NYSE Euronext’s (NYSE:NYX) earnings for the third quarter of 2012 were hit hard by sluggish trading volumes. Total revenues were down 28% from the prior year whereas operating income fell by a whopping 41%. Volume-based revenues declined by 35% year-on-year as average daily volume (ADV) fell across all lines of products.
Foreign exchange had an impact on earnings as well as 43% of the company’s net revenues in the September quarter were in euros or pounds. The U.S. dollar strengthened against these two currencies, leading to a negative impact of $20 million. Total debt at the end of September was $2.5 billion, higher than $2.1 billion at the end of the last calendar year. We expect earnings to remain suppressed in the near term with a long-term recovery as global economic conditions improve.
Our $27 valuation of NYSE Euronext’s stock is in-line with the current market price.
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Listings Remain Strong
Listings was one of the revenue streams not influenced by morose macro-economic conditions. NYSE reported 57 IPOs in the U.S. market in the last three months accounting for 57% of all IPOs in the U.S. during the period. In addition, around 50% of all technology IPOs, including ServiceNow and Palo Alto, were on NYSE. This is quite an important figure as rival Nasdaq OMX (NASDAQ:NDAQ) has traditionally been the favored destination for technology companies. Around 70% of such companies are currently on Nasdaq, however, this trend might just be influenced by the Facebook (NASDAQ:FB) fiasco earlier this year. We expect a steady rise in the number of U.S. listings on NYSE, which currently stand at 2,951.
Cash And Derivatives Down
Revenues from transaction and clearing fees fell from $904 million in the third quarter of 2011 to $570 million. The fall can be attributed to a market-wide decline in trading volumes. The U.S. cash ADV fell by 39% while its European counterpart decreased by 31% over the prior year. Nasdaq also reported a decline of 24% in transaction volumes for the September quarter, reflecting market conditions which are not conducive to trading.
In addition to the market decline, NYSE’s tape A matched market share declined from 36% in 2011 to 32%. Increased competition from relatively new exchanges like BATS contributed to this decline along with an increase in off-exchange trading. Trading outside of traditional exchanges has gained popularity, particularly among institutional traders. The Trade Reporting Facility (TRF) has reported that off-exchange trading accounts for 32% of average daily volume of trades in the U.S. – this figure is up from 28% in the third quarter of 2011. NYSE will look to attract some of these trades through its recently launched Retail Liquidity Provider program (RLP), which currently trades 6 million shares a day. Read our article NYSE Is Worth $34 With Alternative Retail Equity Market Rollout for more details.
We expect a slight increase in U.S. cash products handled by NYSE, influenced by the RLP and gradually improving global economic conditions.