Business context and reporting period
The NASDAQ OMX Group, Inc. (the registrant named in the filing) filed this unaudited Form 10-Q for the quarter ended March 31, 2012. It operates global trading, clearing, listing, market-data and market-technology businesses through Market Services, Issuer Services and Market Technology.
Financial results and liquidity
Amounts are in U.S. dollars; financial comparisons are with the three months ended March 31, 2011 unless otherwise noted.
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Total revenue | $801 million | $815 million; down 1.7% |
| Revenue less transaction rebates, brokerage, clearance and exchange fees | $411 million | $413 million; down 0.5% |
| Operating expenses | $240 million | $230 million; up 4.3% |
| Operating income | $171 million | $183 million; down 6.6% |
| Net income attributable to NASDAQ OMX | $85 million | $104 million; down 18.3% |
| Diluted EPS | $0.48 | $0.57; down 15.8% |
| Operating income / net revenue after transaction costs | 41.6% | 44.3% |
| Net cash from operating activities | $108 million | $171 million |
| Cash and cash equivalents at quarter-end | $525 million | $506 million at Dec. 31, 2011 |
| Total debt obligations | $2.007 billion | $2.117 billion at Dec. 31, 2011 |
| Working capital | $547 million | $543 million at Dec. 31, 2011 |
Operating cash flow was lower year over year, in part reflecting incentive-compensation payments and other working-capital movements; a $127 million increase in deferred revenue partly offset outflows. Investing activities provided $63 million, mainly from sales and redemptions of trading securities. Financing activities used $159 million, including $100 million of revolving-credit repayment, $50 million of share repurchases and an $11 million term-loan payment. Cash increased $19 million during the quarter.
At March 31, 2012, the company reported $624 million available on its revolving credit commitment and $214 million of liquidity available through clearing-related credit facilities; none of the latter facilities was drawn. Restricted cash and securities support regulatory and clearing requirements and are not freely available for general use. The filing reported compliance with debt covenants.
Material changes and operating drivers
- Market Services revenue was $666 million, down 2.5%; Issuer Services was $90 million, up 1.1%; Market Technology was $45 million, up 4.7%.
- Lower U.S. cash-equity and derivatives activity weighed on transaction revenues. U.S. matched cash-equity volume fell 5%, while the company’s U.S. market share rose 2.1 percentage points to 21.3%. U.S. equity-options matched volume declined 12%.
- Market data revenue increased 7.4% to $87 million and access-services revenue rose 7.5% to $57 million. Issuer Services benefited from Corporate Solutions and index revenue; technology revenue grew on license, support and delivery-project activity.
- Operating expenses included $9 million of restructuring charges. A $12 million other-than-temporary impairment of the EMCF equity investment reduced pre-tax income. Interest expense fell $8 million to $24 million, primarily due to lower average debt.
- The reported effective tax rate rose to 39% from 32%, reflecting the EMCF impairment for which no tax benefit was recognized, earnings mix and adjustments related to prior-year tax liabilities. GAAP diluted EPS was $0.48; management’s non-GAAP diluted EPS was $0.61 in both periods, using adjustments described in the filing.
- Balance-sheet totals fell substantially from year-end, including total assets from $14.091 billion to $9.021 billion. The filing attributes the major presentation change to the March 2012 Nordic Clearing structure: clearing-member risk sharing led the company to stop recording certain derivative positions and resale/repurchase agreements gross. These are not comparable balance-sheet movements on a like-for-like basis.
Outlook, risks and unusual items
- Management expected the first-quarter cost-reduction initiative to produce approximately $25 million of pre-tax savings during 2012 and $50 million annualized savings. The filing does not provide a clear quantified full-year earnings or revenue guidance figure.
- Management said near-term operations were expected to provide sufficient cash for operating expenses, capital spending, debt payments, repurchases, dividends and restructuring costs. It also described funding access and cost as healthy, while noting that market conditions could affect trading volumes and funding availability.
- In April 2012, the board declared an initial quarterly dividend of $0.13 per share, payable June 29 to holders of record June 15. Future dividends remain subject to board approval and contractual and legal restrictions.
- Subsequent events: the company signed a non-binding agreement concerning LCH.Clearnet’s proposed acquisition of IDCG; agreed to acquire NOS Clearing ASA for approximately $40 million, subject to regulatory approval; and acquired a 72% interest in BWise in May 2012 for approximately $62 million, with plans to acquire the remaining interest by the first half of 2015.
- Key risks include market-volume and volatility fluctuations, competition and transaction-pricing pressure, regulation, foreign-exchange and interest-rate exposure, acquisition integration, and clearing-counterparty defaults. Nordic Clearing introduced member-sponsored default funds and loss-sharing arrangements in March; pledged member margin collateral was $6.2 billion at quarter-end, compared with $5.0 billion at year-end. Management estimated no material liability for its clearing performance guarantee.
- A Finnish tax challenge could result in approximately $26 million of additional tax and penalties for 2008 through Q1 2012; management considered an assessment unlikely. The company also noted ongoing tax audits and said their final outcomes were not yet determined. It reported no litigation it believed could materially adversely affect the business.
Important facts for investors to verify
- Whether weaker U.S. trading activity and lower operating income persist, and whether market-share gains can offset volume and pricing pressure.
- Delivery and realization of the stated restructuring savings, alongside the costs and execution effects of workforce reductions.
- Cash-flow sustainability and debt repayment capacity, taking account of restricted clearing resources, future dividends, repurchases and acquisition spending.
- The effects of the Nordic Clearing risk-sharing model, including member contributions, collateral requirements, assessments and any future change in reported balance-sheet amounts.
- Outcomes of the Finnish tax appeal and other tax audits, and the final regulatory and transaction terms for announced post-quarter acquisitions and IDCG discussions.
- Reconcile GAAP and non-GAAP results: Q1 2012 non-GAAP net income was $108 million versus GAAP attributable net income of $85 million, with adjustments including impairment, restructuring and tax items.