In a similar narrative to its previous sequential quarter, exchange operator Nasdaq (NDAQ -1.13%) compensated for mediocre trading revenue with vibrant expansion in data and technology offerings to its customers. But the organization also incurred charges that dented the bottom line during the period. As we assess the company's scorecard below, note that all comparable numbers refer to those of the prior-year quarter.
Nasdaq's third quarter: the big picture
|Metric||Q3 2019||Q3 2018||Change (Decline)|
|Revenue||$632 million||$600 million||5.3%|
|Net income attributable to Nasdaq||$150 million||$163 million||(8%)|
|Diluted earnings per share||$0.90||$0.97||(7.8%)|
Significant details from the quarter
- The company achieved impressive organic revenue growth of 6%.
- Market services revenue advanced 2% to $226 million. Higher revenue from equity derivative trading and cash equity trading was party offset by slightly lower fixed-income and commodities trading results, due to weaker volumes in U.S. fixed-income instruments and European commodities.
- Corporate services also notched a modest 2% revenue improvement, to $124 million.
- Information services enjoyed an 11% increase in its top line, to $198 million. Within this segment, market data and index revenues both expanded roughly 7%, to $102 million and $56 million, respectively. Investment data and analytics revenue jumped 25% on organic eVestment revenue growth and a $4 million purchase-price adjustment related to the late 2017 acquisition of this business.
- Market technology posted 24% growth in its top line to $84 million, thanks to contributed revenue from the company's purchase of Swedish trading and clearing technology specialist Cinnober in January of this year. The segment also pegged laudable organic growth of 9% during the quarter.
- Total industry assets under management for exchange-traded funds and other products that track Nasdaq's proprietary indexes rose $1 billion to $2017 billion at quarter-end, setting a new record.
- In September, the company began a restructuring of its technology platforms that will see a retirement of elements of its current marketplace infrastructure and certain technology offerings. The organization expects to book a total of $65 million to $75 million in pre-tax charges toward this effort in the next two years, and incurred the first $30 million in charges during the third quarter.
- Operating margin tumbled 520 basis points, to 35.8%. After adjusting for the $30 million in current-quarter restructuring charges, operating margin dipped 50 basis points to 40.5%. The company's own non-GAAP (adjusted) operating margin calculation (which additionally adjusts for merger and strategic-initiative charges, the amortization of intangible assets, and a current-year provision to notes receivable) landed at 50%, against 48% in the comparable quarter.
- Nasdaq was responsible for 41 initial public offerings (IPOs) and 66 new listings in total during the third quarter. The company led all U.S. exchanges with a 76% IPO win rate over the last three months.
- The company began to track annualized recurring revenue, or ARR, in its market technology division earlier this year, in order to give investors a clearer idea of the growth potential in its nontrading revenue. Market technology ARR increased 17% year over year in the third quarter, to $255 million.
Management's comments on revenue composition
Over the last several quarters, Nasdaq has actively invested internal resources in data analytics, market exchange services, its proprietary index complex, and a host of other technology offerings to supplement core trading revenue. In its earnings press release, CEO Adena Friedman discussed the current balance in the organization's top line:
Our strong third quarter 2019 results reflect significant contributions from across our franchise. I am especially pleased that we have been able to continue delivering strong growth in our expanded technology and analytics offerings, while simultaneously benefiting from our rising equities market share and a busy trading and IPO environment. At the same time, we are progressing on significant initiatives, such as the deployment of our next-generation market technology solutions and enhancing our offerings to the private markets, which will enable us to do more for our clients in future periods.
Nasdaq has supplemented internal investment with a series of meaningful bolt-on acquisitions, which should eventually help it maintain a brisk rate of organic growth. Investors appear to be endorsing the technology innovator's strategy: Nasdaq shares gained 3.5% on Wednesday, and they've advanced 25% so far in 2019.