Michael Geltzeiler - Chief Financial Officer and Group Executive Vice President
Duncan Niederauer - Chief Executive Officer and Director
Stephen Davidson - Vice President of Investor Relations
Lawrence Leibowitz - Chief Operating Officer and Member of Management Committee
Alex Kramm - UBS Investment Bank
Edward Ditmire - Macquarie Research
Celeste Brown - Morgan Stanley
Rob Rutschow - Credit Agricole Securities (USA) Inc.
Michael Carrier - Deutsche Bank AG
Johannes Thormann - HSBC Holdings plc
Kenneth Worthington - JP Morgan Chase & Co
Howard Chen - Crédit Suisse AG
Richard Repetto - Sandler O'Neill + Partners, L.P.
Roger Freeman - Barclays Capital
NYSE Euronext (NYX) Q2 2010 Earnings Call August 3, 2010 8:00 AM ET
Good day, ladies and gentlemen, and welcome to the Second Quarter 2010 NYSE Euronext Earnings Conference Call. My name is Josh and I will be your operator today. [Operator Instructions] I'd now like to turn the call over to Stephen Davidson, Head of Investors Relations at NYSE Euronext. Please go ahead, sir.
Thank you, Josh. Good morning and welcome to the NYSE Euronext Second 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 in the future. Please refer to our SEC filings for a full discussion of the risk factors that may affect any forward-looking statements. Except for any obligation to disclose material information under the federal securities laws, NYSE Euronext undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after this call.
We will discuss non-GAAP financial measures during this call. These non-GAAP measures are fully reconciled in the tables attached to the text of the earnings press release that we issued earlier today. We believe that these tables provide investors useful information about our business trends. However, our non-GAAP measures do not replace and are not superior to GAAP measures.
For the call today, Duncan Niederauer, Chief Executive Officer, will review the highlights for the quarter and our 2010 priorities, walk you through several technology wins, and conclude with a refresher on our corporate strategy and an update on the regulatory landscape. Michael Geltzeiler, Chief Financial Officer, will then review the financial results for the quarter. We will then open the line for your questions.
Also on the call today for the Q&A session is Larry Lebowitz, Chief Operating Officer. [Operator Instructions] We are incorporating slides for the call today, which are available for viewing on our website, and Duncan and Mike will refer to the slides during their remarks. With that, let me turn the call over to Duncan.
Thanks, Stephen. And good morning, everybody. Thanks again for joining the call this morning. Just an early notice, we'll be doing the next one of these from Paris. So look for us to do the third quarter earnings review from there. The good news for all of you is we won't be doing it at 8:00 a.m. Paris time. We'll probably continue to do it at 8:00 a.m. New York time.
I'm going to start with Slide 3 in the deck, and just hit a few highlights on that slide. I think you can see from the slide and from the press release this morning, we had a very strong second quarter. We're growing our Derivatives business. We're stabilizing our Cash Equities business, and we're providing innovative technologies solutions in that business. Our results, which reflect the continued trend of improving financial performance, were driven by stronger trading volumes, increased revenue generation from our new initiatives and continued cost discipline.
We recorded a 25% increase in EPS to $0.64 per share and a 15% increase in operating income on a 7% increase in net revenue, with incremental margins of 76%. These results reflect the growing earnings power from our three primary businesses and the inherent operating leverage in the model. Firstly, our Derivatives segment benefited from record trading volumes as well as the addition of NYSE Liffe Clearing. During the month of May, we executed an average of 13 million contracts per day across our Global Derivatives businesses, driving a 34% increase in net revenue with an increase in our operating margin to 62%, up from 42% the prior year. We were the largest U.S. equities options exchange for the second consecutive quarter.
Turning to Cash and Listings in the first half of 2010, we continue to use see strong demand for our listing venues, both in terms of transfers and new listings. On the execution side, we are continuing to focus on stability and profitability of this business. In the U.S., our market share in Tape A is at 37%, up from 35% in the first quarter. And our share in Europe is holding steady at 74%.
Additionally, on July 13, we launched trading on Tape C stocks on an unlisted trading privilege basis over the NYSE Amex platform. Trading began with 10 issues and now has expanded to approximately 675 NASDAQ listed issues. And we've seen some positive market share developments.
Lastly, our Technology business benefited from the addition of NYFIX and improved software sales, driving a 29% increase in revenue and an increase in operating margin to 19%. I will walk you through the profiles of several deals that we’ve signed in the past few months later in the presentation. They are representative of the enterprise level dialogues that we are having with market participants, encouraging them to leverage our technology to help them run their businesses more efficiently.
As we invest in our future growth and drive our revenue generation, we are maintaining strong expense discipline as well. Our fixed operating expenses in the second quarter on a constant-dollar basis were down $29 million or 7% from the prior year period.
Before I move to Slide 4, let me touch briefly on a few select business highlights for the quarter. Building upon our success with the launch of NYSE Liffe Clearing last July, we have announced our intention to build two new clearinghouses in London and Paris for our European Derivatives and Cash businesses. The economics for clearing are very favorable. And it is our intention to have the new clearinghouses live by mid-to-late '12. We continue to await regulatory approval of our NYSE Amex options and NYPC semi-mutualizations.
