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NASDAQ OMX Group, Inc. (NASDAQ:NDAQ)

Q4 2013 Earnings Call

February 05, 2014 08:00 am ET

Executives

Ed Ditmire - Investor Relations

Bob Greifeld - Chief Executive Officer

Lee Shavel - Chief Financial Officer

Analysts

Rich Repetto - Sandler O'Neill

Kenneth Hill - Barclays

Dan Fannon - Jefferies

Jillian Miller - BMO Capital Markets

Bill Katz - Citi

Ken Worthington - JPMorgan

Rob Rutschow - CLSA

Michael Carrier - Bank of America Merrill Lynch

Operator

Good day, ladies and gentlemen, and welcome to The NASDAQ OMX Fourth Quarter 2013 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference Ed Ditmire, Head of Investor Relations. Sir, you may begin.

Ed Ditmire

Good morning, everyone, and thanks for joining us today to discuss NASDAQ OMX's fourth quarter 2013 earnings results. On the line are Bob Greifeld, our CEO, Lee Shavel, our CFO; Ed Knight, General Counsel and other members of the management team.

After prepared remarks, we'll open up to Q&A. The press release and presentation are on our website. We intend to use the website as a means of disclosing material, non-public information and complying with disclosure obligations under SEC Regulation FD.

I'd like to remind you that certain statements in this presentation and during Q&A may relate to future events and expectations, and as such constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from these projections. Information concerning factors that could cause actual results to differ from forward-looking statements is contained in our press release and periodic reports filed with the SEC.

Now I will turn the call over to Bob.

Bob Greifeld

Thank you, Ed, and thank you everybody for joining us on this very difficult morning. I want to start by saying we are very pleased to announce record fourth quarter 2013 results. It truly caps another exceptional year for our franchise. While the quarter featured record revenues, non-GAAP net income and non-GAAP EPS perhaps what is most noteworthy for us is that we achieved this while also making significant strategic investments in our future.

The progress and strong performance across our core businesses provides us the flexibility that allows us to make critical investments in our future such as NLX, our interest rate derivatives exchange in London, NASDAQ private markets are offering to help private companies manage their interactions with investors and our lead to cash initiative which we expect to make our back office interactions with our Corporate Solution customers more efficient while also delivering outstanding results.

When we look at the underlying reasons for our performance in 2013, and in particular the fourth quarter, it is impressive to recognize the progress across all our business segments, clearly highlighting the soundness of our strategy and approach. Let me highlight some of the major factors contributing to the $1.9 billion record revenue we achieved during the year. We saw a strong performance in Technology Solutions, in particular the doubling of our revenue Corporate Solutions to $230 million.

We also grew our Market Technology business, which achieved record revenue of $219 million, up 12% year-on-year. In fact, in the fourth quarter, we saw organic growth across all our non-transaction business segments, including Information Services Technology Solutions and Listing Services, leading to a 5% overall organic revenue growth in the period.

One of the standout performers in particular was our Index Licensing and Services group. In 2013, revenue grew to a record $74 million, up 17% year-on-year. We made significant progress diversifying and expanding our product offerings by launching 22,000 new indices. We are now one of the only providers that have licensed products covering every major asset class. Clearly, our diverse high-quality revenue mix with 73% coming from recurring and subscription sources and over 60% of our trading revenues coming from the derivatives and fixed income categories has been a core driver in the returns we deliver to our shareholders.

Looking at the bottom line, on a non-GAAP basis fourth quarter 2013 EPS of $0.69 was up 8% versus the prior year quarter of $0.64, but the non-GAAP operating income, up 11% year-over-year. More important than the numbers for this quarter and the year 2013 is the fact that our customers, partners and stakeholders fundamentally recognized the substantial and unique value that NASDAQ OMX provides.

As I mentioned on this call before, our objective is to become a well-established provider of a diversified portfolio of services to the financial and corporate community. Given the strength of our competitive position, with 96% of our revenue is generated from businesses where were either number one or number two, we are executing on that strategy quite well.

Now, I want to turn to some of broad business highlights that define our quarter and the results we delivered, but more importantly how we expanded our capabilities and delivered more value to our customers and also to our shareholders. When we think about the journey this organization has been on since beginning. Over 40 years ago, our technology and expertise in technology have been the drivers behind the value we deliver in the marketplace. As proof of that, as previously mentioned, our Technology Solutions segment had a truly outstanding quarter, with record revenues driven by all-time highs in both, the Market Tech and Corporate Solutions businesses.

Our Market Technology business was clearly the beneficiary of increased demand for proven trading, clearing and risk and compliance solutions. In just the fourth quarter, we saw a 22% growth driven by demand for our advisory services, SMARTS Broker and BWise.

Order intake grew to a record $138 million for the quarter. The new partnerships we forge with exchanges during the quarter and during the year, includes, Tadawul, the Saudi Stock Exchange, the largest exchange in the Arab world, Borse [Dubai], most recently [Borse]. There is no doubt; we have solidified our competitive position. The record backlog of $655 million shows this progress very clearly, truly a remarkable performance and one which underscores the great confidence our customers and partners have in our technology and expertise.

In our Corporate Solutions businesses, we set a new quarterly revenue high, an increase from the prior quarter, which is our first full quarter since we integrated the Thomson Reuters, IR, PR and Multimedia businesses. Additionally, we are seeing very strong year-on-year growth in products like Directors Desk or corporate Board Portal, BWise are highly regarded GRC solutions.

