In its last sequential quarter, Nasdaq Inc. (NDAQ 0.10%) relied on non-trading segments for growth as its market-services segment turned in a near flat performance. In the first quarter of 2018, however, healthy trading volumes resumed, and Nasdaq achieved expansion in each of its four operating segments. Before sifting through important highlights for the quarter, let's briefly review the top-level performance:
Nasdaq: The raw numbers
| Metric | Q1 2018 | Q1 2017 | Year-Over-Year Growth |
|---|---|---|---|
| Revenue | $666 million | $581 million | 14.6% |
| Net income attributable to Nasdaq | $177 million | $168 million | 5.3% |
| Diluted earnings per share | $1.05 | $0.99 | 6.1% |
Data source: Nasdaq Inc.
What happened with Nasdaq this quarter?
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Nasdaq's impressive double-digit revenue gain was composed of 9.4% organic growth, a 3% boost from favorable foreign-currency translation and a positive impact of 2.2% from acquisitions.
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The company's operating margin slipped 140 basis points, to roughly 41%, against the comparable prior-year quarter. Management attributed the cost creep to higher operating expenses due to recent acquisitions and higher incentive-compensation expense tied to the company's top-line gains during the quarter.
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After posting a revenue increase of just $3 million in the last sequential quarter, the market-services segment recorded an improvement of $32 million, to $250 million, in the first quarter of 2018. The 14.7% increase was propelled by higher trading volumes in equity derivatives and cash equities.
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According to management, market-services' results, which represented a quarterly revenue record, were made possible, in part, by the successful integration of International Securities Exchange (ISE), the U.S. options exchange that Nasdaq acquired nearly two years ago.
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Corporate services boosted revenue by $12 million, to $172 million, and information services reported a $36 million rise in revenue, to $174 million. Together, these two segments comprise just over half of Nasdaq's total revenue.
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Management attributed information services' appreciable top-line leap to the October 2017 acquisition of institutional data-analytics provider eVestment, strong organic growth, and momentum in the segment's indexing and licensing services.
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Market technology, Nasdaq's smallest division, improved revenue by 7.6%, to $70 million. Market technology's order backlog, an indicator of its fiscal health, increased 4% year over year, to $735 million at quarter-end.
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In mid-April, Nasdaq announced the completion of the sale of its digital media services and public relations solutions businesses to privately held West Corporation for approximately $335 million. Management had recently deemed these businesses to be non-core revenue streams, given the company's evolving strategic focus on areas such as product listing, data analytics, and client-centered technologies.
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Total assets under management (AUM) in exchange-traded products (ETPs) linked to Nasdaq's proprietary index family grew 25% year over year, reaching a record $173 billion at the end of the first quarter.
Image source: Getty Images.
What management had to say
In Nasdaq's earnings press release, CEO Adena Friedman assessed the organization's progress against its operational and strategic goals:
I am [also] encouraged by the early progress against our 2018 execution priorities. This includes advancing our strategic pivot as an analytics and technology partner, including the recently completed sale of the Public Relations Solutions and Digital Media Services businesses, which allows us to focus our Corporate Services business on the most strategic services and solutions to our corporate clients.
In addition, we continue to expand our pipeline of opportunities in our 'markets economy' technology strategy, and build momentum around our competitive position across several core businesses. While industry macro conditions have been developing positively, we remain focused on structurally advancing our capabilities to deliver over the long term for clients and shareholders, across a broad range of environmental backdrops.
Looking forward
Nasdaq revised its non-GAAP operating expense for the year to account for the transaction with West Corporation. For full-year 2018, the organization now expects non-GAAP operating expense to land between $1.295 million and $1.335 million from a prior band of $1.375 billion to $1.415 billion.
Of course, alongside the expense decline, Nasdaq will lose the revenue associated with its digital media and PR subsidiaries. At the next reporting period, investors will get a sense of the bottom-line effect of the dispositions as the company records its first quarter following the sale of these two small business lines. If Nasdaq continues to stretch its top line at a double-digit pace, the impact is likely to be minimal.
