NYSE Euronext (NYSE:NYX)
Q4 2009 Earnings Call
February 9, 2010 8:00 am ET
Stephen Davidson –Investor Relations
Duncan Niederauer – Chief Executive Officer
Michael Geltzeiler – Group Executive Vice President and Chief Financial Officer
Lawrence Leibowitz - Group Executive Vice President and Head of US Markets
Stephane Biehler - Chief Accounting Officer and Corporate Controller
Roger Freeman - Barclays Capital
Richard Repetto - Sandler O'Neill & Partners L.P.
Johannes Thormann - HSBC
Howard Chen - Credit Suisse
Michael Vinciquerra - BMO Capital Markets
Daniel Harris - Goldman Sachs
Niamh Alexander - Keefe, Bruyette & Woods
Good day ladies and gentlemen, and welcome to the fourth quarter and full year 2009 NYSE Euronext earnings conference call. My name is O’Nika, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. For the Q&A session, we ask that all callers limit their questions to one to allow for broader participation.
I would now like to turn the call over to Stephen Davidson, Head of Investor Relations at NYSE Euronext.
Thank you O’Nika. Good morning and welcome to the NYSE Euronext fourth quarter and full year 2009 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’s 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 were 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.
For the call today, Duncan Niederauer, Chief Executive Officer, will review the highlights for the quarter and provide you with our 2010 areas of focus. Michael Geltzeiler, Group Executive Vice President and Chief Financial Officer will then review the financial results, update you on our financial position, and then provide you with considerations for 2010. We will then open the line for your questions.
When we go to the Q&A session, please limit your questions to one to allow for broader participation. Also on the call today for the Q&A session are Larry Leibowitz, Group Executive Vice President & Head of U.S. Markets and Stephane Biehler, Chief Accounting Officer and Corporate Controller. We are incorporating slides for the call today, which are available for viewing on our website, and Duncan and Mike will refer to the slides during the remarks.
With that, let me now turn it over to Duncan.
Good morning everybody and thanks for joining yet another quarterly earnings call for NYSE Euronext. I’m going to start on Slide 3. I’m going to cover Slides 3 through 6 and then I’m going to turn it over to Mike for the rest of the presentation and then we’ll be sure to leave time at the end for your questions.
Let me start by saying the following: I think you can see from the results of which we’re very proud that it was a solid fourth quarter for us and our full year 2009 results show a trend of improving financial performance which we think gives us strong momentum going into 2010.
You’ll see that we’re growing our derivative business, we’re stabilizing our cash equities business, and we’re providing innovative technology solutions. As we look ahead to 2010 and beyond, we have four core business objectives. Number one, we want to operate the most important set of capital markets in the world. Number two, we want to be innovating across geographies and products with a focus on the customer. Number three, we want to use our infrastructure to build an open platform and number four, we want to apply technology where possible to lower clients’ infrastructure and capital raising costs.
I will review our future goals a bit later but let me first review some highlights from the fourth quarter. In the fourth quarter we recorded non-GAAP EPS of $0.58 on net revenue of $640 million, reflecting growing earnings power from our new businesses, the benefit of our technology harmonization, and our cost savings initiatives.
Fixed costs of $432 million in Q4, including NYFIX, were down 9%. Staffing levels declined 14% year-over-year excluding the addition of NYFIX in December. While NYSE Euronext has historically been regarded as an equities exchange, our business has evolved and today our technology and derivatives business make up 48% of net revenues.
Let me now touch on a few select business highlights for the quarter. First, our global derivatives businesses performed particularly well in the fourth quarter, registering a 21% increase in net revenue an 2010 is promising as well with the addition of NYSE Liffe Clearing, the semi-mutualization of NYSE Liffe US, our Amex Options business, and more favorable macroeconomic conditions for European derivatives.
In our European derivatives business, specifically we experienced very strong January volume levels in our stir complex, volumes we hadn’t seen since the first quarter of 2008. One of our significant 2009 achievements was the completion of the NYSE Liffe Clearing project that gave us the opportunity to verticalize our derivatives business as our competitors have done.
It has already been a meaningful contributor to the P&L with a full quarter’s impact in Q4 ’09 and is poised to be a very meaningful contributor to the P&L in 2010. At the end of the year, we closed a deal to semi-mutualize NYSE Liffe US with the sale of a significant minority stake.
We are on track to launch interest rate futures coincident with the launch of our joint venture, NYPC, which is pending regulatory approval but we expect to close during the summer. Challenging an incumbent is certainly difficult but with our new partners we feel we are well positioned to compete.
The US options business is another great story. Many of you will remember at the time we bought the Amex in October 2008 our Arca and Amex Options platforms had combined market share of 17% to 18%. The definitive agreement to semi-mutualize our Amex business is now signed by our partners and is awaiting regulatory approval.
We were pleased to achieve almost 25% market share in options at the end of 2009 and we ended January with nearly 28%, the biggest share of US single stock equity options. Second, we have continued to focus on profitability and stabilization of the US business. We plan to begin trading Tape C stocks at NYSE Amex and modernize our floor to better reflect our high tech, high touch approach in that market.
On the European cash side, market share continues to be stable and we are focused on positioning our business to capture the long term growth potential of the overall market while diversifying our product and service offering. Clearly, on both fronts, regulatory issues are taking a front row seat and I’ll provide a perspective on these issues on a later slide.
