Nasdaq Annual Report 2016

FY2016 Annual Report · Nasdaq

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Fueling Ambition

2016 NASDAQ ANNUAL REPORTFueling our Ambitions
“One of the things that really I’m passionate about is the fact that we are a

mission driven company. We are here to make the capital markets around the

world as efficient, as effective as possible. And that includes partnering with

corporate clients, and as they are accessing the capital markets, what tools

do they need, what kind of liquidity capabilities do they need, in order to

have an effective relationship with the capital markets to raise money, to be

able to grow their businesses, and expand around the world. That is a critical

part of what we do, and as we look at technologies and capabilities that we

can launch inside our markets, but as well as to support the C-suite as they’re

making that road into the capital markets. We feel really, really excited about

helping them on that journey. We have a range of ways that we can make sure

that they have the right tools, intelligence, and capabilities to interact with

the capital markets effectively. How do we use that technology to make sure

that we create a more efficient capital markets and make it so that the world

wide capital markets are operating in a well-tuned manner that can allow for

economic growth around the world. It is so exciting when I see the level of

pride and passion that our employees have around what we can do

to further the ability for people to access capital and then invest in the

markets around the world and how it really does drive economic growth.

It gets everyone excited to come to work every day.”

-Adena T. Friedman, President and Chief Executive Officer, Nasdaq, Inc.

“All of our efforts are centered on a singular focus—to fuel

“Financially, our

the ambition of our clients. By better serving broker-dealers,

exchange operators, corporates and investors we create

better opportunities for all parties to interact with the capital

markets. And by doing so, we will create value for shareholders,

continue to foster a culture of performance and success for our

results were strong

in 2016, with full-

year net revenues

up to a record $2.28

billion and non-GAAP

operating income

employees, and advance our position as the franchise of choice

also rising to a record,

for prospects and partners around the globe.”

$1.06 billion.”

Adena T. Friedman, President and Chief Executive Officer, Nasdaq, Inc.

Dear Shareholders,

Over the past year, Nasdaq again advanced its ambitions to improve and serve the capital

markets ecosystem. Our progress was evident in the strengthening of our competitive position

through the adoption of new technologies, our strategic acquisitions and the expansion of our

product and service portfolio. All of our efforts are centered on a singular focus – to fuel the

ambition of our clients.

By better serving broker-dealers, exchange operators, corporates and investors we create

better opportunities for all parties to interact with the capital markets. And by doing so, we

will create value for shareholders, continue to foster a culture of performance and success for

our employees, and advance our position as the franchise of choice for prospects and partners

around the globe.

Our Ambitions

$2.28B

I am deeply honored by the Board’s decision to select me as Nasdaq’s Chief Executive Officer.

Net Revenues 1

To me, Nasdaq is far more than a company. The technology, products, and services we provide

help our clients better navigate the complexities of today’s global capital markets. Our

offerings allow ideas to find capital and to seize opportunity, and we create more constructive

interactions with capital markets which create jobs and drive economic growth. I have spent

most of my career at Nasdaq, nearly 20 years, and consider the entrepreneurial spirit and

energy of my colleagues to be the engine that fuels our own ambition.

This spirit is the direct result of the extraordinary leadership of my predecessor, Bob Greifeld,

who led Nasdaq through several important transformations, leveraging the underpinnings

of our position as a leading U.S. cash equity market to become a global capital market and

financial technology solutions leader with a market capitalization of more than $11 billion.

The long-term focus on shareholder value that Bob advanced during his 14-year tenure as CEO

is a focus that I fully embrace. We accomplished much for our shareholders in 2016, and we

intend to continue making great strides for you in 2017 and the years and decades to come.

Financially, our results were strong in 2016, with full-year net revenues1 up to a record

$1.06B

$2.28 billion and non-GAAP operating income2 also rising to a record, $1.06 billion.

Non-GAAP Operating Income 2

1. Represents revenues less transaction-based expenses.

2. Refer to our accompanying reconciliation of U.S. GAAP to non-GAAP operating income.

Our Actions

“If fueling our

clients’ ambitions

is our core focus,

undoubtedly,

technology is

a key catalyst

to our mutual

success. It is a

component we

know well.”

Our industry is dynamic and we continue to make key investments in our businesses that help

strengthen our competitive position, deepen our client relationships, and drive future product

innovation. In Market Services, we acquired International Securities Exchange, the operator of

three U.S. equity options exchanges. We also completed the acquisition of Nasdaq CXC, formerly

Chi-X Canada, an alternative market in Canada for the trading of Canadian-listed securities. In

Corporate Solutions, we purchased Marketwired, a global provider of news distribution services

with about 7,500 corporate clients, and Boardvantage, a leading board collaboration and

productivity provider with approximately 1,900 clients. We are already well along the path to

integrate these four businesses, and are targeting about $60 million of combined cost synergies.

