NASDAQ Earnings Preview: Non-Trading Businesses To Drive Growth

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NASDAQ OMX Group (NASDAQ:NDAQ) is scheduled to announce its Q3 earnings on Friday, October 24. After a solid start to 2014, the exchange operator witnessed a decline in trading volumes during the second quarter. The volume of shares and options traded on NASDAQ’s European and U.S. platforms was low, particularly during the months of May and June, due to which its trading businesses suffered. The revenues generated by the trading of cash equities and options across both geographies fell by 5% year-on-year (y-o-y) to $464 million in Q2. [1]

On the other hand, the company’s non-trading businesses, including market data, corporate services, market technology and listings, sustained growth and offset the decline in transaction-based business. Accordingly, the company’s consolidated revenues in Q2 grew by 6% y-o-y to $865 million despite weakness from trading commissions. [2]

NASDAQ has witnessed an improvement in trading activity in the U.S. in recent months, with the number of shares traded increasing by nearly 5% y-o-y to over 71 billion shares traded in Q3, while the number of equity options traded in the U.S. rose by 8% over the year ago period to 251 million contracts. However, equity and derivatives trading volumes in Europe continue to be suppressed. The number of options and futures traded on NASDAQ’s European platforms were 10% lower than the year-ago period at 21.6 million traded contracts during the third quarter this year. We have a $44 price estimate for NASDAQ OMX’s stock, translating into a $7.4 billion market cap. Our price estimate is slightly higher than the current market price.

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See our full analysis for NASDAQ OMX

Trading Activity Picks Up In Q3

NASDAQ had an 11% annual increase in revenues generated by its U.S. equity trading business during the March quarter, as trading volumes rose by 25%. However, trading activity declined in Q2 as volumes fell by 5% y-o-y to 76 billion shares traded during the quarter. Consequently, revenues generated by NASDAQ’s cash equity trading business declined by over 6% to $295 million in Q2. This trend reversed in the third quarter as the number of shares rose by 5% annually during the quarter. We currently forecast NASDAQ’s U.S. equity trade volumes to be 7-8% higher than 2013 levels through the end of 2014.

Similarly, a decline was observed in derivatives trading in both Europe and the U.S. in Q2 after a robust start to 2014. The total number of options traded in the U.S. in Q2 fell to 242 million contracts – 15% less than the prior year quarter – due to which the revenues generated 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. Although derivative trading in the U.S. picked up in Q3, traded volumes in Europe have remained suppressed.

Here’s a quick roundup on how NASDAQ’s non-trading businesses performed this year.

  • Market Technology and Corporate Services

NASDAQ’s corporate solutions division grew by 81% y-o-y to $80 million in Q2 and by over 130% to $161 million in the first half of 2014 with growth coming from all four sub-divisions – investor relations (+75%), multimedia solutions (+157%), public relations (+66%) and governance (+25%). Much of the growth was attributable to the acquisition of Thomson Reuters’ corporate solutions businesses in 2013. Excluding the inorganic growth, the company’s three non-transaction businesses still grew by 9% over 2013 levels. Moreover, the company expects the profitability of its 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 an operating margin target of 20% for the tech division by the end of 2015, up from 8% currently.

Market Technology revenues increased by over 11% y-o-y to $58 million in Q2 on the back of growing demand for software, licenses and support services. Software licenses revenues rose by 14% over the prior year quarter to $41 million, which the company attributed to the acquisition Netherlands-based service provider BWise contributing significantly to product sales. Additionally, software as a service revenues increased by almost 30% y-o-y to $9 million primarily due to an increase in SMARTS broker surveillance revenues.

  • Information Services

Information services includes revenues from index licensing, servicing and market data products in the U.S. and Europe. The revenues generated by the market data division rose in both the U.S. (+15%) and Europe (+7.5%) year-to-date due to higher customer demand for data products, higher audit collections and slight price hikes. The acquisition of bond trading platform eSpeed in 2013 also contributed indirectly to information services revenues due as it created demand for corresponding market data products.

The company’s index licensing and services business has grown at a CAGR of over 17% in the last five years. The growth rate picked up even further in 2014, partially due to an increase in the number of licensed exchange traded products following eSpeed acquisition. As a result, the company generated $45 million in index licensing and services in the first half of 2014 – 28% higher than the year ago period.

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Notes:
  1. NASDAQ OMX Q2 2014 Earnings Call Transcript, Seeking Alpha, July 2014 []
  2. NASDAQ OMX Monthly Trade Metrics For September, NASDAQ OMX  Investor Relations, October 2014 []