Turning to listing, we’re very pleased with the efforts of our listings team. We continue to expand our service offering to listed clients and we have taken a leadership role in terms of issuer advocacy. The fourth quarter was the strongest quarter of the year and we are looking to build on that momentum in 2010.
Lastly, on the technology solutions side, we closed our acquisition of NYFIX which gets us another source of revenue that is both stable and sticky. It gives us several hundred buy side connections to integrate into our already strong global sell side network. The NYFIX integration is going extremely well with most of the headcount reductions coming off in January.
Over the next six months we will be focused on integrating the NYFIX network into the safety network. The conclusion of the NYFIX network and safety integration should coincide with the lighting up of our data centers in Mahwah and Basildon, we also just recently crossed the 10,000 fixed channel milestone.
Additionally on the technology side, we recently received word from the Board of the Qatar Exchange that we have the mandate to develop the technology for their derivatives exchange on top of the work we are already doing for their equities platform.
Please turn to Slide 4. On Slide 4 I’d like to address a few of the regulatory issues that are currently under discussion and also comment on our issuer advocacy efforts. On the slide you’ll see a number of issues where we are tackling different issues, participating in important discussions and demonstrating leadership.
I will not go through each of these bullets individually this morning but let me highlight a few important ones. With regard to market structure issue we believe we have been pragmatic in our approach. While regulators have a number of topics that they’re wrestling with, we are focused on having a level playing field between ourselves and other pools of liquidity in terms of the pace of innovation, the rulemaking process, and the cost of regulation to name a few.
The SEC is currently engaged in a market structure review and we are hopeful that any changes they enact will help even out the playing field and raise the regulatory bar for less regulated trading venues which we believe would be to the benefit of investors.
In Europe, regulators are embarking on a review of MiFID two years after its implementation. I believe that the regulators in Europe will learn some important lessons from the market fragmentation that resulted from the US deregulation.
As we endeavor to keep our European business stabilized, I am hopeful that the landscape there is not going to turn into something there like we have witnessed here in the United States. I am also confident that the debate around critical market structure issues will resonate across the US and Europe.
With regard to advocacy, our efforts to advocate for our issuers and be an influencer of public policy continues to be an important effort of ours. You have undoubtedly see the political rhetoric coming out of Washington recently which has unsettled the markets a bit to say the least. Most of these proposals do not directly affect our business but they do impact our clients.
Our view is that we should not let politics and emotions get in the way of good policy. It is critically important that we learn the lessons of the past few years and close the gaps in financial regulation but at the same time we cannot let our policymakers get distracted by other issues that were not central to the crisis. For any of you who listened to me from Davos, that was one of my key messages from there.
One specific proposal that we have been aggressively leading from the front on is to oppose the idea of a stock transaction tax. We believe this would be harmful to average investors who would ultimately bear the cost of the tax and we’ve been sharing that view with anyone who will listen on Capitol Hill.
Please turn to Slide 5. On Slide 5 we highlight our 2000 areas of focus and our results. This list of accomplishments is tremendous and I would like to thank all of my colleagues for their dedication and hard work that made it possible for us to hit all of these milestones. There are two multiyear technology initiatives in particular that I would like to focus on because of their importance to establishing our seamless world class technology infrastructure.
These are the migration to UTP and the build out of our two new data centers which we’ve talked about with all of you for much of the last two to three years. First on UTP, you will recall that just over two years ago we had multiple trading systems layered upon systems that could not talk to each other and required prolonged and intensive efforts to implement new functionality. The launch of UTP allowed us to create a single global architecture that will enable us to evolve, adapt, scale, and remain competitive.
For the first time in our history, we will have a single global platform. This saves us money, improves performance, and will allow us to integrate new platforms and functionalities quickly and efficiently.
In our European cash business in Q4 of last year, we successfully migrated Smartpool to UTP and the legacy access infrastructure for customer gateways and market data was decommissioned on December 31. So our European business is complete now with internal matching engine latency as low as 40 microseconds on NYSE Arca Europe. More importantly, all of our European platforms are now on the new technology infrastructure.
On the US side, the UTP rollout to NYSE Arca was completed in mid-January and the migration of NYSE Classic which began in Q3 will continue in early 2010 to further reduce client latency and optimize the trading infrastructure.
On the derivatives side, development is well underway and in order to minimize client disruption and ensure a smooth migration to the new data centers, client migration will begin in Q3. Arca Options and Amex Options UTP rollout will be complete in Q2. So by the end of 2010, all of our products will either be on the UTP infrastructure or about to be on the UTP infrastructure and we will enter 2011 for the first time as a company with one single trading infrastructure.
Now let’s turn to our data centers for a minute. Our data center build out that we undertook last year was not optional. Our objective was not just to replace our existing data centers but also to create the new trading platforms of the future that allow us to provide and develop state of the art technology services and adjacent products. So this is why we’ve developed our data centers.
In the US we will begin the client migration project in June and to ensure the smoothest process, we will work through the remainder of 2010. In September we will begin to close down our two other New York area data centers. In Europe, we expect to begin the migration of clients in April with our European derivatives and cash businesses migrating beginning in September.
In summary, 2009 was a transition year in which we established new revenue streams and moved closer to creating a single global platform supported by state of the art data centers. Now that we’ve achieved this point in our development, we have established the path for the future.
