NYSE Euronext Q1 2010 Earnings Call Transcript

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NYSE Euronext (NYSE:NYX)

Q1 2010 Earnings Call

May 04, 2010 8:00 am ET


Michael Geltzeiler - Chief Financial Officer and Group Executive Vice President

Dominique Cerutti -

Dominique Cerutti - President and Deputy Chief Executive Officer

Stephen Davidson - Vice President of Investor Relations

Lawrence Leibowitz - Chief Operating Officer and Member of Management Committee


Alex Kramm - UBS Investment Bank

Johannes Thormann

Howard Chen - Crédit Suisse First Boston, Inc.

Celeste Brown - Morgan Stanley

Kenneth Worthington - JP Morgan Chase & Co

Richard Repetto - Sandler O`Neill

Michael Vinciquerra - BMO Capital Markets U.S.

Roger Freeman - Barclays Capital


Good day, ladies and gentlemen, and welcome to the First Quarter 2010 NYSE Euronext Earnings Conference Call. My name is Gina, and I will be your operator for today. [Operator Instructions] We now like to turn the call over to Stephen Davidson, Head of Investor Relations at NYSE Euronext. Please go ahead, sir.

Stephen Davidson

Thank you, Gina. Good morning, and welcome to the NYSE Euronext First Quarter 2010 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 of the future. Please refer to our SEC filings for a full discussion of the risk factors that may affect any forward-looking statements. Except for any obligation to disclose material information under the federal securities laws, NYSE Euronext undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after this conference call.

We will discuss non-GAAP financial measures during this call. These non-GAAP measures are fully reconciled in the tables attached to the text of the earnings press release that we issued earlier today. We believe that these tables provide investors useful information about our business trends. However, our GAAP measures do not replace and are not superior to the GAAP measures.

Duncan Niederauer, CEO of NYSE Euronext, will not be on the call today due to meetings with key clients on the West Coast and his participation at the National Ventures Capital Association Conference in San Francisco, but he will be participating on the second quarter call. Given this, Michael Geltzeiler, Chief Financial Officer, will walk you through our first quarter financial results, including a review of our segment results. Dominique Cerruti, President and Deputy CEO, will then provide additional detail on our NYSE Technologies business. Dominique and Larry Lebowitz, Chief Operating Officer, will then provide you with a regulatory update for the U.S. and Europe. We will then go to the Q&A session, and we ask you to please limit your questions to one to allow for broader participation. We are incorporating slides for the call today, which are available for viewing on our website and Mike, Dominique and Larry will refer to the slides during their remarks.

With that, let me now to the call over to Mike.

Michael Geltzeiler

Good morning, everyone, and thank you for joining today's call. We had a strong start to the year and are very excited about the future of this company. The market have responded well to our segment reporting, and the marketplace is beginning to recognize the progress we are making in transforming the company. We remain very focused on implementing our medium to long-term strategy. Our goal, as you know, is to apply technology and market knowledge to operate the leading global capital markets community. As you will see when we go through the deck, our businesses are gaining momentum and poised for future growth.

On Slide 3, you can see that we had a solid first quarter financial results. We recorded a 26% increase in EPS to $0.54 per share on a 7% increase in net revenue, our fourth consecutive quarterly increase in net revenue. The increase in net revenue is reflective of the growing earnings power from our new businesses with our Derivative segment posting a 44% increase in net revenue, and our Information Services and Technology Solutions segments posting a 33% increase in net revenue.

Our Derivative segment benefited from strong trading volumes, in both our NYSE Liffe and U.S. Options businesses, as well as the addition of NYSE Liffe Clearing. Our Technology business benefited from a full quarter impact of NYFIX and improved software sales. Strong results in these two segments helped offset the negative impact of a significant Q1 volume decline in the overall U.S. cash markets and lower revenue capture in Europe.

And as our new businesses come online and drive revenue growth, we are maintaining strong expense discipline. Our fixed operating costs on a constant dollar constant portfolio basis in the first quarter of 2010 were down $42 million or 10% from the prior-year period.

Let me now touch on a few select business highlights for the quarter. Within our Derivatives business, we made headway in establishing a U.S. futures platform. We closed the sale of a significant stake in our NYSE Liffe U.S. business, the six key future market participant, including DRW, that will help to create liquidity on our platform. We plan to launch a full suite of interest rate contracts in the third quarter, coinciding with the launch of our joint venture NYPC. In the first quarter, NYSE Euronext was the largest U.S. options exchange operator, and we our continuing to move forward with the requisite approvals for our semi-mutualization of the NYSE Amex Options business.

In our Cash and Listings business, improved profitability and stabilization of U.S. and European cash trading continue to be our focus. And we are seeing increased momentum in our Listings business. We're winning a majority of the qualified IPOs coming to market.

Consistent with our ongoing drive to create a level playing field and improve investor protection, earlier this morning, we announced that we have entered into agreement with FINRA. That FINRA will assume responsibility performing the market surveillance and enforcement function, currently conducted by NYSE Regulation. This agreement is subject to regulatory approval.

On our Technology side, we benefited from the first full quarter of NYFIX. And the data center migration is underway in the U.S. and will begin for Europe in the next few weeks.

Lastly, as part of our reference to continue to delever, subsequent to the close of the quarter, we concluded the sale of our 5% stake in the National Stock Exchange of India for gross proceeds of $175 million. We will use these proceeds to pay down our debt, which combined with favorable trends in EBITDA, to continue to trend downward for our debt-to-EBITDA ratio.

