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NDAQ > SEC Filings for NDAQ > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for NASDAQ OMX GROUP, INC.

Form 10-Q for NASDAQ OMX GROUP, INC.


6-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of the financial condition and results of operations of NASDAQ OMX should be read in conjunction with our condensed consolidated financial statements and related notes included in this Form 10-Q.

Business Overview

We are a leading global exchange group that delivers trading, clearing, exchange technology, regulatory, securities listing, and public company services across six continents. Our global offerings are diverse and include trading and clearing across multiple asset classes, access services, market data products, financial indexes, capital formation solutions, financial services, corporate solutions and market technology products and services. Our technology powers markets across the globe, supporting derivatives trading, clearing and settlement, cash equity trading, fixed income trading and many other functions.

In the U.S., we operate The NASDAQ Stock Market, a registered national securities exchange. The NASDAQ Stock Market is the largest single cash equities securities market in the U.S. in terms of listed companies and in the world in terms of share value traded. As of June 30, 2014, The NASDAQ Stock Market was home to 2,709 listed companies with a combined market capitalization of approximately $7.6 trillion. In addition, in the U.S. we operate two additional cash equities trading markets, three options markets and an electronic platform for trading of U.S. Treasuries. In March 2014, we launched NPM, a marketplace for private growth companies.

In Europe, we operate exchanges in Stockholm (Sweden), Copenhagen (Denmark), Helsinki (Finland), and Iceland, as well as the clearing operations of NASDAQ OMX Clearing AB as NASDAQ OMX Nordic. We also operate exchanges in Tallinn (Estonia), Riga (Latvia) and Vilnius (Lithuania) as NASDAQ OMX Baltic. Collectively, NASDAQ OMX Nordic and NASDAQ OMX Baltic offer trading in cash equities, bonds, structured products and ETFs, as well as trading and clearing of derivatives and clearing of resale and repurchase agreements. Through NASDAQ OMX First North, our Nordic and Baltic operations also offer alternative marketplaces for smaller companies. As of June 30, 2014, the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic, together with NASDAQ OMX First North, were home to 782 listed companies with a combined market capitalization of approximately $1.3 trillion. We also operate NASDAQ OMX Armenia.

In addition, NASDAQ OMX Commodities operates a power derivatives exchange regulated in Norway and a European carbon exchange. In the U.K., we operate NASDAQ OMX NLX, a London-based market for trading of listed short-term and long-term European (Euro and Sterling denominated) interest rate derivative products.

In some of the countries where we operate exchanges, we also provide investment firm, clearing, settlement and central depository services.

Business Segments

We manage, operate and provide our products and services in four business segments: Market Services, Listing Services, Information Services and Technology Solutions.

Our reportable segments are as follows.

Market Services

Our Market Services segment includes our derivative trading and clearing, cash equity trading, fixed income trading, and access and broker services businesses. We offer trading on multiple exchanges and facilities across several asset classes, including derivatives, commodities, cash equity, debt, structured products and ETFs. In addition, in some countries where we operate exchanges, we also provide investment firm, clearing, settlement and central depository services. Our transaction-based platforms provide market participants with the ability to access, process, display and integrate orders and quotes for cash equity securities, derivatives and ETFs. The platforms allow the routing and execution of buy and sell orders as well as the reporting of transactions for cash equity securities, derivatives and ETFs, providing fee based revenues. In addition, eSpeed's electronic benchmark U.S. Treasury brokerage and co-location service businesses are part of our Market Services segment.

Listing Services

Our Listing Services segment includes our U.S. and European Listing Services businesses. We offer capital raising solutions to over 3,400 companies around the globe representing approximately $8.9 trillion in total market value as of June 30, 2014.

We operate a variety of listing platforms around the world to provide multiple global capital raising solutions for private and public companies. Our main listing markets are The NASDAQ Stock Market and the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic. In March 2014, we launched NPM, a marketplace for private growth companies.


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Information Services

Our Information Services segment includes our Market Data Products and our Index Licensing and Services businesses.

Our Market Data Products business sells and distributes historical and real-time quote and trade information to market participants and data distributors. Our market data products enhance transparency and provide critical information to financial professional and individual investors globally. In addition, eSpeed's market data business is part of our Information Services segment.

