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NYSE Falters on Top Line Plunge - Analyst Blog
11/6/2012 1:33:00 PM
NYSE Euronext Inc. 's ( NYX ) third-quarter 2012 operating earnings per share of 44 cents were 3 cents higher than the Zacks Consensus Estimate of 41 cents but were significantly lower than 71 cents recorded in the year-ago quarter. Consequently, operating net income nosedived 41.9% year over year to $108 million from $186 million in the year-ago quarter.
NYSE reported GAAP net income of $124 million or 44 cents per share compared with $200 million or 76 cents per share in the prior-year quarter. These primarily include the impact of pre-tax merger expenses and exit costs of $18 million in the reported quarter versus $29 million in the year-ago quarter.
These were partially offset by tax benefit of $30 million in the reported quarter against $64 million in the year-ago quarter. The reduction of tax rate in UK to 24% from 25% added 2 cents per share to the earnings.
Top Line Loses Pace
Gross revenues plummeted 28.3% year over year to $902 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 $559 million, sliding 20.6% from $704 million in the prior-year quarter. It also fell short of the Zacks Consensus Estimate of $570 million.
The deteriorating performance was primarily due to the poor transaction and clearing fees that plunged 36.9% year over year to $570 million as well as market data revenue that declined 8.6% year over year to $85 million. Together, these constitute about 73% of the gross revenue.
While listing revenue remained almost unchanged at $112 million from $113 million in the year-ago period, technology service revenue deteriorated 12.0% to $81 million and other revenue slipped 3.6% year over year to $54 million.
Revenue from derivatives reduced 27.4% year over year to $164 million, whereas cash trading and listings' revenue decreased 20.1% year over year to $282 million. Moreover, revenue from information service and technology solutions dipped 9.6% year over year to $113 million.
Overall, top-line results reflected drastic decline in volumes across all global derivatives and cash trading venues. Alongside, unfavorable currency fluctuations and lower average revenue per contract added to the woes. The financial services technology sales are also experiencing a challenging period.
Expenses in Control
However, fixed operating expenses dipped 6.7% year over year to $388 million, although, operating margin deteriorated to 31% from 41% recorded in the year-ago quarter. In the reported quarter, total headcount at NYSE was 3,061, marginally down from 3,077 as of December 31, 2011 and 3,074 as of September 30, 2012. The effective tax rate was 21% as compared with 24.2% in the year-ago quarter.
Additionally, during the reported quarter, NYSE raised $27.0 billion in total global proceeds from 76 initial public offerings (IPOs) on its European and US markets, more than any global exchange group. This came in lower than the prior-year period and prior quarter's level.
As of September 30, 2012, NYSE's total debt of $2.5 billion was higher than $2.1 billion at 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 $2.1 billion. However, total capital expenditure lowered to $41 million from $49 million recorded in the year-ago quarter.
As a result of higher debt and capital expenditure, NYSE's debt-to-EBITDA ratio deteriorated to 2.4x from 1.6x recorded at the end of 2011, which was the lowest level since the inception of this organization in April 2007.
On October 5, 2012, NYSE raised $850 million from the sale of notes that are slated to mature in October 2017 and bear an interest of 2%. The net proceeds were utilized to pre-redeem $336 million of the outstanding $750 million 4.80% notes that were due in June 2013, €80 million of the €1 billion 5.375% notes due in June 2015, reduction in outstanding commercial paper and for other business operations.
Management believes this debt-refinancing will help save an annualized interest expense of $15 million in 2013 and $24 million in 2014.
Stock Repurchase Update
During the reported quarter, NYSE bought back 4.7 million shares at an average price of $25.46 per share for about $120 million, thus buying back 15.9 million shares for $424 million in the first nine months of 2012. Accordingly, the company had $128 million of stock available for repurchases at the end of September 2012. Management is also committed to complete this sanctioned $1.0 billion share repurchase program by the end of 2012.
Last year, NYSE had resumed its $1.0 billion share buyback plan, which was sanctioned in March 2008. However, this plan was shelved in the fourth quarter of 2008, within which the company had already bought back shares worth $350 million. Additionally, NYSE bought back worth $100 million of stock during the fourth quarter of 2011, leaving $552 million in the current stock repurchase authorization at 2011-end.
While management laid out a detailed long-term growth plan in the first quarter of 2012, NYSE believes that its ongoing strategic initiatives coupled with its cost reduction plan and lower share count from stock repurchases should aid in achieving higher earnings growth in 2013 and beyond. Effective tax rate is expected to be 24% in 2012.
Concurrently, the board of NYSE declared a regular quarterly dividend of 30 cents per share, which is payable on December 28, 2012, to the shareholders of record as on December 14, 2012.
Furthermore, on September 28, 2012, NYSE had paid a quarterly cash dividend of 30 cents to shareholders of record as on September 14, 2012.
Most of NYSE's peers have reported their third quarter results in the last fortnight. NASDAQ OMX Group Inc. ( NDAQ ) reported its third quarter operating earnings per share of 62 cents, which surpassed the Zacks Consensus Estimate by a couple of cents. However, it fell shy of the prior-year quarter's earnings, of 67 cents, by a nickel based on weak volumes across businesses.
Further, CME Group Inc. ( CME ) reported third-quarter 2012 operating earnings per share of 70 cents, breezing past the Zacks Consensus Estimate by a penny but significantly lagging behind the year-ago quarter's earnings of 95 cents.
It appears 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. Hence, the exchange industry performers are focusing high on expense management in order to sustain earnings growth.
Currently, NYSE carries a Zacks Rank #4, implying a short-term Sell rating although its long-term recommendation remains Underperform.
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