The Nasdaq OMX Group, Inc. (Nasdaq:NDAQ) today reported results for the third quarter of 2013. Third quarter net revenues were $506 million, up from $412 million in the prior year period, driven by both acquisitions and organic growth in Technology Solutions, Information Services, and Listing Services. On an organic basis third quarter net revenues increased 4% year-over-year.
"This quarter is a great illustration of our strategy and the transformation of the fundamental business and revenue profile of NASDAQ OMX," said Bob Greifeld, CEO, NASDAQ OMX. "We now feature a Technology Solutions segment composed of dominant industry leaders, with over $500 million of annualized revenue in the third quarter, and a Market Services segment which now sees two thirds of its transaction revenue coming from derivative and fixed income categories, each with strong secular growth opportunities. The industry leadership, unique product and service offering, and earnings potential create a compelling franchise for investors and an unmatched partner for our customers."
Mr. Greifeld continued, "Today, businesses comprising 97% of our company's revenues feature either #1 or #2 revenue rankings in their respective industries. Our customers have put us in strong competitive positions through the value they place on our technology, systems, products and services. Our acquisitions of eSpeed and the IR, PR, and Multimedia businesses of Thomson Reuters are ahead of plan and are accretive to earnings, and although we have more to do to ensure they realize their full potential, our confidence has never been stronger in our ability to continue to service the market, deliver for our customers, and create returns for our shareholders."
Operating expenses were $304 million in the third quarter of 2013, compared to $242 million in the prior year quarter. On a non-GAAP basis, third quarter 2013 operating expenses were also $304 million, up 32% as compared to the prior year quarter, primarily due to the inclusion of expenses associated with the acquisitions of Thomson Reuters' IR, PR and Multimedia businesses and the eSpeed electronic fixed income platform. On an organic basis (constant currency and excluding acquisitions), third quarter non-GAAP operating expenses were up 7%, representing a 6% increase in core expenses and a 1% impact from higher GIFT speending. Through the first nine months of 2013, non-GAAP operating expenses were up 2% on an organic basis.
Third quarter 2013 non-GAAP diluted earnings per share were $0.66, versus $0.62 in the prior year quarter. Non-GAAP diluted earnings per share in the third quarter of 2013 excludes $8 million of pre-tax merger-related expenses, which were offset by an $8 million pre-tax gain related to a reduction of a contingent liability related to an acquisition, as well as an increase in net deferred tax liabilities due to changes in tax rates in various jurisdictions. Non-GAAP diluted earnings per share in the third quarter of 2012 excludes $25 million of net pre-tax charges primarily relating to restructuring charges, a loss on a business divestiture, special legal expenses, as well as a $1 million tax adjustment.
On a GAAP basis, net income attributable to NASDAQ OMX for the third quarter of 2013 was $113 million, or $0.66 per diluted share, compared with $89 million, or $0.52 per diluted share, in the prior year quarter.
"We are pleased with the balance and stability of our revenue model as well as our continued strong performance in challenging cycles," said Lee Shavel, EVP and CFO, NASDAQ OMX. "At the same time, our expense discipline has led to very modest organic cost growth thus far in 2013, and we are narrowing our full-year expense guidance towards the low end of our previous projections."
Mr. Shavel continued, "On the capital front, the company paid down $98 million of debt during the quarter, and remains on track to return to our longer-term leverage target in the mid-2x gross debt to EBITDA range by the end of the second quarter of 2014, at which point we will again enjoy the full flexibility to consider all capital return/deployment options."
At September 30, 2013, the company had cash and cash equivalents of $300 million and total debt of $2,718 million, resulting in net debt of $2,418 million. This compares to net debt of $1,479 million at December 31, 2012.
1 Represents revenues less transaction rebates, brokerage, clearance and exchange fees.
Market Services (40% of total net revenues) - Net revenues were $200 million in the third quarter of 2013, up $15 million when compared to $185 million in the third quarter of 2012.
- Derivatives (14% of total net revenues) - Total net derivative trading and clearing revenues were $71 million in the third quarter of 2013, down $1 million compared to the third quarter of 2012. Net U.S. derivative trading and clearing revenues declined $2 million year-over-year due to modestly-lower industry volumes and market share. European derivative trading and clearing revenues increased $1 million, primarily due to revenues associated with the clearing operations.
- Cash Equities (9% of total net revenues) - Total net cash equity trading revenues were $46 million in the third quarter of 2013, down $1 million compared to the third quarter of 2012. Lower net U.S. equities revenues, primarily due to lower market share, were partially offset by higher European equities revenue, driven primarily by higher volumes.
