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NYSE Euronext (NYSE:NYX)

Q3 2010 Earnings Call

November 02, 2010 8:00 am ET

Executives

Michael Geltzeiler - Chief Financial Officer and Group Executive Vice President

Dominique Cerutti - President and Deputy Chief Executive Officer

Duncan Niederauer - Chief Executive Officer and Director

Stephen Davidson - Vice President of Investor Relations

Lawrence Leibowitz - Chief Operating Officer and Member of Management Committee

Analysts

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

Alex Kramm - UBS Investment Bank

Rob Rutschow - Credit Agricole Securities (NYSE:USA) Inc.

Richard Repetto - Sandler O`Neill

Michael Vinciquerra - BMO Capital Markets U.S.

Roger Freeman - Barclays Capital

Daniel Harris - Goldman Sachs Group Inc.

Operator

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

Stephen Davidson

Good morning, and welcome to the NYSE Euronext Third 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 conference call.

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

For the call today from our Paris office, Duncan Niederauer, Chief Executive Officer, will review the highlights for the quarter, comment on the increasing diversification of our business model, update you on the various initiatives that we have for our segments and conclude with an update on the U.S. regulatory landscape. Joining Duncan in Paris, Dominique Cerutti, President, will then provide an update on the European regulatory landscape, the launch of our new liquidity hubs in Mahwah and Basildon, highlight key deals for our commercial technology business. 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 Leibowitz, Chief Operating Officer.

[Operator Instructions] We are incorporating slides for the call today, which are available for viewing on our website, and Duncan, Dominique and Mike will refer to the slides during their remarks.

With that, let me turn the call over to Duncan in Paris.

Duncan Niederauer

Thanks, Steven, and good morning, everybody. From a rainy Paris, thanks for joining today's call, we appreciate it. I'm going to start on Slide 3 entitled Third Quarter 2010 Update. And I would start by saying that we're very pleased with the progress we made in the third quarter, executing against our long-term strategy. In this quarter, we made tangible progress on our goals of operating the most meaningful capital markets, creating broader and deeper networks and delivering innovative products to our expanding client base. Our business model continues to diversify, and we are focusing on new initiatives and growth area to deliver value for our shareholders through all sorts of business cycles.

For the quarter, we recorded EPS of $0.46 per share on net revenue of $599 million, down from $0.53 on $620 million in net revenue in the prior year period. The strengthening of the dollar year-over-year reduced our net revenue by $25 million and EPS by $0.03. Helping to dampen the negative impact of currencies was $31 million in incremental revenue from new businesses, highlighting the continuing diversification of our model, which I will touch on in more detail later.

Our technology business continue to show great growth and benefited from the addition of NYFIX and expanding customer base and improved software sales, driving increased revenue and operating margins. And the business hit several milestones with Qatar and the Tokyo Stock exchanges, as well as in large Eastern European stock exchange signing up to do business with us. The next stage in the growth trajectory for this business will be a combination of co-location revenues and follow-on technology sales from these co-locating clients.

On the cash and listing side, we are continuing to see strong demand for our listing venues in terms of transfers, new listings and secondaries. Year-to-date through September, 13 companies have transferred to the NYSE from other exchanges with a total market capitalization of over $40 billion. A total of 78 issuers have listed on NYSE Euronext markets, raising total proceeds of just over $17 billion, including nine Chinese companies that raised to just under $1 billion. Important to note that this success has continued in October and even in early November where we've already had two listings from Asia two days in for the month.

NYSE Euronext is also the leader year-to-date for proceeds raised through global secondaries for the total of 370 issuers, raising total proceeds of just under $150 billion, which also included the largest secondary ever done in Petrobras, which raised 25 of the $70 billion that they raised in the U.S. markets.

On the cash equities trading side, we are continuing to focus on stability and profitability. In the U.S., our market share in the third quarter is up across all three takes year-over-year and quarter-over-quarter. In Europe, our share has remained relatively stable at 73%, SmartPool continues to show some strong growth. And we continue to believe that over the long-term, we will see growth in the overall European market.

Lastly, the results in our Derivatives segment were mixed. With continued growth in our U.S. Options businesses helping to partially offset negative currency and lackluster volume trends in our European derivatives business year-over-year. The combination of lower volatility and the heightened prospects for a second round of quantitative easing has clouded the outlook for interest rates and inflation, which has reduced a need for hedging over our NYSE Liffe platform and resulted in trading volume declines compared to the elevated second quarter levels.

To close on Slide 3, let me just touch briefly on a few selected business highlights for the quarter. I am most pleased to report that our NYPC DCO filing with the CFTC is now complete, and we entered the 90-day comment period yesterday. Additionally, we have been discussing with the SEC the necessary rule of filings that will govern across the cross margining agreement between NYPC and DTCC's FICC division, and we expect to formally submit that filing later this week and get the clock ticking on that comment period as well. Pending these regulatory approvals, we anticipate the launch of NYPC and the simultaneous launch of U.S. Treasury and euro/dollar futures on our NYSE Liffe U.S. future's platform in the first quarter of 2011. The CFTC, SEC, and Federal Reserve have demonstrated a high degree of coordination throughout this comprehensive review process, and we are grateful to all of the agencies involved for their substantial efforts, especially in light of its challenges they all face with the Dodd-Frank rule making processes. We will continue to work closely with these regulators through the remaining phase of the regulatory approval process, which we expect to end sometime in February of 2011.

