NYSE Euronext, Inc. (NYSE:NYX)
Q3 2008 Earnings Call
October 31, 2008 08:00 am ET
Stephen Davidson - Head of IR
Duncan Niederauer - CEO
Michael Geltzeiler - Group EVP and CFO
Rich Repetto - Sandler O'Neill
Rob Rutschow - Deutsche Bank
Roger Freeman - Barclays Capital
Daniel Harris - Goldman Sachs
Niamh Alexander – KBW
Don Fandetti - Citigroup
Bob Napoli - Piper Jaffray
Howard Chen - Credit Suisse
Brian Bedell - Merrill Lynch
Ken Worthington - J.P. Morgan
Good day ladies and gentlemen and welcome to the third quarter 2008 NYSE Euronext Earnings Call. My name is [March] and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the presentation over to your host for today's call, Mr. Stephen Davidson Head of Investor Relations. Please proceed.
Good morning and welcome to the NYSE Euronext third quarter 2008 earnings conference call. Before I introduce today's speakers, let me remind you that comments on the call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act.
These statements are based on NYSE Euronext’s current expectations and involve risks and uncertainties that could cause NYSE Euronext actual results to differ materially from those in the statements. These forward-looking statements speak as of today and you should not rely on them as representing our views in the future. Please refer to our SEC filings for a full discussion of the risk factors that may affect any forward-looking statements.
Except for any obligation to disclose material information under the federal securities laws, NYSE Euronext undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after this conference call. Please note that the results of operations of Euronext for the third quarter of 2008 are reported under US GAAP and are incorporated in today's earnings press release under the caption European Operations accounting tables.
We will discuss non-GAAP financial measures during the call. These non-GAAP measures are fully reconciled in the tables attached to the text of the release. We believe that these tables provide investors useful information about our business trends. However, our non-GAAP measures do not replace and are not superior to GAAP measures.
On the call today, Duncan Niederauer, Chief Executive Officer, who will review our core areas of focus, address competitive challenges in our selected markets and update you on our growth drivers. Michael Geltzeiler, Group Executive Vice President and Chief Financial Officer will review the financial results for the quarter and provide an update on key strategic initiatives including our integration efforts. We will then go back to Duncan for closing comments, before we take your questions.
Also on the call today for the Q&A session are Larry Leibowitz, Group Executive Vice President, Head of U.S. Market and Global Technology, John Halvey, Group Executive Vice President and General Counsel and Stephane Biehler, Chief Accounting Officer and Corporate Controller and Jean-François Théodore, Group Executive Vice President and Deputy and CEO.
Please note as part of our ongoing efforts to provide more transparency around our results, we are incorporating slides for the call today, which are available on our website. Duncan and Mike will refer to slides during the remarks.
I would now like to turn the call over to Duncan.
Thanks Stephen and we welcome Stephen to the company. This is his first but certainly not his last earnings call with us. So, we are going to be going through the slide presentation. Bear with us this is the first time we are trying this. We would love to get feedback from all of you after this call whether this is a step in the right direction or not.
I will be starting my remarks on slide three, which is entitled third quarter update. I am pleased to share our third quarter 2008 results with you characterized by robust volume across all our U.S and European exchanges, A, revenue generation from our cash equities businesses, on a fixed cost base, on a normalized basis to decline 9% year-over-year.
Pro forma earnings per share from continuing operations, which excludes GL Trade was $0.72 for the third quarter versus $0.75 in the prior year period. Discontinued operations for the quarter represented $0.01 per share in EPS.
Our results for the third quarter were generated against the backdrop of unprecedented market volatility, as a result of the crisis in global finance and the collapse of several major financial institutions. We are bolstered by concerted government initiatives to confront the crisis in the U.S., Europe and Asia.
Throughout the crisis, we have been in close contact with our regulators, issuers and the global trading community. We are committed to doing everything in our power to provide stable, orderly and liquid markets and we have done well so far.
Despite the volatility and spikes in volume, our systems handled the order flow and message traffic without interruption and the strength of our market models played a critical role in ensuring high quality markets orderly opens and closes and best execution for investors in the most transparent fashion.
Please also be aware that we have been very engaged in the dialogue surrounding the CDS market and are preparing for the launch of European CDS index contract and Bclear later this quarter.
Turning to slide four, we provide a summary of our key areas of focus for the company. The longer term implications for the global economy are now being assessed, and we are continuing to execute our growth strategy with a focus on several key areas against which they gauge our performance, maintain or improve our competitive position, and create value for shareholders and customers.
The key points that I would like you to walk away with are as follows: We are showing up our European cash markets in the face of the changing competitive landscape, while continuing our efforts to improve our U.S. position.
In Europe, our initiatives include the following: Implementation of UTP, our cutting-edge technology platform, which we begin to rollout in Europe later this year, and our safety network infrastructure.
Aggressive pricing programs such as Pack Epsilon for high frequency traders, and our new recently announced global pricing initiative. New markets that we are developing with and for our sell-side clients, this includes our pan-European MTF; [that we call] NYSE Arca, Europe; and SmartPool, a block trading MTF for pan-European stocks.
While we are ready to launch NYSE Arca in Europe now, we have delayed this launch to January 2009 in deference to our customers’ request that they get through other year end issues first.
SmartPool, which we expect to launch in November, remains subject to FSA approval, which we expect to receive shortly.
Yesterday, we signed agreements with LCH to terminate our current life clearing arrangements and to establish new clearing arrangements through a new division known as LiffeClear. This arrangement will enhance our competitive position, provide us with strategic flexibility, and allow us to internalize derivatives clearing revenues. When we get to slide nine, I will discuss LiffeClear in more detail.
