NYX Nyse Euronext

NYSE Euronext Inc.’s (NYX) first quarter operating earnings per share of 68 cents came in substantially ahead of the Zacks Consensus Estimate of 60 cents and 54 cents recorded in the year-ago quarter. Consequently, operating net income increased 26% year over year to $177 million from $140 million in the year-ago quarter.

NYSE reported GAAP net income of $155 million or 59 cents per share as compared with $130 million or 50 cents per share in the prior-year quarter. These include the impact of pre-tax merger expenses and exit costs of $21 million versus $13 million reported in the year-ago quarter. The merger expenses in the reported quarter included $15 million related to the proposed merger with Deutsche Boerse.

Gross revenues climbed 6.0% year over year to $1.15 billion in the reported quarter. Besides, net revenues (defined as gross revenues less direct transaction costs consisting of Section 31 fees, liquidity payments and routing and clearing fees) were $679 million, up 5.3% from $645 million in the prior-year quarter and also exceeded the Zacks Consensus Estimate of $658 million.

Revenue growth was injected by information service and technology solutions (up 5.5% year over year to $116 million), derivatives (up 5.5% year over year to $236 million) and cash trading and listings (up 5.1% year over year to $328 million) due to favourable currency fluctuations, higher pricing and improved daily trading volumes. Fixed operating expenses decreased about 1.0% to $436 million from $440 million in the prior-year quarter.

As of March 31, 2011, total headcount at NYSE was 3,028, up 2% from December 31, 2010 but down 6% from March 31, 2010. The effective tax rate was 26%, in line with the management’s guidance for 2011.

Financial Update

As of March 31, 2011, NYSE’s total debt declined $83 million from 2010 end to $2.4 billion and consisted of $2.2 billion in long-term debt and $0.2 billion in short-term debt. At the end of the reported quarter, cash and cash equivalents, investments and other securities were $0.4 billion while net debt was $2.0 billion.

Total capital expenditure declined to $36 million from $92 million in the year-ago quarter. As a result of strong growth in adjusted EBITDA, lower capital expenditures and continued deleveraging, NYSE’s debt-to-EBITDA ratio improved to 1.8x from 2.2x recorded at the end of 2010.

Outlook

For 2011, NYSE management projected fixed operating expenses to be less than $1,650 million on a constant dollar and fixed portfolio basis, compared to expenses of $1,678 million in 2010. Besides, total capital expenditure is expected to be less than $200 million. The effective tax rate is expected to be 26% in 2011.

Business Update

On February 15, 2011, NYSE announced its merger agreement with Frankfurt-based Deutsche Boerse AG to create the world's premier global exchange group in derivatives trading and risk management along with capital raising and equities trading.

Accordingly, each share of Deutsche Boerse stock will be exchanged for 1 share of the new company and each share of NYSE Euronext stock will be exchanged for 0.4700 shares of the new company stock. The total deal is worth about $9.8 billion.

Moreover, Deutsche Boerse will own 60% of the new company while the remaining 40% will be taken over by NYSE. However, the deal awaits regulatory approval.

Additionally, the new merger deal would out beat all the exchange operators giving way to the largest derivative business, representing 37% of net revenue. The prospective deal’s combined business would generate an annual €4.0 billion ($5.5 billion) in revenues, more than any other exchange group. The NYSE management expects cost synergies of about $725 million and substantial opportunities for incremental revenue.

On February 22, 2011, NYSE announced the culmination of its joint venture (JV) with exchange operator APX Inc. after the due approval from the regulators. The JV is known as NYSE Blue. However, the value of the JV remains concealed.

NYSE Blue will primarily deal with the emerging environmental and sustainable energy markets, in order to comfortably align with the growing product modification requirements in the industry and accordingly focus on newer market mechanisms to better tackle the climate changes.

NYSE will contribute its existing investment in BlueNext and retain a majority stake in NYSE Blue. BlueNext is already a predominant spot market for carbon credits. Meanwhile APX shareholders will retain a minority stake in NYSE Blue against their investment in APX.

On March 2, 2011, NYSE announced that it received final regulatory approvals for offering unprecedented one-pot margining of interest rate futures positions clearing by New York Portfolio Clearing (NYPC) with U.S. Treasury and agency securities and repurchase agreements cleared by The Depository Trust & Clearing Corporation's (DTCC) Fixed Income Clearing Corporation (FICC). NYPC will initially clear Eurodollar and U.S. Treasury Futures for NYSE Liffe U.S. NYPC was launched on March 21, 2011.

Furthermore, NYSE Liffe U.S., the U.S. futures platform, also launched Eurodollar and U.S. Treasury futures on March 21 and March 28, respectively. The launch of interest rate futures on NYSE Liffe U.S., which are cleared through NYPC, is eventually expected to improve the results of NYPC and NYSE Liffe U.S.

Dividend Update

Concurrently, the board of NYSE declared a regular quarterly dividend of 30 cents per share, which is payable on June 30, 2011, to the shareholders of record as on June 16, 2011.

Further, on March 31, 2011, NYSE paid a quarterly cash dividend of 30 cents to shareholders of record as on March 16, 2011.

Peer Pressure

NYSE’s arch-rival Nasdaq OMX Group Inc. (NDAQ) reported operating earnings per share of 61 cents on April 20, surpassing the Zacks Consensus Estimate by a penny and prior-year quarter earnings of 43 cents.

Our Take

Results reflect improved volumes in European cash and derivative trading and growth in other listing, market data and technology services that together drove the top line. However, both NYPC and NYSE Liffe U.S. are currently incurring losses.

The company benefited from lower capital expenditure and various cost containment initiative that reduced NYSE’s cost base by over $600 million since the merger with Euronext in 2007. These efforts have been translating into reduction in expenses, modest EBITDA growth and strong free cash flows.

NYSE aided in becoming more efficient with new initiatives taken to start new data centers as part of its long-term strategy. The IPO pipeline also remains strong through 2011.

 
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