In terms of NYPC, we now have a full management team in place. The intensive regulatory review and approval process for NYPC continues to make progress. And we appreciate all the regulatory agencies for their substantial resources they are committing to thoroughly analyze this innovative new clearing model. Given the recent focus on clearinghouses and risk in the newly enacted Financial Regulatory Reform bill, regulators are being appropriately diligent in their analysis. And we are still hoping for regulatory approvals later in the fall.
Our agreement with FINRA, under which they assume responsibility for performing the market surveillance and enforcement functions previously conducted by NYSE Regulation is affective and we believe this agreement is an important step towards consolidated market surveillance, the need for which was highlighted in the events of May 6.
I am pleased to report that our data center migration is on track. We are establishing the liquidity hubs of the future. And Mike will address the timing of the incremental depreciation and amortization for the second half of 2010.
Lastly, as we committed to on our last quarter's call, we have continued to de-lever, and year-to-date we have reduced our outstanding debt by more than $500 million.
In summary, while we are pleased with our strong results for the quarter, driven by higher volumes across most of our venues and a growing base of recurring Technology Services revenue, we still have much to do. We are focused on executing against our long-term strategy of operating the most meaningful capital markets, creating even broader and deeper networks of productivity, and delivering innovative products to our expanding client base. We have, and will, continue to redefine what an exchange is in the 21st century.
Now please turn to Slide 4. The priorities on this slide highlight our goal of creating a community premium, using our scale and scope to benefit not only our own business but our customers' businesses as well. We can achieve this through initiatives and offerings like co-location, co-branding, advocacy and our global distribution network. At the center of the company and in support of our three businesses is UTP, our global integrated and scalable trading platform, an unrivaled global connectivity network and customer gateway; our focus on clearing, which will take on an greater importance in '11 and '12; and two brand-new world-class data centers, set for launch in September and October of this year.
Turning to Slide 5. We have several recent NYSE technology wins, which reflect the growing interest in our full-managed solutions capabilities. The Technology business, as I alluded to earlier, has performed well to date. And approximately 80% of the revenues in this business are recurring. On the exchange partnership side of the business, we continue to land large client deals. As you will recall, last year we signed a partnership with the Qatar Exchange to build their cash and derivatives platforms. And just a few weeks ago, we signed a multi-year eight-figure deal with the Warsaw Stock Exchange to migrate WSE's cash and derivatives markets to NYSE Technologies Universal Trading Platform. In addition, we plan to collaborate with the WSE on other mutually beneficial business initiatives.
Regarding the more traditional client side, you will note on the chart a few examples of deals that we’ve recently signed. Despite reports of slowing technology spend, we are seeing strong interest from the broker-dealer community, investing in leading-edge trading technology. This is a welcome sign, especially after a slow 2009 that saw a decent pullback in technology spend. Our customers are working to leverage our full solution set. We believe the deals shown on this slide represent just the beginning of our ability to deliver innovative products. And these opportunities will only get larger as we deliver.
Supporting many of these deals are our data centers. There is a lot of customer focus on the upcoming Mahwah and Basildon go live dates set for later this year.
On Slide 6, we've included a simple strategy statement to help you better understand where we're going. Our aspiration is to lead our industry and redefine what it means to be an exchange in the 21st century. To achieve this, our mission will be simply to empower the world's capital markets community to innovate and collaborate. To achieve this, our core objectives will be to operate the most important capital markets; connect the members of the community through our ever-growing network; deliver innovative products to our continually expanding client base; and to enable customers to run their businesses more profitably by using our technology and scale that UTP and the data centers deliver.
We have already gone a long way towards redefining what an exchange is. And we’ve moved from being just an operator of markets to much more. As many companies in other industries have done, we are moving across the value chain to improve our competitive position. The more customers and partners we have, the greater the network effect, which further validates the relevance of our community. In short, it is about getting more customers for our products and services, and more products and services for our customers. From our perspective, we think the sum of the parts is being undervalued, because we believe that our unique collection of assets and global reach offers us great revenue and cost synergies, which will ultimately yield the community premium that I mentioned earlier.
Finally for me, on Slide 7, you will see a number of current issues where we are doing our best to demonstrate leadership. We will not go through each of these bullets individually this morning, but we'll highlight a few important ones.
While Congress considered financial regulatory reform legislation, we were very active in advocating for ourselves, and more importantly on behalf of our list of companies. We believe that the Dodd-Frank Act will solidify and bolster our opportunities for future growth, particularly in derivatives. Going forward, the Act mandates hundreds of agency rule-makings. And we are already analyzing and prioritizing these rules and expect to play an active advocacy role on behalf of our clients, but also are committed to be an active participant with the regulators who are going to have to write all these rules.
In terms of market structure, the events of May 6 put a spotlight on the need for improvements to our equity markets. This has created opportunities for us to demonstrate the benefits that the NYSE model brings to issuers, investors and the markets. We testified twice before Congress on market structure matters. And we spent considerable time with the SEC, the CFTC and the Joint Advisory Committee. We believe these opportunities have enhanced our standing with legislative and regulatory policy makers.
