Business Context and Reporting Period
Company: The Nasdaq Stock Market, Inc. (Nasdaq)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2002
Business Overview: Nasdaq operates the world's largest electronic screen-based equity securities market. Its principal revenue streams include Transaction Services, Market Information Services, and Corporate Client Group Services. The company operates as a single segment.
Key Financial Metrics
| Metric (in thousands) | Q3 2002 | Q3 2001 | 9M 2002 | 9M 2001 |
|---|---|---|---|---|
| Total Revenues | $199,088 | $197,708 | $615,643 | $641,781 |
| Net Income | $12,711 | $7,945 | $42,808 | $53,720 |
| Net Income (Common Stockholders) | $10,270 | $7,945 | $35,485 | $53,720 |
| Diluted EPS | $0.13 | $0.07 | $0.40 | $0.44 |
| Cash & Equivalents (Sep 30, 2002) | $274,170 | |||
| Operating Cash Flow (9M) | $151,909 | $86,067 | ||
| Long-Term Debt (Sep 30, 2002) | $440,122 (Senior + Subordinated) |
Material Changes vs. Prior Period
- Revenue Trends: Q3 2002 revenue increased slightly (0.7%) year-over-year to $199.1 million, driven by growth in Transaction Services (+8.9%) and Corporate Client Group Services (+12.2%), which offset a 15.6% decline in Market Information Services. For the nine months, total revenue decreased 4.1% to $615.6 million.
- Profitability: Net income for Q3 2002 rose 60.8% to $12.7 million compared to $7.9 million in Q3 2001. However, nine-month net income declined 20.3% to $42.8 million, largely due to a $15.2 million impairment loss on Nasdaq Japan recognized in Q2 2002.
- Expense Management: Total direct expenses decreased 8.4% in Q3 and 0.8% for the nine months. Notable reductions included computer operations costs (due to contract renegotiations) and professional services. Compensation costs increased due to headcount growth associated with the separation from the NASD.
- Debt Structure: Nasdaq issued $150 million in 5.83% Senior Notes due 2007 in May 2002. It also entered a $150 million unsecured revolving credit facility in August 2002, which remained undrawn as of September 30, 2002.
Guidance, Outlook, and Risks
- Market Conditions: Management cites a difficult environment with stagnant economies, disappointing earnings, and accounting scandals depressing share prices. The Nasdaq Composite fell nearly 20% in Q3 2002. Average daily volume fell 5.8% sequentially but remained 5.3% higher than Q3 2001.
- Strategic Initiatives:
- SuperMontage: Successfully launched in October 2002 to increase market transparency and competition. Full rollout of all listed securities expected by early December 2002.
- Global Expansion: Nasdaq Europe received a funding commitment of €16 million. Nasdaq Deutschland AG agreements were signed in October 2002, with trading anticipated in Q2 2003.
- Nasdaq Japan: Operations ceased in August 2002; the company is in liquidation status.
- Workforce Reduction: In October 2002, Nasdaq announced a 7-10% workforce reduction to be executed in Q4 2002, with associated expenses to be booked then.
- Risks: Key risks include regulatory changes (e.g., SEC actions on market data sharing), competition from ECNs and other exchanges, and the success of the SuperMontage implementation. Legal challenges regarding the Alternative Display Facility (ADF) are pending.
Investor Verification Checklist
- SuperMontage Adoption: Verify the rate of migration of trading volume to SuperMontage and any impact on market share versus ECNs.
- Q4 Restructuring Costs: Confirm the final cost and timing of the announced 7-10% workforce reduction.
- European Investments: Monitor the funding requirements and operational progress of Nasdaq Europe and Nasdaq Deutschland AG.
- Revenue Recognition: Review the impact of the SAB 101 accounting change on the amortization of listing fees (Initial and LAS) over 6 and 4 years, respectively.
- Debt Covenants: Ensure compliance with financial ratios required by the new $150 million revolving credit facility.