Note: This report contains substantially new material.Subsequent reports will have changes highlighted.
Reason for Report:News Update
Prev. Ed.: 4Q12 & FY12 Earnings Update, Mar 28, 2013.
Brokers’ Recommendation: Positive: 72.7% (8 firms); Neutral: 27.3% (3); Negative: 0% (0) Prev. Ed.:7; 3; 0
Brokers’ Target Price: $32.55 (↑$1.88 from the last edition; 11 firms) Brokers’ Avg.Expected Return: -0.5%
A flash update on Nasdaq Closes Thomson Reuters Deal was done on Jun 4, 2013.
Portfolio Manager Executive Summary
The Nasdaq OMX Group, Inc. (NDAQ) provides trading, exchange technology, and public company services worldwide. It offers trading across various asset classes, including equities, derivatives, debt, commodities, structured products, and exchange traded funds; capital formation solutions; financial services and exchanges technology; market data products; and financial indexes. The company provides various capital raising solutions to companies. The Nasdaq OMX Group supports operations of approximately 70 exchanges, clearing organizations, and central securities depositories in 50 countries.
While 73% of the firms in the Digest group covering Nasdaq had a bullish outlook, the remaining 27% rated the stock Neutral. None of the firms had a bearish outlook on the company. All the 11 firms covering the stock provided target prices, ranging from $27.00 (17.5% downside from current price) to $39.00 (19.2% upside from the current price), the average being $32.55 (0.7% downside from current price).
Buy or equivalent outlook – 8/11 or 72.7% – The bullish firms favor the company’s conservative outlook and laud its defensive business model that can surpass expectations when volumes are low in an unfavorable climate. They are of the opinion that the company’s strong cash position will allow share buybacks over the next few quarters and its improving financials will help pay off most of the debt obligations. These firms believe that Nasdaq will capitalize on its non-transaction business and focus on global expansion based on the recent acquisitions.
According to these firms, the initiative by the company to pay dividend will attract a significant number of new investors. These firms opine that even though the company does not look attractive in the short term due to lack of performance boosting catalysts, its long-term perspectives look strong and can be relied upon. Although the company is lagging behind the peer group currently, these firms are optimistic that the company will be able to withstand its headwinds with the recovering macro environment.
Cautious (Neutral or equivalent outlook) – 3/11 or 27.3% – Many of the firms with a cautious outlook opine that the company continues to suffer from an eroding market share owing to the volatile market conditions, unfavorable foreign currency fluctuations and market competition. The firms are skeptical about the company’s shares repurchase initiative because it has to tread a long path to completely recover from the over hangs of lawsuits and litigations. It is advisable for the company to strengthen bonds with its shareholders and grow organically even though the European segment looks challenging. A sluggish volumes environment amid lawsuits further limits any upside in the near term.
Jul 3, 2013
Overview
The Nasdaq OMX Group Inc. (NDAQ) is the world's largest exchange company. It delivers trading, exchange technology, and public company services across six continents with over 3,400 listed companies. The company offers multiple capital raising solutions to companies worldwide, including its U.S. listing market, the OMX Nordic Exchange, Nasdaq OMX Baltic, Nasdaq OMX First North, and the U.S. 144A sector. The company offers trading across multiple asset classes including equities, derivatives, debt, commodities, structured products and ETFs.
Nasdaq OMX technology supports the operations of over 70 exchanges, clearing organizations, and central securities depositories in more than 50 countries. Nasdaq OMX Nordic and Nasdaq OMX Baltic are not legal entities, but describe the common offering from Nasdaq OMX exchanges in Helsinki, Copenhagen, Stockholm, Iceland, Tallinn, Riga and Vilnius.
The company was founded in 1971. Formerly known as The Nasdaq Stock Market, Inc., it changed its name to The Nasdaq OMX Group, Inc. in Feb 2008. The Nasdaq OMX Group is based in New York. For more information on the company, please visit its website at
The firms identified the following key issues in evaluating the investment merits of Nasdaq:
Key Positive Arguments / Key Negative Arguments- The latest relevant acquisitions in the non-transaction space bodes well for the company; are expected to provide modest cost savings and revenue synergies, while also help maintain market position.
