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One-Time Charges Dampen Nasdaq's Third-Quarter Profits

By Asit Sharma - Oct 25, 2018 at 12:45PM

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Despite charges related to mergers and divestitures, as well as a trade-clearing loss, the exchange operator's underlying growth remains vibrant.

Trading, clearing, and market services giant Nasdaq's (NDAQ 2.13%) third-quarter 2018 results, issued Wednesday, reflected a modest top-line dip and a similar decline in net income and earnings per share (EPS). After a look at the major numbers below, let's review the quarter's details, including a handful of one-time charges that hurt profits but have little long-term consequence on the business.

Nasdaq third-quarter results: The raw numbers

Metric Q3 2018 Q3 2017 Year-Over-Year Change
Revenue $600 million $603 million (0.5%)
Net income attributable to Nasdaq $163 million $170 million (4.1%)
Diluted earnings per share $0.97 $1.00 (3%)

Data source: Nasdaq. 

What happened with Nasdaq this quarter?

  • The company's slight top-line decline resulted from the divestment of its non-core public relations solutions and digital media services businesses to privately held West Corporation in April 2018. The $46 million loss of revenue combined with a $7 million negative foreign currency translation effect to create a $53 million headwind against revenue. This was offset by $22 million in revenue from institutional analytics provider eVestment, which Nasdaq acquired in October 2017, and healthy 5% organic growth, which contributed $28 million in top-line improvement.
  • Market services revenue inched up 1% over the prior-year quarter to $222 million.
  • Corporate services revenue advanced 4% during the quarter to $131 million, as client adoption of an all-inclusive annual listing fee structure and higher IPO activity boosted listing services revenue.
  • Information services' top line jumped 19% to $179 million. Major factors behind the advance include the $22 million in new eVestment revenue mentioned above, and a $9 million improvement in revenue from index-related products.
  • Operating margin slipped by 2.3 percentage points to 41% as higher general and administrative expenses, along with higher depreciation and amortization expense due to recent acquisitions, offset reductions in compensation, professional services, and regulatory expenses.
  • A portion of the drag on operating margin was attributable to post-closing expenses of $6 million from the divestiture of the public relations and media businesses.
  • In addition, Nasdaq took a charge of $8 million on a clearing loss on the company's Nordic exchange. Norway's largest individual energy trader, Einar Aas, had been allowed by Nasdaq to clear his own trades, due to personal resources that met the company's minimum clearing requirements. In September, Aas failed to meet margin calls on a concentrated trade in energy when the spread between German and Nordic energy prices widened to extremes 17 times their normal level. Nasdaq has assured investors that it's implementing new controls and studying how it can avoid a similar misstep in the future.
  • Nasdaq incurred one additional charge outside of the operating section on its income statement, a working capital adjustment of $8 million that was also related to the exit of the PR and digital media businesses.
  • Adjusting EPS for the one-time charges above, acquisition-related amortization, and other items affecting comparability, Nasdaq's non-GAAP EPS of $1.15 exceeded the $1.01 of non-GAAP EPS booked in the third quarter of 2017.
  • During the quarter, the company entered into an agreement to acquire Cinnober, a provider of financial technology to brokers and exchanges, for $190 million in cash. The deal is expected to close in the fourth quarter. Management believes the deal will meet internal objectives of providing a return on invested capital of 10% within three to five years and will be accretive to non-GAAP EPS within 12 months.
Employees at an institutional trading desk with trading monitors.

Image source: Getty Images.

What management had to say

While the organization posted an earnings decline during the quarter, on management's earnings conference call, CEO Adena Friedman focused on core underlying growth that is being generated from longer-term strategic shifts in the company's book of services:

[O]ur results from this last quarter continue to track positively to the tactical execution priorities we laid out at the start of the year, which are to complete the initial actions of our strategic pivot, to develop and deploy our marketplace economy technology strategy, and to continue advancing our competitive position in our core businesses. This is particularly evident in the areas where we have shifted more of our resources, particularly -- specifically in technology index and analytics. We are seeing strong growth in these businesses, which reaffirms our new strategic direction.

Looking forward

Nasdaq's management refrains from providing revenue or earnings guidance, but does update full-year expected operating expense each quarter. The company revised its 2018 non-GAAP operating expense expectation to a range of $1.31 billion to $1.325 billion from a previous range of $1.31 billion to $1.335 billion. This very minor tweak hints that the company is expecting a smaller magnitude of one-off charges in the last quarter of the year.

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