It has always been our people at Nasdaq who have been responsible for our progress and

taking the business to new heights. In addition to developing a diverse mix of businesses that

will best serve our industry and our clients, we focus on having the right people to operate

these businesses – individuals with vision, finely honed management skills and deep industry

knowledge. In 2016, we continued to strengthen our senior management team in order to drive

the kind of performance and innovation we demand of ourselves.

At midyear, we appointed Michael Ptasznik as Chief Financial Officer, a position he held at TMX

Group since 2002. Later in the year, we promoted Stacie Swanstrom to Executive Vice President,

Corporate Solutions and Bjørn Sibbern to Executive Vice President, Global Information Services.

Additionally, Hans-Ole Jochumsen was elevated to Vice Chairman, a role in which he works closely

with senior leaders across Nasdaq, most notably in Europe, to identify and select appropriate new

opportunities for our businesses.

Fueling Our Clients’ Ambitions

Opportunities within Nasdaq’s businesses are numerous in today’s environment. We find ourselves

in a period of technological innovation that is truly exciting in its breadth and potential to

impact the businesses we operate. If fueling our clients’ ambitions is our core focus, undoubtedly,

technology is a key catalyst to our mutual success. It is a component we know well. Nasdaq was

founded in 1971 as the world’s first electronic stock market and we remain a financial technology

leader today. In fact, nearly one-third of our global workforce comprises engineers, and today our

technology powers more than 85 marketplaces around the world.

In many ways however, we feel we are still taking the early steps in this journey and there is

much more ahead. Last year, for example, we unveiled the Nasdaq Financial Framework, which

brings together all of the elements of our Market Technology capabilities. The Framework

consists of a single operational core that ties together our business functionality, allowing

exchanges, marketplaces, broker-dealers, clearinghouses and other clients to integrate our

applications with each other seamlessly to create a more streamlined end-to-end trade lifecycle

solution. Additionally, our capital markets clients can now easily leverage the latest technologies

we are developing, such as blockchain-driven services and cloud applications to help achieve

their objectives.

Importantly, we have also built new products and services for our corporate clients. During 2016,

we launched a new innovative Investor Relations platform called Nasdaq IR Insight, which was

designed with significant client collaboration to capture the work streams of Investor Relations

Officers, improve data intelligence and enhance decision-making through a single product. We also

unveiled Nasdaq Influencers, a new solution for communications and marketing professionals to

discover and connect with the most relevant public thought leaders.

In addition, we rolled out Trading Insights, a product suite that combines proprietary data with

advanced analytics and machine learning to provide our broker-dealer clients with additional

insights about the markets that we operate.

While the ways in which we support our clients’ ambitions continue to evolve, the principles of

capital formation and well-functioning markets remain at the core of our organization. Companies

seek growth, from emerging private companies to the opening bell of their IPOs, to the moment

when they become industry giants and household names. In fact, Nasdaq led U.S. exchanges last

year by helping companies begin that journey, with a total of 91 IPOs, representing 73% of all U.S.

IPOs and including 87% of technology IPOs. We have been successful in combining our market

structure and trading tools with our corporate solutions, as well as the attributes of our brand,

to create a truly differentiated value proposition for our new listed clients.

Executing On Our Ambitions

In 2017, we find ourselves well-positioned to capitalize on the opportunities inherent in a rapidly

changing world. Looking across Nasdaq today, I believe this franchise has the broadest set of

capabilities in the industry and therefore is well-suited to serve the diverse needs of our global

client base. Of course, the secret to capitalizing on these capabilities is extraordinary execution.

To us, that means functioning as a single, seamless entity across business units, and we are in a

better place to achieve this today than at any point in our history.

Progress for us also means we routinely evaluate our businesses and relationships to find the

best path to serve our clients in a unified and strategic way. With our fourth-quarter results, we

announced the realignment of our reporting segments, creating a new Corporate Services segment

that incorporates our Listing Services and Corporate Solutions businesses. In addition, Market

Technology has become a stand-alone segment. These changes are designed to let the investment

community better understand how we approach our clients, develop our offerings and create value

across the franchise. We also announced a new fixed income strategy, bringing together our U.S. and

European fixed income products and services under a single brand called Nasdaq Fixed Income.

“Nasdaq led U.S.

exchanges last

year by helping

companies

begin that

journey, with a

total of 91 IPOs,

representing

73% of all

U.S. IPOs and

including 87% of

technology IPOs.”

