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Executives

Vincent Palmiere - Head of IR

Bob Greifeld - CEO

David Warren - CFO

Magnus Bocker - President

Ron Hassen - SVP and Controller

Analysts

Rich Repetto - Sandler O'Neill

Alex Brown - Lehman Brothers

Michael Vinciquerra - BMO Capital Markets

Daniel Harris - Goldman Sachs

Patrick O'Shaughnessy - Raymond James

Dan Fannon - Jefferies

David Grossman - Thomas Weisel

Howard Chen - Credit Suisse

Josh Elving - Piper Jaffray

NASDAQ OMX Group Inc. (NDAQ) Q2 2008 Earnings Call August 6, 2008 10:00 AM ET

Operator

Good day and welcome to the NASDAQ second quarter 2008 earnings results conference call. (Operator Instructions).

At this time, I would like to turn the conference over to the Vice President of Investor Relations, Mr. Vincent Palmiere. Please go ahead sir.

Vincent Palmiere

Thank you, operator. Good morning and thank you for joining us today to discuss NASDAQ OMX's second quarter 2008 earnings results. Joining me are Bob Greifeld, Chief Executive Officer; David Warren, Chief Financial Officer and Magnus Bocker, our President, also on the line is Ed Knight, our General Counsel. Following our prepared remarks, we will open up the line for Q&A. And if you haven't done so already, you can access the results press release on the NASDAQ OMX investor relations and newsroom website at www.nasdaqomx.com. If you have any follow up questions after the call, you can contact me at 212-401-8742.

Before we begin I would like to remind you that certain statements in the prepared presentation and during the subsequent Q&A period may relate to future events and expectations and as such constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. I urge you to read the full disclosure statement concerning such forward-looking statements in our press release and other factors detailed in the company's Form 10-K and periodic reports filed with the SEC.

With that I will turn the call over to Bob.

Bob Greifeld

Thank you, Vince, and thank you, everyone, for joining our call. I am happy to report that NASDAQ OMX delivered outstanding results this quarter, validating our strategic plan to transform our organization into a fully global and diversified multi-asset exchange. This is a very different business than what existed in 2003. Today, we operate the largest, most liquid stock exchange in the United States or the third largest US based options market and have operations that stretch across six continents. Our technology powers markets across the globe, supporting cash equity trading, derivatives trading, clearing and settlement and many other functions. We believe that our diversified business model is compelling and will provide unique growth opportunities for the company in the short and the long-term.

When you think about NASDAQ OMX, it is important to realize that our core competency is the operation of a transaction processing business. Our goal is to create superior returns for our customers and investors by leveraging massive scale against the extreme efficiency of our transaction processing unit. A common theme that you will consistently hear from me is that we look for opportunities to process more transactions on our fixed cost trading engine.

All of our initiatives, including NASDAQ OMX Europe, the NASDAQ Options marketplace, the BSE acquisition, the transaction with the Philadelphia Stock Exchange, and our market technology business seek to increase our scale and efficiency and it is this leverage that will drive profits. NASDAQ OMX delivered outstanding results during the quarter on the strength of our diversified business model. Although net NASDAQ volumes were down around 10% from last quarter, we still managed to deliver these outstanding results.

On the integration front, things are moving full steam ahead with respect to OMX. Earlier this year, we committed to achieving $20 million to $30 million in annual run-rate synergies by the fourth quarter of this year. During our first quarter earnings, we increased that target to $25 million to $35 million in annualized synergies. Today, we feel confident enough in the progress of our integration efforts that we expect to achieve $100 million expense synergy target by the end of the first quarter of 2009. We had previously expected to achieve this target by the end of 2009, end of calendar year 2009, a dramatic move-up of nine months.

With respect to PHLX, although we would have liked to have closed this deal sooner, one benefit of the delay is that we were able to finely tune our plans and hit the ground running. The integration of PHLX will be on a scale similar to that of Brut and INET, allowing us to retain more than 100% of the revenues but dramatically lower expenses. We have already made significant progress in achieving synergies by reducing our staffing needs by 25% or approximately 100 positions within one week of closing the deal. Previously, we had communicated that we would achieve $50 million in synergies within 24 months. These savings will happen much sooner and today we can announce that we expect this deal will accrete to us at the end of the fourth quarter of 2008.

NASDAQ OMX Options completed its first full quarter of operations in the second quarter. In July, it is averaged around 176,000 contracts a day, or approximately 1.2% of total US options volume, up from the second quarter when we traded an average of 82,000 contracts per day, an increase of over 100%. This is a great example of how we are leveraging our fixed cost platform.

We believe that NASDAQ OMX Europe could be the single largest organic growth initiative for NASDAQ OMX. Despite the fact that electronic trading has been in Europe for sometime, we believe that the market is in the early stages of a competitive environment that has created growth opportunities for NASDAQ OMX. When we introduced our platform on the routing technology in Europe, we will be in a prime position to attract all market participants. During the past month, we announced our clearing efforts with the European Multilateral Clearing Facility, EMCF, a wholly owned Fortis subsidiary to deliver our clearing services. We also announced our co-location services, which will enable participants to locate their trading engines onsite in order to reduce latency. We continue to make progress with this initiative and expect to launch the market in the end of September.

Now turning to the Boston Stock Exchange, we expect to close this transaction in the third quarter. It remains an exciting opportunity for us, one in which we expect to achieve synergies in clearing and we will look to fully utilize the second equity license. Our existing technology will be leveraged with this initiative as we use it to introduce a high scale, low cost trading platform that will sit in the data centers that houses the NASDAQ exchange platform.

And finally, I don't believe that Nord Pool gets the attention it deserves here in the US. We are very excited about this business and what we believe it holds for us. Nord Pool's carbon market offers standardized contracts for mission allowances and carbon credits. Nord Pool's experience and knowledge of the commodity market complemented by OMX's technology and its customer base creates an opportunity that will benefit from the development of a global market for carbon dioxide emission allowances. Nord Pool was the first energy exchange to deal in the spot market for electricity and we see a great opportunity to build upon their leadership position to expand trading in electricity throughout Europe.

