Business Context and Reporting Period
Company: The NASDAQ OMX Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: A leading global exchange group formed by the 2008 combination of The Nasdaq Stock Market, Inc. and OMX AB. The company operates three primary segments: Market Services (trading, market data, broker services), Issuer Services (listing services, index group), and Market Technology (exchange technology solutions). As of September 30, 2009, the NASDAQ Stock Market listed 2,836 companies with a combined market capitalization of approximately $4 trillion.
Key Financial Metrics
| Metric (in millions) | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Total Revenues | $810 | $2,593 |
| Revenues less liquidity rebates, brokerage, clearance and exchange fees | $349 | $1,084 |
| Operating Income | $131 | $455 |
| Net Income Attributable to NASDAQ OMX | $60 | $223 |
| Diluted Earnings Per Share | $0.28 | $1.05 |
| Cash and Cash Equivalents | $311 | $311 (Balance Sheet) |
| Total Debt Obligations | $2,089 | $2,089 (Balance Sheet) |
| Working Capital | $541 | $541 (Balance Sheet) |
Material Changes vs. Prior Comparable Period
- Revenue Trends: Total revenues decreased 18.2% year-over-year for the quarter ($810M vs. $990M) but remained relatively flat for the nine-month period ($2,593M vs. $2,625M). Revenues less liquidity rebates and fees decreased 12.5% for the quarter but increased 2.6% for the nine months.
- Segment Performance:
- Market Services: Revenues less fees declined 17.3% for the quarter, driven by a 63.6% drop in U.S. cash equity trading revenues due to lower matched share volume and average net fees. However, derivative trading revenues increased 17.4% for the quarter, aided by the full inclusion of NASDAQ OMX PHLX results.
- Issuer Services: Revenues declined 10.1% for the quarter, primarily due to fewer listed companies and lower market capitalizations in Europe.
- Market Technology: Revenues increased 24.1% for the quarter due to increased contract deliveries.
- Operating Expenses: Decreased 4.0% for the quarter ($218M vs. $227M) due to foreign exchange benefits and reduced headcount (2,450 employees vs. 2,624 in 2008). For the nine months, expenses increased 5.4% ($629M vs. $597M) due to the inclusion of full-period results for OMX and PHLX.
- Non-Operating Items:
- Debt Conversion Expense: A one-time charge of $25 million was recorded in Q3 2009 related to the conversion of 3.75% convertible notes.
- Investment Losses: A $19 million loss was recognized from the sale of the Orc Software investment, and a $5 million loss from the sale of an Oslo investment.
- Foreign Currency: Q3 2008 included a $51 million loss on foreign currency contracts related to the Nord Pool acquisition, which did not recur in 2009.
Guidance, Outlook, Risks, and Unusual Items
- Fee Structure Changes: The company introduced revised fee structures on NASDAQ OMX BX (September 2009) and NASDAQ (November 2009) to address declines in average net fees per share. Management expects these changes to favorably impact Q4 2009 revenues.
- Debt Management: In September 2009, most holders of the 3.75% convertible notes converted to common stock. The company also repurchased $47 million of its 2.50% convertible senior notes. Total debt obligations were reduced to $2.089 billion.
- Subsequent Events: In October 2009, the company agreed to sell its Carpenter Moore Insurance Services business and its UK Broker Services operations. These sales are expected to be recognized in Q4 2009 and are not expected to have a material impact on results.
- Risks:
- Market Volatility: Continued economic weakness and declines in trading volumes could impact revenues.
- Competition: Intense competition in U.S. and European markets for trading volume and listings.
- Foreign Exchange: Approximately 34-36% of revenues and 23-24% of operating income are derived in currencies other than the U.S. dollar (primarily Swedish Krona and Euro), exposing the company to currency fluctuation risks.
- Goodwill Impairment: While no impairment was identified as of September 30, 2009, continued economic weakness could trigger future impairment charges, particularly in the Market Services segment.
Key Facts for Investor Verification
- Trading Volume Decline: Verify the impact of the 42% reduction in U.S. equity matched trades relative to Q3 2008 and the effectiveness of the new fee structures introduced in late 2009.
- Debt Conversion Impact: Confirm the dilution effect from the issuance of 8.2 million shares and $16 million of Series A convertible preferred stock in connection with the 3.75% note conversion.
- Acquisition Integration: Assess the realization of synergies from the OMX, PHLX, and Nord Pool acquisitions, particularly regarding the reduction in operating expenses and headcount.
- Foreign Currency Exposure: Monitor the impact of the Swedish Krona and Euro exchange rates on future earnings, given that over one-third of revenues are non-U.S. dollar denominated.
- Asset Sales: Track the completion and financial impact of the pending sales of the Carpenter Moore and UK Broker Services businesses in Q4 2009.