194 | | | 9.8 | % | | 424 | | | 387 | | | | | 9.6 | % | | |
Market Technology | | 84 | | | 79 | | | 6.3 | % | | 165 | | | 156 | | | | | 5.8 | % | | |
Other revenues(1) | | — | | | — | | | — | % | | — | | | 10 | | | | | (100.0) | % | | |
Total revenues less transaction-based expenses | | $ | 699 | | | $ | 623 | | | 12.2 | % | | $ | 1,400 | | | $ | 1,257 | | | | | 11.4 | % | | |
____________
(1) Includes the revenues from the BWise enterprise governance, risk and compliance software platform which was sold in March 2019. Prior to the sale date, these revenues were included in our Corporate Solutions business within our Corporate Services segment. See “2019 Divestiture,” of Note 4, “Acquisitions and Divestiture,” to the condensed consolidated financial statements for further discussion.
The following charts show our Market Services, Corporate Services, Information Services, and Market Technology segments as a percentage of our total revenues less transaction-based expenses of $699 million for the three months ended June 30, 2020, $623 million for the three months ended June 30, 2019, $1,400 million for the six months ended June 30, 2020, and $1,257 million for the six months ended June 30, 2019:
MARKET SERVICES
The following table shows total revenues, transaction-based expenses, and total revenues less transaction-based expenses from our Market Services segment:
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| | Three Months Ended June 30, | | | | Percentage Change | | Six Months Ended June 30, | | | | | | Percentage Change | | |
| | 2020 | | 2019 | | | | 2020 | | 2019 | | | | | | |
| | (in millions) | | | | | | (in millions) | | | | | | | | |
Market Services Revenues: | | | | | | | | | | | | | | | | |
Equity Derivative Trading and Clearing Revenues(1) | | $ | 297 | | | $ | 203 | | | 46.3 | % | | $ | 583 | | | $ | 396 | | | | | 47.2 | % | | |
Transaction-based expenses: | | | | | | | | | | | | | | | | |
Transaction rebates | | (199) | | | (119) | | | 67.2 | % | | (371) | | | (231) | | | | | 60.6 | % | | |
Brokerage, clearance and exchange fees(1) | | (15) | | | (12) | | | 25.0 | % | | (35) | | | (21) | | | | | 66.7 | % | | |
Equity derivative trading and clearing revenues less transaction-based expenses | | 83 | | | 72 | | | 15.3 | % | | 177 | | | 144 | | | | | 22.9 | % | | |
| | | | | | | | | | | | | | | | |
Cash Equity Trading Revenues(2) | | 590 | | | 372 | | | 58.6 | % | | 1,147 | | | 724 | | | | | 58.4 | % | | |
Transaction-based expenses: | | | | | | | | | | | | | | | | |
Transaction rebates | | (331) | | | (211) | | | 56.9 | % | | (638) | | | (429) | | | | | 48.7 | % | | |
Brokerage, clearance and exchange fees(2) | | (153) | | | (95) | | | 61.1 | % | | (306) | | | (160) | | | | | 91.3 | % | | |
Cash equity trading revenues less transaction-based expenses | | 106 | | | 66 | | | 60.6 | % | | 203 | | | 135 | | | | | 50.4 | % | | |
| | | | | | | | | | | | | | | | |
FICC Revenues | | 15 | | | 17 | | | (11.8) | % | | 33 | | | 38 | | | | | (13.2) | % | | |
Transaction-based expenses: | | | | | | | | | | | | | | | | |
Transaction rebates | | — | | | (1) | | | (100.0) | % | | — | | | (1) | | | | | (100.0) | % | | |
Brokerage, clearance and exchange fees | | (1) | | | — | | | N/M | | (1) | | | (1) | | | | | — | % | | |
FICC revenues less transaction-based expenses | | 14 | | | 16 | | | (12.5) | % | | 32 | | | 36 | | | | | (11.1) | % | | |
| | | | | | | | | | | | | | | | |
Trade Management Services Revenues | | 73 | | | 73 | | | — | % | | 145 | | | 146 | | | | | (0.7) | % | | |
Total Market Services revenues less transaction-based expenses | | $ | 276 | | | $ | 227 | | | 21.6 | % | | $ | 557 | | | $ | 461 | | | | | 20.8 | % | | |
____________
(1) Includes Section 31 fees of $14 million in the second quarter of 2020, $31 million in the first six months of 2020, $11 million in the second quarter of 2019, and $19 million in the first six months of 2019. Section 31 fees are recorded as equity derivative trading and clearing revenues with a corresponding amount recorded in transaction-based expenses.
(2) Includes Section 31 fees of $145 million in the second quarter of 2020, $290 million in the first six months of 2020, $90 million in the second quarter of 2019, and $152 million in in the first six months of 2019. Section 31 fees are recorded as cash equity trading revenues with a corresponding amount recorded in transaction-based expenses.
N/M Not meaningful.
Equity Derivative Trading and Clearing Revenues
Equity derivative trading and clearing revenues and equity derivative trading and clearing revenues less transaction-based expenses increased in the second quarter and first six months of 2020 compared with the same periods in 2019. The increase in equity derivative trading and clearing revenues was primarily due to higher U.S. industry trading volumes, a higher U.S. gross capture rate, and higher Section 31 pass-through fee revenue, partially offset by lower overall
U.S. matched market share executed on Nasdaq's exchanges. The increase in equity derivative trading and clearing revenues less transaction-based expenses was primarily due to higher U.S. industry trading volumes, partially offset by a lower U.S. net capture rate and lower overall U.S. matched market share executed on Nasdaq's exchanges.
Section 31 fees are recorded as equity derivative trading and clearing revenues with a corresponding amount recorded as transaction-based expenses. In the U.S., we are assessed these
fees from the SEC and pass them through to our customers in the form of incremental fees. Pass-through fees can increase or decrease due to rate changes by the SEC, our percentage of the overall industry volumes processed on our systems, and differences in actual dollar value of shares traded. Since the amount recorded in revenues is equal to the amount recorded as transaction-based expenses, there is no impact on our revenues less transaction-based expenses. Section 31 fees increased in the second quarter and first six months of 2020 compared with the same periods in 2019 primarily due to higher average SEC fee rates and higher dollar value traded on Nasdaq's exchanges.
Transaction rebates, in which we credit a portion of the per share execution charge to the market participant, increased in the second quarter and first six months of 2020 compared with the same periods in 2019 primarily due to higher U.S. industry trading volumes and an increase in the U.S. rebate capture rate, partially offset by a decrease in our overall U.S. matched market share executed on Nasdaq's exchanges.
Brokerage, clearance and exchange fees increased in the second quarter and first six months of 2020 compared with the same periods in 2019 primarily due to higher Section 31 pass-through fees, as discussed above.
Cash Equity Trading Revenues
Cash equity trading revenues and cash equity trading revenues less transaction-based expenses increased in the second quarter and first six months of 2020 compared with the same periods in 2019 primarily due to higher U.S. and European industry trading volumes, partially offset by lower overall U.S. matched market share executed on Nasdaq's exchanges. Also contributing to the increase in cash equity trading revenues were higher Section 31 pass-through fee revenue and, for the first six months of 2020, a higher U.S. gross capture rate, while a higher net U.S. capture rate also contributed to the increase in cash equity trading revenues less transaction-based expenses for the second quarter and first six months of 2020.
Similar to equity derivative trading and clearing, in the U.S. we record Section 31 fees as cash equity trading revenues
with a corresponding amount recorded as transaction-based expenses. We are assessed these fees from the SEC and pass them through to our customers in the form of incremental fees. Since the amount recorded as revenues is equal to the amount recorded as transaction-based expenses, there is no impact on our revenues less transaction-based expenses. Section 31 fees increased in the second quarter and first six months of 2020 compared with the same periods in 2019, primarily due to higher average SEC fee rates and higher dollar value traded on Nasdaq’s exchanges.
Transaction rebates increased in the second quarter and first six months of 2020 compared with the same period in 2019. For The Nasdaq Stock Market, Nasdaq PSX and Nasdaq CXC, we credit a portion of the per share execution charge to the market participant that provides the liquidity, and for Nasdaq BX and Nasdaq CX2, we credit a portion of the per share execution charge to the market participant that takes the liquidity. The increase in the second quarter and first six months of 2020 was primarily due to higher U.S. industry trading volumes, partially offset by lower overall U.S. matched market share executed on Nasdaq's exchanges and a lower rebate capture rate.
