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Non-Trading Revenue Bolsters Nasdaq's Second Quarter

Asit Sharma, The Motley Fool

Market services and technology provider Nasdaq (NASDAQ: NDAQ) continued to prove out its long-term strategy of diversifying into market technology, analytics, and trading security services in the second quarter of 2019. An anemic quarter of trading and clearing revenue was offset by services sales during the last three months.

Below, let's absorb headline numbers and focus on the salient details from the period. Note that all comparable numbers below refer to those of the prior-year quarter.

Nasdaq first-quarter results: The raw numbers

Metric Q2 2019 Q2 2018  Change
Revenue $623 million $615 million 1.3%
Net income attributable to Nasdaq $174 million $162 million 7.4%
Diluted earnings per share $1.04 $0.97 7.2%

Data source: Nasdaq.

What happened with Nasdaq this quarter?

  • Market services revenue decreased by 4%, to $277 million, due to lower net revenue from cash equity trading and fixed income and commodities trading and clearing.
  • Corporate services revenue rose 3%, to $123 million.
  • The information services segment's top line improved by 11%, to $194 million. Index revenue climbed 10% on higher licensing from futures trading based on the Nasdaq 100 index, as well as rising assets under management (AUM) in exchange-traded products (ETPs) that are benchmarked to Nasdaq's various indexes. Investment data and analytics revenue jumped 44%, mostly due to a purchase-price adjustment from the company's acquisition of eVestment.
  • Market technology revenues advanced by 20%, to $79 million, primarily from the company's January 2019 acquisition of financial technology-solutions provider Cinnober.
  • Combining all segments, the company enjoyed 4% organic top-line growth and roughly 2% growth contributed from acquisitions. This was offset by a negative impact from divested businesses coupled with foreign currency headwinds, leading to the near-flat revenue performance.
  • Operating margin fell 260 basis points, to 41.1%. After adjusting for the amortization of intangible assets and one-time charges related to debt extinguishment during the quarter, operating margin fell roughly 1 percentage point, to 48%.
  • Nasdaq's quarterly initial public offering (IPO) win rate remained high, as it boasted 75% of all U.S. IPOs during the quarter.
  • Overall AUM of ETPs benchmarked to proprietary Nasdaq indexes rose 9%, to $203 billion, as of June 30, 2019.
  • Nasdaq began to track and disclose software-as-a-service (SaaS) metrics in its market-technology segment to more accurately reflect the business' composition and potential. In the second quarter, market technology's annualized recurring revenue (ARR) increased 16%, $247 million.
Close-up of two hands tracking a stock chart on a laptop computer.

Image source: Getty Images.

What management had to say

In Nasdaq's earnings press release, CEO Adena Friedman discussed specific success factors behind the quarter's mild revenue advance and high single-digit earnings improvement, pointing to core market trading and listing strength while alluding to the rising importance of the company's technology service offerings:

Our solid second quarter 2019 results serve as an encouraging data point as we execute against our strategy to maximize the ways we deliver to our customers both in our marketplace core, as well as through our expanding technology and analytics offering. In particular, in the second quarter, our foundational U.S. and Nordic equity marketplaces each delivered market share approaching multi-year highs, while 80% of U.S. issuers executing IPOs in the first half of 2019 selected Nasdaq as their listing venue. Meanwhile, our Market Technology, Information Services and Corporate Services segments continue delivering at or above their respective longer-term growth objectives.

Looking forward

Nasdaq doesn't issue forward earnings or revenue guidance but does provide investors with a total non-GAAP (adjusted) operating expense estimate for the full year. For the second time this year, Nasdaq tightened this anticipated total expenditure range. It now expects operating expenses of $1.295 billion-1.320 billion, versus a previous band of between $1.29 billion and $1.33 billion.

This might not be the last revision of the year, as Nasdaq has adjusted this number higher in the third quarter in past years. That's usually a positive sign, as stronger trading and technology service activity pulls expenses higher, in tandem with increased revenue.

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Asit Sharma has no position in any of the stocks mentioned. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.