NASDAQ OMX Earnings Preview: Non-Core Businesses To Offset Declining Trading Volumes
NASDAQ OMX Group (NASDAQ:NDAQ) is scheduled to announce its Q1 2014 results on April 24. Over the last few years, the company’s EBITDA margins have consistently fallen from 80% in 2008 to just under 73% last year. The dip in margins is mainly attributable to a decline in the high-margin cash trading business, and that trend is likely to continue. As a result, the company has been focused on other revenue streams to offset that weakness. Last year, NASDAQ acquired the PR, multimedia and corporate solutions division of Thomson Reuters for over $350 million and the e-Speed trading platform for about $1.2 billion. These acquisitions led to significant revenue growth in the corporate services (+137%) and brokerage services (+141%) divisions, respectively. That growth was largely responsible for offsetting the 13% decline in NASDAQ’s cash equity trading business in the U.S. All other businesses remained nearly flat for the full year. Going forward, the increasing revenue contribution from market data, market technology and other corporate services is likely to further compress margins. We expect the cash equity trading business to continue to decline slightly in terms of revenues in 2014, but we expect market data and brokerage revenues to continue to grow.
Our $32 price estimate for NASDAQ OMX’s stock is slightly lower than the current market price.
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Dismal Equity And Derivatives Trading Volumes In Europe
In the first quarter of 2014, NASDAQ’s trading volumes for both fixed income products and other contracts saw significant declines compared to the prior year quarter. However, a slight increase in revenue earned per contract should offset the volume decline for the trading division. [1] Additionally, the company’s derivatives trading volumes in the U.S. were flat in the quarter compared to Q1 2013, with a slight decline in the reported revenue captured per contract (from $0.17 per contract in Q1 2013 to $0.16 in 2014). The decreasing derivatives trading volumes should be a point of concern for NASDAQ OMX, considering that derivatives trading for competing exchange operators such as CME Group (NASDAQ:CME) and Deutsche Boerse increased in Q1 2014. [2] [3]
Over the last few years, cash equity trading volumes in the U.S. have declined substantially, with NASDAQ’s matched equity volume declining from 665 million traded shares in 2008 to about 293 million shares in 2013. However, the rate of decline has slowed down in the last year. Moreover, NASDAQ’s traded volumes remained flat in Q1 2014 compared to the prior year quarter, owing to a healthier trading environment. Consequently, we expect NASDAQ’s cash equity trading volumes to stay flat over last year with a flattish forecast for full-year revenues. Looking ahead, we expect trading activity to gradually pick up in the long term.
Non-Core Businesses Continue To See Growth
NASDAQ’s non-core, lower-margin business such as Market Data, Brokerage and Indexing Services and Market Technology have witnessed growth in the last few years. Brokerage services revenues surged by 140% in 2013 mainly due to the eSpeed acquisition. Excluding eSpeed, organic growth was also strong at 20%. Going forward, we expect organic growth in this division to continue due to the increasing demand for market services.
NASDAQ’s market data revenue stream has grown at a CAGR of almost 6% since 2010. However, we have a conservative long-term estimate of about 4% annual growth in the division owing to somewhat stagnant demand for market data in European markets. Currently, we have a flat forecast for European market data services. If the demand for market data increases substantially due to the growth in derivatives trading in Europe and the European market data revenues breach the $100 million mark, then there could be a 2-3% upside to our price estimate.
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- NASDAQ Monthly Reporting Sheet, NASDAQ OMX Investor Relations, April 2014 [↩]
- CME Group Monthly Volumes, CME Investor Relations, April 2014 [↩]
- Deutsche Boerse Monthly Volumes, Deutsche Boerse Investor Relations, April 2014 [↩]