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NYSE Euronext (NYSE:NYX)

Q4 2010 Earnings Call

February 08, 2011 8:00 am ET

Executives

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

Analysts

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

Richard Repetto - Sandler O`Neill

Kenneth Worthington - JP Morgan Chase & Co

Michael Vinciquerra - BMO Capital Markets U.S.

Howard Chen - Crédit Suisse AG

Christopher Brendler - Stifel, Nicolaus & Co., Inc.

Christopher Harris - Wells Fargo Securities, LLC

Daniel Fannon - Jefferies & Company, Inc.

Roger Freeman - Barclays Capital

Operator

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

Stephen Davidson

Thank you, Towanda. Good morning, and welcome to the NYSE Euronext Fourth Quarter and Full Year 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, Duncan Niederauer, Chief Executive Officer, will review the highlights for the quarter, walk you through our 2010 accomplishments, provide you with thoughts on the external outlook for 2011, update you on key initiatives, including NYPC, and conclude with our priorities for 2011.

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.

When we go to the Q&A session, please limit your questions to one to allow for broader participation. We are incorporating slides for the call today, which are available for viewing on our website, and Duncan and Mike will refer to these slides during their remarks.

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

Duncan Niederauer

Thank you, Stephen, and good morning, everybody. As we often do, we are going to walk you through the slide deck that's available online, so Mike and I will make a point of referencing which slide we're on as we go through the deck. So again, good morning to everybody, and thanks for joining the call today. I'm going to start on Slide 3.

Despite a challenging second half of the year in terms of trading volumes, we are very pleased with the progress we have made in 2010 in transforming our business model, and we enter 2011 with increasing momentum. Our Technologies business is already benefiting from the launch of our new data centers. We have significant optionality with the launch of NYPC and U.S. futures. Our clearing initiative in Europe is progressing, and the pipeline is building in our Listings business.

And the fact that none of these drivers are volume-dependent gives us even more confidence. Why? Because we see the health of corporate balance sheets, we see the return of corporate profitability, we see the global economy growing and therefore, believe it's likely that volumes will increase when compared to the second half of 2010.

As many of you know, we released our monthly volumes for January late last week, and we were encouraged by the sequential rebound in our derivative numbers and both the year-over-year and sequential growth in our European cash and U.S. options volumes. So while it's far too early to call it a trend if volumes do come back to more normal growth levels, we expect to reap the returns of our diversification efforts, as well as benefit from improving volumes. With that as an introduction, let me now turn to the quarter.

For the quarter, we recorded EPS of $0.46 per share on net revenue of $613 million, down from $0.58 on $640 million in net revenue in the prior year period. The strengthening of the dollar year-over-year reduced our net revenue by $19 million and EPS by $0.03, and the prior year period included a $0.06 positive impact from a special LCH.Clearnet dividend and the sale of stakes in NYSE Liffe U.S.

Our Technology business continued to show growth and benefited from the addition of revenue from our data centers coming online, strong enterprise software sales and the impact of NYFIX. Based on our expectations for data center-related revenue, revenue from several large exchange focus managed services agreements already signed and ancillary market data sales, we expect our Technology segment to generate an increase in revenue north of 15% in 2011.

Turning to Cash and Listings. We are continuing to see strong demand for our listing venues in terms of transfers and new listings. During 2010, 14 companies transferred to NYSE from other exchanges, with a total market capitalization of $41 billion. A total of 99 issuers listed on NYSE Euronext markets in 2010 generated proceeds of $39 billion, and 22 of those 99 issuers were from China. The 99 compared to just 44 IPOs for $21 billion in 2009. Additionally, we garnered 40% of technology IPOs. And to put that in perspective, in 2005 that number was less than 10%.

On the cash equities trading side, we are continuing to focus on stability and profitability. In the U.S., whilst exchange trading continues to take away share from the Liffe markets, with TRF share well above 30% of the market in the fourth quarter and early signs in '11 is that it will even go higher. In Europe, our share has remained relatively stable just north of 70%.

Lastly, in our Derivatives segment, while we experienced record volumes for the year, the second half was challenging for our European Derivatives where market participants locked in profits from the first half's robust activity, and trading activity moved out along the yield curve. Any discussion about the near-term possibility of rising inflation or potential rate increases should be supportive of our European Derivatives business.

In our U.S. Options business, we were the number one equity options exchange for a good part of 2010, and we have been successful at maintaining a leadership position in the space, so mission accomplished. Options Insider newsletter also recently named NYSE Amex, our options exchange, the Exchange of the Year for 2010.

Lastly on this slide, I want to provide you with a quick update on several key initiatives. On January 31, the CFTC granted NYPC registration as a DCO, or Derivatives Clearing Organization, a significant step towards our ultimate goal to compete in the fixed income derivatives arena. So having a designated clearing organization status, just to review with everybody, gives us the first step towards being able to launch NYSE Liffe U.S. interest rate futures at NYPC.

The SEC and CFTC must now provide formal approvals allowing NYPC and DTC's fixed income clearing corporation to cross margin fixed income futures cleared at NYPC with fixed-income cash securities cleared at FICC. These regulatory approvals are expected at the end of February. I will speak more about NYPC on a later slide.