Brokerage, clearance and exchange fees increased in the second quarter and first six months of 2020 compared with the same periods in 2019 primarily due to higher Section 31 pass-through fees, as discussed above, and higher routing fees.
FICC Revenues
FICC revenues and FICC revenues less transaction-based expenses decreased in the second quarter and first six months of 2020 compared with the same periods in 2019 primarily due to lower U.S. fixed income products revenues and the sale of the core assets of our NFX business, partially offset by higher European products revenues.
Trade Management Services Revenues
Trade management services revenues were unchanged in the second quarter and decreased slightly in the first six months of 2020 compared with the same periods in 2019.
* * * * * *
CORPORATE SERVICES
The following table shows revenues from our Corporate Services segment:
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| Three Months Ended June 30, | | | | Percentage Change | | Six Months Ended June 30, | | | | | | Percentage Change | | |
| 2020 | | 2019 | | | | 2020 | | 2019 | | | | | | |
| (in millions) | | | | | | (in millions) | | | | | | | | |
Corporate Services: | | | | | | | | | | | | | | | |
Listing Services | $ | 74 | | | $ | 74 | | | — | % | | $ | 149 | | | $ | 145 | | | | | 2.8 | % | | |
Corporate Solutions | $ | 52 | | | $ | 49 | | | 6.1 | % | | 105 | | | 98 | | | | | 7.1 | % | | |
Total Corporate Services | $ | 126 | | | $ | 123 | | | 2.4 | % | | $ | 254 | | | $ | 243 | | | | | 4.5 | % | | |
Listing Services Revenues
Listing services revenues were unchanged in the second quarter of 2020 and increased in the first six months of 2020 compared with the same periods in 2019. In both periods, revenues increased due to higher U.S. listings revenues. In the second quarter of
2020, the increase was offset by lower event-related revenues at the Nasdaq MarketSite and lower NPM program activity, both mainly due to the impact of COVID-19.
Corporate Solutions Revenues
Corporate solutions revenues increased in the second quarter and first six months of 2020 compared with the same periods in 2019 reflecting an increase in governance solutions revenues and investor relations intelligence revenues.
INFORMATION SERVICES
The following table shows revenues from our Information Services segment:
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| | Three Months Ended June 30, | | | | Percentage Change | | Six Months Ended June 30, | | | | | | Percentage Change | | |
| | 2020 | | 2019 | | | | 2020 | | 2019 | | | | | | |
| | (in millions) | | | | | | (in millions) | | | | | | | | |
Information Services: | | | | | | | | | | | | | | | | |
Market Data | | $ | 101 | | | $ | 100 | | | 1.0 | % | | $ | 198 | | | $ | 200 | | | | | (1.0) | % | | |
Index | | 68 | | | 55 | | | 23.6 | % | | 141 | | | 109 | | | | | 29.4 | % | | |
Investment Data & Analytics | | 44 | | | 39 | | | 12.8 | % | | 85 | | | 78 | | | | | 9.0 | % | | |
Total Information Services | | $ | 213 | | | $ | 194 | | | 9.8 | % | | $ | 424 | | | $ | 387 | | | | | 9.6 | % | | |
Market Data Revenues
Market data revenues increased slightly in the second quarter of 2020 compared with the same period in 2019 primarily due to organic growth in U.S. proprietary products from new sales, including continued expansion geographically, partially offset by lower shared tape plan revenues. The slight decrease in the first six months of 2020 compared with the same period in 2019 was primarily due to lower under-reported data usage, partially offset by new sales, including continued geographic expansion globally.
Index Revenues
Index revenues increased in the second quarter and first six months of 2020 compared with the same periods in 2019
primarily due to higher licensing revenue from higher average AUM in ETPs linked to Nasdaq indexes, higher licensing revenues from futures trading linked to the Nasdaq 100 Index, and higher index data revenues.
Investment Data & Analytics Revenues
Investment data & analytics revenues increased in the second quarter and first six months of 2020 compared with the same periods in 2019 primarily due to the acquisition of Solovis and growth in eVestment.
* * * * * *
MARKET TECHNOLOGY
The following table shows revenues from our Market Technology segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Percentage Change | | Six Months Ended June 30, | | | | | | Percentage Change | | |
| | 2020 | | 2019 | | | | 2020 | | 2019 | | | | | | |
| | (in millions) | | | | | | (in millions) | | | | | | | | |
Market Technology | | $ | 84 | | | $ | 79 | | | 6.3 | % | | $ | 165 | | | $ | 156 | | | | | 5.8 | % | | |
Market Technology Revenues
Market technology revenues increased in the second quarter and first six months of 2020 compared with the same periods in 2019. The increase in the second quarter was primarily due to an increase in SaaS surveillance revenues. The increase for the first six months was due to increases in SaaS surveillance revenues and software delivery and support projects.
OTHER REVENUES
Other revenues include the revenues from the BWise enterprise governance, risk and compliance software platform, which was sold in March 2019. Prior to the sale date, these revenues were included in our Corporate Solutions business. See “2019 Divestiture,” of Note 4, “Acquisitions and Divestiture,” to the condensed consolidated financial statements for further discussion of this divestiture.
Expenses
Operating Expenses
The following table shows our operating expenses:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Percentage Change | | Six Months Ended June 30, | | | | | | Percentage Change | | |
| | 2020 | | 2019 | | | | 2020 | | 2019 | | | | | | |
| | (in millions) | | | | | | (in millions) | | | | | | | | |
Compensation and benefits | | $ | 189 | | | $ | 169 | | | 11.8 | % | | $ | 384 | | | $ | 344 | | | | | 11.6 | % | | |
Professional and contract services | | 31 | | | 30 | | | 3.3 | % | | 58 | | | 68 | | | | | (14.7) | % | | |
Computer operations and data communications | | 35 | | | 33 | | | 6.1 | % | | 70 | | | 65 | | | | | 7.7 | % | | |
Occupancy | | 26 | | | 24 | | | 8.3 | % | | 51 | | | 48 | | | | | 6.3 | % | | |
General, administrative and other | | 25 | | | 40 | | | (37.5) | % | | 86 | | | 56 | | | | | 53.6 | % | | |
Marketing and advertising | | 4 | | | 10 | | | (60.0) | % | | 14 | | | 20 | | | | | (30.0) | % | | |
Depreciation and amortization | | 50 | | | 48 | | | 4.2 | % | | 98 | | | 96 | | | | | 2.1 | % | | |
Regulatory | | 7 | | | 8 | | | (12.5) | % | | 14 | | | 15 | | | | | (6.7) | % | | |
Merger and strategic initiatives | | 4 | | | 5 | | | (20.0) | % | | 10 | | | 14 | | | | | (28.6) | % | | |
Restructuring charges | | 13 | | | — | | | N/M | | 25 | | | — | | | | | N/M | | |
Total operating expenses | | $ | 384 | | | $ | 367 | | | 4.6 | % | | $ | 810 | | | $ | 726 | | | | | 11.6 | % | | |
N/M Not meaningful.
The increase in compensation and benefits expense in the second quarter and first six months of 2020 was primarily due to higher performance incentives and higher compensation costs resulting from our recent acquisitions. Partially offsetting the higher compensation and benefits expense in the first six months of 2020 was lower compensation costs resulting from our 2019 divestiture. The favorable impact from foreign exchange was $2 million for the second quarter of 2020 and $5 million for the first six months of 2020.
Headcount increased to 4,670 employees as of June 30, 2020 from 4,296 as of June 30, 2019 primarily due to our recent acquisitions and growth in our Market Technology and Investment Data & Analytics businesses.
Professional and contract services expense increased slightly in the second quarter of 2020 compared with the same period in 2019. The decrease in the first six months of 2020 was primarily due to lower consulting costs and our 2019 divestiture.
Computer operations and data communications expense increased in the second quarter and first six months of 2020 primarily due to higher market data feed costs.
Occupancy expense increased in the second quarter and first six months of 2020 mainly due to higher costs associated with additional facility and rent costs resulting from expansion of our new U.S. headquarters in New York.
