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Morningstar | Nasdaq's 1Q Weighed Down by Slower Markets

Narrow-moat Nasdaq produced no significant surprises during the first quarter. For the quarter, Nasdaq’s net revenue fell by 5%, which is largely the result of slower markets and the divestiture of Nasdaq’s public relations solutions and digital media services businesses. Excluding the divestitures, the company's revenue would have grown nearly 3%. For the quarter, the company earned $1.22 per share, equal to the first quarter of 2018. In the market services segment, Nasdaq generated net revenue of $233 million, a 7% drop from the previous year. We’ll highlight that last year’s first-quarter trading volumes were exceptionally good, as total industry equity derivative average daily trading volume fell 11.7% from last year’s strong first quarter. While market services revenue growth is below our expectations and may force us to change our near-term forecast, we already have built in a slower trading environment into our model. In addition, markets aren’t normally as calm as they were in the first quarter. For now, we're maintaining our fair value estimate of $78 per share.

Nasdaq’s biggest strength during the period was its performance in information services generating year-over-year revenue growth of 11%. Part of this growth is attributable to accounting adjustments related to acquired deferred revenue from Nasdaq’s acquisition of eVestment. Excluding this adjustment, we calculate a growth rate of 4.3%. Market data revenue appeared to be limited by unfavorable foreign exchange movements as the company did have higher U.S. tape revenue resulting from audits on data usage. Exchange-traded product assets under management is up more than 13% from last year, which bodes well for revenue for the remainder of the year. In addition, Nasdaq appears to be benefiting from greater pricing on its eVestment acquisition. Within information services, we believe revenue growth will accelerate the rest of the year.

One recurring theme across our coverage is that U.S. dollar strength has been a noticeable headwind for companies' year-over-year comparisons. Nasdaq is most exposed to the euro and Swedish krona. Given that the dollar bottomed in the first quarter of 2018 and appreciated significantly, it is certain to weigh on companies. That said, unless the dollar appreciates significantly, Nasdaq will face weaker headwinds from foreign exchange for the remainder of the year and it should be less of a factor.

Nasdaq continues to chase the acquisition of Oslo Bors, and during the call, management highlighted that Norwegian regulators assessed the company as “fit and proper” as regulators review Nasdaq’s proposal. Domestically, Nasdaq continues to voice its opposition to “one-size-fits-all” regulation and limits on its ability to control pricing. In Nasdaq’s recently published “Total Markets Blueprint," the company made five proposals. While Nasdaq’s proposals weren’t too specific, they seemed to revolve around preserving Nasdaq’s role in facilitating trading and liquidity for small company stocks while enhancing exchanges’ overall use of technology, which might benefit the company’s technology business.

Finally, upstart MEMX seems to be making progress in developing a rival member-operated exchange. According to LinkedIn searches, the company now has at least four employees and is led by CEO Jonathan Kellner. We think it’s interesting that two of MEMX’s hires are technologists who came from Nasdaq. That said, it will take time for MEMX to start trading and even longer to threaten larger exchanges. Nevertheless, we think these hires demonstrate the seriousness of MEMX and the threat it poses to Nasdaq and Intercontinental Exchange in the long run.