Low Trade Volumes Hinder NASDAQ’s Top Line Growth

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NASDAQ OMX Group (NASDAQ:NDAQ) announced its Q2 earnings on Thursday, July 23, reporting a 7% year-on-year decline in consolidated revenues to $807 million for the quarter. [1] The global exchange operator reported an 11% year-on-year decline in market services revenues (excluding transaction-based expenses and transaction rebates) to $478 million for the quarter. On the other hand, revenues generated by listing services, information services and technology solutions combined stayed flay over the prior year quarter at $329 million.

The exchange operator witnessed mixed trading activity on its various platforms through the June quarter. NASDAQ reported a year-over-year decline in equity options trade volumes in the U.S. but European derivatives trading volumes remained high through Q2. Similarly, cash equity trade volumes continued to be lower than the comparable prior year period through the June quarter, while trading activity on NASDAQ’s Nordic and Baltic exchanges improved in the same period. On a positive note, NASDAQ’s listings business and information services division posted record revenues during the quarter. [2]

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Unimpressive Trade Volumes And Revenue Capture

Back in 2014, NASDAQ lost share to competing exchanges in this market. The combined share of the NASDAQ Options market, NASDAQ OMX Boston Exchange and NASDAQ OMX Philadelphia Exchange (PHLX) fell by a percentage point to 26.9% through 2014. The decline in market share was attributable to increasing competition in this market leading to significant pricing pressure. [3] However, the company’s share picked up in Q1 this year, as it managed to capture 27.8% of the trades in this segment. The market share fell to 24% in the June quarter as trade volumes declined through the quarter. The total number of equity options traded on NASDAQ’s U.S. platforms fell by 13% annually to 210 million contracts through the June quarter. [4]

Comparatively, European derivatives trading volumes have stayed high through 2015 thus far. The company reported a 20% improvement in trade volumes through Q2 with a total of 24.1 million traded contracts. Despite high volumes in Europe, the combined revenues generated by derivatives trading in Europe and the U.S. through Q2  (excluding transaction rebates and clearing charges) were down by 25% y-o-y to $97 million.

NASDAQ’s cash equity trade volumes in the U.S. through Q2 were about 3% lower than the comparable prior year period at a total of 74.3 billion shares traded during the quarter. [4] The implied revenue generated per 1,000 shares in Q1’15 was also slightly lower than the year-ago period at just under $4, due to which cash equity trading revenues stood at $297 million for the quarter, roughly a 7% y-o-y decline. 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 moderate rise in trade volumes for the full year.

Non-Transaction Businesses Post Mixed Results

NASDAQ’s corporate solutions revenues fell by about 6-8% in three successive quarters before the most recent quarter. The company attributed this to the extension of certain subsidies to Reuters’ customers. The trend continued through the June quarter with a 5% annual decline in corporate services revenues to $76 million. However, the company expects its new IR NexGen platform to gain traction among customers in the IR space in the coming quarters. The company is planning to launch the first version of the desktop platform later this year.

Market Technology revenues declined by over 6% y-o-y to $59 million in the June quarter quarter, continuing the trend from the first quarter. However, the company remains optimistic about its technology division and expects demand to pick up in the coming quarters. Management also commented on the possible inclusion of blockchain technology on its platform later this year. The company is targeting an initial release of blockchain technology by Q4 this year. Competing exchange operators including the CME Group (NASDAQ:CME) and the Deutsche Börse Group are also open to the same idea. [5]

NASDAQ OMX’s combined information services revenues stayed rose by 4% over the year-ago period to $128 million. Within information services, market data division’s revenues were roughly flat over the year-ago period at $99 million. On the other hand, index licensing and services revenues were up by over 30% y-o-y to $29 million. The company’s index licensing and services business has grown at a CAGR of over 17% in the last five years and is likely to continue to benefit from the $225 million addition of Dorsey Wright’s indexing business in January this year.

NASDAQ’s listing services business continued to perform well. The company had a 61% market share in IPOs in 2014, with a record year for number of listings. This year (starting Q2), NASDAQ made some price tweaks that has helped the company improve its win rate for new IPOs. The company reported a 70% success rate in terms of gaining new listings during the June quarter. Consequently, listing services revenues were up by over 10% to $66 million in the June quarter.

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Notes:
  1. Nasdaq Reports Record Second Quarter 2015 Non-GAAP Results, NASDAQ Press Release, July 2015 []
  2. NASDAQ OMX Q2 2015 Earnings Call Transcript, Seeking Alpha, July 2015 []
  3. Federal Regulations Self-Regulatory Organizations; NASDAQ OMX PHLX LLC, Justia Regulations, September 2014 []
  4. NASDAQ OMX Monthly Metrics, NASDAQ Investor Relations, July 2015 [] []
  5. CME and Deutsche Börse join blockchain gang, Financial News, July 2015 []