General, administrative and other expense decreased in the second quarter of 2020 reflecting a loss on the early
extinguishment of our 2020 Notes in the second quarter of 2019 and lower corporate travel costs, partially offset by charitable contributions made to the Nasdaq Foundation and to social justice charities. The increase in the first six months of 2020 was primarily due to a loss on the early extinguishment of our 2021 Notes and charitable contributions made to the COVID-19 response and relief efforts and the contributions described above.
Marketing and advertising expense decreased in the second quarter and first six months of 2020 primarily due to lower event spending.
Merger and strategic initiatives expense decreased in the second quarter and first six months of 2020. We have pursued various strategic initiatives and completed acquisitions and divestitures 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 and will vary based on the size and frequency of the activities described above.
Restructuring charges were $13 million in the second quarter and $25 million in the first six months of 2020. See Note 19, “Restructuring Charges,” to the condensed consolidated financial statements for further discussion of our 2019 restructuring plan and charges associated with this plan.
Non-operating Income and Expenses
The following table shows our non-operating income and expenses:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Percentage Change | | Six Months Ended June 30, | | | | | | Percentage Change | | |
| | 2020 | | 2019 | | | | 2020 | | 2019 | | | | | | |
| | (in millions) | | | | | | (in millions) | | | | | | | | |
Interest income | | $ | 1 | | | $ | 3 | | | (66.7) | % | | $ | 3 | | | $ | 6 | | | | | (50.0) | % | | |
Interest expense | | (26) | | | (31) | | | (16.1) | % | | (52) | | | (68) | | | | | (23.5) | % | | |
Net interest expense | | (25) | | | (28) | | | (10.7) | % | | (49) | | | (62) | | | | | (21.0) | % | | |
| | | | | | | | | | | | | | | | |
Net gain on divestiture of business | | — | | | — | | | — | % | | — | | | 27 | | | | | (100.0) | % | | |
Other income | | — | | | 1 | | | (100.0) | | | 5 | | | 1 | | | | | 400.0 | % | | |
Net income from unconsolidated investees | | 26 | | | 10 | | | 160.0 | % | | 43 | | | 55 | | | | | (21.8) | % | | |
Total non-operating income (expenses) | | $ | 1 | | | $ | (17) | | | (105.9) | % | | $ | (1) | | | $ | 21 | | | | | (104.8) | % | | |
Interest Expense
Interest expense decreased in the second quarter and first six months of 2020 compared with the same periods in 2019 primarily due to the refinancing of our 3.875% senior notes in March 2020 with the 2030 Notes at a lower interest rate, the refinancing of our 5.55% senior notes in May 2019 with the 2029 Notes at a lower interest rate and the repayment of our senior unsecured floating rate notes in March 2019 with commercial paper issuances and cash on hand. See Note 8, “Debt Obligations,” to the condensed consolidated financial statements for further discussion of our debt obligations.
The following table shows our interest expense:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Percentage Change | | Six Months Ended June 30, | | | | | | Percentage Change | | |
| | 2020 | | 2019 | | | | 2020 | | 2019 | | | | | | |
| | (in millions) | | | | | | (in millions) | | | | | | | | |
Interest expense on debt | | $ | 24 | | | $ | 29 | | | (17.2) | % | | $ | 48 | | | $ | 64 | | | | | (25.0) | % | | |
Accretion of debt issuance costs and debt discount | | 1 | | | 1 | | | — | % | | 3 | | | 3 | | | | | — | % | | |
Other fees | | 1 | | | 1 | | | — | % | | 1 | | | 1 | | | | | — | % | | |
Interest expense | | $ | 26 | | | $ | 31 | | | (16.1) | % | | $ | 52 | | | $ | 68 | | | | | (23.5) | % | | |
Net Gain on Divestiture of Business
The net gain on divestiture of business in the first six months of 2019 primarily related to our divestiture of BWise. See “2019 Divestiture,” of Note 4, “Acquisitions and Divestiture,” to the condensed consolidated financial statements for further discussion.
Net Income from Unconsolidated Investees
Net income from unconsolidated investees increased in the second quarter and decreased in the first six months of 2020 compared with the same periods in 2019 primarily due to income recognized from our equity method investment in OCC. See “Equity Method Investments,” of Note 6, “Investments,” to the condensed consolidated financial statements for further discussion.
Tax Matters
The following table shows our income tax provision and effective tax rate:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Percentage Change | | Six Months Ended June 30, | | | | | | Percentage Change | | |
| | 2020 | | 2019 | | | | 2020 | | 2019 | | | | | | |
| | ($ in millions) | | | | | | ($ in millions) | | | | | | | | |
Income tax provision | | $ | 75 | | | $ | 65 | | | 15.4 | % | | $ | 145 | | | $ | 131 | | | | | 10.7 | % | | |
Effective tax rate | | 23.7 | % | | 27.2 | % | | | | 24.6 | % | | 23.7 | % | | | | | | |
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| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
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For further discussion of our tax matters, see Note 16, “Income Taxes,” to the condensed consolidated financial statements.
Non-GAAP Financial Measures
In addition to disclosing results determined in accordance with U.S. GAAP, we also have provided non-GAAP net income attributable to Nasdaq and non-GAAP diluted
earnings per share. 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 our 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. In addition, other companies, including companies in our industry, may calculate such measures differently, which reduces their usefulness as comparative measures. Investors should not rely on any single financial measure when evaluating our business. This non-GAAP information should be considered as supplemental in nature and is not meant as a substitute for our operating results in accordance with U.S. GAAP. We recommend investors review the U.S. GAAP financial measures included in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and the notes thereto. When viewed in conjunction with our U.S. GAAP results and the accompanying reconciliation, 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 and non-GAAP diluted earnings per share, to assess operating performance. We use non-GAAP net income attributable to Nasdaq and non-GAAP diluted earnings per share 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 that have less bearing on our ongoing operating performance. Non-GAAP net income attributable to Nasdaq for the periods presented below is calculated by adjusting for the following items:
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. Performance measures excluding intangible asset amortization expense therefore provide investors with a useful representation of our businesses’ ongoing activity in each period.
Merger and strategic initiatives expense: We have pursued various strategic initiatives and completed acquisitions and divestitures in recent years that 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.
Restructuring charges: We initiated the transition of certain technology platforms to advance our strategic opportunities as a technology and analytics provider and continue the re-alignment of certain business areas. See Note 19, “Restructuring Charges,” to the condensed consolidated financial statements for further discussion of our 2019 restructuring plan. Charges associated with this plan represent a fundamental shift in our strategy and technology as well as executive re-alignment and will be excluded for purposes of calculating non-GAAP measures as they are not reflective of ongoing operating performance or comparisons in Nasdaq's performance between periods.
Net income from unconsolidated investee: See Note 6, “Investments,” to the condensed consolidated financial statements for further discussion. Our income on our investment in OCC may vary significantly compared to prior years due to the disapproval of the OCC's capital plan. Accordingly, we will exclude this income from current and prior periods 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, including certain tax items, that are the result of other non-comparable events to measure operating performance. We believe the exclusion of such amounts allows management and investors to better understand the ongoing financial results of Nasdaq.
For the three and six months ended June 30, 2020, other significant items included charitable contributions made to the Nasdaq Foundation, COVID-19 response and relief efforts, and social justice charities which are recorded in general, administrative and other expense in our Condensed Consolidated Statements of Income. The first six months of 2020 also included a loss on extinguishment of debt which is recorded in general, administrative and other expense in our Condensed Consolidated Statements of Income.
For the three and six months ended June 30, 2019, other significant items primarily included a loss on extinguishment
of debt which is recorded in general, administrative and other expense in our Condensed Consolidated Statements of Income. The first six months of 2019 also included a net gain on divestiture of business which represents our pre-tax net gain of $27 million on the sale of BWise.
Significant tax items:
The non-GAAP adjustment to the income tax provision included the tax impact of each non-GAAP adjustment and:
•for the three and six months ended June 30, 2020, a tax benefit on compensation related deductions determined to be allowable in the current period;
•for the six months ended June 30, 2020 and 2019, excess tax benefits related to employee share-based compensation to reflect the recognition of the income tax effects of share-based awards when awards vest or are
settled. This item is subject to volatility and will vary based on the timing of the vesting of employee share-based compensation arrangements and fluctuation in our stock price; and
•for the six months ended June 30, 2019, a tax benefit related to capital distributions from the OCC.
