Tight Expense Discipline Boosts Nasdaq's Third-Quarter Earnings

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Nasdaq Inc. (NASDAQ: NDAQ) was able to supplement decent top-line growth with firm control of its overhead expenses in the third quarter, as its earnings filing on Wednesday revealed. The result? Some pretty impressive bottom-line numbers:

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Nasdaq: The raw numbers

Metric Q3 2017 Q3 2016 Year-Over-Year Growth
Revenue $607 million $585 million 3.7%
Net income attributable to Nasdaq $171 million $131 million 30.5%
Diluted earnings per share $1.01 $0.77 31.2%

What happened this quarter?

  • Net revenue increased by $22 million versus the prior year quarter, or roughly 4%, of which three percentage points were due to organic growth, and one percentage point derived from favorable foreign currency exchange rates.

  • Nasdaq's operating expenses decreased by $9 million. This drop can be traced directly to the company's lower "merger and strategic initiatives" line item expense of $3 million, against $12 million in the third quarter of 2016. However, Nasdaq  also maintained a firm grip on all other general and administrative expenses: Total operating expenses of $340 million matched the prior year's tally. This discipline provided the operating leverage that resulted in the company's 31% jump in diluted earnings per share (EPS). 

  • Market services, Nasdaq's largest segment at 36% of revenue, reported a modest rise of $6 million in revenue to $219 million, as gains in cash equities, fixed-income trading, and trade management services were offset by a $5 million decline in equity derivatives revenue.

  • Revenue in corporate services, Nasdaq's second-largest segment at 26% of total revenue, dipped by $1 million to $161 million. 

  • The information services segment, which provides 25% of company revenue, continued its recent strong performance, gaining $13 million on the top-line to $150 million. The growth was split evenly between data products and indexing and licensing services.

  • Market technology, which contributed 13% of revenue, increased income by $4 million to $77 million. New order intake of $66 million led to a 9% increase in total order value versus 2016, equaling $805 million at quarter's end.

  • Nasdaq completed its roughly $700 million acquisition of institutional analytics provider eVestment after the quarter ended. (The organization announced the deal's closing this week.) 

  • As I discussed in my earnings preview, Nasdaq increased its overall leverage by borrowing funds for the eVestment purchase. Nasdaq issued $500 million in senior notes on Sept. 22 which are due in 2019. Total long-term debt increased by $530 million from the company's last reporting period, to $3.6 billion.
  • The organization also completed its acquisition of surveillance specialist Sybenetix for an undisclosed amount on Sept. 18. This was a relatively small deal, paid for out of company cash; details will be available when the company releases its 10-Q filing for the quarter in a few days.

  • The value of exchange traded product (ETP) assets under management benchmarked to Nasdaq's index families increased by 31% to $154 billion, pointing to the increasing popularity of Nasdaq's indices as ETPs continue to gain favor over mutual funds.

  • Nasdaq once again led initial public offering (IPO) issuance, winning 77% of all U.S. IPOs during the quarter. Nasdaq's Nordic exchanges won 11 new listings during the quarter.

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What management had to say 

In Nasdaq's earnings release, CEO Adena Friedman discussed a review of strategy that resulted in a reordering of company priorities, in which data and analytics services to clients will be emphasized:

"...we completed a strategic review and initiated a business pivot to move more of our resources behind our most sizable growth opportunities. Initial actions supporting this new direction include organic investment in our Market Technology and Information Services businesses. Additionally, we completed the acquisitions of eVestment and Sybenetix, and made the decision to explore strategic alternatives for our Public Relations Solutions and Digital Media Services businesses within our Corporate Solutions business."

CFO Michael Ptasznik provided additional insight on the strategy shift:

"...we have refined our framework for deploying capital and internal resources to support the growth objectives of our fastest growing businesses, while remaining committed to continuing our strong capital return track record. These actions are expected to bolster our ability to deliver on our double-digit total shareholder return target."

Both statements reflect the company's desire to diversify revenue from its legacy trading base to software and information services, while dispensing with business lines that won't meaningfully impact growth or earnings.

Looking forward

Nasdaq doesn't provide revenue or earnings guidance, but does update changes on projected year-long expense. In its earnings release, the company revised the bottom of its non-GAAP full-year expense range upward by $15 million, to $1.275 billion, leaving the top unchanged at $1.290 billion. The increase is due to the closing of the eVestment and Sybenetix transactions. After Nasdaq's admirable expense discipline over the last three months, shareholders can expect that it will hit this targeted range as closes out a profitable year.

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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.