In the U.S., while several months do not make a trend, we appear to have stabilized our NYSE Group market share around 42%. And so, our share increases in September versus August and October month today also is ahead of September.
This quarter we are rolling at a series of new initiatives, which should further strength in our U.S. position, including technology improvements that we'll reduce latency. In addition, the SEC recently approved our new NYSE market model.
The new model has specialist acting as Designated Market Makers and features new supplemental liquidity providers as well. We have begun implementing the new model and expect to have this fully in place across all [starts] by the end of the fourth quarter.
On the cost front, we remain vigilant in streamlining our global operation and leveraging scale for our greater efficiency. With respect to our NYSE Euronext technology integration, we continue to make good progress against our $250 million cost savings initiatives.
In Europe, we've recently announced our intention to carry our restructuring plan on the [heels] of what was done previously in the U.S. to further reduce our fixed cost base involving approximately 200 employees in Europe. Also and less than a month since the closing, we've made significant progress towards our $100 million cost savings project for the Amex acquisition.
We will continue to look for cost savings opportunities in the months to come. These are all examples that show, we are focused on margins and efficiencies. Michael will discuss cost savings in more detain later in the presentation. These initiatives collectively are designed to improve our operating leverage throughout 2009 and into 2010.
Switching to slide five. We list our core assets and key initiatives that would drive our future growth. We are clearly in the investing and integrating phase of our brief history as a public company with many moving parts to drill the time and strengthen our core franchise. This is a balancing act between cutting cost and investing in the future, but all of this is integral to our future success.
It remains our goal to be the most diverse marketplace and the global leader in execution, technology services and listings with a clearing business on the rise as well. In the following slides I will provide more detail on our progress in these areas.
Slide six covers many of the European and U.S. competitive challenges I mentioned earlier. You can that we are addressing these challenges with several key initiatives in the areas of market structure, technology and pricing.
On slide seven, we have more detail on the two significant European initiatives I discussed earlier. We will launch our new pan-European MTF NYSE Arca Europe to handle non-Euronext worth of shares, and we also anticipate the launch of SmartPool, the block trading facility which I mentioned earlier in November.
Both of these initiatives will be on the UTP platform, which we believe will address the scalability, capacity and latency issues that are important to our customers, especially our high frequency traders.
Turning to slide eight, we talk a little bit about NYSE Liffe, our new U.S. futures business. We began recognizing revenue in early September as the platform was launched early that month. NYSE Liffe has performed well to-date and we've made significant progress organizationally including the establishment of NYSE Liffe's Board, which is chaired by Jim McNulty.
As of October 31st, we have nearly 200 members connected with more to come. Tom Callahan and his team have done a great job in getting this business up and running, and there are a number of exciting initiatives on the horizon.
Slide nine, provides a brief overview of what we've done as we establish LiffeClear. As I mentioned, we signed agreements yesterday with LCH to terminate Liffe's current clearing arrangements and establish a new clearing framework called LiffeClear.
As part of the termination of our current clearing arrangements, we'll make a EUR260 million payment. We expect the incremental revenue from this new arrangement to offset the interest cost related to the funding of the termination payments.
We believe this agreement will allow us to better compete against our vertically integrated international peers on a more level playing field and to control the future development of our business. We also believe the arrangement will create new efficient and cost effective clearing opportunities that will benefit our members and provide us strong bases for future innovation. We expect LiffeClear to go live in the first quarter of 2009.
Slide 10 offers a bit more detail on the Amex acquisition, which compliments our competitive position in the U.S. businesses including cash options and EFTs and enables us to realize significant operational efficiencies and new business opportunities.
As I mentioned previously we are making very good progress on our integration efforts and the transaction is expected to produce annualized run rate cost savings in excess of $100 million by the end of 2009.
We will move the Amex equity traders to the NYSE trading floor, the 1st of December and the options traders will move over in the first quarter of 2009. But on slides 11 and 12, we provide more color on our Advanced Trading Solutions businesses, which many of you have asked about.
The In-sourcing of AEMS this summer brought us two advantages; first, we now have control of the management and development of our trading platforms. Secondly, we were able to add AEMS third party exchange business to our ATS portfolio of businesses.
In the slides on pages 11 and 12, we refer to this portion of the AEMS business as the Exchange Solutions portion of ATS. With the pieces of our commercial technology and venture now coming together, we are well positioned to drive revenue growth in this high potential, high growth arena.
ATS continues to develop and implement new innovations in financial technology; including Wombat's Data Fabric feed handler, and SFTI’s growing global connectivity network. ATS is also actively growing its business with new customers in the Exchange Solution space. Recently for example, Itau Securities selected ATS to develop and implement the first global DMA platform offering connectivity to Brazil’s equities and derivatives markets.
I will now turn the presentation over to Mike Geltzeiler, who will take us through the financial results and provide an update on integration. Mike?
Thank you, Duncan and good morning. In my remarks, I will review our financial performance for the quarter and provide an update on our cost efficiency and integration effort plus our financial position and share related initiative briefly provide some comments on the business outlook.
Slide 14, summarize our GAAP financial performance for the third quarter versus the prior year period. On a GAAP basis, we reported revenues of $1.2 billion up 7% versus prior year with EPS and continuing operations of $0.55 per share.
As a result of the disposition of a consolidated subsidiary, GL Trade, this business was reported as a discontinued operation for all periods of the day. Details on GL Trade’s growth performance are provided in the appendix to this presentation.