Our Index Licensing and Services business develops and licenses NASDAQ OMX branded indexes, associated derivatives, and financial products and also provides custom calculation services for third-party clients.

Technology Solutions

Our Technology Solutions segment includes our Corporate Solutions and Market Technology businesses.

Our Corporate Solutions business serves corporate clients, including companies listed on our exchanges. We help organizations manage the two-way flow of information with their audiences through our suite of advanced technology, analytics, and consultative services. In May 2013, we acquired the TR Corporate Solutions businesses which were integrated into our Corporate Solutions business. With the acquisition of the TR Corporate Solutions businesses, Corporate Solutions revenues primarily include product revenues from the following key areas: governance, investor relations, multimedia solutions and public relations.

Our Market Technology business is a leading global technology solutions provider and partner to exchanges, clearing organizations and central securities depositories. Our technology business is also the sales channel for our complete global offering to other marketplaces.

Market Technology provides technology solutions for trading, clearing, settlement, surveillance and information dissemination to markets with wide-ranging requirements, from the leading markets in the U.S., Europe and Asia to smaller African markets. Our solutions can handle a wide array of assets including cash equities, currencies, various interest-bearing securities, commodities, energy products and derivatives. Market Technology also provides broker services and enterprise governance, risk management and compliance software solutions.

Our management allocates resources, assesses performance and manages these businesses as four separate segments. See Note 16, "Business Segments," to the condensed consolidated financial statements for further discussion.

Business Environment

We serve listed companies, market participants and investors by providing derivative, commodities, cash equity, and fixed income markets, thereby facilitating economic growth and corporate entrepreneurship. We provide market technology to exchanges, clearing organizations and central securities depositories around the world. We also offer companies and other organizations access to innovative products and software solutions and services that increase transparency, mitigate risk, improve board efficiency and facilitate better corporate governance. In broad terms, our business performance is impacted by a number of drivers, including macroeconomic events affecting the risk and return of financial assets, investor sentiment, government and private sector demands for capital, the regulatory environment for capital markets, and changing technology particularly in the financial services industry. Our future revenues and net income will continue to be influenced by a number of domestic and international economic trends including:

•Trading volumes in U.S. and European derivative, fixed income, and cash equity securities, which are driven primarily by overall macroeconomic conditions;

•The number of companies seeking equity financing, which is affected by factors such as investor demand, the global economy, availability of diverse sources of financing as well as tax and regulatory policies;

•The demand for information about, or access to, our markets, which is dependent on the products we trade, our importance as a liquidity center, and the quality and pricing of our data and access services;

•The demand by companies and other organizations for the products sold by our Corporate Solutions business, which is largely driven by the overall state of the economy and the attractiveness of our offerings;

•The demand for licensed exchange traded products and other financial products based on our indices as well as changes to the underlying assets associated with existing licensed financial products;

•The challenges created by the automation of market data consumption, including competition and the quickly evolving nature of the market data business;

•The outlook of our technology customers for capital market activity;

•Continuing pressure in transaction fee pricing due to intense competition in the U.S. and Europe;

•Competition for listings and trading related to pricing, product features and service offerings;

•Regulatory changes relating to market structure or imposed upon certain types of instruments, transactions, pricing structures or capital market participants; and


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•Technological advancements and members' demand for speed, efficiency, and reliability.

Currently our business drivers are defined by investors' and companies' cautiously optimistic outlook about the pace of the global economic recovery. Although some major market indices reached record levels in the second quarter of 2014, European equity markets have not performed as well and remain below their pre-financial crisis highs. As the global economy continues to avoid the intermittent crisis environments of 2010 through 2012, we are experiencing modest growth in many of our non-transactional businesses. Since a number of significant structural issues continue to confront the global economy, instability could return at any time, resulting in an increased level of market volatility, oscillating trading volumes, and a return of market uncertainty. Positive momentum in the IPO market has carried over from 2013. Steady performances by major U.S. stock market indices and consistently low volatility in the second quarter of 2014 helped to boost the U.S. IPO market to record post-crisis levels. In the second quarter of 2014, the U.S. cash equity trading business experienced a decrease in volumes due to lower overall industry trading volumes, while the European cash equity trading business saw a slight increase in volume. Both the U.S. and European derivative trading and clearing business experienced a decline in volume. Additional impacts on our business drivers included the international enactment and implementation of new legislative and regulatory initiatives, the adapting business models of our largest transactional business customers as they address the regulatory changes initiated following the global financial crisis and the evolution of market participant trading behavior, and the continued rapid progression and deployment of new technology in the financial services industry. The business environment that influenced our financial performance for the second quarter of 2014 may be characterized as follows:

•A much stronger pace of new equity issuance in the U.S. with 52 IPOs on The NASDAQ Stock Market, up from 35 in the second quarter of 2013. IPO activity improved in the Nordics with 17 IPOs in the second quarter of 2014 on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic, up from 6 IPOs in the second quarter of 2013;

•Average daily matched equity options volume for our three U.S. options exchanges decreased 13.4% compared to the second quarter of 2013, and overall average daily U.S. options volume decreased 10.4%. The decrease in our average daily matched options volume was driven by a drop in U.S. consolidated options volume as well as a decline of 0.9 percentage points in our combined matched market share for our three U.S. options exchanges;

•Average daily matched share volume for all of our U.S. cash equity markets decreased by 3.1% and average daily U.S. share volume fell by 8.3% relative to the second quarter of 2013. Volatility, often a driver of volume levels, was lower in the second quarter of 2014 compared with the same period in 2013. Losses in matched share volume were due to lower U.S. consolidated volume and were partially offset by an increase in matched market share from 19.1% in the second quarter of 2013 (NASDAQ 15.9%; NASDAQ OMX BX 2.4%; NASDAQ OMX PSX 0.8%) to 20.2% in the second quarter of 2014 (NASDAQ 17.1%; NASDAQ OMX BX 2.6%; NASDAQ OMX PSX 0.5%);

•Continuous cost focus in the industry has further increased the growth of our NASDAQ Basic product. The number of NASDAQ Basic subscribers increased 201% compared to the second quarter of 2013;

•A 0.8% increase relative to the second quarter of 2013 in the average daily number of cash equity trades on our Nordic and Baltic exchanges;

•A 17.5% increase relative to the second quarter of 2013 in the SEK value of cash equity transactions on our Nordic and Baltic exchanges;

•A decline of 10.3% experienced by our Nordic and Baltic exchanges relative to the second quarter of 2013 in the number of traded and cleared options, futures and fixed-income contracts (excluding Finnish option contracts traded on Eurex);

•Intense competition among U.S. exchanges and dealer-owned systems for cash equity trading volume and strong competition between multilateral trading facilities and exchanges in Europe for cash equity trading volume;

•Globalization of exchanges, customers and competitors extending the competitive horizon beyond national markets; and

•Market trends requiring continued investment in technology to meet customers' and regulators' demands as markets adapt to a global financial industry, as increasing numbers of new companies are created, and as emerging countries show ongoing interest in developing their financial markets.


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Financial Summary

The following table summarizes our financial performance for the three and six months ended June 30, 2014 when compared with the same periods in 2013. The comparability of our results of operations between reported periods is impacted by the acquisitions of eSpeed on June 28, 2013 and the TR Corporate Solutions businesses on May 31, 2013.

                                   Three Months Ended June 30,        Percentage      Six Months Ended June 30,       Percentage
                                    2014                2013            Change           2014             2013          Change
                                          (in millions)                                     (in millions)
Revenues less transaction
rebates, brokerage,
clearance and exchange fees    $          523      $          451          16.0%    $       1,052     $       869          21.1%
Operating expenses                        332                 292          13.7%              677             620           9.2%
Operating income                          191                 159          20.1%              375             249          50.6%
Interest expense                           30                  26          15.4%               59              50          18.0%
Asset impairment charges                     -                   -              -                -             10               #
Income before income taxes                162                 135          20.0%              319             194          64.4%
Income tax provision                       61                  47          29.8%              114              64          78.1%
Net income attributable to
NASDAQ OMX                     $          101      $           88          14.8%    $         205     $       130          57.7%
Diluted earnings per share     $         0.59      $         0.52          13.5%    $        1.18     $      0.77          53.2%

#Denotes a variance equal to 100.0%.

In countries with currencies other than the U.S. dollar, revenues and expenses are translated using monthly average exchange rates. The following discussion of results of operations isolates the impact of year-over-year foreign currency fluctuations to better measure the comparability of operating results between periods. Operating results excluding the impact of foreign currency fluctuations are calculated by translating the current period's results by the prior period's exchange rates.