Slide 4. Slide 4 highlights the key priorities for our three segments that we introduced at Investor Day in March. 2009 was a transition year for NYSE Euronext. And now in 2010, we are shifting from a cross story to a cross and revenue story, powered by an expanding Derivative portfolio, our stable Cash Trading and Listings franchise and our emerging Information Services and Technology Solutions business. With increased transparency into these three distinct business, we are highlighting the strength and diversification of the global franchise and showcasing the true value of these segments.

The center of the company and support of our three segments is UTP, a globally integrated and scalable trading platform, an unrivaled global connectivity network in customer gateway and two brand new world-class data centers. This core enables us to leverage our assets and support our customers across asset classes in a manner that is unparalleled in the industry.

Slide 5 provides our financial results for the first quarter. GAAP EPS for Q1 was $0.50 versus $0.40 per share in the year-ago period. Through the merger expenses and exit cost, of $13 million and $423 million respectively, net income for the first quarter of 2010 was $140 million or $0.54 per diluted share compared to net income of $112 million or $0.43 per diluted share for the first quarter of 2009. Our only GAAP to non-GAAP reconciling item is merger expenses and exit costs.

As we complete the integration and transformation of the NYSE Euronext merger, we continue to incur cost related to the timing of severance, consolidation of real estate and retirement of systems and platforms. The latter two are generally non-cash charges. My review of our financial results from this point forward will exclude the impact of merger expenses and exit costs just referenced.

Total revenue less transaction-based expenses, or net revenues, for the quarter increased 7% compared to Q1 2009 and were up slightly versus Q4 of 2009. The increase in net revenue versus the first quarter of 2009 was primarily driven by the addition of NYSE Liffe Clearings revenue, $27 million, strong volume growth across our derivative market, an increased software and technology sales bolstered by the first full quarter contribution from NYFIX.

First quarter 2010 net revenue also included the favorable currency impact of $21 million. This was partially offset by the declines in cash equities and lower market data revenues. Operating income for the quarter was $218 million, up 19% versus the first quarter of 2009 and up 4% versus the fourth quarter.

In summary, our first quarter results reflect the inherent leverage in our business model. This 7% increase in net revenue, coupled with only a 1% increase in fixed operating expenses, drove a 26% increase in earnings per share. Incremental margin was 88% in the first quarter.

On Slide 6, we show our first quarter revenue by both business activity and segment. The company continues to maintain a diversified revenue base. 50% of our net revenues came from transaction and clearing fees in the first quarter. Net revenues are above Q4, driven primarily by the contribution from NYFIX. Compared to Q1 2009, net trading revenues were up 8%, driven primarily by the addition of Liffe Clearing and stronger derivative volumes.

Turning to our segments. Cash Trading and Listings makes up 48% of our net revenue. But the Derivative segment is the fastest-growing segment, contributing 35% of our net revenues in the first quarter, up from 26% in the first quarter of 2009 and 31% in the fourth quarter. Information Services and Technology Solutions segment is also showing growth on a relative contribution basis. This segment represents 17% of our net revenues in the first quarter, up from 14% in the last year's first quarter and 16% in the fourth quarter. Growth in revenue is largely attributed to the acquisition of NYFIX, higher software sales in the quarter and continued contribution from SFTI Europe.

Slide 7 provides a harmonized view of fixed operating expenses. [Audio Gap] reconciles our operating expenses segregating the effects of foreign currency variations, portfolio changes and one-time IT integration costs. This is consistent with our 2010 expense guidance and synergy projections.

Q1 reported expenses were up $5 million versus last year. After adjusting for foreign exchange variation, incremental spending for new business initiatives, like NYSE Liffe Clearing, the acquisition of NYFIX and duplicate data center expenditures, fixed operating expenses declined $42 million or 10% versus the first quarter of 2009. On a sequential basis, reported fixed expenses were down $4 million versus the fourth quarter of last year.

Despite lower fixed operating expenses in the fourth quarter, we are reiterating our full year 2010 fixed cost guidance of $1.723 billion to $1.768 billion. As we move through the second half of the year and our new data centers come online, duplicate data center costs will increase in these levels, we'll have some additional investment to the launch of interest rate futures.

Let me be clear that these expenses are included in the guidance provided and we're not seeing the full impact yet due to timing. We are making significant progress in the reengineering front and also reiterate our indicative full year 2011 fixed cost guidance of expenses less than $1.65 billion.

Slide 8 shows the quarterly volume and revenue capture trends for our Derivative businesses. The NYSE Liffe business, the chart also shows comparative currency neutral trading results. Toward delving into numbers, I like to point out that revenue capture numbers that appear on the chart may vary from prior periods that we presented in the past, due to reclassification based on a new segment recording.

Now taking a closer look at the Liffe business. Q1 volumes were higher than both the past [Audio Gap] quarter levels. Q1 2010 ADV for Liffe was up 20% versus the fourth quarter and 28% versus the first quarter of 2009. We saw particular strength in our short-term interest rate product this quarter, which was up 38% versus the prior year, and continued growth in Bclear volumes.