More broadly, our efforts to advocate on behalf of our issuers and to be an influencer of public policy continue to be an important part of our value proposition. We’re working hard to represent our list of companies on issues like corporate governance, proxy access and Sarbanes-Oxley reform. As well as our continued opposition on a tax on transactions to ensure that investors’ interests are protected as well.
Turning to Europe, regulators are also embarking on a plethora of legislative initiatives on both market structure and financial regulation. Two years after its implementation, European policy makers are working on a comprehensive review of MiFID, although we don't expect firm proposals until early next year. We are hopeful that officials in Europe will learn some important lessons from the market fragmentation that has occurred in the U.S. and will avoid heading down the same path. We will also be working with European legislators to ensure an adequate assessment of the increasingly high level of non-transparent trading. We believe that a proper analysis of this issue calls for priority to be given to a more transparent price formation process and increased investor protection.
Derivative regulation is also a key issue in Europe, as has been the case in the U.S. The European Commission will publish legislative proposals in September in keeping with the G-20 commitments, before central clearing of OTC derivative trades. It is our understanding that the Commission will present proposals next year as part of a MiFID revision to bring more OTC derivatives onto central lit platforms.
That concludes my remarks. I'll now turn it over to Mike for a review of our quarter’s financial results. Mike?
Thanks, Duncan. Slide 8 provides comparative GAAP results for the second quarter. Total revenues were flat year-over-year and up 15% versus the first quarter. Net revenue profits and diluted EPS are all up year-over-year and quarter-over-quarter. The $0.70 EPS posted in the second quarter was the company's highest quarterly EPS since Q3 2008.
Unless otherwise noted, all of our financials are presented in accordance with GAAP. As we progress through the latter stages of the post-merger integration, staff reduction and system harmonization efforts, we continue to incur high levels of severance charges, asset write-offs and real estate disposition costs. These discreet items are reported in merger and exit costs. Once we move into the new data centers and exit our legacy premises, we expect the occurrence of these costs to decline significantly.
This quarter, we reported a $32 million charge in merger and exit costs. This consisted of $14 million in cash charges, primarily for severance related to the FINRA transaction, reengineering the structure of local offices, and the U.S. VRIP. The remainder is related to real estate lease cancellations and disposal of legacy system applications. Last year's merger costs of $442 million was principally for the NYSE Liffe Clearing payment, which drove the GAAP loss for the quarter. In the quarter, we reported a $54 million gain from asset disposals, primarily related to the sale of our 5% stake in the National Stock Exchange of India.
Now I'll review our financial results. From this point forward, we'll exclude the impact of merger expenses and exit costs just referenced, as well as the gains from disposal activities during the quarter.
Slide 9 provides a more detailed look at our financial results for the second quarter. Including merger and exit costs in the asset sales, diluted EPS for the quarter was $0.64, up 25% on prior year's $0.51. Year-to-date EPS of $1.18 is up 26%. Q2 earnings performance was driven by a 7% increase in net revenue, and another quarter of solid expense management.
Operating income was $247 million, up 15% compared to the second quarter of 2009. Operating margin rose to 38% this quarter and is 36% year-to-date. This compares to the full year operating margin of 32% for 2009.
Our focus for 2010 is revenue growth and margin expansion. We are pleased with our progress on both fronts. We continue to grow EBITDA margin as well, posting a 48% mark for the quarter. The relatively fixed expense base, we have significant operating leverage on our incremental revenue and volume growth.
Slide 10 provides our segment results on a currency-neutral basis. The U.S. dollar strengthened in this quarter versus both the euro and British pound. For the quarter, 48% of our net revenue was denominated in either euros or pounds. Currency impact was unfavorable, $19 million versus prior year and $22 million versus prior quarter. On a currency-neutral basis, second quarter net revenues grew 10% and operating income 20% versus Q2 of prior year.
Operationally, our Derivative segment grew 38% and the Technology segment grew 33% versus Q2 prior year. Cash Trading and Listings revenue declined by 8%, attributed to lower revenues from BlueNext, our carbon trading venture, and lower U.S. volumes, and revenue capture in Europe. Our Derivatives and Technology profits nearly doubled versus Q2 prior year.
On Slide 11, we show our 2010 year-to-date net revenue split by business activity and segment, with comparison for the first half of 2009. The company continues to benefit from a diversified revenue base. 51% of our net revenues were generated by transaction and clearing fees in the first half of 2010. This is slightly higher than last year because of the strong Q2 volume in 2010 and the addition of NYSE Liffe Clearing. We saw the contribution from Technology Services to show the most meaningful increase during the first half of 2010, the specific gains stemming from NYFIX, growth in our SFTI Europe network, and recent software and infrastructure sales.
Turning to our segments. Cash Trading and Listings comprised 48% of our net revenues in the first half of 2010; while the Derivative segment continued to be the fastest-growing segment, contributing 35% of our net revenues, up from 27% in the first half of 2009; followed by the Technology segment, which grew from 14% to 17% of revenue. Again, this is consistent with our revenue guidance and where we have invested in new initiatives.
Slide 12 and 13 detail the financial performance for our Global Derivatives segment. I'm not going to go through these slides in great detail but simply touch upon a few points. The Global Derivatives franchise continues to grow. Net revenues were $226 million in the second quarter, an increase of $57 million or 34% versus Q2 prior year, and are up 38% year-to-date. The increase is primarily driven by a $51 million increase in trading and clearing revenues due to strong volume growth in European Derivatives and U.S. Options, increased market share for U.S. Options, and the addition of NYSE Liffe Clearing.