In our view, we've only begun to scratch the surface on the exceptional cross-selling opportunities presented by this business, and we expect these opportunities, coupled with the product enhancements we have in the pipeline to increase the value we deliver to our customers, further driving the performance of this business.

As you know, at NASDAQ OMEX, we're all about seeking ways we can deliver technology, partnerships and our expertise to do more for capital markets and help our customers succeed. One of the areas that have [panelized] that approach during the quarter and in 2013, as previously mentioned was the Index Licensing and Services. We ended the fourth quarter with $92 billion in assets under management. That's truly remarkable, up 44% year-on-year and driving a 25% revenue growth.

More firms are recognizing the compelling value of our multi-asset offering. Our goal is to enhance our position as a premier index provider and we intend to continue expanding partnerships with exchange traded products launches worldwide to license more of our indices and drive assets under management or AUM, well above the highs we have set recently.

We also expect to continue expanding the product menu and capabilities above Global Index Calculator, moving to 28,000 indices at the end of the fourth quarter 2013, and early in the first quarter '14, we added 13,000 new which brings our total to 41,000 indices, more to come.

All of our European markets experienced a strong fourth quarter. It is important to note that equity trading stood out among all those strong performances at 22% year-on-year growth, a combination of significantly improved industry volumes, steady market share and improved revenue capture.

We are continuing to enhance our offerings in the Nordic derivatives clearing, and in particular this quarter, we have expanded on our interest rate swap clearing to help customers navigate the new regulatory environment and further decrease risk. Our first buy-side clear transactions were in fact announced this quarter.

Clearly, one of the more visible ways our value proposition comes to life is through our Listings business. In 2013, the IPO market rebounded to levels not seen since 2007 and we saw our 126th IPOs come to NASDAQ. Our win rate was 52% in the U.S., and in totaled NASDAQ had 239 new listings, up over 50% from the prior year. Truly a strong performance.

We also continued to enjoy a dominant share of biotech with a 98% win rate. Interestingly, NASDAQ also hosted 57% of the best-performing IPOs in 2013. The value we offer resonated with a number of high profile brands, including IPOs of Sprouts Farmers Market, Norwegian Cruise Line and zulily to name a few.

Notable switches just from the fourth quarter include Marriott and VimpelCom. Additionally, American Airlines chose to list on NASDAQ after the merger of the previous [NYSE] listed American Airlines and U.S. Airways. Continuing this momentum, 2014 is off to a very strong start, with 24 new U.S. listings in January, actually double the number we had in January 2013, including 10 IPOs versus 6 in the prior year period.

As pleased as we are with the performance and the progress of our core businesses, we are never satisfied and are always looking at ways to increase the value we offer to the investment community, our customers and partners and drive further growth.

I want to take a minute to cover some exciting areas we are working on right now. First, on our two material acquisitions which have already become accretive in the first quarters of ownership even though the vast majority of the synergy and value creation opportunity is still ahead of us.

Since completing our acquisition of eSpeed, we have been pleased with our progress as we made steady improvements with the platform and our drive to deliver industry-best responsiveness. We have implemented a number of system upgrades which have reduced our average latency by about 35% and reduced our tail events by over 80%.

As we plan the migration of the eSpeed matching engine and customers into a world-class Carteret data center near the end of the first quarter 2014, we will complete a fairly significant technology overhaul that puts eSpeed on great footing to be more competitive and do more in the coming periods.

Moving past the technology overhaul and onto our planned product menu expansion, we recently launched our first new products since acquiring eSpeed. U.S. Treasury floating rate notes and we have several other products in the on-deck circle for the first quarter and the first half of 2014. These products include coupon rolls when issues and then tips and bills.

In Corporate Solutions, we continued to progress on bringing our legacy Corporate Solutions businesses in line with the acquired Thomson Reuters' variety of businesses to create a stronger industry leader. To-date, we have meaningfully reduced our reliance on the transition services agreement with Thomson Reuters. We are consolidating the real estate footprint and we are making steady progress on the lead to cash billing solution.

Our sales and development teams have been integrated, increasing our ability to cross-sell effectively even as we invest heavily in our next-generation products suite. As I have said in the past, we are focused, first, on the effectiveness with the acquisition, something I am increasingly confident that we are achieving, and beginning later in 2014, we expect investors to see more and more of the efficiency opportunities are leading scale can deliver as part of our move to Technology Solutions segment, the segment margins to be higher.

Now moving to our organic efforts, one of the growth initiatives which shows increasing progress is NLX, our European interest rate derivatives market in London.

In fourth quarter 2013, NLX set new market highs both, overall with a 2.4% share as well as in certain products that are seeing dramatically higher uptake, like your LIBOR futures we saw our March share greater than 5% and had several days above 20%. Our market share has been building steadily since we launched in May of 2013, but more importantly we continue to add new users which increased by 11 in the second half of 2013 to 27 and we expect that number to grow in 2014.

We are also very encouraged by the development in European regulation, in particular Method 2, which is designed to create more competition in listed derivatives' trading, something which will be as pervasive a change as Reg NMS was in the U.S. equity markets.

We have always believed the competition is the life for a lot of capital markets and the monopolies are natural creations in the capitalist society, and that over time competition will always seek the surface. I believe that this latest regulatory development certainly validate. With NLX as well as our Nordic derivatives platforms and clearinghouses, we believe we are very well positioned for increasingly competitive European directives landscape in the years to come.