I'm also pleased to report that we have successfully completed on time our multiyear plan to build two state-of-the-art liquidity hubs in the U.S. and the U.K., which I will let Dominique speak to later. Within our technology business, we are seeing building momentum as we move forward with our goal of $1 billion in revenue by 2015. We delivered the UTP platform to cutter in the third quarter, and we are beginning work on the derivatives exchange there as well. More recently, as I mentioned earlier, the Tokyo Stock exchange and a large Eastern European stock exchange have chosen NYSE technologies to build trading platforms for their respective exchanges. Our operating margin for this business crossed the 20% threshold for the first time, showing strong progress toward our goal of 25% to 30% margins.

Lastly in the third quarter, we boasted our listings franchise with the acquisition of corporate Board member, a premier provider of director education programs. As I alluded to earlier, we have a great pipeline of IPO prospects and transfer prospects from other exchanges to NYSE Euronext.

Please swing to Slide 4. Slide 4 is a slide that you've seen before, where we outlined and highlight our 2010 priorities for our various business segments. Our objective is to leverage our global infrastructure and scale, to support our businesses and our customers businesses, and create a community premium for our shareholders over time. At the center of the company in support of our three segments is UTP, our globally integrated and scalable trading platform. And on arrival of global connectivity network and customer gateways, our focus on clearing, which will take on an even greater importance in the coming quarters and two brand-new world-class data centers.

We put the slide at every quarter to remind you of what we are working toward. And now that we are coming for the end of the year, it is really designed to show you what we have accomplished this year. I think you can put check marks next to the most, if not all, of the items on the slide.

Slide 5, focusing on execution. On Slide 5, we provide you with a summary of the major initiatives that we have underway for each of our segments. In addition to these points, we also have many more new initiatives on the drawing board to ensure that we have a pipeline of new initiatives ready to come online in the quarters ahead to bolster our business model and to grow our franchise. I think most of the stuff on Slide 5 is familiar to all of you, and we'll touch on a lot what we haven't already in our remarks later in the presentation.

On Slide 6. We try to show the revenue contribution of our new businesses, which reflect the increasing diversification of our model. The $31 million in incremental net revenue generated by our new businesses help dampen the impact of externalities, including foreign exchange and lower capture at volumes in selected markets. This incremental revenue came from a variety of sources; including NYFIX, which is annuity like due to the nature of the revenue model for that business and the stickiness of the channels; the reinsourcing of clearing and verticalization of our NYSE Liffe business in Europe, which occurred in late July last year; technology services revenue from Cutter [ph]; and lastly a small amount of incremental revenue from corporate Board member in the quarter.

In the current quarter where we face significant headwinds, including foreign exchange, neutral to declining volumes and capture across selected markets, we were still able to record a solid $0.46 in earnings on $599 million of revenue. This compares to just for note $0.43 in the EPS that we earned about six quarters ago in the first quarter of 2009 on basically the same amount of revenue slightly higher of $605 million. Now why do we mention that? Because it sort of a random comparison. The reason I felt that was interesting is here we are at six quarters later with the currency against us on a comparative basis, U.S. volumes down 50%, our capture and our European business down 40% because of price cuts we've made in response to competition in the last two years yet our earnings are higher on a similar revenue base. Hopefully, that begins to tell you that we're well on the way on this journey to transform the company and be a much more diversified company who is much less reliant on volumes in its core businesses.

Turning to Slide 7. We have a significant number of regulatory and legislative initiatives, both in the U.S. and Europe. I'll take care of the U.S. side and then turn it over to Dominique for the European side. In the U.S., we have intensified our regulatory advocacy in numerous ways, speaking not only on our own behalf but for investors, issuers and the markets more broadly. For instance, we've been an active participant in CFTC and SEC rule makings to implement the Dodd-Frank act. We participated in Asia and see roundtables on derivatives regulation, met weekly with agency staff and commissioners on both derivatives and cash market issues, and build coalitions with industry participants wherever possible.

We have also spent countless hours with the SEC and CFTC staff as they produced a very thoughtful and thorough analysis of May 6 market turmoil. And in speeches, meetings and commentary, we continue to be a strong advocate for needed market structure reforms, including increased transparency, enhanced market surveillance and the banning of flash orders. We've also increased our advocacy on macroeconomic issues like job creation and economic growth by providing our experience and that of our thousands of listed companies to officials at the White House, in the Treasury Department and on Capitol Hill.

Finally, before I turn it over to Dominique, we wanted to make sure we address the Arca book issue, which came up again last week. If people want to get into this more in Q&A, we can. Larry and I are prepared to answer any questions about that. But let me just give you a quick summary. This is referencing the rule filing that was approved by the SEC in 2008. We began charging these fees for market data in early 2009. Remember that in the Dodd-Frank act, this market data filings are all effective upon filing and then they can be suspended by the SEC within 60 days. In this case, in the case of many other filings recently by our competitors, so far none of these have been suspended. This one has been appeal. The court who approved the appeal did say we have to improve the competitiveness and some of the economic support for the market data filing, and we're working on that actively. And again, we can get into that in Q&A if anybody would like to. But remember that under the new regime, you will see more market data filings like this, they are effective on filing. And so far, none of them has been suspended.

