NASDAQ OMX Group, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2011. Unaudited results are compared with the first quarter of 2010. The company operates exchange and clearing markets, market data, listings and index services, and market technology businesses.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $817 million | $771 million | +6.0% |
| Revenue less transaction rebates and related fees | $415 million | $360 million | +15.3% |
| Operating expenses | $234 million | $248 million | -5.6% |
| Operating income | $181 million | $112 million | +61.6% |
| Net income attributable to NASDAQ OMX | $104 million | $61 million | +70.5% |
| Diluted EPS | $0.57 | $0.28 | +103.6% |
| Cash from operating activities | $171 million | $(16) million | Improved |
- Operating margin was approximately 22.2% of reported revenue, versus 14.5% a year earlier. Relative to revenue after transaction rebates and related fees, operating margin was approximately 43.6%, versus 31.1%.
- Growth in revenue after transaction rebates and related fees reflected $45 million of operational improvement and a $10 million favorable foreign-exchange impact. Expenses fell partly because Q1 2010 included $40 million of debt-refinancing charges; therefore, the year-over-year operating-income comparison benefits from a prior-period unusual item.
- Interest expense increased to $30 million from $25 million, primarily due to the 5.25% notes issued in December 2010. The effective tax rate was 32%, versus 33%; Q1 2011 included a $5 million benefit related to a Swedish tax ruling.
Segments and operating trends
- Market Services: Revenue after transaction rebates and related fees rose 16.6% to $281 million. Derivatives and clearing increased 31.1% to $80 million and access services rose 35.9% to $53 million. U.S. cash-equity revenue after related fees increased 21.9% to $39 million, despite lower trading volumes and market share.
- Issuer Services: Revenue rose 8.3% to $91 million, led by Corporate Solutions, up 29.4% to $22 million. NASDAQ IPOs increased to 22 from 15, but new listings declined to 34 from 41.
- Market Technology: Revenue rose 26.5% to $43 million, supported by surveillance services following the SMARTS acquisition. Order intake was $6 million versus $50 million; total order value awaiting recognition was $471 million, including $150 million of deferred revenue.
- Segment income before taxes was $125 million for Market Services, $30 million for Issuer Services and $1 million for Market Technology. Corporate items were a $4 million loss.
Cash, liquidity, debt and balance sheet
- Cash and cash equivalents were $439 million at March 31, up from $315 million at year-end. Working capital was $380 million, compared with $279 million. Operating cash flow included a $108 million increase in deferred revenue, mainly from annual listing billings.
- Investing activities used $24 million and financing activities used $27 million. Financing cash use included a required $35 million term-loan repayment. Capital expenditures were $10 million.
- Total debt obligations were $2.290 billion, including $140 million current and $2.150 billion long-term, down from $2.321 billion at year-end. The company reported compliance with all debt covenants. A $250 million revolving facility and $459 million of clearing-related credit facilities were undrawn.
- Reported current assets of $10.175 billion and current liabilities of $9.795 billion include large, offsetting clearing positions: $2.295 billion of derivative positions and $6.655 billion of resale and repurchase agreements on both sides. These balances largely reflect clearing activity, not general-purpose liquidity.
- Restricted cash totaled $165 million. Regulatory capital requirements were $292 million, funded mainly by restricted cash and Swedish government securities.
Outlook, risks and unusual items
- The filing discusses a 2011 outlook but provides no clear quantified guidance in the supplied filing text. Management said near-term operating cash was expected to fund operating costs, capital expenditures and debt interest.
- Management cited cautious investor sentiment, sporadic volatility and weak trading volumes, intense competition and pricing pressure, evolving regulation, technology requirements, and foreign-exchange and interest-rate exposure. U.S. matched share volume across its markets fell 24.9% year over year; NASDAQ’s matched share market share for total U.S.-listed equities declined to 16.5% from 20.0%.
- After quarter-end, NASDAQ OMX and ICE pursued a joint proposal to acquire NYSE Euronext, valued at approximately $11.3 billion at the cited March 31 share prices. NYSE Euronext rejected the proposals; the transaction remained subject to negotiations, shareholder votes and regulatory approvals. NASDAQ OMX’s proposed contribution included $2.121 billion cash, approximately 108 million shares and assumption of $2.074 billion of NYSE Euronext debt. The filing warns that completion could require additional borrowing and entail transaction costs and integration risks.
- The company disclosed a Finnish tax challenge that could result in approximately $10 million of additional tax and penalties, though management believed an assessment unlikely. A Swedish tax ruling supporting interest deductions was under appeal; the company recorded a $5 million tax benefit in Q1 and $42 million cumulatively since 2009.
- NASDAQ OMX reported no litigation it believed could materially adversely affect its business or results. Clearing operations expose it to counterparty risk as legal counterparty; pledged collateral at NASDAQ OMX Commodities and Stockholm was $7.2 billion, down from $8.7 billion at year-end. No goodwill impairment was recorded.
Most important facts for investors to verify
- Whether operating-income and EPS growth persists after accounting for the $40 million Q1 2010 refinancing charge and Q1 2011 acquisition and strategic-initiative costs.
- Whether U.S. trading volumes and market share stabilize, and how competition and pricing affect cash-equity trading economics.
- Whether Market Technology converts its $471 million order value into revenue on the estimated schedule, given management’s timing caveat and the low Q1 order intake.
- The financing, dilution, approval conditions and ultimate outcome of the proposed NYSE Euronext transaction, including its effect on debt and liquidity.
- The outcomes of the Finnish and Swedish tax matters and the scale of any clearing-related counterparty losses or liquidity demands.