Both our European Derivatives and U.S. Option venues experienced record volume days in the second quarter. For the quarter, volumes rose 38% and 57% respectively versus Q2 prior year. For one day in May, we handled over 16 million derivative contracts globally. NYSE Euronext was the largest U.S. equity options exchange operator in the marketplace for the second consecutive quarter, with a market share of 26%.
The revenue capture for European derivatives, ex Bclear, was $0.64 per contract in the second quarter. This was up versus the second quarter of last year due to the addition of NYSE Liffe Clearing, but down slightly versus the first quarter because of the stronger dollar.
Rate per contract in the U.S. options was $0.17 per contract in the second quarter. This is down versus both the prior year and prior quarter. The reason for the decrease is largely attributable to an increase in Penny Pilot issues traded on NYSE Arca and minor pricing changes which are offset by market share gains.
Our Global Derivatives segment increased its margins to 62% in Q2, as we were able to leverage volume and revenue growth on a lower cost base. For the first half of 2010, this segment accounted for 50% of our operating income.
Similarly, Slide 14 and 15 show you the financial performance for our Cash Trading and Listings segment. Cash Trading and Listings net revenue was $321 million in the second quarter of 2010, down versus last year but up sequentially versus the first quarter. The year-over-year decrease was driven by a $21 million decline in net transaction revenue and a $14 million decline in other revenue.
Decline in net transaction revenue was attributed to pricing reductions in European cash in 2009 and lower trading volumes in U.S. cash. This was somewhat mitigated by an 18% increase in European volumes during the quarter. Decline in other revenue is principally due to a decrease in volumes on BlueNext, our environmental trading exchange. However, we are actively looking at opportunity to build upon our BlueNext franchise and bolster our carbon trading operations.
Market share in the Euronext primary market was up slightly to 74% in the second quarter, but below the 79% in the second quarter of 2009. Revenue capture for U.S. cash was $0.03 per 100 shares, in line with expectations and recent trends. Revenue capture for European cash was $0.65 per transaction versus $0.90 in the prior year. The decline was attributed to the stronger dollar and a less favorable mix in part due to higher volumes.
NYSE Euronext global listing franchise gathered momentum in the first half of 2010. A total of nine companies with a combined market capital of over $30 billion have transferred from other exchanges to NYSE. Some of these companies include Knight Capital Group, Charles Schwab and Paragon Shipping. Furthermore, a total of 55 IPOs, with total proceeds of $13 billion, listed on our markets during the first six months of the year.
Operating margin for the Cash Trading and Listings segment was 39% in the second quarter, up from 34% in Q1, and virtually flat with the second quarter of 2009.
Slide 16 details the financial performance for our Information Services and Technology Solutions segment. Information Services and Technology Solutions net revenue was $107 million in the second quarter, an increase of $24 million or 29% from Q2 prior year. The increase is primarily driven by the NYFIX acquisition, growth in SFTI clients, and some large software and infrastructure sales. Revenues were slightly behind Q1, but on a currency-neutral basis grew 2%.
Operating income was $20 million, a 67% increase from the prior year, and an 18% increase from the first quarter of 2010. Operating margin was 19% compared to 14% in the second quarter of '09 and 15% in Q1. Adjusted EBITDA margin was 26%.
Advanced cabinet reservations for our new U.S. and U.K. data centers continue to be strong, with both data centers nearly fully subscribed for cabinet space. Co-location revenues will begin to accelerate in the fourth quarter, and reach their annualized level in Q2 2011 once we complete the application migrations to the data centers. The data centers are set to go live in Mahwah in September and Basildon in October.
Slide 17 provides a harmonized view of fixed operating expenses. We continue to make excellent progress in lowering our cost base in real terms, while funding incremental investment to grow the business. Q2 expenses were $20 million below the first quarter. After adjusting for favorable impact of the stronger dollar and for incremental data center integration spending, fixed costs were $15 million below Q1 on an apples-to-apples basis. Second quarter operating expenses were up $10 million versus last year on a reported basis.
Q2 2009 included a onetime $10 million benefit curtailment related to changes made to our retiree benefit plan. After adjusting for this, FX and the impact of acquisitions such as NYSE Liffe Clearing and MiFID, fixed operating costs were down $29 million or 7% from the second quarter of 2009.
Looking at the first half of 2010 on a constant-dollar constant-portfolio basis, our underlying fixed expenses were down $71 million or 9% compared to the first half of 2009. We continue to make good progress and are focused on efficiency and productivity improvement that will further reduce operating expenses for NYSE Euronext.
Slide 18 provides an update to our annual expense guidance. In March, when we provided fixed expense guidance for 2010, we indicated that this guidance was predicated on the average FX rates for 2009. These were $1.39 for the euro and $1.57 for the pound. Given the direction of rates in the first half, we felt it appropriate to adjust our full year guidance to reflect a scenario more in line with current currency trends. Applying the rate of $1.30 for the euro and $1.50 for the pound, our revised fixed cost range is now between $1.685 million to $1.729 million. Likewise, should these rates be applicable for 2011, our prior guidance of cost to be below $1.650 million will be adjusted accordingly.
