Nasdaq Earnings Rise on Lower Acquisition and Restructuring Costs

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Nasdaq Inc. (NASDAQ: NDAQ) reported record net revenue in the second quarter of 2017, bolstered by higher equity-derivatives trading and strength in information services. These gains, coupled with reduced operating costs, led to a favorable quarter versus the prior year. 

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Nasdaq: The raw numbers

Metric Q1 2017 Q1 2016 Year-Over-Year Growth
Revenue $602 million $559 million 7.7%
Net income attributable to Nasdaq $147 million $70 million 110%
Diluted earnings per share $0.87 $0.42 107%

What happened with Nasdaq this quarter?

  • The company's $43 million increase in net revenue was comprised of $34 million added from prior-year acquisitions and organic revenue growth of $15 million, offset by $6 million in foreign-exchange translation.
  • Nasdaq's operating-income margin of 40.5% improved by nearly 9.5 percentage points, as lower acquisition-related and restructuring costs diminished total operating expense. 
  • Market services, Nasdaq's largest segment at 37% of total revenue, enjoyed a 14.4% revenue increase over the comparable prior-year quarter, to $222 million, on the strength of equity-derivatives trading. Inclusion of $21 million from the acquisition of International Securities Exchange (ISE) in June 2016 boosted the segment's top line; the addition was the single biggest contributor to Nasdaq's $43 million net revenue gain.
  • Corporate services, Nasdaq's second-largest segment at 27% of total revenue, saw a marginal $2 million revenue bump, to $164 million.
  • The information services segment -- 24% of total company revenue -- boasted expansion in data products and indexing services, and recorded top-line improvement of $10 million, to $144 million. This was the second-largest contributor to Nasdaq's net revenue in the second quarter. 
  • The company's smallest segment, market technology, which contributed 12% of company revenue, bumped income from software and licensing up $3 million, to $72 million.
  • Nasdaq hosted 64 initial public offerings in the U.S. during the quarter, leading all exchanges with a 52% share of new listings.
  • During the quarter, the company opened the "Nasdaq Analytics Hub," a high-end platform that provides data sets to "buy-side" institutions, such as private-equity groups, mutual funds, hedge funds, etc.
  • Nasdaq indicated that, after substantial share-repurchase activity in 2016 and a 19% dividend increase that was announced last quarter, it began its first ever commercial-paper issuance program during the quarter, with the aim of reducing debt.
  • In other words, the company will use commercial paper (short-term borrowings) to supplement operations while utilizing excess operating cash flow to whittle down long-term debt. Since the beginning of the year, Nasdaq has reduced total long-term debt from $3.603 billion to $3.552 billion.

What Management Had to Say 

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Within the company's earnings release, CEO Adena Friedman noted that Nasdaq is benefiting from both new product introduction on the revenue side, as well as cost synergies from multiple recent acquisitions:

"In addition to achieving a new quarterly net revenue record, we are making significant progress against our 2017 execution priorities, by commercializing key technologies with new products available through the Nasdaq Financial Framework and Analytics Hub, achieving our merger synergies ahead of our original timeline, and raising our market share in our largest trading categories significantly above prior year levels."

Nasdaq confirmed in its earnings report that it's already realized the full $60 million in projected synergies from its multiple 2016 acquisitions, after hitting the $50 million mark last quarter.

Looking Forward

The exchange operator doesn't offer full-fledged earnings guidance, but management did relay that it's expecting to capture an additional $10 million to $20 million in annual cost synergies once all platform migrations from last year's merger transactions are complete. With the acquisition of trading volume, software and financial product companies, its own organic growth, and an increasingly efficient cost structure, Nasdaq has positioned itself nicely for continued revenue and bottom-line gains.

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