Essential Numbers and Themes to Watch in Nasdaq Inc.'s Q3 Earnings

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Nasdaq Inc. (NASDAQ: NDAQ) issues its third-quarter earnings report on Wednesday, Oct. 25, before the start of trading. Last quarter, Nasdaq booked record net revenue and improved operating profit, and shareholders are keen for a continuation of the strong performance. Let's briefly look at key numbers and themes that investors will zero in on when Nasdaq's quarterly report is issued.

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The numbers

  • Trading revenue, which comprises about 25% of Nasdaq's total top line, will likely prove a mixed bag next week. According to Nasdaq's latest monthly trading report, which was issued Oct. 9 and covers all three months of the third quarter, U.S. equity options exhibited healthy volume growth of 5.9%, as 364 million contracts were traded. Per the report, it appears that revenue from this volume will be offset by a drop of 17.5% in U.S. fixed income trading.

  • However, it's a testament to management's efforts to diversify the business that a strong performance from Nasdaq's other primary revenue streams -- trade management services, market technology, information services, and corporate services -- will primarily determine the quarter's fate. For reference, in the third quarter of 2016, Nasdaq booked total net revenue of $585 million.

  • Operating margin should shine as Nasdaq continues to see lower acquisition-related expenses. While merger-integration costs remain, the company is gradually absorbing transactions like the June 2016 purchase of International Securities Exchange. Due to this trend, in Q2 2017 Nasdaq enjoyed a leap of 9.5 percentage points in operating margin, to 40.5%.

  • If both net revenue and operating margin remain vigorous, look for Nasdaq to post favorable bottom-line numbers versus the comparable period. Last year in the third quarter, Nasdaq generated net income of $131 million and diluted earnings per share of $0.77.

Essential themes

In the company's last earnings call in late July, CEO Adena Friedman promised that the integration of previous acquisitions would remain a top priority for year-end. And CFO Michael Ptasznik mentioned the company's goal to decrease Nasdaq's debt-to-EBITDA ratio from a current reading of 3.0 to a more conservative 2.5 by mid-2018, as acquisition-related borrowing has increased balance sheet leverage. Yet both executives also indicated a willingness to engage in new acquisitions if a proposed deal helped the company further its strategic goals.

It didn't take long for opportunity to arise. Last month, Nasdaq initiated its latest in a seemingly unending stream of M&A transactions, announcing its intent to purchase eVestment, a data and analytics firm that assists asset and fund managers in making institutional investment decisions.

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The deal is valued at $705 million and is expected to close by year-end. On Sept. 22, Nasdaq issued $500 million in senior notes, due in 2019, to fund the purchase. Next week, we can expect management to discuss both the rationale for the acquisition, and the bearing it has on Nasdaq's targeted borrowing reduction.

While the company is bulking up its information services segment with the addition of eVestment, it's also culling revenue streams it no longer considers core services. This month, Nasdaq announced that it's exploring options to divest its public relations solutions and digital media services units, which reside in its corporate services segment. This reflects a fine-tuning of company strategy, in which providing data analytics and trading technology services to customers will take precedence over the maintenance of lower-return businesses. Trimming noncore operations will likely figure as a topic in management's earnings conference call next week.

Finally, shareholders will want to check the ever-important barometer of Nasdaq's health, its overall listings statistics and share of initial public offerings (IPOs) won. From the monthly trading report mentioned above, we know in advance that total corporate listings on the company's various exchanges grew roughly 4%, to 3,887, by the end of the third quarter.

In the second quarter of this year, the Nasdaq Stock Market won 52% of all U.S. IPOs. Snaring a predominance of IPO listings has been a point of pride for Nasdaq for quite a while now, and the third quarter shouldn't prove an exception. We'll provide the tally on IPOs, and review the key numbers and themes discussed above, in our earnings recap after the company reports next Wednesday. 

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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.