* * * * * *
The following table shows reconciliations between U.S. GAAP net income attributable to Nasdaq and diluted earnings per share and non-GAAP net income attributable to Nasdaq and diluted earnings per share:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Three Months Ended June 30, 2020 | | | | Three Months Ended June 30, 2019 | | | | | | |
| | | | | | | | | | (in millions, except share and per share amounts) | | | | | | | | | | |
| | | | | | | | | | Net Income | | Diluted Earnings Per Share | | Net Income | | Diluted Earnings Per Share | | | | |
U.S. GAAP net income attributable to Nasdaq and diluted earnings per share | | | | | | | | | | $ | 241 | | | $ | 1.45 | | | $ | 174 | | | $ | 1.04 | | | | | |
Non-GAAP adjustments: | | | | | | | | | | | | | | | | | | | | |
Amortization expense of acquired intangible assets | | | | | | | | | | 26 | | | 0.16 | | | 26 | | | 0.16 | | | | | |
Merger and strategic initiatives expense | | | | | | | | | | 4 | | | 0.02 | | | 5 | | | 0.03 | | | | | |
Restructuring charges | | | | | | | | | | 13 | | | 0.08 | | | — | | | — | | | | | |
Net income from unconsolidated investee | | | | | | | | | | (25) | | | (0.15) | | | (9) | | | (0.05) | | | | | |
| | | | | | | | | | | | | | | | | | | | |
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Extinguishment of debt | | | | | | | | | | — | | | — | | | 11 | | | 0.06 | | | | | |
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Charitable donations | | | | | | | | | | 12 | | | 0.07 | | | — | | | — | | | | | |
Other | | | | | | | | | | 2 | | | 0.01 | | | 3 | | | 0.02 | | | | | |
Total non-GAAP adjustments | | | | | | | | | | 32 | | | 0.19 | | | 36 | | | 0.22 | | | | | |
Adjustment to the income tax provision to reflect non-GAAP adjustments and other tax items | | | | | | | | | | (17) | | | (0.10) | | | (7) | | | (0.04) | | | | | |
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| | | | | | | | | | | | | | | | | | | | |
Total non-GAAP adjustments, net of tax | | | | | | | | | | 15 | | | 0.09 | | | 29 | | | 0.18 | | | | | |
Non-GAAP net income attributable to Nasdaq and diluted earnings per share | | | | | | | | | | $ | 256 | | | $ | 1.54 | | | $ | 203 | | | $ | 1.22 | | | | | |
Weighted-average common shares outstanding for diluted earnings per share | | | | | | | | | | | | 166,073,354 | | | | | 167,041,419 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Six Months Ended June 30, 2020 | | | | Six Months Ended June 30, 2019 | | | | | | |
| | | | | | | | | | (in millions, except share and per share amounts) | | | | | | | | | | |
| | | | | | | | | | Net Income | | Diluted Earnings Per Share | | Net Income | | Diluted Earnings Per Share | | | | |
U.S. GAAP net income attributable to Nasdaq and diluted earnings per share | | | | | | | | | | $ | 444 | | | $ | 2.67 | | | $ | 421 | | | $ | 2.52 | | | | | |
Non-GAAP adjustments: | | | | | | | | | | | | | | | | | | | | |
Amortization expense of acquired intangible assets | | | | | | | | | | 50 | | | 0.30 | | | 51 | | | 0.31 | | | | | |
Merger and strategic initiatives expense | | | | | | | | | | 10 | | | 0.06 | | | 14 | | | 0.08 | | | | | |
Restructuring charges | | | | | | | | | | 25 | | | 0.15 | | | — | | | — | | | | | |
Net income from unconsolidated investees | | | | | | | | | | (41) | | | (0.25) | | | (54) | | | (0.32) | | | | | |
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Extinguishment of debt | | | | | | | | | | 36 | | | 0.22 | | | 11 | | | 0.06 | | | | | |
Net gain on divestiture of business | | | | | | | | | | — | | | — | | | (27) | | | (0.16) | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Charitable donations | | | | | | | | | | 17 | | | 0.10 | | | — | | | — | | | | | |
Other | | | | | | | | | | 4 | | | 0.03 | | | 6 | | | 0.04 | | | | | |
Total non-GAAP adjustments | | | | | | | | | | 101 | | | 0.61 | | | 1 | | | 0.01 | | | | | |
Adjustment to the income tax provision to reflect non-GAAP adjustments and other tax items | | | | | | | | | | (36) | | | (0.22) | | | (11) | | | (0.07) | | | | | |
Excess tax benefits related to employee share-based compensation | | | | | | | | | | (3) | | | (0.02) | | | (4) | | | (0.02) | | | | | |
Total non-GAAP tax adjustments | | | | | | | | | | (39) | | | (0.24) | | | (15) | | | (0.09) | | | | | |
Total non-GAAP adjustments, net of tax | | | | | | | | | | 62 | | | 0.37 | | | (14) | | | (0.08) | | | | | |
Non-GAAP net income attributable to Nasdaq and diluted earnings per share | | | | | | | | | | $ | 506 | | | $ | 3.04 | | | $ | 407 | | | $ | 2.44 | | | | | |
Weighted-average common shares outstanding for diluted earnings per share | | | | | | | | | | | | 166,424,676 | | | | | 167,034,783 | | | | | |
Liquidity and Capital Resources
Historically, we have funded our operating activities and met our commitments through cash generated by operations, augmented by the periodic issuance of our common stock and debt. Currently, our cost and availability of funding remain healthy.
In response to the uncertainties posed by COVID-19 and related economic impacts, we took actions to strengthen our liquidity and cash position and to reduce our refinancing risk.
In March 2020, we observed that conditions in the market for Tier 2 commercial paper issuers were deteriorating, impacting both costs and actionable duration of commercial paper issues. To mitigate funding uncertainties and as a precautionary measure to maximize our liquidity and increase our available cash on hand, Nasdaq borrowed $799 million under the revolving credit commitment of the 2017 Credit Facility. See “2017 Credit Facility” of Note 8, “Debt Obligations,” to the condensed consolidated financial statements for further discussion of our 2017 Credit Facility.
In April 2020, we issued the 2050 Notes and used the net proceeds from the 2050 Notes to repay a portion of amounts previously borrowed under the 2017 Credit Facility. For further discussion of the 2050 Notes, see “3.25% Senior Unsecured Notes Due 2050,” of Note 8, “Debt Obligations,”
to the condensed consolidated financial statements. In June 2020, the remaining outstanding amount under the 2017 Credit Facility was repaid using cash on hand. As of June 30, 2020, the total remaining amount available under the 2017 Credit Facility was $999 million, which excludes the amount that supports a letter of credit.
Also in June 2020, we repaid all outstanding borrowings under our commercial paper program.
In February 2020, we issued the 2030 Notes. We primarily used the net proceeds from the 2030 Notes to redeem the 2021 Notes and for other general corporate purposes. See “0.875% Senior Unsecured Notes Due 2030,” and “Early Extinguishment of 3.875% Senior Unsecured Notes Due 2021,” of Note 8, “Debt Obligations,” to the condensed consolidated financial statements for further discussion. This offering reduced our borrowing costs and also eliminated near-term bond maturities until May 2023.
As of June 30, 2020, our sources and uses of cash were not materially impacted by COVID-19 and we have not identified any material liquidity deficiencies as a result of the COVID-19 pandemic. We will continue to closely monitor and manage our liquidity and capital resources. In addition, we continue to prudently assess our capital deployment strategy through balancing acquisitions, internal investments,
debt repayments, and shareholder return activity including share repurchases and dividends.
In the near term, we expect that our operations and the availability under our revolving credit commitment and commercial paper program will provide sufficient cash to fund our operating expenses, capital expenditures, debt repayments, any share repurchases, and any dividends.
As part of the purchase price consideration of a prior acquisition, Nasdaq has contingent future obligations to issue 992,247 shares of Nasdaq common stock annually through 2027. See “Non-Cash Contingent Consideration,” of Note 17, “Commitments, Contingencies and Guarantees,” to the condensed consolidated financial statements for further discussion.
