Trading Revenues Offset Slump In NASDAQ’s Non-Transaction Businesses

+7.21%
Upside
63.05
Market
67.60
Trefis
NDAQ: Nasdaq logo
NDAQ
Nasdaq

NASDAQ OMX Group (NASDAQ:NDAQ) announced its Q3 earnings on Friday, October 24, reporting nearly stagnant consolidated revenues of $818 million during the quarter. NASDAQ’s information services segment witnessed a mild 3% year-on-year decline in revenues to $114 million while revenues generated by technology solutions fell by 2% y-o-y to $130 million. Market services, or transaction-based revenues, rose by 3% to $515 million during the quarter to partially offset the decline in non-trading businesses. However, net trading revenues – excluding cost of revenues – declined by 3% y-o-y to $194 million due to higher transaction rebates and brokerage and clearance fees expenses incurred by NASDAQ.

The exchange operator had a strong start to 2014 in terms of trading activity across its platforms, with equity and derivatives trades in the U.S. boosting transaction-based revenues. However, as trading volumes declined in the second quarter, the company’s trading businesses suffered in both Europe and the U.S. NASDAQ’s non-transaction businesses, including market data, technology solutions and corporate services, drove revenues and profits in Q2. On the other hand, an improvement in trading volumes across equities and options in the U.S. helped drive trading revenues in the third quarter, even as volumes in Europe remained low. [1] Additionally, the company’s non-trading businesses, including market data, corporate services, market technology and listings, sustained mild declines during the quarter.

See our full analysis for NASDAQ OMX

Relevant Articles
  1. Nasdaq Stock Likely To Edge Past The Street Expectations In Q4
  2. What To Expect From NASDAQ Stock?
  3. What To Expect From Nasdaq Stock In Q3?
  4. Is Nasdaq Stock Attractive At The Current Levels?
  5. What To Expect From Nasdaq Stock Post Its Stock Split?
  6. NASDAQ Stock Gained 9% In One Week, What’s Next?

Trading Activity Picks Up, Net Revenues Subdued

NASDAQ’s U.S. equity trade volumes rose by 5% y-o-y to 71 billion shares traded during the third quarter. [2] Consequently, revenues generated by the U.S. cash equity trading business grew by over 6% on an annual basis to $276 million in Q3. Moreover, cost of revenues, including transaction rebates and brokerage charges, were nearly flat over the prior year quarter at $245 million. As a result, NASDAQ’s net revenues stood at $31 million – 24% higher than prior year level. We currently forecast NASDAQ’s U.S. equity trade volumes to be 7-8% higher than 2013 levels through the end of 2014.

Similarly, the number of contracts traded in the U.S. rose by 8% y-o-y to 251 million contracts in Q3, leading to 7.5% growth in revenues to $114 million. However, transaction rebate costs were up by 17% to $68 million, due to which net revenues were 7% lower than the prior year quarter at $39 million. The company partially attributed this decline to high-end pricing in the prior year quarter that helped boost revenues. Going forward, the exchange operator has witnessed strong demand for options trading in October thus far, with trading volumes rising by almost 30% y-o-y. We currently forecast NASDAQ’s transaction fee per contract traded to be slightly higher than prior year levels at about $0.45 per contract for the full year. As a result, a slight improvement in volumes for the full year should lead to healthy revenue growth.

European trade volumes were disappointing in the case of both derivatives and equities. The number of options and futures traded on NASDAQ’s European platform declined by over 16% y-o-y to 20.1 million contracts. Suppressed trading volumes in Europe kept revenues lower than the year ago period. Revenues generated by the trading of options and futures on NASDAQ’s European platform declined by 7% y-o-y to $27 million in Q3, while transaction revenues from equity trades were flat at $21 million.

Non-Transaction Businesses Decline

Contrary to our expectations, non-transaction businesses posted a fall in revenues during the quarter. After acquiring the corporate services business of Thomson Reuters, the exchange operator witnessed significant inorganic growth in the last few quarters. However, NASDAQ’s corporate solutions division declined by 4% y-o-y to $75 million in Q3, which the company attributed to the extension of certain subsidies to older Reuters’ customers. Going forward, these subsidies could get discontinued in the coming quarters so as not to hinder future growth opportunities.

Market Technology revenues increased by 2% y-o-y to $55 million in the third quarter, albeit at a slower rate than the 11% growth rate witnessed in Q2. Management mentioned that the company completed its technology upgrade data center migration at the start of Q3, which is typically a slow quarter for the technology business. The company expects demand to pick up in the last quarter due to seasonality and a revamped technology product menu.

Revenues from information services, including revenues generated by index licensing, servicing and market data products in the U.S. and Europe, declined by 3% to $114 million during the quarter. The revenues generated by the market data division declined in both the U.S. (-6%) and Europe (-15%)  in Q3 due to declines in subscription-based recurring revenues. The company also attributed the decline to lower audit collections compared to the prior-year period, complemented by a negative impact from currency exchange. However, index licensing at services revenues were up by 22% y-o-y  to $22 million to partially offset the decline in consolidated information services revenues.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. NASDAQ OMX Q3 2014 Earnings Call Transcript, Seeking Alpha, October 2014 []
  2. NASDAQ OMX Monthly Trade Metrics For September, NASDAQ OMX  Investor Relations, October 2014 []