The NASDAQ OMX Group, Inc. — Q3 2010 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2010, compared with the same periods in 2009. NASDAQ OMX operated exchange, trading, listing, market-data, clearing and market-technology businesses across the U.S. and international markets.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $751 million | $810 million | $2,391 million | $2,594 million |
| Revenue less rebates and transaction fees | $372 million | $349 million | $1,121 million | $1,084 million |
| Operating income | $165 million | $131 million | $456 million | $455 million |
| Net income attributable to NASDAQ OMX | $101 million | $60 million | $258 million | $223 million |
| Diluted earnings per share | $0.50 | $0.28 | $1.23 | $1.05 |
| Cash from operating activities | Not reported quarterly | Not reported quarterly | $257 million | $228 million |
Q3 total revenue fell about 7%, while revenue net of liquidity rebates, brokerage, clearance and exchange fees rose 6.6%. Operating income rose about 26%; attributable net income rose about 68%. For the first nine months, total revenue declined about 8%, net revenue increased 3.4%, and operating income was essentially flat. The filing reports operating expenses of $207 million for Q3 and $665 million year to date. Operating margin on reported total revenue was approximately 22% in Q3 versus 16% a year earlier.
In Q3, Market Services revenue was $628 million, Issuer Services $85 million and Market Technology $38 million. Market Services net revenue grew 7.8%, supported by U.S. cash-equity trading net revenue, derivatives and access services, while reported total Market Services revenue fell as transaction volumes and pass-through fees declined.
Balance sheet, cash flow and debt
- Cash and cash equivalents were $336 million at September 30, down from $594 million at December 31, 2009. Working capital was $513 million, compared with $570 million at year-end. Restricted cash totaled $159 million, including $106 million classified as non-current.
- Total debt obligations were $1.986 billion, including $140 million current and $1.846 billion long-term. The company refinanced its prior secured facilities in January, issuing $1 billion of senior unsecured notes and entering a facility with $700 million of funded term loans and a $250 million revolving commitment. It made $95 million in term-loan principal payments during the period.
- Year-to-date investing cash outflow was $79 million, including $76 million for acquisitions and $32 million for property and equipment. Financing cash outflow was $430 million, including $300 million of share repurchases. Operating cash flow increased to $257 million from $228 million.
- Debt maturities include notes due in 2015 and 2020, a term loan due in 2013 and convertible notes due in 2013. The company reported compliance with all debt covenants at quarter-end.
Material changes and unusual items
- Market Services net revenue benefited from higher U.S. cash-equity net fees, stronger derivatives results and access-service growth, but U.S. matched share volume declined 18% year over year. Market data and broker-services revenues also weakened.
- Issuer Services revenue increased 3.7% for both Q3 and the first nine months; Market Technology revenue increased 5.6% in Q3 and 6.0% year to date. Acquisitions included Nord Pool and SMARTS; SMARTS contributed to Market Technology growth.
- Operating expenses for the first nine months included a $40 million pre-tax charge related to refinancing prior secured debt. The company also recorded $11 million in losses from closing the NEURO and Agora-X businesses.
- Attributable net income benefited from comparison with the 2009 period, which included a $25 million debt-conversion expense. The 2010 third quarter included a $5 million tax benefit related to Swedish interest deductibility; cumulative benefit recorded since January 2009 was $32 million. The Swedish Tax Agency appealed the favorable tax ruling.
- The company repurchased $300 million of stock in the first nine months, or 15.1 million shares at an average $19.95. The board’s total authorization was increased to $550 million in October 2010; $250 million remained authorized as of the report date.
Outlook, risks and contingencies
Management expected operating cash flow to be sufficient in the near term to fund operating expenses, capital expenditures, debt interest and the share-repurchase program. The filing provides no specific quantitative earnings or revenue guidance. Management described continued uncertainty in economic growth and financial markets, competition and pricing pressure, lower U.S. trading volumes, and ongoing demand for technology investment.
Key disclosed risks include trading-volume and listing competition, foreign-currency and interest-rate exposure, regulation and implementation of the Dodd-Frank Act, integration and realization of acquisition benefits, debt covenants and access to financing. The company guarantees clearing obligations and reported $6.2 billion of customer collateral held by a custodian for certain clearing operations; these funds are not available for general use. It also disclosed a $25 million guarantee to NOCC for certain customer-default losses. Management said it was not party to litigation believed likely to have a material adverse effect. No goodwill impairment was recorded, though economic weakness or declines in results could trigger future testing.
Important facts for investors to verify
- Whether trading activity, market share and pricing trends sustain the improvement in net revenue despite lower U.S. volumes.
- Whether the $257 million year-to-date operating cash flow is repeatable, given working-capital movements and timing of Section 31 fee payments.
- Debt repayment capacity, revolving-facility availability, covenant headroom and the impact of variable-rate borrowing.
- The outcome of the Swedish tax appeal and any effect on the reported tax benefit or future tax expense.
- Integration and performance of Nord Pool and SMARTS, and the conversion of the $446 million Market Technology order value into recognized revenue.
- Use of the remaining share-repurchase authorization and its effect on cash, leverage and share count.