NYSE Euronext (NYSE:NYX) Q2 2013 Earnings Call July 30, 2013 8:00 AM ET
Stephen Davidson - Vice President of Investor Relations
Duncan L. Niederauer - Chief Executive Officer and Director
Michael S. Geltzeiler - Chief Financial Officer and Group Executive Vice President
Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 NYSE Euronext Earnings Conference Call. My name is Laura, and I will be your operator today. [Operator Instructions]
I would now like to turn the call over to Stephen Davidson, Head of Investor Relations at NYSE Euronext. Please go ahead, sir.
Thank you, Laura. Good morning, and welcome to the NYSE Euronext Second Quarter 2013 Earnings Conference Call. Before I introduce today's speakers, let me remind you that comments on the call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements are based on NYSE Euronext's current expectations and involve risks and uncertainties that could cause NYSE Euronext's actual results to differ materially from those in the statements. These forward-looking statements speak as of today, and you should not rely on them as representing our views in the future. Please refer to our SEC filings for a full discussion of the risk factors that may affect any forward-looking statements. Except for any obligation to disclose material information under the federal securities laws, NYSE Euronext undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after this conference call.
We will discuss non-GAAP financial measures during this call. These non-GAAP measures are fully reconciled in the tables attached to the text of the earnings press release that we issued earlier today. We believe that these tables provide investors useful information about our business trends. However, our non-GAAP measures do not replace and are not superior to GAAP measures. Duncan Niederauer, Chief Executive Officer, will review the highlights for the quarter, update you on key developments in our businesses and conclude with an update on the acquisition by ICE.
Michael Geltzeiler, Chief Financial Officer, will then review the financial results for the quarter. For the call today, we will not be holding a Q&A session at the end of the prepared remarks. We felt that it would be more appropriate given that we are moving closer -- to closing with the ICE management team taking the lead in the process and their call is in just a few days.
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
Right, thanks, Stephen. Good morning, everybody, and thanks for joining today's call.
I'll begin my prepared remarks on Slide 4, because as you all know, in the compliance world that we live in, if you're in a transaction like this, it means 2 slides of disclaimers, not one. So you have to please turn to Slide 4.
Let me start by saying how proud we are of our results for the second quarter.
As you know, we've made significant progress in moving our transaction with ICE toward closing, and at the same time, we've continued to execute against our own business strategy. We're generating strong momentum ahead of the combination with ICE, culminating with an impressive set of recent achievements.
We seamlessly transitioned our U.K.-based Derivatives markets to ICE Clear Europe. We were appointed the administrator for LIBOR. We welcomed Oracle to the NYSE as the largest company ever to transfer its listing. Our market share of tech IPOs stands at 64% year-to-date, and we continue to be ranked #1 globally in terms of capital raising.
Trading volumes in our European derivatives franchise, while not as high as the levels we saw in the first quarter, have continued to show strength and we're pleased by the growing momentum in some of our newer products. We are beginning to generate incremental revenue from our new market data initiatives, which should continue to build during the second half of this year. We've continued to reduce our expenses and are on track to beat our full year 2013 guidance of $1.525 billion. And lastly, we retired the remaining $414 million of our June 2013 notes, which will drive $15 million in savings in the remainder of 2013, and $24 million in annual savings next year in 2014. So for the second quarter, we reported $0.63 per share on $611 million in net revenue.
Modest increases in revenue, both year-over-year and quarter-over-quarter, with strong expense discipline, drove earnings higher by 24% year-over-year, reflecting the strong operating leverage in our business model.
Turning to Slide 5. This provides an update of our Derivatives franchise. NYSE Liffe volumes in the second quarter were influenced by increased volatility in global interest rate markets resulting from speculation about future monetary policy. While volumes pulled back from the elevated levels we saw in the first quarter, June was a standout month with STIR futures hitting new monthly records for short sterling and Euribor futures. May also saw an all-time record for gilt volumes. Year-to-date, long gilt futures contracts are up 24% compared to the same period in 2012. In recognition of the growing demand for gilt products, we're looking to launch ultralong gilts and we are also gauging the market potential for index-linked gilts.
Turning to STIR options, growth has been especially strong for the longer-dated contracts, and for the first time in any quarter, the majority of our Euribor options volume came from our mid-curve contracts.