Next, we are progressing with the build out of our new clearinghouses in Europe and our data centers are live in the U.S. and Europe. So all in all a good quarter and building momentum for 2011.

Shifting to Slide 4. This is a slide that by now should be familiar to all of you as we put it in every earnings deck, and it highlights the 2010 priorities for our three segments and begin to talk about what we accomplished. If you focus on the middle, we are really showing you that what we've been doing the last couple of years is to build the foundation. When we started this transformation just a few years ago, there were disparate trading platforms that were disparate connectivity networks. We had no clearing assets, and we have what I would describe as a very diffused data center strategy at best.

We had 13 data centers in location that, quite frankly, happened to the company rather than comprising a comprehensive strategy. They came through acquisitions. They came through other mergers that had been done before all of us arrived.

So while it wasn't terribly glamorous, I think our view was that we needed to do the following: build out the Universal Trading Platform, get all of the technology platforms onto one platform; think about how to rationalize the safety network, making it the same in the U.S., Europe and Asia, getting everyone connected through a common customer gateway; begin the process of trying to build out our clearing assets and build two new state-of-the-art data centers, which are now up and running.

Now that we have completed the year, please turn to Slide 5 for a review of our accomplishments in 2010. On Slide 5, we note our accomplishments with pride, given we did everything we set out to do and more. I'm not going to go through each item on this comprehensive list, but we have gotten to this place because of the hard work of our colleagues around the globe.

One of the most important accomplishments last year was the articulation of our long-term strategy, which has guided everything that we do, and we have begun to see evidence that we are on the right track. We also made it a focus to do a better job of articulating our strategy to all of you. The build out of NYSE Liffe U.S. was stalled by the lengthy regulatory process to which NYPC has been subjected. Given these, the ways, the benefit of this effort has been delayed by approximately six months. Although the regulatory changes are moving more slowly than we had anticipated, we have stabilized our Cash businesses, and we have also achieved a leadership position in U.S. options.

Our advocacy efforts on behalf of issuers have proven to be quite effective and seem to be valuable by our clients. Whether measured by transfers or IPOs, it is clear that our efforts on behalf of issuers worldwide are paying dividends. We finished behind only Hong Kong and Shanghai at IPO issuance in 2010, quite a feat given the size and more amount of issuance that comes from Asia.

Our two state-of-the-art data centers are live. Others have been decommissioned, and the migration process is just about complete in both Basildon and Mahwah. The data center builds largely behind us and some investments in the portfolio rationalized, our leverage ratios have come down, our ratings are high-investment grade and stable, and we find ourselves in a very healthy financial position.

On Slide 6, we provide you with some color in terms of how we are thinking about the external environment. I personally believe the global recovery is extremely resilient. While it may not feel like it in much of the West, many parts of the world are booming. China, India, Brazil, parts of Eastern Europe, Germany and Silicon Valley is on the move again as well.

The UN believes global GDP will grow by more than 3% in 2011, and the IMF estimate is even higher, 4.2%. While downside risks remain, the overall environment is such that 2011 should be the year that puts the global economy officially on the road to recovery. As I mentioned earlier, corporate profitability has returned, balance sheets are healthy, and many companies are sitting on cash and ready to invest, all of which means that investor confidence is also starting to return.

Some key factors which will determine the strength of the global recovery in 2011 are the rate of CapEx, the level of business inventories, unemployment and job creation statistics and consumer confidence. But in short, we believe that 2011 should provide a better environment for doing business.

Please turn to Slide 7. On Slide 7, we provide you with a more detailed update on NYPC. We’ve talked many times on this call about how we believe that NYPC will serve as a major catalyst for new competition in the fixed-income futures market.

Eurodollar and U.S. Treasury futures listed on NYPC Liffe U.S. will be the first to take advantage of the unique operational and capital-efficient model brought to market by NYPC. We'd like to take a moment to thank the CFTC for their diligent hard work in the approval of the NYPC DCO application, which we received on January 31. As I mentioned earlier, this was the first of the regulatory approvals we need to go live.

We continue to work with the SEC and CFTC on the last set of approvals, which will govern the cross-margining agreement between NYPC and FICC. As I said earlier, we are very optimistic that we will see these approvals in line with our expectations in late February.

Regarding operational readiness, significant work continues to take place with the go-live member firms, who represent some of the largest users of fixed-income futures. We expect NYPC to be operationally ready for launch shortly after regulatory approval of the cross-margining agreements later this month.

On this basis, we are planning for a go-live of interest rate futures listed on NYSE Liffe U.S., cleared by NYPC sometime in March of this year. We continue to receive encouraging feedback from the global trading community regarding the innovative nature of our platform, and our teams are coordinating closely with our global customers to achieve a successful launch.

Moving on to Slide 8. On this slide, we again highlight for you the primary execution themes for our NYSE Technology business. As we’ve said before, NYSE Technologies is at the heart of our community strategy. Through a disciplined approach, we have validated and articulated the community strategy and outlined the strategic objectives. The exercise resulted in the design of a dedicated strategic model for NYSE Technologies with the selection and deselection of market segments, which you can see at the bottom of the slide.

