Business context and reporting period
The NASDAQ OMX Group, Inc. (now Nasdaq, Inc.) reported its unaudited second quarter and six months ended June 30, 2013. The global exchange group operates trading, clearing, listing, market data, index, and technology businesses. Results are compared with the same 2012 periods; segments were reorganized into Market Services, Listing Services, Information Services, and Technology Solutions.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $814m | $815m | $1,557m | $1,619m |
| Revenue less transaction rebates and related fees | $451m | $427m | $869m | $841m |
| Operating income | $159m | $175m | $249m | $346m |
| Net income attributable to Nasdaq OMX | $88m | $93m | $130m | $178m |
| Diluted EPS | $0.52 | $0.53 | $0.77 | $1.02 |
| Operating cash flow | Not separately provided for the quarter | $255m | $318m |
Q2 revenue was essentially flat year over year; first-half revenue declined 3.8%. Revenue after transaction rebates and related fees rose 5.6% in Q2 and 3.3% in the first half. Operating margin on that measure was approximately 35.3% in Q2 versus 41.0% a year earlier, and 28.7% for the first half versus 41.1%. These margins are calculated as operating income divided by revenue less transaction rebates and related fees.
- Business mix: Q2 Market Services revenue was $553m, down 5.8%; Listing Services $58m, up 5.5%; Information Services $108m, up 1.9%; and Technology Solutions $95m, up 41.8%. The Technology Solutions increase included the Thomson Reuters businesses acquired May 31.
- Cash and liquidity: Cash and equivalents were $379m at June 30, down from $497m at year-end. Working capital was $194m, versus $474m at December 31. Availability under the revolving credit commitment was $574m; separate clearing-related credit facilities of $300m were unused. Current assets and liabilities include matching clearing-member funds and margin deposits, so headline working capital and liquidity require context.
- Debt and equity: Total debt obligations were $2.785bn, including $138m current and $2.647bn long-term, compared with $1.976bn at year-end. Stockholders’ equity was $5.862bn. The company reported compliance with debt covenants.
- Capital returns: The quarterly dividend was $0.13 per share. The share-repurchase program was temporarily suspended in April; $10m of shares had been repurchased in the first half.
Material changes versus prior comparable period
- Q2 Market Services net revenue declined primarily because U.S. cash-equity trading revenue after rebates and fees fell 34.1%; U.S. cash-equity industry volumes and Nasdaq’s matched market share were lower. U.S. derivatives revenue after rebates and fees rose 9.1%, supported by higher industry volume and market share.
- Technology Solutions benefited from the May 2013 Thomson Reuters acquisition and growth in Market Technology. First-half results also include eSpeed only from its June 28 closing date.
- Operating expenses rose 15.9% in Q2 and 25.3% in the first half. First-half costs included a $62m Facebook-related voluntary accommodation program, $33m of merger and strategic initiative expense, and a $10m SEC matter expense.
- First-half operating cash flow decreased to $255m from $318m. Investing cash outflow was $1.142bn, mainly reflecting acquisitions; financing cash inflow was $777m, mainly from debt issuance.
Outlook, commentary, risks, and unusual items
- The filing provides no specific consolidated revenue or earnings guidance. Management expected operations to provide sufficient near-term cash for operating costs, capital spending, debt repayments, dividends, and other commitments. A completed restructuring program was expected to generate $60m of annualized savings in 2013.
- Management described modest business growth amid cautious global recovery, low volatility, and competitive pressure. Q2 U.S. and European derivatives volumes improved, while lower U.S. cash-equity volumes weighed on trading results. U.S. IPOs on Nasdaq increased to 35 from 15 a year earlier.
- Acquisitions materially changed the balance sheet and funding needs. eSpeed was acquired for approximately $1.2bn, including $755m cash and contingent future share issuances estimated at $484m, subject to annual revenue targets over 15 years. The acquisition was principally funded with €600m of 3.875% notes due 2021. Thomson Reuters Corporate Solutions was acquired for $390m, including working-capital adjustments.
- Q2 net income included a $176m tax benefit in other comprehensive income related to the company’s assertion that certain foreign earnings would be permanently reinvested. Tax positions also include ongoing Finnish and Swedish matters; the company paid $19m to the Finnish tax authority and expects a refund if its appeal succeeds. It expected recurring Swedish tax benefits of $4m–$5m per quarter, subject to a favorable ruling.
- Facebook IPO-related matters remain a significant contingency. Nasdaq paid a $10m SEC penalty and agreed to remedial measures; private litigation and an appealed arbitration injunction remained pending. The company stated an unfavorable outcome could materially affect it and expected further defense and remediation costs.
- Other principal risks include trading-volume and market-share declines, pricing competition, regulation, foreign-exchange and interest-rate exposure, acquisition integration, debt covenants, and clearing-counterparty risk. A 10% adverse currency move was estimated to reduce first-half operating income by about $12m across the listed currencies; a 100-basis-point adverse rate move was estimated to affect annual pretax income by $2m.
Important facts for investors to verify
- How much of Technology Solutions’ growth is recurring and attributable to acquisitions versus underlying performance, and whether acquired businesses meet integration and revenue expectations.
- Whether U.S. cash-equity market share and net revenue capture stabilize, and whether derivatives growth persists.
- The cash-flow and earnings impact of the Facebook accommodation program, SEC settlement, pending litigation, and related remediation.
- Debt repayment capacity after the eSpeed financing, the August 2013 convertible-note maturity, and acquisition-related contingent share issuance.
- Resolution and accounting impact of Finnish and Swedish tax matters, and sustainability of reported tax benefits.
- Liquidity available for general corporate use after distinguishing company cash from restricted cash and clearing-member collateral.