Last year was both eventful and successful and one that speaks to the opportunities that lie ahead

for Nasdaq. We live in dynamic times – technology, business and the geopolitical landscapes are all

evolving at a rapid pace. The role Nasdaq plays at the intersection of capital markets and technology

uniquely allows us to help clients navigate this challenging environment. Our management team is

73%

of all U.S. IPOs

keenly focused on identifying these opportunities and advancing our clients’ ambitions.

I am excited to lead this organization forward in the next phase of its journey. I look forward to

reporting to you next year on our achievements and our progress in executing our long-term strategy.

Adena T. Friedman

President and Chief Executive Officer

Nasdaq, Inc.

87%

of all tech IPOs

Fueling Long-Term Growth and Shareholder Value
Nasdaq continues to fuel progress for clients and its business. In 2016, the company delivered

net revenues1 of $2.3 billion, record non-trading segment revenues2 of $1.5 billion and record

non-GAAP diluted earnings per share (EPS) of $3.683. As a reflection of the company’s strong

performance, Nasdaq delivered a double digit shareholder return of 17.5%.

Net Revenues

Operating Cash Flow*

Non-GAAP Net Income3

$2,277M

$722M

$621M

+9% Increase Year-over-Year

+6% Increase Year-Over-Year

+7% Increase Year-Over-Year

*Cash flow from operating activities

First in FinTech
Nasdaq’s disruptive nature has been part of its DNA since its start in 1971. And although the term

Fintech wasn’t around back then, the Fintech culture and spirit of new value creation was thriving

at Nasdaq—just as it is today. Fintech is a mindset that challenges the status quo with innovation

and new ideas and solutions for navigating the capital markets ecosystem. Nasdaq has always

been First in Fintech by putting Fintech First.

Nasdaq 2017

Execution Priorities

As a global capital market

infrastructure provider,

Enhance Competitive

Positioning

Market Services:
•Intense customer focus

Nasdaq has one of the

• Introduce innovative

broadest sets of capabilities

order types

Market Technology:
• Expanding use of Nasdaq

Financial Targets:
• Achieve $60m in synergies

Financial Framework

by year-end 2017

• Continue expanding

• Deliver $0.40 accretion

capabilities and user

segments in SMARTS

to 2015 diluted EPS

Commercialize Disruptive

in the industry. We use

these capabilities to

enable entrepreneurs and

innovators to find capital

to grow and move their

businesses forward—which

is the heart of our fintech

mission. Here are some of

the priorities that will ensure

we are successful in the

delivery of that mission.

•Continue NFX progress

Complete Integration

Technologies

Information Services:
• Expanding offering from
critical data to value-added

analytics

of Acquisitions

Market Services:
• Migrate 4 exchanges

to Nasdaq’s platform

•Extend Smart Beta

• Maintain healthy share

Corporate Services:
• Enhance/integrate Corporate

Solutions offering

capture

• Deliver efficiencies

to customers

• Continuous improvement of

sales/service capabilities in

Corporate Services:
• Integrate Directors Desk/

Corporate Solutions

Boardvantage

• Continue Listing Services

• Integrate Marketwired/

share gain story

GlobeNewswire

Blockchain:
• Incorporate into Market
Technology offering

•The Nasdaq Private Market

Cloud:
• Utilize across Corporate

Solutions

• Increasingly use in Market

Technology

Machine Intelligence:
•SMARTS eComms

•Trading Analytics

1. Represents revenues less transaction-based expenses.

2. Non-trading segment revenues represents revenues from our Corporate Services, Information Services and Market Technology segments.

3. Refer to our accompanying reconciliations of U.S. GAAP to non-GAAP net income, diluted earnings per share and operating income.

Profitable Growth Drives Value Creation
A resilient business model and consistent execution enables Nasdaq to achieve its goal of double-

digit value creation, which the company achieved in 2016 with 17.5% total shareholder return.

Objective: Double-Digit Value Creation (TSR)

High
Recurring
Revenue

Resilient
Business Model
Through
Cycles

Consistent
Operating
Leverage and
Strong Cash
Conversion

Effective
Capital
Deployment

• 75% subscription

• Consistent organic growth

• 50% EBITDA5 margin

• Disciplined & ROI-focused

and recurring revenue4

in recurring and subscription

in 2016

businesses

• ~Averaged 75 bps annual

non-GAAP operating

margin expansion last

• Internal growth initiatives

• Growth in dividend

• Opportunistic share buybacks

3 years6

• Targeted acquisitions

• ~95% free cash flow

conversion7 of non-GAAP

net income over last

5 years

4. Represents revenues from our Corporate Services, Information Services and Market Technology segments, as well as our Trade Management Services business,

formerly referred to as Access and Broker Services.

