NASDAQ Earnings: Non-Transaction Businesses Lead To Growth In Q4

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NASDAQ OMX Group (NASDAQ:NDAQ) announced its Q4 earnings on Thursday, January 28, reporting a 6% year-on-year (y-o-y) growth in consolidated revenues to $865 million for the quarter. The main drivers of revenue growth in the quarter were NASDAQ’s listing service and information service businesses, which rose 11% and 12% y-o-y to $68 million and $127 million, respectively. In line with our expectations, transaction based revenues weighed on the results, falling 13% y-o-y, although the fall in net trade revenues was somewhat arrested to 3% y-o-y due to lower transaction-based expenses. ((Nasdaq Reports Record Fourth Quarter and Full Year 2015 Results, NASDAQ Press Release, January 2016))

On the operating expense front, the company practiced strict fiscal discipline, curtailing its expenditures to $290 million in Q4, down 17% y-o-y. However, for the full year 2015, operating expenses were slightly higher at 4% y-o-y to $1.37 billion due to the impact of the Dorsey Wright acquisition. Consequently, NASDAQ’s adjusted EBITDA margin for 2015 declined by 2 percentage points to 41.05%. The company expects margins to remain flat in 2016 owing to expenses from the acquisition of trading platform Chi-X Canada, and new product launches.

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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

Record IPOs Lead to Rise In Listing Revenues

In fiscal 2015, NASDAQ gathered $264 million from listing service revenues, witnessing growth of 11% y-o-y. This surge in revenues was a result of the exchange operator winning an impressive 73% of initial public offerings (IPOs) in the U.S. market and a record 91 IPOs in Europe, in addition to tweaks in the pricing structure. The company said that it is confident about its listing business, even as it faces increasing competition from rivals such as BATS, owing to the brand value it has created for itself and its unique offerings of corporate solutions. [1] Going forward, the company expects growth in the segment to return to low single digits as the effect of January 2015 pricing changes is more visible.

Information Services Helped By Dorsey Wright Acquisition

The Information Services segment is bifurcated into two revenue streams: data products and index licensing. Data product business in the fourth quarter was responsible for 77% – or $98 million – of total information service revenues ($127 million), up 7% y-o-y. On the other hand, index licensing was responsible for $29 million of the segment’s revenues, up 24% y-o-y. The 8% annual rise in information service revenues to $512 million in 2015 was facilitated by the integration of the Dorsey Wright acquisition and the launch of 56 new exchange traded products. The company expects the business to continue being a growth driver in the year 2016, as it works on customizing its data according to client requirements.

Technology Solutions Revenues Subdued

Although revenues from technology solutions services grew slightly in the quarter, they decreased by 3% y-o-y to $543 million in the full year 2015. The two branches of technology solutions, corporate solutions and ($75 million) market technology ($71 million), contributed almost equally to the segment’s revenues in Q4, helped by the integration of Reuters’ corporate business and a strong period of change requests. However, the full year revenues were slightly down for both the streams, primarily due to FX headwinds. The company said that it is hopeful about growing the segment in mid-single digits in 2016, with the roll out of its new product NASDAQ IR Insight and revenue recognition from completion of phase one of Borsa Istanbul, which is the sole exchange entity of Turkey. ((NASDAQ OMX Q4 Earnings Call Transcript, Seeking Alpha, January 2016))

Trading Activity Suffers A Setback

Trading activity in the year suffered a setback, chiefly due to a decline in equity derivative and commodity trade volumes. [2] A decline in market share, coupled with the low trade volumes for equity derivatives, led to a 10% y-o-y decline in product revenues to $188 million in 2015. As a result, net transaction-based revenues decreased 3% y-o-y to $771 million in fiscal 2015. However, transaction-based revenues were anchored by cash equity trading revenues, which rose 13% annually to $253 million in 2015, due to a higher revenue capture and increased volumes of cash equities. The company expects market service revenues to improve going forward, as the acquisition of Chi-X Canada is completed.

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Notes:
  1. NASDAQ OMX Q4 Earnings Call Transcript, Seeking Alpha, January 2016 []
  2. NASDAQ OMX Monthly Metrics, NASDAQ Investor Relations, January 2016 []