Now let me quickly touch on operating highlights for the quarter. Moving on to market services within transaction services, we once again maintained our leadership position as the single largest pool of liquidity to trade US equities. We are the largest liquidity pool in the trading of NASDAQ-listed stocks and Amex-listed stocks and on a couple days in July, remarkably we were also the largest in trading NYSE-listed stocks. Overall, we matched 29.6% of all volume in the second quarter, up from 28.8 in the second quarter last year. During the quarter, we also made strides in market data, becoming the first exchange to offer free universal access to real-time stock data. Google, CNBC, Dow Jones and Xignite have all signed up and we anticipate there will be others.

We all saw a continued success with our flagship proprietary data product. TotalView subscribers grew by 53% from this time last year to a total of 32,700 users. Finally, Market Replay, a Tivo-like tool for the stock market underwent some major enhancements during the quarter. We added consolidated trade data and made replays available on a 15 minute delay, down from prior periods of 24 hours. Market Replay is a prime example of the innovative products that we are developing at NASDAQ OMX.

Now on to the listing side of our business. In a difficult IPO environment, we managed to achieve an extraordinary quarter. We attracted 54 new listings to our markets, including switches from Amex and NYSE. 42 new listings came from our US operations and 12 from non-US. Notable switches from NYSE to NASDAQ included Computer Associates becoming the first company to switch and keep its two-letter symbol and in July the CME group moved their listings solely to NASDAQ.

Further, we added Celera; previously a tracking stock of NSYE listed Applera to our increasingly impressive group of innovative healthcare companies. All total, we had a total of three switches announced during the quarter from NYSE totaling over 31 billion in market cap, our largest gain to-date. And as we continue to innovate in financial products introducing 19 new indices such as the NASDAQ OMX, Middle East and North African index and with the partnership with Clean Edge, we introduced the NASDAQ OMX Clean Edge Global Wind Energy Index.

We had a great quarter in market technology and have great momentum. During the quarter, we won contracts from both the Tokyo Commodity Exchange and the Hong Kong Mercantile exchange. TOCOM is Japan's largest commodity exchange with more than 75% market share. Hong Kong Mercantile is a new commodity exchange that will offer uniquely structured contracts to the international and domestic trading community. Our position as the premier provider of technology to exchanges will be further enhanced as our operations become increasingly integrated. This has been an outstanding quarter for NASDAQ OMX, as we excelled in challenging times. The results we delivered this quarter were derived from the success of execution of the preexisting business plan of old NASDAQ and old OMX. During the quarter, substantial efforts were expended on creating an integrated NASDAQ OMX and an integrated NASDAQ OMX PHLX. The synergies from these efforts will provide value to our shareholders and our customers in the quarters to come.

I now turn the call over to David.

David Warren

Thanks, Bob, and good morning, everyone. Thanks for joining us today. It's good to be with you. Net income for the second quarter was $101.6 million, or $0.48 per diluted share. When reviewing these results on a pro-forma non-GAAP basis, which we believe provides for a better comparison to prior period operating results, net income for the second quarter was $101.8 million. It changes very little. It still stays at $0.48 cents per diluted share, although the differences in the prior periods are greater. So when we compare on a pro-forma non-GAAP basis, the $0.48 represents an increase of 32% when compared to the second quarter of last year and it's up 5% from the first quarter of 2008. The FX impact on EPS for the company comparing 2Q to the first quarter and the second quarter to the fourth quarter of last year was $0.01. In comparing the second quarter of this year to the second quarter of last year, it was $0.03.

Before I jump into the details of our results, I would like to first walk you through some of the changes we have made to our detailed revenue statement. Some of these are in response to comments we have heard from you and we appreciate those. I think you will find these improvements will provide more clarity around how we generate revenue. Specifically within market services, we now have four broad revenue categories, transaction services, market data, broker services and other.

Within transaction services, we have cash equity trading and derivative trading and within each of those categories, we have US versus European revenue. Also included in transaction services are access services revenue. In market data, we have three categories, US Tape Plan revenues; US market data revenues, which were previously labeled US proprietary revenue, and European market data revenues, which were previously labeled non-US proprietary revenue. US Tape Plan revenues represent the revenue collected for Tape A, B and C, net of our revenue-sharing programs and UTP sharing. Previously Tape A and Tape B revenue was included in Execution and Trade reporting revenue. Broker services revenue is generated from providing technology and back office administrative services for customers trading on the Nordic Exchange. This revenue was previously included in non-US Execution services revenue. Revenue statement remains unchanged for our remaining businesses, Issuer Services and Market Technology.

Now turning to our results, I am going to dispense with my usual detailed review of the performance of each business, as these are well covered in our press release and have been further amplified by Bob's remarks. Instead, I would like to focus my time and remarks on expenses and our progress in achieving synergies on the OMX and PHLX acquisition. Second quarter total 2008 expenses were $225.4 million, an increase of $9.2 million over the first quarter. These expenses included number of charges that mask the picture of how we are progressing on an ongoing operating expense level. This is a fact of life with acquisitions, but as we have done with all of our past integrations, I will go into a fair amount of detail here to explain the changes.

Included in total expenses for the quarter, were $5.7 million of merger-related expenses, an increase over the $1.4 million of merger expenses recorded in the first quarter. The decline in the dollar against the Swedish krona from the first quarter to the second quarter increased our Q2 spending by approximately $3.5 million. We also increased our investment in the NASDAQ Options Market and NASDAQ OMX Europe, two of our major strategic initiatives that will be key drivers of future revenue growth. The incremental investment for Q2 over Q1 was $3 million. Excluding the impacts of all these factors, on a non-GAAP basis, adjusted operating expenses were $212.2 million, down approximately $1.5 million from the $213.7 million from the first quarter.

