Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2008, for The NASDAQ OMX Group, Inc. The company is a holding company formed by the combination of The Nasdaq Stock Market, Inc. and OMX AB (publ), completed on February 27, 2008. Under the purchase method of accounting, Nasdaq is the acquirer, and OMX results are included from the acquisition date. The company operates three segments: Market Services, Issuer Services, and Market Technology.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2008 | Six Months Ended June 30, 2008 |
|---|---|---|
| Total Revenues | $821.5 million | $1,635.3 million |
| Revenues less Cost of Revenues | $380.2 million | $658.5 million |
| Operating Income | $154.8 million | $287.8 million |
| Net Income | $101.6 million | $223.0 million |
| Diluted EPS | $0.48 | $1.15 |
| Cash and Cash Equivalents | $740.0 million | (Balance Sheet Item) |
| Total Debt Obligations | $1,643.6 million | (Balance Sheet Item) |
| Working Capital | $567.8 million | (Calculated) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 47.2% for the quarter and 46.0% for the six-month period compared to 2007. This growth is primarily driven by the inclusion of OMX revenues following the February 2008 acquisition.
- Operating Income: Operating income increased 56.5% for the quarter and 59.7% for the six-month period. Market Services revenues less cost of revenues increased 97.7% for the quarter, driven by higher market share in NYSE-listed securities and the inclusion of OMX Market Services.
- Net Income: Net income increased 81.1% for the quarter and 200.0% for the six-month period. The six-month 2008 results include a $26.0 million pre-tax gain from the contribution of the Nasdaq trade name to the Dubai International Financial Exchange (DIFX).
- Debt: Total debt obligations increased significantly from $118.4 million at December 31, 2007, to $1,643.6 million at June 30, 2008, due to financing the OMX acquisition ($475 million in convertible notes and $1,050 million in term loans).
- Cash Flow: Cash provided by operating activities increased 51.1% to $272.5 million for the six months ended June 30, 2008. However, cash used in investing activities was $1,987.5 million, primarily due to the cash paid for the OMX business combination.
Guidance, Outlook, and Risks
- Acquisitions: The company completed the acquisition of the Philadelphia Stock Exchange (PHLX) on July 24, 2008, for approximately $695.7 million. It is also pursuing the acquisition of certain businesses from Nord Pool ASA, expected to close in the second half of 2008.
- Integration Risks: Management highlights risks related to the successful integration of Nasdaq, OMX, and PHLX, including potential difficulties in combining operations, systems incompatibility, and retention of key employees.
- Leverage: The company's leverage limits financial flexibility. Debt covenants restrict the ability to pay dividends, incur additional indebtedness, and sell assets. Failure to meet covenants could result in an event of default.
- Market Conditions: The business environment is characterized by investor uncertainty, elevated market volatility, and intense competition among U.S. and European exchanges. The IPO market has slowed significantly.
- Forward-Looking Statements: The filing contains forward-looking statements regarding the 2008 outlook and integration benefits, which are subject to risks and uncertainties that could cause actual results to differ materially.
Investor Verification Checklist
- OMX Integration Progress: Verify the status of operational and technological integration between Nasdaq and OMX to assess synergy realization.
- Debt Covenants Compliance: Confirm continued compliance with financial covenants (interest coverage and leverage ratios) given the increased debt load.
- PHLX and Nord Pool Acquisitions: Monitor the closing and integration of the PHLX and proposed Nord Pool acquisitions for potential financial impact.
- Market Share Trends: Track matched market share in NASDAQ-listed securities, which declined in the quarter, versus gains in NYSE-listed securities.
- Goodwill and Intangibles: Review the preliminary purchase price allocation for OMX, noting that final adjustments to goodwill and intangible assets may occur within one year of the acquisition.