NDAQ

Business Context and Reporting Period

Company: The NASDAQ OMX Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: A leading global exchange group formed by the February 2008 combination of The Nasdaq Stock Market, Inc. and OMX AB. The company operates in three segments: Market Services (trading, market data, broker services), Issuer Services (listing, corporate services, indexes), and Market Technology (trading systems and solutions). The reporting period reflects the full integration of recent acquisitions including OMX AB, PHLX, and Nord Pool businesses.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 10% to $895 million. "Revenues less liquidity rebates, brokerage, clearance and exchange fees" increased 32.7% to $369 million, driven primarily by the inclusion of full-quarter results from OMX AB and PHLX acquisitions.
• Profitability Decline: Net income decreased 22% to $94 million. This decline is largely attributable to the absence of a $35 million one-time gain on foreign currency contracts recorded in Q1 2008 related to the OMX AB business combination and a $26 million gain from the NASDAQ Dubai transaction.
• Expense Increases: Total operating expenses rose 40% to $203 million, reflecting full-quarter integration costs for OMX and PHLX. Interest expense increased 170% to $27 million due to higher debt levels from acquisitions.
• Segment Performance:
  • Market Services: Revenues less costs increased 38.7% to $258 million, boosted by European trading and PHLX derivatives.
  • Issuer Services: Revenues grew 2.6% to $79 million, despite a slowdown in IPOs (zero IPOs on NASDAQ in Q1 2009 vs. 7 in Q1 2008).
  • Market Technology: Revenues more than doubled to $29 million due to full-quarter inclusion of acquired businesses.

Guidance, Outlook, Risks, and Unusual Items

• Market Environment: The company faces a challenging environment characterized by the slowest pace of equity issuance since the late 1970s, reduced access to capital, and intense competition. Nordic and Baltic exchanges saw a 47% decrease in the value of equity transactions.
• Unusual Items: Q1 2008 results were significantly inflated by non-recurring gains ($35 million on FX contracts and $26 million on NASDAQ Dubai). Q1 2009 included a $4 million gain on the early extinguishment of debt.
• Debt and Liquidity: The company maintains $333 million in cash and cash equivalents. Total debt obligations are $2.45 billion. Management expects operations to provide sufficient cash for expenses and interest payments in the near term, though credit market volatility remains a risk.
• Accounting Changes: The company adopted FSP APB 14-1 on January 1, 2009, requiring the bifurcation of convertible debt components, resulting in increased interest expense recognition.

Investor Verification Checklist

• Acquisition Integration: Verify the extent to which Q1 2009 results reflect the full integration of OMX AB, PHLX, and Nord Pool versus organic growth.
• Non-Recurring Gains: Confirm that Q1 2008 comparisons are adjusted for the $61 million in one-time gains (FX and NASDAQ Dubai) to assess true operational trends.
• Debt Covenants: Review compliance with financial covenants in the $2.075 billion Credit Facilities, specifically the interest coverage and leverage ratios.
• Derivative Exposure: Assess the $4.0 billion market value of outstanding derivative positions held as a central counterparty and the associated collateral requirements ($6.4 billion pledged by customers).
• Listing Trends: Monitor the impact of zero IPOs on the NASDAQ Stock Market in Q1 2009 on future Issuer Services revenue streams.