The impact from recent acquisitions continues to boost the top line of Nasdaq Inc. (NDAQ +0.23%), which released its fourth-quarter 2016 earnings report on Jan. 31. However, net income swung to a loss as the company recorded a non-cash impairment charge in its fixed-income business.
Nasdaq also announced changes to its reporting segments as newly appointed CEO Adena Friedman wasted no time in tweaking the exchange operator's business model. We'll review these and other details from the quarter, after a summary review of earnings results directly below.
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Nasdaq Inc.: The raw numbers
| Metric | Q4 2016 | Q4 2015 | Year-Over-Year Growth |
|---|---|---|---|
| Revenue | $599 million | $536 million | 11.7% |
| Net income attributable to Nasdaq | ($224 million) | $148 million | N/A |
| Diluted earnings per share | ($1.35) | $0.88 | N/A |
Data source: Nasdaq Inc.
What happened with Nasdaq Inc. this quarter?
- A string of acquisitions over the last several business quarters resulted in a $54 million top-line impact during the fourth quarter, fueling Nasdaq's 12% net revenue gain. The nearly $600 million quarter was a record for the trading and financial services company.
- Alongside acquired business, Nasdaq's legacy revenue streams are still prospering: Non-trading revenue exhibited organic growth of 5% versus the prior-year quarter.
- Nasdaq reported that an impressive 75% of total net revenue was comprised of subscription and other recurring revenue.
- The substantial drop in net income resulted from an asset impairment writedown during the quarter. Nasdaq took a pre-tax, non-cash charge of $528 million against earnings related to the eSpeed name. Nasdaq acquired eSpeed, an electronic platform for trading U.S. Treasury securities, in 2013. After a decline in operating performance, the company has decided to rebrand the platform. Thus, the non-cash charges simply reduce the value of intangible assets on the corporation's balance sheet.
- In a related action, the company has combined all fixed-income products and services under a single brand which will now be known as Nasdaq Fixed Income.
- Long-time chief executive Bob Greifeld stepped aside on Jan. 1 to allow Friedman, his chosen successor, to ascend from chief operating officer into the CEO role. Friedman's first noticeable act at Nasdaq's helm is a reshuffling of operating segments.
- Essentially, Nasdaq has scrapped the technology solutions segment. Of technology solution's two components, market technology has been placed in its own stand-alone segment. The other component, corporate solutions, has been added to the listing services segment, which has been renamed "corporate services." Both the information services segment and market services segment (where all trading revenue is tracked) remain unchanged.
What management had to say
Friedman took the opportunity on her first earnings call with analysts to provide her key execution priorities for 2017. Given the transition in management, it's worth quoting these priorities in full:
First is to remain intently focused on completing the integrations of the 2016 acquisitions, so that we can provide the full benefits of these investments to our clients and shareholders. As of the end of the fourth quarter in 2016, we've achieved $38 million in realized run rate cost synergies, and we continue to have high confidence we can deliver the full $60 million total by the end of 2017.
Second is to commercialize emerging technologies in meaningful ways, for our clients and shareholders. Most notably in the areas of machine intelligence, blockchain, and the cloud. Leveraging our investments in the Nasdaq Financial Framework and the new trading and analytics platform, we will progress our commercial offerings in areas where we have the most compelling client opportunities.
Third is to improve our competitive positioning across all of our core businesses through continuous innovation and best-in-class client service. In my view, client-centric innovation and service, coupled with a return orientation to our investments, are the best means to secure our future growth.
In essence, Friedman's approach, at least initially, won't differ markedly from that of her predecessor. Nasdaq will be focusing on some familiar themes: Completing acquisition integration tasks efficiently; investing heavily in technology, especially within non-trading platforms; and generating new products and services to differentiate itself from exchange and services competitors.
Moving forward
Of the points Friedman listed above, the first may be most important in the near term. While Nasdaq is obviously benefiting from its merger activity, the costs of acquiring revenue still pose immediate challenges. Peeling away the $528 million non-cash impairment charge discussed above, Nasdaq's fourth-quarter operating income margin declined by roughly 10 percentage points, to 35.5%, versus the comparable quarter in 2015.
Nasdaq attributes the expense to both acquisition closing costs and ongoing merger and strategic initiative costs. As the company continues to realize synergies from its transactions, and completes merger integration initiatives, expenses should begin to normalize relative to trading and service revenue. Thus, shareholders may want to keep an expectant eye out for operating margin improvement over the coming quarters.
