NASDAQ Posts Strong Quarter, Trading Volumes And Acquistions Drive Performance

April 28th, 2014 by Trefis Team
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Leading exchange operator NASDAQ OMX Group (NASDAQ:NDAQ) announced its Q1 2014 earnings on April 24. NASDAQ OMX’s first quarter revenues grew by over 20% year-on-year to $900 million largely due to an increase in trading activity in the U.S. and growth in the company’s technology and corporate division from acquisitions. [1] The growth in the corporate services offered by NASDAQ OMX included the investor relations (IR), multimedia solutions (MM) and public relations (PR) divisions of Reuters, which the company acquired in 2013. However, management mentioned that the company had a 9% year-on-year (y-o-y) organic increase in revenues as well.

The company’s non-GAAP operating margin was similar to Q4 2014, but was 3 percentage points lower than the prior year quarter. The decline in margins compared to Q1 2013 was mainly due to the relative growth in the trading business, which has lower margins compared to listing, indexing and market data services revenues streams. Going forward, the growth in the trading business could further compress margins due to transaction rebates and brokerage fees.

Our $33 price estimate for NASDAQ OMX’s stock is slightly lower than the current market price.

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See our full analysis for NASDAQ OMX

Transaction-Based Revenues Stagnate In Europe, Grow In The U.S.

Derivatives trading revenues generated by NASDAQ OMX’s European platform remained nearly stagnant compared to last year, with options and futures trading volumes declining by almost 15% y-o-y to 23.9 million contracts. Additionally, trading volumes of fixed income products were also down to 7.3  million contracts in the quarter, compared to 8.9 million contracts in the prior year period. The decline in these trading volumes was offset by a 15% y-o-y revenue growth in energy and carbon products to $15 million during the quarter. Going forward, we expect European futures and options trading revenues to gradually pick through 2014 due to an industry-wide increase in trading activity.

NASDAQ OMX posted slightly better figures for equity trading volumes in the U.S. There was an 11% annual increase in the revenues generated by U.S. equity trading business. The trading business in the U.S. is likely to grow on the back of a healthier trading environment and increased volatility. On the other hand, derivatives trading revenues in the U.S. were $44 million, flat compared to the prior year quarter. We have a conservative estimate of a 3-4% revenue growth in both derivatives and equity trading business in the U.S.

Non-Transaction Businesses Witness Organic Growth

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. In Q1 2014, there was a significant year-on-year revenue increase in the corporate solutions (+240%) and index licensing and brokerage services (+35%) divisions attributable to these acquisitions. However, management mentioned that not all the growth was inorganic.

NASDAQ OMX’s listing business performed well during the quarter, with a 5% increase in net listing revenues. The company listed 73 new companies on its platform, compared to 34 in the year-ago quarter. The company also announced an IPO win rate of 64%, which is a strong positive for the company as it is up from 52% in 2013. However, it is interesting to note that NASDAQ’s listing business grew by just 2% y-o-y in the U.S, whereas the growth rate in Europe was over 15%. This could signal continuing skepticism among investors and companies in the U.S. towards NASDAQ, as well as the threat posed by NYSE to NASDAQ’s listing business, especially in case of technology companies. Going forward, it is likely that the U.S. listings business takes some time to pick up, but we expect the European listings business to continue to grow at a rate similar to Q1 (see more at NASDAQ’s Tech Glitches Could Negatively Impact Its U.S. Listings Business).

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Notes:
  1. NASDAQ OMX Q1 2014 Earnings Call Transcript, Seeking Alpha, April 2014 [↩]