Business context and reporting period
The NASDAQ OMX Group, Inc. (now referred to in this filing as NASDAQ OMX) filed this Form 10-K for the fiscal year ended December 31, 2013. It operates exchange, trading and clearing businesses, and provides listing, market data, index, corporate and market technology services globally. The filing also reports unaudited quarterly results, including the fourth quarter of 2013.
In 2013, the company reorganized its reporting into four segments: Market Services, Listing Services, Information Services and Technology Solutions. The company acquired Thomson Reuters’ corporate solutions businesses in May and eSpeed’s U.S. Treasury platform in June.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Total revenues | $3.211 billion | $3.120 billion |
| Revenues less transaction rebates, brokerage, clearance and exchange fees | $1.895 billion | $1.674 billion |
| Operating expenses | $1.207 billion | $984 million |
| Operating income | $688 million | $690 million |
| Net income attributable to NASDAQ OMX | $385 million | $352 million |
| Diluted EPS | $2.25 | $2.04 |
| Net cash provided by operating activities | $574 million | $594 million |
Net revenue grew 13.2%, while operating income was nearly unchanged as expenses rose 22.7%, reflecting acquisitions and other costs. Operating income was 36.3% of net revenue, compared with 41.2% in 2012. Management’s non-GAAP net income was $445 million, or $2.60 per diluted share, versus $432 million, or $2.50, in 2012; these non-GAAP figures exclude specified items and are not GAAP measures.
Fourth-quarter 2013 total revenue was $849 million, net revenue was $520 million, operating income was $238 million, net income attributable to NASDAQ OMX was $141 million and diluted EPS was $0.81. The corresponding fourth-quarter 2012 figures were $755 million, $422 million, $175 million, $85 million and $0.50.
At year-end, cash and cash equivalents were $425 million, financial investments were $162 million and restricted cash was $84 million. Working capital was $363 million, down from $474 million. Debt obligations totaled $2.634 billion, up from $1.976 billion; $45 million was current and $2.589 billion long-term. The company had $655 million available under its revolving credit commitment and reported compliance with debt covenants. Cash dividends declared were $0.52 per share for 2013.
Cash used in investing activities was $1.189 billion, primarily reflecting acquisitions, investments and capital spending; purchases of property and equipment were $115 million. Financing activities provided $547 million, including proceeds from the 2021 notes, partly offset by debt repayments and dividends.
Material changes versus the prior period
- Net revenue rose by $221 million, led by $141 million from the Thomson Reuters corporate solutions acquisition, $35 million in fixed-income trading net revenue associated with eSpeed, and growth in market data, market technology and index licensing.
- Market Services net revenue increased 2.1% to $776 million, despite a $22 million decline in U.S. cash equity trading net revenue. Information Services rose 8.9% to $442 million and Technology Solutions rose 58.1% to $449 million, largely reflecting acquisitions. Listing Services increased 1.8% to $228 million.
- U.S. cash equity average daily matched share volume across the company’s platforms fell 13.1%, while overall U.S. share volume fell 3.9%; combined matched market share declined to 18.8% from 20.8%. U.S. options market share increased to 27.9% from 27.2%.
- Operating expenses increased $223 million. Compensation, professional services, technology operations and acquisition-related costs rose; 2013 also included a $44 million Facebook IPO voluntary accommodation program expense. The 2012 comparison included $44 million in restructuring charges, versus $9 million in 2013.
- Interest expense increased to $111 million from $97 million, principally following issuance of $895 million in net proceeds from 3.875% senior notes due 2021. A $30 million gain on the sale of the Dubai Financial Market investment partly offset non-operating costs in 2013.
Outlook, risks and unusual items
Management described the outlook for 2014 as dependent on economic recovery, trading volumes, IPO activity, competitive conditions and regulatory changes. It characterized the global outlook as cautiously optimistic, but noted that low volatility and lower trading volumes had weighed on transactional businesses. The filing provides no quantified 2014 earnings or revenue guidance. Management expected diversified subscription and technology businesses, cost discipline and new products to support performance, while continuing to pursue complementary growth opportunities.
Key risks include intense exchange and pricing competition, further volume or market-share declines, regulatory changes in the U.S. and Europe, technology outages and cyber incidents, acquisition integration and execution, foreign-exchange exposure, counterparty and clearing risks, and leverage. The August 2013 outage of the exclusive processor for NASDAQ-listed stocks caused a market-wide trading halt of approximately three hours; the processor’s future operating contract was to be competitively bid.
Facebook IPO-related matters remain notable. The company paid a $10 million SEC penalty and reported completing required remediation by year-end. Separate investor lawsuits and an arbitration demand remained pending; the company said it intended to defend them. The $44 million accommodation payments were made in the fourth quarter. Goodwill was approximately $6.2 billion and net intangible assets approximately $2.4 billion; no goodwill impairment was recorded, though management noted that the estimated fair values of Market Services and Corporate Solutions exceeded carrying amounts by less than 10%.
Other items warranting attention include tax disputes in Finland and Sweden and challenged Swedish VAT refund claims. The company reported that its disclosure controls and internal control over financial reporting were effective, but excluded the newly acquired Thomson Reuters and eSpeed businesses from the 2013 internal-control assessment; together they represented 14% of total assets and approximately 9% of net revenue.
Most important facts for investors to verify
- How much of 2013’s net revenue and earnings growth persists without the partial-year contributions from the Thomson Reuters and eSpeed acquisitions, and what integration costs or synergies remain?
- Whether trading volumes and market share stabilize, particularly in U.S. cash equities, and whether growth in subscription, data and technology revenue can offset transactional weakness.
- The outcome and potential financial exposure from Facebook-related litigation and arbitration, and the effectiveness of remediation after the IPO and 2013 processor outage.
- Debt repayment capacity, interest costs and covenant headroom following the increase in debt; also assess the contingent eSpeed share issuances tied to future revenue targets.
- Resolution and possible earnings or cash effects of tax audits and disputed tax positions, and sensitivity of goodwill valuations to lower forecasts or higher discount rates.