Last but not least for me, please turn to Slide 6. On Slide 6 we highlight our global business and the key areas of focus for 2010. Each of our three global businesses, derivatives, cash trading and listings, and technology information solutions, has an important role to play in 2010, helping us deliver against these objectives. While we continue to defend and grow our core franchises in each of these business lines, revenue diversification will also be an important part of our story for 2010.
In fact, I believe that we are at an inflection point. We evolved from an expense story to a revenue story, but rest assured we remain keenly focused on increasing operating efficiency and margins.
This story will be told through initiatives like NYSE Liffe Clearing, NYFIX, NYSE Amex Options, NYSE Liffe US, and new revenue streams coming off our data centers such as colocation. These revenue streams didn’t exist for us as recently as two years ago and we are a long, long way from what this company looked like as recently as 2005 w hen the majority of its revenues came from US cash trading and listings.
To help you understand this better, we will be changing our segments with our first quarter 2010 results and we will introduce these new segments at our Investor Day on March 3 which I think will go a long way towards illustrating the intense evolution of our business model from a traditional equities exchange to a full spectrum trading community.
Cash trading remains an important piece of the puzzle but is now less than a quarter of our total revenue. In 2010 you will see us execute on a focused list of deliverables. In derivatives, we will expand our clearing efforts, we will grow our US futures platform, and we will continue our leadership position in the US equity single options space.
In cash trading and listings, we will enhance our global listings franchise, capture market growth in Europe, and increase the profitability of our US cash business. In technology and information solutions, we will launch the new data centers which will serve as the liquidity hubs of the 21st century and we will extend our connectivity network while delivering world class proprietary data solutions.
We will provide more details at our Investor Day, but in short, everything we have accomplished over the past few years and which will largely be complete by the end of this year will allow us to shift attention to growth and give us a platform that we can leverage to provide a full range of services throughout the trade flow process to our customers.
We have developed new businesses which will drive revenue growth. We have taken a lot of costs out of the company already but the challenge for us in ’10 remains to re-engineer our processes and operations and turn things upside down if we have to in order to find more efficient ways of operating. This will lead to margin expansion and increased operating leverage in the model.
We are confident that all of these efforts will translate into increased shareholder value and we look forward to providing you with more clarity into our longer term strategy at Investor Day on March 3.
With that, I’ll turn it over to Mike.
Thank you Duncan and good morning everyone. Slide 8 provides our financial results for the fourth quarter and full year. GAAP EPS for Q4 was $0.66 versus a loss of $5.06 per share in the year ago period. During the fourth quarter of 2008, we reported a non-cash pre tax goodwill impairment charge of $1.6 billion, primarily related to the merger of NYSE Group and Euronext.
Non-GAAP net income for the quarter of 2009 was $151 million or $0.58 per share compared to net income of $137 million or $0.52 per share in the fourth quarter of 2008. Non-GAAP results for the fourth quarter of 2009 include pre-tax merger and exit costs and the favorable impact of reversing certain discrete tax reserves which reached their Statute of Limitations.
Non-GAAP net income for the full year 2009 was $533 million or $2.04 per share compared to non-GAAP net income of $763 million or $2.87 per share for the full year 2008. We billed 2009 as a transitional year and we executed on new initiatives, implemented our technology platforms, lowered our cost base, and repositioned the company for growth.
We are pleased to report EPS growth as early as this quarter. Our earnings momentum has been building throughout the year. The fourth quarter of 2009 marked the third consecutive quarterly increase in both net revenues and earnings per share for the company.
On a non-GAAP basis, gross revenues were $1 billion, down 14% versus Q4 2008 and down 3% versus Q3 2009. Gross revenues were negatively impacted by a decline in global cash equity volume, most notably versus October of last year when the financial crisis resulted in record volumes but also from pricing changes across our European and US cash businesses.
Net revenues for the quarter declined 6% compared to Q4 2008 but were up 3% versus Q3 2009. The increase in net revenue versus the third quarter of 2009 was driven by NYSE Liffe Clearing's contribution of $23 million in its first full quarter of operation, increased software and technology sales, and the $8 million in revenue recognized from one month of operation from NYFIX which was acquired November 30. This was partially offset by the decline in cash equity and lower market data revenues.
Fixed operating costs were $432 million for the quarter, down 9% versus a year ago period and up $1 million on the prior quarter. The increase versus the third quarter of 2009 was attributable to $6 million of incremental expenses from the NYFIX acquisition and an incremental $5 million in costs related to the first full quarter of NYSE Liffe Clearance. This was partially offset by a $9 million reduction in compensation and benefits as we continue to make progress on the European [social plans] and the US [zero].
The decline in expenses versus the fourth quarter of 2008 was due to increased efficiencies and synergies related to the Amex acquisition and a 14% year-over-year reduction in staffing including NYFIX resulting in $29 million in lower compensation expense.
Operating income for the quarter was $210 million, flat with the fourth quarter of 2008 and up $13 million versus Q3 2009. Non-operating income was savable as a result of an $8 million special dividend from LCH.Clearnet and the impact of the sale of a minority stake in Liffe US.
This long negotiated transaction was effective as of January 2009 which resulted in the sharing of 2009’s full year investment losses with our new partners. This amount is included in the non-controlling interest line on the income statement.
