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NYSE Euronext Inc. (NYSE:NYX)

Q1 2008 Earnings Call

May 06, 2008 8:00 am ET

Executives

Gary Stein - IR

Duncan Niederauer - CEO

Jean-Francois Theodore - Dy CEO

Joost van der Does de Willebois - Acting CFO

Larry Leibowitz - Group EVP and Head of US Global Technology and US cash Markets

Stephane Biehler - Chief Accounting Officer

Analysts

Richard Repetto - Sandler O'Neill

Daniel Harris - Goldman Sachs

Ken Worthington - JPMorgan

Roger Freeman - Lehman Brothers

Donald Fandetti - Citigroup

Niamh Alexander - KBW

Daniel Fannon - Jefferies

Brian Bedell - Merrill Lynch

Joshua Elving - Piper Jaffray

Michael Vinciquerra - BMO Capital Markets

Edward Ditmire - Fox-Pitt, Kelton

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2008 NYSE Euronext Earnings Call. (Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Mr. Gary Stein, Head of Investor Relations. Please proceed.

Gary Stein

Good morning. I'm Gary Stein, Investor Relations Officer for NYSE Euronext. Welcome to our conference call for NYSE Euronext's first quarter 2008 results, which were outlined in the press release issued earlier this morning.

During this call, our comments 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 obligations 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. Please note that the results operations of Euronext NV for the first quarter of 2008 are recorded under US GAAP and incorporated in today's earnings press release under the caption European Operations in the accompanying tables.

With me on today's call are Duncan Niederauer, Chief Executive Officer, Jean-Franois Thodore, Deputy Chief Executive Officer, Joost van der Does de Willebois, Acting Chief Financial Officer, Larry Leibowitz, Head of Global Technology and US Cash Markets and Stephane Biehler, Chief Accounting Officer.

I will now turn the call over to Duncan, after Duncan is finished, Joost will make a few remarks. At the conclusion of our prepared remarks, we will take your questions.

Duncan Niederauer

Thanks, Gary. Good morning everybody, thank you for joining today's call. As we entered the first quarter of 2008, we focused on four primary goals, realizing balanced revenue growth across our operations, executing our strategic business plan and acting on new opportunities that enhance customer and shareholder value, delivering on our commitment to efficiency and expense control, and improving our competitive position in the US and Europe. I am pleased to report that we have made significant progress towards achieving each of these goals, as evidenced by our strong financial performance in the first quarter.

During the first three months of 2008 we experienced solid revenue growth, primarily due to record trading volumes. In the first quarter NYSE Euronext cash equities exchanges in Europe and the US achieved new all time records in quarterly volume. Our European cash markets handled 103 million transactions and our US cash markets traded 191 billion shares. Our European equities markets registered a 39% increase in total volume. We witnessed strong gains of 66% and 41% in ETFs and core equities trading respectively, compared to the same period in 2007.

While Euronext was setting a new record in volume of an average of 1.6 million transactions per day, our US operations achieved a new record in average daily volume of 3.6 billion shares per day. This included an increase of 26% in quarterly handled volume for all equities trading compared to the same period in 2007.

Liffe, our European derivatives business had an all-time record quarter, with total trading volume increasing by 29%, compared to the same period in 2007. And NYSE Arca Options experienced volume growth of 70%, compared to the first quarter of 2007 making it the fastest growing US options exchange.

These figures illustrate our continued revenue growth across our operations, they also highlight our leadership position in an increasingly competitive environment, as well as strong customer demand for our diverse array of products and services. While Joost will provide more details during his comments, I would also like to spend a few moments on our strategic business plan, specifically the status of our merger integration and technology road map.

As you know, on our last earnings call, we increased our first quarter goal with respect to an annual run rate technology cost savings, from $30 million to $50 million in savings. I am pleased to report that we surpassed this target by generating approximately $70 million of annual run rate technology cost savings during the first quarter. This does not yet include anticipated savings from the eliminations of the AEMS margins. These savings will begin to be realized with the completion of that transaction, which we still expect to occur in August of 2008.

Also, we continue to make significant progress towards the goal set forth in the technology roadmap outlined last quarter. We have already migrated several large NYSE trading firms over to our new, Common Customer Gateway. The initial results associated with this migration have been very positive. The system is operating as expected and customers are benefiting from meaningful reductions in latency.

Strategically we continue to make significant progress as well, just a few of our initiatives and accomplishments during the first quarter include, as part of our efforts to reposition our European clearing business, we received approval from the Board of LCH Clearnet to negotiate a new clearing contract. These negotiations are ongoing. Upon finalizing the acquisitions of Wombat Financial Software, we launched NYSE Euronext Advanced Trading Solutions, our commercial technology business unit. This was followed by the news of commercial technology arrangements with the Tokyo Stock Exchange, Malaysia, The Philippines and Abu Dhabi.

NYSE Euronext Advanced Trading Solutions offers best-in-class technology products and services to exchangers and trading customers around the world. These new arrangements underscore the growth potential of our technology solutions business. Other initiatives include our proposed acquisition of the American Stock Exchange for $260 million in stock and additional stock based on the net proceeds of the sale of the AMEX building. This strategic transaction which we hope we will close in the third quarter will strengthen our US options ETF and cash products offerings. Our acquisition of the CME Group Metals Complex provides us a point of entry in the US futures business.

Our announced plans to acquire a 5% stake in the multi-commodity exchange; India's leading commodity marketplace. This investment, which is still subject to one or two more regulatory approvals, will compliment our strategic investment in the National Stock Exchange of India. The launch of Bluenext and international carbon emission allowances and credits markets in partnership with Caisse des Depots and lastly the launch of Prime Source NYSE Euronext, an independent comprehensive portfolio evaluation service for buy-side customers.