Now I will give you more detail on the variances for compensation and depreciation, two expense categories that did have some movement. Q2 compensation expense, compared to Q1, increased $10.7 million to $115.2 million. While we did reduce headcount by approximately 50 positions in the quarter, the savings from these actions were more than offset by approximately $2 million in FX impacts and another $2 million related to merit increase and the amortization expense of equity grants awarded to OMX employees joining the new company. The largest component of this variance, however, is $7 million of incremental incentive compensation recognizing the improved performance of the company through the second quarter and projected for the balance of the year. We expect to book an additional $7 million of incremental incentive compensation for the second half of the year, meaning compensation expense will be reduced by $3.5 million for our Q3 and again for Q4.

In addition, as part of our technology road map decisions, approximately 30 employees have been notified of their terminations and will be leaving the company in the third and fourth quarters resulting in a reduction in compensation expense of approximately $4 million annually. The decline in depreciation expense results largely from the lower valuation of certain intangible assets. Recall from our Q1 conference call that as part of our technology road map, we had accelerated the replacement of certain OMX developed technology, which results in a lower valuation of these intangibles and lower depreciation expense. We have also adjusted depreciation expense in the pro-formas for, and you will see this specifically in the comparisons to Q2 '07 and Q1 '08. If we look at other income, dividend and investment income of $2.9 million reflects a dividend that our OMX subsidiary receives each year during the second quarter from our investment in the Oslo Bors. We also recorded a $4.9 million gain on foreign currency option contracts relating to hedging or foreign currency risk in connection with the Nord Pool acquisition.

Our effective tax rate for the quarter was 32.3%, a decrease from the 35.8% recorded in Q1. This benefit is due to a higher percentage of earnings from non-US sources and from the non-taxable treatment of the dividend received from Oslo Bors. As a global company, tax planning is now a more significant factor in our bottom line and we will continue to be very focused on it. For the balance of the year, I am anticipating your question here; we expect our effective tax rate to be in the range of 30 to 32%.

Turning briefly to the balance sheet before I discuss OMX and PHLX, cash and cash equivalents at quarter end were approximately $740 million. Of this amount, approximately $409 million is reserved for regulatory needs and commitments for the PHLX and Boston acquisitions. NASDAQ OMX has further strengthened the ring-fencing of its subsidiary that incorporates the Nordic clearing house during the quarter. As a result of these efforts, Standard & Poor's has assigned an individual credit rating of A-plus to our clearing sub. This credit rating confirms the Nordic clearing house's strength and credibility as a central counter-party and will create the foundation for future growth and increase our competitiveness as a clearing house. And finally, to finance the PHLX transaction that we closed earlier, we drew down another $650 million from our existing credit facility and obviously this incremental borrowing is not included in the $1.6 billion of debt obligations that was on our June 30 balance sheet.

Now let me turn to synergies and conclude. As Bob discussed, we have made excellent progress on our integration of OMX and expect to achieve the $100 million of expense synergies in the first quarter of next year. We have included a schedule in our release, the reconciliation of GAAP to pro-forma non-GAAP run rate operating expenses. Sorry for that long title, that compares our Q2 spending with expenses for Q4, the right starting point to measure the individual spending of each company before we came together.

You will see the Q2 spending has been adjusted for merger expenses, foreign currency impacts, investments, and incremental incentive compensation, factors that I have already discussed. We have also adjusted marketing expense to a normal level, since our Q2 marketing expense was seasonally low. With these adjustments, we have reduced quarterly spending by $8 million to date, bringing us to an annualized savings of approximately $32 million, near the midpoint of the synergies we expected to achieve by the end of this year, as we discussed with you on our last call. We have made very strong progress.

Now to Philadelphia, as Bob mentioned, we used the delay to our advantage to increase our focus on integration efforts. We recently released pro-forma results for PHLX. From these statements, you can rightly conclude that on a pro-forma basis, PHLX resulted in a pre-tax loss of $6 million for Q1, factoring in the interest expense and acquisition of intangibles, a $2 million pre-tax loss per month. This is the right starting point for PHLX. We have already achieved significant synergies on this acquisition.

As Bob mentioned, approximately 100 people have received separation packages and these positions have been eliminated. We have also reached agreement with key members of PHLX senior management to leave the company after a brief transition period, and we have eliminated compensation expense related to PHLX's equity plans. Taken together, these actions will result in the savings for the remaining five months of the year of approximately $11.5 million. In addition to headcount, we are also working on actions to lower occupancy and technology expenses for the remainder of the year. However, my point is that our headcount actions that have already been taken alone will offset the $10 million of pretax losses that we would expect to incur before synergies. Simply put, we are executing extremely well and anticipate that our OMX and PHLX acquisitions will accrete significantly ahead of schedule.

In 2009, OMX and PHLX will be integrated and we can look to our 2009 budget process as one company and we will be in a position to provide you with full year expense guidance for these integrated efforts sometime in the first quarter of next year. As Bob said, Boston and Nord Pool will fall into place as we expect for the balance of the year. As we look to the balance of the year and into next year, we also have scheduled retirements on our debt that are planned, that will further improve our operating leverage. So we are very pleased with our progress to date and a lot is still to come, but we are locked in on those plans. And I now turn it over to Bob.

Bob Greifeld

Thank you, David. Well done. We are open for questions.

Question-and-Answer Session

Operator

(Operator Instructions). We'll take our first question from Rich Repetto with Sandler O'Neill.

Rich Repetto - Sandler O'Neill

Yes, good morning, guys. Congrats on a strong quarter.

Bob Greifeld

Thank you, Rich.

Rich Repetto - Sandler O'Neill

I guess the first question is on the synergies. If I understand it right, you're going to realize the 100 in 1Q09, so that means you got 68 annualized, I know it doesn't have to come out, but that's what you're going to cut on by year-end. And just trying to get what the quarterly rate might be, David, you know, you said cap and hap [0:56/18] and or is it more back ended?

David Warren

The actions are already in place. If you take a look at the headcount actions, and some of the actions in occupancy, those two alone generate some big savings. Those tend to be more towards the end of 2008, fourth quarter. So I would think that definitely there will be progress in the third quarter, but more of the progress comes in the fourth.