The value of various assets and liabilities, including cash and cash equivalents, receivables, accounts payable and accrued expenses, the current portion of long-term debt, and commercial paper, can fluctuate from month to month. Working capital (calculated as current assets less current liabilities) was $467 million as of June 30, 2020, compared with $63 million as of December 31, 2019, an increase of $404 million. Current asset balance changes increased working capital by $426 million, with increases in cash and cash equivalents, default funds and margin deposits, and receivables, net, partially offset by decreases in financial investments and other current assets. Current liability balance changes decreased working capital by $22 million, due to increases in Section 31 fees payable to the SEC, deferred revenue, default funds and margin deposits and other current liabilities, partially offset by decreases in short-term debt, accrued personnel costs, and accounts payable and accrued expenses.
Principal factors that could affect the availability of our internally-generated funds include:
• deterioration of our revenues in any of our business segments;
• changes in regulatory and working capital requirements; and
• an increase in our expenses.
Principal factors that could affect our ability to obtain cash from external sources include:
• operating covenants contained in our credit facilities that limit our total borrowing capacity;
• increases in interest rates under our credit facilities;
• credit rating downgrades, which could limit our access to additional debt;
• a decrease in the market price of our common stock;
• volatility or disruption in the public debt and equity markets; and
• the impact of the COVID-19 pandemic on our business.
The following sections discuss the effects of changes in our financial assets, debt obligations, regulatory capital
requirements, and cash flows on our liquidity and capital resources.
Financial Assets
The following table summarizes our financial assets:
| | | | | | | | | | | | | | |
| | June 30, 2020 | | December 31, 2019 |
| | (in millions) | | |
Cash and cash equivalents | | $ | 711 | | | $ | 332 | |
Restricted cash | | 30 | | | 30 | |
Financial investments | | 206 | | | 291 | |
Total financial assets | | $ | 947 | | | $ | 653 | |
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents includes all non-restricted cash in banks and highly liquid investments with original maturities of 90 days or less at the time of purchase. The balance retained in cash and cash equivalents is a function of anticipated or possible short-term cash needs, prevailing interest rates, our investment policy, and alternative investment choices. As of June 30, 2020, our cash and cash equivalents of $711 million were primarily invested in bank deposits and money market funds. In the long-term, we may use both internally generated funds and external sources to satisfy our debt obligations and other long-term liabilities. Cash and cash equivalents as of June 30, 2020 increased $379 million from December 31, 2019, primarily due to:
•proceeds from issuances of long-term debt, net of issuance costs and utilization of credit commitment;
•net cash provided by operating activities; and
•proceeds from the net sales of securities. These increases were partially offset by:
•repayments of borrowings under our credit commitment and debt obligations;
•repayments of commercial paper, net;
•cash dividends paid on our common stock;
•cash paid for acquisitions, net of cash and cash equivalents acquired;
•repurchases of our common stock;
•purchases of property and equipment; and
•payment of debt extinguishment cost.
See “Cash Flow Analysis” below for further discussion.
Restricted cash is restricted from withdrawal due to contractual or regulatory requirements or is not available for general use. Restricted cash was $30 million as of June 30, 2020, unchanged from December 31, 2019. Restricted cash is classified as restricted cash in the Condensed Consolidated Balance Sheets.
Repatriation of Cash
Our cash and cash equivalents held outside of the U.S. in various foreign subsidiaries totaled $131 million as of June 30, 2020 and $160 million as of December 31, 2019. The remaining balance held in the U.S. totaled $580 million
as of June 30, 2020 and $172 million as of December 31, 2019.
Unremitted earnings of certain subsidiaries outside of the U.S. are used to finance our international operations and are considered to be indefinitely reinvested.
Share Repurchase Program
See “Share Repurchase Program,” of Note 11, “Nasdaq Stockholders’ Equity,” to the condensed consolidated financial statements for further discussion of our share repurchase program.
Cash Dividends on Common Stock
The following table shows quarterly cash dividends paid per common share on our outstanding common stock:
| | | | | | | | | | | |
| 2020 | | 2019 |
First quarter | $ | 0.47 | | | $ | 0.44 | |
Second quarter | 0.49 | | | 0.47 | |
| | | |
| | | |
Total | $ | 0.96 | | | $ | 0.91 | |
See “Cash Dividends on Common Stock,” of Note 11, “Nasdaq Stockholders’ Equity,” to the condensed consolidated financial statements for further discussion of the dividends.
Financial Investments
Our financial investments totaled $206 million as of June 30, 2020 and $291 million as of December 31, 2019 and are primarily comprised of highly rated European government debt securities and highly rated corporate debt. Of these securities, $175 million as of June 30, 2020 and $169 million as of December 31, 2019 are assets primarily utilized to meet regulatory capital requirements, mainly for our clearing operations at Nasdaq Clearing. See Note 6, “Investments,” to the condensed consolidated financial statements for further discussion.
* * * * * *
Debt Obligations
The following table summarizes our debt obligations by contractual maturity:
| | | | | | | | | | | | | | | | | | | | |
| | Maturity Date | | June 30, 2020 | | December 31, 2019 |
| | | | (in millions) | | |
Short-term debt - commercial paper | | | | $ | — | | | $ | 391 | |
Long-term debt: | | | | | | |
3.875% senior unsecured notes | | Repaid March 2020 | | — | | | 671 | |
1.75% senior unsecured notes | | May 2023 | | 670 | | | 668 | |
$1 billion senior unsecured revolving credit facility | | April 2022 | | (2) | | | (2) | |
4.25% senior unsecured notes | | June 2024 | | 498 | | | 497 | |
3.85% senior unsecured notes | | June 2026 | | 497 | | | 497 | |
1.75% senior unsecured notes | | March 2029 | | 667 | | | 665 | |
0.875% senior unsecured notes | | February 2030 | | 667 | | | — | |
3.25% senior unsecured notes | | April 2050 | | 485 | | | — | |
Total long-term debt | | | | 3,482 | | | 2,996 | |
Total debt obligations | | | | $ | 3,482 | | | $ | 3,387 | |
In addition to the $1 billion senior unsecured revolving credit facility, we also have other credit facilities primarily related to our Nasdaq Clearing operations in order to provide further liquidity. Other credit facilities, which are available in multiple currencies, totaled $205 million as of June 30, 2020 and $203 million as of December 31, 2019 in available liquidity, none of which was utilized as of June 30, 2020, and of which $15 million was utilized as of December 31, 2019.
As of June 30, 2020, we were in compliance with the covenants of all of our debt obligations.
See Note 8, “Debt Obligations,” to the condensed consolidated financial statements for further discussion of our debt obligations.
Regulatory Capital Requirements
Clearing Operations Regulatory Capital Requirements
We are required to maintain minimum levels of regulatory capital for the clearing operations of Nasdaq Clearing. The level of regulatory capital required to be maintained is dependent upon many factors, including market conditions and creditworthiness of the counterparty. As of June 30, 2020, our required regulatory capital of $153 million was comprised of highly rated European government debt securities that are included in financial investments in the Condensed Consolidated Balance Sheets.
Broker-Dealer Net Capital Requirements
Our broker-dealer subsidiaries, Nasdaq Execution Services, Execution Access, NPM Securities, SMTX, and Nasdaq Capital Markets Advisory, are subject to regulatory requirements intended to ensure their general financial soundness and liquidity. These requirements obligate these subsidiaries to comply with minimum net capital requirements. As of June 30, 2020, the combined required minimum net capital totaled $1 million and the combined excess capital totaled $52 million, substantially all of which is held in cash and cash equivalents in the Condensed Consolidated Balance Sheets. The required minimum net capital is included in restricted cash in the Condensed Consolidated Balance Sheets.
Nordic and Baltic Exchange Regulatory Capital Requirements
The entities that operate trading venues in the Nordic and Baltic countries are each subject to local regulations and are
required to maintain regulatory capital intended to ensure their general financial soundness and liquidity. As of June 30, 2020, our required regulatory capital of $35 million was invested in European government debt securities that are included in financial investments and restricted cash in the Condensed Consolidated Balance Sheets.
Other Capital Requirements
We operate several other businesses which are subject to local regulation and are required to maintain certain levels of regulatory capital. As of June 30, 2020, other required regulatory capital was $11 million and was primarily included in restricted cash and financial investments in the Condensed Consolidated Balance Sheets.