On Slide 9 we show our fourth quarter revenue by both product line and geography. The company continues to diversify its revenues. 50% of our net revenues came from trading activities in the fourth quarter. This compares to 55% in Q4 2008. Net revenues were above Q3 driven primarily by new initiatives and growth in listing revenues. Compared to Q4 2008, net trading revenues were negatively impacted by the stronger US dollar, lower net capture rates for the European cash markets, and lower cash volume.
Global derivative trading was 28% of the company’s net revenues for the quarter and continues to be the largest net revenue contributor by business activity. Software and technology revenues were up versus last year due to the acquisition of NYFIX, higher software sales in the current quarter, and contribution of safety Europe. We have over 100 companies connected.
The increase in other revenues year-over-year is attributed primarily to Bluenext, our carbon emissions trading business and Treasury income earned in connection with the [end] sourcing of the NYSE Liffe Clearing business.
From a geographical perspective, our European operations continue to represent the majority of our net revenue base, generating 53% of our net revenues for Q4 2009. This is down slightly versus Q3 2009 and Q4 prior year.
At our Investor Day on March 3, and for each quarter beginning with Q1 2010, we will be reporting our revenues in the three global business segments.
Slide 10 shows the quarterly volume trends for our major trading operations. Q4 volumes were higher than prior quarter for derivatives, US options, and European cash, while declining for US cash. Versus prior year, volumes rose across our derivative platform and declined in our cash markets, mostly attributed to the record buy ins reported in the prior year fourth quarter and [inaudible].
The NYSE Liffe derivative business was up 11% versus Q4 2008 and 7% versus Q3 2009. The increases resulted from growth in both the Liffe Connect platform as well as Bclear. Each are broken up separately for you in the chart. While Bclear is offered at lower price levels and subject to price cap, we now realize clearing revenue on these volumes as well.
Volume growth for US derivatives year-over-year was fueled by the announcement to semi-mutualize our Amex Options business and the expansion of the penny pilot program at Arca Options. Since we acquired Amex in Q4 2008, our market share has grown from 6% at deal closing to 10% in the fourth quarter of 2009.
NYSE Group US Options Exchange accounted for 24.9% of the total consolidated equity options trading at December 2009, up from 17.4% at December 2008. The figure rose to nearly 28% in January 2010, representing the fifth consecutive monthly increase in market share for our US Options Exchanges and positioned us as number one in the US equity option market for that period.
Fines in the US cash business declined year-over-year and quarter-over-quarter. However, market share on NYSE Classic has increased to 26% in the fourth quarter above the 23% accorded in Q3 2009. This has been aided by the increased supplemental liquidity provider participation on the platform.
SLP participation was nearly 11% in the fourth quarter, the highest quarter since the inception of the program. Although ADV was up slightly this quarter in our European cash market, market share remained stable at around 75%. We remain optimistic for market volume growth over time as new participants enter the market.
Yesterday we issued our volume statistics for January 2010. On the whole, the year is off to a solid start with January volumes exceeding Q4 ADV levels for all four venues. US cash volumes remain sluggish versus prior year levels; however, US and European derivatives were up 32% and 102% respectively.
Slide 11 shows the annual volume trends for our major trading operations. We experienced year-over-year growth on our derivative platforms and saw a sequential decline in both US and European cash. However, it is important to reiterate that 2008 was a year of extreme volatility and many asset classes around the globe experience record trading volumes. We believe we’ve done a good job during the year stabilizing our cash equity franchises and our natural beneficiaries from an increase in overall market volumes.
Slide 12 provides us with our liquidity, routing, and clearing fees and revenue capture between our US and European businesses. For European net revenues the chart also shows comparative currency neutral trading results. Despite lower volumes, US net revenue increased in the fourth quarter as a result of increased higher net pricing.
Steadily improving revenue capture throughout 2009 has stabilized US cash equities in that trading revenue. US derivative revenues increased $5 million in the fourth quarter of 2009 compared to the fourth quarter of 2008 and increased $4 million from the third quarter of 2009 due to the increase in market share which was 670 and 460 basis points respectively. This increase in market share is derived from both our Amex and Arca Options businesses.
Net revenue for European derivatives is down 4% versus prior quarters but up 23% versus Q4 2008. In the fourth quarter European derivatives net revenues benefited from a full quarter’s worth of NYSE Liffe Clearing revenue totaling $23 million.
Compared to the third quarter of 2009, net revenues were down due to high liquidity payments in the fourth quarter. European cash revenues for the fourth quarter of 2009 were significantly below fourth quarter 2008 levels due to volumes that were off 17% as well as revenue capture that declined 32% due to pricing changes that we’ve made during the past year. Versus Q3 2009, European cash net revenues were flat and volumes that were down 1% with the average rate per trade holding steady at $0.93 for the past three quarters.
Slide 13 provides a harmonized view of operating expenses. This chart reconciles our operating expenses segregating the effects of foreign currency variations, portfolio changes, and one-time IT integration costs. This is consistent with our 2009 expense guidance and synergy projections.
On an adjusted basis, underlying fixed costs continued to decline throughout 2009. Q4 reported expenses declined $41 million versus last year. After adjusting for foreign exchange variations, incremental spending for new business initiatives like NYSE Liffe Clearing and NYFIX, duplicate data center expenditures, fixed operating expenses declined $74 million or 16% versus the fourth quarter of 2008.
