Nasdaq OMX Group Inc. Q1 2009 Earnings Call Transcript

| About: Nasdaq Inc. (NDAQ)

Nasdaq OMX Group Inc. (NASDAQ:NDAQ)

Q1 2009 Earnings Call

May 7, 2009 8:00 am ET

Executives

Vince Palmaro – Vice President Investor Relations

Robert Greifeld – Chief Executive Officer

David Warren – Chief Financial Officer

Magnus Bocker - President

Analysts

Richard Repetto – Sandler O'Neill

Howard Chen – Credit Suisse

Daniel Harris – Goldman Sachs

David Grossman – Thomas Weisel Partners

[Alex Framm – Barclay's Capital]

Michael Vinciquerra – BMO Capital Markets

Niamh Alexander – Keefe, Bruyette & Woods

Edward Ditmire – Fox-Pitt, Kelton

Justin Schnack – Rosenblatt Securities

[Shane Finemore – M&K Partners]

[Alex Framm – Barclays Capital]

Christopher Allen – Pali Research

Daniel Fannon – Jefferies & Co.

Operator

Welcome to the Nasdaq first quarter 2009 earnings results conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Vice President of Investor Relations, Mr. Vince Palmaro.

Vince Palmaro

Good morning everyone and thanks for joining us today to discuss our first quarter 2009 earnings results. Joining me are Bob Greifeld, Chief Executive Officer, David Warren, our Chief Financial Officer, Magnus Bocker, President and Ed Knight, our General Council. Following the prepared remarks, we'll open up the line for Q&A.

If you haven't done so already you can access the results press release and the presentation on our website at www.nasdaqomx.com. We intend to use our website as a means of disclosing the material non public information and complying with disclosure obligations under SEC Regulation FC. Any disclosures will be included under the events and presentation section of the site. If you have any questions after the call, please contact me at 212-401-8742.

Before we begin I'd like to remind you that certain statements in the prepared presentation and during the subsequent Q&A period may relate to future events and expectations and as such constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

The actual results may differ materially from those projected in these forward-looking statements. Information containing the factors that could cause actual results to differ from the forward-looking statements is contained in our press release and in our reports filed with the SEC.

Robert Greifeld

I do thank everybody for joining us here this morning. We are particularly proud of the results we are reporting today. GAAP net income for the first quarter 2009 was $94 million or $0.44 per diluted share. When excluding merger related expenses and other non recurring items, on a non-GAAP basis our net income was $102 million or $0.48 per diluted share, an increase of 9% when compared to pro forma non-GAAP results of $0.44 in the first quarter of 2008.

In addition to growing income, our operating margins improved to 47% up from 41% in the year ago period, a remarkable performance in this economic climate. We were able to achieve our year over year growth through the strength of our diversified business model and continued focus on operational efficiency.

By remaining true to our management philosophy, Nasdaq OMX is now in the preferred position of having global scale against a lean cost structure. We have positioned ourselves to succeed whatever the market dynamics.

I will begin my review with a discussion of our Options business. We couldn't be more pleased with the performance of both the PHLX and the Nasdaq NOM options market which combined had 20% of the market during the first quarter and reached 21% during the month of April. The growth in this business has been impressive.

Turning to our Nordic operations, 2009 is a transition year for our cash equity business. By the end of 2009 we will dramatically alter many aspects of the market. We will introduce central clearing through our partnership with the EMCF. We will consolidate trading onto our INET matching engine. We will launch order routing functionality and we'll offer co-locations services for our market participants.

During this time of transition, we are focused on our customers and we have been rewarded by retaining 94% market share in the Nordic and the Baltic cash equities. This is greater than many incumbents in Europe where we see the primary market traded around 74% of the FTSE 100 and the primary market trade around 75% of the Cat40. So truly 94% is outstanding.

In addition, we are starting to see encouraging signs that the markets in the Nordic's are improving. Since December, we witnessed four consecutive months of growth in both the number of trades and the value traded as the number of trades has grown nearly 30% since December and they value traded has grown about 50%.

And finally, we just recently began trading Norwegian equities on the Nasdaq OMX platform and four market makers committed to providing continuous liquidity in these securities.

Our goal through all these activities is to provide greater value by increasing liquidity and trading velocity while reducing costs for our customers.

Now turning to MTF. We recently witnessed significant growth in that market. Average daily value traded on our systems has grown six fold in the past few weeks, truly remarkable. Total traded value yesterday reached more than $300 million, a new record.

