NYSE Euronext (NYSE:NYX)
Q4 2011 Earnings Call
February 10, 2012 8:00 am ET
Stephen Davidson - Vice President of Investor Relations
Duncan L. Niederauer - Chief Executive Officer and Director
Michael Geltzeiler - Chief Financial Officer and Group Executive Vice President
Lawrence Leibowitz - Chief Operating Officer
Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division
Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division
Rob Rutschow - Credit Agricole Securities (NYSE:USA) Inc., Research Division
Roger A. Freeman - Barclays Capital, Research Division
Alex Kramm - UBS Investment Bank, Research Division
Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division
Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Full Year 2011 NYSE Euronext Earnings Conference Call. My name is Dianna, and I will be your operator for today. [Operator Instructions] And as a reminder, today's conference is being recorded for replay purposes. I would now like to turn the call over to Stephen Davidson, Head of Investor Relations at NYSE Euronext. Please go ahead, sir.
Thank you, Dianna. Good morning, and welcome to the NYSE Euronext Fourth Quarter and Full Year 2011 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 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.
Duncan Niederauer, Chief Executive Officer, will address the merger, review the highlights and accomplishments for 2011, walk you through the drivers of our equity story for 2012 and beyond and close with comments on the macro environment. Michael Geltzeiler, Chief Financial Officer, will then review the financial results for the quarter and provide you with preliminary guidance for 2012. We will then open the line for your questions.
We are incorporating slides for the call today, which are available for viewing on our website, and Duncan and Mike will refer to the slides during their remarks.
With that, let me turn the call over to Duncan.
Duncan L. Niederauer
All right. Thanks, Stephen. Good morning, everybody, and thanks, as always, for joining us. Before I get into the details on Slide 3, let me just tell you what we're going to try to accomplish this morning. I thought I'd start by saying a few words about the merger prohibition announcement from last week. We'll move quickly into what we've accomplished in 2011, and I think the most important focus this morning will be to outline our plan for creating value for shareholders in the quarters to come. So let me just dispense with the merger first, if I may.
It is our view and it was our view, and I think it continues to be our view, that the proposed merger was a great opportunity to accelerate our strategy. It was a great opportunity to create long-term value for shareholders, and we also believed it would provide substantial benefits with regard to capital efficiencies for the capital markets community.
However, given the narrow market definition that the Commission chose to use when evaluating the transaction, it was my view that the industrial logic of the transaction would've been significantly compromised if we agreed to meet the Commission's demand for remedies, and we were not going to violate the trust that the shareholders placed on us when they voted to support the deal this past summer. So the deal is done. It's behind us, and I want to be very, very clear about that. I'd like to close that remark by thanking the shareholders, the customers, and most importantly, our employees for their patience and support during this process. I'm still glad we tried. But unfortunately, the outcome was not what we'd hoped for.
So now let's move on to 2011. I'm extremely pleased to share our full year 2011 results with you, which, as you can see, were characterized by a 6% increase in revenue, a 21% increase in operating income and a 19% increase in both net income and earnings per share. The results were driven by strong trading volumes, continued cost discipline and more meaningful contributions from new initiatives. We beat our cost guidance for the year as cost declined 4% on a constant dollar, constant portfolio basis, and we were well below $200 million in CapEx. While we fell short of our target of 15% revenue growth in our NYSE Technologies business, we did achieve double-digit revenue growth under challenging market conditions and the uncertainty for clients that was created by the proposed merger.
On the business front, we made significant progress in growing our NYSE Liffe U.S. business with the launch of interest rate derivatives and the migration of the MSCI Emerging Markets and EAFE stock index futures to our exchange. Open interest in these products has nearly doubled since the migration and open interest across the entire exchange surpassed the $1 million contracts mark in December.
Our approach to semi-mutualization has also paid off in our NYSE Amex Options business, where we worked with our partners to continue to grow the business in 2011. Together with NYSE Arca Options, we grew our market share to a record 28%, which was #1 in U.S. equity options.
We were also the global leader in IPOs in 2011 with 3x the total proceeds rates by our nearest U.S. competitor, who was ranked #8 globally. We continue to make progress in 2012 with big wins in the text sector, as well as continued momentum on the transfer side. Since the beginning of 2010, we have had nearly 3x the number of companies transferred to the NYSE as opposed to away from the NYSE.
The strategy in the Technologies business continued to make strong inroad into Asia in particular with our acquisition of Metabit and the deepening of our relationship with the Tokyo Stock Exchange.
Overall, as you look at Slide 3, if you look at what we accomplished in 2011 and then remember that we also moved a transformational cross-border exchange merger further than any other, the ability to have done both is a testament to the team here and our relentless focus on execution that has become a hallmark of our company. Outside of the post-trade arena, where we slowed the building of our own clearinghouse, we really did not miss a beat last year. Now with 2011 behind us, the key is what are the next steps in the evolution of our company? The next several slides that I'll walk through will address the measures we are going to take to grow the company, guided by our community strategy that has accelerated our growth the last couple of years. A more detailed presentation of these efforts will come on April 2 at our Investor Day.
Please turn to Slide 4. On Slide 4, we highlight in the firm our community strategy and give you the 3 pillars that will drive multiyear earnings growth for NYSE Euronext, assuming only modest improvements in the underlying operating environment. If you look back to 2009 and '10, those were the years when we were finishing our global technology harmonization and building out our data centers as part of our capital markets community strategy. All the work that we accomplished during that time set the table for 2011, where we saw a step-up in earnings power and delivery. Despite the challenging near-term outlook for trading volumes, we remain optimistic about the future. We have within our control several levers that we can pull to drive earnings higher, again with just modest improvements in the operating environment.
