Exchange operator and market services provider Nasdaq (NASDAQ:NDAQ) reported results for the final quarter of 2018 on Jan. 30. Alongside earnings, NASDAQ also announced its intention to compete with rival Euronext NV for Nordic stock exchange Oslo Børs VPS. Below, let's review key points from the quarter and examine Nasdaq's bid for Norway's only independent exchange. (Note that in the discussion that follows, all comparable numbers refer to the prior-year quarter, the fourth quarter of 2017.)
Nasdaq fourth-quarter results: The raw numbers
|Metric||Q4 2018||Q4 2017||Year-Over-Year Change|
|Revenue||$645 million||$630 million||(0.5%)|
|Net income attributable to Nasdaq||($44 million)||$246 million||N/A|
|Diluted earnings per share||($0.27)||$1.45||N/A|
What happened with Nasdaq this quarter?
Market services revenue improved by 12% to $249 million, led by higher equity derivatives, cash equity, and clearing revenue. The segment benefited from higher options and equity trading volumes in the U.S. and Europe.
Corporate services revenue advanced by 2% to $133 million, primarily due to greater listing revenue from an increased number of new IPOs, and client conversions to Nasdaq's new all-inclusive annual listing fee program.
The top line in the information services segment expanded by 20% to $187 million. While market data revenue increased by just 4%, index revenue grew by 17% due to an uptick in assets under management linked to exchange-traded products that are based on Nasdaq indexes. Investment and analytics revenue more than doubled to $36 million and provided the biggest boost to the segment. Most of the additional investment and analytics growth can be traced to $6 million in acquired revenue from Nasdaq's October 2017 purchase of eVestment, as well as a purchase price adjustment related to eVestment's deferred revenue in the amount of $10 million.
After accounting for the effects of acquisitions, noncore business dispositions, and the impact of foreign currency translation, Nasdaq's organic revenue increased by a brisk 10% during the last three months.
Operating income dipped by $5 million to $241 million. Operating margin decreased by nearly 4 percentage points to 37.3% as higher compensation expenses and increased selling, general, and administrative expenses cut into profitability.
One-time items comprised the wide difference between operating income and the net loss shown in the table above. Chiefly, the company recorded an income tax provision of $372 million in the fourth quarter to reconcile the effects of U.S. tax legislation from year-end 2017.
Nasdaq also incurred $23 million in clearing losses from the third-quarter trading default of Norway's largest energy trader.
The items above were partially offset by a gain of $118 million on the sale of Nasdaq's 5% interest in clearinghouse LCH Group Holdings; however, the quarter still ended in a loss due to the tax expense adjustment.
Nasdaq maintains its acquisitive posture
Nasdaq continues to view acquired growth as a critical component of its earnings expansion strategy. Last month, the company completed its $190 million purchase of Cinnober, a Swedish provider of financial technology to brokers and exchanges. In December, Nasdaq acquired alternative data specialist Quandl for an undisclosed amount.
On Jan. 30, alongside its earnings release, Nasdaq announced a bid to acquire Norway's primary stock exchange, Oslo Børs VPS, following an offer from rival Euronext NV to acquire the exchange. Nasdaq's formal offer, published Feb. 4, is priced at 152 Norwegian kroner per share, which represents a premium of roughly 5% over Euronext's 145 kroner offer.
As of this writing, Euronext has already stated its intention to sweeten its initial offer. While acquiring the primary bourse in the richest country in the Nordic region would benefit either company, Nasdaq clearly has a higher strategic imperative, as it already dominates the Nordic trading landscape and owns the exchanges in Iceland, Denmark, Sweden, and Finland.
Nasdaq's annual earnings guidance typically consists simply of a range of expected non-GAAP (generally accepted accounting principles) expenses for the year. For 2019, management projects that non-GAAP expenses will land between $1.325 and $1.375 billion, inclusive of the Cinnober and Quandl acquisitions. Of course, if the company succeeds in wresting the Oslo Børs transaction from the hands of Euronext, this range will be subject to revision in the first or second quarter.