In the second quarter, 60% of our operating expenses were denominated in dollars, 20% in euros and 20% in pounds. Although we've adjusted the cost range solely for currency, our first half expense performance of $834 million coupled with efficiency initiatives in the pipeline provides us increasing comfort that we will achieve our cost guidance for 2010.
Our staffing level as of June 30 is 2,993 full-time positions, which is 374 positions or 11% below year end levels. Roughly 165 of these reductions relate to the recent outsourcing of certain regulatory activities to FINRA. Approximately $11 million per quarter in compensation expense related to this headcount transfer will now be reflected in the professional services line. For the most part, the social plan and U.S. VRIP programs have now been fully executed and are compete. We will continue to pursue a number of process efficiency improvements which will further reduce expenses into 2011.
That said, we do expect cost to rise somewhat in the second half attributable to migration into our new data centers, investment in our new European clearinghouses, and launching of interest rate futures in the U.S. In addition to the integration and transition costs, we expect to begin depreciating the new data centers as we go live in the latter part of the third quarter, adding incremental depreciation costs of approximately $15 million dollars in the second half. Over time, this will be mitigated as we exit some legacy data centers.
Slide 19 details our cash and debt position as of June 30, 2010. After investing a significant amount of capital for building two state-of-the-art data centers, in-sourcing Liffe Clearing, restructuring operations and investing in other avenues of growth, we indicated late last year that our focus will be on de-levering our balance sheet. In just six months, we've made significant progress towards these goals and are now operating well within our long-term target leverage levels. Our debt leverage this quarter has declined to slightly below 1.9x debt to EBITDA versus 2.6x at year end 2009. This improvement is the result of double-digit growth in EBITDA, coupled with significant debt repayment.
During the second quarter, our gross debt declined $434 million to $2.2 billion. Proceeds from the disposition of NSE, coupled with strong operating cash flows, enabled a sizable repayment of short-term debt.
Cash and other financial instruments was $419 million at the end of June 2010. That compares favorably to our short-term debt, which is now below $300 million. For the second quarter of 2010, capital expenditures were $70 million, of which $26 million was for building out for our data centers.
Having reached our comfort zone with regards to leverage, we are revisiting how best to allocate capital going forward, besides just paying down debt. This will entail investing for growth and possibly returning excess cash flows to our shareholders. We’re comfortable with the dividend at current levels, as the payout ratio remains above pre-crisis levels, while we still have an outstanding share buyback authorization. We are currently rated AA- by S&P and A3 by Moody's. The S&P rating is under credit watch, which we expect will be addressed shortly.
And finally, last week the Board declared a $0.30 quarterly cash dividend for the third quarter of 2010, which is payable on September 30. With that, let me turn the call back to Duncan for some closing remarks, and then you take your questions.
Thanks, Mike. So just to recap, we're obviously very pleased with our results for the quarter. I think they were strong, driven by record trading volumes, our derivatives franchise, and year-over-year growth in Technology Services revenue from NYFIX. I think we also continued to show cost discipline during the quarter. And we remained focused on proceeding with our company-wide efficiency efforts that will address globalizing our operations, reducing process complexity and streamlining organizational contracts.
We are on the cusp of concluding a multi-year project with the lighting up of our new data centers which we expect will serve as a cornerstone of our Technology Services growth story. We are signing more major client deals and establishing more commercial exchange partnerships than ever before, based on the superior quality and breadth of technology assets that we have brought together with our organic development and acquisitions the past couple of years.
And we have several other new initiatives that are in the wings that will drive our future growth, including NYPC and our European clearing initiatives set for later on in '11, '12. With these initiatives, we are indeed redefining what it means to be an exchange in the 21st century. So with that, we’ll wrap it up, and we’d like to open the line for your questions. Thanks for listening.
[Operator Instructions] And our first question comes from the line of Roger Freeman of Barclays Capital.
Roger Freeman - Barclays Capital
I guess going back to May 6, what role -- maybe Duncan and/or Larry -- did market data sort of would you say play in the whole thing, in terms of any lag in that? Because it seems like pretty much all the other exchanges declared self-help against Arca, and it sounded like maybe there were some delays in Wombat. And I’m guessing -- my question is, do you have spending to do to enhance the capacity there? Or does that get taken care of with the new data center?
First, not all the exchanges declared self-help against Arca, I think that’s just flat-out wrong. What happened was NASDAQ declared self-help against Arca, which lasted 20 minutes. We believe that was due to a server latency on about 20 symbols that lasted five minutes in Tape C. The other exchanges didn’t -- that’s declared self-help for about seven minutes, and that was due to the fact that some of the prices they were sending us violated our price bands. And when we spoke to them on the phone, they cleared that up relatively quickly. Our direct feeds did not experience latency, as far as we know, in terms of market data. There were some issues potentially on the SIP, meaning the consolidated feed, but probably about 85% or 90% of our volume actually comes from direct feeds. That's another misinformation that’s generally in the market, which is that, in general, consolidated feeds go to retail customers and people who are viewing it with their eyeballs. Most volume is actually generated from direct feeds. That said, on that period, we experienced a tripling of quotes in trades during that burst of about five minutes. When the May 6 event occurred, those were record volumes of message traffic. And I think that we always keep an eye on capacity, and have made -- we're actually in the process of some capacity expansion on the May 6 date that has subsequently been completed. I think it's something that we're always careful about. Volumes are down a bit again after the second quarter, I think everybody’s seen July. But that's partly seasonally. But I think it’s something that we’re just always cognizant of and always reviewing.