The recent events in Greece and the Euro-zone, in general, we have seen significant volatility and a surge in the already strong NYSE Liffe volumes in 2010. This last week, we posted record volumes on our NYSE Liffe platform of 12.4 million contract executed on a single day. And we saw particular strength in our Euribor and Short Sterling futures contracts. Open interest for our fixed income products in July 2007 to December 2009 was averaging 25 million contracts per month. Year-to-date through April 2010, we're average averaging 31.5 million fixed income contracts in open interest, a 25% increase.

Turning to our U.S. Options business, we saw a 63% growth in ADV year-over-year, with gains reported in our Amex and Arca Options unit. This growth was driven by overall increases in market volume, the extension of the Penny Pilot program and technology improvements in Arca Options. ADV was up 20% versus the fourth quarter, showing continued momentum in our options exchange.

Since we acquired Amex in Q4 2008, our market share has grown from 6% at deal closing to 12% in the first quarter. NYSE Euronext's U.S. option exchanges accounted for 26.6% of the total consolidated equity options trading during the first quarter, up from 17% in the first quarter of 2009 and 24% in the fourth quarter. For the first quarter of 2010, NYSE Euronext was the number one exchange operator in the U.S. equity options market, in terms of market share.

Rate per contract in the U.S. Options business was up slightly for the fourth quarter of 2009, but down versus the first quarter of 2009 due to an increase in the Penny Pilot program and Amex pricing changes when we migrated Amex Options to the new floor. These and pricing changes that we made to both the Amex and Arca platform, effective April 1, are expected to have a neutral, slightly positive effect to the blended RPC going forward.

Slide 9 shows you the financial performance for our Derivative segment. As displayed on the chart, the Derivative franchise continue to grow very nicely on a year-over-year and sequential-quarter basis. Net revenues for the Derivatives were up 44% compared to the first quarter of 2009 and 12% versus Q4 2009. As noted on the previous slide, strong year-over-year volume growth across our Derivative platform has doubled operating income versus the first quarter of 2009. Operating income is also up 29% versus the fourth quarter.

Derivatives business demonstrates tremendous operating leverage and finished the quarter of 2010 with a 58% operating margin, up from 41% and 51% in Q1 and Q4 2009 respectively. Derivatives now represents 51% of the company's operating income.

We continue to make progress in our strategic initiatives in the Derivatives business, most notably, completing the sale of a significant minority stake through group of six leading market participants with NYSE Liffe U.S. and our plans to remutualization the Amex Options business. We also announced plans to offer a full suite of interest rate futures beginning in the third quarter, with the expected launch of NYPC, our joint venture with DTCC. The launch of NYPC and the remutualization of Amex Options is pending regulatory approval.

Slide 10 shows the quarterly volume and revenue capture trends for our Cash Trading and Listings segments. The European Cash business, the chart also shows some power to currency neutral trading results. Again as noted on the Derivatives chart, I like to point out that the revenue capture numbers that appear in the chart may vary from prior periods that we presented in the past due to reclassification based on our new segment reporting.

The European Cash products net transaction revenue of $69 million decreased $28 million or 29% from $97 million in the first quarter of 2009. Decline in European Cash net revenue transaction were primarily driven by 2009 pricing changes, which reduced the average fee per transaction from $1.12 in the first quarter of 2009 to $0.80 per transaction in the first quarter of 2010, including the impact of currency fluctuations. In the first quarter of 2010, European Cash trading ADV of 1.4 million transactions is only 0.5% below prior-year levels. Market share in the first quarter held steady at approximately 73%, and we continue to be optimistic for market volume growth in the Euro-zone as new participants enter the market.

Turning to the U.S. Cash business, volumes declined 37% year-over-year and were flat compared to the fourth quarter. Like the large reduction in ADV, net revenues were only down $4 million year-over-year due to a higher revenue capture. We expect pricing to hover around the current level.

Market share for NYSE Classic was 24% in the first quarter, down 200 basis points from both the first and fourth quarter of 2009. Decline in market share was due to increased activity on the TRF. DMM participation was 8.6% in the first quarter 2010, consistent with the fourth quarter. But SLP participation was 11.5% in the quarter, its highest level since inception of the program.

One final comment on Cash volumes. With the recent increase in volatility, global Cash volumes in April were stronger.

Slide 11 shows you the financial performance for our Cash Trading and Listings segment. Cash Trading and Listings net revenues was $312 million in the first quarter of 2010, down 15% in the first quarter of 2009 and down 7% from the fourth quarter of 2009. Decrease in net revenue compared to the first quarter of 2009, primarily driven by a 21% decline in net transaction and clearing fees and a 29% decline in other revenue. Decline in net trading and clearing fees was principally due to pricing reductions in European Cash Trading and lower trading volume at U.S. Cash Trading. Decline in other revenues were principally due to a decrease in volumes on BlueNext, our environmental trading exchange.

Operating income for the quarter was $106 million, resulting in a 34% margin. The margin was down versus prior-year period but in line with the fourth quarter of 2009. Cash and Listings segment represents 42% of the company's operating income.

Regarding our European Cash business, we continue to make progress with the migration of the Mahwah data center, and we recently announced the U.S. stocks will be tradable on NYSE Arca Europe. Both SmartPool, our European dark pool, and Arca Europe have reported large increases in market share this quarter.

Turning to the U.S. business. During the quarter, GETCO joined the NYSE and NYSE Amex as a designated market maker, building on their existing role as a supplemental liquidity provider on NYSE and a lead market maker on NYSE Arca.

