In a quarter in which net trading revenue barely budged, Nasdaq Inc. (NASDAQ:NDAQ) found the key to top-line growth in its corporate, information, and market technology services. We'll drill into the company's fourth-quarter 2017 earnings report, released Wednesday, after a run through the headline metrics directly below.
Nasdaq: The raw numbers
| Metric | Q4 2017 | Q4 2016 | Year-Over-Year Growth |
|---|---|---|---|
| Revenue | $635 million | $599 million | 6% |
| Net income attributable to Nasdaq | $246 million | ($224 million) | N/A |
| Diluted earnings per share | $1.45 | ($1.35) | N/A |
Data source: Nasdaq Inc.
What happened this quarter?
A net revenue increase of $36 million over the fourth quarter of 2016 was comprised of 3% organic growth, 1% acquisition-related growth, and 2 percentage points of favorable foreign currency translation.
Operating margin improved nearly 3 percentage points against the prior-year quarter, to 38.3%. Total operating expenses increased just $6 million versus the comparable quarter, to $292 million, and in turn, the growth on the top line provided favorable operating leverage. As I discussed last quarter, Nasdaq's recent cost control discipline should benefit shareholders over the long term.
Impressively, Nasdaq's top line expanded without much help from trading activities within its largest segment, market services. Market services' net revenue increased just $3 million, to $222 million, as a $3 million drop in organic revenue was offset by a foreign currency translation benefit of $5 million. The organic revenue weakness stemmed from slimmer revenue from U.S. options, but management noted that the company still expanded its share of the U.S. options market during the quarter.
Corporate services, Nasdaq's second-largest segment, also increased revenue modestly, by $3 million during the quarter, to $170 million.
The information services and market technology segments provided the bulk of Nasdaq's year-over-year quarterly revenue advance. Information services added $21 million to its top line over the fourth quarter of 2016, to $156 million. This 16% increase was propelled by Nasdaq's booming index licensing business. Market technology booked a $10 million revenue advance, to $88 million, with $8 million attributed to organic growth. The market technology segment ended the fourth quarter with a record order backlog of $847 million.
Nasdaq continued to exhibit its listing prowess during the fourth quarter. Most notably, consumer goods giant PepsiCo Inc. switched its listing to Nasdaq, transferring $169 billion of market capitalization to Nasdaq from rival exchange NYSE and thus becoming the largest listing transfer in Nasdaq's history. According to the company, since 2005 it's taken $1.2 trillion in market capitalization from NYSE via switched listings.
For the year, Nasdaq again led all exchanges in the U.S. initial public offering market, garnering 63% of all IPOs in 2017.
Image source: Nasdaq, Inc.
What management had to say
Nasdaq's balanced quarter, in which services revenue more than compensated for slim trading growth, demonstrates the progress the company has made in its effort to broaden its revenue streams through analytics, technology, indexing, and listing service offerings, often through small acquisitions. During the company's post-earnings conference call, CEO Adena Friedman pointed out the vigorous growth of eVestment, a provider of analytics to institutional investors, which Nasdaq purchased for $700 million in 2017:
We've been very pleased to see eVestment's strong momentum continues for the fourth quarter. eVestment's top-line stand-alone results in the fourth quarter of 2017 grew 13% year-over-year to $23 million. And in terms of metrics that drive future periods, new subscription sales in the fourth quarter rose 77% and the retention rate was 5 percentage points higher versus the prior year fourth quarter.
Acquisitions like eVestment are especially promising for Nasdaq, as their revenue momentum within specific disciplines (in this case, trading analytics for large institutions) can be supported through Nasdaq's in-house resources and capabilities.
Looking forward
Rather than providing detailed forward guidance, Nasdaq tends to simply project its non-GAAP operating expense each year for shareholders. The organization released its projection on Wednesday for full-year non-GAAP operating expense to fall between $1.375 billion and $1.415 billion.
At the midpoint of this range, Nasdaq will see its operating expense rise roughly 9% from full-year 2017 operating expense of $1.280 billion. The increase is composed of 3% organic expense growth and 1.5% of currency translation effects, with the remainder related to late 2017 acquisitions, including eVestment and surveillance specialist Sybenetix.
Management relayed Wednesday that the timing of acquisition expenses and realization of merger synergies might cause some revision to the expected full-year expense tally. Thus, investors should use the non-GAAP expense number as a ballpark figure as we head into the first half of 2018.
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