In the quarter, GL Trade contributed EPS of $0.01 per share as a discontinued operation. For the quarter, results from continuing operations, our operating income, net income and EPS were all below prior year.
I thought at beginning of the credit crisis, Q3 2007 was our strongest quarter last year. Prior year quarter also included a one-time equity gain of $32 million on the sale of member firm regulatory functions of FINRA and discrete tax benefit of $55 million. These items contributed $0.27 for last year’s EPS.
Slide 15 shows our financial performance on a pro forma basis including Euronext’s full year and 2007 including merger related costs, some other one-time items are detailed in the tables attached to our press release. Those revenues are up 17% in the quarter and 19% year-to-date as compared to same period in the prior year.
The increases are primarily driven by pricing changes in our U.S. cash trading business. The revised pricing structure, we increased the rebate for liquidity provider on the NYSE Arca with the expectation of drawing additional lines. Therefore net revenues are better indicator of our actual performance.
Net revenues were up 1% in the quarter 6% year-to-date. Again, the third quarter of last year is a tough comparable. Fixed operating expenses were up slightly on a pro forma basis and as our (inaudible) we are consistently lower after adjusting for portfolio changes foreign exchange investments. Regulatory fine income, which virtually not in business this year following the transition of FINRA Hawaii last year.
Pro forma EPS from continuing operations is $0.72 this quarter. We generate another $0.01 from discontinued operation in GL trade. Year-to-date pro forma was EPS higher by 18%.
Slide 16, segregate our revenue by both product line and geography. We started showing net revenues by business, which excludes GL trade, which is previously molded on the software & technology line. For the third quarter of 2008, approximately 58% of our revenue is in trading activities.
The revenues remained diverse across geographies as well. 56% is coming from Europe and 44% in the U.S. For the quarter, cash trading was up considerably and some of the associated increase in transaction fees was offset by the increased liquidity payments through the pricing changes I mentioned earlier.
Derivative revenues are higher in the U.S. but lower in Europe, mostly attributed to Q3 2007 being a record revenue period. But, also, somewhat to the weakness of the British pound versus the US dollar.
Software and technology revenue growth reflects the addition of Wombat Exchange Solutions and increased capacity revenues for customer co-location.
Lastly, regulatory revenues are considerably lower, reflecting primarily the transfer to FINRA in the third quarter of last year along with lower member fees.
Slide 17 shows the quarterly volume trends for our major trading operations. After a relatively slow August compared with prior year, global trading volumes accelerated in September. U.S. cash reported record volumes in the third quarter of 2008.
European cash and U.S. option volumes were also above both last year and the sequential quarter. European derivatives reported relatively sharp third quarter volumes this year, but were below the exceptional results of Q2 2008 and Q3 2007.
Slide 18 provides a split of liquidity, routing and clearing fees between our U.S. and European cash and derivative businesses. Information is often requested by our investors and research analysts. Average revenue per trade has declined this quarter in the European cash business, reflecting some changes we made to our generally European cash pricing package.
The popularity of our Pack Epsilon offering for high frequency traders. For the month of September, approximately 30% of total European trades took advantage of the Pack Epsilon pricing schedule.
As mentioned earlier, the new tiered price offering in NYSE Arca has increased gross revenues with a corresponding increase in liquidity payments.
U.S. dollar strengthened versus both the euro and the British pound in the quarter, negatively impacted revenue versus the second quarter. Overall, foreign currency variations negatively impacted total company revenue variances by $18 million versus Q2 2008, positively impacted revenue variances by $11 million versus Q3 2007.
Slide 19 provides a harmonized view of fixed expenses. On an apples-to-apples basis, pro forma fixed operating expenses declined $37 million, or 9% versus Q3 of last year, were lower than last quarter by $15 million.
Versus prior year third quarter, we've added a net $21 million of fixed costs from acquisitions and divestitures, including Exchange Solutions, Wombat, FINRA and a few others.
Discussed on our prior calls, we're incurring incremental expenses to fill our customer requests for co-location services, increase capacity, and speed. We're also implementing the safety network in Europe and will sell these services in 2009. All of the services are or will generate incremental revenue.
Additionally, we are incurring one-time integration and redundancy costs as we execute our technology integration plans. Together, these areas added an incremental $15 million in mostly technology-related costs versus Q3 2007. We are also investing in NYSE Liffe, our U.S. futures business and $3 million on this effort in Q3.
As mentioned on our Q2 call, we provided guidance that we expect to spend about $15 million on this investment in 2008.
Lastly, foreign exchange variations also impact the reported fixed operating segment. As mentioned previously, some of these new business initiatives have generated incremental revenue. Relevant revenue figures for Q3 are shown on the right side of the chart.
Turning to our operating efficiency plan, slide 20 outlines the major initiatives we are targeting to dramatically lower our cost base and improve our operating efficiency. These included the $250 million annual run rate technology cost savings that are targeted to be realized by the end of 2010; a $100 million plus integration savings we expect from the Amex acquisition; several mostly headcount-related initiatives.
Previously, we indicated that we had already exceeded the $25 million non-technology savings targets from the NYSE Euronext merger, a reduced headcount and lower public company costs such as insurance with more opportunities to optimize staffing levels.
In June, we engaged in a voluntary resignation program for over 200 U.S.-based employees that will save us an anticipated $6 million in 2008, $20 million in 2009 and $30 million in 2010. This month we have commenced the restructuring plan in Europe that will impact an additional 200 positions. Details of this program are being discussed with the European Works Councils. We expect to implement this initiative in 2009.