Slide 12 shows you the financial performance for our Information Services and Technology Solutions segment. Information Services and Technology Solutions net revenue was $110 million in the first quarter of 2010, an increase of $27 million or 33% from $83 million in the first quarter of 2009 and up 7% from the fourth quarter of 2009. The increase in net revenue compared to the first quarter of 2009, primarily driven by the first full quarter impact of NYFIX.

Operating income excluding merger expenses and exit costs in the first quarter of 2010 was $17 million, a 55% increase compared to $11 million in the first quarter of 2009 and 11% decline from the fourth quarter of 2009. Operating margins was 15% compared to 13% in the first quarter of 2009 and 18% in the fourth quarter of 2009. Adjusted EBITDA margin was 23% compared to 20% in the first quarter and 24% in the fourth quarter. Advanced cabinet reservations for both our new U.S. and U.K. data centers continue to be strong, with both data centers nearly fully subscribed for cabinet space.

Slide 13 details our cash and debt position as of March 31, 2010. During Q1, our gross debt declined $103 million to $2.7 billion. Cash and our other financial instrument totaled $400 million at the end of March. $2.7 billion of debt included $2.2 billion long-term debt at a weighted average cost of 5.3%. The remaining $500 million short-term debt consisted of commercial paper at an average cost of 0.5%. The first quarter of 2010 capital purchases and software development were $92 million, of which $46 million is for the building of our data centers.

We're currently rated AA by S&P and A3 by Moody's. We are committed to effectively managing our balance sheet ensuring we have appropriate liquidity and flexibility.

At March 31, our debt-to-EBITDA ratio was 2.4x, down from 2.6x at year end and 2.7x at the high point in the third quarter of 2009. Yesterday's sale of our 5% stake in NSE were $175 million gross proceeds. This proceeds will be used to repay debt. We expect the debt-to-EBITDA ratio to continue to improve in Q2 2010. Finally, last week, on April 29, 2010, the board declared a $0.30 quarterly cash dividend for the second quarter of 2010, which is payable on June 30.

I'll now turn it over to Dominique for a more detailed review of our NYSE Technologies business.

Dominique Cerutti

Thank you, Mike, and good morning, everyone. Slide 14. By the way, we have a typo in Slide 14 which I want to correct before talking. On Line 2, we mentioning second half '09 for data center launch, actually, it's second half of '10. And it will be of course corrected when we file.

So Slide 14 is a slow up on the $1 billion in annual revenue target by the end of 2015 that we committed to at Investor Day. Our trajectory toward this target can be simplified into three basic stages, and I'm committed to updating you each quarter on our progress. So with $362 million in annual revenue as a starting point, right off the gate, 2010 will benefit from the full year effect of NYSE's marketplace network.

So in the first stage, we will be leveraging the existing portfolio of businesses. Now at the end of 2010, our new data centers will be online, and we will begin to build for co-location services. The way to think about co-location services is it is the initial sale, which brings our buy side and sell side clients into our data centers and building the community.

So from that initial sale, we are able to cross-sell a whole host of services ranging from Gateways to SuperFeed handlers. And irrespective of whether you trade on our market or not, with an ever-growing community in our data center, we are the technology provider of choice and the network effect begins to kick in. As the network effect takes hold, we start to see a virtual cycle where we'll be able to create new products, many of which will be generated from the ever-increasing activity within our data center in an extremely low-latency environment.

So that takes us through the ancillary product and service growth stage to the next and final stage, as you can see on the chart of a growth, managed services, new product development and potential M&A to fill any gaps or eliminate non-core products and services that do not meet the needs of the changing landscape.

And by the way, our dialogue with many of the largest broker-dealers has evolved. So we are now heading this vision at the highest levels of technology leadership, and we are no longer talking about one of technology sales. Rather, we are talking about enterprise deals for bigger plans, market data distribution, market access gateways.

And as a result of this decision, we are now assessing opportunities to end all the trading infrastructures of several market participants. And those are very large dollar, multi-year contracts, that not just anyone can win because you're not about to outsource your critical and trading infrastructure to anyone. And that is where the NYSE Euronext brand and expertise come in. And by the way, we just completed two important deals with major banks for more than $2 million each.

Moving to Slide 15, we provide you with the better sense of the quality of the revenue stream that we have created with NYSE Technologies. Our quarterly recurring revenue stream makes up, on average, 77% of our revenue. Recurring revenue is defined as fees generated by SFTI, co-location, FIX marketplace and market data. And this revenue stream is subscription-like in nature providing a strong entity stream of revenue.

Non-recurring revenue, which makes up, on average, 23% of the total revenue, is defined as one-off software sales or technology consulting sales. And our goal, of course, will be to continue to maintain a strong percentage of high-quality recurring revenue for the business.

Moving to Slide 16. We provide you with an update on the data center migration in both the U.S. and Europe. So in the U.S., an important milestone for our data center is the first NYSE application that went live in April for Broker system. And we are on track for the NYSE market migration in third quarter of this year.

In Europe, our liquidity data center is now open, with the first stage of customer in selling equipment in readiness for the migration of matching engines, which will take place in the fourth quarter of this year. Of course, as you can guess, migrating entire markets and clients is very complicated with many moving parts, but you can be sure of one thing, our technology team is focused like laser executing on these programs.

And as I said, we are on track for the opening of Mahwah in the third quarter and of Basildon in the fourth quarter. And as we move through the migration process in the second half of 2010, we will be in position to decommission data center, as you can see in this chart, and achieve the targeted savings.