5. Refer to accompanying EBITDA margin schedule.

6. Non-GAAP operating margin increased from 44% in 2013 to 46% in 2016. Refer to accompanying reconciliation of U.S. GAAP to non-GAAP Operating income and

operating margin

7. Free cash flow conversion defined as free cash flow excluding Section 31 fees divided by non-GAAP net income.

Our FinTech Past, Present and Future

1985

Providing Investors with

Transparency and Insight

The NASDAQ-100 Index®

launched on January 31, 1985

as a market capitalization-

weighted index. Fast forward

2004

Greater Market

Certainty in Pricing

In 2004, Nasdaq launched a

to November 1998, in order to

new electronic closing process,

2016

Ramping up Market

Surveillance

make the NASDAQ-100 suitable

the Nasdaq Closing Cross,

Through the use of cognitive

for the basis of an exchange-

traded fund (ETF), the index

weights were modified away

from market cap weights in a

special rebalance. This paved

which provides the industry

computing and machine

with even greater certainty in

learning, Nasdaq has

pricing major transactions and

dramatically increased its

daily mutual fund Net Asset

SMARTS Trade Surveillance

Values. Today, markets around

capabilities to offer a

the way for the launch of QQQ

the world rely on the Closing

next-generation, holistic

or the NASDAQ-100 Index

Tracking Stock®, today known

as the PowerShares QQQ™.

Cross to set the Nasdaq Official

surveillance technology to

Closing Price (NOCP) for U.S.-

the global capital markets.

listed securities.

1971

Pioneering Electronic Trading

Nasdaq began on Feb. 8, 1971,

as the first electronic market to

display quotes for stocks not

listed on exchanges. Nasdaq

capitalized on the microprocessor,

a new technology also born

in 1971, to create the first

electronic stock market. Today,

our trading technology powers

more than 85 marketplaces

in 50 countries.

1990

Electrifying

Derivatives Trading

In 1990, then OMX sold

the world’s first electronic

exchange system for

derivatives trading after

commercializing proprietary

technology through OM, a

European derivatives market.

Derivatives trading used to

happen on trading floors and

over the phone. Now more

than 85 marketplaces around

the world use technology

2015

Bringing Blockchain to

Private Transactions

Nasdaq demonstrated a proof-

of- concept to help transform

how transactions occur in the

private market. Using Nasdaq

Linq, a customer successfully

completed its first private market

transaction using blockchain

technology. Now it is possible

for private shares to digitally

represent a record of ownership

thus reducing settlement

times and the need or paper

certificates.

2016

Making Powerful Technology

Available to Clients

Nasdaq unveiled the Nasdaq

Financial Framework, which

brings together all the elements

of our fintech innovation onto a

Bringing Vast Amounts of

Information into Focus with

Data Analytics

single platform. The framework

Nasdaq is already leveraging

More Efficient and Secure

Transactions with Blockchain

consists of a single operational

technology to harness market

Blockchain has great potential

core that ties together business

intelligence through visualization

across the financial services

functionality, allowing exchanges,

and data enhancement both for

industry, particularly in the

broker-dealers, clearinghouses

our own marketplaces and for

post-trade environment. As an

and others to easily integrate

our technology customers. By

absolute record of ownership, it

our business applications with

extracting data from multiple

could create greater efficiency and

each other. Simply stated, this

sources and putting it into

transparency in position-keeping

framework lets customers

interactive dashboards, we have a

and reconciliation. As we gain more

benefit from Nasdaq services

real-time understanding of events.

experience with the technology,

like blockchain at any particular

With these capabilities, we can

we have several areas where we

moment in time with a minimum

proactively develop new offerings

are creating working proofs of

amount of effort.

to support our customers.

concepts.

2 0 1 7 A N D B E Y O N D

The Power of the Cloud –

Data and Tools on Demand

Anywhere, Anytime

Today we are using the cloud to

power applications as well as

provide clients with services for

the delivery of key applications

like IR Insight and the new IR

webhosting platform. Innovative

cloud services like these will

become increasing popular,

especially as the cloud proves

i tself to be a safer haven for data

– maybe even more secure than

on-premises systems.

2016

Greater Insight for Better

Decision-Making

Nasdaq introduced Trading

Insights, a product suite that

combines proprietary data

with advanced analytics and

machine learning to provide

the trading community with

a comprehensive view of

how they perform in the

market, how the market

behaves, and how they can

adjust their strategies to be

more successful.

Machine Learning: Powering the

New Age of Intelligence

Today in the cloud, there are

approximately 8 zettabytes of

data and that number is expected

to grow to 35 ZB by 2020.

Machine Intelligence thrives on an

abundance of data, and this is why

we are seeing more adoption and

increased effectiveness of these

technologies. Nasdaq expects to

harness Machine Intelligence across

its businesses to provide deep

insights to the financial community,

from improving surveillance with

cognitive computing to the creation

of next-generation investment

models with machine learning.