Slide 21 details the timelines and major components of the $250 million technology savings program. As previously communicated, we achieved $70 million of annualized savings as of the first quarter 2008. This year, the U.S. operations team have replace the U.S. ticker plant's related [NASDAQ]; migrated about 75% of the messaging traffic from CMS to the CCG, designed by TransactTools.
We're in the final stages of replacement the main processing unit called SuperDOT with an Arca developed service solution. The team managed these major initiatives while seamlessly handling the record levels of (inaudible).
We are on target for our next milestone of another $50 million in annualized cost savings by Q1 2009. This annual cost savings will be linked to achieving the milestones related to UTP launch and the global data center migration.
We will provide a more comprehensive update on the technology initiative in the first quarter of 2009. As communicated at the time of the project and on the last earnings call, we expect to incur an increasing level of integration or duplicate costs, as we progress through the transformation. These one-time duplicate costs will go away, when we implement the new platform, complete the integration and migrate the new data centers.
Slide 22 provides an overview on the Amex integration plan. Although the transaction officially closed just this month, we have already made significant progress with the integration planning, lowering the run rate cost of this business. Amex equities and ETF operations were on track to migrate to the NYSE Euronext platforms and facilities by early December.
Amex options business will migrate in February 2009. At that time, we will have migrated all the businesses and operations and NYSE Euronext will no longer operate in the Amex facility. Amex headcount is currently more than 35% lower than the 471 employees that were in the organization, as of the announcement date earlier this year. We have planned to reduce the number of retained positions to around 100 by the middle of next year.
In summary, we are increasingly confident in our cost savings projections and are ahead of schedule. The detailed plan is to generate annualized cost savings of $120 million versus the earlier estimate of $100 million, although $40 million of these costs are already out of the expense run rate.
On the revenue side we have seen a decline in market share over the past few quarters, which we have planned to stabilize and then grow. We will also be losing some of the amortization benefit on the historic convert listing fee as part of (inaudible). As said, we expect Amex to be a positive contributor to our operating income in 2009 and more significantly in 2010.
Slide 23 summarizes our strong financial position as well as some initiatives we executed in October related to our shareholder base. [Priority] on Euronext has a relatively straightforward balance sheet. As of September 30th, we had $3.2 billion in debt and $1.2 billion in cash. This is prior to the proceeds of EUR150 million received in early October from the sale of GL Trade.
We also maintain high investment grade ratings. We view our debt capacity as solid and we believe, we have significant liquidity and safety cushion. We currently have $2 billion in long term debt and another $400 million in the shorter term UK notes. We leverage the commercial paper market for our remaining debt, but have a long term backup bank facility of $1.8 billion and a 364 day backup facility for an additional $1 billion.
On October 1st, we closed the Amex acquisition and issued 6.8 million shares at a conversion rate of $38.33 per share. Also, as previously announced, we removed transfer restrictions on 41.8 million shares dating back to the Arca transaction. We began our share repurchase program this month. As of October 29th, we purchased 4.7 million shares at an average price of $29.93 per share for a total value of $141 million.
Before I turn the call over to Duncan for closing remarks, we thought that it would be beneficial to make some general observations about our business going forward. We do not believe in providing specific earning guidance given our exposure to market conditions and other factors outside our control.
2008 is turning out to be a solid year for NYSE Euronext with stable earnings growth over pro forma 2007 and a long list of strategic accomplishments that position us well for the future. The business is in a state of transition and many of this year strategic initiatives, cost savings and business integration will take us well into 2009.
We also have a number of initiatives that are being launched out and in 2009 such as the European MTF, NYSE Liffe and LiffeClear. The full benefits will not be evident until 2010. On slide 24, we outlined some key trends and challenges which we would like to highlight for 2009.
In summary, we expect 2009 to be a challenging year as a result of difficult market conditions. 2009 financial results will most likely be impacted by margin pressures in the European cash market, timing and transitional nature of our expense reduction program, and integration effort for technology and the Amex integration, continued investment in NYSE Liffe and the impact of a strengthening US dollar.
We also planned to increase capital spending significantly as we launch our two new data center facilities. Foreign exchange exposure shown on this chart is based on the Q3 results. The 1% change in both the euro and British pound would result in a $2 million operating income tax for the quarter and $8 million for the full year.
We remain optimistic about our future and believe 2010 is where the full benefit of our new platforms, reduced cost base and incremental revenue from strategic initiatives will be evident. I will now turn the call back to Duncan.
Thanks, Mike. So I will wrap it up and then as we always do, we will open it up to questions from some of you on the call. So, in closing, NYSE Euronext performed well in the third quarter and October has brought with it approval of the new market model in the U.S., the establishment of LiffeClear in the U.K. and the announcement yesterday by Monster Worldwide to join the NYSE Euronext community of listed companies.
We remain focused on making progress on our technology integration and cost saving targets, as demonstrated by our European and U.S. restructuring initiatives. We are also aggressively improving our competitive positions in both Europe and the U.S. and actively investing in key growth areas that will yield more tangible results in the future.
I would like to acknowledge our customers, listing and trading partners and staff for working so effectively through a period of unprecedented turmoil, volatility, and uncertainty. During this time, our markets were open for business and operating as they should demonstrating our ability to provide accessibility, liquidity, and leadership when the marketplace needs it most.
Moving forward, we are committed to doing our utmost to restore confidence in the global financial system and stability in our markets. This includes working collectively with all of our constituents, as well as regulators and other exchanges to ensure an even better marketplace for the future.
