Nasdaq OMX (NDAQ 2.13%) reported on an auspicious start to 2016 on Wednesday, recording a solid revenue increase and healthy net income in the first quarter of the year. Let's zero in on the key numbers from the earnings filing, and then take a more thorough look at the quarter's performance.
Nasdaq OMX: The raw numbers
|Metric||Q1 2016 Actual||Q1 2015 Actual||Growth (YOY)|
|Revenue||$534 million||$507 million||5.3%|
|Net income attributable to Nasdaq OMX||$132 million||$9 million||See note*|
|Diluted EPS||$0.78||$0.05||See note*|
What happened with Nasdaq OMX this quarter?
- Stripping away a small foreign currency effect of $2 million, and the effects of recent acquisitions, the company's organic revenue increased 4% during the quarter.
- Nasdaq's overall performance was led by its largest segment, market services, which managed a 7% gain in revenue, to $201 million. Management cited higher trading volumes in equity derivatives and cash equities as factors behind the improvement. Operating profit advanced by 12% to $113 million.
- Information services, comprising 25% of total revenue, produced a 6.5% top-line increase, to $133 million, and a 5% expansion of operating profit, to $97 million. The segment's performance was due to growth in index and proprietary data services, as well as the effect of recent acquisitions.
- The technology solutions segment, which is roughly the same size as information services, posted revenue of $134 million, a modest 3% positive change from the comparable prior year quarter. Operating income in this segment jumped by 14% to $16 million.
- Listing services, the smallest of of segments by revenue (12% of total company revenue), similarly turned in a 3% top-line bump, to $66 million, in Q1 2016. However, operating income of $28 million was unchanged from Q1 2015.
- The Nasdaq Futures Market, or NFX, continues to gain share as it competes in the energy futures exchange arena. Management noted that open interest on the exchange rose to 800,000 contracts last week, which is significant given that the exchange only launched in July 2015.
- The company confirmed the closing of two acquisitions during the quarter, both in February. Nasdaq completed its purchase of Canadian alternative-equity market Chi-X Canada, as well as its takeover of news distribution and analytics provider Marketwired. These acquisitions follow the trend of recent quarters, in which Nasdaq has used strong operating cash flow to make serial bolt-on acquisitions that supplement its primary revenue base of trading.
- This doesn't mean Nasdaq is diversifying itself out of the trading business. On Wednesday, investors learned that the Department of Justice has given Nasdaq approval to proceed with its $1.1 billion acquisition of option exchange operator International Securities Exchange (ISE) from Deutsche Borse Group. The deal, which was originally scheduled to close in the second half of 2016, may now be concluded as early as Q2 2016, pending SEC approval.
What management had to say
Nasdaq's executive team has so far adroitly balanced smaller acquisitions such as Chi-X Canada with quite significant transactions such as ISE. In remarks issued alongside earnings on Wednesday, Nasdaq CEO Bob Greifeld commented on management's approach toward acquisitions:
"Our relentless focus on applied technology, innovation, and resiliency continues to strengthen our competitive position, deliver value to our clients, and produce record results for shareholders. ... In addition, we expect our recently announced acquisitions, which are strategically aligned with our vision and business direction, to significantly enhance the effectiveness of our value proposition to serve our corporate and capital markets clients, while creating significant value for our shareholders."
Nasdaq's recent push to relentlessly increase absolute trading volume, while expanding into an array of services, such as financial index construction, or, say, market analytics, will probably continue for some time. The great advantage of this strategy is to give the company a bit of flexibility during each fiscal year, when management constructs a path to earnings. For example, in the last sequential quarter, trading volumes were a bit thin, but services expanded at a brisk pace. In the current quarter, roughly the opposite occurred. Of course, Nasdaq's greatest potential emerges in the quarters, which shareholders greatly appreciate, when both sides of the business exhibit vigor simultaneously.