) was already one of the most diversified exchange players in the
U.S. prior to its acquisitions over the past year. Following these
acquisitions, it is now an entity that is almost unaffected by the
weakness in its most recognizable division, U.S. cash equity
trading. NASDAQ reported its earnings for the third quarter on
October 23, and recorded a 23% jump in its net revenue, primarily
driven by the acquisitions. Organically, its revenue grew by 4%
year-on-year as the U.S. cash equity trading business continued to
lose market share and remained a drag.
Below we provide our take on the most important data released
during the conference call. Our
price estimate for the company's stock is around
, and we will update our model shortly.
See our full analysis for NASDAQ OMX
Good Progress On Capital Plan
NASDAQ has spent over $1 billion in the last year to acquire
fixed income platform eSpeed and Thomson Reuters'
business. The company had to take on a significant amount of debt
for these deals, which initially raised concerns about its credit
ratings. In Q2, its long term debt obligations increased by
$807 million from the end of 2012.
However, the company is committed to reducing its debt at an
accelerated pace, and seems to be doing well on this front. It paid
back $98 million of debt during the quarter, and remains on track
to return to its long-term gross debt-to-EBITDA target of around
2.5x. As debt reduces, we expect NASDAQ's financial flexibility to
return, and the company is then likely to restart its share buyback
program (read: NASDAQ Escapes Moody's Review Without A
New Acquisitions Provide Diversification…
The hefty sum paid for Thomson Reuters' business and eSpeed
definitely seems to be benefiting NASDAQ in terms of
diversification. Whereas the Thomson Reuters' corporate business
acquisition has strengthened its non-transaction based revenue,
eSpeed has helped diversify transaction-based income by
contributing fixed income revenues.
At the moment, cash equities trading accounts for just 9% of
NASDAQ's net revenue, while derivatives, fixed income, and access
and broker services account for 14%, 4% and 13% respectively.
Together, these segments comprise NASDAQ's Market Services
division, which is responsible for 40% of its topline. The other
60% comes from Technology Solutions (26% of revenue) and
Information Services (23% of total net revenues), both of which
provide recurring revenue from long term client
relationships. ((Press release, NASDAQ OMX, October 23, 2013))
We expect the share of non-transaction based revenues to further
increase as NASDAQ continues to roll out new products in the
data and technology markets.
…And Are Likely To Drive Growth
In addition to providing diversification, the two new
acquisitions also provide NASDAQ interesting growth
According to NASDAQ's management, the majority of its clients
are currently using only one or two of its products in the
corporate solutions market. With the acquisition of Thomson
Reuters' businesses, it has an opportunity cross sell to its
clients and increase its revenue per client. The company has
already started integrating Thomson's platforms with its own, and
is reorganizing its sales team to better serve its 10,000 customers
globally. We expect NASDAQ's corporate solutions revenue to grow
rapidly as some of these initiatives start to have an impact.
The opportunity in the fixed income space is also large. With
the acquisition of eSpeed, NASDAQ is now one of the leaders in the
electronic government bond trading markets. During the quarter,
over $3 trillion worth of U.S. fixed income products were traded on
its platform every month, and the figure is likely to increase as
it attracts new clients and launches new products. Since the close
of the eSpeed acquisition, NASDAQ has already enrolled four new
customers and expects to enroll another four by the end of 2013.
The pace of new client enrollments could further increase once it
finishes work on improving eSpeed's responsiveness, a stated
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