The resulting areas of focus are: one, infrastructure and data; and two, front-office analytics for order management/routing technology and execution technology. We have decided to build our strategic roadmap around four main strategic anchors: first, building out our network. We plan to continue the expansion of SFTI in new regional hubs in 2011, introducing standards for service and data exchange on the backbone and looking for a few global partners to build up our capabilities.

Two, we'll be extending data services. We will develop our hosted historical data platform that offers on-demand real-time access. We'll offer market data management services to other venues and major banks and broker dealers, hedge funds and asset managers, and we'll extend our current product range across asset classes and regions. For example, building out super fee. We benefit from a virtual circle here by leveraging client deals for content collection.

Thirdly, we will continue to build out our service platform by developing managed trading platforms for Tier 2 customers to allow them to keep up competitively with more sophisticated firms.

And finally, we will attract other market venues by aggregating them for complementary asset classes, e.g. foreign exchange that pose limited threats to NYX market share, as well as competitors in more mature markets.

Please turn to Slide 9. Continuing on the NYSE Technologies theme, Slide 9 provides you with an update on recent deals that have been signed or in progress. My strategic vision has been validated by both market trends and recent RFPs received from clients and prospects seeking to outsource pieces of their trading infrastructure. We're working with Goldman Sachs to provide them with a Universal Trading Platform to support their European MTF Sigma X that will be hosted in our data center in Basildon. We're cooperating with the Warsaw Stock Exchange to open up access to a full range of solutions, starting with the implementation of the Universal Trading Platform and the expansion of SFTI.

We recently signed a new deal with the Muscat securities market in preparation for their migration to NSC V900. We're providing a front office platform to a global hedge fund, combining a suite of NYSE Technologies products and services, and we signed a cooperation agreement with a European banking group to build out the global market access infrastructure to multiple venues, leveraging NYSE's Technologies’ range of products.

Lastly, before I turn it over to Mike, please turn to Slide 10. So I'm going to quickly review the priorities for 2011. Some of these priorities will have an immediate impact on our 2011 results. Others will help drive our growth in 2012 and beyond. We feel good about the balance. I already touched on NYPC and the interest rate futures launch in Q1, and I've already highlighted the continuing acceleration from the growth of our NYSE Technologies business.

We believe that as we build up our clearing assets, we will be able to in source a meaningful revenue stream, and over time, that should put us in position to capitalize on the migration of the OTC products over the next couple of years to a more exchange-cleared environment.

We continue to be very engaged with regulators here in the U.S. and in Europe. We do think that between what the SEC is looking at in terms of market structure in the Equities business here in the U.S. and what the European legislators are reviewing in terms of the MiFID II revisions, we are optimistic that the outcome will be a net positive for market participants and NYSE Euronext.

We're very proud of the progress we've made lighting up the data centers, retiring some of the legacy centers and moving some of our business into these new data centers. 2011 will be the year we officially finish these migrations and close down the legacy data centers we no longer need. It will also be the year we get the last of our products on to UTP. Finally, we will continue with the disciplined cost management we have exhibited over the past few years, and we will continue to focus on reducing CapEx down to a more maintenance level, which will improve our free cash flow.

With that, let me now turn the call over to Mike for a review of our financial results.

Michael Geltzeiler

Thanks, Duncan, and good morning. Slide 11 provides comparative GAAP results for the fourth quarter and full year 2010.

For the quarter, net income and EPS were below prior year, but rose sequentially versus the third quarter. GAAP results for the fiscal 2010 were up considerably on 2009. This quarter, we reported an $18 million charge for merger and exit costs, barely evenly split between severance and data center exit costs. Last year's merger and exit costs of $43 million were 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. Our review of our financial results from this point forward will exclude the impact of merger expenses and exit costs, as well as gains from disposal activity.

Slide 12 provides a more detailed look at our financial results for the fourth quarter. Excluding merger and exit costs, diluted EPS for the quarter was $0.46, down 21% versus the prior year's $0.58 and in line with the third quarter of 2010. The $0.58 in EPS last year included a $0.06 positive impact from a special LCH.Clearnet dividend and the sale of stakes in our NYSE Liffe U.S. platform.

Our focus for 2010 was revenue growth and margin expansion. For the full year, net revenue, operating income and EPS all grew versus prior year despite currency headwind and a sluggish second half for industry volumes. Margins also improved modestly.

As noted in the third quarter call, we stopped capitalizing interest expense on our data center development project at the time we went live in the new liquidity centers. This accounted for $4 million of higher interest expense in Q4 this year versus last.

Slide 13 provides our consolidated and segment results on a currency-neutral basis. U.S. dollar strengthened this quarter versus prior year for both the euro and the British pound. For the fourth quarter, 47% of our net revenue was denominated in either euros or pounds and 53% in U.S. dollars. Currency impact was unfavorable $19 million versus prior year and favorable $11 million versus the prior quarter.

On a currency-neutral basis, fourth quarter net revenues were down 1%, and operating income declined 5% versus the fourth quarter of 2009. Operationally, revenues for our Derivatives and Cash Trading and Listings segments were down 3% and 4%, respectively, and the Technologies segment grew 14% versus Q4 of prior year.