With that, we'll open the line for questions. Thank you.
(Operator Instructions). And your first question comes from the lines of Rich Repetto from Sandler O'Neill. Please proceed.
Rich Repetto - Sandler O'Neill
Good morning, Duncan and Michael.
Good morning, Rich.
Rich Repetto - Sandler O'Neill
I guess, Duncan, my question comes on clearing, and I appreciate the slide that you included that shows the LiffeClear. I guess I'm just trying to see what your broader strategy is with clearing, because it looks like you are taking more responsibility, but the risk stays with LCH.
And then you are using the OCC for the NYSE Liffe, and I don't know how DTC and the LCH merger comes into play. But just a broader strategy in regards to clearing.
Thanks, Rich. I think it's going to be a multiple step strategy. The first thing we've done is with LiffeClear, we've effectively re-verticalized the business in Europe and we now internalized clearing revenues that before we didn't get. So, now, we're in a position to get transaction revenues, clearing revenues and whatever you want to call them, treasury revenues, interest on margin revenues.
As per our arrangement with LCH, they are going to continue to run the guarantee fund. We didn't think it was an appropriate time to ask our big customers to contribute to a new guarantee fund. And as you probably are aware, LCH uses our technology to perform those risk management services anyway.
So I think it's an opportunity for us to create a vertical in our European derivatives business that positions us to more favorably compete with the other incumbents.
Shifting back to the U.S., while it's possible at some stage should LiffeClear launch on time, which we expect it will in the first quarter, we might be able to migrate that across the Atlantic. I don't think we were in a position to be able to count on that now.
As you guys are aware from the deal we did with CME and the metals business, they are obliged to provide clearing for us through the end of the first quarter of '09. So, we thought it was pretty important for us to come up with an alternative solution so we were not vulnerable in the second quarter of '09. So, OCC will be providing those services for us through a commercial agreement.
I think the DTC-LCH merger is interesting for us, particularly in the arena of CDS. As you guys are all probably also aware, given our position, which today has not included us owning our own clearing house, our CDS approach both here and in Europe has been to come with our business and our front end, called BClear and LCH is the clearing counter-party behind it given their expertise in other related products already.
I think that's put us in a very good position in the U.K. I think we have appeared to the regulators here to be maybe not an American enough solution here in the U.S. So I think actually DTC combining with LCH is quite positive for us on that front as well.
And your next question comes from the line of Rob Rutschow from Deutsche Bank. Please proceed.
Rob, you're there?
Rob Rutschow - Deutsche Bank
Can you hear me?
Yeah. Go ahead. Now, we can.
Rob Rutschow - Deutsche Bank
Okay. I wanted to ask about the Amex integration. I guess first off, can you give us an update on what their financials look like in the third quarter and segment that between options and cash, in terms of, both revenues and expenses?
And then also, if you can give us an update on what your cash balance looks like overall for NYSE, following all of these different moving parts including the payment to LiffeClear, the gain from GL Trade and the cash from Amex?
I'll take that. Rob, we really have not. What we've talked about with Amex is just that we were still able to win hedging out there $178 million in revenue have not broken that into the pieces. That's something we can consider doing…
Yeah but the deal is closed on October 1st, so it's not in the numbers yet.
I think when we report the results in the fourth quarter, we will provide some historic perspective on that. In terms of our cash position, we have $1.2 billion of cash on the balance sheet at the end of September. And as I had mentioned that we sold GL Trade for EUR150 million, $220 million and that cash was received early October. So, that was not in that balance.
The LiffeClear termination fee of EUR260 million will be paid in the first quarter of 2009. So, we also have the transaction with Qatar out there for $250 million that together for the end of 2008. So, we have $1.2 billion in cash. We brought in EUR150 million. Obviously, our business generates a lot of cash and the two big outlays are Qatar pretty much offset with GL Trade and LiffeClear.
And your next question comes from the line of Roger Freeman, Barclays Capital. Please proceed.
Roger Freeman - Barclays Capital
Hello. Hi. Good morning. I will just throw a couple questions in here since I will get cutoff after this. Just a follow-up to Rich. On LiffeClear, can you just give us what you think based on current volumes, the economic pickup is, the total revenues because it's just very difficult from the pricing schedule to get to what you are going to pick up there?
And then secondly, my real question is around the European MTF. So you are saying you are delaying it until the beginning of the year. I am assuming that you have got some key broker-dealers that you have signed up here that are asking to get this delayed because obviously there have been a couple of other launches, including BATS Europe today that are launching in this timeframe?
And then also around the MTF, I think you are saying that you don't want to trade Euronext stocks and I am curious your thoughts around that. I am assuming it's because you don't want to cannibalize. But I am wondering if that hinders any type of basket trading strategies that customers might have. And secondly, does that open you up to others taking that share? Thanks.
Roger, its Duncan. What I will do is I will field the European questions and then I will let Mike talk about LiffeClear, which I think is going to be a bit more of a forward-looking statement. And I think we recognized, we will be providing more clarity on that going forward in terms of what that's going to mean to changes in revenues and expenses as we internalize those revenues.
On the European MTF side, we certainly could have launched, as these other parties are doing right now. You saw NASDAQ come out. I guess BATS it's going to come out sometime in November. We certainly could have launched sometime in November. I think if we had, our general view was none of the key clients, we want on the system were going to be on the system.
So we are going to begin the rollout of UTP. SmartPool will be on UTP. Our bond platform will be on UTP. So we are not going to slow that down. But we have seen some of these other platforms launch without their customers and effectively get no traction.
