Interactive Data Corporation (NYSE: IDC) today reported its financial results for the second quarter ended June 30, 2009.
Interactive Data's second-quarter 2009 revenue was $185.0 million, compared with $186.1 million in the second quarter of 2008. Income from operations in the second quarter of 2009 was $50.6 million, compared with $50.0 million in the same period one year ago. Net income attributable to Interactive Data for the second quarter of 2009 was $33.1 million, or $0.34 per diluted share, compared with net income of $33.5 million, or $0.35 per diluted share, in the second quarter of 2008.
"Our Company continued to navigate challenging market conditions during the second quarter of 2009," stated Ray D'Arcy, Interactive Data's president and chief executive officer. "We made progress during the quarter to drive increased adoption of our core institutional services, which reflects positively on the strength of our fixed income evaluations and reference data services, as well as our ability to respond with new services that address key customer needs around the world. Despite this progress, we confronted underlying revenue softness arising from the difficult economic environment. In addition, our second-quarter 2009 financial performance was further affected by the impact associated with negative changes in foreign exchange rates during the past 12 months. We also recorded a $10.5 million out-of-period accounting adjustment related to the write-down of certain assets and the accrual of certain liabilities associated with the Company's European real-time market data services operation. In response to our financial performance to date and the impact that market conditions will likely have upon our business during the second half of the year, we initiated significant cost-reduction actions during the second quarter."
D'Arcy continued, "Our core institutional services have remained relatively resilient and that resiliency enabled us to produce organic revenue growth of 3.1% this quarter. In the current environment, however, customers continue to closely scrutinize their spending on financial market data and related solutions. This dynamic contributed to more moderate growth in usage-related revenue and continued to put pressure on our institutionally oriented retention rates. These metrics remained below traditional levels due to elevated cancellation levels, particularly for our real-time market data services. We have also continued to experience erosion within our traditional active trader subscriber base."
D'Arcy concluded, "As we look ahead, we continue to see attractive growth prospects in certain product areas, such as our fixed income evaluations, reference data, and our institutionally oriented Web-based and desktop solutions. Our offerings in these areas provide our customers with access to valuable information and tools, and deliver high value in helping them with their mission-critical valuation, risk management, compliance and wealth management challenges. Although we remain optimistic about our prospects in these areas, we expect that usage-related revenue will continue growing at a more modest pace and product areas such as our real-time market data services, fixed income analytics and our eSignal offerings in the active trader market will remain challenged in the current environment. Based primarily on these trends, we've lowered our revenue outlook for 2009 accordingly. Nevertheless, we have reaffirmed our guidance for 2009 income from operations and net income as we aggressively manage the cost base of our business. We believe that our recent cost-saving measures recalibrate our near-term spending in line with anticipated revenue. Just as important, these actions enable us to continue making important investments in our fixed income evaluation capabilities, delivery platforms and infrastructure that we believe are critical to our future success. We move forward with the sound financial foundation, strong customer relationships, extensive global distribution channels and compelling set of offerings that position us well to capitalize on the opportunities we see ahead."
Out-of-Period Accounting Adjustment
As mentioned above, Interactive Data's second-quarter 2009 results included a $10.5 million out-of-period accounting adjustment related to the write-down of certain assets and the accrual of certain liabilities associated with the Company's European real-time market data services operation. The Company's European real-time market data services operation represented approximately five percent of the Company's total revenue in 2008. The out-of-period accounting adjustment decreased second-quarter 2009 revenue by approximately $2.0 million and increased 2009 second-quarter total costs by approximately $8.5 million, which is mostly related to data acquisition expenses that were not properly recorded in prior periods, primarily in 2008 and the first quarter of 2009. This matter is not expected to have a significant impact on the Company's ongoing operations. All expenses related to this out-of-period accounting adjustment have been paid, and the Company's relationships with its customers and business partners have been unaffected. The Company recorded the out-of-period accounting adjustment after various management reviews were conducted following the departure of an accountant within the European real-time market data services operation. Based on management's reviews to date, the Company believes that this former employee incorrectly recorded certain journal entries, and that those errors were limited to the European real-time market data services operation. The Company is taking action to enhance the control deficiencies that contributed to the errors, including the clarification and centralization of the financial reporting lines within its various business units, and the recruitment of additional senior-level financial management and staff to its finance team. Certain aspects of the Company's review are ongoing.
The Company does not believe that the effects of the out-of-period accounting adjustment are material to its estimated full-year 2009 financial results. The Company also does not believe that the out-of-period accounting adjustment, individually or in the aggregate, is material to any previously issued annual or quarterly financial statements. Because the out-of-period accounting adjustment, both individually or in the aggregate, was not material to any of the prior year's financial statements and is not expected to be material to its estimated full-year 2009 financial results, the out-of-period accounting adjustment was recorded in the Company's financial statements for the second quarter of 2009. As a result of all of these factors, the Company has not restated its previously issued annual financial statements or interim financial data.
