NYSE Euronext Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.30.13 | About: NYSE Euronext (NYX)

NYSE Euronext (NYSE:NYX)

Q1 2013 Earnings Call

April 30, 2013 8:00 am ET


Stephen Davidson - Vice President of Investor Relations

Duncan L. Niederauer - Chief Executive Officer and Director

Michael S. Geltzeiler - Chief Financial Officer and Group Executive Vice President

Lawrence E. Leibowitz - Chief Operating Officer


Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division

Howard Chen - Crédit Suisse AG, Research Division

Christopher J. Allen - Evercore Partners Inc., Research Division

Alex Kramm - UBS Investment Bank, Research Division

Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division


Good day, ladies and gentlemen, and welcome to the First Quarter 2013 NYSE Euronext Earnings Conference Call. My name is Caroline, and I will be your operator today. [Operator Instructions] I would now like to turn the call over to Stephen Davidson, Head of Investor Relations at NYSE Euronext. Please go ahead, sir.

Stephen Davidson

Thanks, Caroline. Good morning, and welcome to the NYSE Euronext First Quarter 2013 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 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.

We will discuss non-GAAP financial measures during this call. These non-GAAP measures are fully reconciled in the tables attached to the text of the earnings press release that we issued earlier today. 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.

Duncan Niederauer, Chief Executive Officer, will review the highlights for the quarter, update you on key developments in our businesses and conclude with an update on the acquisition by ICE. Michael Geltzeiler, Chief Financial Officer, will then review the financial results for the quarter. We will then open the line for your questions. Also in the room for the Q&A session is Larry Leibowitz, Chief Operating Officer.

We are incorporating slides to the call today which are available for viewing on our website, and Duncan and Mike will refer to the slides during their remarks. With that, let me turn the call over to Duncan.

Duncan L. Niederauer

Thanks, Stephen. Good morning, everybody, and thanks for joining today's call. I'll begin my prepared remarks on Slide 4.

In the first quarter, we benefited from the actions that we've taken over the past several quarters to improve the fundamental earnings power of the company. We saw improved trading volumes in our European derivatives franchise and launched new products. We are on track to transition our U.K. clearing to ICE Clear Europe by the end of June, and we are focused on realizing the value of our continental derivatives clearing after the first quarter of 2014.

We are continuing to see strong momentum in our Listings business, achieving a 75% market share of tech IPOs in the first quarter on the heels of last year's similarly excellent results. We are beginning to generate incremental revenue from our new market data agreements. We've continued to reduce our expenses and are on track to exceed our full year 2013 guidance. And lastly, the reduction in our share count and other capital management actions we have taken are beginning to have a meaningful impact on earnings.

The macro backdrop, as I noted on our last call, continues to show encouraging signs for the global economy, so I am optimistic that we are on a slow trend up punctuated by event-driven volatility along the way.

In the meantime, we are continuing to execute against our Project 14 commitments to our shareholders and also preparing for our combination with ICE, which I will go into in more detail on the later slides.

The net result of all of this is that we reported $0.50 -- $0.57 a share on $600 million in revenue this quarter, which represents a 21% increase in earnings year-over-year and a 33% increase quarter-over-quarter. So in summary, we are pleased with our results and we are looking to build momentum as we move through 2013 and into our proposed combinations with ICE.

Please turn to Slide 5. Slide 5 is familiar to all of you and illustrates the strong progress we have made in executing against our strategy. As you can see from this slide, we are not taking our foot off the gas. I will highlight a couple of initiatives on the growth side first.

We are launching new derivatives products. In our Liffe business, we continue to move out, out on the yield curve. Remember, our Liffe business in the U.K. has historically been almost entirely focused on the short end of the curve. So we've continued to expand with mid-curve options that we launched last year and the Swapnote products that we're now offering which move us further out onto the yield curve. Once we're in the ICE clearinghouse in the second half of this year, expect to see us launch even more new products.

Next, we continue to be very focused on maintaining the position we enjoy in the capital formation and Listings business. We were #1 in 2011, we were #1 in 2012 and we're off to a terrific start this year. The success we had last year winning 80% of the big tech deals has continued into 2013 and given the pipeline we can see and the deals we know we have already won, some of which have not been made public yet, we believe that this will continue.