For full year adjusted fixed operating costs were lower by $195 million or 11% compared to the prior year period. With the Euronext merger in 2007 and a constant portfolio and constant exchange rate basis, we have achieved over $490 million in aggregate cost savings.
We are pleased with the progress we’ve made on the cost front in 2009. We came in below the full year 2008 level of $1.74 billion and also outperformed our fixed cost guidance provided earlier this year of $1.728 billion. For 2010 we continue to look at ways to re-engineer our cost space in order to achieve maximum efficiency. We’ll provide more formal fixed cost guidance at our 2010 Investor Day on March 3.
Slide 14 details our cash and [deposition] as of year end. For Q4 2009, our gross debt declined $119 million to $2.8 billion. This reduction occurred despite the disbursement of $144 million in the quarter to acquire NYFIX. Cash and other financial investments totaled $0.5 billion. $2.8 billion of debt included $2.2 billion long term debt with a weighted average cost of 5.3%. The remaining $600 million short term debt consists of commercial paper at an average cost of 0.5%.
For the full year, capital purchases and software development were $481 million of which $288 million were for building out our data centers. In December the Board adopted a quarterly dividend policy. On December 3 we declared a $0.30 quarterly cash dividend for the first quarter of 2010 which is payable on March 31.
We are currently rated AA by S&P and A2 by Moody’s. Our A2 rating with Moody’s has been under review since November and we expect Moody’s to revert with the outcome with their review shortly.
We are committed to managing our balance sheet and ensuring we have appropriate liquidity and flexibility. In the near term we are focused on paying down debt with free cash flow generation and monetizing non-core investments.
In Q4 2009, our debt to EBITDA leverage ratio declined [0.6] times, the result of a combination of increase in EBITDA and reduction in Cap Ex. We continue to reduce leverage in the coming months.
Slide 15 highlights some preliminary guidance on our outlook for 2010. On the whole, we anticipate the momentum we have created in 2009 to continue in 2010 as we return to business the top and bottom line growth.
We will provide greater guidance at our Investor Day when we roll out our new business segments. For now we offer the following considerations: as noted earlier, January volumes were better than December in all transaction categories. We saw some weakness in US cash when compared to January 2009. The extreme volatility that we saw this time last year during the height of the crisis has dissipated. The regulatory environment will remain fluid, creating a level of uncertainty in the market.
While we expect pricing to remain competitive, we believe that for the most part we’ve seen our core businesses stabilize both in terms of market share and revenue capital. Foreign exchange remains a critical key performance indicator given the size and scope of our European operation. The recent trend in the Euro is something to watch closely.
We continue to make good progress with our new initiatives and expect these to generate incremental revenue for the company. We expect 2010 revenue growth to be driven from NYSE Liffe Clearing, NYFIX, managed services, Europe, NYSE Amex Options, and NYSE Liffe US. In 2010 we are set to migrate to our new world class data centers in Mahwah and Basildon during Q3. As we prepare for the transition, we expect to incur between $40 million and $50 million in incremental expenses in 2010 for duplicate and parallel processing and one-time integration costs.
Once the new data centers are up and running, we will be in a position to close some of the legacy data centers, eliminate the one-time integration costs, and report incremental colocation revenue. On a net cost [inaudible] basis, we expect 2011 costs to be considerably below 2009 net expenses.
As for other fixed costs, we expect to realize the full year effect on 2009 staff reductions and have initiated a series of other efforts to reengineer our workforce and streamline operations.
I’d like to turn it back to Duncan for some closing remarks and then we’ll take your questions.
Thanks Mike. So in closing folks, our strong financial results in Q4 and improving results over the course of the year set us up well for 2010. To me, no less important is the fact that we have done everything we said we would do on all of these calls on 2008 and 2009.
I know there were times when many of you thought we had too many initiatives we were trying to tackle at once but I would like to think that since we’ve delivered on everything we’ve outlined that we said we would do, we begin to get credit for having changed the culture here to one that is focused on delivering and on the customer.
After those couple of years of pretty hard work and a number of initiatives, I think you’re now hearing that we’re within a couple of quarters of completing several of these initiatives that we’ve been talking about for a long time, namely UTP and the data centers, so the light is clearly at the end of the tunnel and I think as many of you are aware in other businesses, any time you tackle a series of two to three year projects, the risk of failure to execute is pretty high in the beginning and goes down throughout the life of the project and I think we’re now beyond the point of if, it’s clearly when.
I think we always believed it and now most of you should believe it too. We are very near the end of the road here. We’re also redefining what this company is all about which we hope you can begin to more fully appreciate through our new segment reporting structure. We’re not just a cash exchange; we’re a multi-asset global exchange with a world class derivatives exchange, a premier global trading and listings franchise, and a world class commercial technologies solutions business.
I think the new segments will make it abundantly clear that we are a diversified exchange and we hope the added transparency will give investors the tools they need to properly assess our performance and the value of each of these businesses. At our core, we are a world class technology solutions provider using our technology expertise to run markets and to provide services across the trading spectrum to our clients.
It is therefore not by accident that our new deputy CEO, Dominique Cerutti, is a senior executive from IBM. She’s been with us for almost two months and is already adding tremendous value. I look forward to introducing Dominique and sharing more about the future of our company at the much talked about Investor Day on March 3.