Moving to Slide 17. So Larry and I will now address the two regulatory issues that are currently under discussion and also comment on our issue as I look at the initiative. On this slide, you can see a number of current issues where we had to win our best to demonstrate leadership. We are not going to go through each of the point this morning, it would be too long, but we will just highlight two important one.

Let's start with Europe. In Europe, regulators are embarking on a series of legislative initiative. For example, market structure. You may know that two years after MiFID implementation, Europe and policymakers are now working on the comprehensive review of the directive. Also, we do not expect firm proposal until early next year. But we are hopeful that officials in Europe will learn some important lesson from the market fragmentation that have occurred in the U.S. and will avoid heading down the same path.

Derivatives regulation is also a key issue in Europe and as it is in the U.S. And we believe that there is a strong momentum beyond clearing of derivatives products, although it's still unclear this stage whether the European Commission that locating for more central trading.

NYSE Euronext is connecting strong advocacy for legislators and regulators to take advantage of the broad legislative review. Of course, you know that we will use the unacceptable capacity that's taken hold in a substantial segment of the market, and to establish a true level playing field that we allow this industry to grow, while protecting investors from a unique and enabling business to obtain the capital it needs to strive.

Let me now turn it over to Larry for his thoughts on some recent development in the U.S. Larry?

Lawrence Leibowitz

Thanks, Dominique. With regard to market structure issues, we believe we've taken a pragmatic approach. While regulators have a number of topics on their minds, we're trying to focus our attention on two important issues: consistent standards of transparency between ourselves and other pose of liquidity and a level-playing field into the pace of innovation, rule-making procedures and the cost of regulation. The SEC is currently engaged in a wide-reaching market structure review. We applaud the SEC for taking their thoughtful approach and has submitted a common letter on several of these topics.

We're strongly in favor of innovation and competition, but with a framework that assures adequate oversight and investor protection. The FINRA announcement made earlier today is consistent with these goals and will improve investor protection, strength in market regulation by consolidating surveillance and enforcing responsibilities across multiple markets into one regulator. The agreement furthers the consolidation of the regulatory services under FINRA that began with the consolidation of NASP and NYSE's member-firm regulation that created FINRA in 2007.

With regard to the broader financial regulatory reform debate, we're monitoring all the moving pieces very closely and are as involved as appropriate. While most of the proposals do not directly affect our business, it has brought support for more clearing, reporting and trading of overly accounted derivative products, which we believe will help improve market transparency and mitigate systemic risks. Our overarching view of the legislation 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.

With regard to advocacy, our efforts to speak on behalf of our issuers and be an influencer of public policy, continues to be an important part of our value proposition. We're working hard to represent our list of companies on issues like corporate governance, Sarbanes-Oxley reform and imposing a tax on stock transactions to ensure investor interest are protected.

Turning to Slide 18, our Listings. I'd like to talk to you a bit about the strong momentum in our Listings franchise. Year-to-date, there have been 288 global IPOs that raised $54.7 billion, up from 69 IPOs raised in $2.0 billion in the same time period last year. So the IPO markets in general are showing signs of life. NYSE saw 113 total Listings in the first quarter of 2010 versus 61 in the first quarter last year. We also saw six companies from China list with the NYSE during the quarter.

NYSE continues to be the leading U.S. exchange for raising capital. Year-to-date, there were a total of 21 IPOs on the NYSE, with total proceeds of $4.4 billion. Our nearest competitor has 15 IPOs for $1.5 billion. Three largest operating companies to go public in the first quarter all chose to list on the NYSE. And the largest IPO on file, JBS USA, has committed to list on the NYSE.

NYSE has also captured the momentum for tech IPOs. We've had three major tech IPOs this year, MaxLinear, Calix Networks and Sensata. Sensata Technologies was the largest tech deal year-to-date and also the largest overall IPO year-to-date. In addition, we currently have 10 technology deals in the pipeline, which represent 71% of the technology deals on file that have filed with exchange language.

We've also seen strong momentum on the transfer side of the Listings business. With six companies totaling $28 billion in market cap moving to NYSE through quarter one 2010 versus four for all 2009 and non-transferring away from NYSE and only one transferring away from NYSE Amex. Some of these names include Targa Resources, Charles Schwab, Inergy, Paragon Shipping and Kapstone Paper and Packaging. The pipeline remains strong and we're well-positioned to continue growing the Listings franchise in the coming quarters, market conditions permitting.

That concludes our prepared remarks this morning. We want to thank you for your patience, and we'd like to now open the line for questions.

Question-and-Answer Session


[Operator Instructions] And your first question comes from the line of Ken Worthington of JPMorgan.

Kenneth Worthington - JP Morgan Chase & Co

In terms of your data centers, to what extent can you charge premium prices given the technology and architecture are brand-new? And then on the other side, to what extent is the intermediate term risk here that your competitors start to offer data services that reduce cost to drive business? In other words, the risk as data services become a lost leader for the trading business?