Lastly, we are about to see the result of having revamped all of our global market data agreements and launching some new products in that business. All of these growth initiatives are complemented by our accomplishments on the efficiency in capital management fronts, which positively impacted our results this quarter.

Please turn to Slide 6. Slide 6 provides an update of our FICC businesses. We saw a nice rebound in NYSE Liffe volumes in the first quarter, which were up 36% year-over-year with FICC product volume in Europe of 53% when compared with the same period last year. In the upper left quadrant, our flagship Euribor Futures contracts registered an all-time high in trading volumes and ADV for the first quarter of 2013 was 1.2 million contracts, an 82% increase from the last quarter. The surge in volume was driven by a number of key events in the Eurozone, including early LTRO repayments by banks to the ECB in February, uncertainty surrounding the Italian elections and the Cyprus bailout, as well as heightened expectations of a potential rate cut. Euribor options also showed even stronger growth this quarter driven by the continued success of our innovative mid-curve option products, which reached an ADV of 680,000 contracts, a 143% increase from the fourth quarter.

The aforementioned euro Swapnote product, which has been a focus for growth, has had a solid start to the year. Year-to-date Swapnote volume has traded 27 billion of notional, and by way of reference, the CME swap future has traded 19 billion of notional year-to-date.

Among other products, Gilts in the upper right-hand quadrant of the slide, continue to benefit from quantitative easing by the Bank of England. In the lower left-hand quadrant, you can see that in our Liffe U.S. business, we've seen positive volume growth in open interest trends for the first quarter in the MSCI product suite with ADV up 89% year-over-year and open interest up 119% year-over-year. Momentum also continues to build for futures on the DTCC GCF Repo Index as shown in the lower right-hand quadrant of the slide. We experienced record volume days in January, and average daily volume is up 56% sequentially.

Before moving away from the FICC business, I wanted to reiterate our stance on clearing for our U.K. derivatives business. We are on track as discussed previously to transition to ICE Clear Europe at the end of the second quarter. All of our regulatory filings have been submitted, the technology build has been completed, and in May we expect to step up our technology integration and member testing.

Please turn to Slide 7. Slide 7 provides you with selected updates in our equity derivatives businesses. First, on the left-hand side of the slide, let's talk about U.S. options. In January 2013, the NYSE Amex Options and NYSE Arca Options complex reached their highest monthly combined equity options market share to date of 29.4%. We were also the first options exchange to receive SEC approval to begin trading mini options, a product designed for the retail investor which we launched on March 18. Product innovation and development continued to be a focus and in the first quarter, we were able to secure a semi exclusive licensing agreement with the Russell index group. These products began trading this month.

On the right-hand side of the slide, we talk about our FTSE Equity derivatives franchise. This franchise provided a strong start to the first quarter with volumes up 29% year-over-year. The increase in volumes saw a return to trading in our core FTSE derivatives franchise. The FTSE 100 index options were up 86% versus the same period last year and the combined open interest for the FTSE franchise did 13% above 2012 levels.

Please turn to Slide 8. Slide 8 provides you with a snapshot of our cash equities business taking a particular look at trading volumes and net trading revenue. Over the past few years, our objective in the cash trading businesses has been to focus on profitability and stabilizing market share. In Europe, we have maintained our share at around 65% and pricing has been relatively stable. In the U.S., we have opportunistically looked for ways to increase pricing, which has helped to soften the impact of declines in trading volumes and the growth in off-exchange trading, which has impacted our market share.

Before moving onto the next slide, I want to address 2 important issues impacting these businesses. The financial transaction tax in Europe and off-exchange trading in the U.S.

First, let's talk about the state of play with regard to the FTT. As many of you may recall, the commission issued a proposal on February 14 for a broad-based tax on equities, equity-like products, derivatives, bonds and others, which only applies to those member states but could have extraterritorial impact. In terms of the enhanced cooperation group, there is no agreement between the 11 countries as to how the tax will be collected, on what products it should be collected or how the proceeds would be used. In fact, several heads of national debt management agencies, including France and Italy, have publicly warned that the FTT could push up yield spreads and increase borrowing costs. Given all these issues, the Commission's implementation date of January 1, 2014 seems optimistic. It continues to be our view that this tax as currently outlined would likely destabilize the European financial markets, negatively impact returns and increase fees for average investors and mutual fund owners, exactly the wrong policy at the wrong time. Any policy measure that has the direct effect of draining liquidity from the capital markets is a measure that will hurt European entrepreneurs, especially the SMEs that so desperately need to access the markets to finance their growth. But given that this dialogue continues, it bears watching.