- Dividend initiation and continued buy back of shares boost shareholders value and reinstate investors’ confidence.
- The company’s excellent management skills add to the growth of the company in the long run by reducing expenditures and increasing its operational efficiency.
- Competition from NYSE remains strong amid low transactional volumes environment.
- Adverse changes in market and economic environment could affect Nasdaq’s trading volume negatively and keep new listings out of the market.
- Lawsuits continue to be a major concern for the company.
- Inability to overcome the technical glitches continue to tarnish the company’s image.
Note: The company’s fiscal year ends on Dec 31; fiscal references coincide with the calendar year.
Jul 3, 2013
Long-Term Growth
The Zacks Digest model has pegged Nasdaq’s long-term growth rate at 11.7%.
According to the firms, Nasdaq is benefiting from its strong technology position and continues to utilize it for improvising new products including derivatives. Amid the sluggish trading volumes environment, Nasdaq is taking proactive steps to lay foundation for long-term growth. This is reflected by the launch of third retail equity stock options trading platform – BX Options – that is expected to attract retail investors. Further, the launch of MSCI Emerging Markets and MSCI EAFE Index Options are expected to provide competitive advantage to the exchange, as these are the first and only cash-settled options based on the EEMIQ and EAFEQ indices.
Along with these initiatives, management also delivered its planned synergies, extending its history of impressive execution on M&A. In 2012, Nasdaq acquired a number of lucrative assets including BWise, NOS and the index business of Mergent, Inc. along with its Indxis. Moreover, the latest acquisitions of eSpeed and Thomson Reuters' Investor Relations, Public Relations and Multimedia Solutions businesses seeks to generate growth opportunities through international expansion as well as through escalation in technology and data revenue. The acquisition is estimated to shore up Nasdaq’s revenue from corporate solutions services to about $330 million from the current $97 million. This reflects a more than three-fold increase in revenue, accounting for more than 7% of total revenue for the company currently. Nasdaq further aims to accelerate its non-transaction revenue base, which already represents over 70% of the company's total revenue.
The firms believe that the expansion of Nasdaq’s global footprint and asset class diversification support strong EPS growth projected for the years to come. An aggressive management team has positioned Nasdaq well to offensively attack large liquidity pools (e.g. NYSE and pan-European) and gain a competitive edge. They believe, longer term, management will continue to invest on technology upgrades and progress on strategic initiatives to diversify into new growth areas (X-stream, INET and SMARTS, NordPool, etc.). Moreover, Nasdaq’s launch of a new interest rate derivative trading platform Nasdaq – NLX in late 2012 and the establishment of Nasdaq Private Market also elucidates its strategic move to attain competitive edge in Europe. These organic efforts for long-term growth will likely pave the way for healthy capital deployment in order to drive substantial shareholder value in the years ahead.
Jul 3, 2013
Target Price/Valuation
Rating DistributionPositive Ratings / 72.7%↑
Neutral Ratings / 27.3%↓
Negative Ratings / 0.0%
Maximum Target Price / $39.00↑
Minimum Target Price / $27.00
Average Target Price / $32.55↑
No. of Analysts with Target Price/Total / 11↑/11↓
Risks to the target price include peer pressure, regulatory issue, earnings being dependant on volumes being traded, market share retrenchment, higher-than-expected expenses, unstable conditions of the market and concentration of product.
Recent Events
On Jul 1, 2013, Nasdaq announced the culmination of the acquisition of BGC Partners Inc.’s electronic trading platform for the benchmark U.S. Treasury data products – eSpeed. The deal was agreed in Apr 2013 and was valued at $1.23 billion.
Excluding transaction costs, the acquisition is projected to deliver incremental earnings and lucrative returns on capital within its first year.The benchmark U.S. Treasuries are globally one of the most liquid cash markets and have a daily turnover of over $500 billion.
