Exchange operator and financial services provider Nasdaq Inc. (NASDAQ:NDAQ) completed a successful first half of 2018 as its second-quarter 2018 earnings report displayed a convincing balance between trading and nontrading results. While reported revenue advanced only 3% against the prior-year period, underlying growth remained vigorous. We'll sift through the details after a stroll through big-picture numbers directly below.

Nasdaq: The raw numbers

Metric Q2 2018 Q2 2017 Year-Over-Year Growth
Revenue $615 million $596 million 3.2%
Net income attributable to Nasdaq $162 million $146 million 10.9%
Diluted earnings per share $0.97 $0.87 11.5%

Data source: Nasdaq Inc.

What happened with Nasdaq this quarter?

  • Nasdaq's reported revenue growth of roughly 3% was impacted by a headwind of 5 percentage points due to the divestiture of its Public Relations Solutions and Digital Media Services businesses, while foreign currency translation provided a 1% boost. Independent of these factors, organic revenue increased 7% over the second quarter of 2017. This follows 9% organic year-over-year growth achieved in the first quarter of 2018.

  • The company completed the sale of its noncore PR and digital media revenue streams to privately held West Corporation on April 16 for $335 million. Management intends to return most of the net proceeds of the transaction to shareholders. Accordingly, Nasdaq repurchased $242 million worth of its own shares in the second quarter. This leaves $368 million in remaining authorization on Nasdaq's current share repurchase program. 

  • Operating margin increased 310 basis points to 43.7% versus the comparable quarter. Adjusted operating margin (which factors in the effects of mergers and acquisitions, amortization of intangible assets, and debt retirement fees) dipped by 1 percentage point, to 47%. Management noted that a purchase price adjustment related to last year's acquisition of institutional analytics provider eVestment, and transaction expenses from the April business divestments, curbed adjusted operating margin by 2 percentage points. 

  • Nasdaq's trading business achieved credible growth during the period. Market services, the company's largest segment, notched revenue expansion of 7% over the prior year, to $237 million. Performance was paced by equity derivatives and cash equity trading.

  • Information services, Nasdaq's second-largest revenue stream, reported revenue growth of 22%, to $175 million. Approximately half of the increase stems from acquired revenue via the eVestment purchase. The segment also benefited from brisk sales of market data, higher assets under management in exchange-traded products derived from Nasdaq's proprietary indexes, and greater licensing fees from futures contracts trading linked to the tech-laden Nasdaq 100 Index.   

  • Corporate services revenue of $131 million represented a 7% advance over the second quarter of 2017. High client adoption of an all-inclusive annual corporate listings fee constituted the primary driver of the segment's growth.

  • Nasdaq's smallest segment, market technology, reported a top-line improvement of 14%, to $66 million. Management attributed the double-digit jump to growth in delivery, support, and software-as-a-service (SaaS) revenue.

  • The company won 74% of the U.S. listings it competed for during the quarter. Nasdaq led all U.S. exchanges with 89 new listings over the last three months, including 56 initial public offerings (IPOs). Nasdaq's Nordic exchanges also chalked up ample listings growth. The Nordic, First North, and Baltic exchanges combined for 29 new listings, for a total of 1,008 listings at quarter-end.

  • Nasdaq continues to pare down borrowings resulting from recent acquisitions. During the quarter, the company paid down $268 million in debt, bringing total debt to $3.84 billion at June 30th, 2018.

What management had to say 

In the organization's earnings press release, CEO Adena Friedman discussed Nasdaq's strategic direction in broad terms. Nasdaq's current goals include buttressing trading volumes, while diversifying revenue through investments in listing products, data analytics, and other information and corporate services:

I am pleased to see another period of strong organic growth in the second quarter of 2018, in particular the portion of that growth sourced from expanding the ways we serve our clients. Additionally, we are continuing to build for the future by strategically repositioning the company, as demonstrated by the completion of our business divestiture in April and our continued organic investments to implement the Nasdaq Financial Framework technology offering and advance our information services businesses.

Equally critical, our core marketplace trading and corporate franchises are not only operating with the resiliency, efficiency and profitability necessary to support our strategy, but are also finding opportunities to build on their strong competitive positioning, as illustrated by efforts to broaden the offerings to our broker dealer and corporate clients.

Looking forward

Nasdaq doesn't offer revenue or earnings guidance, but it does provide investors with a running projection of total annual adjusted operating expenses. This quarter, the company increased its expected 2018 operating expense outlook slightly, from a previous target of $1.295 billion-$1.335 billion to $1.310 billion-$1.355 billion. The raised floor on expense isn't due to a lack of cost control. Rather, management tweaked the target in light of the organization's strong organic top-line growth, which is triggering higher incentive compensation expense tied to performance.

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