Bob Greifeld

So it's not going to be linear. But it's not going to be completely lumpy also, Rich. Does that help?

Rich Repetto - Sandler O'Neill

Yes. But in any case, it's all out by year-end, so you can realize the full $100 million in 1Q.

Bob Greifeld

No. What we're saying, we'll have it done by the end of February.

Rich Repetto - Sandler O'Neill

Okay. All right.

Bob Greifeld

As we've said, that's obviously the target we're driving towards. We want to be able to claim we got it done within a year. So I think you correctly said we're 32% of the way there, in terms of how the numbers hit the income statement. But in fact, we've obviously taken actions that get us a lot closer to the goal. It is a question of when do they show up in the numbers.

Rich Repetto - Sandler O'Neill

Understood. And then on the PHLX. Your comments, David, all revolved around expenses and how you can offset it just from an expense standpoint. I unfortunately didn't get to see these 1Q numbers. But if you got option volumes, like what about the revenue side is the question? If you get option volumes up plus 30% year-over-year, I'm just trying to see how is that factored in as well?

David Warren

Yes. I'll just give you the starting point on the pro-forma and then Bob can comment on direction of it. But pro-forma showed PHLX for the first quarter reporting revenues of $39.2 million.

Rich Repetto - Sandler O'Neill

Okay. Interesting, because I think that year was 100 million in total. Anyway, I can do follow-up questions on that. I guess my last question, Bob and David.

David Warren

Rich, if I could just interrupt. I think the analysis that I gave you, you've got it is that the expense actions alone just on flat revenue allows this deal to accrete.

Bob Greifeld

Right. So, Rich, our goal is to overachieve in both categories, so we think we'll do better on the expense takeout than what we had presented to our board and we feel very comfortable with that. We also see that the revenue will come in higher than what we had anticipated last year. So we're going to win on both counts.

Rich Repetto - Sandler O'Neill

Understood. Okay, and then the very last question is on the OMX technology revenues. Last quarter was much less, this quarter I think it was $38 million, $39 million, and I see the metrics that you put in the metrics at the bottom of the metrics page, but I don't understand, whether this is a good run rate, the $39 million versus I think it was $11 million or $12 million in the prior quarter.

Bob Greifeld

I think it was higher than that in the prior quarter, but, Rich, I think what we said last quarter and it's important to realize this business will be somewhat lumpier than other businesses we have in the portfolio, because certainly you have big deliveries of big contracts in a given quarter and that doesn't necessarily follow that it will be there in the following quarter. We'll say that the second and the fourth quarter tends to be the stronger quarters for this business.

David Warren

Yes. And Rich, the right number for the, for Q1 is 31.1 in the revised pro-forma.

Rich Repetto - Sandler O'Neill

Yes, I'm sorry. Correct, right.

David Warren

But just to amplify a little bit more of Bob's comment, we did begin recognizing revenue on one of the major contracts. Obviously we signed that order up a while ago, but, again, speaking to Bob's comment, it's lumpy with respect to how you've got the contracts in and then some of them are larger than others.

Rich Repetto - Sandler O'Neill

Okay. And just to sneak one last one, the non-displayed orders, how is that going with the price increase there and that's all I have. Thanks.

Bob Greifeld

It's gone incredibly well for us and that we've been able to maintain share in that type of order while increasing the capture. So we certainly feel good about that.

Rich Repetto - Sandler O'Neill

Thanks, guys.

Operator

(Operator Instructions) We'll next go to [Alex Brown] from Lehman Brothers.

Alex Brown - Lehman Brothers

Hi, good morning. First off, to follow up on Rich's question on the technology revenue, you said in the last quarter that some of your clients were holding back a little bit because of the integration and the closing of the OMX deal. Now, did the second quarter reflect some 1Q revenues flowing into 2Q and have your clients’ increased the spending from there?

Bob Greifeld

Yes. I'll ask Magnus Bocker to comment some more on that.

Magnus Bocker

Hi, Magnus here. I think you were right. We were a little cautious coming out when we reported the first quarter and we have seen that we have strong bounce back from clients. Now when they know what we are doing and what we are focused at. We have announced the technology road map just six weeks into the merger. I think that's been supported due to the strong sales we've seen in the second quarter. So I think you are right in your analysis here.

Alex Brown - Lehman Brothers

All right, and then switching gears to the European, pan-European market, when you announced the pricing there, 0.3, 0.2, which is very consistent with Triax, which is already active over there. So, can you talk a little bit about your pricing discussions with clients, how you got to this 3, 2, which I think originally you were thinking maybe more to the 0.2, 0.1, at least what we had heard. Then related to that, can you also talk about your routing pricing which you have published? Obviously being common pricing is very complex, but I would be interested to know if you look at routing more as a loss leader, which you've done in the US before, or if it's a break-even business or if' you're reason trying to make a spread there. Thanks.

Bob Greifeld

Hi. First I would say you're a little bit ahead of us and that we have not officially announced any pricing. We certainly are in pricing discussions with a number of customers. What I can say is from a policy or a philosophical approach is we expect to have a capture rate that's very similar to the capture rate we have in the US so we're not going to take an incremental approach to it, and we look forward to publicizing the pricing. We're working hard on it and you'll probably hear from us as we get to the early part of September.

Alex Brown - Lehman Brothers

Then maybe on the routing, on the second part?

Bob Greifeld

Same answer on the routing, but I do want to say that we're entering this market obviously to make money and I tie back to my opening comments, is our fundamental operating thesis is that we want to lever our fixed cost platform with scale, so we're moving our technology, it is working here in the states there. The incremental costs for us is very low and similar to our NASDAQ Options marketplace, it does not take a lot of volume for us to make a good return.

Alex Brown - Lehman Brothers

All right. Thanks.

Bob Greifeld

Yes.

Operator

We'll take our next question from Michael Vinciquerra with BMO Capital Markets.

Michael Vinciquerra - BMO Capital Markets

Good morning.

