NYSE Euronext Management Discusses Q2 2012 Results - Earnings Call Transcript

| About: NYSE Euronext (NYX)

NYSE Euronext (NYSE:NYX)

Q2 2012 Earnings Call

August 03, 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 E. Leibowitz - Chief Operating Officer


Howard Chen - Crédit Suisse AG, Research Division

Roger A. Freeman - Barclays Capital, Research Division

Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division

Brian Bedell - ISI Group Inc., Research Division

Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division

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

Jillian Miller - BMO Capital Markets U.S.


Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 NYSE Euronext Earnings Conference Call. My name is Shaquana, and I will be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host, Mr. Stephen Davidson, Head of Investor Relations at NYSE Euronext. Please go ahead, sir.

Stephen Davidson

Thanks, Shaquana. Good morning, and welcome to the NYSE Euronext Second Quarter 2012 Earnings Conference Call.

Before I introduce today's speakers, let me remind you that comments on the call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements are based on NYSE Euronext's current expectations and involve risks and uncertainties that could cause NYSE Euronext's actual results to differ materially from those in the statements.

These forward-looking statements speak as of today, and you should not rely on them as representing our views in the future. Please refer to our SEC filings for a full discussion of the risk factors that may affect any forward-looking statements. Except for any obligation to disclose material information under the federal securities laws, NYSE Euronext undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after this conference call.

We will discuss non-GAAP financial measures during this call. 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 review the highlights for the quarter, update you on the progress we have made in executing our strategy and focus on key developments in each of our segments. Michael Geltzeiler, Chief Financial Officer, will then review the financial results for the quarter. We will then open the line for your questions. Also in the room for the Q&A session is Larry Leibowitz, Chief Operating Officer. 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 now turn the call over to Duncan.

Duncan L. Niederauer

Thanks, Stephen. Good morning, everybody, and thanks for joining the call today. Before I start, I just thought it would make sense to point out that we're having this call at an important time in the markets. I think there's a lot going on, obviously, that has broader ramifications.

So what you'll hear this morning is that what -- that some of our comments will be less focused on our company individually and instead focused on what I'd see as broader industry issues and the longer-term outlook. So to start with, I thought I'd provide some introductory remarks on the operating environment. We'll obviously spend some time reviewing our results for the quarter, and then Mike and I will update you, in each of our businesses, on kind of where we see things going and what the trajectory looks like.

Now as many of you know, in my role, I have the opportunity to do a lot of traveling, and I have the privilege of getting to meet with corporate leaders and government leaders around the world on a pretty regular basis. And as you would expect, what I'm asking them about these days is what do they think about the outlook for the operating environment, the global economy, et cetera. And it won't surprise any of you that to a person, everyone's talking about the tremendous and continuing uncertainty in the underlying foundation, and whether -- that's whether you talk about the political landscape, the economic landscape, et cetera.

Now I then ask people, what do they think about the likely length of this uncertainty and the softness in the global economy? And I think that general consensus is that most people would envision the state we're in persisting for at least the balance of this year and most people think it's going to extend through the end of next year at a minimum.

So what does that mean? That means that, as we're seeing now, a lot of money is sitting on the sidelines. Volumes are obviously muted. Technology spending is on hold, if not down, and many of our competitors and, more importantly, our customers are grappling with their business models. So I think what we have to do as a company is then take a step back and say, "Does this current climate present an opportunity to focus the company for growth when the macro environment turns to whatever the new -- returns to whatever the new normal will be?"

So I think what we'll talk about this morning is to just update you on the progress we believe we made during the quarter in our 3 pillars of growth and delivering against the commitments that we laid out earlier in the year, all tied to what we call Project 14. We remain focused on this long-term plan and setting the table for growth, but we're not going to focus, given that we don't control the macro environment or volumes or currency rates, we are not going to focus on quarter-by-quarter results, which we all understand are largely a function of that global macro environment and the underlying uncertainty that we're seeing from a lot of investors.

So what have we been doing? We've been bringing to market new initiatives. We're focusing on organizational efficiency, and we are being as agile as we can as we deploy our capital more efficiently for the benefit of all of our shareholders.

So let me start by mentioning a few specific things that we did get done since we last spoke to all of you. In June, we announced the new internal organizational construct that will create teams centered around products and clients. The goal of this organizational change is not just change for the sake of change, but it is to get closer to our customers, focus our company more on product innovation and do that more nimbly and make better use of our global shared service functions.

The product groups we've set up will consist of specialists organized to focus on their respective areas of expertise, underpinned by a generalist sales force that will be responsible for cross-selling the full array of transaction and technology products and services we offer to all of our clients. To alleviate a potential concern, we do not envision, nor do we have any plans to change how we report our businesses externally, but we think this new internal structure will foster more collaboration and eliminate some silos that I think had inadvertently developed.

We also took a major step this quarter in creating a full service CCP, NYSE Clearing, by giving official notice of termination to LCH. I'll talk about that more in my comments later. We had several new product launches for NYSE Liffe U.S., which we anticipate will drive further growth. We're excited about the acquisition of Corpedia, which supports our corporate services business and is an entry into the fast-growing areas of governance, risk and compliance.

In our Listings franchise, we continue to experience very positive momentum, whether you measure that in terms of discussions with clients, prospects across all industries, in particular, Silicon Valley, after the events of this past spring. Our market model and IPO process speak for themselves. Our customers are eager to become references for us. And with over 100 companies in the pipeline, we are pleased with how this Listings business is positioned going forward.

Lastly, as you'll hear this morning, we've made excellent progress on Project 14 cost-savings exercise, and we are continuing to buy back stock at what we think will prove to be attractive levels.

The low trading environment and the weaker euro this year is shrouding what we believe is excellent progress that we're making. But as we enter 2013, the tangible benefits of all the work we've been doing should begin to accrue with a return to earnings growth next year.