Dominique Cerutti

So as I said, you've seen that as to me speaking that we have a three-stage approach to executing on our strategy. And so far, so good. We on track on realizing [ph] as we said. From the margin, I'm not going to go into detail. But as you can see, the first stage of evolving the portfolio is co-location, which is a starting point to trade the community, but also to build revenue and so on. The good news is that in this arena, we are sold out in Mahwah and on track in Basildon. And the other good news is that we're holding price model on that. So not to say that in the coming years, we won't have pricing margins. But we are quite careful in targeting the segment where we believe we will resist to price pressure. Now the second part of your question if I catch it correctly is, of course, competition will move. Industry is quite competitive. But we believe that the concept is not to go compete head-to-head. It's to attract by co-location, clients in our data centers. And once we have clients there, if we do a good job in services and evolving our portfolio of services, there is no reason why we would not be able to scale and expand our services. So we have a model, we're quite confident that we can make it. By the way, we're quite careful on margins. The revenue side, optimistic on that. The focus is to keep the margin. And I said, so far, so good in what we're doing.


Your next question comes from the line of Celeste Brown with Morgan Stanley.

Celeste Brown - Morgan Stanley

Dominique, can you address the challenges of selling space in the U.S. versus selling the space in the U.K. given just where the different players are in the market? For example, high-frequency traders are less relevant in Europe, and how you see them evolving over the next couple of years?

Dominique Cerutti

Yes, so, I was searching back in my previous answer. Actually, we're quite satisfied with the speed. So in Mahwah, basically, we sold out on the first quarter of all if that's where you want. It's almost done. It's 96%. We don't want to go into detail, but we don't. The question is more where are we going to go with the overcapacity that clients may demand. So that's one thing. In Europe, you're right. Actually, trading is a little behind what it is in the U.S. but it's picking up as a phenomenon, right. And again, the good news is that we are on track exactly. And same remark on Basildon, we're holding the price level, which suggest that the demand is quite good because we see the reservation, the transformation in some order and the price is holding. So we're quite optimistic.

Lawrence Leibowitz

Celeste, it's Larry. Also remember, even though the European picture is behind in development of both high-frequency trading and co-lo [co-location], we offer a unique proposition in our Basildon data center in the co-location of both a very strong futures exchange in Liffe, in the same place as the equities platform. And that has generated a significant interest among our clients.

Dominique Cerutti

Not to be too long, but the efficacy trading, asking for co-lo and transparency [ph] is picking up in Europe right now. It's more than 30%, and we'll see that growing. So it's a phasing issue versus the U.S. effect [ph] event on that, unless something really big change in regulation that there is no reason why this would happen in group [ph].


Your next question comes from the line of Johannes Thormann of HSBC.

Johannes Thormann

One question concerning the efficacy effect. Could you quantify the impact on European Cash Trading? What is market bringing from what is FX? And also, on the overall market data demand?

Michael Geltzeiler

On the FX, the overall FX impact on revenues to the business is $21 million benefit versus the first quarter of 2009, a $19 million negative impact versus the fourth quarter. You're asking specifically about the market data?

Johannes Thormann

About market data and about the European Cash Trading. The overall impact is shown in the presentation but on the European Cash Trading revenues of $70 million or $69 million. Is this all -- the margin compression, which you showed to revenue capture, is this only FX? Or did you also progress with flooding fee scale?

Michael Geltzeiler

On Slide 10, we provide the revenue capture and also the rates. So I'd say the revenue capture decline in Europe Cash, about half of that was attributed to FX, and the other half or so was attributed to mix. We did not change pricing in any way during the quarter. So it's really the mix of agency versus principal business and where people are in terms of their volumes and rates and so. And in terms of my overall FX variance, I would say about half is Europe Cash and half is the Derivative business.


Your next question comes from the line of Rich Repetto with Sandler O'Neill.

Richard Repetto - Sandler O`Neill

On auctions, it looks like on a transaction revenue basis, that's what grew the fastest. Lower base, but grew at 16%, 17%. So with the caps on fees, proposal by the SEC to cap fees, what do you suspect -- or how was that -- could that impact market share in the industry? I asked, let's just say another exchange. And I don't think they fully understood the question because I think the rebates are going to have to come down and if there is a cap on fees. So I guess, how would it impact you?

Michael Geltzeiler

So Rich, first, we wouldn't comment on the wisdom of our competitors in understanding your question. But in all seriousness, options is in a different place compared to the equities markets, right? In terms of their evolution. Decimalization is still rolling out. The SEC is really starting to take a broader look at it, in the same way that the Reg NMS look at the equities, market interconnects, competitive issues, linkage and fee caps back in 2007 when Reg NMS went into play. So I think that it is actually a healthy time for the SEC to take a look at this. The fee cap doesn't really affect profitability so much, right, because your rebate is scaled according to your fee, right? And it just -- what it really does is it limits rebate competition to a certain point. If you remember back to the equities debate, I mean, the challenge was that brokers were saying, "We are forced by vast [ph] execution requirements to take liquidity we don't really have control over it, and yet people are gouging us on access fees." So I think the SEC is really just taking the standard and in fact, just on a coincidence that they limited. This access fee catalyst proposed, is the same place that's limited in equities. And I think they're going to consider it, they're going to listen to all the sides and we're all participating in the debate. But all this saying is, "Why should a broker accessing liquidity, be subject to an unlimited fee that they don't really have a choice." It's not as part of the price, it's encompassed in it. So it is part of the natural evolution. Does it change some of the competition going forward, of course it does. But it probably changes some of the unfair competition. If you remember back to the ECN days, where we had some easy ends, literally charging $0.90 for access. That resulted in some unfair practices.

Richard Repetto - Sandler O`Neill

And I guess next question is that, the make-or-take models that have maybe an unfair high-rebate unfair-high access fee. It doesn't look like those are the ones that could be negatively impacted?