These levers are the 3 pillars of our equity story we are laying out for you today, and again, greater detail will be provided at the Investor Day in a few weeks. If you look at the right side of the slide, the first pillar is focused on targeted growth opportunities. First, we will be rolling out a series of organically grown new products and services while continuing to focus on market structure innovation in our core markets. Our portfolio of post-trade services will be a key priority in 2012. We have a solid clearing footprint in both Europe and the U.S., which we will now build on to improve our existing businesses and to create new service opportunities. Next, we are expecting NYSE Technologies to continue its double-digit growth trajectory with enhanced managed service capabilities and expanded connectivity and data offerings. And lastly, in the targeted growth opportunity area, we are looking to NYSE Liffe U.S. to accelerate its growth with the possible addition of new partners and an expanded product portfolio.
The second pillar is cost efficiency. Looking back to our merger with Euronext, since that time, we have pulled out over $600 million from the cost base. This has involved hard decisions about our organizational construct, as well as changing the way we do business. This rigor will continue. Next, we will continue to examine our investment portfolio and exit those that are loss-making and/or not expected to achieve the anticipated level of revenue generation as we prioritize our set of growth initiatives. We are also examining our infrastructure to be sure that we are optimally structured for our current and future operational needs.
The last pillar of our story is strategic capital deployment. Over the past several years, we have returned approximately $2.3 billion to shareholders through dividends and share repurchases. We are pledging to continue our shareholder focus with the recently announced $550 million repurchase program. We have several stakes in other companies that, in our opinion, have limited strategic benefit or have not lived up to our expectations. We will continue to examine opportunities to harvest these investments and reallocate the capital to other more attractive opportunities. Lastly, over the past year, we have seen some interesting opportunities on the M&A front, but we emphasized our hope for merger. We will now begin to look at potential complementary strategic M&A opportunities going forward.
In the next few slides, I will focus on the first pillar of our growth story, and Mike will provide some further granularity on the other 2 pillars when he gets into his remarks.
Please turn to Slide 5. Slide 5 shows our strengths and opportunities and illustrate the compelling targeted revenue initiatives we have underway. You should recognize this slide when -- which we first introduced at our shareholder meeting last April. While the DB merger would have helped us fill this chart out, we believe that we have several compelling opportunities on our own in many of these areas.
On the right side of the chart, we show a sample of high-potential initiatives that both enhance our areas of strength and move us beyond our core business. In addition to new product opportunities and derivatives and continued market structure innovation in our core markets, shown as number 6 on this chart, we have some key initiatives in areas of strength that include number 3. We will continue to build on the success we have achieved by partnering with our clients on NYSE Amex and NYSE Liffe U.S. Number 4, we are enhancing our connectivity for NYSE Technologies through the expansion of our network of liquidity hubs around the globe. Number 5, we are looking to make investments in issuer services similar to our acquisition of Corporate Board Member and our minority stake in the receivables exchange, which we believe further enhance our listings brand. And lastly, number 7, we are focused on enhancing our managed services capabilities for NYSE Technologies.
There are also some initiatives that we believe will extend our capabilities beyond our core business. Number one, which you all know will be a key focus for us in 2012, will be completing the development of a post-trade solution for our European derivatives and cash equities businesses. And number two, coming back to the U.S., we will be launching new products in NYSE Liffe U.S. and NYPC, the next one of which, which was just announced, will be a future base on DTC's GCF Repo Index. We hope this will continue to round out NYSE Liffe U.S. and NYPC's capitally efficient value proposition.
My next several slides will go into more detail on some of these opportunities. Please turn to Slide 6. Slide 6 focuses on our post-trade portfolio, which, as I just said, will be a critical area for us in 2012. As I said earlier, we have a strong clearing footprint in both Europe and the U.S., which we will now further develop to improve our existing business and to create new service opportunities. Our immediate focus in 2012 is in Europe, where we will, firstly, enhance our current derivatives post-trade services with attractive new solutions, completing the build-out of NYSE Liffe Clear, which I'll focus on in a minute. Secondly, part of the effort will be to develop new OTC clearing capabilities in collaboration with our users. And thirdly, we will review our European cash clearing options to make sure we select arrangements for the future, which offer stability, capital efficiency and innovation for our customers.
The second area of focus, which I just mentioned, will be NYSE Liffe Clearing and our overall derivatives platform. We made significant investments in NYSE Liffe Clearing through 2011, rolling out a new clearing processing engine, the Universal Clearing Platform, which delivered significant performance improvements to our customers. This technology investment program will continue through 2012 as we roll out new technology interfaces to improve customer service and latency.
While some of our standalone post-trade plans were put on hold in 2011, we have already re-launched our project to convert NYSE Liffe Clearing into a full-service CCP. These plans involve expanding the service to clear all of our European derivatives products and to deliver many of the operational and capital efficiencies for customers, which we envisioned in the merger. We will also develop the OTC clearing capabilities, which I referenced earlier, and we will complete the removing of the reliance on third-party providers by introducing new in-house solutions for treasury management services.
We look forward to engaging with users to develop a full-service U.K.-based clearinghouse, which will offer operating and capital efficiencies, provide innovative solutions across listed and OTC markets and provide an unrivaled level of customer service. With legislation beginning to crystallize on the new mandates which will be imposed for central clearing of derivatives, now is the right time in our opinion to be working with users to develop competitive clearing solutions that will meet their needs. The current derivatives clearing arrangements with LCH.Clearnet expire in the middle of next year.