With that as an introduction for the quarter, we recorded EPS of $0.51 a share on revenue of just over $600 million, down from $0.61 per share on $661 million in revenue in this quarter last year. Cost discipline continued in the quarter with costs down 5% year-on-year on a reported and constant dollar/constant portfolio basis. The excellent work that the team has done will now allow us to exceed our previously stated cost guidance.

As we move into Q3, we continue to battle the macro headwinds that are dampening volatility and reducing volumes. We will do this by focusing on our new growth initiatives, accelerating cost savings and continuing to deploy capital in a disciplined way to reduce our share count.

Please turn to Slide 4. Slide 4 illustrates the strong progress that we are making in executing against our strategy. On the growth side of the ledger, we have several initiatives that are in progress and a number that have been completed, which we believe will yield return on our investment regardless of how the market environment evolves.

To drive our future growth, we are on track to launch a full-service CCP in June of next year. We are launching new products across our Derivatives franchise. We have implemented a new and innovative market structure with our RLP program, and we acquired Corpedia to bolster our corporate services business. We have also realigned our client-facing and product teams, as I alluded to earlier.

And on the efficiency front, we continue to show cost discipline as illustrated by our results. We have eliminated several senior management positions. We have notified LCH of our intention to fully insource clearing. We are looking at options to reduce our global real estate footprint and further streamline our technology costs.

In addition, we continue to look for opportunities to rationalize the portfolio. We recently unwound NYSE Blue, and we have made the decision to terminate our CFD initiative. Given our priorities with clearing, our organizational realignment, the ongoing macro headwinds and dampening client demand for CFDs, we've decided not to move ahead with this investment that we envisioned in retail CFDs. We were in the early stages of a multiyear investment, and I believe this decision evidences our ability to be flexible, focused and disciplined when it comes to capital allocation.

Lastly, on the capital front, we have an agreement in principle to maintain our investment in Qatar at 12%, rather than the initially envisioned 20%. We sold an additional 7% of NYSE Liffe U.S. to our partners. And lastly, we are continuing to buy back shares at attractive levels, and we have paid out more than 50% of our earnings year-to-date in dividends.

Please turn to Slide 5. Slide 5 is a refresher on our strategy compass. Before we dive into the review by segment, I wanted to make sure we remind you of the context for the different initiatives we have in progress. We talked about this at Investor Day, and we will continue to show you how our activities plot against the areas we have chosen to prioritize in the coming 18 to 24 months. The 6 areas we highlight on Slide 5 will be addressed in the coming slides, and then I'll turn it over to Mike.

So please turn to Slide 6. On Slide 6, we're going to focus on growth initiatives specific to our Derivatives business. In the upper left-hand quadrant, on July 16, we launched futures trading on DTCC GCF Repo Index on our NYSE Liffe U.S. platform. And just about 2 weeks of trading, open interest across treasury, agency and MBS asset classes has grown to over 15,000 contracts. The fact that the underlying index is based on actual secured interbank financing transactions is a clear differentiator and is aligned with the global regulatory trend of greater transparency for these markets. The launch of this product complements our strategy of continuing to build our interest rate franchise at NYSE Liffe U.S. through innovative approaches to markets.

In the upper-right quadrant, we highlight the continued strength we have witnessed in our equity options business in the U.S. NYSE Amex registered record-high market share of 15.7% in the second quarter, up 1% from last year and up about the same from Q1.

On the bottom half of the slide, we highlight current trends in our fixed income and equity Derivatives businesses and new product initiatives. First, in fixed income, the ongoing uncertainty in the Eurozone has driven some higher activity in our U.K.-based products on the Short Sterling side, with those products up 77% since the fourth quarter of last year, which was at a low, and the Long Gilt end, up 9% versus last year. These products are key examples of our diversification and strong position outside the Eurozone.

On the new product front, given the decrease in hedging and speculation on the short end of the curve, we are actively looking to move along the yield curve to allow us to generate interest rate business in a persistently low interest rate environment. A clear example of this is the recent launch of our mid-curve options products. On July 17, we launched additional mid-curve options on British pound and Euribor products, and through July 30, they have traded nearly 0.75 million contracts with open interest of about 0.25 million contracts.

Lastly, on our Swapnote product, which has all the characteristics of an OTC swap but is better correlated to the swap curve and is traded and cleared in an exchange environment, this product was relaunched with a new market-making program. The Swapnote product addresses both regulatory needs, as well as the new market paradigm of single-government bond curve that doesn't necessarily meet the needs of the current swap market. We believe the growth potential of this product will be strong over time.

Turning to equities, we've seen a rebound in index futures, and we expect to announce the launch of some new index futures contracts and new country single-stock products later this fall.

Please turn to Slide 7. On Slide 7, I'm going to walk quickly through the key milestones for establishing our full-service CCP NYSE clearing. There are basically 3 main delivery phases to our clearing strategy. First, with the aforementioned termination notice given to LCH.Clearnet in June, we are on track to establish a full-service CCP by the end of the second quarter of 2013. This will be the trigger for eliminating the payments that we now make to LCH for risk management services. This will also position us to gain new sources of income and better position us for new product and service launches.

Next, in the third quarter of 2013, we will establish new OTC clearing services to align with the latest regulatory mandates. We'll leverage our existing franchise by offering clearing for closely correlated products to provide our clients with cross-margining opportunities against their already established open interest.

Third and last, in the first quarter of 2014, we will consolidate all of our European Derivatives into a single CCP. This should bring us incremental clearing fees of about $40 million annually, strengthen our existing equity Derivatives platform and a single pan-European platform should deliver significant operational benefits to members, not the least of which will be major margin offsets of approximately EUR 1.2 billion, given today's open interest.