A table summarizing the out-of-period accounting adjustment and its allocation to earlier reporting periods has been included on page 16 of this press release.
Segment Reporting, Related Operating Highlights and Revenue by Geography
Institutional Services Segment:
- Interactive Data Pricing and Reference Data reported second-quarter 2009 revenue of $123.2 million, an increase of $5.4 million, or 4.6%, over the prior year's second quarter (or an increase of $12.3 million, or 10.5%, before the effects of foreign exchange). Kler's Financial Data Service S.r.l. (Kler's), which we acquired in August 2008, contributed revenue of $2.6 million in the second quarter of 2009. NTT DATA Financial (NDF), in whom we acquired a majority interest in December 2008 and subsequently acquired an additional 10% interest during the second quarter of 2009, contributed an incremental $2.2 million to second-quarter 2009 revenue. Excluding the contributions from Kler's and NDF, related intercompany eliminations associated with NDF and the effects of foreign exchange, second-quarter 2009 organic revenue for this business increased by $7.5 million, or 6.4%, over the same period last year primarily as a result of expanding business with existing customers in both North America and Europe. During the second quarter, the Pricing and Reference Data business introduced the Options Volatility Service, and broadened its Evaluated Services capabilities with new informational resources, transparency tools and expanded coverage of mortgage-backed securities.
- Interactive Data Real-Time Services generated second-quarter 2009 revenue of $32.8 million, a decrease of $5.1 million, or 13.3%, over the same quarter last year (or a decrease of $0.9 million, or 2.4%, before the effects of foreign exchange). The decline in organic revenue resulted from higher cancellations of real-time market data services, partially offset by solid revenue growth for its Web-based solutions. During the second quarter of 2009, this business established alliances with software vendor Aleri, and transaction connectivity and trading solutions provider ULLINK. In addition, on July 20, 2009, the Company announced a significantly expanded relationship with Pershing that now includes access to a customized, Web-based portal as well as its Market-Q desktop application.
- Interactive Data Fixed Income Analytics reported revenue for the second quarter of 2009 of $8.2 million, an increase of $0.1 million, or 0.9%, from last year's second quarter (or an increase of $0.1 million, or 1.0%, before the effects of foreign exchange). In late June 2009, this business announced that a number of city and state government investment managers, including the City of Los Angeles and the San Francisco Employees' Retirement System, are now subscribing to BondEdge®.
Active Trader Services Segment:
- eSignal's second-quarter 2009 revenue of $20.8 million decreased by $1.5 million, or 6.9%, from the second quarter of 2008 (or a decline of $0.9 million, or 4.1%, before the effects of foreign exchange). The decline in the eSignal direct subscriber base and lower advertising revenue more than offset higher average subscription fees. As of June 30, 2009, eSignal managed approximately 57,200 direct subscription terminals, which is 3.1% lower than the same period last year. eSignal's recent highlights include continued enhancement of its offerings and the above-mentioned adoption of its Market-Q offering by Pershing.
Revenue by Geography:
- Interactive Data's total North American second-quarter 2009 revenue grew 0.2% to $131.8 million from the same period last year as growth in its evaluations and reference data services was mostly offset by revenue weakness in its real-time market data and eSignal product areas. Excluding eliminations associated with the Company's redistribution relationship with NDF in Japan, Interactive Data's total North American second-quarter 2009 organic revenue grew 1.1%. The Company's second-quarter 2009 revenue in Europe decreased 9.0% to $45.5 million from the second quarter one year ago. Excluding the effects of foreign exchange and the contribution from Kler's, second-quarter 2009 organic revenue in Europe grew 8.0% primarily as a result of higher demand for its independent fixed income evaluated pricing and reference data services and modest growth in its Web-based solutions. Interactive Data's Asia-Pacific revenue of $7.7 million in the second quarter of 2009 grew 65.6% from the second quarter of 2008 due to the NDF contribution, as well as higher revenue in Australia and Hong Kong. Excluding the effects of foreign exchange and the contribution from NDF, Asia-Pacific organic revenue grew 8.9% during the second quarter of 2009.
- A table comparing revenue by geography, including the impact of foreign exchange as a percentage of total revenue for the three months and six months ended June 30, 2009 and 2008, for each of Interactive Data's major geographic regions has been included on page 13 of this press release.
Other Second-Quarter 2009 Financial and Operating Highlights
Effects of Foreign Exchange:
- Interactive Data's second-quarter 2009 revenue was unfavorably impacted by $11.8 million due to the effects of foreign exchange resulting from a stronger US dollar in comparison with the second quarter of 2008. Second-quarter 2009 revenue before the effects of foreign exchange grew by $10.6 million, or 5.7%, over the same period in 2008. Total costs and expenses in the second quarter of 2009 were reduced by $8.3 million as a result of the effects of foreign exchange. Second-quarter 2009 total costs and expenses before the effects of foreign exchange increased by $6.6 million, or 4.8%, over the second quarter of 2008.
