Nasdaq OMX Group Inc.’s (NDAQ) second quarter operating earnings per share of 52 cents surpassed the Zacks Consensus Estimate of 49 cents and prior-quarter earnings of 43 cents. Operating earnings increased substantially from 47 cents reported in the prior-year quarter. Total operating earnings, on non-GAAP basis, were $108 million, up from $92 million in the prior quarter and $99 million reported in the year-ago quarter.

Nasdaq’s GAAP net income was $96 million or 46 cents per share, up from $61 million or 28 cents in the prior quarter and $69 million or 33 cents in the year-ago quarter. Results of the reported quarter included $16 million in charges related to the divestiture of businesses, expenses associated with severance, merger and strategic initiatives and other non-recurring items.

Total net exchange revenues increased 6.3% year over year to $390 million due to the positive impact of exchange rates and substantially improved revenues from marketing and transaction services, cash equity and derivative trading. This was, however, marginally offset by low market data revenue, weak market technology revenue and low average net fee per share on Nasdaq’s U.S. trading system.

Market Services net exchange revenues for the quarter increased 10% from the year-ago period and 12% from the previous quarter to $270 million. Issuer Services revenues for the reported quarter were $86 million, up 2% from the previous quarter and 1% from the year-ago period on robust performance from its global index group that was partially offset by weakness in global listing services revenue. Market technology revenues were flat from the prior quarter at $34 million, although this marks a decline of 6% from the year-ago quarter.

During the reported quarter, Nasdaq’s order intakes improved to $12 million from $10 million in the year-ago quarter. Total order value (the value of orders signed that have not been recognized as revenue) increased to $453 million from $315 million in the prior-year quarter.

On GAAP basis, total operating expenses increased to $211 million from $208 million in the previous-year quarter. On non-GAAP basis, operating expenses increased 4% from the prior-year period to $207 million, primarily due to higher professional services, occupancy expenses, marketing and advertising, along with changes in the exchange rates of various currencies as compared to the U.S. dollar, which effectively increased expenses by $2 million.

At the end of June 30, 2010, Nasdaq had cash and equivalents of $526 million, debt obligations of $1.912 billion and total equity of $4.69 billion.

Share Repurchase Update

In March 2010, the board of Nasdaq approved a share repurchase program, authorizing Nasdaq to repurchase $300 million of its outstanding common stock. Further, during the reported quarter, the board of Nasdaq authorized an additional $100 million for the program, bringing the total authorized amount to $400 million.

The company also completed $200 million of this share repurchase program during the reported quarter. As of June 30, 2010, Nasdaq repurchased 7.8 million shares of common stock, bringing the total number of shares repurchased since the program was announced in March 2010 to 10 million.

Acquisition Update

Concurrent with the earnings release, Nasdaq announced the acquisition of SMARTS Group, the world-leading technology provider of market surveillance solutions to exchanges, regulators and brokers. This acquisition is part of Nasdaq’s strategy to diversify its Market Technology business and enter the broker surveillance and compliance market.

Also during the reported quarter, Nasdaq completed the acquisition of Nord Pool ASA, which operates the Nordic Power market and the European Carbon market on one trading platform.

Guidance

For fiscal year 2010, Nasdaq management lowered its operating expense outlook from the prior range of $875-$890 million (including about $65 million in non-recurring costs) to the current estimation in the range of $870-$885 million, which now includes $60 million in recurring costs. However, the company is expected to further revise its expense projection at the end of third quarter to incorporate the impact of SMARTS Group acquisition, subject to the closure of the transaction.

Our Take

Nasdaq’s diversified business mix, cost, revenue and technology synergies appear to benefit from improving economic conditions. Furthermore, an improved outlook for equity investments and the number of recession-proven private companies seeking capital are also adding to the new listings and initial public offering (IPO) pipeline.

As well, management aims to return value to shareholders through stock repurchase. However, the ongoing low M&A activity and headwinds related to volume and pricing continue to limit the stock’s upside. We believe that Nasdaq’s operations will gain momentum once the global economy stabilizes and rebounds to its historical highs.
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