NDAQ

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2008, for The NASDAQ OMX Group, Inc. (NASDAQ OMX). The reporting period is significantly impacted by the business combination with OMX AB (publ) completed on February 27, 2008. Under the purchase method of accounting, Nasdaq is the acquirer, and OMX's results are included from the acquisition date. The company operates three segments: Market Services, Issuer Services, and Market Technology.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 44.8% year-over-year, driven primarily by the inclusion of OMX revenues ($39.9 million in Market Services, $4.2 million in Issuer Services) and increased U.S. trading volumes.
• Profitability Surge: Net income increased 563% to $121.4 million. This was largely due to a $63.5 million gain in "Other income (expense), net" compared to a $50.7 million loss in the prior year.
• Non-Operating Gains: The "Other income" line includes a $35.3 million gain on foreign currency contracts (hedging the OMX acquisition) and a $26.3 million gain from unconsolidated investees (related to the DIFX transaction).
• Expense Increases: Operating expenses rose 31.3% to $145.3 million, primarily due to the inclusion of OMX expenses ($41.5 million) and higher compensation costs.
• Balance Sheet Expansion: Total assets increased by $5.8 billion to $8.79 billion, reflecting the acquisition of OMX assets (Goodwill increased by $2.94 billion; Intangible assets increased by $2.03 billion).

Guidance, Outlook, and Risks

• Integration Risks: Management highlights significant risks in integrating Nasdaq and OMX operations, including potential delays, higher-than-expected costs, and the diversion of management attention. Estimated pre-tax restructuring and revenue investment costs are $150 million over two years.
• Proposed Acquisitions: The company has definitive agreements to acquire the Philadelphia Stock Exchange (PHLX) for $652 million, the Boston Stock Exchange (BSX) for $61 million, and certain businesses of Nord Pool ASA for $410.6 million. These are expected to close in 2008.
• Debt and Leverage: To finance the OMX deal, the company incurred $1.525 billion in new debt (convertible notes and term loans). The company notes that high leverage limits financial flexibility and increases vulnerability to economic downturns.
• Market Environment: Outlook is influenced by slowing equity issuance (only 7 IPOs in the U.S. in Q1 2008), intense competition from NYSE Euronext and alternative trading systems, and regulatory changes (MiFID in Europe, Regulation NMS in the U.S.).

Investor Verification Checklist

• Acquisition Accounting: Verify the preliminary purchase price allocation for OMX, specifically the valuation of indefinite-lived intangible assets (Exchange Registrations, Trade Names) and the associated deferred tax liabilities.
• Debt Covenants: Review the financial covenants in the new Credit Facilities (minimum interest coverage, maximum leverage ratio) to ensure compliance given the increased debt load.
• Non-Recurring Items: Assess the sustainability of earnings by excluding the $35.3 million foreign currency gain and $26.3 million DIFX gain to understand core operating performance.
• Regulatory Approvals: Monitor the status of regulatory approvals for the pending acquisitions of PHLX, BSX, and Nord Pool, as well as the launch of the Pan-European Market.
• Integration Costs: Track actual restructuring and integration costs against the estimated $150 million budget to evaluate impact on future margins.