Our next question comes from the line of Michael Carrier of Deutsche Bank.
Michael Carrier - Deutsche Bank AG
Just a question on the expense side. Obviously a great quarter and you guys continue to take down expense, and you got a little bit of help on the FX side. I think the one thing we struggle with is when we look at the top line growth, when you look at sequentially, when volumes are up 10% to 30% across products, top line growth was like 1% if you ex out the FX, 3%, 4%, 5%. It just seems like it might be a while until we’re in an environment where we see the volumes that we saw in the second quarter. So I'm just trying to understand, when you look over the next, call in four quarters or so, where do you see the most, I guess, non-volume growth? And maybe on the data center or the text side, if you can just give any clarity on those co-lo revenues on an annualized basis once we get into the second quarter of 2011, like where we should be or what you should expect, just so we can understand where some of the growth will come from?
Mike, why don’t you address sort of what the year-on-year numbers actually were, with and without the currency because I think -- whether it was 7% or 10% of that? I’ll ask Larry to talk about, obviously, it’s hard to predict revenues our four quarters when we don't know volumes and volatility and currency rates. But I think we can at least talk about where we think some of the new sources of revenue are going to come from on the data center side, co-lo, et cetera.
As we mentioned, our reported revenues grew 7% and -- over this quarter last year, and on a currency-neutral base of, what, 10%. And we did indicate, when you compare our Q2 revenues versus Q1 revenues it was a $22 million negative FX. When you factor that in, Q2, we're sizably ahead of Q1.
I think in terms of Technology Services, obviously co-lo will be a larger revenue source in the future. We have not been as granular on co-lo revenues. But think of it this way, first Arca was out of space for co-lo, it will no longer be out of space. And second of all, New York -- the NYSE Classic side didn’t actually have co-lo. So we're adding a new co-lo revenue source. And likewise in Europe, the whole co-lo concept, particularly on the cash side, is relatively new. So those are clearly sources of growth. But what they’re also fueling along the way, as you saw in some of the deals we outlined, is a general turning to the market centers for infrastructure support, both on their trading hub and their market data hubs. And some of that is related to co-lo but a lot of it really is just a matter of helping them outsource those capabilities to us.
Our next question comes from the line of Richard Repetto of Sandler O'Neill.
Richard Repetto - Sandler O'Neill + Partners, L.P.
My one question is on guidance, I guess, and if you would hold the guidance thought. So you've outlined some wins on the technology side. But I'm just trying to see how that -- how is that progressing against the $1 billion and 30% margins in 2015? And in this guidance, like the guidance on expenses like 2011, any color there?
In terms of the technology side, Dominique Cerutti is not on the call this morning, so I'll make comments on his behalf. He made the statement, $1 billion over three to five years. We don't see anything that would change that horizon. We're confident, in fact if anything we get growing confidence that this business model actually makes sense, that we can -- we see that there is a need, on the sell side in particular, to help manage these processes as they help manage their own cost bases. Now we just have to execute and deliver on it, and that's our jobs to do. But I think that we’re feeling good about all of that. And I think as time rolls out, we’ll probably be even more transparent about the different avenues of those businesses and where they're coming from. But I think the deals that we showed you on the slide, as well as Warsaw, are meant to be sort of case studies of the sorts of things that we can do. And in some ways, each of these deals is we -- it’s sort of the tip of the iceberg deal, which is you start by managing a particular service for a client, you show that you can actually do it. You show that your technology works. You show that you give good enough service, and then you should be able to expand the kinds of services you can do for them because they’re sort of related into their value chain.
And I think we threw out some large deals and some numbers, but the revenue recognition of these is over time. For instance, the Warsaw transaction is mostly a 2011 transaction. Very, very little benefit this year even because it's a long-term agreement. And I think secondly, by showing the margins at 19%, as we had indicated, we should start to see the margin get closer to our goals, even before we get to the $1 billion of revenue. And I think we made some progress this quarter. On 2011 expense guidance, your other question, I mean basically all we’ve laid out there is previous guidance was less than $1,650 million, you can extrapolate that we took our bands down by $38 million for this year. We didn't really re-do the $1,650 million but we’re saying is that there would be -- if the currency stayed at today's levels, which is lower than when we -- the levels that we were at when we indicated the $1,650 million, we will be that much below the $1,650 million as well. We just didn’t want to -- we just didn’t restate it or re-calculate that at this stage.
And our next question comes from the line of Celeste Brown of Morgan Stanley.
Celeste Brown - Morgan Stanley
Once you got regulatory approval for NYPC, how long will it take you to launch this service?
