NASDAQ OMX Group, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; unaudited. The company operated global trading, clearing, listing, market-data, index, and technology businesses across four reportable segments: Market Services, Listing Services, Information Services, and Technology Solutions. Comparisons below are year over year.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $805 million | $746 million | $2.362 billion | $2.365 billion |
| Revenue less transaction rebates and related fees | $506 million | $412 million | $1.375 billion | $1.253 billion |
| Operating income | $202 million | $170 million | $450 million | $516 million |
| Net income attributable to NASDAQ OMX | $113 million | $89 million | $244 million | $266 million |
| Diluted EPS | $0.66 | $0.52 | $1.43 | $1.53 |
| Operating cash flow | Not stated quarterly | Not stated quarterly | $337 million | $356 million |
- Q3 revenue increased 7.9%, while operating income rose 18.8% and attributable net income rose 27.0%. Nine-month revenue was essentially flat; operating income fell 12.8% and attributable net income fell 8.3%.
- Q3 growth in revenue after transaction rebates and related fees was led by Technology Solutions and Information Services. For nine months, Technology Solutions increased 45.6% to $300 million and Information Services increased 8.5% to $333 million; Market Services declined 7.5% to $1.559 billion.
- Operating expenses rose 25.6% in Q3 and 25.5% for nine months. Q3 increases included compensation, professional services, and amortization; nine-month expenses also included a $62 million Facebook IPO accommodation-program charge, $33 million of merger and strategic-initiative costs, and a $10 million SEC-related expense.
- At September 30, cash and cash equivalents were $300 million, versus $497 million at year-end 2012. Working capital was $365 million, down from $474 million. Cash used in investing was $1.184 billion, mainly reflecting acquisitions; financing provided $656 million, including proceeds from new notes.
- Total debt obligations were $2.718 billion, up from $1.976 billion at December 31, 2012; long-term debt was $2.673 billion. The company had $568 million available under its revolving credit commitment and $313 million of separate clearing-related facilities, none of which was used. It reported compliance with debt covenants.
- Total assets were $12.486 billion and equity was $6.056 billion. Default funds and margin deposits were $1.934 billion on both the asset and liability sides, largely reflecting a new collateral-management process; these balances are not equivalent to unrestricted liquidity.
- Dividends declared were $0.13 per share each quarter during the first nine months. The share-repurchase program was temporarily suspended in April 2013.
Material changes and unusual items
- NASDAQ OMX acquired eSpeed’s electronic U.S. Treasury brokerage, market-data, and related businesses in June for approximately $1.239 billion, including $755 million cash and contingent annual share issuances valued at approximately $484 million over 15 years, subject to revenue targets.
- In May, it acquired Thomson Reuters’ Investor Relations, Public Relations, and Multimedia Solutions businesses for approximately $390 million. These acquisitions contributed to higher revenue, expenses, goodwill, and intangible assets; results are not fully comparable with prior periods.
- The company issued €600 million principal amount of 3.875% senior unsecured notes due 2021, with reported proceeds of $895 million. Most proceeds funded the eSpeed cash consideration. Debt increased, and interest expense rose $8 million in both the quarter and nine-month comparison.
- For the Facebook IPO systems issues, the company recorded a $62 million voluntary accommodation-program expense in the first nine months and paid a $10 million SEC penalty. FINRA’s initial review identified $41.6 million in submitted valid claims, subject to further analysis and SEC review before payment.
- Other notable items included $10 million of intangible-asset impairment charges for nine months, compared with $40 million of impairment charges in 2012; the 2012 period also included a $14 million divestiture loss. The 2013 restructuring program was completed in the first quarter.
- Foreign-currency translation generated significant volatility in comprehensive income. The nine-month income-tax benefit on translation was primarily tied to the company’s assertion that certain foreign subsidiary earnings would be permanently reinvested.
Outlook, commentary, and risks
- No numerical earnings or revenue guidance is provided in the supplied filing text. Management said it expects operating cash flows to fund near-term operating expenses, capital expenditures, debt repayments, repurchases, and dividends.
- Management described the economic outlook as cautiously optimistic and reported modest growth in several non-transaction businesses, but noted continued low volatility and lower U.S. and European trading volumes. U.S. IPO activity improved: NASDAQ hosted 38 Q3 IPOs versus 17 a year earlier.
- Key business risks include trading-volume and market-share losses, competitive pressure on transaction pricing, regulatory and technology changes, foreign-exchange exposure, acquisition integration and synergy execution, and debt covenants or reduced access to funding. S&P affirmed the company’s BBB rating but placed it on negative outlook after the increase in acquisition-related debt; Moody’s affirmed Baa3.
- Facebook-related litigation and an appealed arbitration injunction remained unresolved. The company said it intended to defend the claims; an unfavorable outcome could materially affect results. Certain tax audits and positions also remained under review, including Finnish interest deductions and Swedish interest-deduction rules.
- Management concluded disclosure controls were effective. The acquired eSpeed and Thomson Reuters businesses were excluded from the company’s December 2013 internal-control assessment while integration work continued.
Investor verification checklist
- Track whether acquired-business revenue growth translates into sustained operating income, particularly as acquisition and integration costs continue.
- Reconcile debt and liquidity after the eSpeed financing, including scheduled maturities, interest costs, revolver availability, and rating outlook.
- Confirm the final amount and timing of Facebook accommodation payments and monitor remaining litigation, arbitration, and SEC undertakings.
- Assess whether U.S. cash-equity trading volumes and market share recover, and whether growth in data, listings, and technology offsets transaction-market weakness.
- Review clearing collateral, default-fund exposures, and related liquidity requirements separately from unrestricted cash and working capital.
- Monitor tax-audit outcomes and the sustainability of recurring Swedish tax benefits, as well as foreign-currency effects on earnings and equity.