Shifting to the U.S., with regard to off exchange trading. Off exchange trading reached a record level of 36% in the first quarter of 2013, up from 34% in the fourth quarter. To be clear, we think that this is not just about dark pools. Dark pools are only 1/3 of off-exchange trading, the other 2/3 is internalization. While we think there is a place for alternative execution venues, we worry about the aggregate effect of off-exchange activity on market quality and question whether the pendulum has swung too far. As such, we plan to continue raising awareness with regard to our market quality concerns and we'll also continue our level the playing field advocacy efforts here in the U.S. We are looking forward to working closely with Mary Jo White, the new chair of the SEC. Mary Jo has a stellar reputation. She understands the issues that we face with the fragmentation of our markets, and I am confident that we will be able to work together as an industry with the regulators to improve market quality.

Please turn to Slide 9. On Slide 9, we show the continued momentum in our listings franchise. We ranked #1 in IPOs year-to-date 2013 and follow-on proceeds globally, raising $12.1 billion in total global proceeds from 26 IPOs and $48.3 billion in total global proceeds from 140 follow-on offerings in the first quarter of 2013.

In the U.S., we led the market with 17 IPOs, excluding closed end funds, and continued the capture the majority of technology-based IPOs. We saw larger deal sizes from larger companies coming to the market. Private equity-backed companies which made up about 35% of the market year-to-date, carveouts and yield-oriented deals drove the volume in the first quarter. We listed 6 of the 8 private equity-backed IPOs in the first quarter, which raised a total of $1.8 billion or 68% of all proceeds from private equity-backed IPOs. In Europe, we welcomed 6 companies to our markets including Infosys, which was the first company to be admitted to trading on our markets in London, Paris and New York.

Please turn to Slide 10. Slide 10 outlines the new strategic paradigm for the technology business that we introduced last quarter. While the market continues to be challenging for technology sales as you saw in our first quarter results, the market demand for disruptive technology is increasing and we have also increased our dialogue with global trading organizations regarding game-changing service offerings, the hosting of matching engines and open connectivity to global markets. The trading community is becoming even more focused on cost optimization and is looking to us as a trusted partner to provide innovative ways to improve their trading infrastructure models. Regulatory obligations continue to increase, resulting in additional assets required to be traded on exchange. NYSE Technologies is working closely with customers to address these needs throughout our product and solution suite. And NYSE Technologies has the data center and solution set to be well-positioned to take advantage of this industry shift.

So how is this shift in paradigm translating into results? Our client, the Warsaw Stock Exchange, successfully completed its migration of its cash and derivatives markets to UTP and connected to our SFTI network, which will extend their reach across NYSE Euronext global market data and trading infrastructure.

In terms of our large-scale infrastructure hosting capabilities, we are working with several global trading organizations to provide comprehensive trading infrastructure managed services. These are large, recurring revenue transactions. We launched the best trades and quotes market data product, which provides substantial cost savings to retail brokerage firms and wealth management organizations who require access to level 1 data products. And lastly, we are beginning to generate incremental market data revenue that will build through the second half of 2013, and we have significant plans for our SuperFeed business that will begin to generate additional revenue in the second half as well.

Before I move onto the next slide, I wanted to address the recent media coverage of our NYXT business. Jon Robson, the leader of that business, has strengthened his leadership team which is focused on executing against the strategic vision I just outlined. At the same time, we are working with ICE to explore how we will leverage this important business capability in the new organization, post-merger. As we look to expand our capabilities for clients, we regularly have discussions with potential partners, clients and industry participants to explore new opportunities to deliver best-in-class solutions for our trading community. We have always conducted these partnership discussions and we will continue to have discussions with partners, now and in the future, both traditional and nontraditional. We have an exciting business with significant potential that we will continue to drive forward.

