Earnings Preview: NASDAQ

Leading exchange operator NASDAQ OMX Group Inc. (NDAQ) is scheduled to release its fourth quarter earnings results before the market opens on February 2, 2011. The Zacks Consensus Estimate for the fourth quarter is 51 cents per share, representing growth of about 10.6% over the year-ago quarter.

Following the third quarter trends, the positive impact of exchange rates and substantially improved revenues from market and transaction services and market technology, cash equity and derivative trading will continue to drive the top-line expansion. Moreover, disciplined expense management would also help the bottom-line recovery.

However, low market data revenue and orders intake, decline in industry volumes and low average net fee per share on NASDAQ’s U.S. trading system also weighs on the performance. Further, the SMART Group acquisition will also be dilutive to results at least for a couple of quarters.

Previous Quarter Performance

NASDAQ reported third quarter operating earnings of 50 cents per share that surpassed the Zacks Consensus Estimate of 47 cents and prior-year quarter earnings of 42 cents per share. However, operating earnings missed by a couple from 52 cents per share reported in the prior quarter.

Total operating earnings, on non-GAAP basis, were $169 million, up from $152 million in the prior-year quarter but down from $183 million reported in the prior quarter.

Total net exchange revenues increased 7% year over year to $372 million, marginally higher than the Zacks Consensus Estimate of $371 million.

As per segments, Market Services net exchange revenues for the quarter increased 8% from the year-ago period to $249 million. Issuer Services revenues increased 4% year over year to $85 million, while Market Technology revenues grew 6% year over year to $38 million.

During the reported quarter, NASDAQ’s order intakes dipped substantially to $27 million from $37 million in the year-ago quarter. However, total order value increased to $446 million from $318 million in the prior year quarter.

On GAAP basis, total operating expenses decreased to $207 million from $218 million reported in the year-ago quarter, while operating expenses increased 3% year over year to $203 million, on non-GAAP basis.

Agreement with Analysts

Ahead of the earnings release, we do not see any significant variation in analyst estimates over the past 30 days, while no changes were noticed over the past 7 days. Hence, the estimate revision trends and the magnitude of such revisions justify no major changes in the sentiment.

In the last 30 days, four of the 18 analysts have lowered their estimates for the fourth quarter while one upward revision was witnessed. Similarly, 5 downward and one upward revision were witnessed for 2010.

Further, 2 of the 19 analysts raised their estimate for 2011 while one analyst lowered estimate, providing no clear directional movement. This implies that the analysts have provided a neutral outlook and do not foresee any significant upward or downward pressure on the results.

However, the neutral approach towards NASDAQ also gives scope for some positive surprises in the first half of 2011, particularly, with increased clarity on the potential effects of the ongoing financial overhaul regulations.

Moreover, the company is focused on keeping its balance sheet at low risk, a positive that could increase operational efficiencies through a strong expense management, headcount reduction, lower taxes and fewer charges.

On the other hand, it could also point out the absence of any other major catalyst for growth and higher expense on account of the recent SMART group acquisition. Management also raised its expense outlook for 2010.

Magnitude of Estimate Revisions

In the last 90 days, estimates for the fourth quarter dipped only by a whisker to 51 cents, following the third quarter results. Meanwhile, earnings per share remained constant at the current level of $1.94 per share for full year 2010.

However, for fiscal 2011, estimated earnings per share increased to $2.36 from $2.26, over the past 90 days. This trend reveals a moderately positive outlook for the forthcoming year.


Going by past trends, we have a slightly mixed opinion about NASDAQ in the near term given the increased competitive pressures and regulatory uncertainty. The company’s reported earnings per share exceeded its expectations for three of the last four quarters and has a positive four-quarter average surprise of 2.63%.

Our Take

NASDAQ continues to drive its operating leverage through a healthy balance sheet, which is based on strong cash flow and a diverse business model. Additionally, strong debt and credit rating upgrades in 2010 also reflect sound financial outlook and improvement in operating efficiencies.

NASDAQ continues to return value to its shareholders through the ongoing share repurchase program, thereby retaining investors’ confidence in the stock.

However, NASDAQ continues to suffer from an eroding market share and weak trading volumes, which is directly affected by economic and market conditions, volatility of interest rates, inflation and price level. In addition, government regulations such as restrictions on high frequency trading and taxes charged on securities transactions could have an adverse effect on the overall trading volumes.

NASDAQ has been facing intense competition that tends to reduce the market share and the leverage of its business. While arch-rival NYSE Euronext Inc. (NYX) has been snipping off market share, more trading platforms such as CME Group Inc. (CME), CBOE Holdings Inc. (CBOE) and IntercontinentalExchange Inc. (ICE) launched over the recent years have been giving way to severe competition primarily on the OTC, futures and options market.

Despite these risks, NASDAQ’s diversified business mix, cost, revenue and technology synergies will enable it to benefit from improving economic conditions in future. We believe that NASDAQ’s operations will gain momentum once the global economy stabilizes and rebounds to its historical highs.

Hence, we currently provide Neutral recommendation on NASDAQ, given the equal measure of risk and reward in the intermediate term. Thisalso corresponds to the Zacks #3 Rank (short-term: Hold).

NASDAQ OMX GRP (NDAQ): Free Stock Analysis Report

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