Business Context and Reporting Period
Company: The Nasdaq Stock Market, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2001.
Context: Nasdaq operates an electronic, screen-based equity market. The period was significantly impacted by the September 11, 2001 terrorist attacks, which caused a four-day market closure and operational disruptions. Additionally, the company implemented a change in accounting principles (SAB 101) effective January 1, 2000, affecting revenue recognition for listing fees.
Key Financial Metrics
| Metric (in thousands) | Q3 2001 | Q3 2000 | 9M 2001 | 9M 2000 |
|---|---|---|---|---|
| Total Revenues | $197,708 | $202,720 | $641,781 | $621,239 |
| Net Operating Income | $6,754 | $40,877 | $81,581 | $188,419 |
| Net Income | $7,945 | $22,029 | $53,720 | $12,588 |
| Earnings Per Share (Diluted) | $0.07 | $0.18 | $0.44 | $0.12 |
| Cash & Equivalents (Balance Sheet) | $329,099 (Sep 30, 2001) | $262,257 (Dec 31, 2000) | ||
| Operating Cash Flow (9M) | $95,838 | $197,839 | ||
| Long-Term Debt | $286,500 (Sep 30, 2001) | $25,000 (Dec 31, 2000) |
Note: 9M 2000 Net Income includes a one-time cumulative effect of a change in accounting principle of $(101.1) million. Pro forma 9M 2000 Net Income (excluding this effect) was $113.7 million.
Material Changes vs. Prior Period
- Revenue Trends: Q3 2001 revenues decreased 2.5% year-over-year due to lower trading volumes and the 9/11 market closure. However, 9M 2001 revenues increased 3.3% year-over-year, driven by growth in "Other" revenues (licensing) and Corporate Client Group services (adjusted for accounting changes).
- Profitability: Q3 Net Income dropped 64.1% to $7.9 million. 9M Net Income increased to $53.7 million compared to $12.6 million in 2000; however, this comparison is distorted by the $101.1 million accounting adjustment in 2000. On a pro forma basis, 9M 2001 income was down 52.7% from 2000.
- Expense Growth: Direct expenses rose 33.8% in Q3 and 41.3% in 9M. Key drivers included a 52% increase in compensation (due to NASD separation and new initiatives), higher depreciation for new technology (SuperMontage, Primex), and a $7.5 million bad debt reserve for Bridge Information Systems.
- Debt Structure: Long-term debt increased significantly to $286.5 million, primarily due to the issuance of $240 million in 4% convertible subordinated debentures to Hellman & Friedman in May 2001.
Guidance, Outlook, and Risks
- 9/11 Impact: The terrorist attacks caused a four-day market closure and $0.84 million in disaster-related expenses in Q3. Management is still assessing total revenue losses and insurance recoveries. Operations were temporarily relocated, and listing requirements (minimum bid price, market value of public float) were suspended until January 2, 2002.
- Market Conditions: Management cites a softening economy, recessionary environment, and military actions as risks to future volume. Daily share volume in Q3 slowed to 1.63 billion (excluding the closure) from 1.95 billion in Q2.
- Competition: Nasdaq faces competitive threats from regional exchanges trading Nasdaq-listed stocks under the Unlisted Trading Privileges (UTP) Plan. While Nasdaq retains ~97% market share, potential erosion is a risk.
- Fee Increases: On October 26, 2001, Nasdaq proposed a fee increase for listed companies effective January 1, 2002, subject to SEC approval, to fund service enhancements.
- Accounting Change: The adoption of SAB 101 requires deferring initial listing and LAS fees over 6 and 4 years, respectively, rather than recognizing them immediately. This reduces reported revenue in high-IPO periods but smooths income over time.
Investor Verification Checklist
- Pro Forma Comparability: Verify that year-over-year comparisons for 2000 exclude the $101.1 million cumulative accounting adjustment to understand true operational performance.
- 9/11 Financial Impact: Monitor future filings for the final determination of revenue losses and insurance recoveries related to the September 11 attacks.
- Debt Conversion Risk: Note that the $240 million subordinated debentures are convertible into 12 million shares at $20.00/share, representing a potential 9.8% equity interest for Hellman & Friedman.
- Bad Debt Exposure: Review the $7.5 million reserve taken for Bridge Information Systems and assess if further credit losses are likely given the economic downturn.
- Fee Approval: Confirm SEC approval of the proposed fee increases for listed companies scheduled for January 2002.