So at this point, speaking on Slide 7. I will turn the call over to Dominique, and he will handle the European fee for the regulatory landscape and then update you on a number of other issues ranging from our data center launches to some additional insights on our technology services business. Thanks. Dominic?

Dominique Cerutti

Thank you, Duncan, and good morning, everyone. So Slide 7 continuing. And turning to Europe, regulators have been also very busy dealing with issues related to the markets appear on some of the regulations. European policy makers are working on this comprehensive review process, and we are grateful to all the agencies with the European Commission due to issue of decompensation in November. And this terminate in proposals in the second quarter of 2011. And after part of this review, the EU will be working closely with U.S. counterparts to develop a common approach to the regulation to some of the book rates trading[ph].

Derivatives regulation is also a key issue in Europe as it is in the U.S. The European commission issued a proposed draft of EMIR, which stands for European Market Infrastructure Regulation and also on [indiscernible] legislation on September 15 and this legislation is currently going to the European government and the legislative process is expected to last through most of 2011.

The European Commission has introduced the concept of financial activities tax, or FAT, and the financial transition of FAT SEC Europe. This was done in parallel with the working document on financial sector taxations. As we have stated previously, we are not in favor in any form of transaction FAT, and we will advocate this view on behalf of our shareholders and listed clients.

Lastly on Europe, we expect to see some proposed legislation on several other items in fourth quarter of 2010 and first quarter of 2011, like corporate governance, market abuse, transparency requirements for small capitals.

Turning to Slide 8. I'm pleased to report to you that we are now officially launched our EU liquidity center. And on this slide, we have provided an updated timeline on where we go from here. We have successfully completed on time the build out of the two new data centers and had to spend many years as you know in the facility sector, I can confirm that this is a tremendous completion. As I look back at least three of the facilities phase, they are which of being demonstrate sort migration. We are moving entire trading market.

And we are able to get not only for the dedication and hardwork of our global technology staff, and I thank them for their effort. It's another clear demonstration that we can execute against putting.

So let me sort of summarize where we are on Slide 8. In the U.S., our NYSE market completed its migration to Mahwah on August 25. The Europe, our cash market completed the migration successfully as it has been on September 27. And NYSE Liffe derivative market migrated yesterday on November 1, so that's all done.

On the co-location business, in the U.S., about 97% of the costs we've sold-out. And in Europe, the rollout of the. And then the co-location revenues was viewed as we enter 2011, and we should keep full slide with two quarter 2011 billings.

The next step is the migration is for NYSE open market to migrate from Mahwah in the U.S. And that's the outlook is and what I see markets to migrate in Mahwah in the U.S., and that's the end of the first quarter 2011. And as we complete the integration progress, we will begin to retiring obsolete data centers we need to protect and our regional data center. Europe as well, where we have also look upon data center we will begin the rationalization process and ensure that we have adequate data capabilities in both U.S. and in Europe.

Let's move to Slide 9. We give you an example that in technologies that closed or are closing. So thanks to strong investment and subsequent acquisition, we now own a wide range of technology assets, including the main one, our state of the art Mahwah in Washington data center. Our best of class universal trading platform. Our world class safety network and leading communication best of breed market-based space and any of these products . And thanks with the investors, we are building market [indiscernible] provide our clients with a consolidated produce and productivity. Our strategic is reported and concerned by both market trends and the recent state of the art we're seeing from prospects seem to absorb that investiture. And Slide 9 as they show all of them. We fully integrate the value of existing asset, transaction and divestiture and data services when building service platforms either through partnerships with other or a solution provider to clients..

On the top left side of the chart, global Tier 1, we will provide a full solution from continuing and management, and shows that NYSE Technology is now steadily as a Tier 1 service provider.

Must be in order on the left side, the U.S. [indiscernible] side. We provide the fully consolidated managed trading platform, and that is an example of the services that would make sense. We already talked in the middle of the chart about our partnership with the Qatar exchange, Tokyo exchange and the large Eastern European stock exchange that were just qualitative entries that's welcome. And they should effectively our platform, again, geographic and worldwide. We have mostly the recent partnership that have quickly [indiscernible] full breadth of solution.

Bottom of the chart, and most on market data and administration services, we provide to this global bank that I believe into a very wide range of market data programs where we are confirming some specific requirements in that matter from a data platform, to fully manage across asset class integrations. And the development of the strategic deals, we guide as we said recently our world to ensure that we achieved our regional objective with the same time hitting our margin target of between 25% and 30%.

With that said, I would like to turn the call over to Mike for a review of the financial results.

Michael Geltzeiler

Thanks, Dominique, and good morning. Slide 10 provides comparative GAAP results for the third quarter. Total revenues for the quarter were $1.1 billion, which was down 9% year-over-year and 16% versus the second quarter. Net income and diluted EPS are up year-over-year, but down compared to the second quarter of 2010, reflecting the slower trading volume environment we experienced in the third quarter.

