NASDAQ Earnings: Non-Transaction Businesses Offset Low Trading Volumes
NASDAQ OMX Group (NASDAQ:NDAQ) announced its second quarter results on July 24. The company’s net revenues in Q2 grew by 6% year-on-year (y-o-y) to $865 million. Growth in revenues was lower than the 20% increase in Q1 largely due to a decline in trading activity in the U.S., particularly derivatives trading. NASDAQ OMX’s technology and corporate division grew significantly over the prior year quarter due to acquisitions made last year. The exchange operator acquired the investor relations (IR), multimedia solutions (MM) and public relations (PR) divisions of Reuters in late 2013, due to which its non-transaction based businesses witnessed a solid 23% year-on-year growth. However, excluding the impact of acquisitions, the company’s three non-transaction businesses still grew by 9% over 2013 levels. [1]
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Non-Trading Businesses Sustain Growth
NASDAQ’s corporate solutions division grew by 81% y-o-y to $80 million with growth coming from all four sub-divisions – investor relations (+75%), multimedia solutions (+157%), public relations (+66%) and governance (+25%). This was the first full quarter for the company following the acquisition of Thomson Reuters’ corporate solutions businesses in 2013, as some of the listed issuers started operations in February this year. Moreover, management believes that the impact of transitioning to a new billing system and product platforms could improve profits in the long term. Revenues generated by market technology solutions grew by nearly 12% to $58 million during the period. The company expects the profitability of the tech division (which includes market technology and corporate solutions) to improve in the coming quarters due to cost synergies with the Thomson Reuters’ businesses. NASDAQ has a margin target of 20% for the tech division by the end of 2015, up from 8% currently.
NASDAQ’s market data product revenues were up by over 13% year-on-year to $101 million. Within the market data division, U.S. market data product revenues grew by 14% to $72 million while index data product revenues rose by 25% to $8 million. The impact of the eSpeed market data products was partially responsible for growth in the U.S. division. On the other hand, demand for market data products in Europe remained subdued, with revenues staying nearly flat at $21 million.
Transaction Revenues Decline Due To Low Trading Volumes
NASDAQ OMX had a strong start to 2014 in terms of equity trading in the U.S.. There was an 11% annual increase in revenues generated by the U.S. equity trading business during the March quarter, as trading volumes rose by 25% y-o-y. Growth in trading volumes slowed down in April but still maintained 4% y-o-y growth to nearly 29 billion shares traded during the month. However, trading volumes fell on a year-on-year basis during the months of May (6% decline to 24.4 billion shares) and June (13% decline to 23.6 billion shares). [2] Consequently, revenues generated by NASDAQ’s cash equity trading business declined by over 6% to $295 million. This decline can be partially attributed to the skepticism in the market following the scrutiny surrounding the “payment for order flow” trading practice by the Justice Department, the Commodity Futures Trading Commission and the SEC. [3] The practice involves brokerages selling orders to third parties who trade with the customers of brokerage firms, making a profit as a result. We currently forecast NASDAQ’s U.S. equity trading volumes in 2014 to be about flat relative to 2013 volume levels.
A similar decline was observed in derivatives trading volumes in both Europe and the U.S. The total number of options traded in Q2 fell to 242 million contracts – 15% less than the prior year quarter. As a result, revenues generated by derivative trades in the U.S. were down by 7% in the quarter. Total contracts traded on NASDAQ’s European platform in the quarter also declined by over 16% y-o-y to 20.1 million contracts. However, revenues generated by derivative trading in Europe stayed flat over the prior year quarter at $28 million due to a higher realized rate per contract. If the decline in derivatives trading continues in Europe at the same rate through the end of the year, it could translate into a $25-30 million decline in revenues for the full year.
We are in the process of revising our $32 price estimate for NASDAQ OMX’s stock, which is about 20% lower than the current market price.
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Notes:- NASDAQ OMX Q2 2014 Earnings Call Transcript, Seeking Alpha, July 2014 [↩]
- NASDAQ OMX Monthly Volumes, NASDAQ OMX Investor Relations, July 2014 [↩]
- Fallout From High-Frequency Trading Hits Brokerages, Wall Street Journal, April 2014 [↩]