On the European cash clearing side, we're accelerating the review of the strategic options available for clearing our European cash markets. These markets are cleared by LCH.Clearnet in Paris with the current arrangements due to expire at the end of next year. No decisions have been taken on cash clearing, and all options will now be reviewed with a view to promptly identify the most efficient, stable, secure and commercially appropriate solution for the future for our clients and for us.
And lastly on this slide, a minute on New York Portfolio Clearing. NYPC was created last year to deliver unique capital efficiencies to the market by evaluating and margining a clearing member's risk on a portfolio basis across related cash and derivative positions. There are a number of expansion opportunities under active consideration for NYPC, as I noted earlier. More to come in this important area on April 2.
Please turn to Slide 7. Slide 7 is an update on the NYSE Technologies business, which grew revenues by more than 10% year-over-year and will be a significant contributor to our future growth. We remain committed to the $1 billion revenue target in 2015 and committed as well to the margin of 25% to 30% in that business. Our strategic vision for this business is to become the facilitator and enabler of the capital markets community, and the roadmap to achieve this vision is focused on 4 key tenets that will guide us as we innovate. We executed against each tenet in 2011 by introducing new products and services in each arena. On the right-hand side of the table, we show a handful on the significant deals that we signed last year. And these wins, in our mind, validate the strategy we are pursuing. Let me briefly walk you through the 4 key tenets.
First, building out the network. We recently opened new liquidity centers in Chicago, Toronto and Tokyo to give customers the ability to access new markets with unparalleled speed and reliability. In 2011, we also expanded our SFTI network into Mexico and the U.K., increasing direct connectivity to new markets and new participants. We acquired Metabit, which provides industry-leading access to financial markets across Asia, accelerating our efforts in that region.
Secondly, we are extending our data services footprint. We rolled out the SuperFeed product in Europe, connecting 30 markets to the access centers in London and Frankfurt. SuperFeed provides immediate access to our exchanges data but also to data from a range of key global markets across the SFTI network.
Third, it's about building out the service platform. Two major initiatives were successfully launched in 2011 to reinforce our leading position as a service platform provider. We launched the Capital Markets Community Platform, the most secure, reliable and scalable financial services cloud computing environment in the industry. And we created a vendor neutral platform driven by the financial services technology community by open sourcing our MAMA programming interface.
Lastly, we continue to be focused on attracting other market venues. In 2011, we successfully deployed the first fully hosted MTF and ATS solutions, confirming this is an important product for future growth and consistent with where we think our model can go. Add this to our successful partnerships in Tokyo and Warsaw, and you can see why we believe that NYSE Technologies is poised for future double-digit revenue growth.
Please turn to Slide 8. On Slide 8 we show how partnering with our clients has helped grow our Derivatives business. First, NYC Liffe U.S. 2011 was a key year for NYSE Liffe U.S. with our launch of its interest rate futures complex and the much-anticipated launch of NYPC, which was recently named the most innovative clearinghouse in North America during 2011. The platform gained momentum from the launch of interest rate futures, as well as the successful migration of the MSCI Liffe [ph] index futures. Since this migration in June of 2011, as I mentioned earlier, open interest in ADV in the MSCI products has nearly doubled, led by the emerging markets Index products.
The platform's success in 2011 culminated with our crossing the $1 million contracts of open interest milestone in December. This was led by Eurodollar futures where our open interest now represents 10% market share. 2012 will be a critical year for this venture, and we are working on several new initiatives, including launching new products such as options on futures, connecting new clearing members and adding new partners. These efforts should accelerate our progress.
The platform plans continue its innovation theme during 2012. As noted by our January 4 press release announcing that NYSE Liffe U.S. has obtained the exclusive license to list futures based on DTCC's GCF Repo Index futures. Market feedback since that announcement has been overwhelmingly positive.
Finally, Risk Magazine recently named NYSE Liffe U.S. Exchange of the Year, so we're excited about the prospects for this venture in 2012 and beyond.
Next, let me turn to NYSE Amex Options. We have been very pleased with the growth of the NYSE Amex U.S. Equity Options business and the support of our partners. We have seen Amex market share growth from under 6% in the fourth quarter of 2008 to north of 15% in the fourth quarter of 2011. This growth has been possible in part due to our partners who now hold 47.5% of the venture. Several key achievements have been instrumental to success in this venture.
While we oppose the Qualified Contingent Cross order type when ISE first proposed it, given the SEC approval and our acknowledgment that we need to be competitive in the market, we launched a similar product, and the early returns have been very positive.
Another key addition this year was the complex order auction functionality, which allows customers to see graphic price improvement electronically. Lastly, Amex complex order book volume was up over 350% year-on-year. While we're pleased with our growth in this new space, further expansion remains a significant opportunity for us in 2012.
Lastly for me, before I turn it over to Mike, please turn to Slide 9. On Slide 9, we attempt to address a number of the elements in the macro environment that have created uncertainty. Here, we depict the various clouds on the horizon, many of which we believe may also come with a silver lining. With a focus on those elements of our business model that we can control, combined with solid execution of our strategy, we are optimistic that these clouds will not materially impact our business in the near term and may actually afford us with some new unexpected opportunities.
