Nasdaq OMX Group Inc.’s (NDAQ) second quarter operating earnings per share of 50 cents surpassed the Zacks Consensus Estimate of 47 cents and prior-year quarter earnings of 42 cents.
However, operating earnings missed by a couple from 52 cents reported in the prior quarter. Total operating earnings, on non-GAAP basis, were $169 million, up from $152 million in the prior-year quarter but down from $183 million reported in the prior quarter.
Nasdaq’s GAAP net income also came in at $101 million or 50 cents per share, up from $96 million or 46 cents in the prior quarter and $60 million or 28 cents in the year-ago quarter. Results in the reported quarter included $4 million of workforce reduction expenses, merger and strategic initiatives and other non-recurring items. These were offset by a $4 million tax benefit and adjustments.
Total net exchange revenues increased 7% year over year to $372 million, marginally higher than the Zacks Consensus Estimate of $371 million, due to the positive impact of exchange rates and substantially improved revenues from market and transaction services and market technology, cash equity and derivative trading.
This was, however, marginally offset by low market data revenue, decline in industry volumes and low average net fee per share on Nasdaq’s U.S. trading system.
Market Services net exchange revenues for the quarter increased 8% from the year-ago period to $249 million. Issuer Services revenues for the reported quarter were $85 million, up 4% from the year-ago period on robust performance from global index group coupled with marginal growth in global listing services revenue. Market technology revenues grew 6% year over year to $38 million.
During the reported quarter, Nasdaq’s order intakes dipped substantially to $27 million from $37 million in the year-ago quarter. However, total order value (the value of orders signed that have not been recognized as revenue) increased to $446 million from $318 million in the prior year quarter.
On GAAP basis, total operating expenses decreased to $207 million from $218 million in the year-ago quarter attributable to higher professional services, occupancy expenses, marketing and advertising expenses, along with changes in the exchange rates of various currencies as compared to the U.S. dollar, which effectively increased expenses by $3 million.
On non-GAAP basis, operating expenses increased 3% from the prior-year period to $203 million, primarily due to costs associated with SMARTS Group and higher compensation expenses, partially offset by a reduction in expenses resulting from the sale of Carpenter Moore, which occurred in the fourth quarter of 2009.
At the end of September 30, 2010, Nasdaq had cash and equivalents of $336 million, debt obligations of $1.846 billion and total equity of $5.078 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 second quarter of 2010, the board of Nasdaq authorized an additional $100 million for the program, bringing the total authorized amount to $400 million.
The company also completed $300 million of this share repurchase program through the buyback of 15.1 million shares at the end of the reported quarter.
Besides, during the third quarter of 2010, the board of Nasdaq authorized an additional $150 million for the program, bringing the total authorized amount to $550 million.
Acquisition Update
During the reported quarter, Nasdaq completed 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.
Guidance
For fiscal year 2010, Nasdaq management raised its operating expense outlook from the prior range of $870-$885 million to the current estimation in the range of $880-$890 million, which now includes $60 million of recurring costs. The expected revision incorporates the impact of SMARTS Group acquisition.
Management aims to generate annualized net revenue of $2 billion by the end of 2013.
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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