Impacts associated with fluctuations in foreign currency are discussed in more detail under "Item 3. Quantitative and Qualitative Disclosures about Market Risk." For the three months ended June 30, 2014, approximately 33.6% of our revenues less transaction rebates, brokerage, clearance and exchange fees and 21.4% of our operating income were derived from currencies other than the U.S. dollar, primarily the Swedish Krona, Euro, Norwegian Krone, Danish Krone and British Pound. For the six months ended June 30, 2014, approximately 34.0% of our revenues less transaction rebates, brokerage, clearance and exchange fees and 24.1% of our operating income were derived from currencies other than the U.S. dollar, primarily the Swedish Krona, Euro, Norwegian Krone, Danish Krone and British Pound.

The following summarizes significant changes in our financial performance for the three and six months ended June 30, 2014 when compared with the same periods in 2013:

•Revenues less transaction rebates, brokerage, clearance and exchange fees increased $72 million, or 16.0%, to $523 million in the second quarter of 2014, compared with $451 million in the same period in 2013, reflecting an operational increase in revenues. The increase in operational revenues was primarily due to an:

•increase in Corporate Solutions revenues of $35 million, reflecting higher revenues resulting from the acquisition of the TR Corporate Solutions businesses in May 2013;

•increase in fixed income trading revenues less brokerage, clearance and exchange fees of $14 million, reflecting the acquisition of eSpeed;

•increase in Market Data Products revenues of $12 million, primarily from U.S. market data products;

•increase in Market Technology revenues of $7 million;

•increase in cash equity trading revenues less transaction rebates, brokerage, clearance and exchange fees of $6 million; and

•increase in Index Licensing and Services revenues of $4 million, partially offset by;

•a decrease in derivative trading and clearing revenues less transaction rebates, brokerage, clearance and exchange fees of $10 million.

•Revenues less transaction rebates, brokerage, clearance and exchange fees increased $183 million, or 21.1%, to $1,052 million in the first six months of 2014, compared with $869 million in the same period in 2013, reflecting an operational increase in revenues. The increase in operational revenues was primarily due to an:

•increase in Corporate Solutions revenues of $91 million, reflecting higher revenues resulting from the acquisition of the TR Corporate Solutions businesses in May 2013;

•increase in fixed income trading revenues less brokerage, clearance and exchange fees of $28 million, reflecting the acquisition of eSpeed;


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•increase in Market Data Products revenues of $23 million, primarily from U.S. market data products;

•increase in cash equity trading revenues less transaction rebates, brokerage, clearance and exchange fees of $19 million;

•increase in Index Licensing and Services revenues of $10 million, and

•increase in Market Technology revenues of $10 million, partially offset by;

•a decrease in derivative trading and clearing revenues less transaction rebates, brokerage, clearance and exchange fees of $5 million.

•Operating expenses increased $40 million, or 13.7%, to $332 million in the second quarter of 2014, compared with $292 million in the same period of 2013, reflecting an increase in operating expenses of $38 million and an unfavorable impact from foreign exchange of $2 million. The increase in operational expenses was primarily due to additional overall expense associated with our acquisitions of the TR Corporate Solutions businesses in May 2013 and eSpeed in June 2013 and a loss on extinguishment of debt, partially offset by a decrease in merger and strategic initiatives expense.

•Operating expenses increased $57 million, or 9.2%, to $677 million in the first six months of 2014, compared with $620 million in the same period of 2013, reflecting an increase in operating expenses of $54 million and an unfavorable impact from foreign exchange of $3 million. The increase in operational expenses was primarily due to additional overall expense associated with our acquisitions of the TR Corporate Solutions businesses in May 2013 and eSpeed in June 2013, a loss on extinguishment of debt, and higher merger and strategic initiatives expense, partially offset by a decrease in expense related to our voluntary accommodation program and a decrease in restructuring charges.

•Interest expense increased $4 million, or 15.4%, to $30 million in the second quarter of 2014, compared with $26 million in the same period in 2013, and increased $9 million, or 18%, to $59 million in the first six months of 2014, compared with $50 million in the same period in 2013, primarily due to the issuance of our 2021 Notes in June 2013 and the issuance of our 2024 Notes in June 2014, partially offset by lower outstanding balances on our 2011 Credit Facility and the repayment of our 2.50% convertible senior notes in August 2013. See Note 8, "Debt Obligations," to the condensed consolidated financial statements for further discussion.