Regulatory developments and our own efforts to build and grow the market for swap-like futures have helped push Swapnote to new highs as well. In the second quarter, more than 25 million contracts were traded, an increase of 62% from the same quarter last year.
It was also an excellent quarter for our MSCI franchise, both in Europe and in the U.S. The MSCI complex on NYSE Liffe U.S. saw positive trends for open interest, which was up 78% year-over-year and achieved record ADV, up 62% year-over-year. These results reflect our continuing efforts to extend our product set out along the yield curve.
Turning to U.S. equity options, the Amex-Arca complex continued to be an industry leader in equity derivatives volume, which increased by 24% year-over-year. We were the #1 exchange group by market share x dividend strategy trades in Q2, and we've remained #1 for the last 12 months.
Please turn to Slide 6. Slide 6 illustrates the successful clearing migration of our London-based derivatives market. In December, we announced that Liffe had entered into a clearing services agreement with ICE Clear Europe. Leveraging existing NYSE Liffe and ICE Clear Europe technology, as well as ICE Clear's previous clearing migration experience, the joint team successfully completed the transition on July 1 as planned. The transition involved migrating 75 million contract sides held by 43 different members, along with $11.2 billion in assets from the previous clearing arrangement to ICE Clear Europe.
This move reduces our overall cost to clearing, while at the same time retains existing clearing revenues in the newly merged company. Under the new arrangement, we are delivering a world-class service at a cost that is $30 million lower than what we were paying to LCH annually, so that will have a favorable impact on second half 2013 expenses, as well as expenses going forward in the merged company. The partnership with ICE Clear Europe also brings the clearing arrangements for NYSE Liffe in line with the changing regulatory requirements and will give us greater ability to innovate and deliver a first-class service to our customers.
I mentioned a number of new product ideas on the earlier slide. Look for more to come in the coming months.
Please turn to Slide 7. Slide 7 provides you with a snapshot of our cash equities business. As you all know, over the past few years, our objective with the cash trading businesses has been to focus on profitability and stability. In the U.S., we've become less dependent on transaction fees, which has helped soften the impact of a decline in trading volume, as well as the dramatic growth in off-exchange trading, which has impacted our market share. In the second quarter, the Russell rebalance, the MSCI rebalance and the quarterly expiration all drove large volumes to the NYSE market. So despite higher TRF share levels, NYSE market share has been relatively stable and even slightly up, benefiting from improved latency and functionality changes after the full rollout of UTP, which we completed earlier this year.
We will also continue to expand the RLP program in our marketplace, reflecting our initiative to drive retail order flow back to the exchanges. And in Europe, our market share increased to 67% from 65% in the first quarter, which is partly due to the successful renewal of our SLP program where we added a passive market share metric to the existing obligations.
On Slide 8, we show you the continued momentum in our listings business. In the second quarter, the NYSE listings franchise continued to accelerate. Through the first half of the year, we held the #1 position in global capital raising in IPOs, follow-ons, as well as tech IPOs and transfers. We raised more IPO and follow-on proceeds globally than the next 4 global competitors combined. New issuance in the U.S. markets picked up in the second quarter as U.S. equity market indices hit all-time highs in May. The second quarter was one of the most active quarters for IPOs in recent years. We raised $29 billion in total global proceeds through 72 IPOs, and another $105 billion in proceeds on 256 follow-ons.
The deal size also continued to increase. After only 1 IPO of $1 billion or more in the first quarter, the second quarter saw 4 sets deals of $1 billion or more. And I'm most proud of our increasing strength in the technology sector. We're listing 2 out of every 3 tech IPOs that come to the market this year, compared to less than 2 out of every 10 several years ago. This past quarter, we were pleased to announce Oracle's transfer and we'll be celebrating the new partnership with the closing bell later today. Oracle is the largest company to transfer and 1 of 5 NASDAQ 100 companies to transfer to the NYSE in the last couple of years. We are very proud of this win, and we're confident that this momentum will continue in the quarters and years ahead.
Lastly for me, before I turn it over to Mike, we wanted to give you an update on where we stand regarding our combination with ICE and the transaction timeline which we've updated for you on Slide 9. The European Commission's competition authorities unconditionally approved our transaction after their Phase 1 review was completed on June 24. Also in June, both NYX and ICE shareholders overwhelmingly approved the combination. In July, both ICE and NYSE Liffe U.S. submitted notice to the CFTC and the SEC Rule 19b-4 was published for comment. Comments were due to the SEC on July 22, and approval from the SEC is expected on or about August 15.