On Slide 14, we show our full year 2010 net revenue split by business activity and segment compared to full year 2009. The company continues to benefit from a diversified revenue base, which has helped dampen the impact of FX and volume.

48% of our net revenues were generated by transaction and clearing fees, down slightly from 49% in 2009. We saw the contribution from Technologies services 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 revenues. The Derivatives segment contributed 33% of our net revenues, up from 29% in 2009, followed by our Technologies segment, which grew from 15% to 18% of revenues.

Slides 15 and 16 detail the financial performance for our Derivatives segment. I'm not going to go through these slides in great detail, but simply touch upon a few points. Derivatives accounted for 33% of our revenues and 42% of our operating income for 2010. Global Derivative volumes increased 24% for the year, driven primarily by market share and market volume growth in U.S. options.

Volume for Liffe was strong in the first half but lower in the second half, impacted by lower interest rate volatility and reduced equity volumes. Net revenues declined by 6% in the quarter, but finished the year higher by 14% despite a stronger U.S. dollar.

The average net rate per contract for NYSE Liffe derivatives was $0.67 per contract in the fourth quarter compared to $0.69 in the fourth quarter of 2009 and $0.67 in the third quarter of 2010. Decline versus the fourth quarter of last year was due mostly to the stronger dollar.

Rate per contract in U.S. options was $0.17 per contract in the fourth quarter. This is down from $0.18 in the prior year and in line with the third quarter. Our Global Derivatives segment margins were 48% in Q4 and 55% for full year 2010, growing eight basis points versus full year 2009. This includes an investment loss of $30 million for NYSE Liffe U.S. in 2010 as we prepare for the 2011 launch of our interest rate future products. While derivative volumes were seasonally slow in Q4, we are pleased to report January 2011 volumes for Liffe futures and U.S. options were up 25% and 17%, respectively, from fourth quarter ADV levels.

Similarly, Slides 17 and 18 show the financial performance for our Cash Trading and Listings segment. Cash Trading and Listings’ net revenue was $310 million in the fourth quarter of 2010, down 7% versus the prior year period, but up 4% sequentially.

For the year, revenues were down 10%, but only 4% on a currency-neutral basis. This was attributed to lower overall market volumes in the U.S. cash and pricing reduction in Europe cash in 2009. Market share was relatively stable in Q4 and throughout the year for both U.S. cash and in our four European markets, as was pricing on a currency-neutral basis.

Revenue capture for U.S. cash trended up to $0.033 per 100 shares handled for Q4 in line with recent trends, reflecting continued stability. Captures increased compared to the third quarter of 2010 due to strong block trading volume, where we have opportunistically increased fee and less clients hitting tiers on Arca.

Effective November 1, we implemented a new pricing plan for our European market. Revenue captured for European cash was $0.71 per transaction versus $0.88 in the prior year. While decline year-over-year can be attributed to the stronger dollar and prior year price reductions, the increase from $0.66 in the third quarter 2010 level was driven by some growth in non-volume-based revenue sources and less clients hitting tiers, which more than offset the impact of the recent pricing reduction.

2010 trading volumes rose 7% for European cash, but declined 21% for U.S. cash. January 2011 volumes were 26% higher than the fourth quarter ADV for European cash and 6% higher for U.S. cash. Operating margin for the Cash Trading and Listings segment was 32% in the fourth quarter, down from 35% in the fourth quarter of 2009 and 34% in the third quarter of 2010.

Slide 19 details the financial performance of our Information Services and Technology Solutions segment. Information Services and Technology Solutions’ net revenue was $114 million in the fourth quarter, an increase of $11 million or 11% from Q4 prior year.

On a currency-neutral basis, revenues were higher by 14%. The increase was primarily driven by an increase in data center revenue from the launch of the Mahwah and Basildon data centers, strong enterprise software sales and the impact of the NYFIX acquisition.

Operating income was $28 million, a 47% increase to prior year and a 17% increase from the third quarter of 2010. Operating margins rose to 25% compared to 18% in the fourth quarter of 2009, and adjusted EBIT margin was 32%.

For the year, revenues in this segment grew 22%, and margin improved from 15% to 20%, solid progress against our plan to grow revenues to $1 billion with a 25% to 30% margin by 2015.

With our data centers now live, we'll be focusing on migrating clients and markets into our new liquidity hubs. Data center-related revenues begin to accelerate and reach their annualized level in Q2 2011.

Slide 20 provides a harmonized view of fixed operating expenses. We continue to make excellent progress in lowering our cost base in real term of slightly incremental investments to grow the business. Q4 expenses were above third quarter levels as we began to depreciate the new data centers and invest in new initiatives. That said, Q4 costs rose only $6 million versus Q3, $5 million of which was due to a negative variance in FX.

Fourth quarter operating expenses were down $6 million versus last year on a reported basis. 42% of our expenses in the fourth quarter were denominated in either euros or pounds. After adjusting for FX and the impact of acquisitions and divestitures, such as NYFIX and Hugin and new initiatives, fixed operating costs were down $25 million or 6% from the fourth quarter of 2009.

