Business context and reporting period
The NASDAQ OMX Group, Inc. filed this Form 10-K for the fiscal year ended December 31, 2010. The company operates exchange, trading, clearing, market-data, listings, index and market-technology businesses across the United States and international markets. Its three segments are Market Services, Issuer Services and Market Technology. The filing also provides unaudited fourth-quarter results; this is an annual filing, not a standalone quarterly report.
Financial performance and position
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Total reported revenue | $3.197 billion | $3.411 billion |
| Revenue less transaction rebates, brokerage, clearing and exchange fees | $1.522 billion | $1.453 billion |
| Operating expenses | $891 million | $850 million |
| Operating income | $631 million | $603 million |
| Net income attributable to NASDAQ OMX | $395 million | $266 million |
| Diluted EPS | $1.91 | $1.25 |
| Cash provided by operating activities | $440 million | $582 million |
- Reported revenue fell 6.3%, while revenue net of transaction-related costs rose 4.7%. The latter measure is more informative about the underlying revenue trend because certain transaction costs are reported gross and largely pass through.
- Operating margin on revenue less transaction-related costs was approximately 41.5% in both years. Net income attributable to the company was about 26.0% of that measure in 2010, versus 18.3% in 2009.
- Segment revenue net of transaction-related costs: Market Services $1.025 billion, up 5.0%; Issuer Services $344 million, up 4.2%; Market Technology $152 million, up 4.8%.
- FY 2010 cash used in investing activities was $118 million and cash used in financing activities was $595 million. Capital expenditures were $42 million. Year-end cash and cash equivalents were $315 million; cash plus financial investments were $568 million, compared with $902 million a year earlier. Working capital was $279 million, down from $516 million.
- Total debt obligations were $2.321 billion, including $140 million current and $2.181 billion long-term. Interest expense was $102 million. The company reported compliance with debt covenants at year-end and had a $250 million undrawn revolving commitment; separate clearing-related facilities totaled $440 million and were unused.
- Total assets were $16.207 billion and total equity was $4.729 billion. Goodwill was $5.127 billion and net intangible assets were $1.719 billion.
Fourth-quarter 2010 results
Unaudited Q4 revenue was $783 million, revenue less transaction-related costs was $400 million, operating income was $175 million, net income attributable to NASDAQ OMX was $137 million, and diluted EPS was $0.69. For Q4 2009, the corresponding figures were $817 million, $369 million, $149 million, $43 million and $0.20.
Material changes versus the prior comparable period
- Net revenue increased by $69 million, including $52 million of operational growth and a $17 million favorable foreign-exchange effect. Derivatives and clearing, access services, cash equity net revenue, indexes and listings contributed to growth; market data and broker services declined.
- Market conditions remained mixed: matched share volume across U.S. markets decreased 16.2%, and NASDAQ’s matched share market in U.S.-listed equities declined to 18.8% from 21.3%. Conversely, U.S. equity-options average daily volume rose to 14.3 million from 13.4 million, and combined NASDAQ OMX options-market share rose to 27.4% from 21.0%.
- Operating expenses increased $41 million, including a $14 million unfavorable currency effect. General and administrative expense included a $40 million pre-tax charge from repaying the previous secured credit facilities and terminating related interest-rate swaps.
- Net income from unconsolidated investees was $2 million, compared with a $107 million loss in 2009, which included $87 million of investment impairments and a $19 million loss on the sale of Orc shares.
- The company completed acquisitions of Nord Pool, SMARTS, FTEN and ZVM, and acquired North American energy clearing assets. It also launched a Swedish resale-and-repurchase clearing service and the NASDAQ OMX PSX cash-equities market. NEURO and Agora-X were closed, generating an $11 million divestiture loss.
- The company repurchased $797 million of shares during 2010, including $497 million paid for 22.781 million shares from Borse Dubai. Year-end shares outstanding were 175.8 million, down from 211.4 million.
Outlook, commentary, risks and unusual items
- Management expected a gradual global economic recovery to support business in 2011, including potential improvement in IPO activity. It gave qualitative commentary, not quantified earnings or revenue guidance.
- Management anticipated continued U.S. and European regulatory change, further fragmentation of cash-equity trading, and movement of some OTC derivatives activity to exchanges and public execution venues. It cited IDCG as an opportunity in interest-rate-swap clearing and technology platforms and acquisitions as avenues for diversification.
- Key risks include intense competition and pricing pressure, declining trading volumes or market share, dependence on market conditions and IPO activity, regulatory and market-structure changes, technology outages or cyber incidents, acquisition integration, foreign-exchange exposure, counterparty and clearing risk, and leverage.
- Clearing activities involve material counterparty exposure. Customer pledged collateral at NASDAQ OMX Commodities and NASDAQ OMX Stockholm was $8.7 billion; the company guarantees cleared contracts and notes collateral may not fully protect it against default.
- Non-routine items included the $40 million debt-refinancing charge, $11 million loss on business closures and a lower 26.0% effective tax rate, partly reflecting restructuring-related tax benefits. A Swedish tax benefit was $18 million in 2010; the underlying ruling was appealed. A Finnish tax challenge could result in approximately $10 million of additional tax and penalties, although management considered an assessment unlikely.
- In February 2011, the company reported suspicious files on U.S. servers; the files were removed, and management said there was no evidence customer information had been accessed or acquired. The filing reported no litigation believed likely to have a material adverse effect.
- Ernst & Young issued an unqualified opinion on the financial statements and internal controls. Management concluded disclosure controls and internal control over financial reporting were effective as of year-end.
Important facts for investors to verify
- Reconcile the 6.3% fall in reported revenue with the 4.7% increase in revenue net of transaction-related costs, including the effect of pass-through fees and changes in trading volume and pricing.
- Assess whether 2010 cash generation can be sustained: operating cash flow fell 24.4% to $440 million, while the company spent $797 million on share repurchases and ended the year with $315 million of cash.
- Review debt maturities, variable-rate exposure, covenant requirements and the effect of debt service on flexibility; verify the company’s stated covenant compliance and available revolving capacity.
- Monitor U.S. and Nordic trading market share, tape-plan and market-data revenues, and the contribution and integration costs of recent acquisitions.
- Evaluate clearing exposure, collateral protections, restricted cash and regulatory capital needs, particularly as clearing of derivatives and repurchase agreements expands.
- Track the outcomes of the Swedish tax appeal and Finnish tax challenge, and distinguish recurring earnings from tax benefits and other unusual charges.