Please turn to Slide 8. On Slide 8, I'm going to focus on key developments in our Cash Trading and Listings business. Again, starting in the upper left, in our European Cash business, we have seen a nice pickup in market share, moving up more than 300 basis points in June. The share gains in the month of June came off the renewal and expansion of our liquidity provider program. This is all part of our focus on market quality, which is attracting new volume and new participants.

On the upper right, we launched a new and innovative micro structure in our U.S. Cash equities business, which is designed to address the growth of off-exchange volume. This was our effort to help level the playing field through replicating practices that are currently permitted on non-exchange markets. The newly approved Retail Liquidity Program for NYSE and NYSE market allows for price improvement for retail orders within an exchange environment, resulting in real transparent savings for retail investors. Retail order flow represents approximately 10% of the market, and as we all know, most retail orders do not currently make their way to exchanges. We are hopeful that this program will create a more attractive exchange environment for this customer segment and the liquidity providers that would like to interact with it.

Turning to the lower-left quadrant, as we've mentioned, we closed on the acquisition of Corpedia in June, which is designed to diversify our corporate services offering into key adjacencies, such as governance, risk and compliance. Corpedia has a deep and diversified client base of more than 500 customers across all verticals, of which about 25% are part of the Fortune 500. The business model has strong cash flow characteristics, limited capital requirements and is supported by favorable regulatory trends, which include intensified regulatory oversight, scrutiny and enforcement. Mike will provide you in his remarks with a sense of the revenue and expenses tied to this new acquisition.

Lastly, in the lower-right quadrant, our Listings franchise is gaining momentum on all fronts. We're winning more than half the technology IPOs year-to-date, and the tech pipeline is even stronger. Of the 8 companies that have moved to the NYSE in 2012, 2 of them were in the top 100 market cap companies listed on our competitor's exchange. Since 2010, a total of 38 companies have transferred to the NYSE, while 14 have transferred away, about a 3:1 win ratio. And as I mentioned earlier, the most encouraging sign is that there are more than 100 companies in the pipeline already filed with NYSE language. As is always the case, market conditions will dictate how many of these companies actually make it to the market, but on the whole, we feel very good about our Listings business where we continue to have many positive conversations with companies across a wide range of industries.

I'm also pleased to report that the Jobs Act, which we worked so hard on with the Venture Capital Association and others in the industry, has been received very positively by a lot of private companies. And in fact, in my last trip to California, every prospect I talked to said it had changed their thinking on their ability to go public, whether it was the opportunity to file in the early stages confidentially with the SEC and become more transparent when they were ready to do their IPO or whether it was the on-ramp capabilities of having to -- having the opportunity to scale into Sarbanes-Oxley compliance. It's clear that people know we played a significant role in that legislation. They're appreciative of it, and I think it's genuinely making a difference. So we believe that the combination of that, our efficacy efforts, our market model and our service offering will continue to differentiate us globally.

Lastly on Slide 9, before I turn it over to Mike, just a quick update on our commercial technology business. Financial technology is and will continue to be a critical element in the evolution of the capital markets. So the leadership position that we have achieved and continue to aspire to in this business is important for our future growth regardless of the near-term challenging environment.

There are several trends which are impacting the business in the near term, as well as that of our peers. First, technology spending in the medium term is either flat or down. As a result, the industry has shifted from a "build it and they will come" approach to "how can we do it cheaper" approach by costing out their projects. As the technology arms race has cooled with the decrease in trading volumes, technology is increasingly viewed by some as a commodity or an off-the-shelf product firms no longer have to build and house.

The second trend we see is as trading volumes in the fully electronic markets have declined, we are seeing a greater emphasis on the higher-growth OTC products that are in the midst of a migration to a more electronic-based system.

Thirdly, the globalization of the technology services space is continuing. And while we see ourselves as a global leader, there has been a greater focus in Asia where we are in an earlier stage of our growth.

Fourth, an increasing share of the spend from our customers is defensive, focused on things like regulatory compliance around reporting, compliance and risk management.

And the last trend, which eventually should be supportive of our business, is the acceleration of more managed services and outsourcing as clients try to manage their overall costs better.

So while we're clearly in an air pocket, we are doing a lot to actively respond to this challenging environment. First, while we are focused on long-term growth, we cannot lose sight of the short term. So we are reviewing immediate actions we can take to support and run our business more efficiently.

Next, we are improving our execution capabilities, namely, focusing on our costs, making sure we provide great service to our clients and the highest quality product.

Lastly, with the acceleration of the market trend toward managed services and outsourcing, we are placing an increased focus on solutions and managed services. I'm happy to report that the managed services pipeline is strong and building. We are in active dialogue with several investment banks, and we are in the process of rolling out several new MTFs, for example.

We will accomplish this by getting closer to our customers and by having our technology relationship team working together with our markets-focused salespeople. This is exactly what the new organizational construct that I referenced earlier should promote.

With that, let me turn the call over to Mike for a review of our financial results, and then I'll wrap up the call before we turn it over to your questions. Go ahead, Mike.

Michael Geltzeiler

Thanks, Duncan, and good morning. Slide 10 provides comparative GAAP results for the second quarter 2012. This quarter there are several reconciling items between our GAAP EPS of $0.49 per share and our non-GAAP EPS of $0.51 per share. In the quarter, we reported a $12 million charge for merger expenses and exit costs. The majority of the charge was related to severance for our Project 14 efficiency effort. Our GAAP results also include a net $2 million loss related to the winding down of our NYSE Blue environmental venture in April. Lastly, our GAAP tax rate of 21% was below our effective rate of 25%, attributed to some onetime benefits realized in the quarter.

Our review of our financial results from this point forward will exclude the impact of merger expenses and exit costs, disposal activities and discrete tax items. Slide 11 provides a more detailed look at financial results for the quarter. Lower volumes across most of our venues, or particularly, European Derivatives, coupled with a weaker euro, have negatively impacted our financial results versus Q2 2011. That said, Q2 trading volumes increased sequentially for European Derivatives and Europe and U.S. Cash.