For full year 2010, total reported fixed operating cost of $1,678,000,000 were below the low end of our currency-adjusted full year guidance of $1,707,000,000 to $1,749,000,000. On a constant-dollar, constant-portfolio basis, full year fixed expenses were down $113 million or 7% compared to the prior year. We continue to be make good progress and are focused on efficiency and productivity improvement that will further reduce operating expenses for NYSE Euronext in the coming years.

Despite the more than $50 million of incremental expenses expected in 2011 for portfolio changes like adding corporate board member, the build out of our new clearinghouses in Europe and incremental costs from the additional Technology Services revenue, we still expect to deliver fixed cost in 2011 of less than $1,650,000,000. We will provide even greater detail on our full year 2011 fixed cost guidance at Investor Day on March 8.

Slide 21 details our cash and debt position as of December 30, 2010. The company ended 2010 in a strong financial position, well positioned to support future growth and shareholder value opportunities. For the year, we paid down nearly $400 million of debt, while growing EBITDA 4%.

2010 capital expenditures were in line with guidance at $305 million, including $115 million related to building our data centers. With both our data centers now live, we expect our capital expenditures to decline in 2011 to around $200 million or potentially lower. We will provide more guidance to the outlook of CapEx at our Investor Day.

At December 31, our debt-to-EBITDA leverage ratio was 2.2x, down from 2.3x at the end of September 2010 and down from 2.6x at the end of 2009. This improvement in leverage and an upturn in business prospect resulted in the company maintaining A ratings and outlook upgrades to stable from both S&P and Moody's. We continue to operate within our long-term target leverage levels and are committed to return excess cash flow to our shareholders. We plan to discuss this further at our Investor Day in March.

Last week, the board declared a $0.30 quarterly cash dividend for the first quarter of 2010, which is payable on March 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, and thank you, everybody, for listening in. Just a few closing remarks before we open it up for questions as we always do.

In closing, our results for the quarter were solid, and we're pleased with the progress that we're making on the multi-year strategy to create a global capital markets community that will empower our clients to innovate and collaborate. As a result of our diversification efforts over the past several quarters, our business model is much better positioned to weather periods like the one we experienced in the second half of 2010.

We also have additional drivers of growth coming online in the months ahead with our anticipated launch of U.S. interest rate futures in conjunction with the launch of NYPC. With DTCC, we are bringing to market a revolutionary new clearing solution that we believe will finally deliver effective competition to the U.S. futures market. And as I said earlier, we hope to launch that in March of this year.

We have strong growth coming from our Technologies segment in 2011, and I am increasingly confident looking at all the RFPs we’re receiving that we are seeing evidence that our solutions-focused approach is going to continue to gain traction in the quarters ahead. You have all seen our January volume numbers. We feel good about the rebound in European Derivatives and particularly good about the strong year-on-year numbers from European cash.

And lastly, the IPO calendar in ’11, meaning deals already executed and what the pipeline looks like, reflects absolutely a continuation of the positive trends we saw at the end of last year. Continuing this momentum, we have in transfer some other markets. This Friday, we'll be privileged to welcome IMAX to the NYSE.

Given that we will be hosting many of you in just a few weeks on March 8 for Investor Day, when you will have the opportunity to visit our Mahwah data center, we will take only a handful of questions today.

But with that, I will open the line for questions. Stephen, back to you.

Stephen Davidson

Operator, we'll take questions now.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Chris Harris with Wells Fargo Securities.

Christopher Harris - Wells Fargo Securities, LLC

This is a question for Mike. Your compensation expense is very low, I think it was under 22% of revenue in the quarter. I guess I'm wondering, is that really a good run rate for you guys now going forward now that you've kind of right-sized your expense base? Or is there something special going on in the quarter we should be aware of?

Michael Geltzeiler

The comp expense was, in the fourth quarter, $11 million lower than the third quarter. It was a little lower than I would say the run rate. I mean, in the quarter, a couple of things happened. We definitely true up our annual compensation based on performance and goals. We did part of our cost-reduction program, we've been looking at benefit programs, and there was a foreign pension program that when the last executive left the company, we ended up closing. So it was legitimate cost save, but little larger expense benefit in the fourth quarter. And of course, it also reflects continued staff attrition.

Operator

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

Richard Repetto - Sandler O`Neill

I'll take my one shot, will be with Michael too, I guess, and it's on the -- you got CapEx going down by $100 million, but you also got other things that are farther off like the data centers, the clearing, NYPC. I'm just trying to get a feel for what the cash use is and how you see cash being apportioned here in 2011.

Michael Geltzeiler

Sure. I mean, I think our cash flow statement's pretty straightforward. There's not a lot of working capital in this business. In fact, one of the positives we get is as the IPO market picks up, we pick up cash from that, but it doesn't reflect immediately in the P&L. So the two key drivers to our cash flows in '11 versus '10, and we'll talk more about this in the Investor Day, is CapEx, which is declining. It's D&A, which is growing, so the EBITDA and the cash earnings are actually higher. And so I think in some -- and, of course, it's EBITDA and profit growth of the business. So I mean, I think we basically are feeling good about our balance sheet. Ending the year, we feel strong about our cash flow next year, and we believe we have excess cash beyond the $312 million dividend, which is -- that we paid today, and the question is what we do with that excess cash flow investing in the business and looking at alternatives.