And we decided rather than launch and get a handful of trades a day in November and December, when our key partners, who were going to commit to helping us launch the system, were asking us, not to do it until January that was the decision that we made on that one.
To start it in phases, we have decided only to do non-Euronext stocks for now that is not necessarily a permanent decision. But I think for starters, given that we are using Euro CCP for the MTF and we are using Clearnet for the rest of our Euronext businesses on the clearing side, I think we just figured it was easier to keep the two separate for now. But that remains something we are going to take under advisement as '09 unwinds.
I will let Mike answer the question about, if we are able to, about LiffeClear.
What we are comfortable saying right now is that as Duncan has mentioned, we are looking to go live in the first quarter. So, we are talking about three quarter and to next year.
Basically what we have said in the release and we are comfortable saying is that we will be getting incremental revenue from the clearing operations and the treasury operations with our profitable revenues. The net profit that we would realize would exceed the capital costs, our interest costs on the EUR250 million. So, in essence it would be accretive to earnings this year.
And your next question comes from the line of Daniel Harris from Goldman Sachs. Please proceed.
Daniel Harris - Goldman Sachs
Hi. Good morning. I was wondering if I could follow-up on the changes that you guys have made to the specialists of the direct DMMs and maybe supplemental liquidity providers. As I understand it, the amount of rebate that you may be paying to some of these DMMs to be more active on the system, the quote at the inside will be significant and potentially well in excess of what you guys are collecting today on the classic at [$0.08]. So I am just wondering if you can either talk about what those plans are for those rebates and the reasons for those if it’s to bring back significant share back to the NYSE?
Sure. This is Larry. First, in terms of the some of the rebates paid to the DMMs and to the supplemental liquidity providers, we actually expect that if market share were to hold where it is, we would actually be paying less than we are paying to the specialists currently.
If you recall, when NYSE transitioned from specialists receiving essentially commissions, specialist fees for executing orders to a liquidity payment pool. New York Stock Exchange was providing them with fixed dollar payments.
We have since transitioned that into an incentive scheme that incent them to provide liquidity. That's just becoming more transparent as we move to a DMM model. It's just the formula is changing. In fact, the dollars will go down, if you add it two together unless people increase our market share. We think that both the DMMs and the SOPs are significantly incented now to increase their market share. And with the model, they now have the tools to be able to do that. So we're expecting that to actually be a net positive.
And your next question comes from the line of Niamh Alexander from KBW. Please proceed.
Niamh Alexander – KBW
Thank you. Number one, I want to look at your outlook page here. And I am looking for the good news on page 24 and can you explain to me just how you could still deliver operating margin expansion, looking at some of the things you're highlighting here? I thought 2008 was a transition year and it looks like most of 2009 will be as well.
And then my other question, it relates to the European business and the price pressure. It looks like it's down about 10% this year with the new pricing. Should we expect more of the same with the rebates just rolling out there recently? Thanks.
I'll take that. Niamh, what we're basically saying with the outlook is when I say transitional year, I think the business is in the transition for really pretty much since the transaction 2007. The transition is not necessarily a negative term, number of initiatives in place. I think if you look at what we tried to outline was the specific reasons for using that term.
For instance, NYSE Liffe is a new initiative that could be in investment mode for both 2008 and 2009. So the transition in a negative thing, but we would like that to be generating positive results in 2010.
When we look at our cost initiatives, unfortunately a little bit of the nature of it does take some cases for European discussions that we're having today and we'll be into the middle of next year that we'll be able to fully execute some of the things that we're talking about and deciding today.
On the technology side, a lot of the costs are coming out of implementation and harmonizing our system. So we need to get on to the UTP before we can then execute and that's why we provide the timelines and charts. So we can remove some of the costs and synergize the back office that's supporting the system.
So, I think when we originally announced these projects, we've always said 2010. To talk about the European business, we're pretty pleased on how the business is performing to date while we just mentioned it when you see some of the initiatives we put on the table. We are well-positioned to offer whatever type of service our customers are looking for, but we anticipate the margin compression there in that business that as definitely there is some pricing pressure in (inaudible) market.
And your next question comes from the line of Don Fandetti from Citigroup.
Don Fandetti - Citigroup
Duncan, I have a strategic question. As you look at what the concerns and issues that the hedge fund community faces and the global credit crisis, do you look at your global multi-product model differently? I wanted to see if you could comment on that.
I think it's difficult to anticipate exactly what the shakeout on that is going to be. You've read a lot of headlines about hedge funds deleveraging, et cetera. We certainly haven't seen much of an impact in the business yet and I actually think our multi-product approach diversifies our risk in that arena a lot.
A lot of the people with whom we compete are solely derivatives exchanges or solely cash exchanges. So I actually like where we are positioned. I think we are going to have to pay very close attention the balance of this year, because I think we're going to learn a lot about what the hedge fund industry is going to look like in '09 based on what happened the last eight weeks of the year here.
It's difficult for us to predict what year end redemptions are going to look like. It's difficult for us to predict what the business model of the hedge fund community going forward is. But I think it's their participation in our markets collectively is a bit exaggerated. And while it maybe the case that in the derivatives markets, you're going to see lower volumes if there is a considerably less hedge fund activity, I am not expecting that to be a major impact, given how diversified our business is. So, I think our aim of scaling up into different products and different regions remains the strategy until further notice.
And your next question comes from the line of Bob Napoli from Piper Jaffray.