Moving onto the Listings business, we are extremely excited about NASDAQ private market or NPM, which is designed to help companies that aren't public, but have many needs, so much of public issuers. Recent regulatory changes in particular the JOBS Act allow companies to have more investors while still remaining private and create new opportunities for us to help them take advantage of this new flexibility.

While our offering will be multifaceted, it includes a new kind of marketplace that not only brings liquidity for their shareholders, but allows them to manage important aspects of how their investors interact. NPM recently received broker-dealer approval from FINRA and has filed with the SEC for registration to begin operation as an [AGS], which will allow us to launch NPM before the end of the first quarter 2014.

We have been encourage and excited by the response from the market and we look forward to providing a venue for a greater number of companies to have a more efficient access to capital and for investors to have a path for access to entrepreneurial companies.

For 2014, we are optimistic that our business model is well positioned for any potential improvements to the global business environment while the diversity of our offerings provides opportunity to more broadly service our customers across the investment community. For our part, we will continue to focus on strong execution and efficiency while serving the needs of our customers.

In closing, I would like to say this quarter in many ways highlights a year that I would describe as transformational for this organization on a number of levels. We are well-positioned in our core business. Our core businesses have diversified and now provide an optimal mix between recurring and transactional revenue and our strong performance had allowed us to significantly invest in our future while delivering record earnings. We at NASDAQ OMX are very proud of these accomplishments.

With that, I would like to turn the call over to Lee.

Lee Shavel

Thanks Bob. The following comments will focus on our non-GAAP and pro forma non-GAAP results. Reconciliations to GAAP and to non-GAAP and pro forma non-GAAP results can be found in the attachments to our press release and in presentation that's available on our website at ir.nasdaqomex.com.

I'll start by reviewing our fourth quarter revenue performance relative to the prior year quarter. Net revenues increased $98 million to a record $520 million. Contributing to this increase, was an $80 million or 27% increase in subscription and recurring revenue, primarily from acquisitions but also from material organic growth.

Subscription and recurring revenue represent 73% of total revenues, up from 71%. Transaction-driven revenues rose $18 million, mostly due to the inclusion of transaction revenue related to the eSpeed acquisition, but also due to the higher European cash equities revenues, which rose $4 million, partially offset by lower net U.S. derivatives revenues. On an organic basis, assuming constant currency and excluding acquisitions, total company net revenues rose 5%.

I am now going to go over some of the highlights with each of our reporting segments. All comparisons will be to the prior year unless otherwise noted. Information Services, which includes our Market Data and Index businesses increased revenues 10% and operating profit by 6%. Operating margin was down marginally, but remained at very high level at 69%. Market Data had a 7% increase in revenues on growth in new product sales, in particular NASDAQ Basic, select pricing actions such as an increased from Level 2 quotes and mutual fund services and the inclusion of eSpeed market data, partially offset by lower audit collections which were 2 million lower than the prior year period.

Index Licensing and Services grew revenues 25%, including the impact of the merchant indexes acquisition with a number of licensed ETP, up 31% to 148, and assets under management, up 44% to 92 billion.

In Technology Solutions, which includes Corporate Solutions and Market Technology, they increased revenues by $70 million or 89%, mostly due to the impact of the Thomson Reuters and BWise acquisitions, but also due to organic growth at both, the legacy corporate solutions businesses and the end market technology. Operating profit tripled to $21 million, due primarily to the inclusion of Thomson Reuters and secondarily to the organic growth and recognition of certain previously deferred revenues.

Corporate Solutions revenue of course shows a large step up in scale due to the mid-year Thomson Reuters' acquisition more than tripling compared to the prior year period, but it is important to note that we are still seeing solid organic growth here as well, in particular Directors Desk, where we saw clients increased by 27% versus the prior year.

Market Technology revenues grew 22% and set a new quarterly revenue record of $66 million, and perhaps more importantly as we think about future periods, it's set record highs for quarterly and annual order intake at $138 million and $322 million, respectively, establishing a new record backlog at $655 million.

Growth was broad-based and included contributions from both, BWise and SMARTS Broker. Please note that in the fourth quarter we recognized $3 million of revenues that were previously deferred at BWise. A note here on our Technology Solutions operating margins. We saw significant increase in the fourth quarter to 14% from 9% in the prior year period and 7% in the third quarter of 2013.

While we are excited about the great result, we note that the fourth quarter was subject to the seasonal fourth quarter peak in change request revenues and that the $3 million of revenue recognized from previously deferred BWise revenues also added a couple of percentage points.

As we think about the next few quarters, please bear in mind that we will still be in the relatively early stages of the Thomson Reuters integration with elevated investment and modest cost synergies expected to be realized and the most significant progress for the 20% Technology Solutions segment target will happen in 2015, when we expect to realize the majority of the $35 million in targeted cost synergies. Consequently, we don't expect the fourth quarter '13 margin level to continue in the first quarter, but we do expect to show steady year-over-year improvement in 2014.

Moving to Market Services, which includes are derivative, equities and fixed income businesses as well, as our associated Access and Broker Services, we saw a 9% increase in revenues, due primarily to the inclusion of transaction and hosting revenues of the acquired eSpeed business and growth in European equities trading, partially offset by modest decline in net U.S. derivatives.