Disclosures

Non-GAAP Information
In addition to disclosing results determined in accordance

As such, if intangible asset amortization is included in

with U.S. GAAP, Nasdaq also discloses certain non-GAAP

performance measures, it is more difficult to assess the day-

results of operations, including, but not limited to, net

to-day operating performance of the businesses, the relative

income attributable to Nasdaq, diluted earnings per share,

operating performance of the businesses between periods

and operating income, that include certain adjustments

and the earnings power of Nasdaq. Management does not

or exclude certain charges and gains that are described

consider intangible asset amortization expense for the

in the reconciliation table of U.S. GAAP to non-GAAP

purpose of evaluating the performance of our business or

information provided in this communication. Management

its managers or when making decisions to allocate resources.

uses this non-GAAP information internally, along with U.S.

Therefore, we believe performance measures excluding

GAAP information, in evaluating our performance and in

intangible asset amortization expense provide investors

making financial and operational decisions. We believe our

with a more useful representation of our businesses’

presentation of these measures provides investors with

ongoing activity in each period.

greater transparency and supplemental data relating to

our financial condition and results of operations. In addition,

we believe the presentation of these measures is useful to

investors for period-to-period comparisons of results as

the items described below do not reflect ongoing operating

performance.

Restructuring charges: Restructuring charges are associated

with our 2015 restructuring plan to improve performance,

cut costs and reduce spending and are primarily related to (i)

the rebranding of our company name from The NASDAQ OMX

Group, Inc. to Nasdaq, Inc., (ii) severance and other termination

benefits, (iii) costs to vacate duplicate facilities, and (iv) asset

These measures are not in accordance with, or an alternative

impairment charges. We exclude these restructuring costs

to, U.S. GAAP, and may be different from non-GAAP measures

because these costs do not reflect future operating expenses

used by other companies. Investors should not rely on any

and do not contribute to a meaningful evaluation of Nasdaq’s

single financial measure when evaluating our business. We

ongoing operating performance or comparison of Nasdaq’s

recommend investors review the U.S. GAAP financial measures

performance between periods.

included in our 2016 Annual Report on Form 10-K including

our consolidated financial statements and the notes thereto.

When viewed in conjunction with our U.S. GAAP results and

the accompanying reconciliations, we believe these non-GAAP

measures provide greater transparency and a more complete

understanding of factors affecting our business than U.S. GAAP

measures alone.

Merger and strategic initiatives expense: We have pursued

various strategic initiatives and completed a number

of acquisitions in recent years which have resulted in

expenses which would not have otherwise been incurred.

These expenses 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

We understand that analysts and investors regularly rely on

based on the size, timing and complexity of the transaction.

non-GAAP financial measures, such as non-GAAP net income

Accordingly, we exclude these costs for purposes of calculating

attributable to Nasdaq, non-GAAP diluted earnings per

non-GAAP measures which provide a more meaningful

share, and non-GAAP operating income to assess operating

analysis of Nasdaq’s ongoing operating performance or

performance. We use these measures because they highlight

comparisons in Nasdaq’s performance between periods.

trends more clearly in our business that may not otherwise be

apparent when relying solely on U.S. GAAP financial measures,

since these measures eliminate from our results specific

financial items, such as those described below, that have less

bearing on our ongoing operating performance.

Asset impairment charges: Intangible assets that have

indefinite lives are reviewed for impairment at least annually,

or when indicators of impairment are present. For the year

ended December 31, 2016, we recorded a pre-tax, non-cash

asset impairment charge of $578 million related to a trade name.

Amortization expense of acquired intangible assets: We

The impairment charge was the result of a decline in operating

amortize intangible assets acquired in connection with

performance and the rebranding of the trade name due to a

various acquisitions. Intangible asset amortization expense

strategic change in the direction of our Fixed Income business.

can vary from period to period due to episodic acquisitions

completed, rather than from our ongoing business operations.

Other significant items: We have excluded certain other

performance and that actual results could differ materially

charges or gains that are the result of other non-comparable

from those contained in the forward-looking information. Such

events to measure operating performance. For 2016, other

forward-looking statements include, but are not limited to (i)