This quarter, we reported a $25 million charge for merger expenses and exit costs, more than half related to exit costs for our data centers. Last year's merger expenses and exit cost of $8 million was principally for severance. As we have stated previously, the data center related exit costs for legacy systems and platforms is expected to reduce dramatically after this year.

This quarter, we also recorded a deferred tax benefit of $21 million related to the reduction of the U.K. tax rates from 28% to 27%. A drop from 28% to 27% is the first step by U.K. tax authorities to lower the U.K. tax rate to 24% in the coming years. In the prior-year quarter, we reported a $4 million in net pretax gain from asset disposals primarily related to the sale of our stake in BM&F Bovespa.

My review of our financial results from this point forward, we'll exclude the impact of merger expenses and exit costs. Deferred tax benefits just referenced as well as gains from this global activity.

Slide 11 provides a more detailed look at our financial results for the third quarter. Including merger expenses, exit costs, deferred tax benefits and asset sales, diluted EPS for the quarter was $0.46, down 13% versus the prior year of $0.53. Year-to-date, EPS of $1.64 is up 12%. These results include a positive $0.02 EPS impact for a reduction of our effective tax rate from 27.5% to 26.5% as a result of the adoption of favorable tax loss in the Netherlands. We expect to have an effective tax rate of 26.5% for the remainder of 2010.

Our focus for 2010 is revenue growth and margin expansion. While the third quarter was challenging, we are pleased with our progress on both front thus far. On a constant dollar basis, year-to-date revenues were up 5% and margins have improved from 32% to 34%. These results were negatively impacted by the stronger U.S. dollar. Operating income was $180 million, down 8% compared to the third quarter of 2009.

At the time of the launch, we stopped capitalizing interest expense related to the build out of our data center in the U.S. has increased our net interest expense up for the quarter by $1 million to $26 million. In the fourth quarter, we will no longer capitalize interest expense for our U.K. data center, this will increase our net interest expense by an incremental $3 million. The average weighted diluted sharecount increased slightly in the current quarter driven by the vesting of LTIP grants. We expect the share count to remain at 262 million shares for the remainder of the year.

With a largely fixed expense base, we have significant operating leverage on incremental revenue and volume growth. Leverage however cuts both ways and, that's what we experienced in the third quarter.

Slide 12 provides our segment results on a currency neutral basis. U.S. dollar weakened this quarter versus prior year for both the euro and the British pound. For the third quarter, 48% of our net revenue was denominated in either euros or pounds. Currency impact was unfavorable $25 million versus prior year and a favorable $7 million versus the prior quarter. On a currency neutral basis, third quarter net revenues were flat and operating income declined 2% versus the third quarter of 2009. Operationally, revenues for our derivative segment was flat and the technology segment grew 26% versus Q3 prior year. Cash trading and listings revenue declined by 6%, driven with the lower U.S. volumes and lower revenue capture in Europe.

On Slide 13. We show our 2010 year-to-date net revenue split by business activity and segments in comparison to the prior-year period. The company continues to benefit from a diversified revenue base, which has helped dampen the impact of FX and volumes in the current quarter. 49% of our net revenues were generated by transactions in clearing fees for the first nine months of 2010. This is in line with prior year, although this year's results include the benefit of Liffe Clearing, which was acquired in July of last year. We saw the contribution in technology service that show the most meaningful increase with 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 49% of our net revenue. Year-to-date, the derivative segment remains our fastest-growing segment contributing 34% of our net revenues, up from 29% in 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. Though not showing on the chart, 52% of our Q3 net revenues originated in the U.S. and 48% in Europe.

Slide 14 and 15 detailed the financial performance of our derivative segment. I'm not going to go through these slides in great detail, but simply touch upon a few points. Net revenues were $188 million in the third quarter, a decrease of $10 million or 5% versus Q3 prior year and down $38 million or 17% from the very strong second quarter 2010. Adjusting for foreign currency impact, net revenue decreased 2% versus the prior year third quarter. Decrease versus the second quarter of 2010 was driven by volume declines in the overall market, NYC Liffe and U.S. options from elevated second quarter levels.

The average net rate per contract for NYSE Liffe derivatives excluding Bclear was $0.67 per contract in the third quarter compared to $0.75 in the third quarter of 2009 and $0.64 in the second quarter of 2010. The decline versus the third quarter of last year was due to a stronger dollar as well as business mix in the third quarter of 2009, which resulted in lower liquidity payment during that period.

The increase versus the second quarter was principally due to the weakening of the dollar. Rate per contract in the U.S options was $0.17 per contract in the third quarter. This is down versus the prior year but up slightly quarter-over-quarter. The reason for the decrease year-over-year was largely attribute to an increase in Penny Pilot issues created on NYC Arca and minor pricing changes, which were offset by market share gains. Our Global Derivatives segment margins declined to 49% in Q3 from 53% in the prior-year quarter. Derivatives accounted for 43% of our operating income.