I don't think it’ll take that long. Just to manage your expectations, two or three threads here. One is obviously the technology build that had to be done. That's been going apace. That's ahead of schedule, now that the regulatory approval’s been a little bit slower than we would have anticipated a few months ago. So the technology work for this is well underway, and will be delivered I would say now comfortably ahead of any approval we would get. Just remember the comment period will be roughly 90 days. So assuming that there's no glitches there, which we don't anticipate, and that the clients we want connected, or who are already in the process of connecting are connecting, we'd be able to turn this on very, very quickly after approval. Realistically, I think we have to start thinking about this in our own minds as a January of 2011 events. Because even if we went out for comment this month and got all the requisite approvals by the end of this year, I wouldn't anticipate that we would launch something like this the first or second week of December. I think we’d probably get advice from our clients that would say, let's come out of the gate after the new year, ready to go. So we would suggest that, other than the kind of calendar stuff I just talked about, the technology and connectivity, which would be the other two things you would want to have ready, will be absolutely ready by the time we get the approval.
And our next question comes from the line of Howard Chen of Credit Suisse.
Howard Chen - Crédit Suisse AG
Switching gears to European Cash, I was just hoping you could give a bit more color on what drove the revenue capture trends during the quarter? And now that we're past a lot of the craziness within Europe, what you’d anticipate in terms of what we'd sort of see there going forward?
Well, I think what was driven in terms of the year-over-year comparison is really the fact that we had made some pricing changes over the year, and the fact that there’s some tiering mix issues and things like that. And that’s always a challenge. I think what we’re trying to do, both in Europe and particularly in the U.S. going forward, is have our tiering float more appropriately with market volume to try to insulate, both us and our clients to be honest, from getting stuck in a higher tier if volumes drop off. And likewise get pushed into a lower tier if volumes explode. And tried to sort of mitigate some of that, and we’ve implemented that. In addition the -- by the way it’s evolved over time, the European pricing model is overly complex. Because we have this whole agency principal, designation, it's a very complicated system. And we’re working right now with our clients on a way to make that simpler. Because it will make them -- it’s easier for them to make their routing decisions and figure out how they’re going to run their business. Because the reality is what they want is to be able to understand what their rates are going to be and not have them just come out in a certain place based on either volumes or mixes of business or likewise. In terms of volumes, obviously, we don’t -- we can’t do any forecasting there. Your guess is as good as ours. What we kind of note, particularly in the U.S., is while July was down versus the previous month as we've seen, on one hand June is always a very seasonably busy quarter because of Russell and other things, and July for 2010 was higher than July of 2009. So what conclusions you can draw from there are beyond me.
And our next question comes from the line of Ed Ditmire from Macquarie.
Edward Ditmire - Macquarie Research
Just wanted to ask a question on the operating margins. At the Investor Day earlier this year, you said that you should be able to hit a 40% margin within a couple of years. I know we're actually quite close to that today. Any changes to your margin outlook, either as far as timing to that target or what you see beyond that?
I'd say at the time when we presented that, we said for 2009, we were at 32% margin. We have a slide that went through both our revenue growth outlook for our three segments as well as our margin expansion for those three. And we used the word medium to extrapolate that medium, although we didn't say 40%, people have been calculating that it's about 40% of 2011. As I mentioned, we are at 36% year-to-date for this year. We're definitely focused on growing revenues and reducing costs, which would certainly help your margins. And we're at 38% this quarter. So I wouldn’t say we’re changing that outlook, I mean you’re going to have quarters where the volumes are strong and the margins are going to be that much stronger. I wouldn’t extrapolate the second quarter as being our run rate, because we did have pretty strong volumes. But with 36% year-to-date, I think we're on track to higher margins that we had last year, and certainly moving in the direction of our guidance.
And our next question comes from the line of Alex Kramm of UBS.
Alex Kramm - UBS Investment Bank
I want to shift gears quickly to maybe your over-the-counter strategy. You mentioned the Dodd-Frank Act earlier. So I'm wondering how you could really fit in here. If I look at maybe the short-term opportunities clearing, you don't really have any sort of real assets at this point, so maybe that leaves trading or new listed products? And then perhaps, and maybe this is like a real potential for you as well here, the technology side. Is there maybe an opportunity to run some of these swap execution facilities or host some of the data centers? So maybe in general, how are you thinking about your way to participate in the over-the-counter to exchange migration?
Al, it's Duncan. I think you've got three interesting topics, probably, and I would put them in the reverse order in terms of near-term relevance for us. I think given the success we’re having hosting various facilities and components of other firms' infrastructure in the liquidity centers, I would say there's a good near-term opportunity for us to at least be a provider of some technology services there. On the listing side, I suppose there’s an interesting near-term opportunity to list some of these products. I don't know how near-term it's going to be, because I think it's going to take a while for all of this to be codified. But also I continue to be able to believe that there's opportunities in clearing and market data before there are opportunities in trading. So I think there might be some kind of a data opportunity for us. But I don't know how much there’s -- of an opportunity there’s going to be for listing these various products. So I don't think they’re going to be that actively traded in the near-term. Lastly, you're absolutely right, I think our view is to be a force in OTC derivative clearing, you need to own the assets. I think we're on our way to owning potential assets with the clearinghouse build-outs in Europe and the NYPC build-out here in the U.S. But we said publicly before, short of actually owning those assets, it's difficult to play a role if you don't have the clearinghouse assets. So as you would correctly expect, that’s part of the reason behind us trying to build out some of these clearing assets because it's then limitless, the products we can clear in those houses.
