NYSE Euronext (NYSE:NYX) Q3 2009 Earnings Call Transcript October 30, 2009 8:00 AM ET
Stephen Davidson – VP, IR
Duncan Niederauer – Chief Executive Officer
Michael Geltzeiler – Group EVP and CFO
Larry Leibowitz – Group EVP & Head of U.S. Execution & Global Technology
Howard Chen – Credit Suisse
Mike Vinciquerra – BMO Capital
Don Fandetti – Citigroup
Rich Repetto – Sandler O'Neill
Daniel Harris – Goldman Sachs
Roger Freeman – Barclays Capital
Mike Carrier – Deutsche Bank
Good day ladies and gentlemen, and welcome to the third quarter 2009 NYSE Euronext earnings conference call. My name is Josh, and I will be your operator today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. For the Q&A session, we ask that callers limit their questions to one to allow for broader participation.
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 Josh. Good morning and welcome to the NYSE Euronext third quarter 2009 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 were 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.
For the call today, Duncan Niederauer, Chief Executive Officer, will review our third quarter financial highlights, comment on market conditions and the regulatory landscape and provide you with an update on our core equities franchise and new initiatives. Michael Geltzeiler, Group Executive Vice President and Chief Financial Officer will then review the financial results for the quarter and update you on our financial position. We will then open the line for your questions.
When we go to the Q&A session, please limit your questions to one to allow for broader participation. Also on the call today for the Q&A session are Larry Leibowitz, Group Executive Vice President & Head of U.S. Markets; and Stephane Biehler, Chief Accounting Officer and Corporate Controller. 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 the remarks.
With that, let me now turn it over to Duncan.
Thanks Stephen. Good morning everyone and thanks for joining today’s call. I am going to start my remarks for those of you who are watching on the Web, we are going to start on slide 3. As you have seen from our press release this morning, we had another solid quarter. Overall, I am very pleased with the progress we made this quarter in stabilizing our core businesses, advancing our strategic initiatives to further diversify our business model and drive future growth and expanding our technology services businesses.
Our third quarter results are highlighted by a meaningful contribution from one of our key new initiatives, NYSE Liffe Clearing. Pro forma non-GAAP EPS for the third quarter was $0.53, up from $0.51 in the second quarter, but down from $0.72 in the third quarter of 2008. The $0.53 includes a $0.03 per diluted share benefit related to the chewing up of our first half effective tax rate for fiscal 2009 from 29% to 27%, as a result of the mix of profits from our global subsidiaries.
Net revenues were $624 million in the quarter versus $611 million in the second quarter of 2009, and $724 million a year ago. On the cost side, we reported $431 million in fixed costs in the third quarter, higher than the $398 million and $422 million recorded in the second and first quarters respectively, attributable in part to the delayed phasing in of expenses related to our new initiatives and some timing issues. Mike will provide you with more detail on these expenses in his report.
As I look at our core businesses, we have achieved a level of stabilization and in some cases improvement that I find encouraging. NYSE Classic US cash market share of 25% in September was above the 24% recorded in September of the prior year. Overall, NYSE grew market share in Tape A remains in the high-30s, lower than last year, but that’s almost entirely attributable to the growth in internalization. While the competitive environment in Europe is still dynamic, our market share and our regulated cash markets have stabilized at around 76% to 77%.
And in our NYSE Amex options business, our share in September increased to 8.8%, well above the 6% share that Amex had when we closed that transaction. Together with the Arca options platform, we now have consistently over 20% market share in the US equities options market, and in fact, have average closer to 22% to 23% throughout the month of October. Our goal remains at a minimum to get to 25% in that business, and our ultimate goal is to be Number 1.
Several key initiatives also enhanced our global derivatives franchise during the quarter. As I mentioned earlier, NYSE Liffe Clearing which was launched on July 30th, contributed positively to our results for the quarter, and we look forward to the first full quarter’s effect in the upcoming fourth quarter. An improvement in underlying market conditions combined with our new clearing capability positions us well for growth.
Earlier today, we announced that we signed a definitive agreement to have several leading market participants stake in equity interest in NYSE Liffe U.S., including Citadel, GETCO, Goldman Sachs, Morgan Stanley and UBS. We also announced earlier in the quarter an agreement in principal with several major liquidity providers and market makers in the options business, who collectively represent over 40% of overall options market volumes to partner with us in taking our NYSE Amex options platform to the next level.
Finally, I am also pleased to report that we have finalized our formal agreement with DTCC to form New York Portfolio Clearing or NYPC to clear fixed income derivatives. This effort is expected to launch in Q2 of next year pending regulatory approvals.
Turning to our technology services business, NYSE Technologies, we announced our intention to acquire NYFIX, which will broaden our product offering in client base. We have not traditionally had a strong sales channel into the buy side community. So, this acquisition gives us access to a new set of customers for our technology product offering. I will provide you more detail on this transaction and how it fits into our broader strategy shortly.
Shifting to slide 4, slide 4 highlights some macroeconomic indicators, which we think point to continued signs of stabilization in the financial markets. Many of our issuers and clients are feeling a new sense of optimism on the state of the economy and the global capital markets. While there are many hurdles that remain, there are many encouraging signs of recovery. Corporate earnings are improving, the stock market has recovered more than 50% from its lowest in March, and investor confidence seems to have stabilized. Improving market conditions should fuel our listings business where we are seeing a return of IPOs and we have a robust pipeline. In the upper left-hand quadrant of slide 4, you can see a quarterly progression in global IPOs and secondary offerings.