Our share has steadily grown to the point where we're now averaging more than 1% of the CAT40 trading. As we've stated on prior calls, our approach to growing this business has been to first focus on establishing connectivity with customers and then to get close to those customers by providing the market structure, services and flexibility they need.

The launch of NEURO Dock today is a case in point. Our efforts at paying dividends as our conversations remain very positive and we continue to connect new participants to our market. The equity plan which we recently announced goes into effect at the beginning of June and we expect this plan to result in continued increases in market share.

Turning to the U.S. market, the U.S. cash equity business, we are obviously disappointed with the market share during the first quarter. Recently there have been some unique market conditions in which we witnessed a structural shift in the business; for one driven by the supply side to one in which the demand side has become a factor in determining share.

With our recent fee changes, we positioned ourselves to be successful with both types of customers, with Nasdaq catering to participants that are liquidity supply providers while BX is targeted at participants that are natural demand takers. We are confident in the pricing action we took on April 15.

Importantly, we're also planning to better utilize our customer relationships and the size of our liquidity pool, the largest in the U.S. for equities. We are introducing a number of new order types which will allow our customers to lever our size, diversity of customer base and market structure to their advantage.

With respect to BX, we are extremely pleased with the launch of this market. As measured by share volume traded, BX is the most successful launch ever of a U.S. cash equity trading venue where share volume reached 100 million shares traded, approximately 50 days after launch. Truly impressive.

We are also pleased with the performance of our Access Services business. This very stable revenue stream now represents nearly one-third of our U.S. cash equity business. The product is expected to continue to perform well as we have a backlog of customers seeking additional co-location services and access services.

Moving on to our Listing business, we continue to push forward, welcoming four switches from during the quarter and in spite of a slow IPO market, we have a strong backlog of potential deals with 98 applications currently on file and we're currently happy to see that open table will be coming to the market in very short order.

We continue to witness strong demand for our Shareholder Services products as this business is one of the fastest growing within our organization.

Moving to market technology, we are working hard to improve profit margins and most importantly, lever our customer network to sell additional product. We are realizing successes as customers such as TOCOM and the Swiss Exchange launched new technology based on Nasdaq OMX.

So in closing, we have a lot to be happy with this quarter. The strength of our diversified model is demonstrated as we delivered solid results even though the U.S. equity market share was a disappointment. We remain focused on the execution of our plan and it is yielding benefits and Nasdaq OMX is the only U.S. based exchange to deliver year on year growth and non-GAAP profits.

And to give you more color on our financial results, I now turn the call over to Mr. David Warren.

David Warren

Good morning everyone. Thanks for joining us today. It's very good to be with you. As Bob mentioned, when reported on a GAAP basis our net income for the first quarter was $94 million or $0.44 per diluted share. Consistent with my prior calls with you, I will speak to our pro forma non-GAAP results from here on unless I note otherwise.

In doing this, I want to call your attention to the schedules in our press release and to our power point presentation that is available on our investor relations website at www.nasdaqomx.com. The non-GAAP reconciliations can be found in the presentation beginning on Slide 12.

You will see that our non-GAAP net income for the first quarter as Bob mentioned was $102 million or $0.48 per diluted share. Like our peers, our first quarter EPA is down when compared to the pro forma non-GAAP results from the fourth quarter of 2008. However, when you compare our results year over year to the results of our peers who I've seen over the last few weeks, we are the only exchange reporting an increase and we are up 9% when others are down, some dramatically.

Our first quarter results were also negatively impacted by the impact of a stronger U.S. dollar. Please refer to Slide 10 of our earnings presentation, and that's the power point, for this detail. But in summary, when compared to the first quarter of 2008, the stronger dollar resulted in a $0.03 negative impact on our results compared to the fourth quarter of last year. The stronger dollar this quarter resulted in a 1% negative impact to Q1 EPS.

Now highlighting what I see as the important points in our results, and these are captured in the power point as well, net exchange revenues for the quarter were $369 million, a decrease of $50 million or 12% year over year. But of this decline, approximately $35 million or 70% of the variance is related to changes in the exchange rates of various currencies as compared to the U.S. dollar.

Now turning to expenses, first quarter 2009 total expenses on a non-GAAP basis were $194 million representing a decline of $55 million or 22% from $249 million of a pro forma non-GAAP expenses for the first quarter of 2008. FX had the effect of reducing operating expenses by $26 million in the first quarter of 2009 when compared to Q1 '08.

Also contributing to a reduction in spending are synergies from the OMX and PHLX transactions. Total expenses on a non-GAAP basis also declined sequentially, dropping $19 million or 9% from the fourth quarter of '08.