First, in terms of derivatives reform, we have always supported regulatory efforts that bring transparency and better risk management to the markets. We support these efforts because it makes sense for our markets and will significantly reduce systemic risk. Both EMEA and Europe and Dodd-Frank in the U.S. encourage derivatives to move toward a cleared environment, and we have been actively involved in the dialogue in both regions. But the overhang of these reforms is causing uncertainty, changes in our clients' business models and underinvestment. However, as banks look to reduce costs, we believe we are well positioned to serve as a major provider of outsourced trading infrastructure to the sell side as they reinvent their own business models. And with capital becoming an increasingly scarce and valuable resource, capitally efficient clearing houses like NYPC are poised to offer a lot of value to the end users.
Next, we all know we are operating in a lower-volatility, lower-growth environment driven by the lingering effects of the financial crisis, which is keeping rates at or near 0. This type of environment dampens volumes and results in even greater internalization in the U.S. cash markets, as we witnessed in early 2012. On the flip side though, more stable markets means companies are better able to raise capital in the public markets, which is good for our listings business as the pipeline loosens up. It also highlights the benefit of our diversified revenue model. If these lower volatility conditions persist, 2012 promises to be a very good year for capital issuance.
Uncertainty continues to persist around the euro as well, and that is naturally taking a toll an investment and growth in Europe. However, the silver lining here is that spikes in volatility drive volume, and the evolving landscape may also present new product opportunities for us in cash and particularly in derivatives, tough for capital formation but good for transaction volumes.
Lastly, the financial transaction tax has received its fair share of headlines in recent months. We view the likelihood of a transaction tax as initially envisioned at the Eurozone or EU level as increasingly unlikely. Currently, there are individual tax proposals being floated in France and Germany, and we may even see unilateral action in other countries, notably Italy, Spain, Portugal and Belgium. In France, there is a reasonably strong likelihood that some form of stamp duty tax will pass. However, we believe the impact will be muted by the fact that it would be limited in scope and would exempt liquidity providers and market makers. In short, this is a politically charged issue, and we expect it to stay in the headlines in the near term. But in the final analysis, we place a low probability on the implementation of an FTT in Europe that would severely impact the business.
With that, let me turn the call over to Mike for a review of the financial results. Thanks.
Thanks, Duncan, and good morning. Slide 10 provides comparative GAAP results for the fourth quarter and full year 2011. This quarter, there are several reconciling items between our GAAP EPS of $0.43 a share and our non-GAAP EPS of $0.50 a share. As previously communicated, fourth quarter 2011 results include a $25 million pretax charge related to our settlement with French tax authorities on the BlueNext VAT matter. In terms of P&L geography, the gross $42 million was recorded on the SG&A line with an offsetting $17 million recorded on the noncontrolling interest line, reflecting the payment made by our 40% joint venture partner CDC.
In the quarter, we also reported a $46 million charge for merger expenses and exit costs, which included $38 million related to the merger. For 2011, a total of $85 million was spent on the merger. We are in the process of finalizing residual costs related to the merger, and we'll communicate this on our first quarter call.
Lastly, we benefited this quarter from being able to take a tax deduction for merger-related costs now that the merger has been prohibited.
Our review our financial results in this call forward will exclude the impact of merger expenses and exit costs, BlueNext tax settlement and the discrete tax item.
Slide 11 provides a more detailed look at our financial results for the quarter and full year. Versus Q4 prior year, revenues were up and expenses lower, driving a 13% increase in operating income and a 9% increase in EPS. EPS of $0.50 a share is below the unseasonably strong $0.71 recorded in the third quarter of 2011. For the full year 2011, EPS was $2.48, up 19% versus 2010.
The operating environment began to change in Q4 as volatility lessened and trading volumes declined an average of 17% across all our trading venues from Q3. This trend continued into January of this year. Fortunately, our diversified portfolio enables us to weather these periods better than was the case a few years ago. For 2011, 48% of our revenues was attributed to trading volumes. In the quarter, we grew nontrading-related revenues both versus Q3 and prior year, as well as from continued cost discipline. Q4 operating margins increased to 34%, and full year margins climbed 5 percentage points to 38%. This is driven by incremental margins that were greater than 100% in the quarter and for the full year.
NYSE Amex Options continued to perform well in the quarter with market share of 15% for Q4, our highest level of quarterly market share. For the quarter, the pretax profit attributable to the noncontrolling interest on Amex Options was $9 million based on the 47.5% stake in the business held by our partners. For the full year, higher technology services revenue, stronger trading volumes in European cash and U.S. equity options, combined with strong increases in U.S. average net revenue capture and a 1% decline in reported expenses drove double-digit increases in operating income and earnings. We generated $1.3 billion in adjusted EBITDA from the full year 2011, the highest level of EBITDA generation since 2008.
Diluted share count was down slightly due to $100 million in share repurchases in the fourth quarter.
Slide 12 and 13 detail the financial performance for our Derivatives segment. Derivatives accounted for 32% of our consolidated net revenues and 42% of our operating income in 2011. Net revenues decreased by 1% in the quarter. It rose 4% for the full year. Global Derivative Volumes increased 7% year-over-year, driven primarily by a 15% increase in U.S. equity options, which offset a 3% decline in European derivatives. Revenue capture for the quarter was slightly favorable for NYSE Liffe versus both Q3 and prior year quarter due principally to product mix and volumes, whereas capture for U.S. options was lower.
As a reminder, beginning December 1, we modified pricing for the trading of individual equity options and index futures and options on NYSE Liffe Amsterdam and Belgium. These ADVs represent approximately 10% of total NYSE Liffe volumes in 2011. We expect this pricing change to decrease NYSE Liffe overall capture by an annualized 3% to 4%.