Meanwhile, the eSpeed platform will be integrated into the Nasdaq’s Transaction Services business to enhance the OTC market and to take advantage of the growing demand for diverse instruments on an independent market. On the other hand, the U.S. Treasury data products will be integrated into the company’s Global Information Services, further enhancing its data product offering.
On Jun 3, 2013, Nasdaq announced the culmination of the acquisition of the corporate management arm of Thomson Reuters well within the scheduled expectation of closure by the first half of 2013.
Announced in Dec 2012, the deal was inked for $390 million, whereby the company had agreed to obtain the Public Relations, Investor Relations and Multimedia Solutions businesses of Thomson Reuters. These three businesses will now be amalgamated with Nasdaq’s Global Technology Solutions operations.
On Apr 24, 2013, Nasdaq announced its 1Q13 earnings results. Operating EPS of $0.64 modestly surpassed the Zacks Consensus Estimate as well as the prior-year quarter earnings of $0.61.
GAAP net income was $42 million or $0.25 per share, quite lower than $85 million or $0.48 per share recorded in the year-ago quarter. Total net exchange revenues edged up 1% year over year to $418 million, but lagged the Zacks Consensus Estimate of $426 million.
Guidance
Management revealed core operating expense projection of $910–930 million. Additionally, the company expects approximately $50–60 million of incremental expenses from new initiative spending and $12 million from certain corporate solution expenses. Including these charges, total operating expenses are projected within $972–1,002 million. However, the cost guidance excludes a restructuring expense related to the latest new cost reduction plan and expenses related to the acquisitions of eSpeed and the corporate arm of Thomson Reuters. Tax rate was previously anticipated in the band of 34–37%.
Dividend
Concurrently, the board declared a cash dividend of $0.13 per share, which was paid on Jun 28, 2013 to the shareholders of record as on Jun 14, 2013.
Revenue
During 1Q13, total net exchange revenues inched up 1% y/y to $418 million, but fell short of the Zacks Consensus Estimate of $426 million. On a constant currency basis and excluding acquisitions, revenue declined 2% y/y in 1Q13.
The marginal y/y growth was primarily attributable to improved information and technology revenues. However, revenue from market services and listings continue to witness weakness. Additionally, cash equities and derivatives continued to be feeble based on lower industry trading volumes, rate per contract and market share, although market data revenue witnessed improvement.
Market Services
The company reported Market Services net exchange revenues of $182 million in 1Q13, deteriorating 4.2% y/y, based on slashed revenue, which was partially offset by lower cost of revenues.
- Net cash equity trading revenue was $45 million in 1Q13, down 15.1% y/y. The decline was primarily attributable to lower trading activity and volumes in both the U.S. and European equity markets.
- Derivatives trading and clearing revenues were $74 million in 1Q13, marginally down from $75 million in 1Q12. The improvement was primarily due to 5% y/y hike in derivative revenues from the U.S., partially offset by European derivative and clearing revenues.
- Access and Broker Services revenues stood at $63 million in 1Q13, slightly up from $63 million in 1Q12. Growth was driven by the increase in demand for such services and the uptake of new products including 40G connectivity.
Listing Services
Listing Services revenue were $55 million in 1Q13, marginally down from $56 million in 1Q12. Higher revenue from Europe was more than offset by lower revenue from the U.S. markets.
Information Services
Nasdaq reported total revenue from Information Services of $108 million, up 5.9% y/y.
- Market Data revenue was $91 million, increasing 4.6% y/y, driven by higher sales in the U.S. market data and index data products. European market data products remained flat y/y.
- Index Licensing and Service revenue increased 13.3% y/y to $17 million, driven by growth in assets from licensed products along with contribution from the acquisition of Mergent Inc.
Technology Solutions
Revenue from Technology Solutions was $73 million in 1Q13, up 10.6% y/y.
- Corporate Solutions revenues increased 14.3% y/y to $24 million. The upside was primarily led by improved results from Shareholder.com, GlobeNewswire and Directors Desk products.
