NYSE Beats but EPS Falls - Analyst Blog

NYSE Euronext Inc.'s (NYX) third quarter operating earnings per share of 46 cents came in three pennies ahead of the Zacks Consensus Estimate of 43 cents. However, earnings were substantially behind the 53 cents recorded in the year-ago quarter and 64 cents recorded in the prior quarter.

Results reflect weak transaction and clearing volumes, particularly in the European cash and derivatives trading that primarily lowered the top line. Both New York Portfolio Clearing (NYPC) and NYSE Liffe U.S. are currently undergoing loss. However, the company benefited from various cost reduction programs.

These programs that helped decline the fixed expenses by 6% year over year. It aided in increasing efficiency of the new initiatives taken to launch new data centers as part of its long term strategy. Nevertheless, operating net income decreased to $121 million compared to $138 million in the year-ago quarter.

NYSE reported GAAP net income of $128 million or 49 cents per share as compared with $125 million or 48 cents per share in the prior year quarter. These include the impact of pre-tax merger expenses and exit costs of $25 million and a $21 million deferred tax benefit related to the reduction of the UK corporate tax rate in the reported quarter. The year-ago quarter includes $8 million of pre-tax merger expenses and exit costs, and a $4 million net gain from disposal activities.

Gross revenues declined by 9.5% year over year in the reported quarter of 2010. Besides, net revenues (defined as gross revenues less direct transaction costs consisting of Section 31 fees, liquidity payments and routing and clearing fees) were $599 million, down 4% from $621 million in the prior year quarter.

However, net revenues were marginally above the Zacks Consensus Estimate of $596 million. On a constant currency basis, NYSE's net revenue decreased 25% over the prior year quarter.

Revenues from information service and technology solutions (up 20% year over year) was partially offset by decline in derivatives (down 5% year over year) and in cash trading and listings (down 12% year over year) due to price reductions and lower trading volumes.

Fixed operating expenses decreased modestly to $419 million from $426 million in the prior year quarter. The effective tax rate was 24.2%, within management's guidance for 2010. At September 30, 2010, total headcount of NYSE was 3,030 down 10% and 11% from December 31, 2009 and September 30, 2009, respectively.

At September 30, 2010, NYSE's total debt declined $0.2 billion from December 31, 2009 to $2.5 billion and consists of $2.1 billion in long-term debt and $0.4 billion in short-term debt. At the end of the reported quarter, cash and cash equivalents, investments and other securities were $0.4 billion and net debt was $2.1 billion.

Outlook for 2010

Concurrent with the earnings, NYSE management revised its guidance for 2010. The company upped its fixed operating expenses projection to the range of $1.707-$1.749 billion, adjusted for currency fluctuations. The effective tax rate is projected to be 26.5% for the remainder of 2010.

Dividend Update

Similarly, the board of NYSE declared a quarterly cash dividend of 30 cents for the fourth quarter of 2010, which will be paid on December 31, 2010 to shareholders of record as on December 15, 2010.

Our Take

NYSE's rival company Nasdaq OMX Group Inc. (NDAQ) reported operating earnings per share of 50 cents on October 29, surpassing the Zacks Consensus Estimate of 47 cents and prior-year quarter earnings of 42 cents.

NYSE's disciplined fixed expense control and de-leveraging of the balance sheet through debt reduction is expected to give a big boost to the company's long-term strategies of developing clearinghouses in London and Paris by the end of 2012. While the NYPC is expected to be operational from first quarter of 2011, new data centers were launched in U.S. and Europe. Through these long-term strategies, NYSE is not only working vigorously to lower its business risk but also to expand and strengthen its competitive position globally. However, increased competition, weak volumes and product pricing along with government regulations continue to pose risk on the market share and the operating leverage of the company.