NYX Nyse Euronext

NASDAQ OMX Group Inc.’s (NDAQ) first quarter operating earnings per share of 61 cents came in a penny higher than the Zacks Consensus Estimate of 60 cents and significantly higher than prior-year quarter earnings of 43 cents. Total operating earnings, on non-GAAP basis, increased 19% year over year to $190 million.

However, NASDAQ’s GAAP net income also came in at $104 million or 57 cents per share, dramatically up from $61 million or 28 cents in the year-ago quarter but down from $137 million or 69 cents in the prior quarter. Results in the reported quarter included $9 million of merger and strategic initiatives, a sub-lease loss reserve and other non-recurring items.

Total net exchange revenues increased 15.3% year over year to $415 million, which also exceeded the Zacks Consensus Estimate of $407 million. The increase was attributable to the positive impact of exchange rates and substantially improved revenues from market, transaction, issuer services and market technology, cash equity and derivative trading. This was, however, marginally offset by reduced average fees, lower-than-expected market data revenue and year-over-year decline in volumes.

Segment-wise, Market Services net exchange revenues for the quarter increased 16.6% from the year-ago period to $281 million. Issuer Services revenues for the reported quarter were $91 million, up 8.3% from the year-ago period on robust performance from global index group coupled with growth in global listing services revenue. Market technology revenues grew 26.5% year over year to $43 million.

During the reported quarter, NASDAQ’s order intakes dipped substantially to $6 million from $50 million in the year-ago quarter. Consequently, total order value (the value of orders signed that have not been recognized as revenue) plummeted to $471 million from $496 million in the prior year quarter.

Meanwhile, on non-GAAP basis, operating expenses increased 11.9% from the prior-year period to $225 million, primarily due to costs associated with FTEN, SMARTS and Nord Pool ASA acquisitions. Exchange rate of various currencies as compared to the U.S. dollar increased expenses by $7 million compared to the year-ago quarter.

On a GAAP basis, total operating expenses decreased 5.6% year over year to $234 million. Consequently, operating margin rose to 46% from 44% in the year-ago quarter.

At the end of March 31, 2011, NASDAQ had cash and equivalents of $439 million, up from $315 million at the end of 2010. Debt obligations lowered to $2.15 billion from $2.181 billion at the end of 2010. While total assets increased to $18.07 billion, total equity grew to $5.04 billion, over 2010.

Guidance

For fiscal year 2011, NASDAQ management contracted its operating expense outlook to the range of $895-$915 million from the prior range of $920-$940 million. However, the revised guidance excludes approximately $50 million in merger related and other infrequent charges.  

Management aims to generate annualized net revenue of $2 billion by the end of 2013.

Acquisition Update

On April 1, 2011, NASDAQ and IntercontinentalExchange Inc. (ICE) announced a joint bid to take over NYSE Euronext Inc. (NYX) offering $43.13 per NYSE share, one-third in cash and two-third in stock, totaling approximately $11.3 billion.

This was about 21% higher than the earlier proposed merger between NYSE and Deutsche Boerse of $10.0 billion. NASDAQ and ICE had planned to finance the cash portion of the deal through cash and a combined financing of $3.8 billion.

While ICE was expected to take over NYSE’s European futures markets (Liffe, Liffe U.S.) and the over-the-counter clearing business (NYPC), NASDAQ was expected to take care of the remaining businesses of NYSE, such as the NYSE Euronext stock exchanges in New York, Paris, Brussels, Amsterdam and Lisbon as well as the U.S. options business.

However, on April 8, 2011, NYSE refused the offer citing various regulatory, political and commercial hurdles that the NASDAQ-NYSE merger could pose. Along with antitrust concerns, NYSE did not show much interest in splitting the company’s business while also extending additional debt burden to the merged company, thereby posing ample execution risk.

Yesterday, NASDAQ and ICE announced a renewed takeover offer for NYSE with fresh commitments. Accordingly, the joint parties for the bid claimed that its $11.3 billion is financially superior and is consistent with the terms of NYSE’s existing merger agreement with Deutsche Boerse AG.

NASDAQ and ICE offered to pay a reverse break-up fee of $350 million, in the event that they are unable to obtain necessary antitrust and competition approvals from the regulators in the U.S.

The joint parties have also committed a full $3.8 billion financing from a syndicate of banks including Bank of America Corp. (BAC), Nordea Bank AB, Skandinaviska Enskilda Banken AB and UBS Investment Bank of UBS AG (UBS). ICE has signed and received fully committed financing from a syndicate of banks including Wells Fargo & Co. (WFC) and Bank of America. NASDAQ OMX and ICE remain committed to a prudent use of leverage to finance the transaction.

Additionally, actions necessary to start the U.S. antitrust review processes have been taken and those reviews are expected to commence shortly. NASDAQ remains focused on maintaining its investment-grade credit rating.

While NASDAQ and ICE are looking forward to meet with NYSE and evaluate the superiority of their proposal, NYSE has acknowledged the receipt of the proposed merger agreement from NASDAQ and ICE.

 
BANK OF AMER CP (BAC): Free Stock Analysis Report
 
INTERCONTINENTL (ICE): Free Stock Analysis Report
 
NASDAQ OMX GRP (NDAQ): Free Stock Analysis Report
 
NYSE EURONEXT (NYX): Free Stock Analysis Report
 
UBS AG (UBS): Free Stock Analysis Report
 
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
 
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