Tepid trading activity during the third quarter of 2012 had an adverse effect on Nasdaq OMX’s (NASDAQ:NDAQ) earnings as total revenues were down 27% from the prior year period. Nasdaq was able to mitigate the impact of a 30% decline in equity trading volume in the U.S. and Nordic exchanges by cutting down on transaction rebates, which were down 36% compared to the third quarter of 2011. As a result, revenue excluding rebates, clearing and exchanges fees was just 6% below the figure for last year at $409 million.
Non-transaction based businesses, which include listing services, market data, market technology and access and broker services, continued strong growth observed in the last quarter and hold the key to our $29 price estimate for Nasdaq OMX’s stock.
The market data division is the most important division for Nasdaq, according to our analysis, accounting for 22% of our valuation. Revenues earned by providing propriety market data to institutional investor clients and news and information channels increased 15% year-on-year in the third quarter as demand for information increased. The company started 2012 with 19,000 subscriptions but has managed to increase the number manifold and is on track to cross 90,000 by the end of the calendar year. Innovative pricing and products such as Ultra-Feed and FPGA will drive further growth in the division, as illustrated by the interactive chart below.
Still Attracting Listings
Nasdaq has built a strong reputation as the preferred destination for technology companies in the U.S. Around 70% of such companies listed in the country are currently on Nasdaq. Despite the Facebook (NASDAQ:FB) fiasco, the exchange, the second largest in the U.S. after NYSE (NYSE:NYX), has managed to attract more than half the 109 companies that have gone public so far this year. Nasdaq hosted 17 IPOs in the third quarter including travel search engine Kayak (NASDAQ:KYAK).
Challenging macro-economic conditions have slowed down the IPO market as listings are down 10% from 2011. We forecast a slight short-term decline in the number of U.S. listings on Nasdaq.
Access services is a high margin (48% compared with cash equity trading which has EBITDA margin of 7%) business and has observed steady growth over the last few years. Last quarter, revenues increased 2% over 2011. More significantly, Nasdaq announced the launch of FinQloud, in collaboration with Amazon (NASDAQ:AMZN), to allow brokers in the U.S. to store trade information on its cloud network. Initiatives such as this and the recently launched 40G product will allow the business to continue the growth trend.
Transaction Volumes Down
Nasdaq’s share of U.S. equity market fell from 22% in the second quarter to 20% as the average daily trading volume suffered a 24% year-on-year decline. As a result, transaction-based trading and clearing revenues in the U.S. fell 33% to $29 million. BATS Global, which started just six years ago, has been siphoning away Nasdaq’s market share. The two exchanges operated by BATS now account for more than 13% of cash products traded in the country. We expect the increased competition to have a deleterious effect on Nasdaq’s market share of U.S. listed shares traded. However, we believe the company will be able to offset the loss in its core business by diversifying its offerings.
Our current valuation implies a premium of 20% to the market price. We will shortly update our model to account for the latest earnings results.