* * * * * *
Cash Flow Analysis
The following table summarizes the changes in cash flows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | | | Percentage Change | | |
| | 2020 | | 2019 | | | | | | |
Net cash provided by (used in): | | (in millions) | | | | | | | | |
Operating activities | | $ | 821 | | | $ | 523 | | | | | 57.0 | % | | |
Investing activities | | (145) | | | (163) | | | | | (11.0) | % | | |
Financing activities | | (294) | | | (573) | | | | | (48.7) | % | | |
Effect of exchange rate changes on cash and cash equivalents and restricted cash | | (3) | | | (10) | | | | | (70.0) | % | | |
Net increase (decrease) in cash and cash equivalents and restricted cash | | 379 | | | (223) | | | | | (270.0) | % | | |
Cash and cash equivalents and restricted cash at beginning of period | | 362 | | | 586 | | | | | (38.2) | % | | |
Cash and cash equivalents and restricted cash at end of period | | $ | 741 | | | $ | 363 | | | | | 104.1 | % | | |
Net Cash Provided by Operating Activities
Net cash provided by operating activities primarily consists of net income adjusted for certain non-cash items such as: depreciation and amortization expense of property and equipment; amortization expense of acquired finite-lived intangible assets; expense associated with share-based compensation; and net income from unconsolidated investees.
Net cash provided by operating activities is also impacted by the effects of changes in operating assets and liabilities such as: accounts receivable which is impacted by the timing of customer billings and related collections from our customers; accounts payable and accrued expenses due to timing of payments; accrued personnel costs which are impacted by employee performance targets and the timing of payments related to employee bonus incentives; and Section 31 fees payable to the SEC, which is impacted by the timing of collections from customers and payments to the SEC.
Net cash provided by operating activities increased $298 million for the six months ended June 30, 2020 compared
with the same period in 2019. The increase was primarily driven by higher net income, an increase in Section 31 fees payable to the SEC as a result of unusually high U.S. industry trading volumes, lower performance incentive payments made in the first six months of 2020 compared with the same period in 2019 primarily due to prior year performance, lower income taxes paid, and lower interest paid due to a decline in average interest rates on our debt obligations, partially offset by an increase in receivables, net due to higher U.S. industry trading volumes.
Net Cash Used in Investing Activities
Net cash used in investing activities for the six months ended June 30, 2020 primarily related to $157 million of cash used for acquisitions, net of cash and cash equivalents acquired and $68 million of purchases of property and equipment, partially offset by $85 million of proceeds from the net sales of securities.
Net cash used in investing activities for the six months ended June 30, 2019 primarily related to $193 million of cash used for the acquisition of Cinnober, $63 million of purchases of
property and equipment, partially offset by receipt of cash of$108 million related to the sale of the BWise enterprise governance, risk and compliance software platform.
Net Cash Used in Financing Activities
Net cash used in financing activities for the six months ended June 30, 2020 primarily related to $1,470 million in repayments of borrowings under our credit commitment and debt obligations, $391 million of net repayments of commercial paper, $158 million of dividend payments to our shareholders, $152 million in repurchases of common stock, and a $36 million payment for debt extinguishment costs, partially offset by $1,928 million of proceeds from issuances of long-term debt and the utilization of our credit commitment.
Net cash used in financing activities for the six months ended June 30, 2019 primarily related to $1,215 million in repayments of debt obligations, $150 million of dividend
payments to our shareholders, and $50 million in repurchases of common stock, partially offset by $680 million from the utilization of our credit commitment and issuances of long-term debt and $192 million in net borrowings of commercial paper.
See Note 4, “Acquisitions and Divestiture,” to the condensed consolidated financial statements for further discussion of our acquisitions and divestiture.
See Note 8, “Debt Obligations,” to the condensed consolidated financial statements for further discussion of our debt obligations.
See “Share Repurchase Program,” and “Cash Dividends on Common Stock,” of Note 11, “Nasdaq Stockholders’ Equity,” to the condensed consolidated financial statements for further discussion of our share repurchase program and cash dividends paid on our common stock.
* * * * * *
Contractual Obligations and Contingent Commitments
Nasdaq has contractual obligations to make future payments under debt obligations by contract maturity, operating lease payments, and other obligations. The following table shows these contractual obligations as of June 30, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period | | | | | | | | |
Contractual Obligations | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| | (in millions) | | | | | | | | |
Debt obligations by contract maturity(1) | | $ | 4,410 | | | $ | 86 | | | $ | 846 | | | $ | 628 | | | $ | 2,850 | |
Operating lease obligations(2) | | 591 | | | 71 | | | 62 | | | 52 | | | 406 | |
Purchase obligations(3) | | 57 | | | 30 | | | 27 | | | — | | | — | |
Total | | $ | 5,058 | | | $ | 187 | | | $ | 935 | | | $ | 680 | | | $ | 3,256 | |
____________
(1) Our debt obligations include both principal and interest obligations. As of June 30, 2020, an interest rate of 1.30% was used to compute the amount of the contractual obligations for interest on the 2017 Credit Facility. All other debt obligations were primarily calculated on a 360-day basis at the contractual fixed rate multiplied by the aggregate principal amount as of June 30, 2020. See Note 8, “Debt Obligations,” to the condensed consolidated financial statements for further discussion.
(2) Operating lease obligations represent our undiscounted operating lease liabilities as of June 30, 2020. See Note 15, “Leases,” to the condensed consolidated financial statements for further discussion of our leases.
(3) Purchase obligations primarily represent minimum outstanding obligations due under software license agreements.
* * * * * *
Non-Cash Contingent Consideration
See “Non-Cash Contingent Consideration,” of Note 17, “Commitments, Contingencies and Guarantees,” to the condensed consolidated financial statements for further discussion.
Off-Balance Sheet Arrangements
For discussion of off-balance sheet arrangements see:
• Note 14, “Clearing Operations,” to the condensed consolidated financial statements for further discussion of our non-cash default fund contributions and margin deposits received for clearing operations; and
• Note 17, “Commitments, Contingencies and Guarantees,” to the condensed consolidated financial statements for further discussion of:
• Guarantees issued and credit facilities available;
•Other guarantees;
• Non-cash contingent consideration;
• Routing brokerage activities;
• Legal and regulatory matters; and
• Tax audits.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a result of our operating, investing and financing activities, we are exposed to market risks such as interest rate risk and foreign currency exchange rate risk. We are also exposed to credit risk as a result of our normal business activities.
We have implemented policies and procedures to measure, manage, monitor and report risk exposures, which are reviewed regularly by management and the board of directors. We identify risk exposures and monitor and manage such risks on a daily basis.
We perform sensitivity analyses to determine the effects of market risk exposures. We may use derivative instruments solely to hedge financial risks related to our financial positions or risks that are incurred during the normal course of business. We do not use derivative instruments for speculative purposes.
Interest Rate Risk
We are subject to the risk of fluctuating interest rates in the normal course of business. Our exposure to market risk for changes in interest rates relates primarily to our financial investments and debt obligations which are discussed below.
Financial Investments
As of June 30, 2020, our investment portfolio was primarily comprised of highly rated European government debt
securities, which pay a fixed rate of interest. These securities are subject to interest rate risk and the fair value of these securities will decrease if market interest rates increase. If market interest rates were to increase immediately and uniformly by 100 basis points from levels as of June 30, 2020, the fair value of this portfolio would have declined by $6 million.
Debt Obligations
As of June 30, 2020, the majority of our debt obligations were fixed-rate obligations, provided that the interest rates on certain tranches of notes were subject to adjustment to the extent our debt rating is downgraded below investment grade, as further discussed in Note 8, “Debt Obligations,” to the condensed consolidated financial statements. While changes in interest rates will have no impact on the interest we pay on fixed-rate obligations, we are exposed to changes in interest rates as a result of borrowings under our 2017 Credit Facility, as the interest rate on this facility has a variable interest rate. We are also exposed to changes in interest rates as a result of the amounts outstanding from the sale of commercial paper under our commercial paper program, which have variable interest rates. As of June 30, 2020, there were no outstanding borrowings under our 2017 Credit Facility or commercial paper program.
We may utilize interest rate swap agreements to achieve a desired mix of variable and fixed rate debt.