That concludes our prepared remarks and we’ll now open the line to all of you for your questions. Thank you for listening.
(Operator Instructions) Your first question comes from Roger Freeman - Barclays Capital.
Roger Freeman - Barclays Capital
You made some comments about European regulators I guess reassessing MiFID. I was wondering if you could just expand on that a little bit. Clearly from your guidance you expect pricing to be stable in 2010. To what extent, are there real initiatives being considered to limit the fragmentation we’ve seen here and ultimately that can drive the MTF volume a lot higher and push pricing down?
Our general view is, and I don’t think we’re being delusional here, I genuinely believe the European regulators, two years post MiFID, are already doing what we really didn’t do here which was re-examine what had happened, what did they anticipate, what did they not anticipate, so I think that alone is fairly healthy.
Secondly, in our meetings with them, they’re quite aware that, and it’s their firm belief that an outcome like we’ve had in the US is not what they’re looking for. Part of the reason for that, remember, is there are nationalistic tendencies I think. Unlike the markets here where the SEC can decide to regulate the relatively unregulated pools more or less the same and whatever they do, they have the ability to bring it all back under their regulatory umbrella.
As I think you’re aware, the European landscape is quite different and when the volume migrates away to some of the MTFs, sometimes it also migrates out of that local regulators jurisdiction which I think has got them very uneasy, particularly in the wake of the crisis.
Our belief is that the minimum that will happen is that the playing field will get level and for example, it is a little bit confusing to us why we continue to be told that to operate in the markets we want to operate in, we must have a footprint and some infrastructure in each underlying market, yet some of the people with whom we compete don’t have that same requirement.
So I think consistent with what you’ve heard us argue for in the US, I think we’re expecting that the regulators will even out the regulatory burdens that everybody has. I think make it a little more of a fair competition if you will, and I think because of the regional/national issues in Europe, it’s a different ballgame than here.
I think that all leads us to be a lot more optimistic about what the regulators might do upon further review. We’re not under any illusion that exchanges are going to be given back their monopoly rights. I don’t think that’s every going to happen but I do think it’s going to be much easier for us to compete there than it has been in the US.
Roger Freeman - Barclays Capital
I know you probably want to save a bigger discussion about the cost guidance for the Analyst Day, but just listening to what you said here, costs ex any sort of integration and duplicate costs are going to be down considerably. The $40 million to $50 million of duplicate data center costs in 2010, what are those for 2009 as we kind of think about the delta. Are there actually any?
We did indicate there are some in 2009 as well. There’s really two categories of costs. It’s the duplicate or the parallel processing until we go live in the centers which gets larger as you get closer to the go live date, and it’s a number of one-time costs, consulting, other expenses we’re going to incur to actually make the transition.
So the number for costs in 2009 is modest. The $40 million to $50 million we’re talking about is incremental to 2009’s expenditures. We’ll call that one two-part question instead of two questions just to make sure you don’t violate the rules.
Roger Freeman - Barclays Capital
It was just a follow up.
Your next question comes from Richard Repetto - Sandler O'Neill & Partners L.P.
Richard Repetto - Sandler O'Neill & Partners L.P.
Let me be clear, I have a few follow ups as well. It seems like we’re turning a corner here and certainly in the strategy and the cost savings and the growth. My one question would be on the balance sheet. It seems like we’ve drawn down and we’re down to the catch all of $500 million so with [Section 31-3] so where are you comfortable with cash, how do you feel about the dividend and then how do you expect, are there less Cap Ex requirements, how do you expect the cash to build as we get into this growth phase?
We have as you indicated about $500 million of cash on hand. Some of that cash is restricted. There’s probably about $100 million to $150 million of that cash that is sort of conservative levels of cash balances so as an exchange we need to keep a certain amount of cash on hand and we’re getting closer to that level.
In terms of capital expenditures, the story was that we’re trying to communicate that we have this discrete initiative of building these two data centers. We saw our maintenance capital expenditures and we’ve indicated in the past of sort of sub $200 million. We think it can be even lower than that.
It will probably be 2011 before we get to that level because in 2010 it will be the finalization of the data so in our guidance we’ll talk a little bit about Cap Ex in our Investor Day. Cap Ex will certainly be considerably lower in 2010 then 2009 but we won’t be at the maintenance level until 2011.
As far as the dividend goes, I think you heard what we said. Obviously we worked with our Board last year and we had sort of a target for what it’s worth to pay out 40% to 45% of earnings. Clearly the $1.20 was more than what we thought we were going to earn in 2009 but we feel as though with the investments we’ve made and with the patience people have exhibited with us, I think it’s the right thing to do to maintain the dividend level.
It also sends a signal I think that we believe where earnings are going and growing in 2010 and 2011. So no plans at the time being to do anything about the dividend but we are revisiting it every quarter now instead of annually in case we’ve made an error in judgment here.
One last point to your question, we are continuing to look at some of the non-strategic investments we have and possibly monetizing those. You saw us in this quarter, we disclosed a [inaudible] and in the previous quarter, our small interest in [CMS divest] as well. So we continue to look at things that are not necessarily required for us to execute our strategy and if they’re not a productive asset, we’re looking to monetize those and redeploy the cash.
Your next question comes from Johannes Thormann – HSBC.
Johannes Thormann - HSBC
One question concerning the outlook for your US equity option business. Could you give us a bit more meat on what you expect in volume growth after the tremendous growth this year and probably also with the revenue sharing, how big will the impact on margin be?