Similarly, Slide 16 and 17 show you the financial performance for our Cash Trading and Listings segment. Cash trading and listings net revenue was $298 million in the third quarter of 2010, down versus both the prior-year period and sequentially. Net transaction revenues, adjusting for foreign currency, were down 6% versus Q3 2009. This was attributed by pricing reductions in European cash in 2009 and lower overall market volumes in U.S. cash. Partially offset by a 9% increase in average U.S. net capture and higher market share across all venues for U.S. cash trading.

Market share on our four European markets was down slightly to 73% in the third quarter from the second quarter levels. Revenue capture for U.S. cash trended up to $0.31 per 100 shares in line with expectations and recent trends. Revenue capture for European cash was $0.66 per transaction versus $0.90 in the prior year. The decline in European pricing was attributed to the stronger dollar, prior year price reductions and a less favorable mix.

As previously announced, we have redesigned and simplify the pricing for our European cash trading offerings, effective November 1. We eliminate the distinction between agency and principal tradings, and will implement other changes that more aligned us with other European regulated exchanges. Operating margin for Cash Trading and Listings segment was 34% in the third quarter, consistent with the third quarter of 2009.

Slide 18 details the financial performance for our Information Services and Technology Solutions segment. Information Services and Technology Solutions net revenue was $113 million in the third quarter, an increase of $19 million or 20% from Q3 prior year. On a currency neutral basis, revenues were higher by 26%. The increase was primarily driven by NYFIX acquisitions, growth in safety clients, delivering of UTP to cutter and some large software and infrastructure sales. Revenues were $6 million or 6% higher than Q2.

Operating income was $24 million, a 100% increase to prior and a 20% increase from the second quarter of 2010. Operating margin was 21% compared to 13% in the third quarter of 2009. Adjusted EBITDA margin was 30%. As our data center is now alive, we will be focusing on migrating clients and market and join their liquidity hubs. Co-location revenues begin to accelerate and reached our annualized level for Q2 2011.

Slide 19 provides a harmonized view of fixed operating expenses. We continue to make excellent progress in lowering our cost base in real term while funding incremental investments to grow the business. As expected, Q2 expenses were about second quarter levels as we began to appreciate the new data centers. After adjusting for negative impact of a weaker dollar, after incremental data center integration spending, fixed costs were just $4 million above Q2 in an apples-to-apples basis. Third quarter operating expenses were down $7 million versus last year on a reported basis. However, after adjusting for FX and the impact of acquisitions and divestiture such as NYFIX and Hugin and new initiatives, fixed operating costs were down $26 million or 6% in the third quarter of 2009.

On a constant dollar, constant portfolio basis, year-to-date fixed expenses were down $97 million or 8% compared to the prior year period. We continue to make good progress and our focus on efficiency and productivity improvements, and will further reduce operating expenses NYSE Euronext in the coming years.

Slide 20 provides you with some FX sensitivity for annual expense items. In March, when we provided fixed cost guidance for 2010 at $1.723 billion to $1.768 billion, we indicated that this guidance was predicated on the average FX rates for 2009 of $1.39 for the euro and $1.57 for the pound. Based on recent currency moves, we now estimate full year 2010 currency rates of around $1.34 for the euro and $1.55 for the pound, from which you derived a currency adjusted full year 2010 at expense guidance range of $1.707 billion to $1.749 billion. Based on fixed cost developments through the three quarters of the year and a year-to-date spend of $1.253 million, we now expect our full year 2010 fixed expenses to come in below the low end of the currency adjusted range.

We remain committed to our 2011 objective of reducing constant dollar, constant portfolio of fixed expenses below $1.650 million. 2010 acquisition such as corporate board member, NYSE Blue and our May announcement to build two new clearinghouse in Europe are incremental to this guidance. In the third quarter, 61% of our operating expenses was denominated in dollars, 19% in euros, 20% in pounds. Our staffing level as of September 30 was 3,030 full-time positions, which is 337 positions or 10% below year end levels and include 34 staff from our recent acquisition of corporate board member.

Previously indicated, we do expect cost to rise in the fourth quarter largely due to the migration into our new data center, investments in our new European clearinghouses and launching of interest rate futures in the U.S. A weaker dollar are also increased costs, which is more than offset of the beneficial impact on European revenue. In addition to the integration and transition costs, we began to appreciate a new data centers, which it added an incremental depreciation of approximately $4 million in the third quarter of 2010 and an incremental $10 million will be a flow-through in the fourth quarter. Over time, this will be mitigated as we exit our legacy data centers.

Slide 21 details our cash and debt position as of September 30, 2010. Total debt was $2.5 billion, cash market securities totaled $0.4 billion and net debt was $2.1 billion. The $2.5 billion of debt, included $2.1 billion of long-term debt with a weighted average cost of 5.3%, the remaining $400 million short-term debt consisted of commercial paper at an average cost of approximately 0.5%. Through nine months, we have spent $244 million on capital expenditures, including $106 million related to our data centers. We expect our capital expenditures to decline significantly over the next two quarters to a more maintenance levels. We will provide more guidance for the outlook for CapEx at our Investor Day in March 2011.