As I hope you agree, we continue to effectively execute our strategic plan and take advantage of opportunities that enhance customers and shareholder value. We also have tremendous operating leverage in our business model. We intend to capitalize upon this advantage for the benefit of our customers and shareholders, when and where appropriate. In this regard our Board of Directors authorized the repurchase of up to $1 billion of NYSE Euronext common stock.

The repurchase is subject to US and European Regulations, strategic considerations, market conditions and other factors. Our Board also approved the 20% increase in our annual dividend as part of well defined dividend policy to grow the dividend to shareholders and achieve a target payout ratio of 35% to 45% of net income, while maintaining high investment grade ratings.

As we move forward, we also remain committed to further improving operating efficiencies and to delivering on our commitment to expense control. We have implemented a global and I would like to underscore the word global business process reengineering project. To that end our total headcount at the end of the first quarter excluding GL Trade, it decreased by more than 4.5% from the same period, a year ago.

In the first quarter of this year, NYSE Regulation completed a voluntary retirement program. This streamlining reflects the evolving nature of trading related regulatory surveillance and yesterday afternoon as part of our global business process reengineering efforts, we announced the voluntary reduction program for our US employees excluding the NYSE regulation staff. We will report the results of this headcount reduction initiative on our next earnings call. So, as you all can see we have made and we will continue to make progress in managing and reducing our expenses.

During the first quarter of 2008, we also made significant progress in our listings business. Some highlights include the IPO VISA on the NYSE, at nearly $18 billion, it was the largest domestic IPO in US history, and the world’s third largest IPO. The IPO of Liberty International on Euronext, a 600 million euro offering, was the largest European IPO during the quarter.

Our European growth market, Alternext, welcomed its first Chinese company with the listing of China Corn Oil, and we also welcome China’s (inaudible) on the NYSE and General Steel Holdings on the NYSE Arca. Indian Satyam computer services became the first NYSE listed company to cross list on our European market using our new and innovative fast-path process.

Recently both Philip Morris International and Anheuser-Busch cross listed on our US and European markets. We extended our leadership in ETFs and now have 548 ETFs listed in the US and Europe combined. No other exchange group was more ETF products or trades more ETF shares around the world than NYSE Euronext.

We have also taken several steps during the first quarter to improve our competitive position in both the US and European markets. These steps include our announcement in March of new transaction pricing for customers and NYSE Arca for both equities and options they became effective April 1st. As a result of these pricing and other changes, we have gained meaningful market share in NASDAQ's primary business, we also continue to have a considerably higher share of trading in NYSE listed stocks than NASDAQ has trading its own stocks.

We ensure that we are in the forefront of our industry in the US. We are also working with the SEC, in a number of rule changes and initiatives. We believe these efforts will prove beneficial to customers, who send orders to the trading floor of the NYSE.

For instance, in response to customer interest, we are introducing two types of reserve orders for electronic entry to the NYSE. These new order types will provide customers with greater choice and flexibility in how they access the liquidity resident on the NYSE.

With respect to the competitive landscape in European cash trading, we are well-situated to succeed and maintain our leadership position through. Our highly efficient central order book with an internal order processing time of 2 milliseconds, our internal matching service, which is now over 35 active customers, who are now sending an average of 12% of their volume through the service and project SmartPool, the first European exchange led electronic block trading platform, which is targeted to go live later this year.

In addition, in order to meet the specific needs of the newly emerging high-frequency class of traders in Europe, we plan on implementing a new dedicated pricing package, the details of which will be announced soon. We are also exploring opportunities to create a pan-European ECN. As these actions illustrate, we are making significant progress in executing our strategic business plan.

We are successfully evolving our business model and are committed to providing the highest quality in most competitive markets. We are thinking and acting like one company, one firm. We are more customer-focused, more competitively positioned and even more determined to create sustainable value for our shareholders.

I will now turn the call over to Joost, who will present our financial results for the quarter. Thank you.

Joost Van der Does de Willebois

Well, thank you, Duncan, and good morning, everyone. As you have seen in the press release of today, we reported net income of $230 million, or $0.87 per diluted share for the quarter ended March 31 of ‘08. It is a $162 million, or 238% increase as compared to net income of $68 million, or $0.43 per diluted share, for the quarter ended March 31 of ‘07. These results are presented in accordance with US Generally Accepted Accounting Principles and the comparative results for ‘07 reflect the operations of NYSE Group only.

On a non-GAAP basis, giving effect to the Euronext transaction as if it occurred at the beginning of the earliest period presented, and excluding merger expenses and exit costs, the net income of NYSE Euronext for the quarter ended March 31 of ‘08 would have been $241 million, or $0.91 per diluted share. This represents an $83 million or 53% increase versus non-GAAP net income of $158 million, or $0.60 per diluted share, for the quarter ended March 31 of ‘07. A full reconciliation of these non-GAAP results is included in the table that accompanied our press release issued this morning.

At constant US dollar to Euro, and US dollar to pound exchange rates, neutralizing the impact of acquisitions and dispositions of businesses and equity investments for the period, and on a non-GAAP basis, NYSE Euronext's revenues, net of activity assessment fees, for the quarter ended March 31 of ‘08 increased $236 million, or 25%, compared to the quarter ended March 31 ‘07.

Operating income increased $99 million, or 38%, compared to the quarter ended, again on March 31 ‘07. And in addition, on a normalized basis, revenues increased $129 million, or 12%, while operating income increased $93 million, or 34% compared to the quarter ended December 31, '07. Please refer to the table in the press release and try to normalize operating income including non-GAAP financial measures for more detail.

On a non-GAAP basis, net transaction revenues, defined as cash and derivative trading revenues net of liquidity payments and routing and clearing expenses increased $138 million or 39% for the three months ended March 31st of '08 versus the year ago period.