As Duncan indicated, Global Derivatives continues to be a major area of focus for future investment and growth. Our Liffe U.S. and NYPC businesses were still very much in investment phase for 2011, both reporting sizable losses. In 2012, we are planning incremental investments in building out our European clearing capabilities and the new product and service offerings.
Similarly, Slides 14 and 15 show the financial performance for our Cash Trading and Listings segment. Cash Trading and Listings account for 50% of our consolidated net revenues and 47% of our operating income in 2011. Cash Trading and Listings net revenues was $315 million in the fourth quarter 2011, up 2% versus prior year but down 11% compared to the third quarter of 2011. European cash ADV of $1.6 million transactions increased 13% from the fourth quarter 2010 levels but decreased 17% from Q3 levels. In U.S. cash equities volumes increased 5% to 2.1 billion shares last year and decreased 18% from strong third quarter levels.
Market share was down slightly in Q4 for U.S. cash and was 65% in our 4 European markets compared to 72% in the prior year. That said, European share was stable quarter-on-quarter. Listings revenue increased $5 million year-over-year and was up $24 million for the full year 2011. IPO slowed in the fourth quarter. However, the pipeline is strong. Revenue capture for U.S. cash increased to $0.039 per 100 shares handled for Q4, well above the $0.033 recorded in the fourth quarter of 2010. Since the second quarter of 2010, we have linked tiers to overall U.S. consolidated volumes, we moved the inversion at the highest tier on Arca and benefited from sponsored access rule changes.
Revenue capture for European cash decreased to $0.58 from $0.71 in the fourth quarter of 2010 and $0.64 in the third quarter of 2011. The decline in capture was driven primarily by a reduction in fees at auction and lower trade size, which began in August and continued through December. Pricing in basis points is up slightly versus Q3.
Slide 16 details the financial performance for our Information Services and Technology Solutions segment. This segment accounted for 20% of our net revenues and 13% of our operating income in the fourth quarter. Information Services and Technology Solutions revenue was $127 million in the fourth quarter, an increase of $13 million or 11% from Q4 prior year. The increase was primarily driven by an increase in SFTI and co-location revenue and growth from managed service sales to TSE, Warsaw and Sigma X. Revenues for this segment have grown sequentially every quarter this year. For the year, our Technology segment grew revenues 10% and expanded margins from 20% to 26%.
Slide 17 provides a harmonized view of fixed operating expenses. Despite the intense focus on the merger, we made excellent progress this year on reducing our operating expenses. Q4 expenses were favorable to our prior guidance attributed to high cost management, a stronger U.S. dollar and a onetime savings realized from a real estate transaction in Europe. Fourth quarter operating expenses were down $9 million versus last year on a reported basis. 38% of our expenses in Q4 were denominated in either euros, 18%, or pounds, 20%. After adjusting for FX and the impact of transactions such as NYSE Blue JV and the acquisition of Corporate Board Member and Metabit, fixed operating costs were down $16 million or 4% from the fourth quarter of 2010.
The end of 2011 was reported fixed cost $12 million below 2010. However, excluding the impact of foreign exchange and changes to our portfolio, our expenses were $70 million or 4% below prior year levels. This puts us well below the commitment we made to you in early 2010 that our expenses will be less than $1,650 million on a constant dollar, constant portfolio basis in 2011.
Slide 18 reconciles our cost evolution since 2007 merger with Euronext. Over this period, we saved over $650 million on a constant portfolio basis. About 2/3 of the savings was reinvested through business acquisitions or new business start-ups. In 2012 and 2013, cost efficiency will remain a priority. We see further opportunities to leverage resources efficiently for the benefit of the group with the goal of achieving a community premium for the company. As Duncan mentioned, there are a number of target areas where we'll be seeking greater efficiencies. We'll provide greater transparency on this at our Investor Day.
Slide 19 details our cash and debt position as of December 31, 2011. The company ended the year in a strong balance sheet position. A combination of EBITDA growing 15% and debt declining $300 million reduced our leverage ratio to 1.6x, down from 2.2x at the end of 2010. This is the lowest level of leverage since NYSE and Euronext merged. Capital expenditures were $54 million in the quarter compared to $61 million in the prior year quarter. For the year, capital expenditures were $170 million, well below our full year guidance of less than $200 million in capital spending.
We executed $100 million in stock repurchases during the fourth quarter as part of our $1 billion share outstanding. We're repurchasing 3.7 million shares at an average price of $29.96. A total of $550 million remains on the existing share buyback authorization, and these repurchases will be funded out of cash on hand and cash from operating activities through 2012.
Repurchases at current stock price levels are highly accretive. We see our strong balance sheet and free cash flow generation as a major enabler for future earnings growth. With the merger now prohibited, we are in the process of building a multiyear plan to grow earnings and strategically reposition the company. We will dive deeper into this plan at our Investor Day on April 2.
On Slide 20, we are providing some preliminary guidance for 2012. First, let me discuss revenue. Duncan discussed our growth priorities earlier in the presentation. We are targeting another year of double-digit growth for NYSE Technologies, and we expect margins to improve from the 26% level achieved in 2011. Over the past 2 years, we have invested heavily in our U.S. futures business, Liffe U.S. We expect the financials in this venture to improve in 2012, and by 2013, to turn profitable.
