Nasdaq OMX’s (NASDAQ:NDAQ) fourth quarter earnings were helped by diversification of operations as net revenue for the three months ending December were in-line with the figure reported in 2011, despite a decline in transaction volumes. More than 70% of net revenues were earned through non-transaction based business, the highest level in the company’s history. The issuer services division, which includes the exchange’s listing services, was the biggest gainer with double digit growth and accounted for a quarter of net revenues.
We believe the company’s diverse range of operations will help it wade through a period of tepid trading activity. Our price estimate of $29 for Nasdaq OMX’s stock is at a premium of 10% to the current market price.
Trading Volumes Remain Low
In 2011, U.S. cash equity trading accounted for nearly half of Nasdaq’s gross revenue. However, industry-wide trading volumes were low throughout 2012. The total U.S.-listed securities average daily volume dropped by 18% from the 2011 level while Nasdaq’s market share dropped from 21% to 19%. As a result, U.S. cash equity trading revenues declined by 26% and accounted for just 38% of the company’s gross revenues. The trading slump can be attributed to low volatility in the market and the prevailing economic uncertainty. We expect a gradual increase in industry-wide trading in the next few years, which will lead to an increase in transaction-based revenues.
Issuer Services Carry The Load
Nasdaq reported an 11% year-on-year increase in issuer services revenues for the fourth quarter, helped largely by a 55% increase in corporate solutions revenue. This growth was driven by the acquisition of BWise in May 2012 and Glide Technologies in October 2011. The corporate solutions division also reported double digit growth in GlobeNewswire, Directors Desk and Surveillance businesses.
The Global Index Group, which provides Nasdaq-branded indexes and associated derivatives, reported an 8% year-on-year revenue growth helped by an increase in underlying assets associated with licensed financial products. We account for the Global Index Group as part of our “Broker and Index Services” division and expect moderate organic growth in the coming years. You can modify the interactive chart below to gauge the effect a change in forecast will have on our price estimate.
Listing Services Remain Solid
Nasdaq reported 19 initial public offerings in the U.S. during the fourth quarter of 2012, but the number of companies listed on the exchange dropped from 2,610 at the end of the September quarter to 2,577. However, revenues earned through annual renewal, listing of additional shares and initial listing were in-line with the figures for the fourth quarter of 2011. The IPO industry has also been adversely affected by the current economic uncertainty, but we expect a long-term recovery.