I would also like to highlight that we realized certain tax efficiencies as a result of the NYSE Euronext merger, following the reorganization of certain of our businesses. The effective tax rate of NYSE Euronext on a non-GAAP basis was 30% for the three months ended March 31st of '08 as compared to 35% for the same period a year ago and 32.5% for the three months ended December 31, '07.

Finally, as of March 31st of '08, NYSE Euronext had a strong financial position. We ended the quarter with almost $1.7 billion of cash, cash equivalents, investments and other securities and by the way this includes $124 million related to the Section 31 fees and $3 billion of debt obligations.

Before we take your questions, I would like to provide you a few more details on our cost savings initiatives. As Duncan noted earlier, during his prepared remarks as of the end of the first quarter, we have achieved annual run rate technology cost savings of approximately $70 million and to remain on track to achieve $250 million in technology cost savings related to the NYSE Euronext merger.

While the $70 million dollars of technology savings are derived from array of initiatives. The key drivers of these run rate savings include; retirement of a mainframe and the elimination of headcount in our shared data center in the US, which provided a savings of more than $12.5 million. The retirement of certain systems, non-stops and headcount in connection with the replatforming of our NYSE training systems, which provided a savings of $12 million; and last but no least the realization of the efficiencies in connection with our corporate systems, which provided a savings of more than $8 million.

In addition, during last quarters earnings call, we referenced $66 million of capacity related capital expenditure budgeted for the year 2008, against which we have spent approximately $60 million during the first quarter. We had also made significant progress on our non-technology related run rate expense savings targets.

In addition to the various headcount initiatives Duncan referenced earlier we have also taken a number of other actions to generate savings, the highlights of which include the following: Over $9 million in savings from the elimination of certain marketing programs and a reduction of overlapping market spending in the US and in Europe. Almost $5 million in savings from the streamlining of our real estate portfolio and occupancy expenses and approximately $5 million in savings from the elimination of overlapping insurance spending in the US and in Europe.

I am now happy to take your questions.

Question-and-Answer Session

(Operator Instructions) Our first question will come the line of Richard Repetto with Sandler O'Neill, please proceed.

Richard Repetto - Sandler O'Neill

Yeah, good morning guys, congrats on a strong quarter.

Duncan Niederauer

Thank you, Rich.

Richard Repetto - Sandler O'Neill

I guess my first question has to do with the expense reductions Duncan. I’m just trying to understand what you've got in the run-rate, but trying to understand how much actually flowed through in the first quarter versus how much you're going to see come down, say in the second quarter, depending on when you got the reductions in 1Q?

Duncan Niederauer

Joost want to take that stuff.

Joost van der Does de Willebois

Rich you mean your question with regard to let say the fourth quarter of last year and the first quarter of this year, it’s a little difficult to be very precise on the, lets say run-rate expenses are more seasonal. I think there is a little bit of both in there and a bit of this -- it's a bit difficult to give you that precise amount. But what you see in there, lets say first quarter expenses is our clear commitment to run the organization as efficient as possible and as we indicated, lets say in our prepared remarks, a lot of it, lets say the cost savings are coming in at this very moment.

Richard Repetto - Sandler O'Neill

Okay and I'll move on to I guess to the second question. In regards, you had a lower tax rate this quarter 30% and I’m trying to understand, how much of this and I know you made note of this or highlighted it in the release, but is this the appropriate tax-rate going forward and is this is a recurring due to the sort of the mix in income being more weighted towards Europe, now?

Stephane Biehler

Yes, Rich, it's Stephane Biehler. That's right as you see an increasing portion of our income coming from Europe, there is a favorable impact on our tax-rate, in addition to that and in connection with the NYSE Euronext merger, we've reorganized some of our businesses and we try to be as tax efficient as we could. So, this tax rate is sustainable to 30%. If you are looking at, we think that we expect our tax rate for the balance of the year to be in the range of 30% to 30.5%.

Richard Repetto - Sandler O'Neill

Great, okay. I will get back in the queue. Thanks guys.

Larry Leibowitz

Hey, Rich. This is Larry, to address part of your first question. When we talk about $70 million of run rate saving in tax. That's an increase of roughly 33 in the fourth quarter run rate, of that $33 million differential, half of those savings came at the very end of the quarter. So, they are not going to be reflected in the first quarter expenses.

So, you would expect to see second quarter expenses down roughly an additional $15 million, $17 million what you saw in the first quarter. So, I think that addresses sort of the phasing in of those end of quarter run rate savings.

Richard Repetto - Sandler O'Neill

That's exactly what I was looking for. Thank you.

Operator

And our next question will come from the line of Daniel Harris with Goldman Sachs. Please proceed.

Daniel Harris - Goldman Sachs

Good morning. Just congratulation guys on a good quarter. Just skimming through, when you go through the quarterly highlights it's really amazing just how many things you guys are going on at one time and so for Duncan. I guess my higher level of question. How do you think about prioritization with looking like more in the dozen new initiatives going on?

What are the most important things you look at in terms of running the business to achieve these synergy targets and just the business targets you are setting out on the daily basis?

Duncan Niederauer

It's a good question, Dan. So, for those of you, who have track my movements recently you have noticed that a lot of my time is now spent outside of the US. So, I think with some of the senior hiring we have done with Larry having been here nearly a year now and our new head of HR and our new General Counsel etcetera, I think the US business with some new additions that we can't talk about yet, but who are on the way as well. I think it's given me more freedom to spend more time outside of the US because you will also notice that a lot of these initiatives are either European, Middle Eastern, or Asian in many cases. So, what we are trying to do is figure out how to strike the right balance staying focused on the cost savings. To me that’s been really a firm wide effort. I'm very proud of the work that’s been done across borders on the expense rationalism side.