Non-GAAP operating income was $175 million, an increase of 3% from the year ago period. This represents an operating margin of 47%, up from 41% in Q1 '08 and equal to the 47% achieved in Q4 of last year.

Effective tax rate on a GAAP basis for Q1 '09 was 34%. This reported tax rate includes the impact of the loss on the sale of our Icelandic Brokers Service business of $2 million which is non deductible for tax purposes so this loss flows directly to the bottom line. Excluding this loss, our tax rate was 33.3% in line with the 33.5% non-GAAP rate achieved for Q4 of last year.

Now turning briefly to the balance sheet, cash, cash equivalents and financial instruments at quarter end were approximately $746 million. Of this amount, approximately $413 million is reserved for regulatory requirements. Cash flow from operations was approximately $83 million for the quarter.

Our total debt obligations at quarter end were $2.45 billion reflecting a decline of approximately $70 million from the end of the fourth quarter of '08.

You may recall that during last quarter's call I commented that we would continue to pay down our LIBOR based debt throughout all of 2009. We paid down $56 million of this debt in this quarter and we will pay down a minimum of $56 million each quarter for the balance of the year.

We also bought back approximately $24 million of our convertible notes during the quarter. That's a reduction of $80 million. Some of you might be asking why the balance sheet shows only a drop of $70 million. Anticipating this question, let me briefly give you an answer.

The difference is due to the change in accounting treatment for convertibles that requires us to book the convert as both debt as equity components and accrete the equity to interest expense over the term of the convert. So $16 million of the $24 million par value brought in was recorded as a reduction in debt and the rest as a reduction in equity. That's probably too many words for a $9 million gap, but no one ever said I wasn't precise.

But now let's move to some larger positive results within our Treasury operations. In addition to our commitment to paying down debt, we have also signed a term sheet with a major Nordic bank to provide $100 million collateralized credit facility for the benefit of our Stockholm clearing company.

With this facility, we are able to free up $100 million of corporate cash currently set aside for regulatory purposes. While this cash is available for any corporate purpose, we expect to use this cash to pay down additional debt.

And last but no means least, with the strong performance in expense control this quarter, we are lowering our expense outlook for the full year 2009 from what we communicated when we presented our Q4 '08 results back in February.

We expect total operating expenses to be in the range of $830 million to $850 million. Included in these figures are approximately $30 million of non recurring merger related expenses, but also included in these figures are approximately $40 million in spending for new initiatives including IDCG and the introduction of ENCF as our central clearing counterparties in the Nordic's to name a few.

So I want to thank you for your time today. In my brief summary, I would say that we are executing and doing it very well. We are controlling expenses while making very critical investments in our future growth.

And with that, we're ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Richard Repetto – Sandler O'Neill.

Richard Repetto – Sandler O'Neill

On expenses, the run rate was definitely below, if you divide the guidance by four, and even if you annualize the expenses, the $194 million, the $195 million, you're going to get well below $800 million. Are you planning expense increases later on? Are we just being conservative, or what's the deal?

David Warren

I'm taking into account in that some impact of FX. If you take a look at the sec, we were about 8.4 sec to dollar in Q1. That's dropped considerably now. Again, nobody has a real accurate crystal ball for this but I think you have to anticipate some additional expense given the relationship of those currencies.

And I think the other important part is that $40 million of investment spending does have some back loaded component to it.

Richard Repetto – Sandler O'Neill

The synergies that you experienced or realized in this quarter, I think we've been expecting that OMX and PHLX technology synergies, when you consolidate to INET, were going to occur during the summer. Is that still going to take place, or has some of that occurred already?

Robert Greifeld

We're looking to make this major system migration starting this quarter with the completion in the early part of the third quarter. So there will be expense reductions associated with that technology.

Richard Repetto – Sandler O'Neill

So there's going to be even more expense cuts related to OMX and PHLX to come.

Robert Greifeld

Yes. David mentioned two factors but there is also some seasonality to the numbers.

Richard Repetto – Sandler O'Neill

You fully acknowledge the disappointment with the market share in the U.S. and the question is, you've got the two platforms, you've got some good performance out of BX initially, but how do you balance the profitability with BX pricing being much different than the INET or Nasdaq platform. Is this suffice enough to think the two platforms, is that the answer to the market share loss that you've experienced over the last five months?

Robert Greifeld

No. But it's a step. So you saw that the pricing action that we took on the 15th of April has essentially stopped the bleeding and we have to grow BX as our platform for those who are take sensitive, and the pricing we have in place today is obviously meant to generate the enthusiasm, the excitement to give that the breath of life.