Richard Repetto - Sandler O`Neill

But I guess, maybe more specifically, is there going to be any cash usage for NYPC clearing or the clearing that you're working towards in 2012?

Michael Geltzeiler

I mean, there are, as you move into clearing, there is definitely a little more cash on hand, regulatory capital one needs to maintain, which is factored into our plan. So it's really, I would think, more of a 2012 and even a 2013 issue on the European clearinghouses. And NYPC, the cash that we need to maintain, is all factored into the projections.

Operator

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

Howard Chen - Crédit Suisse AG

The Information and Technology segment margin expansion this quarter stood out to me. I was thinking that might come a bit later when the data centers were more fully online. What's driving that? And then given you mentioned the revenue ramp up from here, should we just assume further margin expansion from here or is it going to get a little bit lumpy?

Duncan Niederauer

I'll start by articulating, Howard, what the longer-term goal was, and then I'll let Larry fill in some of the blanks on that. So it's a multi-year goal that includes increasing the revenue base from what was $360 million a couple of years ago to $1 billion in the outyears and expanding that margin which when we put all these businesses together, that margin was around 13%, if memory serves, and we're striving for a 25% to 30% margin in that business, hopefully, which is a combination of some of the things we indicated on the call about the early success we're having, particularly in being involved in the Infrastructure business. But I think we did make a lot of progress in '10 towards those goals, so let me just talk a little bit about some of the other things that we'll truly see. So I think part of what contributed also was remember, we bought NYFIX and then we started to realize the cost saving synergies of that. So that improved the margins in itself. I think what we're seeing is this business maturing and getting to scale in certain segments in particular, like the Network segment, where we hope that we start to utilize the network even further as we grow the business. Remember, a lot of these contracts are lumpy, but the way we recognize them are spread out over time. So while we may sign a big deal with someone, and they have big headline numbers, a lot of them are spread over three, four years. So they don't actually look as lumpy in the P&L. So this is a trend that we, obviously, hope to continue. I think the data centers coming online helps us get some of those revenue streams. But more importantly, serves as sort of a catalyst for being able to sell these broader solution packages because you've got the new data centers, you've got the critical mass of markets, you've got more and more things going in there that are attractive to our clients.

Operator

Your next question comes from the line of Dan Fannon with Jefferies.

Daniel Fannon - Jefferies & Company, Inc.

A question on NYPC. Just want to get a sense of, I guess, the confidence level around the approval process and the timing of that. And then also, are you out marketing this to other customers? I think you talked about underway with the kind of go-live member base today. Is that something where you anticipate expanding that member base prior to approval? Or is there a marketing campaign that's set to kind of launch in conjunction with the go-live launch?

Duncan Niederauer

Great question, and I'll start by saying, we have a tremendous amount of confidence, given our conversations with the regulators, that the extensions have been taken. The comment periods are behind us. And I think when you see that the two primary regulators who have been involved in this, the CFTC and the SEC, converging around an approval date in late February so that they don't -- so one isn't getting ahead of the other. For example, the CFTC could have given us the DCO and the cross-margining agreement a week or 10 days ago. They specifically said to us, "We're giving you the DCO. We want to converge the cross-margining agreement with the SEC later in February," which makes total sense to me. This also comes -- remember, because this was a unique approach, this also involves the Federal Reserve as well. So while they wouldn't go through a comment period or anything like that, they were intimately involved in this process. And I will tell you, as an observer, I thought the three agencies did a very good job of cooperating and collaborating throughout the process. But because it was a new approach, it did take longer than obviously we all thought it was going to take. Now in fairness to them, that was compounded by Dodd-Frank as well because that's job number one, two and three for a lot of the key agencies. But we're supremely confident that by the end of February, we will have the records and approvals. Now shifting gears to the launch, the good news is that if you are connected to NYSE Liffe U.S., there's no more work for you to do in terms of trading the contracts on our platform because this is just -- think of this, Dan, as if we're adding a new product, right? So we're just putting some new products out there for people to trade. It's a new product launch, but if you've already got connectivity to NYSE Liffe U.S., by definition you get that. What we've had to do is get people to be clearing members of NYPC, and that's really accelerated in the last couple of months when it became more clear that we were going to get the approvals. Frankly, I don't blame the customers. Everybody's busy. Us going to them months ago and saying, "Hey, trust us. We're definitely going to launch this thing in Q1 of '11." I don't blame them for saying, "You know what, I'll focus on this when it's more clear that you're going to get up and running." So we've had a lot of success in the last six weeks as it's become more clear that we're going to get there. And I think another accelerator was the DCO approval. So we're very actively engaged with everybody on the membership side right now. So that shouldn't be an impediment to launch. And lastly, the technology that had to be built underneath for the fixed systems to talk to the NYSE Liffe U.S. systems, that's all in great shape. So that's been one benefit of the regulatory process taking a little longer that we've had plenty of time to test those systems.

Operator

And your next question comes from the line of Chris Brendler with Stifel, Nicolaus.