We also paid a net $126 million in Section 31-B to the SEC this quarter, reflecting the usual payment of the eight months of these pass-through charges. At the end of September, our debt-to-EBITDA leverage ratio was 2.25x, up from 1.9x at the end of June 2010 but still down from the 2.6x at the end of 2009. The increase in leverage ratio in Q3 was due to the seasonal effect of the payment of section 31 fee I referenced earlier, another cash outflows, including the second quarter payment and the weakening of the dollar at the end of the third quarter, which increased debt in dollar terms by $150 million. We expect our debt to EBITDA to move lower in fourth quarter as cash flows improve.

NYSE Euronext is currently rated A+ by S&P and AAA by Moody’s, and we are now on stable outlook with S&P. We continue to operate within our long-term target leverage levels, and we are committed to continue to invest in our growth and return excess cash flow to our shareholders. Last week, the Board declared a $0.30 quarterly cash dividend for the fourth quarter of 2010 which is payable on December 31.

With that, let me turn the call back to Duncan for some closing remarks and then we'll take your questions.

Duncan Niederauer

Thanks, Mike. Just to wrap it up before we open it up to questions, a quick review. Obviously, a quarter with very challenging market conditions. But I've come away from the quarter pretty optimistic and very pleased with the progress we're making in our multiyear strategy as we endeavored to create a global capital markets community. I think the decisions we've made in the past few years to acquire other businesses are now generating incremental revenue, and that's more than helping us offset the negative impacts of things that we don't control like the currency and the volume.

I also think that this was the quarter where we're beginning to see the results of our diversification efforts. As it's clear, there are business model is much better positioned than it was a few quarters ago. This revised periods like the one we're in right now. And I think as we look forward to 2011, with all of the things that Dominic and Mike had just touched on in terms of initiatives coming on the back of the data centers, we combine that with the anticipated launch of interest rate futures and the launch of New York portfolio we're beginning early in 2011, I think we're very optimistic that we've got some built-in growth drivers for next year, even if the volume environment remains where it is. I think if you ask us as a management team, we're cautiously optimistic that through 2011 will look a lot brighter. It's hard for us to imagine that people who just continue to stay out of the listed equity and derivative markets to the degree they have in the last few months.

The other thing I like about our data centers I think it is, they're very representative of how we've been able to change the culture of the company. This is a much more innovative company than it was a few years ago. It's a truly globally integrated enterprise now. And I think these data centers, which really will act as liquidity hubs for our community strategy going forward, I think will prove to be the cornerstone of that technology services growth story that we've talked so much about in the last few quarters. So all in all, thank you for listening. We think it's a very good show and given the conditions. And we are increasingly confident going into next year about our abilities to effectively meet the ever changing needs of our ever expanding customer base.

With that, that concludes our formal remarks, and we will open up the lines for Q&A. You've got Mike and Larry in Europe and you've got Dominic and you've got me here in Paris.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Daniel Harris from Goldman Sachs.

Daniel Harris - Goldman Sachs Group Inc.

I wanted to go back to the NYPC commentary that you made. You guys are on the comment period now and obviously looking forward to a 1Q launch. Can you tell us operationally sort of what are you doing behind the scenes with the people that have expressed interest in becoming members or participating on this exchange to get them ready for the launch? And what are you seeing in terms of 1Q in terms what their concerns are, or how they're planning on using the system?

Duncan Niederauer

Great question, Dan, it's Duncan. So first and foremost, we've been operating under the assumption for the better part of this year that we would eventually get out for comment. So a lot of the spade work has already been done on building out the infrastructure and working with clients to make sure we've got all the connectivity, winkles ironed out. Now having said that, given that the pre-approval or the pre-comment period with somewhat elevated, you would understand that a lot of the clients have said we get it, we understand what you're trying to do, we're supportive given all of the their other technology priorities. Remember, we just ask them also migrate to new data centers in Mahwah and Basildon in the last couple of months. They said to us, okay we've got it, we know what's going to happen, it's gone. Let's really get focused on it. Once you're out for comment because now we know the clock is ticking. So a lot of the membership application work is done. The technology work with ourselves and DTC has been working anticipating on an earlier launched than this, so that's not going to be a problem. And now I think what we will start to do as we start to go through the comment period is actually do the work to test the connections, make sure everything's clear. Remember, that most of these clients are already connected to NYSE Liffe U.S. That's not going to be issue, this is just a new product over that connection. It's just getting the linkages from those companies middle offices back in the NYPC. So everyone knows what has to be done. My guess would be that work will start in earnest now that we are out for comment.

Operator

Your next question comes from the line of Rob Rutschow.

Rob Rutschow - Credit Agricole Securities (USA) Inc.

I wanted to ask about -- we've talked quite a bit about the U.S. data center and the build out there. I wanted to ask about the European data center. First, I was hoping you might be able to give us a little bit of education on what the competitive landscape looks like for high frequency trading and for proximity hosting prior to your build out of this data center? And what your capabilities looked like before you built this and what they look like now? And then, what the pipeline for high frequency trading looks like in Europe and whether or not there's going to be any regulatory or tax changes for the cash businesses as you consolidate everything and Basildon?