We’re seeing growth of the underlying options market. We don’t expect that to change. The penny options continue to roll out and the effect continues to grow. We’ve been very pleased by the growth of Amex. We think it’s due to two things. One is putting the Amex on our UTP core technology platform when the past Amex technology didn’t really allow the market to operate efficiently.
Second, we’re just starting to see the contribution by our options partners in that project and we expect it to grow. On the other hand, it’s a completive market. We aren’t complacent. We already see our competitors responding to our growth by becoming aggressive and we’re prepared to engage them both on the technology and offerings front and wherever we need to in order to continue to grow our platform.
The transaction is currently binding as Duncan mentioned, waiting for SEC approval. The essence of the transaction is the partners will be buying into the Amex Options business and paying cash to us. Once that deal closes, we will be consolidating the financial results and certainly recording a minority interest offset. When we evaluated the business proposition, we obviously considered what we expect to get out of the transaction offset by some sharing of the future profits with the partners.
Obviously that sale will give us more cash in answer to part of Rich’s question.
Your next question comes from Howard Chen - Credit Suisse.
Howard Chen - Credit Suisse
On the regulatory environment and specifically the local rule proposal, I know the data isn’t easy to parse thorough, but I was just hoping to get your views and some perspective from your current seat and maybe former life on how much volume you think the sell side proprietary trades are really contributing to the overall market in your business?
I think a lot of that activity that some of the rules are trying to get at is probably a lot more on the fixed income side where I think it’s really hard, my point when I was interviewed a couple of times is that it’s really hard to separate in a market that at its core is a principal market already, what’s a proprietary trade, what’s a principal trade, what’s a facilitation trade, etc.
I think a lot of the banks’ activity and a lot of, I believe, the source of profitability comes from the fixed income and currency businesses, not the regulated equity markets. I actually think for the big banks the own account trading for a big bank in the equity markets is actually quite low.
Having spent most of my career on that side of the business, the overwhelming majority of the business was in the customer facilitation category. Almost all the principal trading you did was on back of a customer inquiry so my point was two-fold really. One, it’s really hard to separate it and two, what does it necessarily accomplish if we separate the small fraction of equity volume that these banks do for their own account?
I don’t really think that had anything to do with the crisis that we just lived through so part of my not-so-subtle message is an encouragement of the policy makers to focus on solutions that get at the root cause of the crisis and I just don’t think this is one of them.
But to answer the more important part of your question, I think this is a de minimis part of equity trading volume that we get.
Howard Chen - Credit Suisse
My follow up, I was hoping to get an update on New York Portfolio Clearing, maybe where you stand with the [inaudible] relationship. It doesn’t sound like it’s built within the 2010 expectations but I know this one has a little bit more of a longer time frame to it.
I would say it’s not really in the 2010 plan as a real contributor to profits but I think we’d be disappointed if we haven’t gotten all the requisite approvals and we’re not up and running and actually operating the clearing house at DTC by I guess if July and August are technically Q3, I think I’d be disappointed if it slipped much beyond Q3.
Obviously you can never really predict the pace of regulatory approvals and because of the nature of this effort, we do have to get approval from the Fed, the SEC, and the CFTC and there’s varying degrees of ease or difficulty with each of those hurdles we have to clear.
I think the customers are quite supportive of us doing it for obvious reasons because not only does it create competition but it’s also a more capitally efficient clearing model. I think because it’s new, as you would expect, it takes a little longer to outline it for the regulators.
The technology work that we’re collaborating on with DTC is already well underway. We’re in the process of searching for a CEO for that enterprise so we’ve embarked on a search to do that. So we’re working behind the scenes. I think the gating issue is whether we get all the regulatory approvals in time to launch by July.
Your next question comes from Michael Vinciquerra - BMO Capital Markets.
Michael Vinciquerra - BMO Capital Markets
I just want to ask on the derivatives side in Europe, you mentioned the January activity being very strong. Of course we noted that. But what do you attribute the growth in the rate side of the business as the issues around Greece and just questions in that regard or is there something else you can point to and kind of related to something you said in the prepared remarks about expanding your clearing efforts in European derivatives caught my ear and I wasn’t sure what you were referring to with that.
A couple of observations there. One, January was a very good month for us. Remember, our primary product is the short end of the rate curve in Europe and I think you’re correct, the combination of we’re off the de-leveraging lows of a year ago during the crisis and the combination of some of the other event driven stuff that’s been going on in Europe specific to some of the jurisdictions you mentioned has certainly been a factor.
Our equity business has been strong and our much smaller commodity business has also been strong so I think we’re benefiting from having to write the right kind of portfolio right now. The NYSE Liffe US business on the gold and silver side and on the index side is also contributing a little bit and that volume continues to grow.
I wouldn’t say it’s moving the needle hugely yet but those volume are certainly giving us reason to think that we’re onto something there, especially if we can add an interest rate complex over here.
I also think the other thing that’s happened is due to the good efforts of our team, our client base has gotten more diversified and more global in the last year. I think we’ve gotten better at recognizing that the client opportunities are really around the world and as we’ve learned in the equities business, your big volume providers and your big customers may not look like they looked like 5 or 10 years ago.
