NASDAQ OMX Group, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Financial amounts are in millions of U.S. dollars unless noted. NASDAQ OMX operates trading and clearing markets, listing and market-data businesses, and market-technology and corporate-solutions services.
Financial performance and liquidity
- Revenue: Total revenue was $898, up 20.7% from $744. After transaction rebates, brokerage, clearance and exchange fees, revenue was $529, up 26.6% from $418.
- Segment revenue: Market Services $582; Listing Services $58; Information Services $123; Technology Solutions $135. Technology Solutions grew 80%, primarily reflecting the 2013 Thomson Reuters Corporate Solutions acquisition.
- Profit: Operating income was $184, compared with $90; net income attributable to NASDAQ OMX was $103, compared with $42. Diluted GAAP EPS was $0.59 versus $0.25. Operating income as a proportion of revenue less transaction-related costs was 34.8%, versus 21.5%.
- Adjusted results: Company-reported non-GAAP net income was $125 and diluted EPS was $0.72, versus $108 and $0.64. These measures exclude specified items and are not GAAP results.
- Cash flow: Operating cash flow was $183, up from $149. Investing activities used $46 and financing activities used $153. Cash and cash equivalents declined $14 to $384.
- Debt and liquidity: Debt obligations totaled $2,514, including $430 classified as current, compared with total debt of $2,634 at year-end 2013. The $400 principal amount of 4.00% notes matures in January 2015; management said it plans to refinance before maturity. Cash was $384; $750 was available under the revolving credit facility, and separate clearing-related facilities totaled $311, none utilized.
- Other balance-sheet items: Total assets were $12,978 and total liabilities $6,738. Working capital was negative $59, versus positive $363 at December 31, 2013, primarily because the 2015 notes were classified as current.
- Margins and tax: The effective tax rate was 34%, versus 29%. The filing reports no clear company-defined operating or net profit margin measure; the operating-margin comparison above is calculated from reported figures.
Material changes versus Q1 2013
- Revenue growth reflected, among other factors, the acquired Thomson Reuters Corporate Solutions businesses and eSpeed, plus stronger cash-equity trading, market-data and index-licensing revenue. Comparisons are affected by those acquisitions, completed in May and June 2013.
- U.S. cash-equity matched market share rose to 20.6% from 18.4%; average daily matched share volume across U.S. cash-equity markets increased 24%. NASDAQ IPOs increased to 47 from 18.
- U.S. options market share fell to 27.3% from 29.6%; Nordic and Baltic derivatives and fixed-income contract volumes also declined. The filing describes mixed trading-volume trends across businesses.
- Operating expenses rose 5.2% to $345. Higher compensation, depreciation and amortization, and merger and strategic-initiative costs were partly offset by the absence of the prior-year voluntary accommodation and restructuring charges.
- Q1 2014 included $28 of merger and strategic-initiative expense, including an $18 charge for technology-platform consolidation and retirement in Corporate Solutions. Q1 2013 included a $62 voluntary accommodation program expense, $9 of restructuring charges, and $10 of intangible-asset impairment charges.
Outlook, risks and contingencies
- Management said operating cash flow and revolving-credit availability were expected to fund near-term operating needs, capital expenditures, debt payments, potential repurchases and dividends. The supplied filing text provides no specific full-year 2014 revenue or earnings guidance.
- Management characterized the recovery as cautious and identified trading volumes, IPO and listing activity, market-data demand, regulation, competition, pricing pressure and technology requirements as important business drivers. It warned that economic weakness or renewed market instability could affect volatility, volumes and results.
- Debt covenants may constrain operations; floating-rate borrowings and foreign-currency exposures create market risk. Management reported compliance with debt covenants at March 31, 2014. S&P had affirmed NASDAQ OMX’s BBB rating and placed it on negative outlook; Moody’s affirmed Baa3.
- Tax matters include Finnish interest-deduction and Swedish tax positions, as well as Swedish VAT refund claims under appeal. Management expected certain tax audits to be settled and did not anticipate a material effect from those settlements, but outcomes remain uncertain. Reported tax benefits depend on disputed or unresolved positions.
- Facebook IPO-related litigation remained pending, including an appeal and a member-organization arbitration dispute. A separate securities-market manipulation case naming NASDAQ OMX was filed in April 2014; the company said it could not estimate potential liability and intended to defend the claims.
- Clearing operations expose the company to counterparty risk. Clearing-member cash contributions and margin deposits are reflected as matching assets and liabilities; substantial pledged non-cash collateral is off balance sheet. The filing estimated no material liability for the clearing guarantee at quarter-end.
- The eSpeed acquisition includes contingent annual share issuances through 2027, subject to revenue targets. NASDAQ OMX also completed its acquisition of the remaining 28% interest in BWise on March 31, 2014; a second installment was expected in 2015.
Important facts for investors to verify
- Whether the company refinanced the $400 million notes due January 2015 and how refinancing affected interest expense and liquidity.
- How much reported growth reflects acquisitions versus underlying performance, particularly in Technology Solutions and eSpeed-related businesses.
- Progress and eventual outcomes of the Finnish, Swedish and VAT tax matters, including the assumptions supporting recognized tax benefits.
- Developments and potential financial exposure in Facebook IPO-related litigation and the high-frequency-trading lawsuit.
- Trading volumes, market share, pricing pressure, and the conversion of the $652 million Market Technology order book into recognized revenue.