Bob Napoli - Piper Jaffray
Good morning. Just was hoping that maybe you could help me with it. So many initiatives and so many opportunities in front of you and it's a little bit difficult to understand from you which opportunities you view as having the ability to move the needle the most and over what timeframe. So, if you were trying to put some economic effect to New York Stock Exchange from the broad list of initiatives, where are we going to see the most material effect on your results and when?
Yeah. That's a great question. So I'll put them in four categories and I'll try to rank order them in the four categories where I think we probably have the highest degree of optimism for where some of these initiatives rather will find their way through down to the bottomline.
I think the first group would be our derivatives business broadly speaking. I think NYSE Liffe once established, which will take us probably till the end of the first quarter to get the clearing organized properly to get the technology upgraded to our platform and then to be ready to meaningfully rollout new products, I think presents a very sizable opportunity to us.
I think elsewhere in our derivatives suite of products, I think the completion of the LiffeClear transaction, which let us re-verticalize and internalize some of those revenues, I think is also a very positive impact on forward earnings and I think enhances our competitive position there greatly.
Underneath that on the broader derivatives umbrella, I think, the first thing has to be the much talked about CDS space. While I certainly, as I articulated earlier, while I certainly think we can play a role in the U.S. and we are still optimistic about that.
I think we can play a very meaningful role in Europe and are probably better positioned than anyone else to do that given that rather than putting out press releases and holding press conferences, we are actually going to launch a real product in four weeks. And I think hopefully that's going to make a difference and send a very positive message.
More broadly under the derivatives umbrella, I think with the options medallion we have picked up with the Amex transaction and how we can reposition that in the marketplace probably in partnership with some of our biggest customers, I think also represents a meaningful medium and long term opportunity for us.
So we will probably put that category of initiatives at the top of the list. If I were going to mention a couple of others, I would include the efforts on the pan European side, where I think if UTP comes together the way it should, while there is no doubt with five or six new competitors, it will be difficult to maintain our market share in our core businesses.
I don't think anyone is taking into account the gains we might be able to make outside of our core markets, where to-date we have obviously no market share. I think our product will be well received. I think folding that into the global pricing initiative will be well received. And I think that's another potential big contributor to revenue going forward.
Lastly the combination of our commercial technology businesses represents a reasonably high growth area for us. I think putting the various assets, we put together from Exchange Solutions to TransactTools to Wombat, et cetera that really is going to present a good not only '09 opportunity, but an opportunity beyond that. And if it's as successful as I think it's going to be, we will look forward to reporting that as the separate segment sometime in the not too distant future.
Bob Napoli - Piper Jaffray
Great. Thank you.
And your next question comes from the line of Howard Chen, Credit Suisse. Please proceed.
Howard Chen - Credit Suisse
Good morning everyone. Thanks for all the additional details and the slides this morning. I had a two part question on cash equities. Duncan, in your prepared remarks, you spoke to U.S. cash market share rebounding.
How much of that rebound, do you think is attributable to initiatives you put in place versus how much do you think is due to just the volume at the open and close being higher portion of the overall volume and the fact that the primary market still dominates the open and the close?
And then from a European perspective, from what we have seen in the alternative platform so far, when the primary market isn't functioning properly, the alternatives don't seem to pickup any of the market share. It's very different than what we historically saw in the U.S. So why do you think that's occurring and how do you overcome that when your offering finally comes to market? Thanks.
This is Larry. On the U.S. side, I would say that respectfully that none of our market share rebound has anything to do with anything we have done. It is partly the fact of the concentration of the open and the close.
But partly the fact that during times of market volatility and uncertainty, you see market volumes migrate from the [grade] market into the primary exchanges, as people seek more transparency and don't want to miss trades that happen during this volatility.
We actually view that as encouraging because our initiatives are just now being put into play. We haven't actually done anything that we would have expected would have increased the market share.
And so whether it's luck or anything else, we view it as being sort of fortunate tailwinds that will set the stage now for us to implement the initiatives that we think we can actually regain some market share with.
Then on the European side, I would say this. We have noticed the same phenomenon all of you noticed, that it appears that when a few of the other exchanges have had issues, the alternatives that were out there have not picked up the volume and market share one might have expected given our collective experiences here. I think that's attributable to a couple of things.
One, I don't think those markets are deep enough yet, that's not to say they won't be, but they are not deep enough yet that they are really setting the price. They are waiting for the reference price to be set. And it would appear that the business model was more one that says let' put the reference price get set on the primary market and then we will mimic that price as quickly as we can and be as nimble as we can to keep up to-date with that.
My second observation would be it struck me as well, Howard that there wasn't as much connectivity to these platforms as I probably thought there was from a distance. Now if we turn the page forward to when we have got our pan-European MTF, I don't know, we go about solving the first question because if everyone really is waiting for the reference price and that local market is closed, we will certainly do our best to have a model in place that encourages people to setup prices on our platform.
But I am not at all worried about the second piece of it because for us, this is just saying to our clients, hey, you are already connected to us. No more work for you to do on the connectivity side. Now we have just got a bunch more things you can trade on our platform. So I am pretty confident that's going to be an easy thing for us to address, because when we launch the platform, the connectivity and our network comes with it.
And your next question comes from the line of Brian Bedell from Merrill Lynch. Please proceed.
Brian Bedell - Merrill Lynch
Hi. Good morning, folks. Question for Duncan and Larry on the rollout of UTP and in conjunction with Europe. Larry, if you could just comment on we are through another quarter here, comment on, how you view the UTP plan coming out in the U.S?