I think that the derivatives team here deserves a lot of credit for having traveled to Asia and other parts of Europe and Latin America and around the US to make sure that we’re making our products available to more and more clients around the world. So I think that’s also helped us.
On the clearing side, part of it is this is the first year that we’re going to have the clearing revenues from NYSE Liffe Clearing for the whole year so that in and of itself is quite an uptick for us. To go back to Howard’s question, we’re pretty optimistic that at least in the second half of this year we’re going to be clearing some instruments in the jointly owned clearing house with DTC.
We’ve got two or three other conversations going on about other potential clearing initiatives, some with other clearing venues, some with other partners, etc. So I think it’s anyone’s guess as to where that leads. But I think that’s going to be a pretty important focus for us going forward.
Obviously the CDS opportunity for us did not turn out to be successful. I don’t think we had the right value chain set up and I don’t think we had the right partnership [inaudible] organizational constructs set up so I think we’ve learned from that and we have a couple of other conversations going on that make me believe that NYSE Liffe Clearing is sort of a growth opportunity in and of itself but I think we can extend that in NYPC into other realms as well. So that was what that comment was really alluding to.
Your next question comes from Daniel Harris - Goldman Sachs.
Daniel Harris - Goldman Sachs
I want to shift focus over there in Europe and talk about, you’ve had a maturation of BMTS over the last few years, quite a few marked structure in pricing changes. So I was wondering at this stage if you guys can give us an update of how you see the impact of the new traders that have come online in high frequency and how it goes to see your transactions were up 4% even amid all the increase in competition. So when you think about it going forward view, do you still see a lot more room for growth from high frequency trading or other types of participants and how that would potentially impact the pricing.
Through the course of the year, first I think we were responsive to the competitive pressures but also to the needs of these developing clients like high frequency traders and also the changing trading characteristics even of our more traditional customers as they more heavily developed algorithms and other ways of taking advantage of the entering markets.
I just think it’s been a slower process in Europe, partly because of the regulatory framework, partly because of the clearing framework, partly because there is no consolidated [inaudible], there’s a lot of reasons why it just hasn’t gone as full and fast as the US.
On the other hand, it’s clear that there’s more high frequency trading then there was. It’s clear that pricing has come down and we understand that and we’ve responded. We’ve had to add to our offerings and we continue to respond to that. There’s still some room for growth obviously both in terms of overall market volume and in terms of high frequency trading as a percentage of the market.
To be honest, some of the MTFs have been entirely unsuccessful getting a foothold. There’s been a couple of them that have done a good job. Partly against us but to be honest, a lot of it has been against some of the weaker competitors who are in more of the same shape as we were in New York two years ago when our technology platform wasn’t up to competitive standards, when we weren’t as responsive on the pricing front, and so on, that allowed more incursion into their markets.
Nonetheless, we’re not complacent, it’s a developing story, and we’re in constant contact with our customers. I think the biggest lesson there is we’ve got to be in discussion with our customers, responsive to their needs, both on the technology and the pricing front.
Your next question comes from Niamh Alexander - Keefe, Bruyette & Woods.
Niamh Alexander - Keefe, Bruyette & Woods
The listings business was very strong. Was it, we’ve had some pick up in activities in IPOs, but was there some kind of benefit in the valuation pick up as well as Europe because I’m just wondering with the market seeing a lot more IPOs and things like that, should we expect to see more strong sequential improvements like this or is there maybe something unusual within the fourth quarter?
I think you have to keep one thing in mind on the listing side. Yes, the calendar is quite strong. Yes, we really like our competitive position. We’ve got lots of companies in the pipeline and we’re very confident that although it’s a competitive environment, we’re going to win more than our fair share. I think the recent record kind of displays that pretty clearly.
I think whether those IPOs are coming from the US, whether they’re some of the private equity deals that are coming back to market, the ones that were taken private a few years ago, whether they’re coming from places like China or Latin America, we’re very well positioned in all of those arenas.
I think it goes back to Larry’s customer focus point. We’re recognizing that there’s a lot of constituents here that we have to stay close to and make sure they understand what services we’re providing.
So that’s all good news. I like the momentum but you have to remember that, and Mike can correct me if I’m wrong on this because I don’t understand it, but the good news when you get a lot of new IPOs is obviously they trade, you get more volume, and that’s the revenue that accrues to you immediately.
All the other fees from a new IPO that are around the listing are amortized over a fairly lengthy period of time so even though we’ll have a more normal IPO market in ’10 then I think we had in all of ’08 and the first half of ’09, it’s not like you’ll notice that in the listings numbers right away.
You might see it as an uptick in some of the transaction revenues because it does create volume obviously so what did I leave out there, Mike?
I think the other part of her question, we are seeing some revenue growth this particular quarter and we did receive some benefit from some structure product in the US, some balance sheet compares in Europe that probably aren’t going to repeat themselves in the next year like the Citigroup deal and so on.
Mike is right, a lot of those one-time deals that were done, the secondaries and all these various things, it has some nice fees attached to them that I think we have to assume and we should all hope are non-recurring. We hope we’re kind of through the balance sheet repair era.
So that brings it to a wrap. Obviously Mike and Steve and the team will make themselves available to anybody who wants to follow up. We appreciate as always your listening in and your good questions. Thanks for your ongoing support. We appreciate it. Have a good day.
Ladies and gentlemen, this concludes the presentation and you may now disconnect.
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