Foreign Currency Exchange Rate Risk
We are subject to foreign currency exchange rate risk. Our primary transactional exposure to foreign currency denominated revenues less transaction-based expenses and operating income for the three and six months ended June 30, 2020 is presented in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Euro | | Swedish Krona | | Other Foreign Currencies | | U.S. Dollar | | Total |
| | (in millions, except currency rate) | | | | | | | | |
Three Months Ended June 30, 2020 | | | | | | | | | | |
Average foreign currency rate to the U.S. dollar | | 1.1009 | | 0.1033 | | # | | N/A | | N/A |
Percentage of revenues less transaction-based expenses | | 7.5 | % | | 6.2 | % | | 4.8 | % | | 81.5 | % | | 100.0 | % |
Percentage of operating income | | 12.4 | % | | (4.2) | % | | (4.3) | % | | 96.1 | % | | 100.0 | % |
Impact of a 10% adverse currency fluctuation on revenues less transaction-based expenses | | $ | (5) | | | $ | (5) | | | $ | (3) | | | $ | — | | | $ | (13) | |
Impact of a 10% adverse currency fluctuation on operating income | | $ | (4) | | | $ | (1) | | | $ | (2) | | | $ | — | | | $ | (7) | |
| | | | | | | | | | |
| | Euro | | Swedish Krona | | Other Foreign Currencies | | U.S. Dollar | | Total |
| | (in millions, except currency rate) | | | | | | | | |
Six Months Ended June 30, 2020 | | | | | | | | | | |
Average foreign currency rate to the U.S. dollar | | 1.1016 | | 0.1033 | | # | | N/A | | N/A |
Percentage of revenues less transaction-based expenses | | 7.7 | % | | 6.5 | % | | 4.7 | % | | 81.1 | % | | 100.0 | % |
Percentage of operating income | | 7.6 | % | | (4.0) | % | | (4.7) | % | | 101.1 | % | | 100.0 | % |
Impact of a 10% adverse currency fluctuation on revenues less transaction-based expenses | | $ | (11) | | | $ | (9) | | | $ | (7) | | | $ | — | | | $ | (27) | |
Impact of a 10% adverse currency fluctuation on operating income | | $ | (5) | | | $ | (2) | | | $ | (3) | | | $ | — | | | $ | (10) | |
____________
# Represents multiple foreign currency rates.
N/A Not applicable.
Our investments in foreign subsidiaries are exposed to volatility in currency exchange rates through translation of the foreign subsidiaries’ net assets or equity to U.S. dollars. Substantially all of our foreign subsidiaries operate in functional currencies other than the U.S. dollar. The financial statements of these subsidiaries are translated into U.S. dollars for consolidated reporting using a current rate of exchange, with net gains or losses recorded in accumulated other comprehensive loss within stockholders’ equity in the Condensed Consolidated Balance Sheets.
Our primary exposure to net assets in foreign currencies as of June 30, 2020 is presented in the following table:
| | | | | | | | | | | | | | |
| | Net Assets | | Impact of a 10% Adverse Currency Fluctuation |
| | (in millions) | | |
Swedish Krona(1) | | $ | 3,239 | | | $ | (324) | |
British Pound | | 194 | | | (19) | |
Norwegian Krone | | 157 | | | (16) | |
Canadian Dollar | | 114 | | | (11) | |
Australian Dollar | | 110 | | | (11) | |
Euro | | 32 | | | (3) | |
____________
(1) Includes goodwill of $2,408 million and intangible assets, net of $595 million.
Credit Risk
Credit risk is the potential loss due to the default or deterioration in credit quality of customers or counterparties. We are exposed to credit risk from third parties, including customers, counterparties and clearing agents. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. We limit our exposure to credit risk by evaluating the counterparties with
which we make investments and execute agreements. For our investment portfolio, our objective is to invest in securities to preserve principal while maximizing yields, without significantly increasing risk. Credit risk associated with investments is minimized substantially by ensuring that these financial assets are placed with governments which have investment grade ratings, well-capitalized financial institutions and other creditworthy counterparties.
Our subsidiary, Nasdaq Execution Services, may be exposed to credit risk due to the default of trading counterparties in connection with the routing services it provides for our trading customers. System trades in cash equities routed to other market centers for members of our cash equity exchanges are routed by Nasdaq Execution Services for clearing to the NSCC. In this function, Nasdaq Execution Services is to be neutral by the end of the trading day, but may be exposed to intraday risk if a trade extends beyond the trading day and into the next day, thereby leaving Nasdaq Execution Services susceptible to counterparty risk in the period between accepting the trade and routing it to the clearinghouse. In this interim period, Nasdaq Execution Services is not novating like a clearing broker but instead is subject to the short-term risk of counterparty failure before the clearinghouse enters the transaction. Once the clearinghouse officially accepts the trade for novation, Nasdaq Execution Services is legally removed from trade execution risk. However, Nasdaq has membership obligations to NSCC independent of Nasdaq Execution Services’ arrangements.
Pursuant to the rules of the NSCC and Nasdaq Execution Services’ clearing agreement, Nasdaq Execution Services is liable for any losses incurred due to a counterparty or a clearing agent’s failure to satisfy its contractual obligations, either by making payment or delivering securities. Adverse movements in the prices of securities that are subject to these transactions can increase our credit risk. However, we believe that the risk of material loss is limited, as Nasdaq Execution Services’ customers are not permitted to trade on margin and NSCC rules limit counterparty risk on self-cleared transactions by establishing credit limits and capital deposit requirements for all brokers that clear with NSCC. Historically, Nasdaq Execution Services has never incurred a liability due to a customer’s failure to satisfy its contractual obligations as counterparty to a system trade. Credit difficulties or insolvency, or the perceived possibility of credit difficulties or insolvency, of one or more larger or visible market participants could also result in market-wide credit difficulties or other market disruptions.
Execution Access is an introducing broker which operates the trading platform for our Fixed Income business to trade in U.S. Treasury securities. Execution Access has a clearing arrangement with Industrial and Commercial Bank of China Financial Services LLC, or ICBC. As of June 30, 2020, we have contributed $10 million of clearing deposits to ICBC in connection with this clearing arrangement. These deposits are recorded in other current assets in our Condensed Consolidated Balance Sheets. Some of the trading activity in
Execution Access is cleared by ICBC through the Fixed Income Clearing Corporation, with ICBC acting as agent. Execution Access assumes the counterparty risk of clients that do not clear through the Fixed Income Clearing Corporation. Counterparty risk of clients exists for Execution Access between the trade date and settlement date of the individual transactions, which is at least one business day (or more, if specified by the U.S. Treasury issuance calendar). Counterparties that do not clear through the Fixed Income Clearing Corporation are subject to a credit due diligence process and may be required to post collateral, provide principal letters, or provide other forms of credit enhancement to Execution Access for the purpose of mitigating counterparty risk. Daily position trading limits are also enforced for such counterparties.
We have credit risk related to transaction and subscription-based revenues that are billed to customers on a monthly or quarterly basis, in arrears. Our potential exposure to credit losses on these transactions is represented by the receivable balances in our Condensed Consolidated Balance Sheets. We review and evaluate changes in the status of our counterparties’ creditworthiness. Credit losses such as those described above could adversely affect our consolidated financial position and results of operations.
On January 1, 2020, we adopted ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” See “Recently Adopted Accounting Standard,” of Note 2, “Basis of Presentation and Principles of Consolidation,” to the condensed consolidated financial statements for further discussion. This ASU changes the impairment model for certain financial instruments. The new model is a forward looking expected loss model and applies to financial assets subject to credit losses and measured at amortized cost and certain off-balance sheet credit exposures. This includes loans, held-to-maturity debt securities, loan commitments, financial guarantees and trade receivables.
We also are exposed to credit risk through our clearing operations with Nasdaq Clearing. See Note 14, “Clearing Operations,” to the condensed consolidated financial statements for further discussion. Our clearinghouse holds material amounts of clearing member cash deposits which are held or invested primarily to provide security of capital while minimizing credit, market and liquidity risks. While we seek to achieve a reasonable rate of return, we are primarily concerned with preservation of capital and managing the risks associated with these deposits. As the clearinghouse may pass on interest revenues (minus costs) to the members, this could include negative or reduced yield due to market conditions. The following is a summary of the risks associated with these deposits and how these risks are mitigated.