Net revenues of $602 million for the quarter were down 9% year-over-year and increased slightly from Q1 levels. Costs were lower by $23 million or 5% for the quarter and are running $35 million lower year-to-date. For the second quarter, 39% of our operating expenses were denominated in either euros or pounds, 60% in U.S. dollars and another 1% in various Asian currencies.

We closed the acquisition of Corpedia at the end of the second quarter. We expect this business to generate approximately $7 million in revenue per quarter for the second half of 2012. The effective tax rate was 25% for the quarter, down from 26% in the prior year. The diluted share count was reduced by 6 million shares to 253 million this quarter. The period-end fully diluted share count was 249 million shares.

Slide 12 provides our consolidated and segment results on a currency-neutral basis. The U.S. dollar strengthened this quarter versus prior year for both the euro and British pounds by 11% and 3%, respectively. For the second quarter, 45% of our net revenues was denominated in either euros or pounds. The currency impact on net revenue for the quarter was a negative $22 million versus prior year and unfavorable by $3 million versus the previous quarter. Foreign exchange contributed an unfavorable $11 million to operating income this quarter versus prior year. On a currency-neutral basis, second quarter net revenues were down 6%, and operating income decreased 10% versus the second quarter of 2011. Operationally, revenues for our Derivatives and Cash Trading and Listings businesses decreased 12% and 5%, respectively. Commercial technology revenues were up 2%.

Slides 13 and 14 detail the financial performance for our Derivatives segment. Derivatives accounted for 30% of our consolidated net revenues and 36% of our operating income. Derivatives net revenues of $182 million in the second quarter was down 15% versus prior year, but up 3% sequentially. Despite a sequential quarter increase of 9% in European Derivatives trading volumes and an 8% increase in open interest across the exchange, the environment remains challenging due to our focus on the short end of the yield curve.

Revenue capture for the quarter was higher for NYSE Liffe versus Q1, but lower compared to the prior-year second quarter. The decline year-over-year was primarily due to a modified pricing in Q4 2011 for the trading of individual equity options and index futures and options on NYSE Liffe Amsterdam and Belgium. The increase compared to Q1 was principally due to a positive mix shift, principally higher sterling futures activity, given continued uncertainty in the Eurozone.

Capture for the U.S. options business was lower year-over-year but stable on a linked quarter basis. The decline in capture year-over-year was principally due to a few changes at NYSE Arca. NYSE Amex Options notched a quarterly market share record high in the second quarter of nearly 16%.

We gave LCH.Clearnet notice that we'll be terminating our outsourcing arrangement in June 2013, putting us on track to establish a full-service CCP called NYSE Clearing. This move is expected to save an annualized $30 million. Moving continental clearing to NYSE clearing is targeted for Q1 2014. This will enable us to realize approximately $40 million in annual revenues and traditional derivative clearinghouse margins.

Similarly, Slides 15 and 16 show the financial performance for our Cash Trading and Listings segment. Cash Trading and Listings accounted for 50% of our consolidated net revenues and 53% of our operating income in the second quarter. Cash Trading and Listings net revenue was $300 million in the second quarter, down 8% versus the prior-year period and down 1% compared to the first quarter of 2012. Global Listings revenues increased $2 million or 2% year-over-year on a constant currency basis.

European Cash ADV of 1.7 million transactions increased 11% from second quarter 2011 levels and increased 8% from the first quarter of 2012. Market share across our 4 primary markets, which excludes off-exchange trading volume, was 66% in the second quarter, down from 71% in the prior year but up from 65% in the first quarter of 2012. Market share in June was 69%, reflecting strong activity from a revamped supplemental liquidity provider program.

In U.S. Cash equities, volumes decreased 12% to 1.8 billion shares compared to prior year, but increased 2% from the first quarter 2012 levels. Our market share across all takes increased slightly sequentially but is down 200 basis points year-over-year. Non-exchange traded share, or TRF share, remains elevated at 32% of the U.S. equities market, down from 34% in Q1, but up from 31% in the prior year. In response to the growth in off-exchange trading, we have launched the Retail Liquidity Provider program in Q3, as Duncan discussed earlier.

Revenue capture for U.S. Cash increased to $0.043 per 100 shares handled for Q2, well above the $0.039 recorded in the second quarter of 2011 and in line with Q1. The 10% increase in capture helped offset the 12% decrease in trading volumes, resulting in a 4% decline in net trading revenues. Revenue capture for European Cash on a per-transaction basis decreased to $0.52 from $0.74 in the second quarter of 2011 and was down from $0.57 in the first quarter of 2012.

As average daily value traded and the average trade size has decreased, it has resulted in an increase in the number of transactions per day, artificially depressing our revenue capture on a per-transaction basis. While the fee per transaction has decreased 30% year-on-year, in terms of local currency fees and basis points, we're down only 5% year-on-year. The weaker euro and higher mix of volumes from liquidity providers has reduced Q2 capture versus Q1.

Slide 17 details the financial performance for our Information Services and Technology Solutions segment. Information and Technology Solutions accounted for 20% of our net revenue and 11% of our operating income in the second quarter of 2012. Segment revenue was $119 million in the second quarter, a decrease of $3 million from Q2 prior year. At constant exchange rates, revenues were up $2 million or 2% on prior year. For the first half of 2012, commercial technology revenues at constant exchange rates were up 4%.

Our top line growth is below our long-term expectations for this business and reflects a very challenging environment for financial technology spending in the industry. Clients are delaying technology decisions, reducing staff levels, which impacts market data revenues, and the lower volatility and trading environment is impacting co-location connectivity revenues.

Pipeline for solution and managed service fields are growing. We expect growth to be sluggish for at least one more quarter as we work through this cycle and execute the turnaround plans.