significant items primarily included accelerated expense

projections relating to our future financial results, growth,

due to the retirement of the company’s former CEO for

trading volumes, products and services, order backlog, taxes

equity awards previously granted, a regulatory fine received

and achievement of synergy targets, (ii) statements about

by our exchange in Stockholm and Nasdaq Clearing, the

the closing or implementation dates and benefits of certain

release of a sublease loss reserve due to the early exit of a

strategic, restructuring, technology, de-leveraging and capital

facility, and the impact of the write-off of an equity method

return initiatives, (iii) statements about our integrations of our

investment, partially offset by a gain resulting from the sale

recent acquisitions, (iv) statements relating to any litigation

of a percentage of a separate equity method investment. For

or regulatory or government investigation or action to which

2015, other significant items included income from our equity

we are or could become a party, and (v) other statements that

investment in The Options Clearing Corporation, or OCC,

are not historical facts. Forward-looking statements involve

where we were not able to determine what our share of OCC’s

a number of risks, uncertainties or other factors beyond

income was for the year ended December 31, 2014 until the

Nasdaq’s control. These factors include, but are not limited

first quarter of 2015, when financial statements were made

to, Nasdaq’s ability to implement its strategic initiatives,

available to us. As a result, we recorded other income in the

economic, political and market conditions and fluctuations,

first quarter of 2015 relating to our share of OCC’s income for

government and industry regulation, interest rate risk, U.S.

the year ended December 31, 2014. Significant adjustments

and global competition, and other factors detailed in Nasdaq’s

also included the reversal of a value added tax refund.

filings with the U.S. Securities and Exchange Commission,

Disclaimer
Cautionary Note Regarding Forward-Looking Statements

Information set forth in this communication contains

forward-looking statements that involve a number of

risks and uncertainties. Nasdaq cautions readers that any

forward-looking information is not a guarantee of future

including its annual reports on Form 10-K and quarterly

reports on Form 10-Q which are available on Nasdaq’s investor

relations website at http://ir.nasdaq.com and the SEC’s website

at www.sec.gov. Nasdaq undertakes no obligation to publicly

update any forward-looking statement, whether as a result of

new information, future events or otherwise.

Operating Income And Operating Margin
Reconciliation of U.S. GAAP to Non-GAAP

(US$ millions)

U.S. GAAP REVENUES less transaction-based expenses

U.S. GAAP OPERATING INCOME

Voluntary Accommodation Program (12)

Securities and Exchange Commission matter (13)

Merger and strategic initiatives (3)

Restructuring charges (2)

Extinguishment of debt (15)

Special legal expenses (10)

Sublease reserve (9)

Reversal of value added tax refund (8)

Amortization of acquired intangible assets (1)

Other

Regulatory matters (5)

Executive compensation (6)

Total Non-GAAP adjustments

NON-GAAP OPERATING INCOME

U.S. GAAP OPERATING MARGIN*

NON-GAAP OPERATING MARGIN**

2013

2014

2015

$1,895

$2,067

$2,090

$688

$754

$720

2016

2,277

$839

(3)

172

148

176

256

(1)

216

$836

$930

$976

$1,055

36%

44%

36%

45%

34%

47%

37%

46%

*U.S. GAAP operating margin equals U.S.GAAP operating income divided by total revenues less transaction-based expenses.

**Non-GAAP operating margin equals non-GAAP operating income divided by total revenues less transaction-based expenses.

EBIDTA Margin
Earnings Before Interest, Taxes, Depreciation and Amortization

(US$ millions)

U.S. GAAP net income attributable to Nasdaq

Income tax provision

Net income from unconsolidated investees

Other investment income

Net interest expense

Asset impairment charges

U.S. GAAP operating income

Non-GAAP Adjustments*

Non-GAAP operating income

Depreciation and amortization of tangibles

EBITDA

Net Revenues

EBITDA Margin**

2016

$108

(2)

(3)

130

578

$839

216

$1,055

$1,143

$2,277

50%

* See accompanying reconciliation of U.S. GAAP operating income to non-GAAP operating income

for summary of 2016 non–GAAP adjustments.

**EBITDA margin defined as EBITDA divided by net revenues.

Free Cash Flow

Free Cash Flow Calculation
(US$ millions)

Cash flow from operations*

Capital expenditure

Free cash flow

Section 31 fees (net)**

Free cash flow ex. Section 31 fees

Non-GAAP Net Income

Free Cash Flow ex. Section 31 Fees
divided by Non-GAAP Net Income

2012

2013

2014

2015

2016 2012 – 2016

$567

(87)

480

493

464

106%

$548

(115)

433

441

484

91%

$632

(140)

492

(28)

464

542

86%

$682

(133)

549

565

581

97%

$722

(134)

588

(4)

584

621

94%

$3,151

(609)

2,542

2,547

2,692

95%

* Cash flow from operations has been restated for adoption of Accounting Standards Update 2016-15 and 2016-18.

** Net of change in Section 31 fees receivables of $4 million in 2012; ($7 million) in 2013; $14 million in 2014; ($11 million) in 2015;

$1 million in 2016 and $1 million in 2012-2016.

