NASDAQ OMX Earnings Preview: Trade Volumes Could Boost Q4 Revenues

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NASDAQ OMX Group (NASDAQ:NDAQ) is scheduled to announce its Q4 earnings on Thursday, January 29. The global exchange operator witnessed low trading volumes in Q2 and Q3 after a solid start to 2014 in the first quarter. As a result, revenues generated by NASDAQ’s market services division were up by almost 15% y-o-y in Q1 at $582 million. However, combined trading revenues through the second and third quarters were flat over the comparable prior year period at just over $1 billion. Revenues generated by the company’s listing business through the first three quarters of 2014 rose by a mild 4% over the year-ago period to $177 billion.

On the other hand, the company’s non-trading businesses, including market data, corporate services, market technology and listings, witnessed sustained growth through the three quarters of 2014, offsetting sluggish growth in transaction-based business. NASDAQ’s technology division saw a 32% y-o-y growth in revenues to $403 million through the three quarters of 2014, while information services revenues were also up by almost 10% y-o-y to $360 million in the same period.

We have a $44 price estimate for NASDAQ OMX’s stock,which is slightly lower than the current market price.

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See our full analysis for NASDAQ OMX

Trading Activity Up In Q4 After Mid-Year Slowdown

NASDAQ’s cash equity trading volumes in the U.S. rose by 23% y-o-y to nearly 91 billion shares traded in the fourth quarter. The surge in trade volumes was similar to the first quarter, when the total number of shares traded on NASDAQ rose by 24% to 87 billion shares. Comparatively, trade volumes for Q2 and Q3 combined were flat over the prior year period at about 147 billion shares traded. Consequently, revenues generated by cash equity trading through the first three quarters of 2014 were about 5% higher than the prior year period at $889 million. We currently forecast revenues generated by NASDAQ’s U.S. equity trading to be 10% higher than 2013 at about $1.2 billion due to a nearly 11% rise in trade volumes for the full year.

Derivatives trading in the U.S. also witnessed a surge in trading volumes in Q4, with a 15% y-o-y rise in the number of equity options traded to 274 million. Comparatively, equity options trading volume for the first three quarters combined was about 3% lower than comparable 2013 period at 761 million contracts. Despite a late rally in trading volumes, revenues for the full year could be flat over the previous year at about $450 million.

Similar to U.S. volumes, European derivatives trade volumes were about 8% higher than the prior year quarter at 23.5 million contracts traded in Q4. Trade volumes through the first nine months of 2014 were about 14% lower than the comparable 2013 period at 65.6 million contracts traded. As a result, we forecast full year revenues for derivatives trading in both the U.S. and European divisions to be lower than 2013 levels.

Market Technology and Corporate Services

NASDAQ’s corporate solutions revenues in Q3 were flat over the prior year quarter at $75 million. However, revenues through the first three quarters combined were over 60% higher than the year-ago period at $236 million, with growth coming from all four sub-divisions – investor relations (+56%), multimedia solutions (+100%), public relations (+57%) and governance (+27%). Much of the growth was attributable to the acquisition of Thomson Reuters’ corporate solutions businesses in the latter half of 2013. Furthermore, 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% at the end of Q2.

Market Technology revenues in Q3 2014 were nearly flat over Q3 2013 at $55 million. 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 generated by the technology division through the first three quarters of 2014 were 6% higher than prior year period at $167 million. The company expects demand to pick up in the last quarter due to seasonality and a revamped technology product menu, leading to comparatively higher Q4 revenues.

Information Services

Information services includes revenues from index licensing, servicing and market data products in the U.S. and Europe. 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 $67 million in index licensing and services in the first three quarters of 2014 – 24% higher than the year ago period. This division is likely to be boosted in the long-term due to the $225 million addition of Dorsey Wright’s indexing business in January this year.

NASDAQ OMX’s market data division suffered in Q3, with revenue declines in both the U.S. (-6%) and Europe (-15%) on a y-o-y basis. However, revenues generated by the U.S market data division in the three quarters combined rose by over 8% to $211 million due to higher customer demand for data products, higher audit collections and slight price hikes. However, European market data divisions stayed flat over the prior year period at $60 million.

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