We are also in the process of obtaining the non-objection from the Euronext College of Regulators and local European regulatory authorities. So that leaves us expecting to close the deal sometime this fall.
Since we are asked frequently, I thought I'd share a word on dividend policy. As we mentioned in the press release, which I'm sure all of you read line by line, we declared our $0.30 dividend, which is payable on September 30, provided that the ICE transaction has not been completed as of the September 16 record date. ICE will reiterate its intentions with regard to the envisioned dividend policy of the merged company should the transaction be completed before mid-September. Our conversations are also ongoing with all stakeholders regarding the IPO of Euronext, which we expect will follow sometime after the closing of the transaction of ICE. We'll continue to be transparent about the process and keep you updated on key milestones and developments as they are achieved.
With that, I would now like to pass the call over to Mike for a review of the second quarter's financial results.
Michael S. Geltzeiler
Thanks, Duncan, and good morning.
Slide 10 provides comparative GAAP results for the second quarter of 2013. Our GAAP EPS was $0.71 per share, which compares favorably to the $0.49 per share we reported in Q2 2012. Our non-GAAP EPS of $0.63 per share reflects 3 primary adjustments this quarter, as reconciled in the schedule attached to our press release. In the quarter, we reported a $22 million charge for merger expenses and exit cost, of which $14 million was related to the ICE transaction. We also recorded a $10 million in nonoperating income from the sale of a portion of our equity stake in LCH Clearnet. Lastly, our GAAP EPS benefited from a favorable tax outcome with certain European tax authorities.
My review of our financial results from this point forward will exclude the impact of merger expenses, exit cost, disposal activities and discrete tax items.
Slide 11 provides our non-GAAP financial results for the quarter. Net revenues of $611 million, on a reported basis, were up 1% from the second quarter of 2012 and included a $2 million negative impact from foreign currency fluctuations. Net revenues were also slightly up versus the first quarter of 2013, driven by higher volumes in our Global Derivatives businesses and increased market data revenue.
Reported costs were lower by $14 million or 4%, driving an 11% growth in operating income. The weighted average diluted shares outstanding in the quarter was lower this quarter versus prior year, which helped drive a 24% improvement in EPS.
Slide 12 provides our consolidated and segment results on a currency neutral basis. The U.S. dollar weakened versus the euro this quarter by 2%, a strange inverse [ph] of the British pound by 3%. For the second quarter, 43% of our net revenue was denominated in either euros or pounds. On a currency neutral basis, second quarter net revenues were up 2% and operating income increased 11% versus prior year.
Operationally, revenues for our Derivatives business increased 9%, we're stable for our Cash Trading and Listings business and technology solutions fell 4%.
Slide 13 and 14 detail the financial performance for our Derivatives segment. Derivatives revenue in the second quarter of $195 million was up 7% year-over-year, attributed to strong trading in European interest rates and U.S. equity options. The revenue growth on flat costs helped boost Derivatives EBITDA margin to 57%. Derivatives accounted for 32% of our consolidated net revenues and 40% of our operating income. Revenue capture for NYSE Liffe was lower year-over-year and quarter-over-quarter, attributed primarily to fee changes in French [ph] single stock futures and higher volumes.
Capture for the U.S. options business was higher year-over-year and quarter-over-quarter driven by positive mix and strategic pricing changes.
Similarly, Slides 15 and 16 show the financial performance for our Cash Trading and Listings segment. Cash Trading and Listings accounted for 49% of our consolidated net revenues and 50% of our operating income in the second quarter. Cash Trading and Listings net revenue was $302 million in the second quarter of 2013, up 1% versus the prior year period and up 5% compared to the first quarter of 2013. In U.S. cash equities, our market share was slightly up year-over-year but down quarter-over-quarter. Off-exchange traded share remains elevated at 35% of the U.S. equities market, up from 32% in the prior year.
Revenue capture for U.S. cash increased to $0.047 per 100 shares handled for Q2, above the $0.043 recorded in the second quarter of 2012 and the $0.043 recorded in the first quarter. The incremental increase in capture was due to favorable mix. Revenue capture for European cash on a per transaction basis increased to $0.56 in Q2 2013 from $0.52 in Q2 2012, a decrease from $0.62 quarter-over-quarter. The decrease quarter-over-quarter was due to the renewal of the SLP program, culminating in an increase of SLP activity.
