The NASDAQ OMX Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2011. Financial statements are unaudited; amounts are in U.S. dollars, generally millions except per-share data. The filing registrant is The NASDAQ OMX Group, Inc.
Business context
NASDAQ OMX operates exchange and clearing businesses, market data and listing services, and market technology businesses across the U.S., Europe and other markets. Its three reported segments are Market Services, Issuer Services and Market Technology. At June 30, 2011, its U.S. and Nordic/Baltic markets listed 2,724 and 780 companies, respectively.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $838 | $886 | $1,655 | $1,657 |
| Revenue less transaction rebates and brokerage, clearance and exchange fees | $416 | $390 | $831 | $750 |
| Operating income | $158 | $179 | $341 | $290 |
| Net income attributable to NASDAQ OMX | $92 | $96 | $196 | $157 |
| Diluted EPS | $0.51 | $0.46 | $1.09 | $0.74 |
- Q2 operating margin was approximately 18.9% of reported revenue, versus 20.2% a year earlier; six-month operating margin was approximately 20.6%, versus 17.5%.
- Q2 Market Services revenue declined 8.7% to $699, while Issuer Services rose 8.1% to $93 and Market Technology rose 35.3% to $46. For the first six months, those segments reported $1,382, $184 and $89, respectively.
- Operating cash flow was $430 for the first six months, compared with $223 in 2010. Investing activities used $76 and financing activities used $96. Cash and cash equivalents rose to $578 from $315 at year-end 2010.
- At June 30, total debt obligations were $2,209, including $140 current and $2,069 long-term. Working capital was $510. The company reported compliance with debt covenants.
- Other comprehensive income included a $214 after-tax foreign currency translation gain for the first six months; comprehensive income attributable to NASDAQ OMX was $406, compared with a loss of $84 in 2010.
Changes, outlook and risks
- Net revenue after transaction-related costs increased 6.7% in Q2 and 10.8% for the first six months. Management attributed growth to access services, derivatives, Issuer Services and Market Technology, partly offset by weaker cash-equity trading.
- U.S. matched cash-equity volume fell 32.6% year over year in Q2, amid lower industry volumes and intense competition; U.S. equity-options volume increased 15.1%. Nordic/Baltic cash-equity transaction value and derivatives activity also weakened year over year.
- Q2 operating expenses increased 22.3% to $258, mainly reflecting $29 of merger and strategic initiative expense. These costs primarily related to the joint NYSE Euronext acquisition proposal, withdrawn in May 2011 after discussions with the U.S. Department of Justice. First-half merger and strategic initiative expense was $34.
- Interest expense rose to $31 in Q2 and $63 for the first six months, largely due to the 5.25% notes issued in December 2010. The company paid $120 of term-loan principal in the first half, including a $50 optional payment.
- Management said operating cash should be sufficient in the near term for operating expenses, capital expenditures and interest payments, and characterized funding availability and cost as healthy. No specific quantified full-year earnings or revenue guidance is provided in the supplied filing text.
- Principal risks include trading-volume and market-share declines, competitive pricing, economic and regulatory changes, foreign-exchange and interest-rate exposure, integration and execution risks, and clearing-counterparty defaults. Clearing operations had $6.9 billion of customer pledged collateral at June 30; the company is the legal counterparty on specified cleared transactions.
- Tax matters include a Finnish challenge to interest deductions, with potential tax and penalties of approximately $18 if the authority prevails, and a Swedish tax ruling under appeal. Management considered additional Finnish assessments unlikely and expected the Swedish ruling to be upheld. No litigation was identified as likely to have a material adverse effect.
Important facts for investors to verify
- Whether improved six-month earnings and net revenue after transaction costs can persist despite weak cash-equity trading and market-share pressure.
- The size, duration and recurrence of acquisition-proposal and other strategic-initiative costs, and the effect of the withdrawn NYSE Euronext proposal.
- Debt-service capacity and refinancing exposure, particularly the $450 term loan due in 2013 and other scheduled maturities.
- The liquidity and risk implications of clearing guarantees, collateral arrangements and counterparty exposures, distinct from unrestricted cash and reported debt.
- Outcomes of Finnish and Swedish tax matters and any resulting changes to recorded tax benefits.
- Reliance on non-GAAP measures: Q2 non-GAAP diluted EPS was $0.62 versus GAAP $0.51; first-half non-GAAP diluted EPS was $1.23 versus GAAP $1.09.