I think you'll see in time that pricing migrate to something I'll call a more rational basis, and to the extent that we have greater success sooner, that day will come sooner. But we with our pricing actions want to have a clear delineation between what we'll call the Nasdaq classis with respect to its attraction to the rebate, the supply side, and we want to have a clear attraction to the demand side.

All that being said, there's a lot of things happening in the market. Some of them will be ephemeral and we don't need to focus on it, but others are structural changes in the market. We are very excited with the different order types that we are coming that allows us to have certain customers essentially scan our large liquidity pool before routing out or interacting with the general market. So we expect some of these order types to come on line very soon and as I said, we're optimistic.

Operator

Your next question comes from Howard Chen – Credit Suisse.

Howard Chen – Credit Suisse

I know you're probably sad and the rest of the management team to Chris' departure. I was hoping you could just discuss a bit about the process of finding his replacement is going and more broadly how you think about the succession planning here with the franchise.

Robert Greifeld

One is I would say that it's a good time to be looking for talent in the external marketplace and there are no lack of strong external candidates, and we also have very strong internal candidates. As I've said, I will be deliberate in my considerations of who is going to take on this role. My expected time frame is for two to three months.

So as we stand here today, I'm comfortable that the professional knowledge that Chris has brought to Nasdaq OMX business will be replaced. Certainly Chris had unique personal skills and we're not looking to replace those. But the practical knowledge out there, those who can help us lead us along will be good. We'll be well served.

Howard Chen – Credit Suisse

Historically you and the management team have average two acquisitions a year. Deal integration has been a real hallmark for the management team. I know you've got a lot of balls in the air in terms of organic growth but can you discuss your appetite to do a deal here. What's the landscape look like? I know you touched a little bit on the human capital landscape, but what's the deal environment look like?

Robert Greifeld

First as always, we focus on executing the operational business plan. As you referenced, we do have more organic growth opportunities on our plate than at any time during my tenure here at Nasdaq OMX, so that demands its own level of attention.

We have as Nasdaq OMX I think a responsibility to understand the global competitive landscape and there may or may not be opportunities for us. It's obviously an episodic event when a transaction happens and I would say that the climate is not so different than other climates, but that doesn't mean we are interested and/or positioned or desiring to do anything.

Operator

Your next question comes from Daniel Harris – Goldman Sachs.

Daniel Harris – Goldman Sachs

I was hoping you could give us some more quantitative or qualitative numbers around how the MTX in Europe is going, how many clients are on it, how many are in the pipeline to sign up and what the trajectory of what the client uptake has been over the last couple of months.

Robert Greifeld

It's been a remarkable progress. I was there at the end of March and we were matching, really trading about $50 million a day and in reference to the call, it's grown three fold, so we set a new record yesterday where we exceeded $300 million. So it's a period of time of exhilaration for the team there to have that kind of rapid growth in a month and a half and the good news is that we're just really getting started.

So we still have a large number of customers who are working very actively to be hooked up to us by June 1 when we start the equity jump ball, so we have at least 10 committed participants to the jump ball and we certainly hope to dramatically increase that number as the month waxes on.

Daniel Harris – Goldman Sachs

Here in the U.S. you spoke about the BX platform and the success you've had in the early stages, but are you seeing most of those clients transitioning from NYSE classic that raise their rates and you snuck in underneath them or is this just new share that is coming from different parts of the market?

Robert Greifeld

I think it's all the above. It's impossible for us to directly quantify where each share is coming from, but we can theorize based upon how we're positioning our pricing what the result will be and we're clearly segmenting the BX platform to be attractive to those people who are sensitive to the take rate. That's the one comment I can make with complete confidence.

Operator

Your next question comes from David Grossman – Thomas Weisel Partners.

David Grossman – Thomas Weisel Partners

As you think about some of these structural changes that have happened in the market in the last several months, some of the pricing actions, several pricing actions that have been taken, independent of tiering of the pricing, how should we think of net capture going forward? Do you think we're at a base line? Do you think on a net basis it goes up? Do you think it goes down?

Robert Greifeld

I would say this. You've obviously had a lot of discussions in the last several weeks with respect to the competitive positioning of our U.S. transaction business and the discussions are centered not so much about reduction in capture rate but the structural shifts in the market where the demand side is controlling the debate more so than the supply side.