Now let me turn to costs. On a constant dollar basis, exclusive of new business initiative and incremental M&A, we are guiding that fixed expenses for 2012 will be below the 2011 cost of $166 million. This includes absorbing incremental variable costs associated with higher technology revenues. As Duncan mentioned earlier, one of our key 2012 priorities will be the build-out of our post-trade capabilities in Europe. We will provide more guidance on the costs and benefits of this initiative once we finalize our plans. The incremental expenses and capital spending is expected to have a favorable rate of return once we can report the clearing revenues and rationalize cost for LCH to handle risk management and treasury functions for Liffe clearing.
Turning to capital. We expect CapEx in 2012 to be above last year's $170 million but still below our maintenance level of $200 million due in part to incremental capital spending to build on our clearing capabilities. Our $550 million buyback will become effective after today's earnings. We expect to complete the buyback in 2012. We are confirming our long-term financial policy of targeting debt levels between 2x and 2.25x EBITDA.
Lastly on taxes, we anticipate our non-GAAP effective tax rate to be approximately 26% for 2012.
I'll now turn the call back to Duncan for some concluding remarks before we open the line for questions.
Duncan L. Niederauer
All right. Thanks, Mike. So just to summarize, the results for the quarter and full year 2011 were solid driven by strong volumes, continued cost discipline and increasing contributions from our non-trading businesses as a result of our diversification efforts over the past few years. We're pleased with the progress we are making on our strategy to create a global capital markets community that will empower our clients to innovate and collaborate.
And as we move to through 2012, we are not sitting still waiting for the operating environment to improve. We are focusing on those levers within our control to execute against our community strategy and to expand our ability to generate underlying earnings per share growth. As we've said, this will be accomplished through a mix of targeted revenue-generating initiatives, accelerated cost efficiency efforts and strategic capital deployment. As we talked about, we've already executed it recently, $100 million of stock repurchases at a price just below $27, and our announced $550 million additional share repurchase program will begin immediately.
So with that, we're happy to open the line for questions. We'll have time to take a few questions. And then as always, we'll make ourselves available to the analyst community throughout the day. So thank you.
[Operator Instructions] And the first question will come from the line of Rich Repetto, Sandler O'Neill.
Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division
And I guess my one question, I'd focus sort of on the capital return, Duncan and Michael. If you look at the $550 million buyback and you hint that the -- your target leverage, if you just took 25% more up on the 1.6 EBITDA it would be another $500 million, so I guess the question is, that's 14% of the market cap. How do you evaluate the timing? I guess you laid out the buyback, but the timing of increasing leverage. And how do you evaluate M&A versus what peer exchange special dividend or increase in the buyback?
Duncan L. Niederauer
So Mike, why don't you start with sort of the timing of the buyback, and let's just dispense with that first. And then I'll try to address some of the -- what the other opportunities might be in terms of other capital deployment possibilities.
Sure. I mean, as I mentioned on the call, we are -- we do expect to complete the buyback in 2012. The $550 million is 8% of our market cap. And yes, we agree with you that with our target leverage ratio, your math is pretty good, that there was about $1 billion of capacity. And as I mentioned, we would be buying back those shares with the cash that we generate this year beyond the dividend that we pay out.
Duncan L. Niederauer
Right. And I think, Rich, to add that, obviously, as you point out, we're also in a position not only to do the buyback and maintain what we think is a healthy dividend, but we'd also be -- we're also in a position to grow the company through strategic M&A. Now I don't say that to startle everyone. As I've said publicly, I don't think that -- it's obviously not as easy to get these mega-cross-border mergers done as the industry may have thought a few years ago. And if we all look back on 2011, I think everyone is going to say, well, much-anticipated consolidation was met with much-unanticipated resistance. But I think, as you correctly point out, given how strong we ended up 2011 on the balance sheet side, there's a lot more we can do than simply the stated share repurchase program. And we'll be as transparent as ever about what some of those other options are as they're presented to us.
And the next question will come from the line of Niamh Alexander.
Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division
And I appreciate the heads-up on the additional detail we'll get in April. And you're already signaling to us that the expenses should be lower in 2012. But the operating environment is still very difficult. Do you think you can actually grow your earnings without an improvement, because I'm just concerned about the impact of the deleveraging in Europe? And even the number of terminals are coming down. Help me understand where you can draw the growth.
I'll start. I know one of the things, we've -- so we get the message clear is we don't really want to be focusing on the next quarter or the quarter after that. So we have really current operating environment because that was difficult low volatility. I think the message of our slide, and that’s why our focus on 2 years is as Duncan indicated, sort of in a normal operating environment. We have -- we can look at 248, and there are several levers. We have significant growth initiatives that are either in the loss-making mode that we think we'll be making money, as well as new initiative, the clearing. We definitely believe, as we did this year that we can reduce cost year-over-year, and of course, we have accretive opportunities to deploy our capital. So we're focusing on those things. We're not focusing on that the January volumes were lower than last year. We don't believe at this stage that, that's any indication of what January 2013, will be, et cetera.
Duncan L. Niederauer
Yes. And I think that's what we also try to focus on Slide 9 because we know there were plenty of uncertainties in terms of some macro clouds already. And now for the whole industry, that's a bit compounded by this low-volume, low-volatility environment that we've started the year off on. It's hard for us to imagine that, that situation would worsen. We do remind everybody that a healthy chunk, I think more than half of this point of our revenue, you could argue, is not transaction related. And we think there's a lot of other opportunities. Having said that, we're not delusional. The near-term operating environment's looking pretty muted. I can't predict what the catalysts will be, but it's hard to imagine that these clouds of macro-uncertainty won't start to part pretty soon here.