Margins for the quarter remained at 23% for the second consecutive quarter, below our 26% rate for all of last year. Given lower projected revenue growth this year, we have taken short-term actions to reduce costs for this business and expect segment expenses to be below last year's level for the second half of 2012.

Slide 18 provides a reconciliation of our underlying cost base and updates our 2012 cost guidance. Costs are below $400 million for the first time in years. Current period expenses of $396 million are rebased to currency rates for our 2012 cost guidance, resulting in a rebased cost base in -- for Q2 2012 of $400 million, $809 million year-to-date. We spent a total of $12 million on growth initiatives during the quarter. This translates to second quarter core expenses of $388 million and $789 million year-to-date. This compares favorably to our prior full year guidance for core expenses.

We are updating our full year expense guidance for strategic initiative as follows. With the acquisition of Corpedia, along with the $14 million of incremental revenue, we expect to incur about $10 million in costs in the second half of 2012. As Duncan mentioned earlier, we have decided not to move forward with the buildout of our contractor differences initiative, so we're no longer including it as a discrete investment. We expect to save $10 million, which we had anticipated spending on this project in 2012.

NYSE incremental costs in the quarter were $7 million and $11 million year-to-date. As I mentioned, we're now expecting incremental NYSE costs for the full year to be between $5 million and $10 million, reflecting the short-term actions we are taking to reduce costs in the business in the second half and protect margins. This will save about $15 million from prior estimates.

Our solid expense control in the first half, combined with the anticipated $15 million in discrete initiative savings, will put us on track to be well below our initial cost guidance for reported and core expenses. So we're revising downward our full year 2012 guidance to be between $1,612 million and $1,617 million on a constant dollar basis, using the rates of $1.35 to the euro, $1.60 to the pounds. We also expect our core expense base to be less than $1,580 million, which is below the low end of our original full year guidance.

Slide 19 details our cash and debt position as of June 30, 2012. Gross debt at June 30 was $2.3 billion, and there was a little over $400 million in cash on the balance sheet, bringing net debt to $1.9 billion. Debt levels increased slightly as we financed the share buyback and acquisition of Corpedia. Our debt-to-EBITDA leverage ratio increased to 2.1x, reflecting a weak first half for EBITDA. We have agreed in principle with the Qatar Exchange to maintaining our stake at 12%. This will allow us to forgo the 2 remaining $40 million payments.

Capital expenditures were $41 million in the quarter and $84 million year-to-date, in line with our full year 2012 guidance. The second quarter $2 million of CapEx was related to the buildout of our clearing capability in Europe.

We executed $177 million of stock repurchase in the second quarter, retiring 6.9 million shares at an average price of $25.60, and year-to-date, we've retired 11.2 million shares. Last week, the board declared a $0.30 quarterly cash dividend for the second quarter of 2012, which is payable on September 28.

Now I would like to turn the call back to Duncan for closing remarks.

Duncan L. Niederauer

Okay. Thanks, Mike. Before we open it up to questions, and I realize we've gone on a little longer than we sometimes do, so we'll -- so we hope to wrap this up at 9:00. But if we need to go a few extra minutes, we'll be prepared to do that, and obviously, we'll follow-up with many of you throughout the day.

So just a few closing remarks before we open up the phone to questions. In summary, we're pleased with the progress we're making on our strategy to create a global capital markets community that empowers our clients to innovate and collaborate. We believe we've made a lot of progress in executing against this strategy, and combined with the cost reduction plans we have in place and better management of our capital, we believe that the company is well positioned to return to strong earnings growth in 2013 and beyond.

And finally, before we get into questions, I think it would be appropriate to comment on the unfortunate situation that occurred this week with Knight Capital. As Knight reported, they incurred a technology issue that caused a routing error involving roughly 140 issues listed on our exchange. As we said Wednesday, the systems here at the NYSE operated and performed normally, and we believe that the human interaction on the floor, as well as some of our liquidity refreshment points that are built in as speed bumps into our model, actually assisted in mitigating this issue to some degree.

As many of you know, under our rules, we broke trades in a handful of the issues, which were found to be clearly erroneous. And after carefully reviewing the trading issue with the SEC and other market participants, we validated the trades in the remainder of the issues as is mandated under our exchange rules, rules that I would point out are uniform across all exchanges.

There has been some speculation in the media that this was somehow related to the launch of our RLP program. So let me be clear in saying that it had nothing to do with RLP. As I said a moment ago, RLP enjoyed a successful launch with multiple market participants trading on the new platform with no problems whatsoever. To be clear, the technology specs for this new order type were out in October of last year. We opened for user acceptance testing in January of this year. And even though the rule was just approved, this testing's gone on for months. And we sent notice of the official launch and a reminder of testing in the middle of July, and many market participants have tested with us during those -- during this period of user acceptance testing, including Knight, in fact.

We will continue to work with the SEC, FINRA and others to the extent we can provide any additional information they may need as we work our way through this issue. Happy to take more questions on that if it's relevant in Q&A.

And with that, we'll open the line for your questions. So Stephen, back to you.

Stephen Davidson

We're ready to take questions.

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Howard Chen representing Credit Suisse.

Howard Chen - Crédit Suisse AG, Research Division

Duncan, just picking up where you left off on the Knight events, do you anticipate any potential liabilities or exposures NYX may have? And maybe more importantly, just what do you see as the longer-term implications from an event like this?