Operating profit increased 7% and operating margin of 43% was down modestly from 44% in the prior year period. In net derivatives and trading and clearing, European revenues were unchanged, but net U.S. derivatives saw a moderate decline due to modest declines in average capture market share. Though I would note, we were proud to finish our fourth straight year as the sheer leader in U.S. equity options trading.

At equity trading, revenues rose 9% as European equity revenue grew 22%, [mainly] of higher industry volume coupled with flat net U.S. equities revenue and basically unchanged industry volumes, share and average capture.

I would note that while European equities obviously has had strong increases over the last few years, we are seeing encouraging signs in U.S. equities, where we had three consecutive quarters of rising average capture and modest improvement in market share and that positive share momentum has continued into the first quarter 2014.

Net fixed income trading revenues fell $1 million from the third quarter due to lower industry volumes, which impacted us a little more as we worked to shift our pricing mix to include a higher variable component, something we expect to pay significant dividends when volumes begin to increase.

In Access and Broker Services, revenues fell $1 million or 2% to $64 million, due largely to muted demand for ports and co-location, partially offset by the addition of eSpeed hosting revenues and growth in newer products like microwave.

Listing Services, which include U.S. and European listings saw a $1 million or 1% increase in revenues, principally on higher European listing fees, which reflect higher market capitalization there. In the U.S. listing fees results reflect as higher listing fee revenue was offset by lower revenues associated with events at the market site facility which is undergoing a renovation.

Operating profit decreased $3 million or 12% to $23 million in operating margin of 40%, was down six percentage points versus the prior year period, principally on marketing commitments and expenses related to the NASDAQ private market initiative.

U.S. new listings in the quarter doubled 80 from 40 in the prior year and our IPO win rate was around 44%, down from 48% in the prior year period and below our 52% full year results, due mainly to an unusually high number of spinoff of NYSE-listed companies and REITs during the fourth quarter of 2013. Excluding these two categories, our win rate would have been 54%. In addition to having a productive quarter in terms of new issue activity, we gained 18 switches from NYSE, including as Bob noted earlier Marriott International and American Airlines only software departures.

Non-GAAP operating expenses increased by $77 million from the prior year with the vast majority of the increase coming from the two acquisitions. Organic expenses excluding acquisitions and assuming constant currency rose 6% this quarter, including GIFT spending above our normal organic expense growth rates, due to higher incentive compensation costs as well as the initial temporary investments spend we are making into our acquisitions. Full year organic expense growth was 3%, about 1% of which is the impact of the higher GIFT budget.

Moving onto our 2014 expense guidance on Slide 20 of the presentation, we are initiating 2014 expense guidance at $1,250 billion $1,285 billion, including $35 million to $50 in GIFT expenses. The higher end of our core expense range of $1,215 billion to $1,235 billion on the core expenses will be most likely 2014 future significant improvements in the underlying industry conditions and activity levels.

Understanding that are significant mid-2013 acquisitions make comparisons to our new guidance challenging, I would note that taking our fourth quarter 2013 non-GAAP operating expenses of $313 million and annualizing them gets you to $1,252 billion and our 2014 guidance of $1,215 billion to 1,285 and about 1% to 3% growth.

Non-GAAP operating income in the fourth quarter of 2013 was $207 million, up $21 million or 11% from $186 million in the prior year period. Non-GAAP operating margin came in at 40%, down from 44% in the prior year period, primarily the result of a larger contribution of the lower margin Technology Solutions business due to the Thomson Reuters acquisition. As we achieved cost synergies related to this transaction, we expect to see Technology Solutions and overall margins increase.

Net interest expense was $28 million in the fourth quarter of 2013, an increase of $6 million versus the prior year, due to increased borrowings associated with our acquisitions. The non-GAAP effective tax rate for the fourth quarter was 34% at the low end of our 34% to 36% guidance range. Going forward, we expect that our tax rate for 2014 to be in the range of 33% to 35% a ranges that is 1% lower than our prior guidance.

Non-GAAP net income was $119 million, $0.69 per diluted share compared to $108 million or $0.64 per diluted share in the fourth quarter of 2012. The $0.05 increase in our EPS reflects a $0.04 improvement in our core operating profitability, a $0.04 benefit from the acquisitions net of financing costs, $0.01 benefit from a lower effective tax rate partially offset by $0.02 of increased spending on our GIFT initiatives and $0.02 higher fully diluted share count.

Fourth quarter non-GAAP EPS of $0.69 excludes the impact of several items, including a $30 million realized gain on the sale of an investment security, $18 million in reserve releases related to the execution of the voluntary accommodation program and $11 million in gains related to merger activity and strategic initiatives as the primary components. GAAP EPS was $0.81 in the fourth quarter.

Moving onto the balance sheet, on Slide 22, we are showing our debt structure and debt maturities. Our higher debt and leverage versus the prior year reflects the completion of our acquisitions of Thomson Reuters at the end of May, and eSpeed at the end of June, financed largely with debt while both our debt and leverage declined versus the second and third quarters of 2013, reflecting debt pay down in the quarters since those acquisitions were funded as well as improved EBITDA.

In the fourth quarter, the company paid down $98 million in debt, including $87 million in repayment on the revolver and $11 million on our term loan, but changes in foreign exchange led to a $14 million increase in the U.S. dollar amount of foreign denominated debt on the balance sheet, netting to an $84 million decline in total debt compared to the third quarter of 2013.