And then in terms of my priorities, I think it continues to be focused on stuff that is going to positively impact the corporate culture. Like we talked about it in all the other calls, we are trying to be one firm and then also trying to make sure that the things we are doing are consistent with our strategic initiatives. Many of you have heard me say that, I think well we are in a consolidating industry. I think the pace of transformational mergers is going to slow down and we should be more focused on the kinds of things that we are doing in, in the Middle East and in Asia, which are more commercial technology partnerships. Then other smaller investments like we just executed in MCX were bolt-on acquisitions like Wombat and the AMEX.

So, I think you are going to see us spending a lot of our time there, getting things like that done proving to all of you that we can integrate them effectively. And then at the same time, staying very focused on the expense side of the equation, but you are right that it is a lot to juggle.

Daniel Harris - Goldman Sachs

Yeah. I would agree with that. I was also hoping that you could talk a little bit more about the CME Metals business that you guys acquired recently. It certainly seems like it gives you a small footprint in the US futures business, but it also faces very well entrench competitor in the Comax. How do you think about the ability to compete with them? I think when CBOT launch that it was so unique opportunity as they were electronic versus non-electronic.

What you are going to do with clearing and potentially non-futures related, maybe OTC related business there? Thanks a lot.

Duncan Niederauer

Great, sure, thanks Dan. I think you hit the nail on the head. The first thing we were trying to do was effectively just get what I would call a ticket to the game. I think it gave us an opportunity to now go talk to the CFTC about getting a license and having real products around that. While we hope to have some success with the golden silver-business over time, we certainly don’t think 6, 12, and 18 months out from now, that will do the extend of our product offering in the US.

We think it gives us a lot of opportunity to potentially offer products related to our ETF business, potentially offer products related to our existing derivatives business in Europe. So, I think what I like about having a future license is it gives you the opportunity to be innovative. As you all know that, the products we can trade on our equity platform and at our options platform, really that’s out of our control. It’s what is the market, what is the market give you, what companies get brought to the market etcetera. We think in the futures business, there is a lot more opportunity to be innovative and that innovativeness is rewarded.

So, I think you guys should expect to see us launch other products on the back of getting license. Right now, we hope to have our DCM license by the third quarter and then we hope to have a clearing solution by the end of the year. We are considering a number of different clearing opportunities. So, I think we will have that solved by the end of this calendar year. In terms of Dan’s question in the OTC space, where you can safely assume, we are having a lot of conversations with both, government and regulatory officials, as well as market making participants to try to come up, what we think would be a joint solution to solve the OTC clearing issue.

We have a B-Clear product already that has had quite good success in Europe, and is poised to have success in the United States. But I think there is a lot more to it than that, and there is a big role that exchanges could play. You will see us only looking to play that role, however, in concert with what the regulatory authorities are looking for and what the market participants are looking for. Thanks.

Operator

And our next question will come from the line of Ken Worthington with JPMorgan. Please proceed.

Ken Worthington - JPMorgan

Hi, good morning. In terms of Liffe's negotiations.

Unidentified Company Representative

(Multiple Speakers.)

Ken Worthington - JPMorgan

In terms of Liffe's negotiations with LCH.Clearnet on derivative clearing, what are the sticking points? And I assume this question is very premature, but I'll go for it anyway. If can discuss any thoughts about direct revenue benefits from those negotiations, I'd love that too, although I don't know if you can answer?

Jean-Francois Theodore

No specific sticking points as we announced in March, as the board of LCH.Clearnet approved the negotiation of the new (inaudible) which would lead to the creation of Liffe deal, in which Liffe would use netting business and claim, which is software revenues. It's getting, frankly speaking, would go to Liffe, and LCH would still be doing reinsurance and guarantee a bit. Negotiation continues for the implementation of this agreement. We cannot provide any details at this stage, but they are on with the target to close by the end of the year, we will implement the new systems by the end of the year.

Duncan Niederauer

And Ken, its Duncan. I’ll be in London tomorrow actually, and among the meetings I have is to sit with the Chairman of Liffe Clear, just to confirm that everything’s on track and we where it should be.

Jean-Francois Theodore

The Chairman of LCH.

Duncan Niederauer

The Chairman of LCH, excuse me.

Ken Worthington - JPMorgan

Thank you. And I understood that perfectly. And then secondly, Duncan, I'd love to share your thoughts on the European cash trading environment. We had more months since MiFID has been implemented, and I wanted to see how you saw your competitors, the ATSs. How their strategy is evolving and then, well, I’ll just leave it at that?

Duncan Niederauer

Right. And I will start, Ken, and then I will ask Jean-François to fill in if I leave anything out. I think the first thing we’ve noted, is that some of the new ATSs certainly have garnered some volume, and our analysis so far would suggest that this volume is what I would call incremental volume. So I mentioned in my prepared remarks that we are about announce a pricing package for the high frequency class of market participants. We are doing that because we believe that our model, to date, while the speed has been satisfactory for those type of participants, the various pricing packages have not been conducive to encouraging them to trade on our platform.

So what we are seeing is exactly what we saw here with things like VATs, when VATs first started. Which was, it attracts the high frequency volume, and in Europe, we believe that that was new or incremental volume. So we are going to come out with the pricing package that we think will attract that type of player, and then we are going to continue to do our homework and see if it does indeed attract that type of player. We would think that would just be more additive volume, because what we have seen from this market segment here in the US at least is, they are not afraid to make markets if the market model is right on any number of venues.

So I think for us, it's still a growth opportunity. Obviously, there is volume that we are not getting now, that goes without saying. But we do think its incremental volume and the work we have done so far and now we're going to go after it and see if we can get some of that volume as well. I think we will have a pretty good picture on what that looks like, potentially as early as our earnings call three months from now.

So I think that's step one in terms of what's happening on the competitive landscape. Then in terms of other steps we are taking, with things like our internalization product and SmartPool and potentially a Pan-European ECN, I think that's just in response to all of the other competitive forces that are going on out there.