Duncan L. Niederauer

Yes, I was going to say more in my remarks, Howard, because I thought we'd get a question on that. So let me just give you some additional thoughts, and hopefully, this will address it as much as we're able to today. So firstly, as I said in my remarks, while I don't want to go into too much more detail, I think it's fair to say that the market model we have here helped us flag this issue sooner than I think others would have been able to. So we went to work pretty quickly to dissect what we thought the root cause would be, and within minutes, we were in contact with Knight to begin working through the issue with them. I think subsequent to that, they've clearly articulated what the problem was, and I think Tom Joyce has handled this rather unfortunate situation as well as he could have, from my point of view, in terms of how he's communicated, how upfront he's been and how accountable he's been. And I think he's to be commended for that. In terms of what -- if you listen to what Knight has said, they publicly stated that the problem was caused cost by a software problem on their side. And I think while it's fair to say that this issue happened to be coincident with the timing of the launch of our RLP program, there is no indication, based on our review and reviews that others have done, that our software had anything to do with the problem. And in fact, as I said in my remarks, several firms have been actively using RLP successfully, and we don't see a problem with the software. In following the procedures that we follow in the aftermath of an issue like this, I think I want to be very clear, we adhered strictly to the provisions of the clearly erroneous rules. Frankly, the way those rules are written, I think correctly, they don't give exchanges a lot of latitude, and I think market participants agree that, that is more sensible. We coordinated with all the market participants, all the other exchanges and the regulators, and I firmly believe we made the right decision on that. Now at this time, we haven't received any claims relating to this matter, and we don't expect any. But we should be mindful of the fact that the situation is still unfolding. On the bigger issue, I'd say this is yet another instance that highlights the need for reforms in market structure in the United States. We've talked about this publicly, that the growing fragmentation and uneven regulations across what is now hundreds of competing platforms continue to fuel a crisis of confidence among investors. It's just too hard for them to understand how the markets work. As I testified publicly before Congress in June, I believe the time has come for policymakers to address the public concerns. And we fear that quite frankly, there's been too much focus recently on what I would call market microstructure incrementalism, and there hasn't been the right amount of public discourse on what we should really be focused in, which is the reliability and resilience of the markets during crises, during periods of volatility or aberrant behavior, and we should remember that we're here to serve the investors in the broader market, not individual participants or their business models. So I'm sincerely hopeful and of the belief that incidents like this will encourage the regulators to more seriously address these issues, and we've already indicated to the regulators, as we did to Congress in our testimony, that we stand ready to be an active participant in any and all dialogue going forward. So hopefully, that address the details and kind of where we think we might go from here.


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

Roger A. Freeman - Barclays Capital, Research Division

Maybe a bit more of a detail question, and hopefully, I didn't get this wrong. But the -- Mike, when you were going through the currency impact on the quarter, it seemed that this quarter, there was a bigger negative impact on operating income versus revenues, which -- sequentially, which is different in prior quarters. And I'm just wondering if there's anything that's changed then for the cost revenue match in Europe.

Michael Geltzeiler

Nothing in particular. I mean, I think it's complicated when you compare them quarter-on-quarter. I mean, when we talk about our European-based costs, obviously, some are in pounds and some are in euros, and the euro is declining faster than the pound. But the currency calculations that we're giving you and the currency impacts are precise.

Roger A. Freeman - Barclays Capital, Research Division

Okay. And nothing out of the ordinary?

Duncan L. Niederauer

It's the same as previous quarters.


Your next question comes from the line of Rich Repetto representing Sandler O'Neill.

Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division

Yes. Duncan, I find it interesting that you said that you notified Knight within minutes, as you said, but that's interesting. I guess my questions follow up on the RLP program. As you said -- as you say, Duncan, through no fault of its own, it got more fanfare in its launch, but -- and your other comments about looking at broader market issues. But I know the intention of the program was to bring retail internalized liquidity back to the exchange and back to the lit markets. But it also accomplished, to a lot of surprise, sort of custom segmentation where pricing -- other exchanges are looking at actually segmenting customers and pricing for different customer types. So I guess the point is, do you -- how do you balance that looking at broader market structured issues with now this precedent of segmented pricing by a client type? And then I'd also just love to get a feel for, in this week of retail execution turmoil, how the volumes in there went throughout the week?

Duncan L. Niederauer

All right. Why don't I let Leibo start on that one and talk to you about sort of what was underpinning our desire to do this? And keeping in mind that everyone else with whom we compete has been able to segment a lot more than an exchange has ever been allowed to. And while we're not trying to play favorites, we are trying to give retail a proactive choice, and we're trying to give liquidity providers the opportunity to interact with that flow in a transparent environment. But why don't -- Leibo, why don't you talk a little bit about the genesis of it and then kind of what we've seen? We've only had 2 or 3 days of activity, but what you've seen is what we're seeing so far.

Lawrence E. Leibowitz

Yes. Just to tag on to Duncan just at the end there. It is clear that this is a major shift in the way exchanges view their customer base. The concept that you can segment is a new policy direction. It's not clear where that will go, and I think that this is an experiment. In terms of how -- look, the idea is how are exchanges going to compete with all the other execution offerings that are out of the market, and this is simply one way to do that. In terms of the success of the program, I mean, I think our goals were relatively small this week, notwithstanding the issue the other day, which was have a very small controlled rollout. And we focused everyone on 5 stocks. We got a lot of different participants in. We've gotten some good trading through. We've gotten higher than we expected in terms of price improvement. But it's a small sample size, so we're not out -- not going to go out there, and I don't think it would be appropriate for us to be tooting our horn one way or the other on this right now, given the larger picture that's going on around us. Our goal is to get through this week. We're going to watch how it goes, talk to participants and roll it out in a controlled and stable way. Duncan, I don't know if you had anything else to add?

