Please ensure Javascript is enabled for purposes of website accessibility

Essential Numbers and Themes to Watch in Nasdaq Inc.'s Q3 Earnings

By Asit Sharma - Oct 19, 2017 at 3:07PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The global operator of equity and futures exchanges seeks to maintain its momentum.

Nasdaq Inc. (NDAQ 2.00%) issues its third-quarter earnings report on Wednesday, Oct. 25, before the start of trading. Last quarter, Nasdaq booked record net revenue and improved operating profit, and shareholders are keen for a continuation of the strong performance. Let's briefly look at key numbers and themes that investors will zero in on when Nasdaq's quarterly report is issued.

The numbers

  • Trading revenue, which comprises about 25% of Nasdaq's total top line, will likely prove a mixed bag next week. According to Nasdaq's latest monthly trading report, which was issued Oct. 9 and covers all three months of the third quarter, U.S. equity options exhibited healthy volume growth of 5.9%, as 364 million contracts were traded. Per the report, it appears that revenue from this volume will be offset by a drop of 17.5% in U.S. fixed income trading.

  • However, it's a testament to management's efforts to diversify the business that a strong performance from Nasdaq's other primary revenue streams -- trade management services, market technology, information services, and corporate services -- will primarily determine the quarter's fate. For reference, in the third quarter of 2016, Nasdaq booked total net revenue of $585 million.

  • Operating margin should shine as Nasdaq continues to see lower acquisition-related expenses. While merger-integration costs remain, the company is gradually absorbing transactions like the June 2016 purchase of International Securities Exchange. Due to this trend, in Q2 2017 Nasdaq enjoyed a leap of 9.5 percentage points in operating margin, to 40.5%.

  • If both net revenue and operating margin remain vigorous, look for Nasdaq to post favorable bottom-line numbers versus the comparable period. Last year in the third quarter, Nasdaq generated net income of $131 million and diluted earnings per share of $0.77.

Illustration of purple, yellow, fuchsia, and blue charting arrows on a pale background.

Image source: Getty Images.

Essential themes

In the company's last earnings call in late July, CEO Adena Friedman promised that the integration of previous acquisitions would remain a top priority for year-end. And CFO Michael Ptasznik mentioned the company's goal to decrease Nasdaq's debt-to-EBITDA ratio from a current reading of 3.0 to a more conservative 2.5 by mid-2018, as acquisition-related borrowing has increased balance sheet leverage. Yet both executives also indicated a willingness to engage in new acquisitions if a proposed deal helped the company further its strategic goals.

It didn't take long for opportunity to arise. Last month, Nasdaq initiated its latest in a seemingly unending stream of M&A transactions, announcing its intent to purchase eVestment, a data and analytics firm that assists asset and fund managers in making institutional investment decisions.

The deal is valued at $705 million and is expected to close by year-end. On Sept. 22, Nasdaq issued $500 million in senior notes, due in 2019, to fund the purchase. Next week, we can expect management to discuss both the rationale for the acquisition, and the bearing it has on Nasdaq's targeted borrowing reduction.

While the company is bulking up its information services segment with the addition of eVestment, it's also culling revenue streams it no longer considers core services. This month, Nasdaq announced that it's exploring options to divest its public relations solutions and digital media services units, which reside in its corporate services segment. This reflects a fine-tuning of company strategy, in which providing data analytics and trading technology services to customers will take precedence over the maintenance of lower-return businesses. Trimming noncore operations will likely figure as a topic in management's earnings conference call next week.

Finally, shareholders will want to check the ever-important barometer of Nasdaq's health, its overall listings statistics and share of initial public offerings (IPOs) won. From the monthly trading report mentioned above, we know in advance that total corporate listings on the company's various exchanges grew roughly 4%, to 3,887, by the end of the third quarter.

In the second quarter of this year, the Nasdaq Stock Market won 52% of all U.S. IPOs. Snaring a predominance of IPO listings has been a point of pride for Nasdaq for quite a while now, and the third quarter shouldn't prove an exception. We'll provide the tally on IPOs, and review the key numbers and themes discussed above, in our earnings recap after the company reports next Wednesday. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Nasdaq, Inc. Stock Quote
Nasdaq, Inc.
$155.59 (2.00%) $3.05

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.