Michael Geltzeiler

Well, I guess, unfairness is in the eye of the beholder. In this case it's the payer of the liquidity because the receivable of the rebates certainly doesn't feel it's unfair. But I think the SEC felt that at some point, it has to step in, given that it is a -- given the conflict between your best execution requirements and the fee structure, it certainly will change the nature of competition. The competition somehow finds a way, and you've notice that there hasn't been any abatement in competition in the equities market, expect the fact that there's been a fee cap there for four or five years.


Your next question comes from the line of Alex Kramm with UBS.

Alex Kramm - UBS Investment Bank

Want to shift gears quickly to the U.S. Cash business. Mike, you made a comment about pricing basically expected to be stable going forward. You just put a pricing change in a couple of weeks ago, which you could argue, kind of looks like it could be a little bit of slight increase. But more importantly, if you look at your biggest competitor, they're kind of raising the net pricing a little bit. If you look at the other direct competitors, they're focusing more on profitably these days. And then lastly, I guess, in the Specialists' DMM side, it looks like a couple of firms are really interested in that business and you're even attracting some of the new firms like the GETCOs of the world. So you could argue that maybe the economics are so good that you might actually lower the rebates of the demand side as I'm going. So is there some pricing power here throughout the year or are you just being conservative?

Lawrence Leibowitz

So all interesting observations, I would say that in the U.S. equities market, we don't regard ourselves as having pricing power. I mean, I think it could be a very competitive market. People do stupid things in their pricing to try to win market share. But I actually think we've reached at least a temporary stabilization within a couple of percentage points of market here vis-à-vis exchange competitors. Now as you've seen in the first quarter, most of the major exchanges and almost every exchange, lost a little bit of market share to TRF [trade reporting facility], which is a combination of internalization and our polls together. I think part of that is -- that's caused by a change in the mix of volume in the first quarter, relatively was low, not a lot of natural volume coming out there. And so, the mix was different than it has been. In addition, I think over the last several years, we've seen a steady increase in the sophistication of broker internalization and order routing in an effort to get volume away from exchanges. That's the secular trend in a less regulatory changes would change that. And it's going to just continue that way. But I think that we're all looking for tweaks at the margin and half of us, shore up or improved market share on the margin, or shore up and improve our profitability on the margin. But at the complicated mix, I don't think that any of us are viewing this as major changes in market share, nor major changes in profitability. I think on the DMM side, you're absolutely right that GETCO voted with defeat [ph]. And to be honest, we had a lot of demand for -- we still have a lot demand for people who want to be DMMs. Is that because they think that it is a huge source of profitability? I don't know that I would go there. I think if you compare the New York model compared to every other model in the U.S., including Arca, obviously, those are all non-differentiated models. They scale their rebate and they scale their access fees by volume. There are no obligations to the market, and there is no other way to gain differential rebates other than provide more volume. The New York model is distinct and that, not only in providing a parity of difference, but also it's the only model where the rebate is scaled according to the obligations you have for the model. We think that that's really good for investors. We think it's really good for issuers. But it also creates a difference. And that difference is what attracts a GETCO or someone else, because they want to be able to play in that arena as well, as in all the other arenas. And it's the only way for them to get that differential rebate on New York. They and many others like them, have participated in the SLP model. They like that model as well. And so this is just one other avenue for them to take advantage of a higher rebate. I wouldn't say that we are looking at this point, you know, the drastic change in our DMM pricing. And in fact, we just changed the model a little bit in NYSE and made the increase, the SLP pricing. So we like that model. We think it's working really well. And we think it also has the dual advantage of not just incenting liquidity to the marketplace, which is what all maker-taker models of any sort do. But also enhancing liquidity providers who have an obligation to the market, which we think is a very important selling point and differentiator.

Michael Geltzeiler

I mean, we are constantly reviewing pricing, we have seen in the last five quarters, the revenue capture move up a little bit and as Larry said, we did find -- we're always looking for opportunities where we can put price increases or the opportunity is there based on the demand to tweak the pricing. I think we're now kind of guiding that we think we should be stable around today's levels.

Lawrence Leibowitz

Yes. And remember also, sometimes revenue capture increases, when volumes go down, people fall out of top tiers. That's not our intent. It's just the result of natural volume falling down. And then, like as we did in Arca in April and May, we actually lowered the tiers because we thought given market volumes, people were unable to hit the top tiers. And so you'll see slight fluctuations of revenue capture, partly as a result of that.


Your next question comes from the line of Roger Freeman with Barclays Capital.

Roger Freeman - Barclays Capital

I guess just on the expenses. In terms of your guidance, can you just walk through what impact the, I guess, FINRA agreement has? Because I guess, the way we thought about this is you've been collecting like $40-ish million in revenues there, right? And Duncan's been saying, he's paying $80 million of expense there. So I'm just wondering, kind of how that shapes out? And then also, does the guidance include any sort of expenses for a derivatives data center in Chicago? Because I think Tom Callahan was mentioning that at the FIA Conference a couple of weeks ago, that you're going to do that?

