NYSE Euronext’s Earnings Hit By Market Uncertainty

NYSE Euronext (NYSE:NYX) reported earnings for the first quarter on Monday. The company reported net income of was $87 million, or $0.34 per diluted share. ^[1] The fall was largely due to expenses incurred due to its failed merger with German exchange operator Deutsche Boerse AG. The company’s earnings were also impacted by the fall in trading volumes fueled by uncertainty in the American markets amidst growing fears of a second recession and the European debt crisis. NYSE Euronext is the largest exchange in the world and competes with Nasdaq OMX (NASDAQ:NDAQ), CME Group (NASDAQ:CME).

See our full analysis of the NYSE Euronext stock here

Decline in Trading Volumes

Cash Trading and Listings are major source of revenue for NYSE Euronext, accounting for nearly half (46%) of our price estimate for its stock. NYSE saw a 23% decline in U.S. cash trading as the company reported an average of 1.8 billion shares traded per day. It saw similar weakness in Europe with the weakening Euro negatively impacting revenue, coupled with a decline in cash trading volumes over the last year, from 1.8 million to 1.6 million.

Failed Merger with German Exchange

Pre-tax merger expenses and exit costs of $31 million and $21 million respectively were incurred by NYSE Euronext this quarter, of which $16 million were attributed to the failure of its proposed merger with Deutsche Boerse AG. The deal was blocked in February by the European Commission after months of speculation citing that the deal could create a monopoly in the exchanges’ trading of derivatives, particularly in Europe. Derivative trading, which accounts for 41% of our price estimate for NYSE held up reasonably well in Europe, and the company expects trade to resume at a normal growth rate forward.

The NYSE plans to enhance cost efficiency and emphasize strategic investment as it targets growth through its initiative called Project 14. This project will also focus on increased revenue generation through the company’s technology platforms by optimizing performance. Information Services and Technology Solutions segment, which accounts for 13% of our price estimate, showed positive growth with an increase of $5 million or 4% from the first quarter of last year.

The company remains confident of this sectors performance, going forward despite the challenging environment. This sector is likely to be boosted by the opening of a liquidity center in Tokyo. (See NYSE Opens Liquidity Center In Tokyo, Targets $1 Billion in Technology Solutions Revenues.)

Our price estimate for NYSE Euronext’s stock is $34, 25% above the current market price.

Understand What Drives a Stock at Trefis

1. NYSE Euronext’s CEO Discusses Q1 2012 Results – Earnings Call Transcript, SeekingAlpha, April 30th, 2012 [↩]