Bob Greifeld

How are you doing, Mike?

Michael Vinciquerra - BMO Capital Markets

David thanks for all the additional financial detail. I'm sure your people have been working hard on all this. One question for you on the PHLX, just looking in the filing that you put out late last week, if I'm looking at it correctly, the two lines, and you mentioned this, depreciation and amortization and then interest expense, if I'm looking at those right, depreciation will go up without any other changes about $2.7 million a quarter and we’d be looking at interest expense of around $12 million. Is that the right way to think about it?

David Warren

You're correct on depreciation. If you're looking at interest expense of approximately, it was 9.9 for the first quarter. I should say that the LIBOR, obviously this is a LIBOR-based financing, so LIBOR for the first quarter was quite high. It's come down 30 basis points in Q2. But the right number, if you're looking at Q1 pro-forma, it would be $10 million for interest expense.

Michael Vinciquerra - BMO Capital Markets

Okay, very good, thank you. And then among all the good news that you've announced, I want to ask about your share in your own listing. Fortunately you're gaining share in the NYSE side, which is obviously growing much faster, but can you talk about the loss share in your domestic NASDAQ-listed trading?

Bob Greifeld

Yes. We certainly live in a competitive environment and we pay tremendous attention to it. Our fundamental requirement is obviously to deliver return to our investors and we feel quite proud of the actions we've taken with respect to our non-displayed order that improved our financial performance. So, we think we're at a good balance point, but it's something we evaluate on a regular basis.

Michael Vinciquerra - BMO Capital Markets

Fair enough. Okay. Thank you, Bob.

Operator

We'll take our next question from Daniel Harris with Goldman Sachs.

Daniel Harris - Goldman Sachs

Good morning. On the NASDAQ Options platform, as opposed to the Philly and you’ve gotten a decent total, given at you started from a starting stop. Can you guys comment a little bit about speed of that platform versus what else is out there? What you're hearing from clients and then what your expectations are as a mix of those two businesses?

Bob Greifeld

Right. I think the first point is we recognize we're on a long march and we're simply significantly ahead of where we thought. We are involved with a large number of customers. We're working with a large number to have them booked into the marketplace. As we stand here today, we essentially have two liquidity providers into the system. We expect that number to increase as the quarters go by. As we're engaged in the dialogue with the customers, we're certainly taking feedback from them with respect to features and functions that we want to add to the platform and it's a positive reinforcement cycle today. The speed of the platform is clearly superior to anything that exists in the marketplace today and we look forward to having that platform really excel as the volume continues to increase in the options marketplace.

Daniel Harris - Goldman Sachs

Okay. Thanks. That was helpful. Then if I could just touch a little bit more on the market technology that you discussed a little bit earlier. Is there another way to think about it? Is it our percentage that's ongoing maintenance or recurring revenue and some that's going to be more lumpy roll out revenue and if that is true, can you certainly help us frame how we should think about that?

Bob Greifeld

Sure.

Daniel Harris - Goldman Sachs

Good.

Bob Greifeld

I think what you could think about, and this is for those that have followed the old OMX, is that the US GAAP and the way we service our clients might be of some effect to the lumpiness. That is mostly coming in not on the line of facility management, but either on the project and the service side.

Daniel Harris - Goldman Sachs

So is there a way quantitatively to think about that?

Bob Greifeld

I think when you look into it going forward and then you go back, you will see that the, the lumpiness might not be that huge, but you will see a few million up and down quarter-on-quarter and that will be mostly on the license, support and project revenue line.

David Warren

Let us say that we'll endeavor for the next quarterly release to give some better visibility into that business, but it will obviously have contract, it happened to one quarter that don't necessarily mean they will be that same level of contracting in the next quarter.

Daniel Harris - Goldman Sachs

Okay, thank you.

Bob Greifeld

The other one to add to that is what you also saw on the matrix of, where you saw the order intake, which is also to some extent a guidance and order backlog to some extent, guidance for your expectations of revenues to be recorded.

Operator

We'll take our next question from Patrick O'Shaughnessy with Raymond James.

Patrick O'Shaughnessy - Raymond James

Hi, good morning.

Bob Greifeld

How are you doing, Patrick?

Patrick O'Shaughnessy - Raymond James

Pretty good. I was wondering if you can kind of give us an update on the Nord Pool acquisition, as far as timing and what you are expecting from the integration.

Bob Greifeld

All right. Well, that has been delayed through regulatory review. We're obviously, like we were with Philly, anxious to close the transaction. That will probably close sometime in the fall, October, November-type timeframe and we are, like Philly, fine tuning our plans for integration of the acquisition. They have continued to excel as a stand-alone company, so as I said, we're anxious to complete it.

Patrick O'Shaughnessy - Raymond James

Great. And then the only other question I had was if you can provide the revenue impact of currency translation during the quarter?

Bob Greifeld

As they are looking at that number, I would say with respect to Nord Pool, we're happy to report that both presidential candidates support carbon trade in the US and that could represent a wonderful opportunity for us, because it's one of their core competencies.

David Warren

Yes, it's David here. Ron Hassen our controller has the answer to your currency question.

Ron Hassen

Yes. When you compare the second quarter versus the first quarter to $0.02 benefit, when you compare the second quarter versus the fourth quarter it's a $0.03 benefit. Then when you compare the second quarter over second quarter '07, it's a $0.07 benefit.

Patrick O'Shaughnessy - Raymond James

Great. Appreciate it.

Operator

We'll take our next question from Dan Fannon with Jefferies.

Dan Fannon - Jefferies

Good morning. Thanks for taking my questions. Just a comment or question around OMX, obviously you guys are doing very well on the cost cutting side and I just want to clarify that those improvements in synergies in the push-up, is that more than offsetting any potential changes on the negative side that have occurred in the revenue as you guys were projecting this out when the deal was announced?