Duncan L. Niederauer

Added to the broader policy. I mean, does that get at the question, Rich? Because, I mean, what we've been saying to the regulators and policymakers for a while is it's all part of the level playing field argument, right. We're just trying to have the flexibility to do some of the things that the people with whom we compete do in less transparent venues, and I think this was a step in that direction. As Larry said, it was a pretty soft rollout. This was more to test the -- to kind of validate the concept this week, and we think it's validated. Several participants used it pretty actively, and I think our goal is to have this more broadly rolled out by September. And then we would hope, I think, that no later than the end of the year, we can assess, okay, did this make a difference, what kind of differences did it make and is this the beginning of a bit of a shift in policy, where we're given a little more flexibility than we've been given historically, which all the people with whom we compete outside of the exchange world are able to have today. So I think that's kind of where we hope to go, and we'll obviously report pretty openly on this going forward.


Your next question comes from the line of Brian Bedell representing ISI Group.

Brian Bedell - ISI Group Inc., Research Division

Duncan, I appreciate your comments on the market structure. Maybe just to tag on, add a little bit to that. To what extent do you think you can be persuasive or have -- provide leadership in changing market direction with the regulators? And if you could give us a sense of, obviously, the SEC has been studying this for a very long time, and there's a lot of complexity around it. Could you give us a sense of, if you had to speculate, what type of timing we'll see on changes to your market structure, and what are maybe the 2 or 3 most important things that you'd like to see change? And then just lastly, any comment on the impact of the financial transactions tax in France?

Duncan L. Niederauer

Right, we'll count that as one question, Brian, with multiple parts. So I'll let Leibo talk in a minute about what we think the potential for the impact of the FTT in France and potentially other markets will be. We'll get to that in a minute. In terms of the market structure, if you go back and reference the commentary that I shared publicly in both our written statement and then my oral remarks in front of Congressman Garrett's committee in the House, I don't think our feelings have changed with the recent events. We just simply think the recent events are another example that the structure that has evolved over the last decade in the U.S. has led to inexorable fragmentation. Really, an emphasis on speed, a feeling that somehow if something can happen faster, it is by definition better. And I think the more of this we see, we're all understanding -- meaning we, market participants and, most importantly, the regulators are understanding that speed is not always better. I think the market structure has gotten incredibly complex. It's virtually impossible to explain to a policymaker or an investor anymore. And I think all we're saying is not that we're trying to go back to the old days, but what we said to our sell-side customers and to the policymakers is it would seem that it's a time for all of us to sit around and acknowledge that whatever's happened -- sure, some good things have happened them. There's no question that spreads are tighter. But let's be honest, spreads are tighter more because of decimalization than because of anything that happened on the regulatory landscape in terms of market structure. When you went to decimals, that obviously made the spreads tighter. So let's acknowledge the victories that we've had and the things that made it better for investors, but at the same time, let's have a heavy dose of intellectual honesty and say that no one would look at this rationally and say, "It's not broke and we shouldn't fix it." There's clearly some things that need to be examined. Now without getting into details in terms of the 2 or 3 things we'd like to see, because I think they were all in the testimony so I don't need to be redundant, this week's a really interesting example, right. Because we sit here and we see things that are now able to happen, and you take a step back from that and say, "There must be things we could fix." For example, we've had a lot of talk in the wake of the flash crash, and I think we're certainly prepared to lead, as we did at that time in convening the various participants around the table to think about what we should do and individual and market-wide circuit breakers were put in place. Okay? We were -- we think that's important. It's always been a function of our model. And in fact, our speed bumps are tighter than the circuit breakers that the industry approves. Now I actually think those -- that our individual circuit breakers, which I would reiterate, we have not removed from our model nor do I think we should, I think that mitigated problems -- the problem on Wednesday to some degree, and it would mitigate other problems that could arise like that. So there's an example of where I think if we all just sit around and say, "How do we make it better? How do we re-instill confidence?" We're not asking to do away with dark pools. We're not asking for everything to come back to the exchange. What we are asking is for people to at least acknowledge this is indescribably complex, and I think it's incumbent on all of us to sit down and see what we can do positively. These things always take longer than we think. But I feel like this latest incident will be a call to action, and we've committed to the regulators that we're prepared to convene the industry and do whatever it takes to come to some consensus around the kind of things that could be done. Leibo, why don't you talk a little bit about the FTT? And I mean, it's early days, but just what we think about that?

Lawrence E. Leibowitz

Sure. Well, first, as a context, the new FTT that France has implemented is actually smaller still than the U.K. stamp tax, just to put it in context. And in intention, at the very least, it looks like it's supposed to have similar exemptions. I think one of the things that we have seen is a confusion in the market as to those exemptions, and that has caused some liquidity providers to pull out, at least temporarily, while they get counsel and get advice on how that's going to happen. And in fact, some of the directives just recently came out. We also saw some confusion, for example, where some custodian banks were in the U.S., were saying that they would not support transfer of ownership in French ADRs because they couldn't figure out double taxation and things like that, and we had a fear that we might have to not allow those stocks to trade. Now subsequently, the French government gave relief on that, at least, temporarily. So there's a lot of issues still up in the air. So it's hard to really draw any conclusions from a couple days of trading. We continue to believe that financial transaction taxes are not the best way to either raise revenues or punish people for things that should -- could be done other ways, and that interfering with the price discovery process is dangerous due to unintended consequences. Nonetheless, we do feel that the impact of this, if we can get the exemptions clarified, certainly in the equities market, would be relatively muted.

Duncan L. Niederauer

And again, it's 2 days. It's 2 days, Brian. But I mean, our volumes the last 2 days have been above average. So I think you'll read a lot about it, but I don't think it's going to be a high-impact outcome. It's also -- I just spent the last 4 days in Europe. It's very clear that in most jurisdictions in Europe, they are not actively considering a similar type of tax.


Your next question comes from the line of Patrick O'Shaughnessy representing Raymond James.

Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division

I was wondering if you can maybe provide some thoughts on what might serve as the catalyst for your GCF Repo contract to really start taking off in terms of volumes and open interest? I think a couple days ago, the Fed announced that it was -- or the Treasury announced that it was probably going to be issuing floating rate notes and that's certainly one of benchmarks that they're looking to. Is that kind of what you're pinning your hopes on?