So if you look at the last six years, you didn't go wrong by catering to the supply side. That's no longer one size fits all answer. So on the good news side, I think we see structural discussions more so than compression discussions, but we live in a competitive landscape and it's our job to lever what we call massive scale against extreme efficiency then we'll be able to deliver to our customers very attractive capture rates while also delivering superior returns for our investors.

So if you look at our actions here, moving the PHLX platform to the INET platform in the second quarter going to the third, moving the Nordic's into the INET platform in the fourth quarter, seeing increasing uptake in the NORO platform, that just gives us a fundamentally different business model than our competitors. So we have that as our driving philosophy.

David Grossman – Thomas Weisel Partners

So looking at that last point that you just made, do those systems migration, I think I understand the cost advantages, are there any reasons to think that your share or some revenue opportunity that makes you more competitive from that standpoint other than on the cost side?

Robert Greifeld

We obviously are focused on market structure and advantages, enhancements that will give us advantage in the market. But let's understand, to the extent that we have a fixed cost base that then is spread across a large number of transactions, what we call massive scale, then we're in a position to deliver what our customers first demand and that's attractive capture rate, and that's an attractive transaction rate.

We want to do that. We're here to listen to our customers and deliver value to our customers while servicing our shareholders. So it's a clear mission. We will continue to look at the price to make sure we're delivering the best value to our customers. We've said it from six ago, we intend to be a price leader in this marketplace.

We're going to do that not as a loss leader as some upstarts ECM's or MPM's might do, but as part of an overall business plan to make sure we have the proper level in place that we can serve two masters.

Operator

Your next question comes from [Alex Crem – Barclay's Capital]

[Alex Crem – Barclay's Capital]

Sorry to come back one more time to the whole pricing market share discussion but maybe asking this a little different, do you think this whole pricing trend has been really a lot of changes here, but all the changes we've seen will just continue. Everybody's just tweaking pricing all the time, or do you think that you actually have an opportunity to maybe do some wholesale changes that make changes in terms of how business thrives and maybe lever some of your non transaction businesses and your dominant market share right now to maybe lock clients in by using all you can eat trading, something along those lines before things trickle down further.

Robert Greifeld

I think you raise some very good points and everything that you're mentioning are things that we think about and consider and I'd say that we are intensely thinking about it as we go through this period of time. But I think the important point here is, in this first quarter we were disappointed by our market share in the U.S. transactions business.

So we're not saying anything different than that. We clearly have to do a better job there. But, we're extremely proud of the overall performance of the corporation. So again, in my mind we're spending too much time on the U.S. transactions business. We are a diversified business. We delivered $0.48 per share of our earnings. We grew our business year on year while obviously suffering headwind in U.S. transactions.

It just points to the strength of this business model, and we are not the Nasdaq we were three years ago. It's a different set of drivers that gets us to this result. We're not here to minimize the importance of U.S. transactions, but we're not also here to say that's the only thing we should be talking about.

[Alex Crem – Barclay's Capital]

You mentioned recently that the most time you spend these days actually on the interest rate flops and I don't know how much there is to say, but talking to some dealers out there it seems like the one that already has a grasp on the business which is LCH has done a lot of business already with the dealers and when you think about the others that are looking to get into the business, it seems that they might have an edge in terms of cross margin with existing products and so forth. Where are you coming in and what kind of edge do you bring to the table that you can really have a value proposition here?

Robert Greifeld

One is we are happy with the progress that IDCG made in the first quarter. This progress is obviously something that does not show up on any of the financial statements as of yet. But let's understand very clearly that what we're offering to the marketplace is unique. We're bringing to the marketplace an all to all clearing model that will essentially, if you read some of the publicity that came out yesterday, will allow a broader participation in this market.

I think it will help mitigate risk in this market and it will fundamentally help this market grow. So it's a unique product offering at this point in time. It's one that it's logic. I think it's compelling to certainly GSC's, to the natural buy side and to a large part of the dealer community, and it offers as part of this model, advantages that you cannot get in other environments where we have certainly segregation and margin advantages.

So we're working hard at it right now. We understand we're trying to change the world. We understand that there are other efforts to do different things but they try to say they're similar, but we're having fun with it. And as I said, we made tremendous progress in the first quarter and we hope to continue with it in the second quarter.

[Alex Crem – Barclay's Capital]

I noticed on the Market services side I think some line items shifted a little bit. Can you talk about what you did there in terms of re-statement?

David Warren

We moved $11 million from other market services and that went into, just to give you geography on it, market technology, $3 million went there executed to some technology contracts we have, Access services took up $3 million which would be primarily related to the European Access services, European listing fees was $2 million, Corporate services was $1 million and then there were some other ones of about $2 million.