Bob Greifeld

I would say yes, and we do still see tremendous revenue opportunity with OMX. I think it's important to recognize in the Nordic marketplace today, they have a very low velocity of trading, so at old NASDAQ we have a very high, OMX, we have a very low, so clearly one of the synergies on the combined company is to increase the velocity of trading in the Nordic marketplace and we're working hard on that. We expect to see I think some fairly dramatic progress on that in 2009.

Dan Fannon - Jefferies

Okay. And then in terms of your launch in Europe at the end of September, what potential of hurdles remain out there that could delay this launch or any other that we should be looking for?

Bob Greifeld

We need final approval from the FSA. We're expecting to get that by the end of August and we do find them to be a responsible organization as a regulator. So we're comfortable and confident that we will get that approval, but from the part of the process that we control, I think the effort has been well managed and well led and we are ready to go.

Dan Fannon - Jefferies

Great, thank you.

Operator

We'll take our next question from David Grossman with Thomas Weisel.

David Grossman - Thomas Weisel

Good morning, thanks.

David Warren

Hi, David.

David Grossman - Thomas Weisel

Hi. Just, David, on back of Philadelphia just for a minute just to make sure I understand all the pieces here. So if we look at Philly, should we assume that the $39 million quarter, run-rate and the $6 million pretax loss is the right starting point exiting the second quarter?

David Warren

That's the assumption. Yes.

Bob Greifeld

Okay, and that right now you have visibility on about, call it $7 million a quarter in annualized cost savings? I just annualized the 11.5 over five months basically.

Bob Greifeld

Yes.

David Grossman - Thomas Weisel

Okay.

Bob Greifeld

That's just what we talked about and we also, as I mentioned in my comments there that we expect that to increase as we get toward the end of the year as we're able to realize the benefit from technology actions and occupancy actions that can't be realized immediately.

David Grossman - Thomas Weisel

Okay. But we shouldn't necessarily assume that the full $50 million of synergies would be realized by the fourth quarter, is that correct?

Bob Greifeld

That's correct, but the deal becomes that there is definitely more to do and will be done. But the deal definitely accretes and the continued execution and operation of Philly will be baked into our 2009 budget.

David Warren

Right. I think that's the larger point. We will have both of the transactions to the point of accretion by the first quarter. Philly in the fourth and then old OMX in the first, but that doesn't mean the expense synergies are done. They will continue, but at that point, we'll give guidance for the combined company, what the expenses will look like and not separately break it out, because as you are probably guessing, we're moving very hard to make this one integrated company where it doesn't make sense to try to pull out one piece versus the other because it's so interwoven.

David Grossman - Thomas Weisel

All right, I got it. Then we make a crude estimate of net capture and I emphasize it's fairly crude, but looks it looks like the NASDAQ in the cash equities business was up modestly sequentially, OMX ex-currency was flattish and derivatives was down. Does this sound like, we got it right directionally, and if so, how should we think about net capture for the balance of the year?

Bob Greifeld

Well, in the US, the net capture was actually higher and that was masked by the fact that we had a rebate from DTCC in the first quarter and that went into the same bucket. So we did see some up tick in the capture rate. I think for the European part of the business, we will see probably some declines in capture rate as we drive to increase velocity in the marketplace. They go hand in hand.

David Grossman - Thomas Weisel

Okay. And then just finally, one last question, I think David, you said a tax rate, we should think of 30% to 32% for the balance of the year. Is that including once you add Philly into the numbers for the second half of the year?

David Warren

It does not at this point.

David Grossman - Thomas Weisel

Could you give us a sense, once we roll in Philadelphia, how we should think about the tax rate?

David Warren

Yes. I guess, our planning right now and obviously we're still looking at it, is it would go up, probably increase by a percent, maybe 2 or maybe 3 might be.

David Grossman - Thomas Weisel

Okay. Very good, thanks a lot.

David Warren

Thank you.

Operator

We'll take our next question from Howard Chen with Credit Suisse.

Howard Chen - Credit Suisse

Hi. Good morning, everyone.

Bob Greifeld

How are you doing there, Howard?

Howard Chen - Credit Suisse

Well thanks. Congrats on a strong quarter and thanks for the new disclosure.

Bob Greifeld

Thank you.

Howard Chen - Credit Suisse

On the market technology business, Bob, you touched a bit on the Tokyo and Hong Kong new business wins, but historically you've also spoken about your desire to improve the operating margins of the business. I know it's early, but can you touch on where they stand now, any early progress you may have made, and your outlook there?

Bob Greifeld

I would say we've made early tremendous early progress that's not being represented in the financial statements you see here in the second quarter. So that's one of the great opportunities we have and as we say that we will hit $100 million of expense synergies by the first quarter of 2009, it's probably important to note that from a market technology point of view, we won't be done.

There will be more coming and we'll just exceed what the original target was. So I think as Magnus mentioned, we had basically finalized the road map six weeks after closing and now we're executing it.

Howard Chen - Credit Suisse

Okay, great, thanks. Then David, on compensation, thanks for walking through all the moving parts. If I heard you correctly, all else being equal in the third quarter, $3.5 million of incentive comp will drop out and roughly $1 million related to technology roadmap initiatives will also come out. Is that broadly correct? Also, can you discuss that outlook and how that balances with the impact of the Philly deal and the other initiatives that you may have coming in during the quarter?

David Warren

Yes, that's right, and then another $3.5 million comes out in the fourth quarter as well in incentive comp, as I said. I think I get your question. With respect to Philly, that just adds onto that.

Bob Greifeld

Right, but there won't be additional compensation credit for achievement of Philly. So, just stepping back for one second, we're obviously overachieving on the synergy targets we've established for OMX and then for Philly, and that's why the number went up. So to the extent that we didn't achieve, then the number would go back down, but that's not going to happen. So this increase in comp is reflective of the expected performance on both OMX and Philly integration efforts.

David Warren

That's right. I'm sorry. I misunderstood the question.

Howard Chen - Credit Suisse

Okay, great. Then take just one quick point of clarification on that, I guess free synergy, the Philly expense base that we are working out of, something like the $130 million annualized or is that ballpark about right?

