NASDAQ Earnings Preview: Transaction Revenues To Remain Lackluster in Q4

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NASDAQ OMX Group (NASDAQ:NDAQ) is scheduled to announce its Q4 earnings on Thursday, January 28. [1] Equity derivatives and cash equities in the U.S. failed to show growth in the final quarter of fiscal 2015. Conversely, the European markets remained resilient for both the products, clocking in growth in almost every quarter of the year. This mixed trend in volumes will likely result in lukewarm growth in transaction revenues in Q4, and may hinder meaningful growth in full-year net revenues.

Through the first three quarters of fiscal 2015, technology solutions revenues were down 5% year on year (y-o-y) to $396 million. Comparatively, information services revenues grew by 7% over the year-ago period to $385 million because of benefits accrued from the Dorsey Wright acquisition and higher customer demand for U.S. proprietary data products. Moreover, higher annual listing fees and increased number of listed companies in the U.S. led to a rise in listing services revenues of 11% y-o-y to $196 million. [2]

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We have a $50 price estimate for NASDAQ OMX’s stock, which is about 15% lower than the current market price.

See our full analysis for NASDAQ OMX Group

Higher Revenue Capture To Support Cash Equity Revenues

Cash equities, which have traditionally been the bedrock of company’s market service segment, began 2015 on a slow note. NASDAQ not only lost market share for cash equities but also witnessed reduced volumes in the first half of the year. Nevertheless, in Q3, U.S. equities trade volumes on the company’s platform increased by 25% y-o-y to 88 billion shares. ((NASDAQ OMX Monthly Metrics, NASDAQ Investor Relations, January 2015)) This upsurge in volumes, however, was not sustained through Q4, resulting in a 10% decline in U.S. equity volumes. On the other hand, revenue captured per 1000 shares saw continued growth momentum in 2015, jumping by nearly 25% y-o-y to $0.53 in Q4. Consequently, the higher revenue captured by NASDAQ could result in an increase in trade revenues for the product in Q4.

European equity markets proved fairly resilient in fiscal 2015, after experiencing a slow start. The total value of shares traded on the Nordic and Baltic exchanges increased by $11 billion to $869 billion in 2015. Accordingly, cash equity trade revenues rose by 14% y-o-y to $187 million in Europe and the U.S. combined in the nine months ended September. [3] Due to the considerably higher revenue captured in the U.S. market, we expect cash equity revenues for the full year to rise, thus supporting growth in the market service segment.

Low Derivatives Volumes To Hinder Revenue Growth

Trade volumes for U.S. equity derivatives declined in every quarter of 2015, as compared to previous year levels. Furthermore, the exchange operators consistently lost market share over the past few years amid intense competition. Correspondingly, NASDAQ’s share of U.S. equity derivatives was down 80 basis points to 25.8% in Q4, while its trade volumes fell 14% y-o-y to 239 million contracts. [4] However, owing to a 5% y-o-y rise in revenue capture in Q4, we do not expect a severe revenue drop for the product in the quarter.

In contrast, the Nordic and Baltic exchanges exhibited growth in terms of trade volumes in every single quarter of the fiscal year 2015, including Q4. 95.6 million derivative contracts were traded in the year, up by 7% compared to the previous year. However, revenue captured per contract regularly fell through the year, ending at $0.42 in Q4 (a drop of -20% y-o-y). Declining market share and low derivative volumes for equity derivatives caused a decline of 10% y-o-y in revenues to $140 billion in the first three quarters. In line with this trend, we expect full-year trade revenues for equity derivatives to be a drag on the company’s market service segment.

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Notes:
  1. Nasdaq Holds Fourth Quarter 2015 Investor Conference Call, Nasdaq Investor Relations, January 2016 []
  2. (NASDAQ OMX Q3 2015 Earnings Call Transcript, NASDAQ Investor Relations, October 2015 []
  3. NASDAQ OMX Quarterly Report, The SEC, October 2015 []
  4. NASDAQ OMX Monthly Metrics, NASDAQ Investor Relations, January 2015 []