Please turn to Slide 11. The next 2 slides focus on the transaction with ICE. Slide 11 is a quick review of the compelling nature of the combination. When you look at the combined business, you see a company with a completely different complexion than the one we have today. The cash trading segment, which is arguably the most competitive and commoditized part of our business, generated 7% of our revenues in the U.S. and 9% in Europe in 2012. This combined 16% would decline to around 10% of the combined company and even less after the envisioned IPO of Euronext. The more lucrative and competitively stronger derivatives business, which is 26% of our revenues in 2012, would increase to 44% of the revenue base for the new company. Most importantly, almost 50% of our pro forma net revenue will be generated from this derivatives -- from our derivatives businesses. This is a critical aspect of the transaction because of the relatively high margin and its impact on our overall valuation. We are excited about the potential and remain confident that our companies can unlock significant value and growth, a confidence the market seems to share. We believe that change will be a constant in our industry for some time to come, and our combination brings the experience, assets and leadership together that is necessary to drive sustainable growth for our investors and our clients.

Please turn to Slide 12, which will be my last slide before I turn it over to Mike. We put this slide in the deck because we've gotten a lot of questions about next steps in the transaction timeline, so we thought we would lay it out for everybody on this slide. We are currently working on 2 parallel tracks, 1 focused on the competition approval process and the other on general transaction requirements that are needed to close the deal. On the competition side, we've completed the U.S. process with the DOJ under the Hart-Scott-Rodino Act, and we are now focusing on the European requirements. Last week, we received the official referral of the competition review to the European Commission from the United Kingdom, Portugal and Spain, so we are now working towards the completion of our notification of the commission, known as Form CO, which will serve as the basis for the competition review. Upon the receipt of our notification, the European Commission will begin Phase I, which is a 25-business day review process. If an in-depth investigation of the transaction is required, so called Phase II, that would start a 90-day clock after that. As we've learned in the past, the timelines for these review processes are not guaranteed and are just guiding principles and are subject to further extensions based on circumstances. But we've already made good progress. Our Form S-4 has been filed with the SEC and has been deemed effective by the SEC as of today. And on the back of that, both companies, both we and ICE, have set the date for the shareholder vote on June 3. We still believe that this transaction will be finalized in the second half of this year. Our conversations are also ongoing with all stakeholders involved with the IPO of Euronext, which we expect will follow soon after the closing of the primary transaction. We will continue to be transparent about the process and keep you updated on key milestones and developments.

With that, I would now like to pass the call over to Mike for a review of the first quarter's financial results.

Michael S. Geltzeiler

Thanks, Duncan, and good morning. Slide 13 provides comparative GAAP results for the first quarter of 2013. Our GAAP EPS was $0.52 per share, which compares favorably to the $0.34 per share we reported in Q1 2012.

Our non-GAAP EPS of $0.57 per share reflects 2 primary adjustments this quarter as reconciled in the schedule. In the quarter, we reported an $8 million charge for merger expenses and exit costs, primarily related to the ICE transaction. The other item was a $10 million pretax charge to fair value outstanding restricted stock awards resulting from the increase in our stock price. Following recent shareholder approval of our amended plan, outstanding restricted stock awards will again be fixed in value under equity settled accounting rules. As a result, equity compensation costs in the second quarter of 2013 will decline by $10 million, hence the adjustment. After adjusting for these items, we derived non-GAAP EPS of $0.57 per share.

My review of our financial results from this point forward will exclude the impact of merger expenses, exit cost, the stock-based compensation charge I discussed and discrete tax items.

Slide 14 provides our non-GAAP financial results for the quarter. Net revenues of $600 million on a reported basis were in line with the first quarter of 2012 but up 7% versus the fourth quarter. The increase quarter-over-quarter was driven by higher volumes in our Global Derivatives businesses. Reported costs were lower by $25 million or 6%, driving a 12% growth in operating income. Diluted share count declined by 15 million shares year-over-year from our 2012 share repurchase plan, which helped drive EPS growth to 21% for the quarter.