Christopher Brendler - Stifel, Nicolaus & Co., Inc.

Just maybe a little color on co-location, just sort of give me a little dimension on the ramp you're expecting between first and second quarter? And then, my understanding is that you'll be pretty well ramped up by then at that point for the rest of the year. But how do you grow that business in 2012?

Lawrence Leibowitz

This is Larry. First, obviously, we don't report co-lo in granularity as a broken out line item. But the business kind of follows the markets as they migrate into the new data centers. So we've got European derivatives and cash moved into Basildon. That's most of the way ramped up. In the U.S., we've got to move Arca into Mahwah. That will bring its co-lo revenues. But remember, we're receiving co-lo revenues in their existing space already, so I don't know how much materially will be added to that. I think what it really does is then serves as the launching point for all the other services that we sell alongside it. As we've said all along, with co-lo is important to what we do, but the reality is, it's not the be all and the end all, and it's really about having the critical mass to attract other services like market data dissemination or ticker plants or routing or managed services or all the other pieces that we sell along with solutions. I think you're going to start to see those deals start to ramp up. And in fact, we've already -- that is on that page that talks about deals. A lot of those deals really were contingent on us getting towards Mahwah.

Christopher Brendler - Stifel, Nicolaus & Co., Inc.

And a related follow-up, can you just comment perhaps on the recent SEC proposals for market-making obligations for high-frequency trading firms and how that impacts your thoughts on the co-lo business?

Lawrence Leibowitz

Well, first, a couple of things. One is, the New York Stock Exchange has market-making obligations for our DMMs and SLPs that are far in excess of any market-maker obligations that have been discussed in the market. So as far as the core New York market, there's certainly no impact. Remember...

Duncan Niederauer

In fact, some of the SLPs are what people would say are in the electronic markets.

Lawrence Leibowitz

Exactly. Electronic market makers. I think what you're going to see is that these SEC market-maker obligations, as far as we can tell so far, are really about firms that want to qualify for market makers to get some of those benefits. To be honest, from what we've seen, most of the firms that want those benefits, and those benefits include lower capital requirements, some slight differences in short sale and internalization capabilities. Most of the big guys are going to be able to qualify for that anyway. Most of the obligations that are being thrown around, we don't think are strong enough that they will be a material impact. In fact, we've argued for stronger obligations in general. So we don't think that this is going to be a material difference in the market.

Operator

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

Roger Freeman - Barclays Capital

Just to I guess come back to the data centers. I guess Mahwah in particular and thinking about the revenue ramp. How much of the rack space that’s been taken down actually has client servers installed and actually actively trading at this point, and I'm asking just to get sort of the fixed versus variable revenue component there right now versus maybe what it could be if it was sort of fully utilized.

Lawrence Leibowitz

So Mahwah data center, where we built out effectively three out of the five halls, and when we initially tested out, we get devoted about two of those halls to our own systems and one for customers. We sold out effectively over 90% of that spare capacity, and then what we've done is we’ve then gone back and identified some of the space. And the customer could get an additional yield of 15%-ish right off the bat without having to build out a further hall. So building out a further hall is somewhere in the $35 million to $40 million CapEx. We don't think that we're going to need to do that within 2011, and that's not in the budget. So we think that we've got enough room for a bit of expansion here as we go forward. And in general, the customers are relatively happy with the space they have. So we're thinking we're getting towards steady state. Then the utilization of that space is going to grow with the core NYX Technologies business itself. Mike, do you want to add anything to that?

Michael Geltzeiler

What's currently being utilized in that one pod is non Arca space. It's about 90% installed, but what's in there today would be the applications that are currently migrated to Mahwah, which is principally options and the NYSE Classic.

Operator

And your next question comes from the line of Rob Rutschow with CLSA.

Rob Rutschow - Credit Agricole Securities (USA) Inc.

I was wondering, are you planning to list your European Derivatives in NYPC once you launch it. And can you give us any sort of color around the decision process there given that the U.S. has some more favorable bankruptcy laws and so forth?

Duncan Niederauer

So if you mean the interest rate products, Rob, I'll take a leap of faith that that's what you're talking about. I do think that if the model we're deploying here in the U.S. works and it proves to be as useful and as capitally efficient and as innovative to the customer base as we hope it could be, then I think there are certainly opportunities to think about extending that capital efficiency across border. Now remember, if you've been paying attention to this OTC discussion as a lot of us have, a lot of what the focus on the OTC clearing discussion has been central to is people are looking for regional, if not national, solutions for some of this. So we want to walk before we run because it may be that even if we think it's a good idea and even if we think the customers think it's a good idea, if we start to trade products that are from different jurisdictions on different exchanges, we may run into unanticipated resistance that we didn't see from other places. But in theory, nothing would stop us from listing those interest rate products that are on the short end of the curve on NYSE Liffe U.S. I think we will not do that until NYSE Liffe U.S. and NYPC gets a traction. Then and only then would we even consider it. And then after that, it's going to be more than just asking the customers about it. But yes, it's definitely on the drawing board.

Operator

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

Michael Vinciquerra - BMO Capital Markets U.S.