For as long as MiFID has been around, I don't think we have seen much impact from message so far MiFID, and a lot of the competitors that have received a lot of press are still a few months away from actually doing their first transaction. So I would assure everyone we are paying close attention to it, the high frequency pricing strategy is really the second and third step we are taking. SmartPool continues to move forward, and as I mentioned in my remarks, the internalization product is working quite well, as well. JFT would you add anything to that?

Jean-Francois Theodore

Maybe not forgetting the strength of the central order book, which is a traditional strength of European exchanges and especially of Euronext. Their longstanding improvement in the computerization of the European exchanges during the 90s, and especially the investments we made last year in Euronext, in which we had a 10 milliseconds on answer time for a one or two milliseconds for the statement and other in the enterprise system, with the development of colos which will be starting in the very next week if we go to five milliseconds that's also relative. So, we believe that some central order book is quite competitive, compared to new initiative. We believe also that these new initiatives will be competing in between themselves a lot, because the target has been category of the year.

Ken Worthington - JPMorgan

Great, thank you very much.

Duncan Niederauer

Thanks Ken.

Operator

And our next question will come from the line of Roger Freeman with Lehman Brothers. Please proceed.

Roger Freeman - Lehman Brothers

Hi, good morning. I wanted to actually follow-up on Ken's question about the European strategy. So, one, the ECN strategy presumably from the way you are talking about this would be a Pan-European strategy type, 200 or 300 stocks kind of like NASDAQ is going after. And I guess, so the second question would be, how do you think about the evolving high frequency, low touch market in Europe and the impact that it could have on pricing broadly? I guess some of the work we've done, so just there are five to 10 times differential in pricing between Europe and US. Do you think about much of the cannibalization impact on your existing business there?

Duncan Niederauer

I think for the first question Roger, I don’t think we’ve decided how small or large to make the group for the Pan-European ECN. I think we will continue to talk to the customers and see what they want and then whatever our business model ends up being, will reflect what the customers are asking for, I don’t think we are just going to do a meaty product. It will be driven more by what the customers want.

On the second piece of that, I think we’ve already very effectively created tiered priced models in Europe. And I think it's just coming up with a new tier for these types of clients. I think we’ve gotten some good learning from what these clients want and need in terms of speed and pricing here in the US and I think when we announced that package, which will probably be in the next week or two, I think it will make it clear where we're headed there.

We're all fully cognizant of the difference between pricing here and in Europe, but I think there is plenty of room given the tiered pricing structure to give the high frequency guys, what they need and their percentage of volume is not nearly what it is. Here, I think it's very embryonic over there, and we're just going to keep a close eye on that and see if we can provide pricing packages that meet their needs and then we'll continue to report on what our findings are in subsequent costs.

Roger Freeman - Lehman Brothers

If we look at the sequential decline in pricing in Europe from 4Q to 1Q, is it safe to say that's really just a function of the higher volumes triggering some tiered reductions, as opposed to any priced customer in the quarter?

Jean-Francois Theodore

Yes, indeed it is and it is linked to our sliding scale fee (inaudible) volumes, which by the way is a protection by itself against competition.

Roger Freeman - Lehman Brothers

Okay. And just sneak a real quick one in here. On headcount reductions in Europe, can you give us a sense of timing? It sounds like most of the headcount that came out this quarter was in the US. I know you have somebody in new in Europe working through, the counseling folks. Can you give us an update on that?

Duncan Niederauer

Yes. What I can tell you is that I specifically reiterated the word global in my prepared remarks to give you guys as much information as I could. You'll see that we announced the voluntary program in the US, because we thought that was the most effective way to approach, to solve the problem here, and you can safely assume that we will do whatever we think is most intelligent and as timely a manner is possible in other parts of the world. But we are not at liberty to say anymore about it at this time.

Roger Freeman - Lehman Brothers

Okay. Thanks

Operator

As a reminder ladies and gentlemen, please limit your questions to two questions. And our next question will come from the line of Don Fandetti with Citi. Please proceed.

Donald Fandetti - Citigroup

Hi good morning and congratulations on delivering on the synergies so far. My question is around life. Wanted to get just what is your sense, your outlook for your rate products there in terms of any risk to deleveraging in the current market?

Jean-Francois Theodore

I don't believe we have specific risk. Our customers are not very leveraged and you remember that in this type of business we have a lot of OTC Business already competing against its regulated exchanges. In the type of markets we have today, being a regulated exchange backed by your clearinghouse is a competitive advantage.

So globally speaking, we would see the situation as relatively favorable. Our customers found us very leveraged and some people are coming back from OTC to a telling situation, especially through our B-Clear product

Duncan Niederauer

And a couple of you picked up that, even when the volumes in the markets, in general kind of drifted off in April. If you look at the numbers on the live platform through April, it's really quite strong and almost no change from the first quarter, still more than 50% ahead of last April for example.

So I think it may be that we just happened to be well positioned in some of our rate products being Euro products. Maybe the Euro starting to become increasingly more of a global reserve currency and its too early to tell, but certainly if April is any early indicator, the volumes in our European platform both on the exchange traded stuff and on B-Clear held up extremely well.

Jean-Francois Theodore

Okay. This helped to a new velocity on European rates especially for the short-term parts of the lead curve on which we are, with the (inaudible).

Donald Fandetti - Citigroup

Okay. Thank you.

Duncan Niederauer

Thanks Don.

Operator

And our next question will come from the line of Niamh Alexander with KBW. Please proceed.

Niamh Alexander - KBW

Thank you. Good morning. Congratulations on the quarter.

Duncan Niederauer

Thank you.

