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NYSE Plunges YoY on Poor Top Line

Zacks Equity Research

NYSE Euronext Inc.’s (NYX) fourth-quarter 2012 operating earnings per share of 43 cents comfortably surpassed the Zacks Consensus Estimate of 39 cents but were significantly lower than 50 cents recorded in the year-ago quarter. Consequently, operating net income decreased 19.2% year over year to $105 million from $130 million in the year-ago quarter.

NYSE reported GAAP net income of $45 million or 12 cents per share compared with $92 million or 43 cents per share in the prior-year quarter. These primarily included the impact of pre-tax merger expenses and exit costs, debt refinancing costs of $97 million in the reported quarter versus $88 million in the year-ago quarter.

For full-year 2012, NYSE reported operating earnings per share of $1.84 against $2.48 in 2011, although it marginally exceeded the Zacks Consensus Estimate of $1.80. Operating net income also plunged 29.2% year over year to $462 million. Including post-tax merger, exit, debt refinancing and BlueNext tax settlement costs of $160 million versus $156 million in 2011, GAAP net income stood at $470 million or $1.39 per share in 2012 compared with $725 million or $2.36 per share in 2011.

Top Line Bottoms Out

Gross revenues plummeted 13.8% year over year to $909 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 $562 million, sliding 10.5% from $628 million in the prior-year quarter. However, it breezed past the Zacks Consensus Estimate of $557 million.

The deteriorating performance was primarily due to the poor transaction and clearing fees that plunged 19.4% year over year to $565 million as well as market data revenue that declined 5.6% year over year to $85 million. Together, these constitute about 72% of the gross revenue.

While listing revenue grew marginally to $114 million from $112 million in the year-ago period and other revenue improved to $58 million from $56 million, technology service revenue deteriorated 8.4% to $87 million.

Revenue from derivatives reduced 14.0% year over year to $160 million, whereas cash trading and listings’ revenue decreased 10.5% year over year to $282 million. Moreover, revenue from information service and technology solutions dipped 5.5% year over year to $120 million.

For full-year 2012, gross revenues plunged 17.6% year over year to $3.75 billion, whereas net revenues decreased 13.0% over 2011 to $2.32 billion, although it came in line with the Zacks Consensus Estimate. Overall, top-line results reflected drastic decline in volumes across all global derivatives and cash trading venues.

Unfavorable currency fluctuations and lower average revenue per contract added to the woes. The financial services technology sales are also experiencing a challenging period.

Additionally, during 2012, NYSE raised $37.0 billion in total global proceeds from 120 initial public offerings (IPOs) on its European and US markets, more than any global exchange group. This was also higher than prior-year level.

Expenses in Control

However, fixed operating expenses dipped 6.0% year over year to $392 million, although, operating margin deteriorated to 30% from 34% recorded in the year-ago quarter. Total operating expenses reduced 5.0% over 2011 to $1.58 billion in full-year 2012. Yet, operating margin radically deteriorated to 32% from 38% in 2011. The effective tax rate was 24% in 2012 as compared with 26% in 2011.

For the full-year 2012, NYSE generated savings worth $115 million from Project 14, which represented 46% of the total $250 million estimated to be saved by the end of 2014. This surpassed the prior target of achieving 25% or $63 million in savings in full-year 2012.

NYSE exited 2012 with a total headcount of 3,079, marginally up from 3,077 as of December 31, 2011 and 3,061 as of September 30, 2012.

Financial Update

As of December 31, 2012, NYSE’s total debt of $2.5 billion was higher than $2.1 billion at 2011-end. Total debt includes $0.4 billion remaining from the 4.8% June 2013 notes, which is slated to be retired in the second quarter of 2013.

At the end of 2012, cash and cash equivalents, investments and other securities were $0.4 billion while net debt was $2.1 billion. However, total capital expenditure increased to $66 million from $54 million recorded in the year-ago quarter. The company expended $191 million in 2011, up 12.4% from $170 million in 2011.

As a result of higher debt and capital expenditure, NYSE’s debt-to-EBITDA ratio deteriorated to 2.5x at 2012-end from 1.6x recorded at the end of 2011, which was the lowest level since the inception of this organisation 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.

Stock Repurchase Update

During the reported quarter, NYSE bought back 1.1 million shares at an average price of $24.67 per share for about $27.1 million, thus buying back 17.0 million shares for $451 million in 2012. Accordingly, the company had about $100 million of stock available for repurchases at the end of 2012.

In 2011, 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.

Guidance for 2013

Management estimated total operating expenses to be around $1.525 billion in 2013. Including the savings from Project 14, expenses are expected to about $1.465 billion.

The debt-refinancing executed in October 2012 will also help save an annualized interest expense of $15 million in 2013 and $24 million in 2014. Subsequently, NYSE anticipates debt-to-EBITDA ratio to improve to 2.0x in 2013 from 2.5x in 2012. Meanwhile, effective tax rate is expected to be between 24% and 25%.

Additionally, NYSE is progressing well with its proposed merger with IntercontinentalExchange Inc. (ICE), announced in December 2012. However, the company now expects the deal to close by the second half of 2013.

Total capital expenditures are expected to be approximately $150 million in 2013, lower than 2012 levels. As a result of leveraging ICE's existing infrastructure, the cost of transitioning Liffe derivatives to ICE Clear is estimated to be significantly less than what NYSE had projected to spend on its own clearing initiative.

Dividend Update

Concurrently, the board of NYSE declared a regular quarterly dividend of 30 cents per share, which is payable on March 28, 2013, to the shareholders of record as on March 14, 2013.

Furthermore, on December 28, 2012, NYSE paid a quarterly cash dividend of 30 cents to shareholders of record as on December 14, 2012.


While both NYSE and IntercontinentalExchange carry a Zacks Rank #3 (Hold), other strong performers in the financial sector include Euronet Worlwide Inc. (EEFT) and Moody’s Corp. (MCO), both of which carry a Zacks Rank #1 (Strong Buy).

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