The NASDAQ OMX Group, Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010; filed August 4, 2010. All financial amounts below are in U.S. dollars and millions, except per-share data, percentages, and where noted. The company operates exchange and trading markets, clearing services, listings, market data, indexes, and exchange technology globally.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenues | $876 | $889 | $1,640 | $1,784 |
| Revenues less liquidity rebates, brokerage, clearance and exchange fees | $390 | $367 | $750 | $735 |
| Operating income | $179 | $159 | $290 | $324 |
| Net income attributable to NASDAQ OMX | $96 | $69 | $157 | $163 |
| Diluted EPS | $0.46 | $0.33 | $0.74 | $0.77 |
| Cash provided by operating activities | — | $223 | $224 |
- Q2 revenue declined 1.5% year over year, while net revenues after rebates and transaction fees rose 6.3%. Q2 operating income increased 12.6%; net income attributable to the company rose 39.1%.
- For the first half, total revenues fell 8.1%, while net revenues after rebates and transaction fees increased 2.0%. Operating income fell 10.5%, attributable in part to higher operating expenses; net income attributable to the company decreased 3.7%.
- Q2 operating margin on reported total revenue was approximately 20.4%, versus 17.9% a year earlier. First-half operating margin was approximately 17.7%, versus 18.2%.
- Net interest expense was $24 in Q2 and $46 for the first half. Income tax provision was $51 and $81, respectively; effective tax rates were 35% for Q2 and 34% for the first half.
Balance sheet, liquidity and debt
- At June 30, cash and cash equivalents were $526, down from $594 at year-end 2009. Working capital was $554, compared with $568 at December 31, 2009. Restricted cash included $105 of non-current restricted cash, including a $25 capital contribution to NOCC.
- Total debt obligations were $2.052 billion, including $140 current and $1.912 billion long-term. The company reported compliance with all debt covenants. Its new facility included a $250 million undrawn revolving commitment; $3 million of separate clearing-related credit facilities was utilized.
- In January, NASDAQ OMX issued $1 billion of senior unsecured notes and established a $950 million senior unsecured credit facility, including $700 million of funded term loans, using proceeds and cash on hand to repay its prior senior secured facilities. The first-half refinancing charge was $40, including $28 of debt issuance cost write-offs, $9 to terminate interest-rate swaps, and $3 of other costs.
- Six-month financing cash outflow was $258, including $200 for share repurchases and debt repayments, partly offset by new debt proceeds. The company repurchased 10.0 million shares for $200 at an average $19.95; $100 of the original authorization remained at June 30. In July, the board authorized another $100 of repurchases.
- Outstanding derivative positions associated with clearing operations were reported as equal gross assets and liabilities of $1.511 billion at June 30. These balances do not represent available liquidity; the company acts as legal counterparty in the cleared transactions.
Material changes and operating drivers
- Q2 Market Services net revenues increased $24 to $270, led by U.S. cash equity trading net revenues (+$11), European derivatives (+$8), and access services (+$9). First-half Market Services net revenues rose only $6 to $511: derivative and access services gains were offset by weaker cash equity trading.
- Issuer Services revenue increased to $86 in Q2 and $170 for the first half. Global Index Group growth helped; U.S. annual renewal fees were lower amid a smaller listed-company base. NASDAQ listings activity improved: Q2 had 23 IPOs versus 3 in 2009; the first half had 38 versus 3.
- Market Technology revenue was $34 in Q2, down from $36, and $68 for the first half, up from $65. Its reported total order value was $453, of which $121 was deferred revenue; revenue timing depends on contract execution and other factors.
- Operating expenses were $211 in Q2 versus $208 and $460 for the first half versus $411. The first-half increase chiefly reflects the $40 refinancing charge. Other expense changes included higher occupancy costs from data-center expansion and higher professional services.
- Foreign exchange was a $2 favorable effect on Q2 net revenues, but a $18 favorable effect for the first half; excluding currency effects, management said first-half net revenues declined $3 operationally.
Outlook, risks and unusual items
- No numerical full-year 2010 earnings or revenue guidance is provided in the supplied filing text. Management said near-term operating cash flow should be sufficient for operating expenses, capital expenditures, debt interest, and the share repurchase program.
- Management described improving credit-market access but highlighted uncertainty around economic growth, sovereign debt, market volatility, regulation, trading volumes, listing demand, competition and pricing, and technology investment requirements. U.S. cash-equity trading remains exposed to intense competition and fee pressure.
- In Q2 the company recorded $11 of losses on closing NASDAQ OMX Europe (NEURO, $6) and Agora-X ($5); management expected neither closure to significantly affect future results. The company acquired Nord Pool ASA in May for $17 and acquired a U.S. energy clearing business for an immaterial amount. The Nord Pool transaction expanded its power and carbon markets.
- On July 27, the company announced a definitive agreement to acquire SMARTS, a market-surveillance technology provider; closing was expected in Q3, subject to conditions. A third U.S. cash-equities market, NASDAQ OMX PSX, was also planned for later in 2010, subject to SEC approval.
- Clearing operations guarantee fulfillment of contracts. The company reported $5.3 billion of customer collateral held by a custodian for Nordic clearing operations, plus a $25 million guarantee to NOCC for certain customer defaults. Management said collateral and risk controls mitigate exposure; no contingent liability was recorded for these arrangements. Broker-dealer clearing guarantees have unquantifiable maximum exposure, which management considered unlikely to result in payments.
- The Swedish Tax Agency appealed a favorable ruling on deductibility of certain interest expense; management expected the ruling to be upheld. Tax audits were ongoing, with settlements anticipated to reduce unrecognized tax benefits; management did not expect a material financial impact. The company reported no litigation it believed could materially adversely affect its business, financial condition, or results.
- Comprehensive income attributable to NASDAQ OMX was a loss of $113 in Q2 and a loss of $84 for the first half, largely reflecting foreign-currency translation losses; accumulated other comprehensive loss was $647 at June 30.
Important facts for investors to verify
- Whether improved Q2 net revenues and trading activity persist, particularly against first-half weakness in U.S. cash-equity trading and continued competitive pricing.
- How the $40 refinancing charge, debt service, required term-loan amortization, and covenant limits affect future cash available for repurchases and investment.
- Whether cash and operating cash flow remain adequate after the $200 repurchase, restricted-cash needs, and obligations tied to clearing operations.
- Progress and financial terms of the SMARTS acquisition, and SEC approval and launch prospects for NASDAQ OMX PSX.
- Potential sensitivity to foreign exchange, trading volumes, clearing-counterparty defaults, regulatory change, goodwill impairment, and the Swedish tax appeal.