And our next question comes from the line of Ken Worthington of JP Morgan.
Kenneth Worthington - JP Morgan Chase & Co
I know this is a small business for you, but market share and cash equities has stabilized in the U.S. Do you think you're generally at equilibrium? And if so, what does it take to see market share shifts from here? And in Europe, how close are the cash markets to price and market share equilibrium?
I think that we're at a temporary equilibrium where you sort of swing a couple of percentage points in either direction in the U.S. But there are new entrants coming in, in terms of models. NASDAQ just announced -- or put through their affiliate model. There's going to be innovations around here. This is a competitive business. And we don't sit here and assume that we are where we are. We know that this is just going to be a fight that doesn't end. I think in Europe, it's much more of a developing situation. It will depend probably on the results of the MiFID review. It will probably depend on developments in clearing, whether that’s consolidation or inter-operability. And so we're earlier in the game there. So I think that, that's how we view both of those markets.
And the only thing I might add on the U.S. side to what Larry said is, I suppose there's a greater-than-zero chance that with the concept release out for comment and everyone's still assessing what happened in the wake of May 6, it’s possible, Ken, that you could see a couple of -- I don't think they’d be monumental changes, but I think you could see a couple of incremental changes that certainly would help change that equilibrium a little bit potentially in our favor. But we're not sitting here expecting any major changes that would kind of create a new order.
And our next question comes from the line of Rob Rutschow of CLSA.
Rob Rutschow - Credit Agricole Securities (USA) Inc.
You've done a nice job cutting headcount down, I think, over 500 year-over-year. Can you give us an idea once you get through all of the data center build-out and to more of an equilibrium, I guess, type business model, what sort of headcount should we expect? And what might be some of the movement between the different business lines and geographically?
I'll start, and then I'll ask Larry to add a little bit on the technology side. But I think ,Rob, what we’ve said to the -- to our Board most recently is the headcount of the overall company on a pro forma basis has gone from north of 5,000 to around 3,000. I could see it going down a little bit from here. I wouldn't expect much movement the balance of this year because, remember, as we finish the UTP migration and we’re lighting up the new data centers, which then puts us in position to decommission the older data centers, I wouldn't expect too much change in that, in the status quo on our headcount now for the balance of this year. I think there is a possibility that when UTP is done and when all the data center migration and decommissioning is done, you could see another leg down. But I don't think we want to anticipate that. Because at the same time, we've got a Technology Services business that is growing. And those require a different kind of potentially consultative sales force, so you could see us add some people there. So I would say in the near-term, those trends kind of offset. Now a lot of the operational efficiency gains that were talked -- that I referenced earlier in my remarks, I think could lead to some headcount changes on the margin. But a lot of those initiatives are simply just streamlining processes that don't really impact headcount at all.
I agree. I think this year, there won't be much. Although to be really honest, I had set a aspirational goal for the team about two years ago. And at the time, I just got some icy stares from the technology guys, and they actually achieved it. I think that we will be going down further as the data center is finished, as UTP finalizes and as we -- we’re globalizing operations, remember, we’d have the Belfast initiative. A lot of that is going to hit the consultant headcount where so the mix of employees versus consultants will probably change a bit, swinging a little bit more towards the employees. But we're constantly looking for, and it will be in the realm of process reengineering, simplification and globalization towards reducing headcount. If not our primary goal -- our primary goal is cost. And the heads that are coming out as this year progresses and as we hit the end of the data center projects, et cetera, we are really built into Mike's cost guidance. So that while we haven't given a headcount guidance, that was kind of where we were headed for cost, and to be honest, not all those are headcount either. That’s not really our primary focus. But clearly, as you simplify systems, that's a natural result.
And I think the message for all of you on the call, is pro forma headcount’s down 40%. I think that's pretty substantive. I wouldn't be looking for another big leg down, that's our point.
And our next question comes from the line of Johannes Thormann of HSBC.
Johannes Thormann - HSBC Holdings plc
Just a quick question on the share buyback. Under which conditions would you start the share buyback again, considering your reduced net debt level, although it's probably FX driven.
I'll take that, Johannes. What I said in my remarks is, we are operating currently this quarter at sort of our target level of leverage. We do want to maintain a strategic flexibility and a strong balance sheet. So we’re -- our priorities are, first, stay within that level; second, to invest in the business and invest in growth. The opportunities, obviously, exceed our desired return levels. And then should we determine that we have excess cash flows, and cash flow outlook for the business is strong, we would look to dividend and share buyback. So really rather not comment further at this stage. We do have a share buyback authorization outstanding. We haven’t been executing on it since the financial crisis. And it’s something that we’ll continue to be working at as we’ve now de-levered sort of to the levels that we're comfortable with.
At this time, you’re showing no further questions available. You may proceed.
Josh, thank you for your help. And everybody, thanks for listening. As always, those of you who would like access to Michael and Stephen and Eric and the team here, I'm sure they'll set up meetings with you throughout the day. So any other questions you didn't get answered, feel free to chime in. We thank you for your support, and thanks again for listening. Enjoy the rest of your summer. Thanks a lot, everybody. Cheers.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.
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