And then Duncan, if you could comment on the global pricing model that you are envisioning now. And if you could make comments on the Euronext side of that as well, particularly given the pricing compression that we are seeing in Europe. Are you trying to come out with a value traded model potentially on the Euronext market?
Sure. This is Larry again. Let me take the UTP question. UTP really consists of three major components. It’s CCG; its Wombat market data; and it's a matching engine. In the U.S., as we have talked about, the rollout of CCG is largely complete. We have got 75% of the volume onto it. We will have 85% we believe by next month, which starts tomorrow I guess or next week. So we are actually really well on target with CCG in the U.S.
In Wombat, we will be replacing a good chunk of the market data before the end of year as well. So, we think that in the U.S. pushing the components of UTP out will work well and position us for replacing elements of the matching engine starting in early next year. And by the way, in the U.S., that will get our latency down to competitive levels for NYSE Classic.
The UTP rollout testing with customers has already started in Europe with the CCG and the market data platform. And as we talked about, we are going to be rolling out the bond platform later this year in preparation. It’s a perfect test case. We are then rolling out the rest of the platforms, as we start with MTF and SmartPool as we head into 2009. So, UTP actually remains on track. All the components seem to be performing as we would hope, and we are optimistic about that.
Following up on that on the global pricing side, we are going to be spending the balance of this year trying to decide whether we change our pricing approach on the Euronext side from a transaction based to a notional traded value based or whatever you called it. So I think that's certainly up for consideration.
Obviously when we launch the MTF, we are going to be going in that direction where it will be basis point pricing instead of per trade pricing. And what we are thinking about in terms of global pricing is merely to try to incent our customers who are customers of ours on all of our various platforms to further consolidate their business.
So we think one thing that we are optimistic about as we launch our MTF is a lot of those customers that are going to be our partners on the MTF are our largest customers on all of our platforms in the U.S. and Europe.
So, we think there is an opportunity to do more pricing across platforms. And as our customer base is consolidating, position them to improve their results by consolidating their volume on the various NYSE Euronext platforms around the world.
And your last question comes from the line of Ken Worthington from J.P. Morgan.
Ken Worthington - J.P. Morgan
Hi. Good morning. To follow-up on your comments on the commercialization of the technology business for Duncan, NYSE has a number of best-in-class technologies and services, LiffeConnect, ATS and I am sure with LiffeClear risk as well. And as we look out over the next three, five years so kind of longer-term, why are exchanges and brokers and trading firms going to increasingly outsource rather than insource?
And then for Larry and [Jena-Francois] to get the international perspective, if Duncan is wrong here, what leads to more insourcing kind of like what we have seen with the re-verticalization of clearing?
This is Larry. Let me take the outsourcing versus the insourcing question over the next three to five years. The trend has been that as volumes explode and these technology type problems become more complicated, it's harder for everyone of these brokers to make that investment spend and solve the problem.
So for example, market data volumes have quintupled in the U.S. over the last couple of years and we expect the same thing to happen in Europe as these MTF platforms take hold, as markets interconnect, and as high frequency trading really proliferates. That means that the average broker can't make the investment spend to keep up with sub-millisecond response times.
They just can't do that. And that leads them to require more [can] solutions, but they are not just like walking into Egghead software to buy it off the shelf. It's a very complex solution. We think that because we have to solve the problems ourselves that we can be the vendor of choice because then we can offer it to them.
The analogy is in the algorithms. The brokers developed algorithmic software for themselves a long time ago, right. We were executing view app on trading desks in the early '90s. And that trend was to move it out from the brokers to the clients’ overtime.
The same thing is happening on the software side with exchanges. We first perfect that for ourselves and then once we can handle speed and latency and the complex requirements of the software we then push it out, not only to trading clients, but also to other exchanges that have to solve these problems as well. If you were a small stock exchange, you can't be expected to come on line in this technologically complex world and start from scratch and do it yourself.
Globally speaking, on the technology side, we have probably the largest range of what you could provide of interactive transactional technology, connectivity, market data, trading [software] would be cash and derivatives. We are already provider of the 16 big exchanges in the world from Latin America to Southeast Asia.
With the launch of UTP, we will have the ultimate benchmark product, which we will be doing one third of all trades by itself and will be by definition a benchmark by its amortization cost and its equities. We think we have a very good business case as shown by recent deals we have made in cash equity in Brazil, in derivatives in Tokyo with LiffeConnect for the option market and in cash equity also (inaudible).
And I would now like to turn the call over to Duncan for closing remarks.
All right. We thank you all for being on the call with us today. We are going to go get back to work. And, obviously, Mike and Stephen and their teams will make themselves available today for follow-up calls with the analysts. And we would particularly in these calls in addition to answering your questions; I want to reiterate something I said at the beginning.
Please give us some feedback on whether we are achieving our goal of making what w are working on more transparent for all of you. It's not lost on us that we have a lot of moving parts. There is a couple of slides in here that really speak to that about trying to manage through integration, trying to figure out, how to increase our operating leverage, while at the same time investing in new businesses that we think are critically important.
And doing all of these things while, as Larry likes to say, the car is moving at 100 miles an hour. We realized that there is a lot going on and it can be quite confusing to people from the outside.
So, we would love to hear from you on these calls today whether we are getting at the point and whether what we are providing is heading us in the right direction to make it easier for all of you to understand our business.
So with that, we will close. We will thank you again. And we will wish everyone at least in the United States, a happy Halloween. Thank you very much.
Thank you for participation in today’s conference. This concludes the presentation. You may now disconnect. Good day
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