Michael Geltzeiler

So in general, our guidance includes everything. If I talk about FINRA first, the arrangement we've made with FINRA, we will continue to be doing the billing to the members, so the revenues will continue to accrue to us. We still have really oversight for that responsibility even though we are outsourcing activities to FINRA. In terms of the $80 million of expenses and the impact of that, I mean, that was for all of our regulatory compliance works. Some of that business is staying with us, the listing compliance is an example. But we do believe as FINRA develops GAAP, there is opportunities for increased efficiency to come from these announcements. So I would say as parts of our overall focus on re-engineering and thinking outside the box and thinking about how we can run our business more efficiently, I would certainly put FINRA in that, right. But to be really clear, FINRA and the decision to move outsourcing is really not principally a cross effort. And it is because we believe that's the best way for the market to be surveilled. We think it helps level the playing field and we totally support others moving in that direction. With regards to the derivative data center, when we've launched Liffe U.S., we did lease some small data center space in Chicago and we continue to use that space. I think there was a little bit of a misunderstanding in previous discussion that we were not building, nor buying out a data center in Chicago. We have a small center that we currently utilize. It's conveniently close to where many of our clients are situated. And it's not a significant expense to the operation. It has three or four more years left on the lease.


Your next question comes from the line of Howard Chen with Credit Suisse.

Howard Chen - Crédit Suisse First Boston, Inc.

I just have a follow-up for Dominique, if we just focus on the current portfolio opportunity, what revenues and earnings does that contribute, assuming like you have a fully subscribed co-lo program, which it seems like you will?

Dominique Cerutti

Say it again?

Howard Chen - Crédit Suisse First Boston, Inc.

I'm just trying to get a sense of what revenues and earnings a fully subscribed co-lo program generates?

Lawrence Leibowitz

So we haven't disclosed the co-lo as a separate item, but it is included in all of our thoughts about where our revenues are going. So to be honest, we expected that the U.S. business will be fully subscribed and planned out accordingly. Obviously, that revenue won't be coming in until the data center is up. And so, it doesn't have a lot of 2010 impact anyway. But you'll see it as included in our Technology segment numbers.

Michael Geltzeiler

Correct. And it's a solid contributor, but that alone is not generating the GAAP between $350 million to $0.5 billion.

Lawrence Leibowitz

We've seen a couple questions about the premium of this service and to be honest, our pricing on co-lo is competitive. It's not premium. And that's not what we're using to drive our Technology business. We're using the market effect of having many clients in the same place and then buying other services. It's not that we're relying on charging them other pricing. In fact, the co-lo pricing is a filed schedule with the SEC, it's completely transparent. And we believe it to be in line and consistent with what our competitors charge.

Dominique Cerutti

And if your question was on more granularity, we want to go there. But basically today, in any of the Technology segment, we had three [indiscernible] transaction services, data centers, infrastructure services. Co-lo belonged to infrastructure services. As we said, working, finding Mahwah sold out. On plan on Basildon. And we will execute, we have no concern on that. The reason why we're seeing that is because we're holding the price, which is a reflection on the demand. We're seeing the reservation. So the revenue is flowing in this infrastructure subsegment, which we don't break down at this stage. And margin out [ph] our community. And back to what we were saying, we should see co-lo, and I was making the point in my introductory remarks, co-lo is a business you can sell, right? Getting renew on profit. But it's also the way of building the community that we are doing them to leverage to ramp up our services, and we have a plan of doing that. And we know it's working. I mentioned that we closed two significant deals in the first quarter. We cannot mention the client. And it's based on this all concept of having the clients working with us. And us being able to go to manage services and pool together our credibilities. And yes, we are the beginning of the journey. But all indicators are green at the moment. We don't have issues. Now it's still on us to execute is going to be a multi-year journey, but it's possible as I said.


In the interest of time, we have time for one last question. It's from the line of Mike Vinciquerra with BMO Capital.

Michael Vinciquerra - BMO Capital Markets U.S.

Just wanted to ask on the Indian stake sale. Clearly, when you bought it, it was not just a financial but also I think a strategic purchase. Can you talk about what change between '07 and now in terms of selling that? And then Mike, what debt will you be paying down when you get the proceeds, I assume it's the 5 3/8% debt?

Lawrence Leibowitz

I think you're exactly right, which is when we first made the investment, we thought of it as a strategic investment. I think what we found over time that there weren't a lot of strategic avenues open to us with NYSE. We had a lot of respect for the management there. They run a very good business. But it really look to us like it was turning into just a financial investment at which point we said, "Well, that's really not the business we're in." And we talked to our Board, and thought that the best use of our capital would actually be to cash out and pay down the debt. So mike, why don't you talk about...

Michael Geltzeiler

Yes, I mean, unfortunately, I'd like to pay down the 5% debt. But our 5% debt is our long-term bonds. So that's not easily extinguished. So what we have is $500 million of commercial paper and $400 million of cash on hand. So really the debt that we continue to pay down is our commercial paper. And to our build off our cash balance. Again, the longer-term debt expires in 2013 and 2015. There's penalties if you pay it down early. So it's the short-term debt, the 0.5% that we'll be paying down.

Michael Vinciquerra - BMO Capital Markets U.S.

Okay. So there's actually no financial impact and financial benefit from the pay down right now?

Michael Geltzeiler

It's just strengthening the balance sheet, lowering our leverage ratio and really, positioning us well. But not a P&L benefit in that regard. I mean, we did only pay $115 million to the asset, so we will be reporting a gain on the sale. Thank you, everyone, for participating in the call. We appreciate taking your questions. As always, our Investor Relations team will be available to follow-up on any questions we weren't able to address today. Thank you very much.


This concludes the presentation. Thank you for your participation at today's conference. You may now disconnect. Have great day.

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