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NYSE Beats Est, Plunges YoY

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NYSE Euronext Inc.’s second-quarter 2012 operating earnings per share of 51 cents were a penny higher than the Zacks Consensus Estimate of 50 cents but were lower than 61 cents recorded in the year-ago quarter. Operating net income plunged 20% year over year to $128 million from $160 million in the year-ago quarter.

NYSE reported GAAP net income of $125 million or 49 cents per share compared with $154 million or 59 cents per share in the prior-year quarter. These primarily include the impact of pre-tax merger expenses and exit costs of $12 million in the reported quarter versus $31 million in the year-ago quarter, along with loss from disposal activities of $2 million. These were partially offset by tax benefit of $45 million in the reported quarter against $42 million in the year-ago quarter.

Gross revenues plummeted 9.7% year over year to $986 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 $602 million, sliding 8.9% from $661 million in the prior-year quarter. It also came lower than the Zacks Consensus Estimate of $606 million.

The deteriorating performance was primarily due to the poor transaction and clearing fees that fell 12.5% year over year to $649 million as well as market data revenue that declined 5.4% year over year to $87 million. Together, these constitute about 75% of the gross revenue.

While listing revenue remained unchanged at $112 million, technology service revenue also slipped 2.2% to $87 million and other revenue that deteriorated 10.5% year over year to $51 million.

Revenue from derivatives reduced 14.6% year over year to $182 million, whereas cash trading and listings’ revenue dipped 8.3% year over year to $300 million. Moreover, revenue from information service and technology solutions edged down 2.5% year over year to $119 million.

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

However, fixed operating expenses dipped 5.5% year over year to $396 million, although operating margin deteriorated to 34% from 37% recorded in the year-ago quarter. In the reported quarter, total headcount at NYSE was 3,062, marginally down from 3,077 as of December 31, 2011 but up from 2,988 as of June 30, 2011. The effective tax rate was 25% as compared with 26% in the year-ago quarter.

Additionally, during the reported quarter, NYSE raised $7.3 billion in total global proceeds from 21 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 level.

Financial Update

As of June 30, 2012, NYSE’s total debt of $2.3 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 $1.9 billion. Total capital expenditures increased to $41 million from $31 million recorded in the year-ago quarter.

As a result of higher capital expenditure and debt, NYSE’s debt-to-EBITDA ratio deteriorated to 2.1x from 1.6x recorded at the end of 2011, which was the lowest level since the inception of the organization in April 2007.

During the reported quarter, NYSE entered into a three-year senior unsecured credit facility agreement worth $1 billion, scheduled to mature on June 15, 2015. This financing replaces NYSE's existing $1.2 billion credit facility, which was entered into in 2007 and scheduled to mature on July 31, 2012. The new revolving bank facility is projected to be utilized for general corporate purposes.

Stock Repurchase Update

During the reported quarter, NYSE bought back 6.9 million shares at an average price of $25.60 per share for about $177 million, thus buying back 11.0 million shares for $304 million in the first half of 2012. Accordingly, the company had $248 million of stock available for repurchases at the end of June 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 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.

Long-Term Growth Outlook

While management laid out a detailed long-term growth plan in the previous quarter, 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.

Dividend Update

Concurrently, the board of NYSE declared a regular quarterly dividend of 30 cents per share, which is payable on September 28, 2012, to the shareholders of record as on September 14, 2012.

Furthermore, on June 29, 2012, NYSE had paid a quarterly cash dividend of 30 cents to shareholders of record as on June 15, 2012.

Peer Take

Last week, a couple of NYSE’s rivals reported their first quarter results. NASDAQ OMX Group Inc. (NDAQ - Free Report) reported its second quarter operating earnings per share of 64 cents, surpassing the Zacks Consensus Estimate of 60 cents and the prior-year quarter’s earnings of 62 cents a share.

Further, CME Group Inc. (CME - Free Report) reported second-quarter 2012 operating earnings per share of 89 cents, outpacing the Zacks Consensus Estimate of 82 cents and the year-ago quarter’s earnings of 88 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. However, the exchange industry players are focusing high on expense management in order to sustain earnings growth.

Currently, NYSE carries a Zacks Rank #3, implying a short-term Hold rating although its long-term recommendation remains Underperform.

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