David Warren

Well, it was 33.

Bob Greifeld

It was 33 for the quarter, so you can just annualize that.

Howard Chen - Credit Suisse

Great. Okay, thanks again.

Operator

We'll take our next question from Josh Elving with Piper Jaffray.

Josh Elving - Piper Jaffray

Hey, good morning.

Bob Greifeld

How you doing?

Josh Elving - Piper Jaffray

Good. Just wanted to follow-up, I guess a little more question, not to beat a dead horse, but on the Philly then, if we're looking at, did you say $11 million in cost saves over the balance of the year or on a run-rate basis?

David Warren

$11.5 million over the balance of the year just from compensation actions that we've already taken.

Josh Elving - Piper Jaffray

Okay. So that's an annualized, call it $22 million, $23 million, out of the $50 million. So you have essentially $25 million in cost saves left to achieve once we head into '09, is that the right way of looking at it?

David Warren

That's the right way of looking at it. Yes.

Josh Elving - Piper Jaffray

Okay.

David Warren

What I also said and what Bob has said further is that we've got actions planned for the balance of the year on technology saves and occupancy saves, which obviously, will add to that annualized number. We would expect to continue with our plans for integrating Philly as part of our 2009 combined operating plan.

Josh Elving - Piper Jaffray

Right. Okay. That makes sense. Just any additional color on the Dubai relationship and what you have planned there over the next year or two?

Bob Greifeld

Great question. I'm happy to move away from Philadelphia into Dubai. As you probably saw, we took one of our leading executives, Jeff Singer and with the agreement of the DIFX Board, he was appointed the CEO. Jeff had a great background and he ran part of listings here in the US and then had an international assignment over the last year. So he goes there with a perfect background to work with us and Dubai to make that a truly global listings venue. So, I think under his leadership, it's going to do incredibly well. I think the Dubai management before Jeff's arrival has done a wonderful job getting positioned for the launch of the derivatives market. They are using NASDAQ OMX technology for that. They have just received what are called tentative approval from the DFSA and we expect to launch that market in the fourth quarter of 2008. It will be the first derivatives market in that part of the world.

So, we see great opportunity from the listing point of view to attract international listing companies in there. As part of that effort, we’ll also look to have the locals to be able to trade on the market in a fashion they are accustomed to, so we will be opening up for Sunday trading. We'll allow trading in dirhams and we're happy with the progress and certainly excited about the plan.

Josh Elving - Piper Jaffray

Is there a cash market there today?

Bob Greifeld

There is.

Josh Elving - Piper Jaffray

Great. Thank you very much.

Operator

We'll take our next question from Brian Bedell with Merrill Lynch.

Brian Bedell - Merrill Lynch

Hi. Good morning, guys. Congrats on a great quarter.

Bob Greifeld

Thanks a lot, Brian.

Brian Bedell - Merrill Lynch

Just to hit on the revenue synergies a little bit for the OMX deal, if we can talk about a couple of the components of that. First of all, whether it's a NASDAQ matching engine is officially already part of a Genium package or when you plan to have that rolled out and what you expect a general range of synergies from that to be. And then if you could elaborate on some of the other synergies you’re talking about, improving the velocity in the OMX markets, maybe if you could just talk about that in conjunction with, clearly what we're seeing as declining volumes in the OMX during the third quarter so far.

Bob Greifeld

Right. Well, I would say one general statement, the revenue synergies that we put forth will be overachieved I think by a substantial amount. When you look at the NASDAQ OMX Europe effort, it is a true synergy of the respectively organization in that neither one of us could have done this by ourselves and as we're looking forward to launching that in September. We see great opportunity to increase velocity in the Nord marketplace and that will be through the marriage of the INET matching technology over the Genium overall architecture and we're looking for a second and third quarter launch of that in 2009, and that will have a dramatic impact I think on our revenue opportunities. So, we feel that we have been conservative with the revenue synergies and we look forward to delivering on them in a meaningful way in 2009.

Brian Bedell - Merrill Lynch

So you're looking at $50 million in 2009 as you said and you think that remains conservative?

Bob Greifeld

Well, we had, I think, committed to $50 million by 2010. We're not on this call moving that date up, but you might expect to us provide further clarification on that after we launch the market to London in September and also get closer to, introducing INET technology inside the Genium in the Nordic marketplace in 2009.

Brian Bedell - Merrill Lynch

All right, great, okay. And then just if you can elaborate a little bit more on the Boston acquisition in terms of any additional color on plans to launch the second quote? You mentioned the clearing synergies, if we could elaborate on a little more detail on what type of level of synergies?

Bob Greifeld

Sure. Boston is like a lot of these efforts that require regulatory approval somewhat overdue. We're growing increasingly confident that we'll be able to close that transaction in August. We eagerly await the date. On the clearing side, I'll start with that, because we have been a beneficiary of the threat of competition already, as we've seen I think two rounds of price cuts from DTTC so far this year. So that's all to the good just by the possibility of us entering the market. But we do have a development team hard at work and we do expect to launch that in 2009. We do need regulatory approval to operate the clearing license. More straightforward would be the launch of the second quote and we expect to do that hopefully soon after we close the transaction. Our hardware kit is built and ready, it's in our data center. We just need to have the approval to turn it on.

Brian Bedell - Merrill Lynch

Okay, great. May I ask one more question?

Bob Greifeld

Yes, you may.

Brian Bedell - Merrill Lynch

Just on the revenue captures that it did tick up, if we net the rebate out, what would the revenue capture have been in the first quarter?

Bob Greifeld

I don't have that number handy and we haven't publicized that number.

Brian Bedell - Merrill Lynch

Okay, but are you saying it was up from the first quarter? I assume obviously due to the revenue increase on the non-displayed orders and that was on May 1, so we would expect I guess all else equal in the third quarter to have at least, again, another little tick up in US revenue capture?

Bob Greifeld

Yes.

Brian Bedell - Merrill Lynch

Okay, great. Thanks very much.