•In the first six months of 2013, asset impairment charges of $10 million were related to certain acquired intangible assets associated with customer relationships ($7 million) and a certain trade name ($3 million).

•Income tax provision was $61 million in the second quarter of 2014 compared with $47 million in the same period in 2013, an increase of $14 million. The income tax provision was $114 million in the first six months of 2014 compared with $64 million in the same period in 2013, an increase of $50 million. The increase in both periods was primarily due to the increase in income before income taxes and a change in the geographic mix of earnings and losses. In addition, in the second quarter of 2014, we recorded adjustments related to our 2010 through 2012 tax return liabilities which resulted in an increase to the tax provision.

These current and prior year items are discussed in more detail below.


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NASDAQ OMX's Operating Results

Key Drivers

The following table includes key drivers for our Market Services, Listing
Services, and Technology Solutions segments. In evaluating the performance of
our business, our senior management closely watches these key drivers.



                                                 Three Months Ended         Six Months Ended
                                                      June 30,                  June 30,
                                                  2014         2013         2014         2013
Market Services
Derivative Trading and Clearing
U.S. Equity Options
Total industry average daily volume (in
millions)                                           14.2         15.9         15.1         15.4
NASDAQ OMX PHLX matched market share               15.6%        18.0%        15.8%        19.3%
The NASDAQ Options Market matched market
share                                              10.6%         8.9%        10.5%         8.4%
NASDAQ OMX BX Options Market matched market
share                                               0.8%         1.0%         0.9%         1.0%
Total market share                                 27.0%        27.9%        27.2%        28.7%
NASDAQ OMX Nordic and NASDAQ OMX Baltic
Average daily volume:
Options, futures and fixed-income contracts      393,115      438,418      407,373      442,805
Finnish option contracts traded on Eurex          55,599      101,255       69,195      123,438
NASDAQ OMX Commodities
Power contracts cleared (TWh)(1)                     345          424          774          884
Cash Equity Trading
NASDAQ securities
Total average daily share volume (in
billions)                                           1.97         1.78         2.07         1.80
Matched market share executed on NASDAQ            26.6%        25.5%        26.2%        24.3%
Matched market share executed on NASDAQ OMX
BX                                                  2.4%         2.4%         2.6%         2.5%
Matched market share executed on NASDAQ OMX
PSX                                                 0.5%         0.8%         0.5%         0.9%
Market share reported to the FINRA/NASDAQ
Trade Reporting Facility                           34.6%        35.8%        34.9%        35.8%
Total market share(2)                              64.1%        64.5%        64.2%        63.5%
New York Stock Exchange, or NYSE, securities
Total average daily share volume (in
billions)                                           3.16         3.58         3.36         3.57
Matched market share executed on NASDAQ            12.6%        11.7%        13.1%        11.6%
Matched market share executed on NASDAQ OMX
BX                                                  2.6%         2.2%         2.8%         2.3%
Matched market share executed on NASDAQ OMX
PSX                                                 0.4%         0.5%         0.4%         0.5%
Market share reported to the FINRA/NASDAQ
Trade Reporting Facility                           31.2%        32.0%        31.1%        32.3%
Total market share(2)                              46.8%        46.4%        47.4%        46.7%
NYSE MKT and regional securities
Total average daily share volume (in
billions)                                           0.92         1.24         1.06         1.12
Matched market share executed on NASDAQ            12.0%        14.6%        12.1%        14.0%
Matched market share executed on NASDAQ OMX
BX                                                  2.9%         2.7%         3.1%         2.7%
Matched market share executed on NASDAQ OMX
PSX                                                 0.8%         1.4%         0.9%         1.4%
Market share reported to the FINRA/NASDAQ
Trade Reporting Facility                           32.2%        31.2%        31.4%        32.0%
Total market share(2)                              47.9%        49.9%        47.5%        50.1%
Total U.S.-listed securities
Total average daily share volume (in
billions)                                           6.05         6.60         6.49         6.49
Matched share volume (in billions)                  77.0         80.7        164.1        150.9
Matched market share executed on NASDAQ            17.1%        15.9%        17.1%        15.6%
. . .
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