NASDAQ OMX Group, Inc. — 2011 Form 10-K
Business context and reporting period. The filing is for the fiscal year ended December 31, 2011, not solely the fourth quarter. It reports full-year audited results and unaudited quarterly data. NASDAQ OMX operates global exchanges and clearing services, listing and market-data businesses, and market technology. Its segments are Market Services, Issuer Services, and Market Technology.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Total revenue | $3.438 billion | $3.197 billion |
| Revenue less transaction rebates, brokerage, clearance and exchange fees | $1.690 billion | $1.522 billion |
| Operating expenses | $994 million | $891 million |
| Operating income | $696 million | $631 million |
| Net income attributable to NASDAQ OMX | $387 million | $395 million |
| Diluted earnings per share | $2.15 | $1.91 |
| Net cash provided by operating activities | $669 million | $440 million |
- Net revenue increased 11%; operating income increased 10%. Operating income was about 41% of net revenue in both years.
- Reported net income declined 2%, while diluted EPS rose 13%, helped by a lower weighted-average share count following substantial repurchases. Adjusted, non-GAAP net income was $455 million, or $2.53 per diluted share, versus $411 million, or $1.99, in 2010; these measures exclude specified items and are not GAAP.
- Fourth-quarter 2011 unaudited results: total revenue $839 million, net revenue $422 million, operating income $161 million, net income attributable to NASDAQ OMX $82 million, and diluted EPS $0.45. Fourth-quarter 2010 figures were $783 million, $400 million, $175 million, $137 million, and $0.69, respectively.
- At year-end, cash and cash equivalents were $506 million; financial investments were $279 million, including restricted regulatory assets. Working capital was $543 million. Operating cash flow was $669 million; investing and financing activities used $146 million and $325 million, respectively.
- Total debt obligations were $2.117 billion, including $45 million current debt. The company had $524 million available under its $750 million revolving credit commitment and reported compliance with debt covenants. Reported cash, investments and liquidity facilities are not all freely available: some assets are restricted for regulatory or clearing purposes.
Material changes versus the prior comparable period
- Growth in net revenue was led by access services (+$49 million), derivatives trading and clearing (+$37 million), Issuer Services (+$19 million), market data (+$14 million), and Market Technology (+$13 million). Cash equity trading net revenue fell $14 million.
- Market Technology revenue rose 20% to $183 million; Issuer Services revenue rose 7% to $369 million; Market Services net revenue rose 11% to $1.138 billion.
- U.S. cash-equity matched share volume declined 11.7%, and the company’s matched market share across U.S.-listed securities on its platforms fell to 21.2% from 22.2%. U.S. options volumes and market share strengthened. Nordic/Baltic equity trade counts rose, while the SEK value traded declined slightly.
- Operating expenses rose 12%, reflecting higher compensation and acquisition-related costs and a $34 million increase in merger and strategic initiatives expense, largely tied to the joint proposal to acquire NYSE Euronext. Interest expense increased to $119 million from $102 million.
- The effective tax rate increased to 33.2% from 26.0%, contributing to lower GAAP net income despite higher operating income.
Outlook, risks and unusual items
- Management described a cautiously positive 2012 outlook, expecting a slow global recovery and potential support from a stronger IPO pipeline. It anticipated continued market fragmentation, regulatory change, and migration of some cash-equity activity to OTC venues, while OTC derivatives activity could shift toward exchanges. The filing gives no numerical 2012 earnings or revenue guidance.
- Key risks include intense exchange and technology competition, pressure on transaction pricing, trading-volume and IPO volatility, market-share loss, regulatory and market-structure changes, foreign-currency exposure, and dependence on reliable systems and cybersecurity. The filing says suspicious files were detected on U.S. servers in February 2011 and removed; the company reported no evidence that customer information was accessed or acquired.
- Clearing operations expose the company to counterparty risk: it guarantees completion of certain cleared contracts. Customer pledged collateral at NASDAQ OMX Commodities and NASDAQ OMX Stockholm was $5.0 billion at year-end, held by a third-party custodian and not available for general use. A member-sponsored default fund for NASDAQ OMX Stockholm was planned for March 2012.
- Unusual 2011 items included an $18 million non-cash impairment of the DFM investment, $38 million of merger and strategic initiative costs, and $31 million of debt extinguishment/refinancing charges. Goodwill was $5.1 billion; the company reported no goodwill impairment for 2011.
- A Finnish tax authority challenge could result in approximately $23 million of additional tax and penalties for 2008–2011 if the authority prevails; management considered an assessment unlikely. The company reported no litigation it believed would have a material adverse effect. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether derivatives and access-services growth can offset weaker U.S. cash-equity activity and declining market share.
- How much of reported cash, financial investments and credit availability is unrestricted and available to the parent company.
- Debt maturities, variable-rate exposure, covenant headroom, and the cash impact of share repurchases and debt repayment.
- The sustainability of adjusted earnings growth relative to GAAP earnings, including acquisition, financing, and tax-related adjustments.
- Developments in the NYSE Euronext proposal, regulatory changes, clearing exposures, cybersecurity, and the Finnish tax matter.