NASDAQ Earnings Preview: Market Services Revenue Likely To Fall Due To Stiff Competition And Macroeconomic Uncertainty

NASDAQ OMX Group (NASDAQ:NDAQ) is scheduled to announce its Q3 earnings on Wednesday, October 26th.  The consensus estimates are for around 11% growth in the exchange operator’s revenue and 2.3% growth in EPS. We believe this growth will primarily be driven by the company cashing in on demand for technologically-enhanced platforms and efficient information services among investors. We saw 12% and 5% year-to-date growth in technology solutions and information services revenues, respectively, for the first half of the year. Technology solutions have benefited from its product, NASDAQ IR Insight, and the acquisition of Marketwired, the leading global provider of news distribution services and analytics.The exchange’s acquisitions of Boardvantage have strengthened its technological capabilities.  However, a decrease in cash equity and fixed income trading volumes will likely have a negative impact the exchange operator’s market services revenue, which constitutes nearly 16% of overall revenue. Moreover, the recent launch of Investors’ Exchange (IEX) could result in added pressure on NASDAQ’s market share.

Our price estimate for NASDAQ stands at $64.64, implying 2% discount to the market.

Please see the complete Trefis analysis for Nasdaq

Non-Transaction Business Is Likely To Continue Driving Growth

The exchange operator’s information services have continued to be a major driver of revenue growth over the years. Increasing demand for powerful insights and analytics-driven recommendations have propelled the revenue from this segment.

Along with this, the demand for technologically-enhanced platforms for easy usage of investors has pushed the technology revenues for the exchange.

The revenues from information services and technology support together contribute about 65% of the overall revenue. Hence, continued growth in these segments are likely to make the exchange  a preferred choice over the near and long term.

NASDAQ’s Market Services Revenue Is Likely To Decline In Q3

Unlike the first half of the year, cash equity trading volumes, which constitute around 65% of the market services revenue, have suffered in Q3 in both the U.S. and Europe. With increased macroeconomic uncertainty in Europe and stiff competition in the U.S., NASDAQ’s trading volumes have deteriorated and market share has declined. However, we expect growth in cash equity volumes, driven by continued volatility in the U.S. financial markets.

Moreover, NASDAQ’s fixed income volumes have continued their decline across the U.S. and Europe for over a year now. Low returns, coupled with stringent regulations, have weighed heavily on the fixed income trading volumes, causing reduced participation from big players. Accordingly, we expect volume declines to continue going forward.

However, the exchange operator’s equity options trading volumes, which constitute around 20% of the market services revenue, have seen a marked improvement in Q3. With the completion of the acquisition of International Securities Exchange on June 30th, the company saw a notable increase in its market share to around 40% in the quarter as opposed to around 25% over the past year. The negative impact of decline in the European volumes on the revenue is likely to be curbed by the growth in revenue per contract. Going forward, we expect growth in equity options volumes, driven by continued volatility in the U.S. financial markets. However, the European volumes are likely to remain suppressed with macroeconomic uncertainty to prevail in the near term.

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