- Total Market Technology revenues stood at $49 million, up 8.9% y/y, driven by higher revenue from BWise acquisition although order intakes declined.
During 1Q13, Nasdaq’s order intakes plunged to $19 million from $55 million in 1Q12. Conversely, total order value (the value of orders signed that have not been recognized as revenue) improved to $524 million from $496 million in the prior-year quarter. New listings totaled 37 against 46 in the year-ago quarter.
Outlook
Most firms are bullish on Nasdaq’s acquisition of Thompson Reuters' corporate solutions related businesses, which is projected to add about $250 million in annualized revenues and generate double-digit operating margins in 2013. Overall, the high-recurring revenue generation structure of Nasdaq as well as the company’s efforts to shift away from transaction-based revenue is likely to bring in some consistency in the top-line growth in the upcoming quarters.Moreover, the partnership with The Order Machine (TOM) and SharesPost is expected to accelerate business expansion intoEurope.
Margins
Operating margin stood at 43% in 1Q13, lower than 44% in 1Q12, led by higher expenses. Meanwhile, non-GAAP operating expensesupped 2.2% y/y at $237 million. On a GAAP basis, total operating expensessurged 35% to $328 million from $243 million in 1Q12, primarily spurred by higher operating costs and expense related to voluntary accommodation program.
GAAP operating income in 1Q13 was $90 million, decreasing 47.4% from $171 million in 1Q12. This included restructuring charges of $9 million, merger and strategic initiatives charges of $8 million, regulatory charges of $7 million and expenses against voluntary accommodation program of $62 million. Accordingly,total operating income, on a non-GAAP basis, slipped 0.5% y/y to $181 million.
Interest expense stood at $24 million in 1Q13, flat y/y, while interest income recorded in 1Q13 was $3 million, up from $2 million in 1Q12.
Outlook
For 2013, management projected core operating expense of $910–$930 million.Additionally, the company expects approximately $50–60 million of incremental expenses from new initiative spending and $12 million from certain corporate solution expenses. Including these charges, total operating expenses are projected within $972–1,002 million.
However, the cost guidance excludes a restructuring expense related to the latest new cost reduction plan and expenses related to the acquisitions of eSpeed and the corporate arm of Thomson Reuters.
Management projects tax rate in the range of 34%–37% for 2013.
Earnings per Share
Operating EPS stood at $0.64 in 1Q13, exceeding the Zacks Consensus Estimate as well as the year-ago quarter’s EPS of $0.61. Slightly improved top line and lower non-GAAP operating expenses primarily drove the upside.
Nasdaq’s GAAP net incomestood at $42 million or $0.25 per share in 1Q13, significantly lower than $85 million or $0.48 per share recorded in 1Q12. Results in the reported quarter included net after-tax charge of $66 million or $0.39 per share, primarily related to voluntary accommodation program, asset impairments, special legal expenses, reserve for SEC issue along with merger and strategic initiatives, restructuring and other items partially offset by a tax refund.
Excluding non-recurring items, operating net incomewas $108 million that came in line when compared with 1Q12 figure.
Outlook
The latest acquisitions of eSpeed and Thomson Reuters are expected to generate incremental earnings within the first year of their culmination.
Most of the bullish firms increased their estimates for 2013 and 2014 to reflect the earnings expansion from the latest acquisitions. Moreover, the trend in volumes in 2Q13 has been positive. The firms believe that if the outcome of the latest events is as expected, these should boost the operating leverage of Nasdaq.
The company’s diversified revenue stream and will also provide firmness to the bottom line once the trading activity rebounds. Moreover, a continued effort to invest in core businesses and reduce share count while returning capital to shareholders raises optimism for higher EPS.
However, some cautious firms have reduced or kept their EPS estimates intact for the time being based on higher tax rate and increased competitive pressure, which should more than mitigate the fair cost guidance, thereby adding to the risk and ambiguity. The expenses related to the acquisition may also hinder margin growth.
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