Just wanted to ask on the technology side, a couple of things you've mentioned here as new opportunities, you talk about aggregating liquidity venues across asset classes. And then second of all, you mentioned finding some partners for SFTI on a global basis. Can you just touch on those opportunities and how long those may take to ramp?

Lawrence Leibowitz

Sure. I mean, I think doing the second one first, as we move into other areas, whether it's Asia, Brazil or other places like that, it doesn't necessarily make sense for us to build that out all by ourselves. So for example, in Brazil, we already have a partner for extending SFTI. We have a partnership going in both directions. And so we look to partnerships to help extend that whether in Canada or in Asia or other places like that. And so part of that is also on the common terms of getting order flows going in both directions. You're doing it based on increased activity in that region over time, so to me, that's a longer-term payoff, and therefore, we certainly don't want to spend a lot of money upfront to get there, but we want to create some partnerships. In terms of aggregating liquidity venues, first, I think some of that is going to be market. Traditional or not, we've opened our doors in Basildon and Mahwah for some of whom you might have thought of as our competitors to be located with us because we think it's good for our customers in terms of decreasing their cost of connectivity to the market. It increases their market opportunities. So those are all good things. The Goldman MTF is a perfect example in Europe of the type of thing we're interested in doing because that locates a big customers, dark market or MTF market with us, and we think that, that will add to the critical mass of that data center and make other solutions more attractive to all of our clients across the range. So it's something -- and then there'll be some non-traditional asset classes, like FX, that we think might be very interesting to locate in our data centers and that where there might be cross market arbitrage opportunities as long as we do it within the right regulatory framework.

Operator

And your final question comes from the line of Ken Worthington with JPMorgan.

Kenneth Worthington - JP Morgan Chase & Co

Duncan, in your prepared remarks, you mentioned that regulatory changes were positive for the market participants. Based on what you're hearing from regulators now, where do you think regulatory changes will be most positive for New York? Is it U.S. or Europe, cash or derivatives, execution or clearing? And then, is there any positive impact on the Technology business from the regulatory changes?

Duncan Niederauer

Good question, Ken. That's a good one to end on. So I'll give some thoughts, and I'm sure Larry has some opinions as well. As Ken's question articulates, there's a lot of different regulatory discussions going on. So if you think about where a lot of the focus has been away from the financial crisis, both the U.S. and Europe are taking a close look at their cash equities markets, their respective cash equities market structures. Obviously, the U.S. regime has been in place longer than the European regime. And I think it's fair to say we get the sense in talking to regulators on both sides of the Atlantic that the Europeans seem more prepared to undo some of the things that were done that have led to increased opacity, increased fragmentation, et cetera, far from implemented, far from executed. But I think we believe that there is a greater likelihood of more substantive market structure changes in the cash markets, in the equities markets in Europe than there probably is in the United States. I think the derivatives discussion has been sort of put off in our view. This notion of fungibility, intraoperability, et cetera, I think that's going to be postponed until we understand where all the Dodd-Frank will filings land, what impact that has on the more unregulated parts of the derivatives market, whether it does indeed enhance our ability to manage systemic risk throughout the various markets or not. So we get the sense that, that is not front and center for the regulators right now. If you look at most of where Dodd-Frank is focused to get to the part of Ken's question focused on OTC are listed, I think it's going to have a lot more impact on the clearing side than really on the execution side. Many of you on the call have heard me say many times that if you think about these less easily standardized derivative products, focusing on clearing and focusing on transparent reporting makes a tremendous amount of sense to me, pushing these all to be exchange-traded makes less sense to me. So I'm still kind of in the camp that says I need to be convinced. So I think most of the Dodd-Frank filings and similar filings in Europe are going to be focused on clearing of the standardized products, potentially on reporting of those products, but I'm yet to be convinced that they're going to be that focused on trading. Now net-net, most of those things I just talked about either leave us in the status quo position or present opportunities for us to potentially grow or expand our business. That doesn't mean we'll be able to achieve all of those. For example, we're still very much building out our clearing assets. But I think net-net, those are pretty positive for us. Leibo, you want to add anything to that or did I...

Lawrence Leibowitz

I mean, the only other thing I would say is that yesterday the TRF in Tape C was 37%. And so that number just keeps going up more and more off exchange volume. Obviously, from a self-interested standpoint, we'd love to see more happen on an exchange. But from a market quality standpoint, I think we're even more concerned with the toxicity of flow that ends up on exchanges as a result of the cream getting skimmed off in the off-exchange markets. That makes it harder to incent a provision of liquidity in the public markets. It disadvantages retail limit orders that are resting, and so we think there will be potential for some increased tension there. Now make no mistake about it, we are not against ARPUs. We are not against internalization. What we're really talking about is a better balance between them. Because at a certain point, the health of the public markets suffer, and I think we're actually seeing that.

Duncan Niederauer

So I think we're going to call that a wrap, guys, right on schedule at nine. As always, Mike and Stephen and team will be available to anybody who wants to follow up one-on-one. We thank you for your attention and your patience and look forward to seeing everybody at Investor Day on March 8. Thanks a lot. Bye.

Operator

Thank you for joining today's conference. That concludes the presentation. You may now disconnect and have a wonderful day.

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