Niamh Alexander - KBW

I just wanted to touch on that and smaller part of operating earnings, but still there is a lot of work going on to reshape the value proposition on the floor and on the US cash equities business. Can you maybe give us an update? Because I think when we last caught up with Larry there was a lot going on, a lot of discussions with the SEC. I think Duncan you reported last night about expecting maybe the floor presence to shrink even further. So perhaps you can help me understand what's changing here?

Duncan Niederauer

Why don’t I start on the floor piece specifically, because I did speak to some people from Reuters yesterday. So that’s probably where that came from and I then turn it over to Larry to give some more details on actually what we have in motion with the SEC and with the various communities.

So I was asked yesterday by some in the media about what our plans for the floor were and I'll tell you a couple of things. One is most of you know we've already consolidated into the two larger trading rooms, the so called main room and garage. It would not surprise me as the market model continues to evolve and we continued to embrace technology that more as a risk management can be done off the floor. I think that would be positive for liquidity provisions. So we are not going to resist that, having said that we are not about to turn this into a remote business.

So I think when I calculated all the factors, my view was it was definitely possible that we could consolidate the existing core NYSE business in the one larger trading room, that wouldn’t surprise me. At the same time remember that as we do the Amex transaction we will have one of the floors we occupied for what I would call a micro and small cap market.

The stocks that are traded on the Amex now that will not transfer to New York or NYSE Arca. And then we'll also have one of the smaller rooms in the back will be for a foot print for a small options floor. The equity floor will probably happen late in ’08, the options floor in early ’09. So my guess is we will have, we'll be having more people come to this building 6 to 12 months from now, not fewer but I certainly could see consolidation from two rooms to one on the main NYSE business.

Larry, why don’t you take it on what we are doing in terms of functionality and technology and things like that?

Larry Leibowitz

Sure, so I think there is a couple of threads here; one thread is that a large amount of our cost savings come from retooling the technology and supports the floor at the New York to be more in line with what we do across the rest of the firm. And so we continue to move along that path and make significant progress. Some of that resulted in cost savings, some of it result in performance or latency reductions to our clients, which we started to rollout with our CCG platform, which had a pretty significant latency reduction for people using that, its somewhere around 35%.

That said when hybrid was put in that was an initial response to regulation requirement to electronically link the market to trade-through rule. What we've really been doing is then redefining the balance between the various constituents that represent our trading platform whether that's floor traders, specialists or electronic trading. It’s creating new value propositions for each of those participants that help us figure out what’s the right mix of each of them.

So as an example we've just announced rolling out electronic reserves on pilot stocks a couple of weeks ago, that was creating more transparent and more functionality to the electronic trading side of our constituents. We just announced I think it was yesterday that we're going to roll that out rest of the stocks as of this Friday, we're going to continue to add functionality as we evolve the platform.

We're talking to the SEC about the changing the rules to make the market simpler, more conducive to electronic trading, but also allowing a role for market maker with obligations, more of a liquidity provider as we evolve the specialist role. And then to continue to evolve the floor traders have more functionality that makes more sense in an electronic world.

So you'll see in July for example rolling out algorithms in the handhelds, so that floor traders will be able to work out also from the floor but also when large block trades happen to be there to represent the customer. Not to allow our [upstairs] traders to not feel that they are shut out when they give a trade to the floor, that they are also forgoing the benefits of the algo trading.

So it’s a constant evolution working aggressively on a number of paths, working with the regulators to get rules past as quickly as possible as we change this model at a breakneck pace, still within the confines of maintaining the discipline of getting the cost out and the performance up of the underlying technology.

Niamh Alexander - KBW

Okay. Thanks for that color Larry. Just in terms of understanding the financial implications. I think it was a big landmark to get past kind of say eliminating the non-staff issue. Is that correct, so literally what you've achieved in the last quarter does that allow you to kind of move more quickly ahead with integrating the three different front end cash platforms?

Larry Leibowitz

So, you're right getting rid of the non-staff is important for a lot of reasons. One is to get through the lot of latency. Two is it helps us save us a lot of the costs. Three, it helps us simplify our world which will make our time to market for software changes faster.

CCG is a big piece of those non-staff, I think 15% of our non-staff alone is in CCG and we are progressing along that path pretty well. We think that we have a release coming up in the next few weeks that will help us accelerate that process even further. We have already cut out some of the non-staff to turnover of a market data infrastructure platform. We will continue along that path. I would say by late third quarter, towards the end of this year, we will have cut a significant percentage of our non-staff out of the platform.

Niamh Alexander - KBW

Okay. That’s helpful, thanks. On my second question, the Arca Option is taking some impressive market share there, particularly in the penny quoting. But I just wanted to understand, I mean you treated your pricing recently, not with that just rolled out there kind of make or take or model. And now we are seeing ECNs try to kind of break into the options trading world. How do you feel about Arca’s competitive positioning, your market share? I know you are going to run a kind of bifurcated pricing when you were bringing in Amex. But is there lot more potential for Arca to gain from here or is the penny quoting kind of taking a backseat without volatility?

Duncan Niederauer

So even though you’ve violated the two question law, I will answer you anyway.

Niamh Alexander - KBW

Sorry. But the first was a follow-up.

Duncan Niederauer

Just teasing. First, we do continue to see growth of the Arca platform. I think that as pennies have rolled out, to some extent but the market hasn’t fully adapted the pennies. It’s going to take a while for all of the participants to retool, to become more electronic; to become more like integrated market makers like you see in the equities world. So what that says to me is even though a directed flow and payment for flow model will continue to exist side-by-side with an ECN model.

The balance of what percentage of the market is ECN versus directed flow will probably continue to switch towards ECN as we find that balance as more and more participants adapt to penetrating plus more electronic automated trading, that what we saw in the equities markets. I think that that will happen just like in the equities markets, we think that those two models will continue to exist side-by-side.