Our gross debt to EBITDA leverage fell to 2.8 times from 2.9 times last quarter and a peak of three times at the closing of our acquisitions in the second quarter of 2013. The deleveraging process is consistent with our original expectations and we continue to expect leverage to return to the new 2s range by the end of the second quarter in 2014.

Cash and cash equivalents and certain liquid investments, net of our regulatory and restricted cash were $255 million at the end of the fourth quarter.

Thank you for your attention. With that, I will now turn it back over to Ed.

Ed Ditmire

Operator, please open up the lines for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Rich Repetto of Sandler O'Neill. Your line is now opened.

Rich Repetto - Sandler O'Neill

Good morning, Bob. Good morning, Lee. Congrats on a strong quarter here.

Bob Greifeld

Thank you.

Rich Repetto - Sandler O'Neill

My questions is information services and more specifically Market Data, because you are looking good year-over-year, but there were some sequential quarterly declines and I am trying to see does it have anything to do with the restructuring of eSpeed market that or our agreements. Just explain the quarter-over-quarter changes in our market data and information services.

Bob Greifeld

Sure. Rich, the reason that you are seeing a decline from the from the third quarter really is principally due audit revenues, so as you know we are engaged in the process of evaluating the utilization by our clients of the market data services we will undertake audits of those clients and occasionally recognize that the clients are under reporting or under calculating the amount of revenue.

In the third quarter, we had a particularly strong level of audit revenue. As a consequence, the fourth a particularly strong on level of a quiet revenue and as a consequence, the fourth quarter comparison was lower because we simply had lower right lower audit revenues on than in the third quarter. I wouldn't say that it represented that any fundamental change in the business and it was not infected by its eSpeed, so third quarter was high, fourth quarter low, first quarter be more in line.

Rich Repetto - Sandler O'Neill

Sort of like if you look at the of the two rather than…

Bob Greifeld

…way to do it.

Rich Repetto - Sandler O'Neill

Okay. Then my follow-up is eSpeed, you have a plan, Bob, and there has been stuff flow there about market share changes. I just want to see whether you could sort of point us in the right direction of, you know, how you feel about the market share in eSpeed and that the offering going forward doesn't conflict with your clients' interest.

Bob Greifeld

I would say quite the opposite, so one of the things I am happy about the progress we made with the relationship with our customers and I think we had to do some level of repair work there, but what's interesting to me is, we are to come to new contractual relationships with them in a lot of shorter period of time than one had thought.

I think, with a core bank customer base, we are in a better position now than we were six months ago. We also have made progress with introducing new customers into the marketplace and probably just as important is where the final stages of having trading technologies being certified on a platform and that's been really holding back some of the progress.

I think, one, the market share is work-in-progress. It's essentially what it was when we did the acquisition. We clearly want to improve it and we have made major technology changes and that information is filtering into communities, filtering into the technology folks who support these platforms and we are building the data to show in times of stress our platform is certainly remarkably strong and dramatically better than what it was six months ago, so work-in-progress. We are happy that were taking all the right actions and we expect that in the not too distant future that will show up in our results.

Rich Repetto - Sandler O'Neill

Understood. Thanks and congrats on a strong quarter.

Bob Greifeld

Thank you. Appreciate it.

Operator

Thank you. Our next question comes from Kenneth Hill of Barclays. Your line is now opened.

Kenneth Hill - Barclays

Good morning, Bob and Lee.

Bob Greifeld

How are doing.

Lee Shavel

Morning.

Kenneth Hill - Barclays

Doing good. I wanted to start on NASDAQ private market. I think that's an interesting - am not sure you guys have and you are working to get the approvals in place shortly. Just kind of wondering and I am sure ahead of those approvals, you have been talking to a lot of customers. How are you thinking about the revenue outlook for those businesses, what kind of services customers are looking at?

Bob Greifeld

Yes. I would look at the three revenue drivers for this marketplace. One is, a subset of our corporate solutions products is certainly applicable to this marketplace. Just because you are private, doesn't mean you don't want to send press releases out in the order you want. You still need some marketing surveillance. Clearly, your directors want to have automated board tools, numbers of different products we will be selling to them, so we are finalizing that offering now.

The second is, and in many ways is important in the beginning is, to have control of your shareholder register, so we want to provide product and services to allow them to do that, you know, who owns the shares and who can sell under what conditions. The third is, you have to provide liquidity programs to these issuers. It's not going to look like NASDAQ public market. It will be some type of auction that will be based on the issuers' desire to have it once-a-year, once-a-quarter, once-a-month. We certainly believe that over time our liquidity is seductive to people and they have more rather than less of these liquidity auctions, but I think it could be quite small in the beginning, so three drivers there.

What's important to recognize is, when we look at embed that capital markets to public market which is fundamentally different than the private market is, we probably have more revenue opportunity NPM than we do in public market context and the public market companies do not trade that often. So in a real sense, liquidity programs could be that much more attractive to us and to them.

We are obviously trying to get a sense of the scope of the market, but there hundreds of companies that are a natural first target for us. I would say that we are going to make sure that we keep the quality of the companies very high to come to market here and we are definitely going to look to do a controlled launch in March and I think quite respective in number of companies that use a platform in the beginning, but the demand is certainly there and the excitement is building.

Kenneth Hill - Barclays

Okay. My follow-up I guess is on the other side of that equation, on the expense side. I was just wondering I think you mentioned that Lee, in the comments, there's a somewhat of a drag on margin for the quarter. Just wondering how much might be on the new initiative spend, is that 35 to 50 and maybe what it could grow to over time?