Net Income and Diluted EPS
Reconciliation of U.S. GAAP to Non-GAAP

(US$ millions, except EPS)

2012

2013

2014

2015

U.S. GAAP NET INCOME ATTRIBUTABLE TO NASDAQ

$352

$385

$414

$428

Voluntary Accommodation Program (12)

Securities and Exchange Commission matter (13)

Income from open positions relating to the operations of the exchange

Gain on sale of an investment security (14)

Merger and strategic initiatives (3)

Extinguishment of debt (15)

Asset impairment charges (4)

Loss on divestiture of a business (17)

Sublease reserve (9)

Restructuring charges (2)

Special legal expenses (10)

Income from OCC investment (7)

Reversal of value added tax refund (8)

Amortization of acquired intangible assets (1)

Other (11)

Regulatory matters (5)

Executive compensation (6)

TOTAL NON-GAAP ADJUSTMENTS

Non-GAAP adjustment to the income tax provision(16)

Total Non-GAAP Adjustments, net of tax

(11)

(30)

(3)

172

(13)

150

132

225

243

(38)

(33)

(97)

(90)

112

128

153

NON-GAAP NET INCOME ATTRIBUTABLE TO NASDAQ

$464

$484

$542

$581

GAAP diluted EPS

$2.04

$2.25

$2.39

$2.50

Total adjustments from non-GAAP net income, above

$0.65

$0.58

$0.74

$0.89

NON-GAAP DILUTED EPS

$2.69

$2.83

$3.13

$3.39

2016

$108

578

(1)

800

(287)

513

$621

$0.64

$3.04

$3.68

Non-GAAP Adjustments Footnotes
(1) Refer to the non-GAAP information section for further

associated with a receivable under a tax sharing agreement with

discussion of why we consider amortization expense of acquired

an unrelated party. For the year ended December 31, 2012,

intangible assets to be a non-GAAP adjustment.

merger and strategic initiatives expense related to acquisitions

(2) During the first quarter of 2015, we performed a

comprehensive review of our processes, businesses and systems

in a company-wide effort to improve performance, cut costs,

and reduce spending. In June 2016, we completed our 2015

and other strategic initiatives, net of gain on acquisition of NOS

Clearing ASA. Refer to the non-GAAP information for further

discussion on why we consider merger and strategic initiatives

expense to be a non-GAAP adjustment.

restructuring plan. For the year ended December 31, 2016

(4) For the year ended December 31, 2016, we recorded a

restructuring charges primarily related to severance costs,

pre-tax, non-cash asset impairment charge of $578 million

asset impairment charges, facility-related costs associated

related to our eSpeed trade name. The impairment was the

with the consolidation of leased facilities and other charges.

result of a decline in operating performance and the rebranding

For the year ended December 31, 2015, restructuring charges

of the eSpeed trade name due to a strategic change in the

primarily related to the rebranding of our trade name, severance

direction of our overall Fixed Income business. For the year

costs, facility-related costs associated with the consolidation of

ended December 31, 2014, we recorded pre-tax, non-cash asset

leased facilities and other charges. Restructuring charges are

impairment charges of $49 million related to certain acquired

recorded on restructuring plans that have been committed to

intangible assets associated with customer relationships and

by management and are, in part, based upon management’s

certain technology assets. For the year ended December 31,

best estimates of future events. Changes to the estimates

2013, pre-tax, non-cash asset impairment charges of $14 million

may require future adjustments to the restructuring liabilities.

related to certain acquired intangible assets associated with

For the year ended December 31, 2013, as part of our 2012

customer relationships and a certain trade name. For the year

restructuring plan, we recognized restructuring charges totaling

ended December 31, 2012, we recorded pre-tax, non-cash asset

$9 million, primarily related to severance costs. For the year

impairment charges of $40 million related to certain acquired

ended December 31, 2012, restructuring charges of $44 million

intangible assets totaling $28 million as well as an other-than-

related to workforce reductions of $23 million, facilities-related

temporary impairment charge of $12 million related to an equity

charges of $10 million, asset impairment charges of $9 million

method investment. Refer to the non-GAAP information section

and $2 million of other charges. The 2012 restructuring plan was

for further discussion of why we consider asset impairment

completed in the first quarter of 2013. Refer to the non-GAAP

charges to be a non-GAAP adjustment.

information section for further discussion of why we consider

restructuring charges to be a non-GAAP adjustment.