- Fixed Income (4% of total net revenues) - Total net fixed income trading revenues associated with eSpeed were $18 million, roughly in line with prior-year levels. Higher industry-wide volumes for electronically-traded, on-the-run U.S. Treasury securities were offset by somewhat lower market share compared to the prior period, a function of market share changes prior to NASDAQ OMX's ownership of the business.
- Access and Broker Services (13% of total net revenues) - Access and broker services revenues totaled $65 million in the third quarter of 2013, down $1 million compared to the third quarter of 2012. Connectivity and co-location saw modestly lower demand in the third quarter of 2013 compared to the third quarter of 2012, partially offset by the addition of eSpeed hosting revenues, and new products, such as microwave connectivity and FinQloud, which are seeing increased demand.
Information Services (23% of total net revenues) - Revenues were $118 million in the third quarter of 2013, up $19 million from the third quarter of 2012.
- Market Data (20% of total net revenues) - Total market data revenues were $100 million in the third quarter of 2013, up $16 million compared to the third quarter of 2012. The third quarter of 2013 saw a $7 million increase in audit collections compared to the prior year period, the inclusion of market data revenues associated with eSpeed, growth in products such as NASDAQ Basic, and select pricing initiatives.
- Index Licensing and Services (3% of total net revenues) - Index licensing and services revenues were $18 million in the third quarter of 2013, up $3 million from the third quarter of 2012. The revenue growth was a function of materially higher assets and number of licensed exchange traded products, including the impact of the acquisition of the index business of Mergent, Inc.
Technology Solutions (26% of total net revenues) - Revenues were $131 million in the third quarter of 2013, up $58 million from the third quarter of 2012.
- Corporate Solutions (15% of total net revenues) - Corporate solutions revenues were $78 million in the third quarter of 2013, up $56 million from the third quarter of 2012. Corporate solutions revenue growth was primarily due to the inclusion of the acquisition of Thomson Reuters' IR, PR, and Multimedia businesses, as well as organic growth, in particular the growth of Directors Desk, IR Suite, and PR distribution.
- Market Technology (11% of total net revenues) - Market technology revenues were $53 million in the third quarter of 2013, up $2 million from the third quarter of 2012. The revenue increase is primarily due to change request and advisory revenues and includes growth at BWise. Order intake increased, from $34 million in the third quarter of 2012 to $119 million in the third quarter of 2013, a record quarterly result. The backlog rose to $579 million, also a company record, up from $540 million in the prior year period.
Listing Services (11% of total net revenues) - Revenues were $57 million in the third quarter of 2013, up $2 million compared to the third quarter of 2012. U.S. listing revenues were unchanged. European listing revenues rose, due to higher market capitalization.
COST GUIDANCE - The company has narrowed the core expense guidance to between $1,075-$1,090 million, from the previous $1,070-$1,100 million range. The new initiatives or "GIFT" expense guidance range has been reduced to $45 million, from the previous $50-$60 million, and total expenses are now expected in the $1,120-$1,135 million range, from the previous $1,120-$1,160 million range.
• Announced several major new mandates in Market Technology. NASDAQ OMX announced agreements to supply its leading Market Technology systems to exchanges including Boerse Stuttgart and Borsa Istanbul, the latter with which NASDAQ OMX also entered into a broader strategic partnership.
• Listing Services has strong momentum, highlighted by Marriott International and Fairchild Semiconductor switches to NASDAQ. NASDAQ OMX saw 59 new U.S. listings in the third quarter of 2013, including 38 IPOs, and 4 switches from other markets. In addition, in October, Marriott International (MAR) and Fairchild Semiconductor (FCS) announced voluntary switches to NASDAQ listings.
• Transitioned structure of Nordic derivatives clearinghouse. As part of the process for creating an EMIR-compliant central counterparty, independent directors have been appointed, and the current clearinghouse operation is being maintained within the current company, renamed to NASDAQ OMX Clearing AB. All exchange related operations have been moved to another separate company within the Group. The application for a renewed clearing license under EMIR regulation has been submitted to the Swedish Financial Supervisory Authority, and it is in the final stage of the approval process. Final approval is expected later this year.
• Significant milestone for European swap clearing. On August 19, 2013 NASDAQ OMX announced that the total cleared volume of SEK denominated interest rate swaps (IRS) has reached SEK 100 billion, equal to €12 billion, making NASDAQ OMX Clearing the second largest IRS clearinghouse in Europe.
• Strategic alliance between NASDAQ OMX and Natural Gas Exchange Inc. (NGX). Created an alliance between NASDAQ OMX's U.S. physical energy entity, NASDAQ OMX Commodities Clearing Company, and NGX's physical energy exchange and clearinghouse, owned by TMX Group, which serves more than 250 contracting parties in the U.S. and Canada.