Operator

We'll take our next question from Niamh Alexander with KBW.

Niamh Alexander - KBW

Good morning. Good quarter.

Bob Greifeld

Thank you.

Niamh Alexander - KBW

You're welcome. If I could just go back to Europe for a bit, the MTF, you were talking about increasing the velocity of customer trading activity and this is something you know really well, the high velocity customers, especially in the US. Can you give me a sense of where you think the big high velocity customers in the US; are they even operating in Europe right now? I'm trying to get a sense for the growth opportunity because there's quite a few lining up to participate there. If it's 30% of the volume in the US at least could what is it right now in Europe, what's the opportunity?

David Warren

Well, the first thing I would say, with our European effort, we are approaching all manner of customer and I think we do have global appeal across all the different segments of the customer base. We certainly see some of the liquidity providers being the early adopters, but if you talk to any of the European customers, regardless of the segment you want to put them in, they have a strong interest in participating in the new competitive world that exists.

So I think the opportunity, as I said, is large. We think it's our single largest organic revenue opportunity that we do have and we're obviously anxious to launch in the latter part of September.

Niamh Alexander - KBW

Okay. Thanks for that color. Then I think if I just switch back to the US cash equities market, because purely Tape A volume is quite substantially up pacing Tape C and it looks like that's kind of structural and it's certain types of customers and it's a bit of a tailwind from Reg NMS. Do you think we might benefit from this trend for maybe another year or so? I'm trying to get a sense of when we revert back to the long-term growth trends for US cash equities which is probably single digits?

David Warren

Yes. It's hard for us to guess, but I think to the extent that there's still friction in the system as a result of having a different market structure from what had been the central market that represents opportunity. To the extent the market had transformed itself entirely to price-time matching engines competing against itself, you could then positive would be at that point in a more normal growth level.

Niamh Alexander - KBW

Okay, thanks for taking my questions.

Operator

We'll take our next question from Don Fandetti with CitiGroup.

Don Fandetti - CitiGroup

Hi, Bob, quick question. Do you think all the dislocation and the market fragmentation has changed the psychology of the European exchange CEOs to where they might be more likely to sell and would you be interested in participating in that?

Bob Greifeld

More likely to sell what?

Don Fandetti - CitiGroup

To sell the exchange more M&A in the Europe landscape?

Bob Greifeld

Well, I would say this. First, what I said in last quarter still holds. We have a lot on our plate and it's our job to make sure we deliver to our customers and to our investors the benefits that we've set out with these acquisitions. So we have to get to that platform. At that point, we'll then ascertain what are the proper moves forward for this organization. So it's not something that we're thinking about at this point in time.

Don Fandetti - CitiGroup

Okay. That's all I had. Thank you.

Bob Greifeld

Thank you.

David Warren

Thank you.

Operator

We'll take our next question from Mike Carrier with UBS

Mike Carrier - UBS

Thanks, guys. In terms of the Pan-European platform, just what has been the client traction thus far and how much further do you have to go, so you feel like you had the expected target market onboard? Then given the complexities on the clearing side; just curious why you went with Fortis? And then David, if you could just give us the interest cost on the convertible notes?

David Warren

All right. So I would say this, that we have the necessary number of customers working today to hook up to our market for the launch in late September. Clearly, we'll be on a long March to have additional customers, and that will increase quarter-by-quarter as we go forward. So we have 15 of the large customers now working with us. So we're very comfortable. What was the second part of your question?

Mike Carrier - UBS

It was just on the Fortis.

David Warren

Well, that one was obviously, to us, fairly straightforward, is that we knew they are in operation, so we didn't have to worry about growing pains, in that they are doing the work for [Chavis] today. We thought there were advantages to having cross-margining capability and we certainly feel like their transaction rates were low and they had a state of philosophy of making sure they were the lowest provider in the space, whether that be against EuroCCP or anybody else.

Mike Carrier - UBS

Okay, thanks.

Bob Greifeld

And you had a question on interest?

Mike Carrier - UBS

Yes, just on the convertible notes.

Bob Greifeld

Yes, for the quarter it was 4.88%.

David Warren

The convertible.

Bob Greifeld

Over the convertible? We have 2.5% is the interest rate on the $475 million. 3.75% is the coupon on the other.

Mike Carrier - UBS

All right, thanks.

Bob Greifeld

Okay.

Operator

We'll take our next question from Edward Ditmire with Fox-Pitt Kelton.

Edward Ditmire - Fox-Pitt Kelton

Good morning, guys.

David Warren

How are you doing, Edward?

Edward Ditmire - Fox-Pitt Kelton

One follow-up question on M&A. You guys had previously said that you wanted to clear your plate or substantially clear your plate on the current M&A integrations before you moved on to new things. Are financial constraints going to become more important in, say early 2009, given that you guys seem to have the other stuff well in hand?

Bob Greifeld

I think I said we're certainly not thinking that far ahead. We're proud of the fact that we are driving further, faster and better than we ever could have imagined with these transactions and as we get further down the pipe with them, then we would contemplate some other ways to leverage our platform, where the platform exists for NASDAQ OMX at that point in time. So the answer is we don't have a thoughtful answer.

Edward Ditmire - Fox-Pitt Kelton

Okay, great. Thank you.

Operator

We have no additional questions at this time. I would like to turn the call back over to management for any closing remarks.

Bob Greifeld

Great. Well, I certainly appreciate your time today. We are obviously proud of this quarter. As I said previously, this quarter represents the successful execution of the stand-alone business plans of what we know as old NASDAQ and old OMX, but most importantly in the quarter, we had tremendous success in creating the new integrated NASDAQ OMX and the synergies on both the revenue and the expense side will become visible to all our customers and investors in the quarters to come. We look forward to delivering upon those to you. So we appreciate your time and thank you, and we'll talk to you in three months.

Operator

This concludes today's conference. We thank everyone for their participation. You may now disconnect your lines.

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Source: NASDAQ OMX Group Inc. Q2 2008 Earnings Call Transcript
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