Operator

Your next question comes from Michael Vinciquerra – BMO Capital Markets.

Michael Vinciquerra – BMO Capital Markets

You mentioned the Access services number being a third of your U.S. business essentially. Can you talk a little bit more about the continued growth there? What other types of clients still haven't co-located with you at this point and is that a business that is kind of a high fixed cost, low income incremental cost type of business?

Robert Greifeld

First is that we pent up demand. We have demand greatly exceeding supply at this point in time so we're working very hard to increase the supply. We expect that we'll have a lot more capacity coming on stream in July following through the rest of the year so we do expect some healthy revenue growth in that business in the second half of the year.

I think the profitability of that business is relatively consistent. It doesn't de-scale, nor does it scale. It is what it is, so we're very pleased with how we're running it and the margins we're getting from it but we don't see benefits of scale.

Michael Vinciquerra – BMO Capital Markets

And you comments are for both Europe and the U.S.?

Robert Greifeld

It's primarily here in the U.S. and one of the exciting growth periods we'll have in 2010 as we introduce the INET platform in the Nordic's in the fourth quarter, we will for the first time offer co-location services there and we have data center capacity. We have supply available.

So when you look at our opportunities into '10 you see that the Nordic's, we expect that to be a driver of growth for us and that you'll have increased velocity as a new set of players able to transact in that market as we have the platform they want to trade on, and we have central counter party clearing which will greatly reduce the post trade costs.

So we have a triple win. We'll have win on the clearing side with our interest in EMCF, a minority interest in EMCF. We'll have increased velocity of trading and we'll also be able to offer access service of co-lo and connectivity, so wonderful opportunities for us.

Michael Vinciquerra – BMO Capital Markets

Where do the Nord Pool revenues shake out in your revenue detail page? Where are they included?

David Warren

It would be in European derivatives.

Operator

Your next question comes from Niamh Alexander – Keefe, Bruyette & Woods.

Niamh Alexander – Keefe, Bruyette & Woods

If I could shift towards the Issuer services and we start to see some very, very early activity in IPO's and of course the secondary is picking up as well, how are your conversations with issuers going? How do you think about Nasdaq's competitive positioning especially in the U.S. now, maybe even versus a year ago?

Robert Greifeld

I think our positioning in the issuer services improves on a weekly or monthly basis. I think we're getting to a point where we can fairly compete for the vast majority of issues or companies that are listed on competing exchanges and that's dramatically different than three years ago. And that's all we ask for. If we have a fair chance to compete, then the odds that we win are quite strong.

Niamh Alexander – Keefe, Bruyette & Woods

In terms of the conversations with issuers, are you getting a sense that you're expecting to see a pick up in filings? Have your conversations picked up recently?

Robert Greifeld

I think the point I would direct you to is the fact that we have 98 companies on the backlog. People do not file with the SEC and go public because they have nothing else to do. It's a laborious task and it means that they have a fundamental belief in their business model and are looking for a window to open.

We're here obviously hoping for some parting of the clouds as we march on in the year and these companies are ready to go.

Niamh Alexander – Keefe, Bruyette & Woods

With respect to the issuer services, and I know you're kind of frustrated that we keep coming back to cash equities because it is only one part of your business, but from our perspective it's the part where we just see more extreme price pressure recently and some market share declines, so how do you view the market share of the trading with respect to the listings and the issuer services businesses? Is there a level of market share where you feel like it might hurt the competitiveness there that the level of market share where you'd rather not get to?

Robert Greifeld

I said in previous calls it's our job to make sure we're balancing market share against profitability. Right now we are not comfortable with our market share performance and it's our job to address it.

Niamh Alexander – Keefe, Bruyette & Woods

You're broadly diversified but maybe help me understand what product areas might be of interest to you in organic, because I know you're already looking at the clearing initiative on an organic basis. What should we think about there?

Robert Greifeld

I can't be too precise as you might guess, but I would say what I've said before. Our acquisition discipline is well developed here. First, if we do a transaction, it has to be something that leverages the mother ship. It has to be strategically significant. We always talk about one bowling pin to the left or right.

So you'll not see us do something that comes out of left field. It has to leverage. It also then has to deliver results to our shareholders where we want it to accrete within on year of closing of the transaction. As we've said, for a larger transaction we might wait a little bit longer, but if you wait too much longer, implicit in that is some view of the future which we know we really don't have a crystal ball. So the quicker the accretion, the more sure we are about it.

