Business Context and Reporting Period
This Form 10-Q covers The NASDAQ OMX Group, Inc. for the quarterly and nine-month periods ended September 30, 2008. The company is a holding company formed by the business combination of The Nasdaq Stock Market, Inc. and OMX AB (publ), completed on February 27, 2008. During the reporting period, the company also completed the acquisitions of the Philadelphia Stock Exchange (PHLX) on July 24, 2008, and the Boston Stock Exchange (BSX) on August 29, 2008. Results for OMX, PHLX, and BSX are included from their respective acquisition dates.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Total Revenues | $990.4 million | $2,625.7 million |
| Net Income | $60.1 million | $283.1 million |
| Diluted EPS | $0.28 | $1.42 |
| Operating Income | $165.1 million | $452.9 million |
| Cash from Operating Activities | N/A | $166.4 million |
| Total Debt Obligations | $2,556.2 million | $2,556.2 million |
| Cash and Cash Equivalents | $737.9 million | $737.9 million |
Note: Cash and cash equivalents include $355.9 million of restricted cash, primarily held for the Nord Pool acquisition.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 51.9% for the quarter and 48.2% for the nine months compared to 2007. This growth is primarily driven by the inclusion of OMX and PHLX revenues.
- Net Income Decline: Despite revenue growth, net income decreased significantly compared to the prior year. For the three months ended September 30, 2007, net income was $365.0 million, driven largely by a $431.4 million one-time gain from the sale of the London Stock Exchange (LSE) investment. The 2008 period lacks this gain.
- Foreign Currency Losses: The company recorded a loss of $50.7 million on foreign currency contracts in the third quarter of 2008, primarily related to hedging the Nord Pool acquisition. This contrasts with a $35.2 million gain in the same period in 2007.
- Operating Expenses: Total operating expenses increased 85.3% to $234.0 million for the quarter, largely due to the consolidation of OMX and PHLX expenses and increased compensation costs.
- Debt Levels: Total debt obligations increased from $118.4 million at December 31, 2007, to $2,556.2 million at September 30, 2008, due to financing the OMX, PHLX, and Nord Pool transactions.
Guidance, Outlook, and Risks
Management Commentary: Management notes that the business environment is characterized by significant investor uncertainty, high market volatility, and reduced access to capital. While trading volumes in the U.S. grew due to volatility and market share gains, the Nordic Exchange saw a decline in the value of equity transactions due to falling prices.
Subsequent Events: On October 21, 2008, the company completed the acquisition of Nord Pool's clearing, international derivatives, and consulting subsidiaries for approximately $325 million. Upon closing, the company settled a foreign currency contract, recording an additional realized loss of approximately $33 million in the fourth quarter.
Risks and Contingencies:
- Market Conditions: Global economic uncertainties and credit market volatility could reduce trading volumes and demand for services.
- Integration Risks: The company faces challenges in integrating OMX, PHLX, and BSX, which may be more costly or time-consuming than expected.
- Debt Covenants: The company is subject to financial covenants under its credit facilities, including minimum interest coverage and maximum leverage ratios. Adverse economic conditions could impact the ability to satisfy these covenants.
- Foreign Currency: Significant exposure to foreign currency exchange rate fluctuations, particularly regarding the Nord Pool transaction and European operations.
Key Facts for Investor Verification
- Acquisition Impact: Verify the extent to which revenue and expense growth is attributable to the acquisitions of OMX, PHLX, and BSX versus organic growth.
- Foreign Currency Hedging: Review the specific terms and settlement status of the foreign currency contracts related to the Nord Pool acquisition, which resulted in significant losses in Q3 2008.
- Debt Structure: Confirm the terms of the $2.0 billion senior secured term loan facility and the $475 million convertible senior notes, including interest rates and covenants.
- One-Time Items: Distinguish between recurring operating performance and non-recurring items, such as the $431.4 million LSE sale gain in 2007 and the $26.0 million gain on the DIFX trade name contribution in 2008.
- Restricted Cash: Note that a significant portion of cash ($355.9 million) is restricted and not available for general corporate use.