The NASDAQ OMX Group, Inc. — Q3 2012 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2012. NASDAQ OMX operates exchange, trading and clearing, listing, market-data, and market-technology businesses in the U.S. and internationally. Financial amounts below are in U.S. dollars and millions, except per-share data.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $743 | $944 | $2,367 | $2,595 |
| Revenue less transaction rebates, brokerage, clearance and exchange fees | $409 | $436 | $1,244 | $1,263 |
| Operating income | $170 | $195 | $516 | $536 |
| Net income attributable to NASDAQ OMX | $89 | $110 | $266 | $306 |
| Diluted EPS | $0.52 | $0.61 | $1.53 | $1.70 |
| Operating cash flow | Not separately presented for the quarter | $356 | $436 |
- Q3 revenue declined 21.3%; the company’s net-revenue measure above fell 6.2%, and operating income fell 12.8%. Nine-month net income attributable to the company declined 13.1%.
- Operating margin, calculated as operating income divided by reported revenue, was about 22.9% in Q3 2012 versus 20.7% in Q3 2011; nine-month margins were about 21.8% and 20.7%, respectively. Reported revenue includes pass-through Section 31 fees, so the company’s net-revenue measure is also relevant.
- GAAP diluted EPS fell 14.8% in Q3 and 10.0% for the nine-month period. Management’s non-GAAP diluted EPS was $0.62 for Q3 versus $0.67, and $1.86 for nine months versus $1.90; these exclude selected items and are not GAAP measures.
Balance sheet, liquidity and capital
- At September 30, cash and cash equivalents were $438, restricted cash was $106 (current and non-current), and financial investments were $157. Working capital was $524.
- Total debt obligations were $1.986 billion, including $45 million current and $1.941 billion long-term; total debt was down from $2.117 billion at December 31, 2011. The company reported compliance with debt covenants and $624 million available under its revolving credit commitment.
- Nine-month operating cash flow was $356 million, investing cash flow was negative $27 million, and financing cash flow was negative $403 million. Cash declined $68 million to $438 million, chiefly reflecting share repurchases, debt repayments and dividends.
- NASDAQ OMX repurchased $225 million of stock in the first nine months and paid $43 million in dividends. A further $275 million remained under the newer repurchase authorization at quarter end. The quarterly dividend was $0.13 per share.
- Total assets fell from $14.091 billion at year-end 2011 to $8.920 billion, principally because implementation of member-sponsored clearing default funds changed balance-sheet presentation; clearing positions and related resale/repurchase agreements previously recorded gross were no longer recognized on the balance sheet.
Material changes and operating drivers
- Market Services was the main source of weakness: Q3 revenue less transaction costs declined 10.3% to $269 million; nine-month results fell 2.8% to $834 million. Lower U.S. and European trading activity, lower U.S. cash-equity market share in Q3, and weaker derivatives volumes weighed on results.
- Q3 matched share volume across U.S. cash-equity markets fell 38.7%, and average daily U.S. share volume fell 31.6% year over year. Nordic/Baltic cash-equity trade count declined 32.6%, while value traded fell 37.9%.
- Issuer Services revenue rose 3.3% in Q3, supported by Corporate Solutions and index licensing; Market Technology revenue rose 2.2%. Market Technology order value was $523 million, compared with $473 million a year earlier, but timing of revenue recognition depends on project delivery and other factors.
- Interest expense declined to $24 million in Q3 and $73 million for nine months, mainly due to lower average debt and rates. These savings partly offset weaker operating performance and unusual charges.
Outlook, risks and unusual items
- Management said it expected operations to provide sufficient near-term cash for operating costs, capital expenditures, debt repayments, repurchases, dividends and restructuring costs. The filing does not provide a specific earnings or revenue forecast.
- A company-wide restructuring was expected to generate approximately $25 million of pretax savings through 2012 and $50 million annualized beginning in 2013. The company recorded $36 million of restructuring charges in the first nine months and expected about $7 million of additional charges through Q1 2013.
- Q3 included a $14 million loss on the sale of International Derivatives Clearing Group (IDCG). Nine-month charges included $28 million of intangible-asset impairments and a $12 million impairment of an equity-method investment in EMCF. Nine-month results also included a $40 million total asset-impairment line.
- Facebook IPO systems issues led to lawsuits, an SEC investigation, and a voluntary accommodation program of up to $62 million, subject to SEC review. The company said it could not predict outcomes and had not recorded a litigation reserve because loss was not considered probable and could not be reasonably estimated. It anticipated additional legal, regulatory and remediation expense.
- A Finnish tax appeal could result in approximately $27 million of additional tax and penalties for 2008–2011 and the first nine months of 2012 if the company loses. Management said it considered an assessment unlikely and was appealing the ruling.
- Management cited subdued global economic confidence, volatile and low trading volumes, competitive pricing pressure, regulatory change, foreign-exchange exposure and technology demands as business risks. U.S. markets were closed October 29–30 due to Hurricane Sandy; the impact was still being assessed.
Investor verification checklist
- Verify whether trading volumes and market share recover, particularly in U.S. cash equities and derivatives and Nordic/Baltic markets.
- Track delivery and conversion of the $523 million Market Technology order value into recognized revenue, and assess associated timing uncertainty.
- Monitor progress and realized savings from restructuring against the $50 million annualized target and remaining expected charges.
- Follow the Facebook-related SEC investigation, litigation, accommodation program, and any resulting cash costs or liabilities.
- Check the outcome of the Finnish tax appeal and other pending tax audits, as well as debt covenant compliance and cash availability after shareholder returns.
- Assess the clearing default-fund and collateral arrangements, including the planned 2013 change in Nordic margin-collateral handling, and distinguish reported balance-sheet movements from underlying operating changes.