Lawrence Leibowitz

This is Larry. I think it's safe to say that both high frequency trading and co-location are not as well developed in Europe as they are in U.S. The market isn't as mature. There aren't as many trading venues. And a lot of what drives higher frequency trading and co-lo are having many venues to route between. That said, we had some presence both on the Liffe side and a little bit on the cash side of co-lo, not nearly as much on the cash side. Now remember, we've got a data center where we've got Liffe and the cash business located together, as well as the equity options that goes along with the Liffe business. So we believe that, that will create a healthy environment for co-location and for the high frequency trading. But it is a market that is behind the U.S. And I think I'm going to turn this over to Dominique in a second, as regulators are really taking a hard look at these. Dominic, you want to comment on that?

Dominique Cerutti

Well, we think not expanding what Larry said, actually trading would be above 50% in the U.S. It's roughly around 30% in Europe, but it's trending in the same direction. Sooner or late, that's going to equalize and that's one thing. So it's less sensitive. Number two, on search for licensed fee, of course, a few advocacy traders are looking for that. But we see more and more players trying to get latency, and that's a need across the industry. We're not the same demand but it's in across the industry and not on pure advocacy trader. And we see that in the new co-lo member that we're adding in Basildon to answer your question. And last on the regulatory scrutiny, you, of course, know that they really try to understand. We consider that once we go underneath and in the details, the regulators will understand later at the model. We'll speak we'd be maybe more transparency what's there to be speak. But there is no real impact on their advocacy trading business, again, once the homework is done.

Operator

Your next question comes from the line of Michael Vinciquerra from BMO Capital Markets.

Michael Vinciquerra - BMO Capital Markets U.S.

I just want to ask, Mike, on the compensation, a nice dip on a sequential basis here. Can you give us any more detail on the breakdown between incentive comp and then kind of your base and benefits? And is this level for compensation something that you think is a run rate over? Was there something special in the third quarter that helped bring it down further?

Michael Geltzeiler

One of the things that helped in the third quarter is the outsourcing of a number of the regulatory activities to FINRA. So we previously -- we're actually moving in a way costs that was previously in the compensation line when these individuals were employees, and now on the professional services fee. So there was some reduction in the compensation line in real terms based on our continued reduction in cost but a nice portion of that improvement, which is sustainable going forward. But it did come from a little bit of movement between the line. In terms of our incentive comp, and we haven't really discussed that into much, pretty comfortable saying in aggregate, our kind of annual bonus full salaries in the cash side is about $100 million to give you a perspective out of our compensation.

Operator

Your next question comes from the line of Richard Repetto from Sandler O'Neil.

Richard Repetto - Sandler O`Neill

My question is sort of a follow-on on the co-location and I know you talked about the 97% capacity. But I'm just trying to see get more details, just like what is the revenue contribution from co-location? And then, how would that -- just as you broadly look at it and I know you're going to shut down the other data centers next year, but just how you look at, I know there's other contributions besides co-lo but the return on investment, et cetera, on the data centers?

Duncan Niederauer

In terms of co-lo. First, we are 97% sold out. We have various options for expanding this space from here. As you know, we have two hauls where we have to just filled out the infrastructure that expand into. Those will require capital investment. But the second option is to actually just densify the power supply in the existing hauls, which is a much smaller capital expenditure. This actually gives us more capacity within that. And we are looking at that option as a, it cost less and also, it's far less the lead time to do that. The we look at co-lo is it's an incremental revenue. It has cost against at obviously the that we, and we think that the ROI in it is good. But it's also important to our general strategy of building the liquidity hub and telling other value-added technology services whether those are, take or plans, managed services or other services that go along with it. So it's all part of the broader technologies, strategy that Dominic and his team have embarked on. So we sort of see it as a whole, we're really pleased with the way this is going out and we expect it to continue. So I don't if that answers it. We're not completely transparent in terms of the granularity of co-lo revenues. But you know what our competitors disclose and you should assume that we're not pretty far off on that.

Operator

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

Roger Freeman - Barclays Capital

Duncan and/or Larry, I guess, question on trading opportunities in sort of inside the OTC realm. I'm wondering kind of how you're thinking about the opportunity set to maybe partner with dealers or other SEF's that are going to be maybe created, maybe the technology services provider to get in on perhaps some eventual exchange trading of product maybe like CDX, where you don't come in as much of a threat to the dealers as existing incumbents?

Lawrence Leibowitz

It's something we spent a lot of time on, Roger, so I'd break it down into two pieces. One, on the clearing side, I think it's pretty obvious that the near-term opportunity is going to be more on the -- to be a provider of post-trade services. And as everyone on the call is well aware, that is not our strong suit. We did not have, I thought the right post-trade assets. So between the NYPC venture in the U.S. and what we're working on in Europe having largely vertical as our U.K. business and now working on finishing the last step of that with the clearinghouse and the guaranty fund in the U.K. and then building one in the eurozone, I think we're in much better position in the next 12 to 18 months to participate on the post-trading side. I think it's a little early to tell exactly how much of these products find their way through trading venues or swap executions, facilities, et cetera. But I would tell you that our view on any of these front ends is that given that these products have here before it had been in the OTC space, any of these products that find their way, either voluntarily or by regulatory fee have to be traded more transparently. Our view is not, if you build that they will come theory, we would anticipate that we would construct these in partnership with the team, liquidity providers. We would take the selling to the realized approach we've taken in some of our other projects like our MX options business and our NYSE Liffe as to derivatives business. And you can safely assume we're already having conversations along that vein.