Slide 17 details the financial performance for our Information Services and Technology Solutions segment. Information Services and Technology Solutions accounted for 19% of our net revenue and 10% of our operating income in the second quarter of 2013. Segment revenue was $114 million in the second quarter, a decrease of $5 million from Q2 prior year but an increase of $2 million sequentially. The increase sequentially is attributed to our market data initiatives, which will continue to build revenue through the rest of this year. Approximately 84% of our clients are registered for the new non-display license agreement. This momentum will be further reflected in the third quarter, and on an annual basis, is expected to increase proprietary market data revenues by double digits.
NYSE Technologies also launched a new product, NYSE Best Quote and Trade feed, which will serve as an alternative to the CTA data feed and is particularly geared towards retail and wealth management firms.
With that said, the pipeline is looking strong, but the signing of new large managed service deals has slowed due to the uncertainty surrounding the proposed ICE transaction.
Slide 18 provides you with the progress we have made with our Project 14 cost efficiency program. Over the past 12 months, we've reported total operating expenses of $1,539,000,000, which is $127 million below the 2012 base level of $1,666,000,000. Adjusting for currency rates and portfolio changes and discrete investments of $52 million, we arrived at an annualized expense base of $1,505,000,000 in the second quarter of 2013, which is $161 million below our $1,666,000,000 starting point, or 64% of the total $250 million to be saved by the end of 2014. You'll recall that our original commitment for P14 savings was 60% of the $250 million by the end of 2013, so we have already exceeded this target.
Based on the positive development of expenses in the first and second quarter and a series of savings initiatives planned for the second half, including the $15 million we expect to save in the second half of 2013 with our move to ICE Clear Europe, we expect to surpass our full year 2013 expense guidance of $1,525,000,000.
Slide 19 details our cash and debt position as of June 30, 2013. Gross debt at June 30 was $2.2 billion. The decline in total debt was driven by the retirement of the remaining $414 million of our $750 million 4.8% U.S. notes that were due in June. This will result in a decrease of annualized interest expense of $15 million in 2013 and $24 million in 2014. Our debt-to-EBITDA leverage ratio decreased to 1.9x due to debt retirement and stronger EBITDA generation in the first half of 2013 compared to the second half of 2012. Capital expenditures were $32 million in the quarter and $59 million year-to-date, well within our guidance of less than $150 million for the full year.
Lastly, the Board declared a $0.30 quarterly cash dividend for the second quarter of 2013, which is payable on September 30, provided that the ICE transaction has not been completed as of the September 16 record date.
Before I pass the call back to Duncan for closing remarks, I wanted to clarify next steps with regards to the shareholder election process for the combination with ICE. The deadline for shareholder elections is subject to the deal closure date. At this time, we do not have a set date for the closing. But once a date is set, our transfer agent will be able to accept the election choices made by shareholders.
Now, I'd like to turn the call back to Duncan for closing remarks.
Duncan L. Niederauer
In closing, our second quarter results were strong and we're continuing to execute against our strategy. Revenues are up and non-GAAP diluted EPS is 23% higher for the first half of this year compared to last year. Volumes in our European derivatives franchise remained strong with growing contribution from our new products. We successfully transitioned our U.K. Derivatives clearing to ICE Clear Europe, which will drive future efficiencies and product innovation. Our listings franchise continues to build momentum by maintaining the #1 global leadership position and achieving 64% market share of tech IPOs. And in the last few weeks, in addition to Oracle, we've welcomed Perrigo and Exar to the NYSE.
We started generating positive revenue impact from our new market data agreements, and our costs are on track to beat our full year 2013 cost guidance, as Mike just outlined. While we're executing our business planning commitments, we are also well into the integration planning and regulatory approval process of our combination with ICE, and we're pleased to have already secured approval from our shareholders in the European Commission.
As Steve mentioned earlier, given that we will no longer be a stand-alone entity in the coming months and ICE will be holding their call in just a matter of -- in a matter of just a few days, we are not going to hold a Q&A session this morning. We appreciate your time, and I'd like to thank our employees and our shareholders for all their support during the approval process and during the last several years. Thanks a lot. See you out there.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Thank you, and have a good day.
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