Slide 15 and 16 detail the financial performance for our Derivatives segment. Derivatives revenue in the first quarter was $201 million, higher by 14% year-over-year and up 26% sequentially, attributable to a strong pickup in trading volume. Euribor Futures volumes, in particular, increased 82%, while both Arca and Amex options reported growth in both market share and ADV. The revenue growth on flat cost helped boost EBITDA margins to 56%.

Derivatives accounted for 34% of our consolidated net revenues and 43% of our operating income.

Revenue capture for NYSE Liffe was lower year-over-year and quarter-over-quarter, attributed primarily to clients hitting volume tiers with the increase in volumes. Capture for the U.S. options business was higher year-over-year and quarter-over-quarter driven by positive mix.

Similarly, Slides 17 and 18 show the financial performance for our Cash Trading and Listings segment. Cash Trading and Listings accounted for 48% of our consolidated net revenues and 47% of our operating income in the first quarter. Cash Trading and Listings net revenue was $287 million in the first quarter of 2013, down 6% versus the prior-year period but up 2% compared to the fourth quarter of 2012. European cash market share across our 4 primary markets, which excludes off-exchange trading volume, was 65% in the first quarter, up from 64% in the prior year. In U.S. cash equities, our market share across all takes declined 120 basis points both year-over-year and quarter-over-quarter. Off-exchange traded share increased to 36% of the U.S. equities market, up from 34% in the prior year.

Global listings revenues, including government services, which we report in other revenues, is up 9% in the first quarter. Revenue capture for U.S. cash increased to $0.043 per 100 shares handled for Q1, above the $0.042 recorded in the first quarter of 2012 and the $0.040 in Q4. The incremental increase in capture is due to volume mix and minor pricing adjustments on NYSE Arca.

Revenue capture for European cash on a per transaction basis increased to $0.62 in Q1 2013 from $0.57 in Q1 2012 and $0.58 in Q4 2012. The increase year-over-year was driven by an increase in trade size and the decision to reduce listing fees for European warrants and increased trading fees.

Slide 19 details the financial performance for our Information Services and Technology Solutions segment. Information Services and Technology Solutions accounted for 19% of our net revenue and 10% of our operating income in the first quarter of 2013. Segment revenue was $112 million, a decrease of $9 million from Q1 prior year and a decrease of $8 million sequentially. As Duncan mentioned earlier, the sale shortfalls were attributed to the absence of any significant new managed services sales whereas the prior quarter had large sales with Russell and ATG in Q4 and Warsaw in Q1 prior year. The environment continues to be challenging, but we believe this business is well-positioned to leverage the industry's focus on cost optimization and changing infrastructure models. With the new global market data agreements in place, we expect to see technology services revenue growth to accelerate in the back half of 2013. These incremental revenues will begin in Q2 and are expected to grow as the year progresses.

Slide 20 provides you with the progress we've made with our Project 14 cost efficiency program. Over the past 12 months, we have reported total operating expenses of $1,556,000,000, which is $110 million below the 2011 base level of $1,666,000,000. Adjusting for currency rates and portfolio changes in discrete investments of $49 million, we arrived at an annualized expense base of $1,522,000,000 to the first quarter of 2013, which is $144 million below our 2011 starting point or 58% of the total $250 million to be saved by the end of 2014. You will recall that our commitment for P14 savings was originally 65% of the $250 million by the end of 2013, so we are well on our way to exceed this target.

Based on a positive development of expenses in the first quarter and a series of savings initiatives planned for this year, including the $15 million we expect to save in the second half of 2013 with our moves to ICE Clear Europe, we now expect our full year 2013 reported expenses to be less than $1,525,000,000.

Slide 21 details our cash and debt position as of the end of March. Gross debt at March 29 was $2.5 billion. This is basically the same level of debt we had at year end, as we do not have any variable debt that we could pay down with our excess cash from the quarter. Our cash balances grew by $147 million in the quarter. In June, we plan to retire the remaining $414 million of 4.8% U.S. notes. Our debt to EBITDA leverage ratio decreased to 2.3x on stronger EBITDA generation. Had we been able to use our excess cash to retire debt, leverage would have been reduced to 2.2x for the quarter. Capital expenditures were $27 million in the quarter, well within our guidance of less than $150 million for the full year. And last week, the board declared a $0.30 quarterly cash dividend for the second quarter of 2013, which is payable on June 28.