There will be room for new entrants in the ECN market. I think Fox has done some work, NASDAQ has not really made any headway yet, but we certainly pick them as a real competitor threat, but we think that that part of the market will continue to grow. So we are going to continue to be aggressive in adding functionality in Arca to maintaining price competitiveness in Arca, at the same time, we are going to use our AMEX like electronic directed flow market to compete with the other side of the market where we currently have zero market share and we can think will continue to exist.

So I think that we have continued reason to grow our market share. I also think that as penny's and the automated trading continue to grow that means in the ECN side of the world, you are going to see continued growth of overall options volume. That's also a secular trend you have seen as markets adapt to penny pricing and more electronic trading, because of the adoption and adaptation of the market makers penetration by the high frequency trading guys, which you are really seeing fueling a lot of options growth and even more penetration by retail trading as volumes grow as sort of the grease in the machine penetrates more and there is less stickiness in the model.

Niamh Alexander - KBW

Okay. That's helpful. Thanks for taking my questions.

Operator

And our next question will come from the line of Dan Fannon with Jefferies. Please proceed.

Daniel Fannon - Jefferies

Good morning. Most of my questions have been asked, but you guys have become more aggressive with the pricing here and in the US side. However, the price cuts appeared to be accelerating. Can you talk about how we should look at the profitability or lack [of the rev with] this segment, beyond, the next couple of months so may be a year or two down the road?

Duncan Niederauer

Yes, I think we think that it's an aggressive competitive business. We don’t think that there is any end to that inside it. It's not like one day BATS and NASDAQ will say, you know what we give up. We think that to some extent the market structure of the US encourages that by subsidizing those interested in market data subsidies, which has become essentially a flash point.

But on the other hand, we view it as a very diversified company, that's relatively a small percentage of our business in transaction fees. Its one of the reasons that we've pushed hard into the commercial software business, in terms of value add technology solutions for our clients. We intend to continue to be aggressive and competitive in pricing in the US secondary cash business.

Larry Leibowitz

I think we’re actually late to, a little to go after some of the competition in their core markets. I think what you've really seen from us in the last quarter is a message that we're willing to play offense not just defense. And I think we had very little to lose in page C for example, and are just trying to set a tone that, we're going to plan both sides of the ball, not just one.

Duncan Niederauer

Right, and that’s also an area where we clearly have the most room for growth and it was clear that in our last pricing salvo it had significant inroads.

Daniel Fannon - Jefferies

Okay. And then in terms of listings business, which is also very competitive. Are you looking at your pricing structures there and/or adding additional services to gain market share in that business?

Duncan Niederauer

I think more of the latter than the former. I think especially with all my traveling overseas, I’m finding that the brand name is a clear winner everywhere else in the world and I think here we certainly continue to win an overwhelming majority of the companies that qualify to list here. Does that mean we're going to get complacent? No, I think there's other things we need to do. For example, number one, we do need to offer some of these other services that I think we got very comfortable with some of the other market participants providing given what our market model was.

So I think you'll see us doing some thing's in the next quarter to make it clear that we are going to provide more services to some of our companies and they will take different shapes and sizes, so we'll be able to report more on that probably by the next time we all get on the phone together.

Secondarily, I think we need to do a better job particularly outside of the US of articulating exactly what the regulatory landscape here is and isn't. On my most recent trips to Asia, it's quite clear that their first choice is to list in the US and to list here. The challenge they've got is not with us it's with the US regulatory environment and they want to make sure that they are understanding that Sarbanes-Oxley really has been changed. Has the SEC really struck the right cord in terms of accounting standards and can they count on the environment to be a little friendlier than maybe was perceived to be a few years ago.

So I think the biggest place where its competitive is with our regulatory regime in this country against maybe the UK and Hong Kong. I find that to be more relevant than the competition onshore. Once a company gets over the hurdle of wanting to list in the US, I think its actually not that competitive, we do quite well. The last thing I want to see us do better is if we were almost too associated with this being the place were only well established companies list.

I think what we are trying to convey is with the NYSE and Euronext platforms and the NYSE Arca and Alternext platforms. This is the place for great emerging companies to list too and I think we are starting to do a better job by getting that message out as well.

Daniel Fannon - Jefferies

Thank you.

Duncan Niederauer

Thank you.

Operator

And our next question will come from the line of Brian Bedell with Merrill Lynch. Please proceed.

Brian Bedell - Merrill Lynch

Most of my questions have been asked. But just to get a little more detail in a couple of topics that you have talked about. First on the merger. You are definitely clearly tracking ahead of schedule. To what degree should we think of their being potential upside to the $250 million number? As well as having potential upside to the revenue synergy number over the next couple of years?

Larry Leibowitz

This is Larry. On the technology phase, I would try to be conservative about it and the way I view it is this is more certainty that we are going to hit our number. As we all know, technology projects some of them coming ahead of time those are the surprises and often they don't. This sort of buys us more room as we move down the line to make things happen.

With that said, we know that we are going to pick up $12 million of savings in margin recovery right away when the close the AEMS deal that's already actually been recovered. It just comes through in cash right now not in our earnings. So that's a certainty and it's sort of like everyone one of these projects get us closer to the goal, makes the risk of hitting the goal lower, and obviously do we want to have upside surprise from there? Yes. But I would rather just be conservative and just keep playing this game every day and showing our discipline.

Brian Bedell - Merrill Lynch

Okay, because really just you're executing better than the original plan there.

Larry Leibowitz

Surprisingly yes.

Brian Bedell - Merrill Lynch

That's sounds great and then my second question would be on just talk a little bit more about Europe. You guys have spoken about this during this call, but some more specifics on the timing of some of the launches. You said second half for SmartPool, should we be thinking later second half or earlier second half. And then in terms, the same question for the ECN there and also the pricing model whether you will be moving to and maker-taker type of pricing model in Europe anytime soon?

