Business Context and Reporting Period
Company: The NASDAQ OMX Group, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Overview: NASDAQ OMX is a leading global exchange group providing trading, exchange technology, securities listing, and public company services across six continents. The company operates three primary segments: Market Services (trading and market data), Issuer Services (listing and index services), and Market Technology (software and systems for exchanges). The 2009 reporting period reflects the full-year integration of the 2008 OMX AB business combination and the acquisitions of PHLX, BSX, and Nord Pool assets.
Key Financial Metrics
| Metric (in millions) | 2009 | 2008 |
|---|---|---|
| Total Revenues | $3,409 | $3,650 |
| Revenues less liquidity rebates, brokerage, clearance and exchange fees | $1,453 | $1,460 |
| Operating Income | $603 | $640 |
| Net Income Attributable to NASDAQ OMX | $266 | $314 |
| Diluted Earnings Per Share | $1.25 | $1.55 |
| Cash and Cash Equivalents | $594 | $374 |
| Total Debt Obligations | $2,092 | $2,524 |
| Goodwill | $4,800 | $4,492 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 6.6% to $3.409 billion, driven by a 16.7% drop in U.S. cash equity trading revenues due to lower matched share volumes and reduced market share. This was partially offset by growth in derivative trading and Market Technology revenues.
- Operating Income: Operating income declined 5.8% to $603 million. Operating expenses increased 3.7% to $850 million, primarily due to the inclusion of full-year expenses for OMX and PHLX, partially offset by favorable foreign exchange impacts.
- Net Income: Net income decreased 15.3% to $266 million. This decline was significantly impacted by a $107 million net loss from unconsolidated investees, driven by $87 million in impairment charges (NASDAQ Dubai and Agora-X) and a $19 million loss on the sale of Orc Software shares.
- Debt Reduction: Total debt obligations decreased to $2.092 billion from $2.524 billion, following the conversion of most 3.75% convertible notes into common stock and principal payments on term loans.
Guidance, Outlook, and Risks
Outlook: Management anticipates a more positive environment in 2010, citing signs of recovery in the IPO market and improved economic conditions. Strategic initiatives include the launch of a third U.S. cash equities market (NASDAQ OMX PSX) and the expansion of INET technology to Nordic exchanges.
Key Risks and Contingencies:
- Market Share Erosion: Matched market share in U.S. equities declined to 21.3% in 2009 from 29.1% in 2007 due to intense competition from alternative trading systems (ATS) and new exchanges.
- Impairment Risk: The company holds significant goodwill ($4.8 billion) and intangible assets ($1.6 billion). Continued economic weakness could trigger future impairment charges.
- Regulatory Changes: Potential regulatory shifts regarding high-frequency trading, short selling, and transaction taxes could materially impact trading volumes and revenue.
- Investment Realignment: The company agreed to exchange its 33 1/3% stake in NASDAQ Dubai for a 1% interest in Dubai Financial Market (DFM), with the transaction expected to close in 2010.
Investor Verification Checklist
- Impairment Charges: Verify the valuation methodology and future recoverability of the $82 million NASDAQ Dubai and $5 million Agora-X impairment charges recorded in 2009.
- Debt Refinancing: Confirm the terms and covenants of the new $1 billion senior unsecured notes and $950 million credit facility issued in January 2010 to replace existing facilities.
- Market Share Trends: Monitor quarterly matched market share data for U.S. equities and derivatives to assess the impact of competitive pricing and new entrants.
- Foreign Exchange Exposure: Review the impact of currency fluctuations (Swedish Krona, Euro, Norwegian Krone) on future earnings, as approximately 34.5% of net revenues were derived in non-U.S. currencies.
- Convertible Notes: Track the conversion status of the remaining 3.75% convertible notes and the potential dilution from the Series A convertible preferred stock issued as a conversion inducement.