NASDAQ OMX Group, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless otherwise stated. NASDAQ OMX operates exchanges and clearinghouses and provides listing, market data, index, and technology services globally. Figures below are in U.S. dollars.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $744 million | $804 million | Down 7.5% |
| Revenue less transaction rebates, brokerage, clearance and exchange fees | $418 million | $414 million | Up 1.0% |
| Operating expenses | $328 million | $243 million | Up 35.0% |
| Operating income | $90 million | $171 million | Down 47.4% |
| Net income attributable to NASDAQ OMX | $42 million | $85 million | Down 50.6% |
| Diluted EPS | $0.25 | $0.48 | Down 47.9% |
| Operating cash flow | $149 million | $108 million | Up 38.0% |
Operating margin on revenue less transaction-related costs was approximately 21.5%, versus 41.3% in Q1 2012. GAAP results included $62 million for the Facebook IPO voluntary accommodation program and a $10 million reserve for a potential SEC matter; a further $10 million of non-cash intangible-asset impairments was recorded below operating income. Management’s non-GAAP results excluded specified items: non-GAAP net income was $108 million in both periods, and diluted EPS was $0.64 versus $0.61.
Cash, liquidity and debt: Cash and cash equivalents were $591 million at March 31, up from $497 million at year-end; working capital was $494 million. Total debt was $1.966 billion, including $137 million current, with $1.829 billion long-term. The $750 million revolving commitment had $624 million available; separate clearing-related facilities totaled $308 million and were unused. The company reported compliance with debt covenants. Cash provided by operations exceeded capital expenditure of $20 million; operating cash flow included a $105 million increase in deferred revenue, mainly from annual listing billings. Financing cash outflow was $35 million, including dividends, debt payments, and repurchases.
Margins and segments: Revenue less transaction-related costs was $182 million for Market Services (down 4.2%), $55 million for Listing Services (down 1.8%), $108 million for Information Services (up 5.9%), and $73 million for Technology Solutions (up 10.6%). Segment operating income was $74 million, $24 million, $81 million, and $2 million, respectively; corporate items and eliminations were a $91 million loss, primarily reflecting the Facebook program, SEC reserve, restructuring, and strategic costs.
Material changes and management commentary
- Lower trading activity and reduced U.S. matched cash-equity market share weighed on Market Services. U.S. matched share volume fell 19.4%; total matched market share declined to 18.4% from 21.3%. European cash-equity trades and Nordic/Baltic derivatives activity also weakened. U.S. options matched market share increased to 29.6% from 27.4%.
- Information Services benefited from demand and pricing for U.S. market data and growth in index licensing. Technology Solutions growth reflected Corporate Solutions, BWise, and Market Technology revenues. Listing Services was slightly lower, primarily due to U.S. initial listing fees.
- The 2012 restructuring program was completed in Q1 2013. Management expected annualized savings of $60 million in 2013; Q1 restructuring charges were $9 million.
- The company realigned reporting into four segments—Market Services, Listing Services, Information Services, and Technology Solutions—and recast prior-period segment data.
Outlook, transactions and risks
- Management described funding costs and availability as healthy and expected near-term operations to fund operating needs, capital expenditures, debt repayments, dividends, and restructuring costs. It anticipated moderate business growth if markets avoided renewed crisis conditions, while emphasizing that trading volumes, listings, pricing pressure, regulation, and economic conditions could affect results. The filing does not provide a clear numerical full-year earnings or revenue guidance figure.
- In April 2013, the company agreed to acquire eSpeed assets for $750 million cash, subject to adjustments, plus contingent stock issuances tied to tax benefits and annual revenue targets over 15 years. The deal was expected to close in the second half of 2013 and could be funded with cash, debt, or securities. S&P placed ratings on CreditWatch negative and Moody’s placed the company’s rating under review, citing expected acquisition-related debt.
- The planned $390 million Thomson Reuters Investor Relations, Public Relations and Multimedia Solutions acquisition was expected to close in Q2 2013; funding was expected from cash or the credit facility. The filing also notes a 25% investment in TOM completed in April and an intended 25% interest in EuroCCP, subject to closing.
- Facebook IPO-related exposure includes the $62 million voluntary accommodation program, a $10 million SEC-matter reserve, investor lawsuits, and a member arbitration demand. The company disputed the claims and intended to defend them; outcomes and additional costs were uncertain.
- A Finnish tax dispute could result in approximately $20 million of additional tax and penalties if the company loses; management considered an assessment unlikely. A Swedish interest-deduction position was subject to new legislation and a requested advance ruling; management expected recurring quarterly tax benefits of $4 million to $5 million.
- The share repurchase program was temporarily suspended in April 2013. The company declared a $0.13 per-share dividend for Q1 and declared the same quarterly amount for payment in June, subject to the stated approval process.
- Key risks include market-volume and market-share declines, competition and pricing pressure, regulation, foreign exchange and interest-rate movements, clearing counterparty exposure, litigation, integration and acquisition financing, and credit-rating or covenant constraints.
Important facts for investors to verify
- Whether reported trading volumes and market share stabilize, and whether Information Services and Technology Solutions growth can offset weakness in Market Services.
- The recurring earnings impact of the Facebook program, SEC reserve, legal costs, and any further remediation or settlement costs.
- Actual funding, closing conditions, integration costs, and leverage effects of the eSpeed and Thomson Reuters acquisitions, including rating-agency decisions.
- Whether the expected $60 million restructuring savings are realized and how much is offset by ongoing strategic, compensation, or technology costs.
- Developments in the Finnish and Swedish tax matters and the sustainability of the stated Swedish tax benefits.
- Cash conversion excluding the substantial deferred-revenue working-capital benefit, debt maturities, and capacity to maintain dividends after the repurchase suspension.