We have a great strategy team led by Dana Freedman. We're aware of all the different assets on a global basis. We have a viewpoint of the attractiveness of these assets to Nasdaq OMX either today, tomorrow or sometime in the future, and that guides us through the day.

Operator

Your next call comes from Edward Ditmire – Fox-Pitt, Kelton.

Edward Ditmire – Fox-Pitt, Kelton

I had one question on equity clearing and then I wanted to move on to U.S. options. Can you give an update on what's going on in the U.S. equity clearing initiative?

Robert Greifeld

One is we have been a direct beneficiary of our announcement of our move into clearing and as the largest single customer of DPPC, we welcome the price decreases that they've given to us and that certainly has helped us in this quarter and quarters in 2008.

That being said, we're in active dialog with the commission with respect to this clearing model that we'll be bringing to the marketplace which I think has some unique advantages and some clear differentiators to how things are processed today and soon as we get further along with the commission, we'll shed more light on that, and I would say our development team is hard at work on this effort right now.

Edward Ditmire – Fox-Pitt, Kelton

Can you talk about some other things that are driving the good growth in the U.S. option share?

Robert Greifeld

One, as you know, we're situated like we are in equities now on basically both sides of the philosophical divide. So with our Philadelphia options market we have a dealer centric model that is I think more attuned to the customer requirements of that model. I think it's been very careful execution of the business plan that has allowed that organization to grow its share

So let by [Adam Noones] and [Hal Wittman], we've done incredible well. What exciting is that as we complete the migration to the new system, we do have a number of initiatives that we've kept on the shelf waiting for the new system to come into place, so you'll see from us in the months after the conversion, a number of different steps to help increase that market share that much further?

Now the other side of the aisle, with NOM, we are pleased with the fact that we made tremendous progress in the quarter. We certainly have a belief that a price time model will have an increasing share in the options market places, especially in the penny issues and we're happy to be positioned there. We're happy to see the growth and we expect to see that continue to come.

We also benefited by the fact that you have basic organic growth in the segment and we're pleased to ride that wave.

Operator

Your next question comes from Justin Schnack – Rosenblatt Securities

Justin Schnack – Rosenblatt Securities

I'm wondering on the M&A front it seems like you are challenged right now on the top line with some of the core businesses and a lot of the new initiatives are long term in nature and given your outstanding track record in indentifying and integrating acquisitions, can we expect you to return to or consider returning to the M&A market any time soon?

Robert Greifeld

We covered that but it's a top of eternal fascination. I would say this; you can't predict M&A activity. It's episodic. It's our job to understand the different assets that are available on a global basis and have some pre-conceived knowledge of whether or not they are strategically to us and if there's a transaction that can be done that accretes to our shareholders in a reasonable period of time.

So that's the radar we use as we go through the waters here and that's probably all I can say.

Justin Schnack – Rosenblatt Securities

The other thing goes back to your response to the question about co-location services. I'm curious, you mentioned that there is much greater demand than supply right now and you're working to increase supply. Given the nature of folks who ask for that type of service that's very high frequency in nature, what might that mean for volumes for the rest of the year, because clearly we're in a position now where volumes are a lot higher this year. The increases year on year are not what most people would have expected last year, and the worry is that the comps get more difficult in the second half of the year. Any thoughts you have on that front will be appreciated.

Robert Greifeld

Certainly the comps in the second half of the year are tough but I would say this. We failed to execute properly in that we didn't anticipate really remarkable demand for co-location services. So as I meet our customers today that's generally the first thing they ask for, is we need more space and a new data center?

We've been on it in an aggressive way for the last number of months. And as I said, we have increased capacity coming on in July and that capacity increase will continue through the balance of the year into 2010, so hopefully we'll start meeting some of that demand.

The interesting and exciting thing as you put this capacity in beyond the direct revenue increase from co-lo which we do very profitably, what does that mean to transaction volume? I would say this. It's not going to hurt it. We're not going to predict how much it's going to grow but it will certainly be a benefit.

Operator

Your next question comes from [Shane Finemore – M&K Partners]

[Shane Finemore – M&K Partners]

Can you explain to me what's in the draw that allows to take your market share in the Nordic market high relative to the competitors in the other European countries?

Robert Greifeld

That's a great question and one we're very happy to answer. I think led by Hans, the team has done a remarkable job listening to the customers. We have come with creative pricing which represented a net reduction to them but still allowed us to operate very profitably. So again, at the end of the day, focus on the customers, making sure you understand what they're asking for and delivering that.

