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NYSE Echoes Peers' Dismal Results - Analyst Blog

By: Zacks.com
Posted: 4/30/2012 1:53:00 PM
Referenced Stocks: CFD;CME;NDAQ;NYX

NYSE Euronext Inc. 's ( NYX ) first-quarter 2012 operating earnings per share of 47 cents fell shy of the Zacks Consensus Estimate of 49 cents and were substantially lower than 68 cents recorded in the year-ago quarter. Consequently, operating net income plunged 31.6% year over year to $121 million from $177 million in the year-ago quarter.

NYSE reported GAAP net income of $87 million or 34 cents per share as compared with $155 million or 59 cents per share in the prior-year quarter. These include the impact of pre-tax merger expenses and exit costs of $31 million in the reported quarter versus $21 million in the year-ago quarter. These were partially offset by tax benefit of $42 million in the reported quarter against $61 million in the year-ago quarter.

Gross revenues plummeted 17.1% year over year to $952 million in the reported quarter. Meanwhile, net revenues (defined as gross revenues less direct transaction costs consisting of Section 31 fees, liquidity payments and routing and clearing fees) stood at $601 million, sliding 11.5% from $679 million in the prior-year quarter and the Zacks Consensus Estimate of $616 million.

The deteriorating performance was primarily due to the weak transaction and clearing fees that plunged 25.3% year over year to $609 million and market data revenue that declined 5.2% year over year to $91 million. Together, these constitute about 74% of the gross revenue.

However, these were marginally offset by technology service revenue that grew 4.9% to $86 million, listing revenue that crawled up 1.0% to $110 million, and other revenue that improved 21.7% year over year to $56 million.

Revenue from derivatives dipped 25.4% year over year to $176 million, whereas cash trading and listings' revenue slipped 7.3% year over year to $304 million. Nevertheless, revenue from information service and technology solutions climbed 4.3% year over year to $121 million.

Overall, top-line results reflected declining volumes across all global derivatives and cash trading venues. Unfavorable currency fluctuations and lower average revenue per contract added to the woes.

However, fixed operating expenses dipped 2.9% year over year to $403 million, although operating margin deteriorated to 33% from 39% in the year-ago quarter. In the reported quarter, total headcount at NYSE was 3,079, marginally up from 3,077 as of December 31, 2011 and 3,028 as of March 31, 2011. The effective tax rate was 25% as compared with 26% in the year-ago quarter.

Moreover, during the reported quarter, NYSE raised $9.8 billion in total global proceeds from 45 initial public offerings (IPOs) on its European and US markets, more than any global exchange group.

Financial Update

As of March 31, 2012, NYSE's total debt of $2.1 billion was almost at par with 2011-end. At the end of the reported quarter, cash and cash equivalents, investments and other securities were $0.4 billion while net debt was $1.7 billion. Total capital expenditure increased to $43 million from $35 million recorded in the year-ago quarter.

As a result of higher capital expenditure and slightly higher debt, NYSE's debt-to-EBITDA ratio deteriorated to 2.0x from 1.6x recorded at the end of 2011, which was the lowest level since the inception of the company, in April 2007.

Stock Repurchase Update

During the reported quarter, NYSE bought back 4.3 million shares at an average price of $29.73 per share, for about $127 million. Accordingly, the company had $425 million of stock available for repurchases at the end of March 2012. Management is also committed to complete this sanctioned share repurchase by the end of 2012. 

Last year, NYSE had resumed its $1.0 billion share buy back plan, which was sanctioned in March 2008 but was shelved in the fourth quarter of 2008, within which the company had already bought back shares worth $350 million. Additionally, NYSE bought back $100 million of stock during the fourth quarter of 2011, leaving $552 million in the current stock repurchase authorization at 2011-end.

Long-Term Growth Outlook

After the termination of its proposed merger with Deutsche Boerse, management declared a two-year target plan in April this year. This plan is projected to drive accelerated earnings growth through a blend of top-line growth initiatives, which includes diversification of growth into non-core space of information and technology.

Previously, on March 28, 2012, NYSE announced its intention of building clearinghouse - NYSE Liffe Clearing - in London that should be operational between the second and third quarters of 2013. This is a significant attempt to erect an exchange entity on a vertical clearing model.

Initially, NYSE projects to commence the clearing of derivative contracts, while the equity trades will still be cleared by LCH.Clearnet, which cleared all of the company's trades until now, for the time being. Management also aims to transfer all the derivative trades from Amsterdam, Brussels, Lisbon and Paris to London by the first quarter of 2014.

Additionally, NYSE has scheduled the European launch of a new electronic retail derivatives market in the first quarter of 2013. The company has been mulling over this business proposition for over nine months now. This retail derivative market will trade in Contracts for Difference ( CFD ) and will include products such as commodities, currency pairs, equities and indices. The CFD market is particularly designed for retail and professional clients who look for tax-efficient instruments.

Post the clearance of the deal with the respective partners and vendors, which is expected soon, NYSE expects to add other products such as oil, metals, foreign exchange, bonds and interest rates across all CFD markets in the industry. Management also elucidated that the foreign exchange CFD market itself is worth about $8 billion, thereby offering ample scope of intense expansion of other products in the retail derivative market.

While NYSE plans to launch the CFD market and kick-start NYSE Liffe Clearing, as announced last week, in 2013; the company projects to incur costs within the range of $1.627-$1.652 billion in 2012, almost in line with management's prior guidance of less than $1.666 billion. This also includes $30 million estimated for shifting its clearing business from LCH.Clearnet to its own Liffe Clearing, further validating the company's capital expenditure target of $200 million in 2012, up from $170 million in 2011.

Nevertheless, NYSE expects to generate annual cost savings worth $250 million by the end of 2014 and additional profits from the CFD market from the same year onwards. While most of the annual cost synergies are expected to be generated in the form of intense expense management, $90 million worth of saving is projected from organizational efficiencies that include centralization of operations and expansion of a shared service model.

Another $90 million of cost synergies is expected to be achieved by giving up its legacy systems and organizing its technology across the business platform. NYSE also anticipates generating another $70 million of savings by narrowing down its business portfolio as well as self-focusing on core operations and services.

Through these business-building and cost-cutting efforts, the company already expects to recognize 25% of the savings by the end of this year and another 60% by next year-end.

Overall, NYSE looks forward to a disciplined cost management and healthy capital deployment. While the outlook for trading volumes and currencies remains cautious in the near term, the company believes a modest improvement in the operating environment should initiate progress.

Dividend Update

Concurrently, the board of NYSE declared a regular quarterly dividend of 30 cents per share, which is payable on June 29, 2012, to the shareholders of record as on June 15, 2012.

Furthermore, on March 30, 2012, NYSE had paid a quarterly cash dividend of 30 cents to shareholders of record as on March 15, 2012.

Peer Take

Last week, a couple of NYSE's arch-rivals reported their first quarter results. NASDAQ OMX Group Inc. ( NDAQ ) reported its first-quarter 2012 operating earnings per share of 61 cents, which came in a couple of cents below the Zacks Consensus Estimate. However, results were in line with the prior-year quarter's earnings.

Besides, CME Group Inc. ( CME ) reported first-quarter 2012 operating earnings of $4.02 per share, which were at par with the Zacks Consensus Estimate but lagged the earnings of $4.36 reported in the year-ago quarter.

It appeared that the dominant players of the exchange industry have been marred by weak volumes and sluggish clearing and transaction services, which also faltered the top line for both the peers of NYSE.

Currently, NYSE carries a Zacks Rank #3, implying a short-term Hold rating and a long-term Neutral recommendation.


 
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