And the next question comes from the line of Rob Rutschow, CLSA.
Rob Rutschow - Credit Agricole Securities (USA) Inc., Research Division
So you guys posted, I guess, a 29% pretax margin this quarter with an included debt expense, which is about at least 10% below your closest peers. So my question is, how can you guys guide to flat expenses when the pretax margin is so far below the peer level?
Yes, this is Mike again. So I mean, for the fourth quarter, our margins were 34%, our operating margins. And for the year, as I mentioned, for 2011, we -- our margins improved 5 percentage points to 38%. We do agree that there is -- we can -- we should continue to focus on margins. That said, you do need to look at our business. It's not that comparable to all of our peers in the sense that we have a growing Technology business that, as we've mentioned, we'd be very pleased with 25% or 30% margin for that business, a little bit of mix issue there as well. And when we have a number of growth investments we've made, I mentioned Liffe U.S. is in a sizable loss position. That isn't, obviously, our desire end result. So we think we -- I hear what you're suggesting. We -- from the last time I looked at it, we are, I think, the only exchanges actually year-on-year bringing cost down and are guiding for lower cost year-over-year. So I think we've done a decent job historically on cost, and we sort of understand that margin improvement is a priority.
Duncan L. Niederauer
Yes. We understand the benchmarking analysis. We do it ourselves. I think some of it's attributable to the portfolio mix. And I think what we're not going to do is overreact in the near term and shut down some initiatives that are still in investment mode right now and give up prematurely. At the same time, as we hopefully outlined in our remarks, we'll continue to be vigilant. We think there's a number of investments that we've made, and we're not alone in this with it, maybe have not materialized. I think you can't be too wet to them. You have to be disciplined on those. And then there's also a number of other investments, and I don't think effective margin, but minority investments that were sort of en vogue in the industry a few years ago that in some instances you have difficulty confirming the initial hypothesis. So I think you'll see us continue to do things there that hopefully will free up more capital for investment and more profitable endeavors.
And the next question will come from the line of Roger Freeman, Barclays Capital.
Roger A. Freeman - Barclays Capital, Research Division
I guess my question would be around the catch-up that we see here. It sounds like CapEx came in a bit lower last year. There were some projects on hold. Technology deals from customers, some were put on hold pending the merger outcome. A lot of senior management time resources were on the deal that free up now. So I was just trying to think about what kind of sort of near-term tick up and pulling some of the things that you can actually queue quickly are.
Duncan L. Niederauer
All right. So I'll start with that, and then maybe Larry can add to some of that as well. I think the -- we did manage that. Post the data center build, we thought maintenance level CapEx would come down to a number south of $200 million. And I think it did. I think you're right, Roger. I think it would have been a little higher last year if we had continued to invest in the completion of the build-out of Liffe Clear. I still think it would have been under $200 million, but it would have been a little bit higher. So I think we're trying to reflect that as we sort of look at what the CapEx for '12 looks like. I do honestly believe having stayed very close to some of the big banking customers in terms of their needs to reinvent their business, but in fairness to them, as they were thinking about a big outsourcing decision in 2011 and looking at us and saying, "Okay, I understand the value proposition. Can you tell me with certainty where your data centers and where your hubs are going to be in 2012 and beyond?" I think it would've been disingenuous of us to represent that, that was a certainty given what was going on with the merger, the various technology platform discussions that were being held. So I think it was an easy decision for them to put off for the time being. And I think we now need to revisit with them, and I think that's one of the reasons, among several, that we think the Technology business' double-digit revenue growth is pretty easily achieved in 2012, as far as we can tell, given that we know some of those decisions were put on hold. And lastly, as I've said to some of you before, yes, this was certainly a drain on a few of us. A few of us were back and forth to Europe quite a bit. At the same time, our strategy was to involve as few people as possible in executing the merger. And what I mean by that is my philosophy was to take a meaningful percentage of a handful of people's time instead of a very small percentage of a lot of people's time. So I think people like Mike and Larry have been able to stay very focused on the task at hand, which is why we feel better about going into '12. So I do think you're right. There are a lot of near-term opportunities, whether it's around clearing or the technology business or just a return rigor on capital deployment, which we obviously largely put on hold last year even though we were generating a ton of free cash flow that I think get us pretty excited about 2012. Lastly, I share your excitement in keeping the team together. That is one of the side benefits. And we had a team led by Larry that has been focusing on what would happen if the merger weren’t approved, and that's why I think we've been able to be, a week after prohibition, able to give you guys as much information as we've given on the call this morning. Leibo, do you want anything to add for that on that part of it?
No, I think that was actually pretty well said. The only thing I would say is I wouldn't expect other than on the clearing side that we postponed other expenses.
Duncan L. Niederauer
Yes, we really -- yes.
So there shouldn't be expenses. It's not that our expenses are artificially low because of the merger.
Duncan L. Niederauer
It should be given an investment, that's right.
It's really just the clearing project, which we should be able to give you a little bit more clarity on as a separate item anyway.
And the next question will come from the line of Alex Kramm, UBS.