Lee Shavel

Well, in terms of the interest the overall expense growth, as I mentioned, we had a 6% organic growth in operating expenses and that reflected a higher level of investment in the two acquisitions as we described initially, particular with Thomson Reuters there is an initial investment base, and as Bob mentioned, a number of the technology investments that we are making in eSpeed are contributing to that, but we view those as temporary influences on that.

Once those investments are made, I think, we expect the margins to improve in those businesses. As it relates to GIFT spending, the guidance that we provided reflects our expectations for the portfolio of projects that we have principally in there it is our NLX initiative, but we have other portfolio investment opportunities that we see there and I think that the overall level that you see for the 2014 guidance is down slightly from where we were in 2013.

Kenneth Hill - Barclays

Thanks for taking my question.

Operator

Thank you. Our next question comes from Dan Fannon of Jefferies. Your line is now open.

Dan Fannon - Jefferies

Good morning. I guess if you could talk to us about the second quarter when you get your deleveraging targets and think about capital priorities and looking at buybacks, dividends and potential acquisitions and kind of update us on those thoughts and what potential areas of new businesses you might be looking at if any.

Bob Greifeld

I would say one is, we want to get the second quarter, and the way to do that successfully is to focus on one of the first and the second quarter execution, so with respect to capital return, I would say that the board will contemplate that probably sometime after the second quarter, assuming we achieve what we think will, we all are confident we will in the first two quarters - not the time and the place, but it will come.

The second part of your question was about acquisitions?

Dan Fannon - Jefferies

Correct.

Bob Greifeld

Well, I mean, what we have said before is, we have, I think, a very capable corporate development department and we literally look at probably a hundred different opportunities in any given year. We obviously don't participate in the vast majority of them and I would say that it's just the normal course of business, but there is certainly no higher or lower activity than we normally see in that as -in terms of thinking about things.

As I said before, it's our job to know every asset in every corner of the world across all different asset classes. To the extent you have really a template of where the world is and where the world might go then you have a pretty clear view of how that will play and help or hurt strategically where you want to go.

Dan Fannon - Jefferies

Great. Thank you. Then I guess, Lee, just on the GIFT spend, you know, NLX last year was a big component. Is that a smaller component in 2014, and one of the other programs and development you listed is now increasing as a percentage?

Lee Shavel

I would say that with both, regard to NLX, it continues to be the most significant element of the overall GIFT spending budget, and depending upon how NLX continues to progress, it could be an increasing amount or a decreasing amount, but it's really too early to say. As Bob indicated, we are extremely pleased with the progress that we have seen on the market share front and we have to allow that the continued time as we indicated through 2014 for us to come to our conclusion, but certainly our expectation is that we will continue to generate momentum at clients. As a consequence, be a less significant expenditure within the GIFT budget.

I certainly NLX had a very exciting fourth quarter. As we said, we had 20% market share in certain days and certain hours of your LIBOR. That was not unnoticed by the community. More importantly as a result of that, we do see a strong series of inbound calls and a strong number of new participants and some very large participants in the marketplace now working very hard to hook up to NLX, and obviously that will be the determinant of our long-term success, so very successful fourth quarter and very strong progress so far in the first quarter 2014.

Dan Fannon - Jefferies

Thanks for taking my questions.

Lee Shavel

Thank you.

Operator

Thank you. Our next question comes from Jillian Miller of BMO Capital Markets. Your line is now opened.

Jillian Miller - BMO Capital Markets

Thanks, guys. I am just following upon that last kind of question. Given the strength that you have seen in NLX and all the success you have had in the fourth quarter, I am just wondering when do you plan to roll back some of those incentives for people that trade to see what's fixed versus what might be just kind of temporarily to be around for this rebate?

Bob Greifeld

Good question. I think it ties back what I just said. Right now, we do have a queue of people wanting to hook up and I think hopefully there is more coming and that's a process. To the extent we are through that queue, and we know that we have a really steady-state number of participants that would be the time that we would start thinking about it.

Jillian Miller - BMO Capital Markets

Okay. Got it. Then there was a news article few weeks back that had some commentaries some guy suggesting you might potentially be interested in acquiring an index properties going forward and I know (Inaudible) during that platform, but buying some more IP to run on it, so I just want to get your thoughts on that specifically, what would be attractive to you guys those businesses, how do you think about valuation just because maybe they tend to be relatively high multiple businesses.

Bob Greifeld

A good question. One is, we have said publicly before that we love our positioning in the index business. We undertook through a GIFT initiative development of our index platform to basically be on par from a breadth with any of the platform out there and we think from a technology point of view, we are representing a step function.

If you equate the Index business to the Transaction business, you see that now that we have the planned incremental business, incremental revenue tends to drop to the bottom line, so the plant is built no different than when we looked at the Transactions business back 10 years ago, so we want to put good volume to it.

We have made one small very successful acquisitions in the Index business called Mergent, and that was a dividend achievers. We have done incredibly well with that. To the extent that other Mergent-type opportunities become available, we clearly would be interested in that, but I would also say that our primary focus is about organic development. We've increased the sales outreach, we are making, I think, very strong incremental progress in that effort and we have more prospects lined up than we ever had before, so we are going to look at both weapons. We have the plant, we have the capability, we have the scalable platform and we are going to look at both, organic and inorganic growth in this space.