Operator

Your next question comes from [Alex Framm – Barclays Capital]

[Alex Framm – Barclays Capital]

On the cost side, can you talk about how much was merger synergies and related or was it actually a component this quarter of tightening the belt in this environment and if that all was what we're seeing basically persistence X any new initiatives?

Robert Greifeld

I didn't break it out but I think clearly the drop in our expenses comes from both. It comes from continuing to drive and deliver on efficiencies that we get from the acquisitions and from the successful implementation of those, but a lot of it also comes from general good cost control.

[Alex Framm – Barclays Capital]

On the M&A front, not to get too specific but there's certainly some regional smaller exchanges in Europe, in the eastern European countries, how do you view those exchanges going forward? Is this something that's actually an opportunity because maybe they have more protective markets because the MTS might not be as interested in those smaller markets, it's actually an opportunity to align yourself with them? What's going to happen to those?

Robert Greifeld

I would say possibly it's an opportunity but possibly it's not. We don't know. But as I've said in this call and it's about as far as I can go, it's our job as Nasdaq OMX to understand the different assets, the different institutions that are out there and have a point of view before any asset would come into play. So we do have our point of view. We're not going to share it on this call but we know what's going on in our space on a global basis.

Operator

Your next question comes from Christopher Allen – Pali Research.

Christopher Allen – Pali Research

I was wondering if you could comment on any potential regulatory change that may be coming either in U.S. or over in Europe. Obviously there's a lot of discussion [inaudible] the major risk there seems to have abated. Just any commentary on how to think about new regulation on how it might impact any of your businesses going forward.

Robert Greifeld

When you look at the cash equity market on a global basis and the list of derivatives markets, they are regulated, and you can argue the wellness of the regulation but they are regulated. So when you see the re-regulation is going to develop on a global basis, it's going to be primarily focused on systemic risk and the over the counter derivatives marketplace.

So we clearly see opportunity in the developing landscape and we have staked our claim. The new world will develop through our IDCG effort and as I sais, we're very pleased with the progress we made in the first quarter and the progress continues in the second.

Operator

Your next question comes from Daniel Fannon – Jefferies & Co.

Daniel Fannon – Jefferies & Co.

Can you address the visibility within the technology side, how much of that you think is subscription based and how we think about that going forward?

Robert Greifeld

You're speaking to the market technology business?

Daniel Fannon – Jefferies & Co.

Correct.

Robert Greifeld

Okay, I'll let Magnus answer that question.

Magnus Bocker

I think you should see that part as we normally go forward and as we also disclosed it's three different kinds of revenues. It's the license and support business, it's the project business and it's what we normally refer to as other.

When you look into that you should see that support and also some of the projects are very stable and comes in on a very regular basis, and that's why we also have left shifts quarter on quarter on that revenue.

And over time it's also shifting over to the U.S. GAAP accounting for it you will see even less changes in hopefully stable growth. So the short answer is it's very stable revenues coming out of that business.

Daniel Fannon – Jefferies & Co.

When you think about the pipeline for new licenses or new transactions is that something that's more later on is it the dialog there, is there a lot of IFP's or new action there today?

Magnus Bocker

I think we have as Rob mentioned, we have an interesting pipeline coming up for the business which we're working with. We had a very positive announcement earlier this morning where TOCOM which is the first non Japanese technology platform going live in Japan with our technology. They went live yesterday which is something we're very proud of.

When you look into what we do, seeing a contract on the technology side, think about it as a five year contract time, so when you add that value to it, you should see it over five years. That's the importance of seeing why it's so stable.

Robert Greifeld

The one thing I would add, and I think I mentioned this previously, we signed a memorandum of understanding with Osaka and I have been a critic of exchanges signing these meaningless MOU's, but I would direct you to the fact that this is a meaningful one, and we expect it to result in a very long and I think fruitful partnership between us and the Osaka Exchange.

David Warren

Some of that question is prompted by the decline in revenues from Q4, just there are obviously foreign currency impacts, but one of the things we had last year was revenues coming in from Nord Pool following acquisition of that. Obviously we don't get the benefit of that technology revenue, but we get the benefit of the revenue from Nord Pool now owning it, but that obviously appears in other parts of the income statement.

Operator

There are no further questions. I'd like to turn the conference back over to our speakers for any additional or closing remarks.

Robert Greifeld

I don't have any closing remarks beyond the fact that we had a very strong quarter in a challenging economic climate. We're proud of it and I look forward to getting to your questions later in the day and also to reconvening in three months time. So thank you.

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