- A table comparing the average foreign exchange rates during the three months and six months ended June 30, 2009 versus the comparable periods of 2008 in three of the Company's primary overseas currencies (as measured against the U.S. dollar) is provided on page 15 of this press release.
Cash Position, Stock Buyback Activities, and Quarterly Cash Dividend:
- As of June 30, 2009, Interactive Data had no outstanding debt and had cash, cash equivalents and marketable securities of $269.5 million. During the second quarter of 2009, Interactive Data repurchased 321,200 shares of its common stock at an average price of $23.05 per share. Entering the third quarter of 2009, nearly 2.5 million shares were available for repurchase under the existing stock buyback program. During the second quarter of 2009, Interactive Data paid $18.8 million to stockholders in connection with its regular quarterly dividend of $0.20 per share to stockholders.
- During the second quarter of 2009, Interactive Data acquired an additional 10% interest in NDF (which has since been renamed as Interactive Data Japan) for 302 million yen (or approximately U.S. $3.2 million based on exchange rates at the time of the transaction). This transaction brought the Company's ownership of the outstanding equity in NDF to 90%. With a firm commitment in place to acquire the remaining outstanding equity by the end of 2010, Interactive Data's future financial statements will reflect 100% ownership of this business.
Board of Directors Changes:
- On July 14, 2009, Interactive Data announced that Donald C. Kilburn, Victor R. Simone and Luke Swanson were appointed to the Company's Board of Directors. These appointments bring the total number of directors actively serving on the Board to 10.
First-Half 2009 Results
- For the first six months ended June 30, 2009, Interactive Data reported revenue of $371.0 million, an increase of $3.2 million, or 0.9%, from $367.9 million in the same period last year. Foreign exchange reduced first-half 2009 revenue by $26.8 million and acquisitions contributed an incremental $9.0 million during that same period. Excluding the effects of foreign exchange and the net impact of acquisitions, first-half 2009 organic revenue grew by 5.7%. Total costs and expenses increased $3.2 million, or 1.2%, to $272.1 million in the first half of 2009. Net income attributable to Interactive Data during the first half of 2009 was $65.1 million, or $0.68 per diluted share, versus $65.8 million, or $0.68 per diluted share, in the comparable period of 2008. The effective tax rate for first half of 2009 was 34.8% compared with 36.2% in the same period last year.
Market conditions in 2009 are expected to remain challenging. Overall spending on market data and related services by customers in the financial services industry in 2009 is being influenced by various factors including delayed sales cycles, cost-containment activities, the impact of recent mergers and acquisitions, and overall economic conditions. Based on our results to date and expected performance during the second half of the year compared with 2008, we have implemented significant cost-reduction actions, including the elimination of 2009 annual merit-based salary increases and substantial reductions to certain 2009 incentive bonus compensation programs. We have updated our 2009 non-GAAP and GAAP outlook as follows:
* 2009 organic revenue growth over 2008 (on a percentage change basis) is now expected to be at the low end of the low-single digit range. This compares with prior guidance that called for the organic revenue growth to be in the mid-single digit range.
* 2009 organic income from operations growth versus 2008 (on a percentage change basis) is unchanged from prior guidance that called for growth in the mid-single digit range.
2009 revenue is now expected to be roughly flat with 2008. This compares with prior guidance that called for 2009 revenue growth over 2008 (on a percentage change basis) to be at the low end of the low single digit range.
- This forecast still includes an anticipated positive impact of approximately two percentage points from acquisitions completed in 2008.
- Our prior revenue guidance assumed that 2009 revenue would be negatively impacted by approximately six percentage points associated with changes in foreign exchange rates. Our revenue forecast now includes a negative impact of approximately four percentage points associated with changes in foreign exchange rates as of June 30, 2009.
2009 income from operations versus 2008 (on a percentage change basis) is unchanged from prior guidance that called for the decline in 2009 income from operations to be in the low single digit range.
- This forecast still includes an anticipated positive impact of approximately two percentage points from acquisitions completed in 2008.
- Our prior guidance assumed that changes in foreign exchange rates would negatively impact 2009 income from operations by more than five percentage points. This forecast now includes a negative impact of at least four percentage points related to changes in foreign exchange rates as of June 30, 2009.
The effective 2009 annual tax rate is still expected to be in the range of 35.0% to 36.0%.
2009 net income attributable to Interactive Data versus 2008 (on a percentage change basis) is unchanged from our prior guidance. We still expect that 2009 net income will decline in the low-to-mid single digit range.
2009 capital expenditures are now expected to be in the range of $54.0 million to $56.0 million versus our prior capital expenditure guidance of $56.0 million to $58.0 million.
- The forecast now includes expenditures of $7.0 million to $8.0 million for leasehold improvements related to the planned relocation of our midtown New York office and refurbishment of our European headquarters in London. We expect that approximately 30% of these leasehold improvements will be reimbursed by each respective landlord during this year with an additional 20% to be reimbursed in 2010.
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