Jillian Miller - BMO Capital Markets

Okay. Thank you.

Operator

Thank you. Our next question comes from Bill Katz of Citi. Your line is now opened.

Bill Katz - Citi

Thank you very much for taking my questions. First question is just coming back to the expense guidance try maybe frame the operating leverage underneath that. What kind of revenue backdrop are you considering? Then to the extent that we either had a fair than expected or worse than expected operating leverage. CapEx is at range of expenses.

Lee Shavel

Well, I would say, Bill, and that revenue outlook that we are looking for the expense range is, as I indicated in the comments, if it revenues remain - the environment remains as it was in the second half of 2013, then I think our expectation is that we would be towards the lower end of the expense guidance range that's set out, the 1,250 billion.

To the extent that we see an improvement across our businesses and activity in terms of trading activity or pickups in our technology businesses, then we expect we would be towards the higher end of that range. Is that the guidance that you are looking for?

Bill Katz - Citi

Yes. Thank you. I apologize if I missed your prepared remarks. Second question I have is just, you mentioned that your synergies and transaction times when we are back into 2015, which seems reasonable [versus]previous, can you give us an update on where you stand maybe even qualitatively? What you are hearing from clients as it relates to the possible for cross-sell, or revenue synergies as you are now another quarter into the transaction?

Bob Greifeld

Yes. I would say this. One is, we like to break things down into manageable pieces, so cross-sell is a big overarching theme that we will execute upon obviously in the quarters and the years to come. In 2013, now going to 2014, we more narrowly defined it, so when you look at a product that old NASDAQ had that old Thompson did not have, which has high growth and high margins that was Directors Desk, so clearly that was the number one thing that we want to do in cross-sell, so we want to give that to the sales force to do and in a very manageable way.

Then when you look at what old Thompson had, and clearly NASDAQ, always wish they had that was first call and content products such as StreetEvents, so that was our focus, so that will be the mission for the next number of months and then we will expand upon that as we go along, so great opportunities with those two. As we mentioned in the prepared remarks, Directors Desk had an outstanding year and quarter, and clearly a lot of that was related to cross-selling that we were able to do.

Bill Katz - Citi

Thank you.

Operator

Thank you. Our next question comes from Ken Worthington of JPMorgan. Your line is now opened.

Ken Worthington - JPMorgan

Thank you very much. First I wanted to ask on the SIP, what are your intentions with the SIP? I think you gave notice to give up responsibility, so maybe what are the advantages of controlling the SIP and if you continue to manage it, what kind of investments may be needed to improve the technology there?

Bob Greifeld

Yes. All right, so a couple comments with the SIP. One is, we have made a recommendation to strip to many 10 things that needed to be done and we spoke to the committee about that verbally, obviously post 822 and then put it formally in front of them in November.

We have not seen progress on those 10 items. We have progress on two items. It's basically wholly unacceptable to us. If this is under our control, and we lived through, what happened then 822 and 823, we would be working hard around the clock to remediate the system which had been obviously sitting there, somewhat neglected over the last decade. So, it obviously is a source of frustration to us and we have to communicate that.

We sent determination and that it's not tolerable for us to work in this environment with a known system with no deficiencies and the committee is not stepping up to their responsibilities to authorize us to fix that, so it's the is a frustration right now and like you said, we have no intention to want to continue on this environment and we are going to communicate that pretty loudly and clearly.

Ken Worthington - JPMorgan

I am sorry. What are the advantages of actually controlling the SIP? How is this a strategic…

Bob Greifeld

It's not. It sits at infinite risk. At this point, no reward.

Ken Worthington - JPMorgan

Okay. Great. Then maybe for the follow-up, can you give us an update on the pursuit to replace Eric Noll.

Bob Greifeld

Yes. As I commented before, we are going to look to do that in and around the end of the first quarter, so that's in process.

Ken Worthington - JPMorgan

Okay. Thank you.

Bob Greifeld

Meantime, I am having some fun running the U.S. transaction business, which had a strong fourth quarter in [Italy].

Ken Worthington - JPMorgan

Thank you very much.

Operator

Thank you. Our next question comes from Chris Harris of Wells Fargo Securities. Your line is now opened.

Chris Harris - Wells Fargo Securities

Thanks, guys. First question relates to Method. It sounds like your commentary, you are positive or constructive about what that might do, but correct me if I am wrong, but it seems like it would open up your Nordics business to a little bit more competition, so wondering net that whether you guys view this as a really good opportunity for NASDAQ or potential threat at the same time.

Bob Greifeld

I think it's an unbelievable opportunity for NASDAQ. As I said in my prepared comments, it definitely sounds to me, it feels to me like the days before Reg NMS was implemented and you had a number of deniers out there in terms of what that would mean to the marketplace, so I don't know the precise numbers.

The way I look at this right now with respect to European clearing, we might have the 5% market share, so I have 5% market share to think about for that 95% market share to go compete for us, so I like that ratio, so it is a fundamental and basic opportunity for us. There will be heightened competition in the trading of these instruments and it's something we do well.

Chris Harris - Wells Fargo Securities

Okay. That makes sense. Then the follow-up question, the numbers question maybe for Lee. You guys did have a nice pick up in the Tech Solutions revenues and you did walk through a few of those line items. Just wondering though, you how, much of the revenue bump was driven by seasonality? It seems like a few of the line items might be part of the more recurring bucket you have, so just trying to as we think about this revenue line item going forward, in which we expect over the next couple of quarters.