(5) During 2016, the Swedish Financial Supervisory Authority, or

SFSA, completed their investigation of cybersecurity processes at

(3) For the year ended December 31, 2016, merger and strategic

our Nordic exchanges and clearinghouse. In December 2016, we

initiatives expense primarily related to our acquisition of

were issued a $6 million fine as a result of findings in connection

U.S. Exchange Holdings, Inc. and its subsidiaries. For the year

with this investigation. We have appealed the SFSA’s decision,

ended December 31, 2015, merger and strategic initiatives

including the amount of the fine.

expense primarily related to certain strategic initiatives and our

acquisition of Dorsey, Wright & Associates, LLC. For the year

ended December 31, 2014, merger and strategic initiatives

expense primarily related to our acquisition of the TR Corporate

businesses in May 2013 and eSpeed in June 2013 and a charge

of $23 million related to the reversal of a receivable under a tax

sharing agreement with an unrelated party. For the year ended

December 31, 2013, merger and strategic initiatives expense

reflected $45 million of merger and strategic initiative costs

primarily associated with our acquisitions of eSpeed and the TR

Corporate businesses, partially offset by a credit of $23 million

(6) For the year ended December 31, 2016, we recorded $12

million in accelerated expense due to the retirement of the

company’s former CEO for equity awards previously granted.

(7) We record our investment in The Options Clearing

Corporation, or OCC, as an equity method investment. Under the

equity method of accounting, we recognize our share of earnings

or losses of an equity method investee based on our ownership

percentage. As a result of a new capital plan implemented by

OCC, we were not able to determine what our share of OCC’s

income was for the year ended December 31, 2014 until the

first quarter of 2015, when OCC financial statements were made

(12) For the year ended December 31, 2013, we recorded a $44

available to us. Therefore, we recorded other income of $13 million

million charge related to the one-time program for voluntary

in the first quarter of 2015 relating to our share of OCC’s income

accommodations to qualifying members of up to $62 million, for

for the year ended December 31, 2014.

which a liability was recorded when the program was approved by

(8) We previously recorded receivables for expected value added

tax refunds based on an approach that had been accepted by

the tax authorities in prior years. The tax authorities have since

challenged our approach, and the revised position of the tax

authorities was upheld in court during the first quarter of 2015.

As a result, in the first quarter of 2015, we recorded a charge

of $12 million for previously recorded receivables based on the

court decision.

(9) The credit of $1 million for the year ended December 31,

2016, pertains to the release of a previously recorded sublease

the SEC in March 2013. This program expanded the pool available

to compensate members of The Nasdaq Stock Market for qualified

losses arising directly from the system issues experienced with

the Facebook IPO that occurred on May 18, 2012. After claims

were reviewed, our liability was reduced to $44 million and

payment of valid claims totaling $44 million was made in the

fourth quarter of 2013.

(13) For the year ended December 31, 2013, we recorded a charge

of $10 million related to an SEC matter related to system issues

experienced with the Facebook IPO.

loss reserve due to the early exit of a facility, partially offset by

(14) For the year ended December 31, 2013, we recorded a gain

a sublease loss reserve charge recorded on space we currently

on the sale of an investment security of $30 million related to the

occupy due to excess capacity. For the year ended December 31,

sale of our available-for-sale investment security in Dubai Financial

2014, we recorded a sublease loss reserve of $11 million on space

Market PJSC.

we occupied due to excess capacity.

(10) In March 2015, we established a loss reserve of $31

extinguishment of debt of $11 million reflecting $9 million related

million for litigation arising from the Facebook IPO in May

to notes due in 2015 and $2 million related to refinancing costs.

(15) For the year ended December 31, 2014, we recorded a loss on

2012. The reserve was intended to cover the estimated amount

of a settlement of class-action litigation initiated on behalf of

investors in Facebook common stock on the date of its IPO. The

reserve also covered the cost of re-opening Nasdaq’s voluntary

accommodation program to allow any Nasdaq member that did not

file for compensation in 2013 to submit a claim during the second

quarter of 2015, subject to the conditions and limitations that were

applicable to claims filed in 2013. The re-opened accommodation

program is now closed. The insurance recovery recognized during

the three months ended December 31, 2015 represents amounts

reimbursed by applicable insurance coverage which offsets the

loss reserve that was recorded in March 2015. For the year ended

December 31, 2014, we recorded special legal expense of $2

million and recorded special legal expense of $3 million for the

year December 31, 2013.

(11) Other charges primarily include the write-off in 2016 of an

equity method investment, partially offset by a gain resulting from

the sale of a percentage of a separate equity method investment.

(16) Primarily includes the tax impact of each non-GAAP

adjustment. In addition, for the year ended December 31, 2016,

we recorded a $27 million tax expense due to an unfavorable tax

ruling received during the second quarter of 2016, the impact

of which related to prior periods. For the year ended December

31, 2014, the amount includes $23 million associated with the

recognition of a previously unrecognized tax benefit. This amount

is offset by the reversal of the receivable described in note 3

above. For the year ended December 31, 2013, the amount

includes $23 million associated with a reserve for an unrecognized

tax benefit. This amount is offset by the receivable described in

note 3 above.

(17) For the year ended December 31, 2012, we sold International

Derivatives Clearing Group, LLC and recorded a loss of $14 million.