NASDAQ OMX Group, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Financial statements are unaudited; amounts are in U.S. dollars unless stated otherwise.
Business context
NASDAQ OMX operates trading venues and clearing services, listing and market-data businesses, and market and corporate technology services. It reports four segments: Market Services, Listing Services, Information Services, and Technology Solutions. Comparisons with 2013 are affected by the acquisitions of eSpeed and Thomson Reuters Corporate Solutions, both completed in 2013.
Financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $865 million | $814 million | $1,762 million | $1,557 million |
| Revenue less rebates and related fees | $523 million | $451 million | $1,052 million | $869 million |
| Operating income | $191 million | $159 million | $375 million | $249 million |
| Net income attributable to NASDAQ OMX | $101 million | $88 million | $205 million | $130 million |
| Diluted EPS | $0.59 | $0.52 | $1.18 | $0.77 |
| Operating margin, calculated on reported revenue | 22.1% | 19.5% | 21.3% | 16.0% |
- Q2 revenue rose 6.3%, operating income 20.1%, and net income 14.8%. For the first half, revenue rose 13.2%, operating income 50.6%, and net income 57.7%.
- Q2 segment revenue: Market Services $544 million (down 1.6%); Listing Services $60 million (up 3.4%); Information Services $123 million (up 15.0%); Technology Solutions $138 million (up 43.8%). Technology Solutions growth primarily reflects the Thomson Reuters acquisition.
- Operating expenses were $332 million in Q2 and $677 million for the first half. Q2 interest expense was $30 million; first-half interest expense was $59 million.
- Cash and cash equivalents were $314 million at June 30, down from $398 million at year-end 2013. Operating cash flow was $383 million for the first half, versus $255 million a year earlier. Investing cash flow was negative $94 million and financing cash flow negative $373 million.
- Debt obligations totaled $2.408 billion, down from $2.634 billion at year-end. Working capital was $294 million, versus $363 million. The $750 million revolving facility was undrawn; the company reported compliance with debt covenants.
Material changes and management commentary
- Growth in adjusted revenue was led by Corporate Solutions, acquired businesses, market data, and technology. Market Services adjusted revenue increased despite lower Q2 derivatives activity; Q2 U.S. cash-equity and options volumes were weaker industry-wide.
- U.S. IPO activity strengthened: 52 NASDAQ IPOs in Q2, compared with 35 a year earlier; Nordic and Baltic exchanges recorded 17, compared with 6. Management described the broader outlook as cautiously optimistic but warned that economic instability could return and affect volatility and trading volumes.
- In May, the company issued $500 million of 4.25% notes due 2024. Proceeds and cash were used to repay the $400 million 2015 notes and reduce the term loan; early repayment generated a $9 million pretax charge. First-half share repurchases were $93 million, and dividends paid were $47 million.
- Management said operations and available revolving credit were expected to fund near-term operating expenses, capital spending, debt repayments, repurchases, and dividends. No quantified 2014 earnings or revenue guidance is provided in the supplied filing text.
Risks, contingencies, and unusual items
- Effective tax rates were 38% for Q2 and 36% for the first half, up from 35% and 33%. The company cited geographic earnings mix and tax-return adjustments. Finnish and Swedish tax positions are contested; an unfavorable Swedish ruling is being appealed. Tax outcomes and any resulting adjustments remain uncertain.
- Facebook IPO-related litigation continues. New putative class actions allege high-frequency trading market manipulation and unequal market-data dissemination. The company says it will defend the claims and cannot estimate potential liability in the newer cases.
- Clearing operations carry counterparty and default risk. At June 30, clearing-member contributions and margin deposits totaled $9.703 billion, including $7.124 billion in non-cash contributions not recorded as company assets. The company reported no recorded liability for its clearing performance guarantee.
- eSpeed purchase consideration includes contingent annual issuances of 992,247 shares through 2027 if annual gross-revenue thresholds are met, creating potential dilution. Foreign currency exposure is significant; a 10% adverse currency move was estimated to reduce first-half operating income by several million dollars across currencies.
- First-half 2014 includes acquisition and strategic initiative costs, a debt-extinguishment charge, and higher compensation and amortization. The prior-year comparison included a $62 million voluntary accommodation program expense, $9 million of restructuring charges, and $10 million of impairment charges.
Investor verification points
- Assess how much reported growth reflects acquisitions versus organic performance, especially in Technology Solutions and fixed-income trading.
- Review volume, market-share, and revenue-capture trends in U.S. options, cash equities, and European derivatives.
- Track cash generation, debt levels, refinancing costs, capital returns, and covenant headroom.
- Follow developments in Finnish and Swedish tax disputes and the Facebook-related and market-data litigation.
- Evaluate clearinghouse exposures, collateral and default resources, and the potential dilution from eSpeed contingent share issuances.