Operator

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

Alex Kramm - UBS Investment Bank

Just wanted to come back to the European cash business and the market share stabilization that you've seen there. And I hope that you can maybe talk a little bit more about the high frequency trading that you're seeing over there? I think historically, when we think about high-frequency and cash equities, we think that the market makers that are using technology and are very rebate sensitive. But when we talk to people in Europe today, they're saying a lot of the growth is actually coming from the signal proprietary high-frequency traders. And when I think about those guys, I think about looking for liquidity, speed, depth of book and things like that, so that should actually really play into your existing markets. So are you seeing the same thing? Am I thinking about this right? And maybe what else is helping the stabilization right now?

Duncan Niederauer

I think the stabilization is probably just coming from the structure itself, which is for these other MTF to proliferate, they've got to have good cross exchange routing. They've got have enough liquidity to sort of draw the flow, include is some fungibility or interoperability of clearing issues. I think that the market is just not as well developed. We certainly do have high-frequency traders that are acting more like market makers than just liquidity takers on the regulated platforms. And I would assume that the same is true on our competitors' MTF platforms as well as the regulated market. So I don't know whether the mix is a little bit different in Europe versus the U.S. I just think the market is less well developed because there are fewer routing options, and routing itself is not as well developed or is clearing interoperability. It's a very different landscape. I think it will look more U.S. like over time, but it is taking time. I don't know if Duncan or Dominic, you want to add anything to that?

Operator

And your next question is our final question from the line of the Niamh Alexander from KBW.

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

If I could just go back I guess to the revenue side of the technologies business, and the NYFIX acquisition helped a lot last year. You're getting towards the end of the big CapEx spend with the data centers. So should we think about maybe you're starting to reallocate monies back towards acquiring to grow that revenue line? Help me understand the priorities for the use of some of this cash as well, please?

Dominique Cerutti

I'm not sure I get the other question.

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

I'm just trying to understand if you're ready to get back into the acquisition mode in the Technologies business now that the big spend is behind you with respect to the data center expansion?

Dominique Cerutti

Again, I will let Mike elaborate on that. So you'll see what we're doing this year, executing on the current portfolio and expanding. And you may remember that we said that we moved from a $362 million business last year, and we are now on our way delivering 30% growth in third quarter. Again, leveraging nicely but without any other acquisition. If you project the business as it is today, and as we already mentioned, you can do that. There is no secret into that. And back to the $1 billion goal of doubling the operating margins that we said, we should reach out something like $750 million normally by just executing, that's one thing. Number two, we are preparing other initiatives, which I'm not going to detail today, maybe in next call, it will be too long. But to extending our global network, extending our better service business and building the service platform and I gave a few examples on deals. And one day or another, attracting older market venues, and this is not long term green because we're working on that as we speak. So back to the $700 million projected to equation, we think that just with a current portfolio and new initiatives we've got acquisition. We have decent hold on what we committed. Besides that, yes,we're working on acquisition but nothing in the short term radar just to tell you that we can doing portfolio, new initiatives, leveraging our assets that we have already and we know how to do that and potential acquisitions. And we can see them versus the goal that we mentioned both in revenue and margins. Mike, if you want to expand and to be a little bit more granular?

Lawrence Leibowitz

This is Larry. In terms of the acquisitions, I think the team has shown that we are capable of integrating acquisitions and evaluating them in a very thoughtful way. So we're not going to run around making acquisitions, even that don't make sense, or difficult to integrate. I think we did that the NYFIX, we did it with AMEX, there's any number of acquisitions. I think we are looking at this very opportunistically. We have to see things that fitting with our technology portfolio, take advantage of our networking and in distribution, and allow us to take costs out or get other benefits leverage on the platform. In terms of sort of the bigger picture, Mike, why don't you talk about that?

Michael Geltzeiler

As we mentioned in the second quarter, with the dramatic reduction in our leverage, it kind of signal that we're no longer focusing on the delivering. And that what we now we're looking at in terms of types of capital allocation priorities is first and foremost, we want to maintain the flexibility and a strong balance sheet. But we are looking to invest in growth where we see the opportunity to do so, both acquisition and organic opportunities. And of course, we would evaluate whether we had cash excess cash flows as well, and we consider share buybacks, et cetera. As we look forward to 2011, not only are we strengthening our EBITDA, but we're looking at an environment we have considerably less capital expenditure, investments and in fact will be reporting as we said, higher cash earnings rather than book earnings of our D&A will be considerably above our CapEx going forward. So be in a good cash position, M&A will definitely be part of a little bit of looking at to evaluate. But as Larry said, it's going to be a disciplined process.

Duncan Niederauer

We thank you all of for dialing in. This is the first time we've tried this on the split screen from New York and Paris, so thank you for being patient with us. Hopefully, everything was easy to hear. But any feedback would be appreciated. And Mike and his team will make themselves available for one-on-one throughout the day at meeting with the analysts. Thanks a lot.

Operator

Thank you for your participation in today's conference. This concludes your presentation and you may now disconnect. Have a great day.

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