Now I'd like to turn the call back to Duncan for closing remarks.

Duncan L. Niederauer

Thanks, Mike. So in closing, the first quarter was a very strong start for us in 2013. We saw a rebound in trading volumes in our European derivatives franchise, and we launched some new products. We're on track to transition our U.K. derivatives business clearing to ICE Clear in Europe by the end of Q2. Our Listings franchise continue to build momentum by maintaining the #1 global leadership position and achieving a dominant market share of technology IPOs. We expect to begin seeing the positive revenue impact of our new market data agreements in the current quarter. And lastly, our costs are on track to exceed our full year 2013 cost guidance. While we are executing against our Project 14 commitments, we are also well into the integration planning and regulatory approval processes of our combination with ICE and the next milestone for that combination will be the shareholder meetings on June 3.

With that, we will take a few questions from all of you. Thanks for listening.

Question-and-Answer Session


[Operator Instructions] The first question comes from the line of Richard Repetto from Sandler O'Neill.

Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division

I guess the first question, Duncan, comes from your remarks on market quality. We know or at least [indiscernible] was pointing the meeting, you've met with the SEC with some of the other exchange heads. I think I'm aware of your meeting with even some companies as well. But when you talked about like what are the remedies if 1/3 of the TRF volume is -- looks like you're pointing towards the wholesalers, the other 2/3. What are the remedies besides a trade out rule do you see you could bring back the market quality you're talking about?

Duncan L. Niederauer

I'll start, Rich, and then I'll let Leibo add to it as well. So we realize it's a complicated question. This didn't happen overnight. Our point that we keep trying to focus on is that it isn't just about dark pools. If we're talking about dark pools and those were blocked crossing networks that provide a significantly better customer experience that the public market may not be able to provide, I think there has to be a place for those in market structure in the U.S. I think our bigger concern and to be clear, we think it's going to have to be a combination of things that would get done. I don't think there's one single thing that would necessarily enhance the market quality. But we feel like there's a degradation in market quality. The darker individual stocks seem to get, the wider the spread seems to get, we don't think that's a healthy trend. And whether it's talking about some kind of a trade out rule that simply requires an internalizer to improve the customer experience in either size or price, the way they've done in Canada and are talking about doing in Australia, or thinking about a rethink of the access fees, there's a whole host of things that could be done. We realized this isn't -- it took us a long time to get here. It's going to take us a while to kind of reverse the trend if it's even possible. But I'm encouraged by the fact that a lot of people are at least willing to come to the table to talk about it, right? We're meeting with investors, we're meeting with a number of sell side firms. We're all meeting together and having roundtables to talk about, is there a better solution that would be better for the end clients, and I'm cautiously optimistic. Leibo, what would you add to that?

Lawrence E. Leibowitz

I think it's a pretty good summary. I just think that if you add up all the regulatory changes made over the last 10 years, they have sort of caused just a natural competitive force that will drive more and more volume off exchange, as other parties get more and more sophisticated about segmenting customer flow, or recirculating flow before it gets to an exchange so that what gets to the exchange is lower and lower quality. And I think what we're really concerned about is not our market share, it's about what's the quality of the flow that comes to the exchange, what's the -- how wide do the spreads get, those sort of things, that's our main concern. And we understand that this is going to be a balancing act, where exchanges are going to have to give something and that we're going to have to put this together in a piece that it makes natural sense for competition to fund at the right level.

Duncan L. Niederauer

Right. And look, we expect everyone to defend their business model, and people should expect us to defend the sanctity of the public quote. Right, everyone's doing what they should do. So I think we're going to remain engaged in this dialogue, and we're happy to sit down with everybody and put other things on the table too if that's what it takes to strike the right compromise.


The next question we have comes from the line of Howard Chen from Credit Suisse.

Howard Chen - Crédit Suisse AG, Research Division

Just with respect to the new global market data agreements coming into place, is your expectation still that the incremental revenue opportunity is about 10% additive on a full run rate? And if user and terminal count continue to trend a bit lower, how much does that eat into the potential upside?

