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A Drop in Trading Volume Curbs Nasdaq's Results

By Asit Sharma – May 3, 2017 at 2:45PM

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Lighter trading activity muted the effect of higher revenue from recent acquisitions.

Positive revenue and profit growth for Nasdaq Inc. (NDAQ -0.03%) in the first quarter of 2017 was somewhat dampened by weaker transaction volume in the company's trading markets. Nasdaq's earnings report, released on April 26, demonstrates that trading volume still plays a significant role in the exchange operator's financial model. But it also reveals the effectiveness of Nasdaq's recent efforts to diversify its revenue streams. We'll dive into the quarter's details after a run through key earnings metrics below.

Nasdaq: The raw numbers

MetricQ1 2017Q1 2016Year-Over-Year Growth
Revenue $583 million $534 million 9.2%
Net income attributable to Nasdaq $169 million $132 million 28%
Diluted earnings per share $0.99 $0.78 15.3%

Data source: Nasdaq.

What happened with Nasdaq this quarter?

  • Nasdaq gained $50 million in revenue over the prior-year quarter courtesy of the acquisitions of Marketwired, ISE, Nasdaq CXC, and Boardvantage. It also reaped another $15 million in organic revenue from non-trading services. This total was partially offset by a $12 million decline in trading volumes, and further reduced by $4 million in currency effects.
  • Similar to last quarter, 75% of Nasdaq's total net revenue was comprised of subscription and other recurring revenue, highlighting the stability of the company's income.
  • Market services, the company's largest segment at 37% of total net revenue during the quarter, bore the brunt of the $12 million decline in trading revenue, as this is where most of Nasdaq's exchange activities are recorded. Nonetheless, boosted by prior-year acquisitions, the segment was still able to report a top-line increase of $17 million, to $218 million, versus the prior year.
  • Nasdaq's three non-trading segments also booked revenue improvements in Q1 2017. Corporate services rose nearly 12% to $160 million. Information services revenue gained 3.7% to $138 million. And market technology's top line rose 17.5% to $67 million, notably on extremely strong organic growth.
  • The company asserted that it's already achieved $50 million out of a total of $60 million in projected annualized cost synergies from its numerous 2016 acquisitions.
  • Perhaps due to achieving these synergies, Nasdaq slightly revised its operating expense guidance for 2017, to a range of $1.26 billion-$1.30 billion, versus a prior band of $1.26 billion-$1.31 billion.
  • Continuing its dominance over new U.S. initial public offering listings, Nasdaq won 52% of all IPOs during the quarter.
  • Nasdaq's commodities trading platform, Nasdaq NFX, which was launched in mid-2015, continues to aggressively gain market share. NFX reported a daily peak of 2.3 million open contracts in April 2017, versus a daily peak of 800,000 open contracts in April 2016.
  • Nasdaq increased its quarterly dividend by 19% to $0.38, which at current share price equates to an annualized yield of 2.2%.
  • Primarily in order to offset the effect of stock-based compensation, the organization repurchased $156 million worth of its own shares during the quarter.
Electronic stock ticker wall in yellow.

Image source: Getty Images.

What management had to say 

While Nasdaq has utilized bolt-on acquisitions to remain competitive with other exchanges and financial service providers, it appears to be broadening its approach.

A week before earnings, the company announced the launch of a new quasi venture capital arm, Nasdaq Ventures, which will partner with and invest in emerging financial technology (fintech) companies.

During Nasdaq's earnings conference call on April 26, CEO Adena Friedman provided some color on the purpose of the new fund: "A key focus for me is not only to the new technologies themselves, but how we can better apply them to accelerate our pipeline of new commercially viable products that add greater value to our clients. ... [W]e see Nasdaq Ventures as an avenue for us to discover, partner and invest in emerging companies in the fintech space that are developing and leveraging groundbreaking technologies that align to our clients' needs, including, but not limited to, machine intelligence, blockchain, and the cloud."

Potentially, Nasdaq Ventures will make the overall entity's future acquisitions much more efficient. By taking minority stakes in fintech start-ups early on, Nasdaq will be able to guide the development of services which directly benefit its own client base. And it can be more selective in choosing which companies to eventually buy outright. 

Looking forward

The first three months of 2017 validated Nasdaq's buying spree over the last several business quarters. In a weak trading quarter, the company was still able to post a 9% gain in revenue.

Nasdaq has for some time wanted to decrease its reliance on trading revenue, as transaction activity within cash, derivatives, equity, and commodity markets can be quite cyclical. The expanding NFX platform provides evidence that trading remains a revenue priority. But Friedman's comments above indicate that Nasdaq will continue to diversify its business model in 2017, and likely for a few years to follow, as well.

Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.

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