•Credit Risk. When the clearinghouse has the ability to hold cash collateral at a central bank, the clearinghouse utilizes its access to the central bank system to minimize credit risk exposures. When funds are not held at a central bank, we seek to substantially mitigate credit risk
by ensuring that investments are primarily placed in highly rated government and supranational debt instruments.
•Liquidity Risk. Liquidity risk is the risk a clearinghouse may not be able to meet its payment obligations in the right currency, in the right place and the right time. To mitigate this risk, the clearinghouse monitors liquidity requirements closely and maintains funds and assets in a manner which minimizes the risk of loss or delay in the access by the clearinghouse to such funds and assets. For example, holding funds with a central bank where possible or investing in highly liquid government or supranational debt instruments serves to reduce liquidity risks.
•Interest Rate Risk. Interest rate risk is the risk that interest rates rise causing the value of purchased securities to decline. If we were required to sell
securities prior to maturity, and interest rates had risen, the sale of the securities might be made at a loss relative to the latest market price. Our clearinghouse seeks to manage this risk by making short term investments of members' cash deposits. In addition, the clearinghouse investment guidelines allow for direct purchases or repurchase agreements of high quality sovereign debt (for example, European government and U.S. Treasury securities), central bank certificates and supranational debt instruments with short dated maturities.
•Security Issuer Risk. Security issuer risk is the risk that an issuer of a security defaults on its payment when the security matures. This risk is mitigated by limiting allowable investments and collateral under reverse repurchase agreements to high quality sovereign, government agency or supranational debt instruments.
* * * * * *
Item 4. Controls and Procedures
Disclosure controls and procedures. Nasdaq’s management, with the participation of Nasdaq’s President and Chief Executive Officer, and Executive Vice President, Corporate Strategy and Chief Financial Officer, has evaluated the effectiveness of Nasdaq’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, Nasdaq’s President and Chief Executive Officer and Executive Vice President, Corporate Strategy and Chief Financial Officer, have concluded that, as of the end of such period, Nasdaq’s disclosure controls and procedures are effective.
Changes in internal control over financial reporting. There have been no changes in Nasdaq’s internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, Nasdaq’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See “Legal and Regulatory Matters - Litigation,” of Note 17, “Commitments, Contingencies and Guarantees,” to the condensed consolidated financial statements, which is incorporated herein by reference.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed under “Risk Factors” in our most recent Form 10-K. These risks could materially and adversely affect our business, financial condition and results of operations. The risks and uncertainties in our most recent Form 10-K and Form 10-Q are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.
Risks Relating to our Business
The COVID-19 pandemic could have an adverse effect on our business, financial condition, liquidity or results of operations.
We are continuing to closely monitor the evolving impact of the COVID-19 pandemic on our industry and business in the United States and worldwide, including its effect on our customers, employees, vendors and other stakeholders. The COVID-19 pandemic has created significant volatility, uncertainty and economic disruption, which may adversely affect our business, financial condition, liquidity or results of operations.
While results in our Market Services business were strong in the second quarter reflecting unusually high trading volumes amidst the COVID-19 pandemic, there is no assurance that such trading levels will continue. In our Corporate Services segment, while we have experienced increased demand for IPOs in the second quarter compared to the first quarter, we cannot predict whether investor demand for IPOs and new listings will continue for the remainder of the year, and customers in certain industries, particularly those adversely affected by the effects of COVID-19, are delaying or reducing discretionary spending
for our Corporate Services offerings. We continue to observe that certain Market Technology customers are delaying purchasing decisions or extending implementation schedules. In our Information Services segment, some customers are scrutinizing their discretionary spending, and consequently extending our sales cycle. While our licensed ETPs, and in particular our Nasdaq 100 index, have grown due to the increases in the market and net inflows, there is no assurance that such growth or volume trends will continue for the remainder of year.
As the COVID-19 pandemic and its resultant economic effects continue, other existing customers in our each of our segments may reduce or cancel spending for our products and services. Additionally, our sales pipeline with new client prospects may be further affected as new clients may delay or cancel purchase decisions while they evaluate the impact of COVID-19.
In response to COVID-19, we have shifted to having a majority of our staff work from home and have added additional network capacity and monitoring. However, such remote work may cause heightened cybersecurity and operational risks. Certain of our global offices have re-opened on a limited basis, or expect to re-open subject to limitations during the third quarter. We could face disruption to our business or operations if a significant number of our employees or any of our key employees becomes ill due to the virus. Any disruption to our ability to deliver services to our clients could result in liability to our customers, regulatory fines, penalties or other sanctions, increased operational costs or harm to our reputation and brand. This, in turn, may have an adverse effect on our business, financial condition, liquidity or results of operations.
Due to the pandemic, we may be exposed to increased credit risk from third parties, including our customers, who may be unable to pay our invoices when they become due. We also may be exposed to increased counterparty default risk, including at Nasdaq Clearing and in our FICC business, which could pose a risk to our liquidity. In addition, we may be exposed to liquidity and credit risk with respect to our investments; if the value of those investments becomes impaired, we may be required to incur charges relating to such impairments. If any of these risks materialize, we may experience adverse consequences to our operating results or ability to conduct our business.
The extent to which the COVID-19 pandemic impacts our business, financial condition, liquidity or results of operations will depend on future developments, which are uncertain and cannot be predicted, including the scope and duration of the COVID-19 pandemic, the length of time government, commercial and travel limitations are in place, the continued effectiveness of our remote work arrangements, actions taken by governmental authorities, regulators and other third parties in response to the pandemic, as well as other direct and indirect impacts on us, our exchanges, our customers, our vendors and other stakeholders. To the extent the COVID-19 pandemic adversely affects our business, financial condition, liquidity or results of operations, it may also have the effect of heightening risks described in the section entitled “Risk Factors” in our most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The table below represents repurchases made by or on behalf of us or any “affiliated purchaser” of our common stock during the fiscal quarter ended June 30, 2020:
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Period(1)(2) | | (a) Total Number of Shares Purchased | | (b) Average Price Paid Per Share | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | (d) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions) |
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April 2020 | | | | | | | | |
Share repurchase program | | 310,707 | | | $ | 97.54 | | | 310,707 | | | $ | 480 | |
Employee transactions | | 8,990 | | | $ | 96.47 | | | N/A | | N/A |
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May 2020 | | | | | | | | |
Share repurchase program | | — | | | $ | — | | | — | | | $ | 480 | |
Employee transactions | | 3,235 | | | $ | 108.42 | | | N/A | | N/A |
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June 2020 | | | | | | | | |
Share repurchase program | | — | | | $ | — | | | — | | | $ | 480 | |
Employee transactions | | 9,033 | | | $ | 118.13 | | | N/A | | N/A |
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Total Quarter Ended June 30, 2020 | | | | | | | | |
Share repurchase program | | 310,707 | | | $ | 97.54 | | | 310,707 | | | $ | 480 | |
Employee transactions | | 21,258 | | | $ | 107.55 | | | N/A | | N/A |
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N/A Not applicable.
(1) See “Share Repurchase Program,” of Note 11, “Nasdaq Stockholders’ Equity,” to the condensed consolidated financial statements for further discussion of our share repurchase program.
(2) Represents shares surrendered to us to satisfy tax withholding obligations arising from the vesting of restricted stock and PSUs issued to employees.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
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101 | | The following materials from the Nasdaq, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019; (ii) Condensed Consolidated Statements of Income for the three and six months ended June 30, 2020 and 2019; (iii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020 and 2019; (iv) Condensed Consolidated Statements of Changes in Stockholders' Equity for the three and six months ended June 30, 2020 and 2019; (v) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019; and (vi) notes to condensed consolidated financial statements. |
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104 | | Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101. |
* Management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | Nasdaq, Inc. | | |
| | (Registrant) | | |
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Date: | August 5, 2020 | By: | /s/ Adena T. Friedman | |
| | Name: | Adena T. Friedman | |
| | Title: | President and Chief Executive Officer | |
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Date: | August 5, 2020 | By: | /s/ Michael Ptasznik | |
| | Name: | Michael Ptasznik | |
| | Title: | Executive Vice President, Corporate Strategy and Chief Financial Officer | |
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