NASDAQ OMX Earnings Preview: Technology And Market Data To Make Up For Sluggish Trade Volumes

April 22nd, 2015 by Trefis Team
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NASDAQ OMX Group (NASDAQ:NDAQ) is scheduled to announce its Q1 earnings on Thursday, April 23. The global exchange operator reported an 8% year-on-year growth in consolidated revenues to $919 million in the most recent quarter, while full year revenues were up by 9% to $3.5 billion in 2014. NASDAQ’s technology solutions division was largely responsible for driving top line growth, as revenues rose by over 19% y-o-y to $542 million for the full year. [1] 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. NASDAQ’s has witnessed lower trade volumes for both equity and derivatives in the March quarter compared to the prior year period.

We have a $45 price estimate for NASDAQ OMX’s stock, which is slightly lower than the current market price.

See our full analysis for NASDAQ OMX

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Trading Activity Subdued Through Q1

NASDAQ’s cash equity trading volumes in the U.S. through 2014 stayed flat over the previous year at 1.76 billion shares traded per day for the full year. Although trade volumes were high in Q1 and Q4, lower trade volumes through mid-2014 (Q2 and Q3) resulted in a flat full year average over the previous year. As a result of minimal growth in trade volumes, NASDAQ lost market share in terms of total shares traded in the U.S. NASDAQ’s share fell from 28.4% in 2013 to 27.5% of the handled volume in 2014. However, the implied revenue generated per 1,000 shares was up by over 10% y-o-y to $3, due to which cash equity trading revenues rose by 10% y-o-y to $1.33 billion for the full year. We currently forecast revenues generated by NASDAQ’s U.S. equity trading to be about 2% higher than 2014 at about $1.35 billion due to a nearly 6-7% rise in trade volumes for the full year.

Similarly, derivatives trading on NASDAQ’s platform in the U.S. during 2014 was also flat over the previous year. Despite a late rally in trading volumes in the December quarter, full year trade volumes were flat over 2013 levels. Consequently, the exchange operator witnessed only a 2% y-o-y rise in net revenues to $525 million. Trading activity has sequentially declined in the March quarter, from 274 million contracts traded in Q4 to 251 million in the quarter ended March. [2] The total number of contracts traded in Q1’15 were about 6% lower than the comparable prior year period. Contrary to U.S. volumes, European derivatives trading volumes were both sequentially (+8%) and annually (+7%) higher at 25.4 million contracts traded in Q1. Trade volumes in Europe were sluggish in 2014, with a 12% decline in derivative trading volume for the full year.

Market Technology and Corporate Services

NASDAQ’s corporate solutions revenues in 2014 rose by over 36% to $314 million for the full year. 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 December 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 for the full year 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

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. Keeping up the trend, index licensing at services revenues were up by about 20% y-o-y to $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’s revenues rose by over 6% to $384 million in 2014 due to customer demand for data products, higher audit collections and slight price hikes. However, European market data revenues stayed flat over the prior year period at $60 million. Similarly, NASDAQ’s combined U.S. and European listing business witnessed a moderate 4% y-o-y growth to $238 million for the full year.

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Notes:
  1. NASDAQ OMX Q4 2014 Earnings Call Transcript, Seeking Alpha, January 2015 [↩]
  2. NASDAQ OMX Monthly Supplemental Information, NASDAQ Press Release, April 2015 [↩]