Jean-Francois Theodore

I think we've already given some indication. The new package would be in the very next days or weeks. SmartPool is an ongoing project, which should be starting in the second half of the year. You have seen that we announced yesterday, I believe, that we have picked euro CCPN, LCH.Clearnet, the clearer for some pan European in the form of stock pool. Speaking of the ECN, it's some kind of preliminary speaking at the time being and we have still to address its exact shape of the project.

Brian Bedell - Merrill Lynch

I am sorry the new pricing model should we be thinking of that as the maker-taker type model?

Duncan Niederauer

I wouldn't go quite that far.

Brian Bedell - Merrill Lynch

Okay. So more of just the actual tier pricing then, I guess.

Duncan Niederauer

I just think it is another kind of super tier.

Brian Bedell - Merrill Lynch

Okay. Great, can I ask one more question?

Duncan Niederauer

What do you guys think? Okay. Larry said okay.

Brian Bedell - Merrill Lynch

Thank you very much. Just really quickly, if we assume volumes on Euronext are the same in the second quarter as the fourth quarter, should we assume the revenue capture is the same as the fourth quarter as well or is there a downward trend?

Joost van der Does de Willebois

Well. I think its, this is Joost. I think it's a little difficult to make those projections and because you know that's also, if you look at the balance of the volume, there is also a mix back. So, I would be a little bit afraid of making those projections going forward at this moment.

Duncan Niederauer

Yeah, I mean all things being equal. It should be, right because we haven’t changed our tiered pricing structure. The question is with that out of our control is does the secondary business consolidate in this environment? Does the business get handled by fewer firms who were then able to achieve higher tiers? There is no indication of that yet that we can tell.

Joost van der Does de Willebois

So in terms it our consolidation with the sliding scale and the split of business in between the four packages that we have already (inaudible) that we will be intimating.

Brian Bedell - Merrill Lynch

Okay, great, that is very helpful. Thanks very much.

Joost van der Does de Willebois

Not very much interpreted to be true.

Operator

And our next question will come from the line of Joshua Elving with Piper Jaffray. Please proceed.

Joshua Elving - Piper Jaffray

Hi Good morning thanks my questions have been answered.

Duncan Niederauer

Thank you.

Operator

And our next question will come from the line of Mike Vinciquerra with BMO Capital Markets. Please proceed.

Michael Vinciquerra - BMO Capital Markets

Thank you just two clean up questions here, number one, could you share with us what if anything Wombat contributed in revenue to the quarter? The market data fees were little bit stronger than I was anticipating.

Larry Leibowitz

Yeah this is Larry again. Wombat contributed negligible amounts to the quarter because the deal didn't close till the very end of the quarter. So it's only a couple of weeks worth so it’s immaterially.

Duncan Niederauer

And also just going forward, sorry. That Wombat revenue is going to flow through software and technology services that's closed to market data.

Michael Vinciquerra - BMO Capital Markets

It wasn’t even into the low double-digit hurdle or single-digit millions at all in the quarter?

Duncan Niederauer

No.

Michael Vinciquerra - BMO Capital Markets

Okay. Second thing on the share repurchases have you guys actually been active. I know that was again announced late in the quarter, but I am curious you guys are already starting to put some of that to work.

Duncan Niederauer

Yes just so that's clear because maybe I didn’t articulate that well when we announced it with a stock deal pending. We are actually not allowed to be in the market. So what we were telegraphing to the market is that as soon as we're able to do a stock buyback, which would obviously coincide with the closing of AMEX deal, which we expect to be some time in the summer. Then and only then could we be in motion. So we were basically telling the market, we would if we could in essence and right now we can because we have a stock deal pending.

Michael Vinciquerra - BMO Capital Markets

Very good. Okay, thanks Duncan.

Duncan Niederauer

Thanks, Mike.

Operator

And ladies and gentlemen, we only have time for few more questions. Our next question will come from the line of Edward Ditmire with Fox-Pitt, Kelton. Please proceed.

Edward Ditmire - Fox-Pitt, Kelton

Hi, guys. I have one very simple question and then a more complicated one. On the US options did you guys breakout what the rebates of liquidity payments were this quarter?

Joost van der Does de Willebois

The liquidity payments were $13 million this quarter on the US option side.

Edward Ditmire - Fox-Pitt, Kelton

Okay and then I thought it might be helpful, you guys are obviously making great progress on the synergies you've laid out. But as we think about our projections, can you speak at all to what the natural growth rate and expenses would be in the US and European respective businesses or maybe some sort of range to frame our expectations?

Joost van der Does de Willebois

Yeah, this is Joost. I like the question, but I mean it's very difficult to make any forward projections in this area. So we do not give any guidance, I’m sorry.

Edward Ditmire - Fox-Pitt, Kelton

Okay and the US business as well as no sense of aside from the merger what the growth rate would have been in expenses?

Duncan Niederauer

I'd rather not, we'll surely give it some thought Ed, but I'd rather not go there on the call, I'd rather give it some more thought because we’ve got as some body asked many questions ago. We’ve got a lot of moving parts right now and I don't want to, its actually getting harder and harder to talk about the core expenses as we keep bolting these things on. But I think if we can ever give clarity on that we will. But I don’t think we are in a position to do that today.

Edward Ditmire - Fox-Pitt, Kelton

Okay. Thank you.

Duncan Niederauer

Thanks. Sorry about that.

Operator

Ladies and gentlemen, that’s all the time we have for question and answers. This concludes our question-and-answer session. And I would now like to turn the call back over to management for closing remark.

Duncan Niederauer

Thanks everybody for joining. If you have any follow up questions, please feel free to contact us directly.

Operator

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. Good day.

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Source: NYSE Euronext Inc. Q1 2008 Earnings Call Transcript
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