Alex Kramm - UBS Investment Bank, Research Division
Just coming back to the last point on clearing, I'm hoping that you could talk about that a little bit more. You said a little bit about it in your prepared remarks, but obviously, you know back to building it out yourself. But you also said -- particularly on the cash side, and I think that was new, that you're evaluating other alternatives. And obviously, there are a lot of clearinghouses out there, independent ones. So maybe you can talk about that. And then on the Derivatives side, obviously, during this whole process with DB1, you even talked about LCH a little bit. So I know you can't be too specific, but is that something that could still make sense given also the regulatory form? And then just lastly, sorry to drag it out, but you obviously worked very closely with DB1. In the process, you were excited about capital efficiencies and so forth. Are there things that you can do with DB1 going forward? And I know that you have a good relationship or better relationship with them that could accelerate growth areas.
Sure. So we'll decide after the call whether Alex just violated the one-question rule. But we'll call that a 4-part -- one question that had 4 parts. So firstly, on the Derivatives side, I think -- remember, as far as we got with Liffe Clear was really everything but some of the treasury and risk management functions. So a big part of that build-out was already done for our Derivatives business. So I don't think it's a big lift from here. And I take full responsibility for having put that project on hold in 2011. Some of our best people are already re-engaged. They have been for a few weeks now, and off they go. So I think we'll be able to give, as Larry said, a lot more clarity on some of the milestones for that, the timing of all that, et cetera. On the cash side, as we've said before, I don't think it's nearly as strategic, but that doesn't mean it's not imported commercially to us. Those of you who have been with us for a while will remember that going back a few years ago, the cost of those services provided to us were quite high, which meant it was quite high for our customers because it was just a pass-through. So while we reduced those costs significantly in the last couple of years, I do believe that they are still priced -- our provider still prices them above the market. And I think we have some work to do there to either strike a commercially viable agreement with them or think about other options there. As far as LCH goes, I think it's fair to say we'd obviously be very interested in what happens with that asset. We own nearly 10% of the company. We have a board seat, and we're the enterprise's largest customer. We think that the company has a great deal of potential under Ian Axe's leadership. I think he's been doing a great job since he got in there. But whether it's LCH or the alliance, as you referred to, with DB1, I think given the shifting landscape and the clients' need for capital efficiency, I think it would be foolish for us not to consider any and all go-forward alliances that might make sense between various exchanges and clearing organizations. Ultimately, it has to be all about the customer. And if there are things we could all do together to provide some of those cash capital efficiencies that people may not be able to do individually, we should certainly consider that. I think the alliance we have with DTC and NYPC is a great example of that. That was pretty much unprecedented. And I think that puts us in position to provide capital efficiency that neither we nor DTC could do alone. So hopefully, that gets at most of your question, Alex.
And the next question comes from the line of Patrick O'Shaughnessy, Raymond James.
Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division
I wanted to ask question about the regulatory environment in Europe. And maybe another 2-part one-question-type thing. So with the financial transaction tax that Sarkozy wants to apply in France, it might be more of a stamp duty type of tax than a financial transaction tax. What exactly did you mean by a muted impact? I guess there, I'm trying to get to what sort of impact do you think you'd see in market share, potential opportunity for regulatory arbitrage, et cetera. And then the second part would be, with such a negative regulatory environment overall, to what extent are you worried that maybe a year or 2 down the line, either through method 2 or a mirror of some other construct, that Europe might try to blow up the vertical clearing model?
Duncan L. Niederauer
So let me go over the FTT first. So let me just be clear about what I said. When this was first floated as much as 1 year ago, I think it was a lot more draconian than it sort of evolved to. I think common sense has prevailed and people realized that the policymakers in Europe, I think, have come to realize that while it sounds good on paper, when you get down to the details and talk about how to implement it, you realize that if it's not implemented broadly and pretty consistently, it gets challenging at best. And I think policymakers also realized that it's not that hard for a lot of the volume to migrate across border now. So I think what we were trying to say in our remarks, and look, I want to reiterate, this is a populous enough issue that we should all expect it to stay in the press for the foreseeable future. But I think if you listen to the news coming out of Europe of late, these proposals are sort of evolving to stamp duty proposals, so sort of a fraction of an amount that we've lived with another jurisdiction around the world before. We do think the latest proposals are at least a little more sensible because they are limited in scope. They're not as dramatic in terms of costs as the originally proposed ones were. And if you exempt the things we'd be most worried about are, we just don't want to affect price discovery and liquidity, then obviously, if you exempt liquidity providers and market makers, which we imagine would be a pretty broad definition, hopefully, it's easy for everyone to see why we'd be more optimistic that it's a fairly muted impact on the business. So that's -- it's a long-winded answer to a long question. And we also think if they apply it, it'll apply to MTFs and exchanges, so I don't think there's as much opportunity for regulatory arbitrage as there was talked about a few months ago. The second part of your question, I think, bears watching. I think we're going to have to stay very close to that. I think if we have any learnings from the recent experience we had in Europe is that they, the policymakers there, are bound and determined to push some of these regulations through. And I think we will keep a very close eye on where that goes. Certainly, in the cash business, I think we think that the silo’s already more or less been broken, and where it goes from here and the derivatives market remains to be seen. As we've mentioned on this call and to some of you before, I think everyone should tread carefully because I don't get the sense that there is similar momentum for such change in North America, South America or Asia, nor do I think there will be in the near term.
With that guys, I promise if we didn't get to you, Mike and Stephen and the team will be available today. We thank you for your patience, not only on the call but really the last year. It was an exacting year for us. I don't regret what we tried to do for a second. And we go onward and upwards from here. And we appreciate the opportunity to share some of our thoughts in the near term here, and we look forward to seeing everybody in Investor Day on April 2. Thanks a lot.
Thank you very much. This concludes today's conference. Thank you again for your participation. You may now disconnect, and have a great day.
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