Lee Shavel

I can't predict what our expectations are for the quarter ahead. I think the things that I would point out is that we tend to see and I think you can look at this on a quarterly basis, we tend to see strong growth in the change and request revenue, or a sub-revenue line item in the fourth quarter and so if you are trying to get a sense as to what the seasonality impact, I think you can look at that number to get a feel for it.

Then there are also some impacts in the corporate solutions business, but it's very difficult I think to identify specific products or give you a sense of the percentage. The other element that I think you should just be aware of is, as I noted there were approximately $3 million of revenues associated with BWise that was a acceleration of revenue recognition due to an accounting change that we made that influenced the fourth quarter numbers. Those revenues in subsequent quarters will also be increased, but we probably had an un-repeating, non-recurring element about $3 million in the fourth quarter, so I think those are the elements that would address your question.

Chris Harris - Wells Fargo Securities

Understood. Thanks.

Operator

Well, our next question comes from Rob Rutschow of CLSA. Your line is now opened.

Bob Greifeld

How are you doing, Rob?

Rob Rutschow - CLSA

Good morning. Thanks for taking my question. I was just wondering if you could give us an update on eSpeed client base and how many of those clients you have been able to renegotiate into longer contracts?

One is, we have a one-year contract and we continued with that and we finished that renegotiation I think somewhat early in the fourth quarter and it's sometime in the fourth quarter, so as I said before that happened sooner or quicker than I would guess and I think there was generally positive experience for both sides.

Rob Rutschow - CLSA

Okay. Then just a numbers question, follow-up - I appreciate the disclosure on foreign currency. I was just curious as to why there was sort of a big swing in the Swedish Kroner expenses from quarter-to-quarter.

Bob Greifeld

Rob, I don't think we have an answer at our fingertips for that question, but we will follow up with you afterwards and take a look at that.

Rob Rutschow - CLSA

Thanks a lot.

Operator

Thank you. Our next question comes from Mike Carrier. Your line is now opened.

Bob Greifeld

How are you doing, Mike? I guess, he is not doing that well.

Operator

(Operator Instructions) Our next question comes from Michael Carrier of Bank of America Merrill Lynch. Your line is now opened.

Bob Greifeld

How are you doing, Mike?

Michael Carrier - Bank of America Merrill Lynch

Good. Just a question first on the technology business, I think you even excluding that adjustment of $3 million, still strong quarterly. If we look the pipeline, the backlog, everything you looks positive going forward. I guess just the two questions there, even axe that $3 million, is there still some seasonality in terms of revenue recognition in the fourth quarter?

Then we think about going forward and you think about the opportunity that you guys see whether it's with exchanges, the buy-side clients, sell-side client, just where are you in terms of going after that opportunity, meaning, how much market share, what else exist, because there's only so many exchanges out there that you can have relationships with.

Lee Shavel

I'll let Bob handle the outlook, but just to confirm. You mean to suggest that $3 million was the only impact in the quarter as I discussed the change in request revenue line separate from the other revenues has a seasonal impact in the fourth quarter as people are generally rushing to get the final changes in before yet year end, so that's influencing it, but you are right. I mean, what's primarily driving the quarter is just the very order intake that we saw from Market Technology.

Bob Greifeld

Let me get you your other question, so one there does seem to be more and more exchanges available for us to sell to, so I kind of have shared your thought three years ago, but I would say the number of new name exchanges that we are talking to now is greater than it's been in the past. In addition to that in terms of driving our growth, we have gone in a very significant way in declaring systems, post-trade and so you see what is turbulence of our the new deals and it's not just the trading systems, they are looking to us for clearing systems, post-trade processing. In addition to that with our SMARTS acquisition, we have certainly made a major splash in risk management and SMARTS tie together with BWise truly will give us a leading position there.

We have an increasing number of customers we are talking to and we are talking to customers at multiple levels right now, really pre-trade, risk management, trading and post-trade, so our opportunity set is quite large.

Michael Carrier - Bank of America Merrill Lynch

Okay. That's helpful. Then just follow-up, the U.S. auction business, it looks like market share has trended in the right direction. Pricing look like it ticked down. I think, you guys have a new proposal in terms of the new pricing mechanism, so just any comments on the outlook of the auctions business and from a strategy standpoint, you now, what you guys are trying to achieve?

Bob Greifeld

I would say the auctions business is certainly multidimensional chess that we play and we play it basically on a month-by-month basis. Our team is incredibly well led and we tend to think in the right ways, and by that I mean really acting in concert with what our customers require, so I think it's a tough competitive environment and we continue to do well and we certainly are very excited about the new plans we are putting in place, but we also recognize that two to three months, after that we will be doing further refinements to those plans.

Michael Carrier - Bank of America Merrill Lynch

Okay. Thanks a lot.

Bob Greifeld

Okay. So, one, we want to thank you for attending on this snowy day. Two, is I want to just repeat what we said earlier. We are certainly proud of the fact that we had record revenues, but probably more importantly than that, we had in certain ways record investments in our future and certainly some most GIFT initiatives showing some real signs of life, so it's a great thing to be able to, one, deliver record revenues, invest in our future and obviously delivery to our investors, so we are proud of the quarter, we are excited about what 2014 will represent and we certainly appreciate your support and look forward to talking to you in the future, so thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a wonderful day.

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