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Morningstar | Nasdaq's Information Services Leads Growth Drivers in 2Q

Narrow-moat Nasdaq's second quarter saw few surprises. GAAP net revenue grew 2.2% from the previous year to $615 million. Excluding revenue from divestitures, the company produced organic revenue growth of 7% driving year-over-year adjusted EPS growth of 16.8%. During the quarter, the company benefited from greater trading volumes that lower market share partially offset. Though Nasdaq's market services chipped in organic revenue growth of 6.8% from the previous year, the company's biggest contributor came from information services which saw revenue grow by 21.5%. Some of this growth is tied to the company's acquisition of eVestment, but the bulk of this comes from higher revenue from index licensing, and most important, a 9% increase in market data revenue. During the call, the management attributed the increase in data revenue to "additional usage of Nasdaq Basic … as well as our continued work with clients to ensure that they're properly reporting current data usage." Given we've been expecting much of this quarter's growth, we're maintaining our fair value estimate of $76 per share.

As mentioned, Nasdaq's data segment benefited from ensuring clients are properly reporting current data usage. We suspect this means that Nasdaq is vigorously auditing its clients, finding new ways to bill clients for similar usage and using these audits as a growth lever. Though we have some concerns that this may attract scrutiny from regulators, we suspect that Nasdaq can use these audits to leverage growth over the medium term. However, market data isn'’t the only area driving growth within information services. At the end of the second quarter, exchange traded products tracking a Nasdaq index was $178 billion. This is a 27% increase from the previous year.

In addition, the company continues to invest in its market technology business. This is the business that operates the technology infrastructure on a software-as-a-service platform for third-party exchanges. As mentioned during the call, given the outsize investment to develop and grow this business, investors should expect lower margins in 2018 and 2019. While some investors may be concerned by this, we believe Nasdaq's two wins in the quarter should assuage investor fears. Nasdaq announced it had won business from the National Stock Exchange of India and the Swiss Exchange. Given the high switching costs of these businesses, we suspect the initial investment may generate high returns for years.