Michael S. Geltzeiler

I'll take the first part of that. In terms of the run rate, we have previously said that we expect the series of changes, the new products that we're launching, the price increases and the restructuring of the global data agreements, including addressing the nondisplay access to generate a double-digit growth, yes.

Duncan L. Niederauer

And I think it's hard to predict where that trend is going to go. Remember that, that's an overall industry issue. It impacts the size of the entire CTA pie, not just specifically us. But we're sort of dealing with that by being more aggressive, more balanced, I would say, in how we charge for nondisplay and the proprietary products we sell ourselves because we are developing a lot more of these proprietary products. So we expect that, that would offset those things.


The next question we have comes from the line of Chris Allen from Evercore.

Christopher J. Allen - Evercore Partners Inc., Research Division

I just wanted to ask on the Information Technology segment, just given the upcoming deal with ICE and some of the recent articles in the press about potentially looking at other partners, which you guys acknowledged maybe some discussions there. Is it realistic to expect any large signing of agreements in that business until kind of the dust settles in that front, people can figure out who they're going to be dealing with longer-term?

Duncan L. Niederauer

Sure. I think it's a really good question, Chris. I think what you're seeing here is an industry that's in transition. Our clients are going from buying products to trying to figure out how to rationalize large chunks of infrastructure. And the technology itself is in transition with more and more emphasis on cloud and virtualized computing and managed services, softwares and services, things like that. So to some extent, some of the hesitation you're seeing is that the things they are demanding are changing and the organizations themselves are trying to figure out the new solutions. At the same time, our portfolio of solutions is changing to match that, transitioning from sort of the more traditional product-based to more of a solutions-based thing. The backdrop of that, of course, is this ICE deal. So, yes, I think that we're certainly going to get those questions and we would expect to get those questions. On the other hand, we're always looking to figure out what's the best combination of our portfolio with partners, that's been our way of doing things anyway and you've got a new management team in there led by Jon Robson, that's really thinking about how they provide the best solution set. So I would expect that the industry is in transition, but that we will start to see and we are actually seeing contracts signed. The results kind of hide some of the more traditional products are decreasing while some of the new products are actually increasing. And we probably have to do a better job with you guys at showing the pipeline and showing that transition so you see how that transition is going, but we are signing new deals. It hasn't ground to a halt. And some of the new deals are actually larger deals and longer deals and I would expect that, that will continue.


Next question we have comes from the line of Alex Kramm.

Alex Kramm - UBS Investment Bank, Research Division

Maybe just to stay on the topic of what Chris just talked about on the technology business. Can you maybe try to give a little bit more color on how you would break this business down or how this business breaks down in terms of what are the pieces that are actually really essential to an exchange like market data, how much of that account for then? On the other side, when we talk to some of your customers, it seems like a lot of the pieces are not very well integrated and they don't really talk to each other as much. So you would actually think that there are some smaller components that are very easily to -- easily flow to an auction and see some private equity holders would like to buy more. Do you think this business will actually -- is more of a -- this has to grow as a whole or stay together as a whole?

Michael S. Geltzeiler

Sure. I mean, I can help you a little bit with the -- as Larry mentioned, we have discussed in the past, we restructured this business into 3 primary -- 3 primary revenue segments, content, infrastructure and liquidity, and the 2 largest being content and infrastructure. So in the content area is the proprietary market data, the data fee handlers, some of the software sales. In the infrastructure we have the connectivity, the SFTI services and the hosting and the NYFIX business. In the liquidity, we have the co-location services, some of the market solutions we're doing for other exchanges and businesses like our Metabit operation in Japan. So it is a pretty diverse segment. Clearly, the larger area of growth for this year we're looking at is in content because that's where the market data initiatives are coming in. But we have initiatives across hosting is where a lot of these managed services deals come in. I think Larry was talking a little bit about the co-lo and the connectivity that had both new sales and also some lower renewals at times, but that is really how we break the business down, into those 3 businesses.

