Business context and reporting period
The NASDAQ OMX Group, Inc. (now identified in the request as NASDAQ, Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. The global exchange group reports Market Services, Issuer Services and Market Technology. Unless noted, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenues | $823m | $837m | $1,624m | $1,651m |
| Revenues less transaction rebates, brokerage, clearance and exchange fees | $424m | $415m | $835m | $827m |
| Operating income | $175m | $158m | $346m | $341m |
| Net income attributable to NASDAQ OMX | $93m | $92m | $178m | $196m |
| Diluted EPS | $0.53 | $0.51 | $1.02 | $1.09 |
| Operating margin on revenues after transaction costs (calculated) | 41.3% | 38.1% | 41.4% | 41.2% |
- Q2 operating income increased 10.8% despite a 1.7% decline in total revenue. Revenue after transaction costs rose 2.2%; management cited growth in market data, access services and other market services, partly offset by weaker cash-equity and derivatives trading and foreign-exchange headwinds.
- Six-month net income attributable to the company fell 9.2%, while diluted EPS declined 6.4%. Six-month revenue after transaction costs increased 1.0%.
- Cash and cash equivalents were $491m at June 30, 2012, versus $506m at year-end 2011. Working capital was $423m, versus $543m. Total debt obligations were $1,996m, including $45m current; the company reported $1,951m long-term debt and $624m available under its revolving credit commitment. It was compliant with debt covenants.
- For the first half, operating cash flow was $318m, versus $430m a year earlier; investing cash flow was negative $14m and financing cash flow negative $317m. Financing uses included $175m of share repurchases, $100m of optional revolving-credit repayment, $22m of term-loan principal payments and $22m of dividends.
- During the first half, the company paid its first quarterly dividend of $0.13 per share. It repurchased 7.27m shares for $175m at an average $24.07 per share.
Material changes and segment trends
- Market Services revenue after transaction costs increased 4.3% in Q2 to $289m, but fell 1.6% for the first half to $565m. Market data and access services grew; U.S. cash-equity trading and European derivatives were weaker. U.S. matched share volume fell 3.9% in Q2 year over year, and U.S. options market share also declined.
- Issuer Services revenue was $91m in Q2, down 1.1%, and $181m for the half, up 0.6%. Corporate Solutions and index revenues grew, offset by weaker U.S. and European listing services. NASDAQ recorded 15 IPOs in Q2 versus 25 a year earlier; Nordic and Baltic exchanges had none.
- Market Technology revenue was $44m in Q2, down 4.3%, and $89m for the half, essentially unchanged. Q2 order intake was $77m; total order value awaiting recognition was $529m, compared with $483m a year earlier.
- Reported total assets declined from $14.1bn at year-end to $8.9bn, primarily because the March 2012 member-sponsored clearing default-fund structure changed balance-sheet presentation. Clearing-related derivative positions and resale/repurchase agreements previously reported gross are no longer recorded on the balance sheet under the new structure.
Outlook, commentary, risks and unusual items
- Management described a cautious market backdrop: uncertain global recovery, uneven volatility and trading volumes, a slower IPO market, intense transaction-pricing competition, regulatory change and continued investment needs for technology. The filing provides no quantified revenue or earnings guidance.
- A company-wide cost program is expected to generate approximately $25m of pretax savings in 2012 and $50m annualized savings. The company recorded $26m of restructuring charges in the first half, including $17m in Q2, and expected approximately $9m of additional charges through 2012.
- Non-cash impairment charges totaled $28m in Q2 for acquired intangible assets; first-half impairment charges totaled $40m, including a $12m charge on the EMCF equity investment. These charges reduced GAAP pretax income.
- In connection with systems issues during the Facebook IPO, the company proposed voluntary accommodations of up to $62m, subject to SEC review; no amount was accrued. It faces investor lawsuits and an SEC investigation, and expects additional legal, investigation and remediation expenses. Management said it believes the lawsuits are without merit; outcomes and potential impact remain uncertain.
- A Finnish tax challenge could result in approximately $25m of additional tax and penalties for 2008 through June 2012 if the authority prevails. Management considered an assessment unlikely and had recorded the tax benefits associated with its position.
- Other key exposures include trading-volume and market-share declines, foreign-exchange movements, regulatory and technology risks, clearing-member defaults, and debt covenants and floating-rate borrowing costs. In July 2012, the company acquired NOS Clearing ASA for approximately $40m.
Important facts for investors to verify
- Whether the Facebook accommodation program received SEC approval, its ultimate cost, and the outcome of related litigation and investigation.
- Whether operating cash flow and trading activity recover, and whether the cost-saving program achieves its stated savings without impairing operations.
- How the $28m intangible and $12m EMCF impairments affect future results, and whether additional impairment indicators emerge.
- Debt repayment, liquidity availability and compliance with credit-facility covenants, particularly if market conditions weaken.
- Resolution of the Finnish tax appeal and other tax examinations, including the timing and financial effect of any settlements.
- Conversion of the $529m Market Technology order value into recognized revenue, given management’s warning that timing depends on contract delivery and other factors.