NASDAQ OMX Q4 Earnings: High Trading Activity Offsets Weakness In Non-Transaction Businesses

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NASDAQ OMX Group (NASDAQ:NDAQ) announced its Q4 earnings on Thursday, January 29, reporting 8% year-on-year growth in consolidated revenues to $919 million during the quarter. NASDAQ’s information services segment and listing revenues both witnessed a 5% y-o-y rise in revenues to $113 million and $61 million, respectively. On the other hand, revenues generated by technology solutions fell by 8% over the prior year quarter to $138 million. Market services, or transaction-based revenues, rose by 14% y-o-y to $607 million during the quarter driving much of the top-line growth. However, net trading revenues – excluding cost of revenues – were flat over the prior year period at $205 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. Trading business picked up further in Q4 across both Europe and the U.S. [1] For the full year, NASDAQ’s consolidated revenues were up by 9% to $3.5 billion, with technology solutions revenues rising by over 19% y-o-y to $542 million. The information services segment witnessed an 8% growth for the full year to $473 million, while listing services only grew by about 4% to $238 million. Transaction-based revenues were up by over 7% to $2.2 billion for the full year. However, net trading revenues – excluding cost of revenues – were only about 4% higher than the previous year at $814 million.

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Trading Activity Picks Up In Q4, Net Revenues Subdued

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. [2] Consequently, revenues generated by cash equity trading in Q4 were 26% higher than the prior year period at $378 million. 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, trading volumes for Q2 and Q3 combined were flat over the prior year period at about 147 billion shares traded. Revenues generated by NASDAQ’s cash equity trading segment for the full year were about 10% higher than the previous year at $1.3 billion. Correspondingly, the cost of revenues – including transaction rebates and brokerage charges – for the full year was about 8% higher than 2013 at $1.1 billion. As a result, NASDAQ’s net revenues stood at $223 million – 17% higher than the prior year level.

Similarly, 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. [2] Comparatively, equity options trading volume for the first three quarters combined was about 3% lower than comparable 2013 period at 761 million contracts. Similar to U.S. volumes, European derivatives trading volumes were about 8% higher than the prior year quarter at 23.5 million contracts traded in Q4. Trading 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, revenues for the full year were about 2% higher than 2013 at $525 million. However, transaction rebate costs were up by 10% to $285 million, due to which net revenues were 6% lower than the prior year period at $223 million.

Non-Transaction Businesses Witness Limited Growth

NASDAQ’s non-transaction businesses were unimpressive during the quarter. NASDAQ OMX witnessed significant inorganic growth in its market technology division over the last few quarters owing to the acquisition of Thomson Reuters’ corporate services division. However, Q3 and Q4 revenues were about 5-6% lower than the previous year quarters at $75 million and $78 million, respectively. The company attributed to the extension of certain subsidies to Reuters’ customers. Going forward, these subsidies could be discontinued in the coming quarters so as not to hinder future growth opportunities. Furthermore, the company expects its new IR NexGen platform to gain traction among customers in the IR space in the coming quarters. The company is targeting to launch the first version of the desktop platform by Q2’15.

Market Technology revenues declined by 11% y-o-y to $60 million in the fourth quarter, which the company primarily attributed to a negative foreign exchange impact. However, higher revenues in the preceding quarters meant that the company’s market technology revenues were flat over the previous year at $228 million. The company expects demand to pick up in the first quarter due to seasonality.

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. Keeping up the trend, index licensing at services revenues were up by 10% y-o-y  to $22 million in Q4, while full year revenues were about 20% higher than 2013 at $89 million. 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 picked up in Q4 after a disappointing third quarter. Revenues in Q4 rose by nearly 5% to $91 million. Full year revenues generated by NASDAQ’s market data division rose by over 6% to $384 million as the company continued to witness a higher customer demand for data products, higher audit collections and due to slight price hikes.

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Notes:
  1. NASDAQ OMX Q4 2014 Earnings Call Transcript, Seeking Alpha, January 2015 []
  2. NASDAQ OMX Monthly Trade Metrics For December, NASDAQ OMX  Investor Relations, January 2015 [] []