Trading, exchange, and institutional data and analytics services provider Nasdaq (NDAQ 0.03%) suffered through patchy trading volume in its first quarter of 2019. Reported revenue declined against the prior year; nonetheless, positive results in information services and market technology services pushed organic revenue higher in the first three months of the year.
Below, we'll review the salient details from Nasdaq's report issued on April 24, and discuss the company's ongoing attempt to acquire and operate one of Europe's leading stock exchanges. Note that in the discussion that follows, all comparable numbers refer to the prior-year quarter.
Nasdaq first-quarter results: The raw numbers
| Metric | Q1 2019 | Q1 2018 | Year-Over-Year Change |
|---|---|---|---|
| Revenue | $634 million | $666 million | (4.8%) |
| Net income attributable to Nasdaq | $247 million | $177 million | 39.5% |
| Diluted earnings per share | $1.48 | $1.05 | 40.9% |
Data source: Nasdaq.
What happened with Nasdaq this quarter?
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Market services revenue dipped 7% to $233 million, due to lower U.S. equity derivative trading volumes, weaker European cash equity volumes, and a decline in income derived from U.S. fixed-income trading.
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Corporate services revenue dipped 1% to $133 million.
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Information services rose 11% to $193 million. Index revenue gained on increased Nasdaq 100 futures trading, higher assets under management in exchange-traded products linked to Nasdaq indexes, and improved index data revenue. Investment data and analytics revenue benefited from a purchase-price adjustment to Nasdaq's October 2017 eVestment acquisition, as well as organic revenue growth.
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Market technology enjoyed a strong quarter: The segment's top line jumped by 28% to $77 million. The January 2019 acquisition of financial-technology provider Cinnober contributed roughly 17 percentage points of this growth, with the balance attributed to an increase in both the quantity and size of software projects, and vigorous software-as-a-service financial surveillance revenue.
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Nasdaq continued to dispose of businesses which don't fit its current emphasis on building analytics capabilities and developing technology solutions for clients. The company sold its BWise enterprise governance and risk management platform to privately held SAI Global on April 1 for an undisclosed amount.
- Nasdaq has undertaken a number of acquisitions and business dispositions over the last year, making it difficult to follow actual revenue growth at a glance. This quarter, acquired revenue contributed $11 million to sales, while dispositions removed $50 million from the top line. Foreign-exchange translation reduced sales by an additional $15 million. Thus, organic revenue improved by $22 million, or 3%.
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Operating margin increased by 330 basis points to 43.4%. The company achieved this through lower compensation costs and lower general and administrative expenses against the prior-year quarter, which absorbed the impact of lower reported revenue.
- Due to the higher operating margin, operating income of $275 million slightly exceeded the $273 million in operating income earned in the first quarter of 2018. However, the company realized a $27 million gain from the sale of BWise, and also booked a one-time, $36 million income recognition item from an unconsolidated investee. These two adjustments drove net earnings substantially higher as seen in the table above.
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Nasdaq increased its dividend by 7% to $0.47 each quarter, which yields 2.1% at the current share price on an annualized basis.
Oslo Opera House seen at dusk. Image source: Getty Images.
Update on Nordic exchange bid process
As I discussed last quarter, Nasdaq is competing against rival exchange operator Euronext to acquire Norway's primary stock exchange, Oslo Bors VPS. Both companies have increased their transaction prices in recent months, and as of this writing, both are bidding 158 Norwegian kroner per share for the bourse.
On April 11, Nasdaq announced that it had acquired roughly 844,000 shares of Oslo Bors at the deal's offering price of 158 kroner per share, bringing Nasdaq's total ownership interest to 37%; Euronext owns approximately 53% of the exchange.
During the company's first-quarter earnings conference call, Nasdaq president Adena Friedman discussed the surprise accumulation of additional shares, as well as the company's outlook on its prospects to for approval by Norway's finance ministry as the winning exchange:
[I] think that the share purchase was somewhat opportunistic because there was a particular holder that was ready to sell and [they] gave us opportunity to buy it. So I think that is just helpful to bolster our proposal and so was an opportunistic decision.
I think that with regard to our efforts there, we continue to feel very strongly that we have the strongest proposal available in terms of the strategic benefit to the Norwegian capital markets, to Oslo Bors itself, [and to its] clients in particular. And we continue to manage our relationships with the stakeholders there to make sure that they're aware of all the benefits that we can provide to the Norwegian capital markets as part of our bid.
The Norwegian finance ministry is slated to make a decision by mid-May, but could potentially delay the final award until June as it deliberates.
Looking forward
The only quantitative guidance Nasdaq typically provides is a non-GAAP operating expense range it issues for the entire year. The company trimmed its 2019 operating expense range to between $1.29 billion and $1.33 billion, versus the prior band of $1.325 billion to $1.375 billion, as a result of the disposition of BWise. Of course, this range is subject to revision as early as next quarter, should Nasdaq receive the green light to take over the Oslo bourse.