Duncan L. Niederauer

Yes. I think that's directionally correct, right. I believe we think it's a good alternative to products that have previously been benchmarked against LIBOR. Obviously, it's early days. So we shouldn't get ahead of our skis here. But I think that if things like -- if the Fed were to do that or Treasury were to issue some notes and use that as an underlying benchmark, we certainly think that would be a good acid test for this. Frankly, we just thought it was a good innovation. And remember, we launched -- we had this on the drawing board before all these questions about the efficacy and accuracy of the derivation of LIBOR as a benchmark. But I mean, let's be a little realistic here, too, right. So we know that LIBOR is deeply embedded in -- and currently very, very important to basically how money markets function around the world. To our best information, there is more than $600 trillion of business tied in some way to a LIBOR benchmark, and some of that goes out for decades. So it's not just as simple, for example, as saying, "Okay. Don't list any more products tied to some of these underlying benchmarks." That's easy to say. It is not easy to implement. It is so embedded in how the markets work. So I think what we've said to the regulators here and abroad is we're happy to work with them. We're happy to work with their market participants. If people think there should be ways to address the concerns that have been expressed and to be part of implementing some change, whether it's different mechanics, new kinds of innovative products like we just launched, they should consider us to be more than eager to do that. But I think a lot of the participants we've spoken to feel that whether or not LIBOR stays as a standard, which given all the business that's marked to it, it's going to be hard to see it disappearing overnight. I think they're still inclined to use this because the repo product, at least for U.S. underliers, I think actually is a better hedge against some of the bespoke swaps people would put on than the -- than euro dollars might enable you to do. So news to come, we're going to be very transparent about the volumes. But given that we're only 2 weeks in, I think we're pretty pleased so far with how we've done.


Your next question comes from the line of Niamh Alexander representing KBW.

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

If I could go into the Technologies business, Information Technologies business, and you're pretty clear that the environment and the customers are just -- it's just slow and there's not much you can do to control that. But I guess we thought we might see some deals in the space. Are you kind of hesitant until the environment improves? And so that's one aspect of it. I guess another one is, are you still comfortable with the guidance? And then you've made some changes. You've highlighted them in your release around the Mahwah facility, and I guess that's part of that business. Can you expand a little bit on exactly what you're doing there?

Duncan L. Niederauer

Yes, sure. With respect to Mahwah, when we first opened it, it was a highly closed and limited facility. And I think what we've done is open the facility up for more vendor access, more cross-connect collaboration between vendors and things like that based on customer feedback. I wouldn't expect that, that would have an immediate impact, but that will, over time. What we want to be is the data center of choice for people locating applications, locating significant services, buying market data. And the more we restrict what they can do in that data center, the more you sort of cut them off before they can even get to the place they need to get to. So I think by opening these policies, which we've done both in Basildon and Mahwah, that will significantly help things. It just takes time because it's not like you suddenly make that change and everybody goes, "Oh, okay, great." It's just as they start to make their new decisions, now they can consider Mahwah more fully as the correct solution for themselves. Mike, why don't you talk a little bit about the guidance and kind of what we see the pipeline looking like, et cetera?

Michael Geltzeiler

And the pipeline first. So as we've mentioned, the managed services and solutions part of the business is the fastest-growing part of our business, but it's also the smallest. So there is a growing pipeline. We are in active dialogue, as Duncan mentioned in his opening remarks. But the core portion of this segment's revenues still comes from connectivity and co-location and market data and software sales. So it's a little bit of a mix issue, where you're going to need -- while that core is under some marketplace pressure, you're not going to get enough growth near term from the solutions and managed services to grow the business double digits. In terms of our guidance, we have adjusted downward our guidance to sort of low single-digit revenue growth. I mentioned constant rates, first half, we're at 4%. This quarter, we were at 2% growth. What we are focusing on is that the business year-to-date has a 23% margin. Last year, it had a 26%. We'd still like to try to hold that margin of last year. So you're going to see some better cost discipline in the second half that should improve the profitability, get closer to sort of last year's margins.


Your next question comes from the line of Jillian Miller representing BMO Capital Markets.

Jillian Miller - BMO Capital Markets U.S.

Just want to come back to the LIBOR issue. Your main short-term rate complex at Liffe is linked to Euribor, which seems to be also coming under some scrutinary -- scrutiny along with LIBOR. So just wanted to get your thoughts on how we should be thinking about the potential risk to that benchmark, if there are any, and your rate franchise in Europe, if they're -- if it does come to light that there was some manipulation of Euribor.

Duncan L. Niederauer

Yes. I think it's a good question, Jillian, and it's one we're asking ourselves a lot around here, too. Obviously, look, we're all familiar that the 2 benchmarks are calculated, there are idiosyncrasies in which the way they're calculated. The investigation to date has been pretty much focused on LIBOR. That's not to say it won't be focused on kind of all these different benchmarks. We're -- we have already been in conversations with the regulators and participants in the U.K. and in the EU. So to the degree we need to develop products that might provide an alternative, as we've been able to do here, we would be prepared to engage in the dialogue on that. But much as I said about LIBOR, this is not something you can change overnight, even if you thought that both of the underlying benchmarks had some idiosyncrasies that were manipulative. So I think we're going to pay very close attention. It is a different process, the way the 2 are calculated. But I don't think we can take 100% comfort from that. That doesn't mean we're not going to engage in the dialogue with the policymakers over there. In fact, we have. So more to come on all that, but I don't think this is going to happen quickly on either side of the pond. But keep in mind, there are some differences to how the benchmarks are calculated too.

All right. We thank you guys for participating. And anybody who didn't get their questions answered, the team will be available to you today. And we wish everyone a good rest of the day and a good weekend. Thanks a lot.


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

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