Lawrence E. Leibowitz

Right. I mean, I think your observation that says that we haven't integrated some of these offerings is dead on and it's actually consistent with what I was saying about moving from a product-based sale to an integrated solutions-based sale. Some of that reflects the industry's attitude changing and some of it reflects that we need to do a better job at that and that's exactly what Jon and his team are working on. I think to speculate that we're going to sell various pieces off to private equity, the honest truth is, it's in our competitors' interest to sort of fan those flames so that everybody thinks that these are weak assets. The truth is that most of our competitors are in reasonable amount of transition themselves in this arena and I think that actually creates a lot of opportunity for natural providers of these solutions like we are because we have the market, we have the connectivity, we have the market data. We have a lot of the pieces that actually naturally sort of go into that and people would like to portray this as a weak position whereas I actually view it as a strong hand.

Duncan L. Niederauer

Or -- and I'm going to add one more thing to that, not to belabor the point. We think we have a pretty good idea of the origin of the leak last week. We actually think it was one of our competitors doing exactly what Larry just said, like fanning the flame of uncertainty given the deal that's out there and then coming in behind and saying, "Well, it's really hard to do something with those guys. I mean, they're in a state of flux over there." It's like we're not in a state of flux just because a competitor says we're in a state of flux because it suits their marketing pitch. So I'm at a lot of these meetings, Larry's at a lot of these meetings. These are much more complicated discussions than a product sale, right? A product sale, you show someone an à la carte menu, they want 1 item or 2. This is a much more comprehensive discussion about sharing infrastructure and things like that. So what we're going to remain optimistic and we'll remain focused and as we get closer to combining with ICE, we'll be able to get the benefit of their input as well.


The next question we have comes from the line of Niamh Alexander from KBW.

Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division

If I could switch over to the clearing, so you're ahead of the deal, even you're moving at the end of May as you'd previously guided, but can you walk me through how to think about the risk of the clients, how easy should it be for clients, there already is some technology overlap. And then from a modeling perspective financially, doesn't this accelerate some of the cost savings? Does it accelerate maybe some impairments and some write-downs on some of the investments so far as well?

Duncan L. Niederauer

So I'll try to give you -- it's Duncan, Niamh, I'll try to give you the outline on sort of what we're doing on the timeline and then Mike can talk a little bit about how that will translate to the results beginning in Q2 and what that means for what we've already spent on what we used to call project Gemini, et cetera. So as I said in my remarks, the project to move the U.K. derivatives piece from Liffe clear to ICE Clear is on track to happen at the end of Q2. So it will be the end of June, not the end of May. We'll be using May to sort of do member testing. We're collecting all the novation certificates now, that's all going very smoothly. The nice thing about this transition is given that more than 90% of the clients who were connected to Liffe Clear were also connected to ICE Clear, there was very little migration risk, there were only a handful of clients that actually had to do a meaningful technology lift to get this done. The majority of clients were already connected and we're actually relieved that there was less work to do for them than there would have been had we proceeded down the project Gemini route. So we are highly confident that will happen by the end of June. So we will be clearing in ICE Clear in the second half of the year. And then Mike can talk to you about what that means for the kind of results going forward and what we're doing with the expenses that we'd already put to work on Gemini last year and before. Go ahead, Mike.

Michael S. Geltzeiler

So the financial benefits, Niamh, of this transaction is really twofold. Firstly, when we go live in the beginning of the second half, we will no longer be outsourcing the treasury and risk management with LCH and in turn we'll be using ICE Clear and as we've indicated on the call, we'll save annualized $30 million from that, $15 million in the second half. The investment that we made in Gemini in our internal build last year prior to signing the ICE Clear agreement was all written off in the fourth quarter last year, so there is nothing else on the balance sheet right now as it relates to that. Secondarily, we have the Continental derivatives which we've talked about in the past that we, today, don't get any revenues or costs, and we expect in first quarter, end of the first quarter 2014 to realize the revenues on that business at a healthy margin as we also bring that business, execute that plan. So 2 strong financial benefits second half of this year and 2014 coming from clearing.

Duncan L. Niederauer

I think we're going to wrap it there. So Stephen, any -- we're going to give you the last word, anything you want to do to wrap it up?

Stephen Davidson

Thanks, everyone, for joining us and we'll see you later.

Duncan L. Niederauer

And as always, the team will be available for any one on ones that people need throughout the day. Thanks a lot, everybody. Have a good day.


Thank you, ladies and gentlemen, for your participation in today's conference. That concludes the presentation. You may now disconnect. Have a good day.

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