In the third quarter of 2009, global secondaries increased well above pre-crisis levels. Year-to-date through October, $203.6 billion from 468 secondaries have been raised on NYSE Euronext markets, more than any other exchange group. For initial public offerings in the third quarter, we saw a ten-fold increase in capital raised through IPOs when compared to the anemic fourth quarter 2008 levels. Year-to-date through the end of October, we have raised a total of $16.3 billion through IPOs, second behind Hong Kong with $16.8 billion, but ahead of Shanghai at $14.5 billion, and well ahead of the next largest US Exchange which raised $7.1 billion.
We also have a strong pipeline of deals coming to market, including the publicly announced hired hotels. Since August 1st, 24 IPOs have filed to list with the NYSE, more than twice our nearest US competitor. In the upper right quadrant, we have the monthly foreign currency developments for the British Pound and the Euro. While the currency headwinds persist year-over-year, we have experienced some recent weakening of the dollar, which has positively affected our results in the third quarter of 2009.
In the lower left-hand quadrant, we chart the TED Spread, a key indicator of health for the financial services industry broadly speaking, and you will see that it has returned to more historic levels after the spike during the crisis in the third quarter of last year. We are encouraged by the relative stabilization of several of these broad indicators to capital markets help. Our Liffe franchise has fared well over the past year relative to competitors, because of our focus on the short end of the curve (inaudible) and Sterling products. Our primary competitors however are focused are on the long end of the curve and on Euro/dollar features an options, which have been negatively impacted by a very explicit zero rate policy in the US.
European rates however have hovered around 1%, and regulators have been much more vague about when rates might move higher. With the increasing speculation that the Bank of England will end the quantitative easing program, we are seeing participants move out on the curve, driving increased volume in our Sterling and Gilt futures products, we are well positioned to capture this trend with the impending launch of short and medium-term Gilt futures.
So, while we continue to see low levels of risk appetite and balance sheets are still fragile, market participants are beginning to take diverging views on when interest rates will move higher and inflation becomes a concern. Lastly, in the lower right quadrant, investment grade new issuance returned to more robust levels in the first half of 2009, and experienced a seasonally slow Q3. Undoubtedly, there is a great deal of work to do and the recovery is likely to be a slow one, but the signs of improvement certainly are encouraging.
Please turn to slide 5, and let address a few regulatory issues that are currently under review in discussion. As I have said publicly many times before, until we fix the underlying problems in our financial system, the economy will have a much tougher road to recovery. To that reason, we have taken a strong leadership position on issues of market structure and on some policy matters that directly impact our issuers and/or the investing public. On slide 5, you see a number of issues where we are demonstrating leadership. I will not go through each these topics individually, but let me just reiterate our bottom line.
We support competition amongst trading venues, but it must occur on a level-playing field. We must be allowed to innovate at the same pace and a comparable cost of ATS and dark pools. There should be similar room making processes and regulatory standards. Furthermore, the nature of fragmented markets has hindered price discovery, but more importantly has made market surveillance more difficult if not impossible to the detriment of investors. The SEC has been focused on these issues for some time. They are committed to open meetings such as the one last week on dark pools and are demonstrating strong leadership on issues including class trading and other market structure matters.
In Europe, regulators there are about to embark on a review of method [ph], two years after its implementation, which will involve consideration of many of the market structure issues I just mentioned. I am confident that the debate around critical market structure issues will remain in focus across US and Europe.
We have been also working with the industry to proactively improve transparency for the benefit of investors. Earlier this month, we announced our efforts with a number of other broker dealers to plan off-exchange trades on our existing trade reporting facility beginning in early November. We believe this will bring needed transparency to ATS and other off-exchange transactions. With regards to advocacy, let me just mention a couple of highlights. We took a strong leadership position on behalf of our issuer community against a proposal for increased tax rates for US corporations doing business overseas. The consensus here that has emerged is that the administration has listened and is shelving this idea, which is good news since its proposal would have damaged the international competitiveness of all US headquartered companies.
We are also continuing to fight against other taxes that will raise transaction costs for companies and investors such as the recently talked about transaction tax on transactions in the regulated securities markets. In addition to advocating on tax policy and global competitiveness, w are working hard to represent our issuers on matters of corporate governance, financial regulatory reform, and financial literacy. With regard to corporate governance, we continue to believe that if federally mandated, one size fits all approach to the border and corporate governance is not right. In response, we launched an advisory commission last month, studying and proposal issues on these issues, and I have promised lawmakers in Washington if they can expect to see a list of recommendations from us in early 2010.
Shifting to slide 6, I want to turn back to the businesses for a few minutes before I turn it over to Mike. This slide shows some selected data points, which reflect the stabilization of our core cash equities franchise. We are continuing to build organic liquidity on the NYSE. As I said earlier, I am pleased to report that NYSE Classic matched their market share in September, was 25%, slightly above the 24% reported in September of last year, just before we began to roll out the new market model.
In the third quarter, we also expanded the supplemental liquidity provider group to a total of 7, including Octane, and we have two more applications pending. In September, we implemented new incentive-based quoting standards that have served to further increase the percentage of time and size that are DMM community or at the NBBO. NYSE Amex also plans to trade Nasdaq-listed equities and selected EPS on an unlisted trading privilege basis, beginning in January, supplementing our NYSE Arca platform. NYSE Amex trading of Tape C starts will be we powered by the NYSE parity based market model and underscores our commitment to offer customers the broadest array of compelling choices for trading US equities. In the months ahead, we will see new technology blending with a fresh new physical look for the NYSE floor and many new additions to our floor-based trading community.
Shifting to Europe, we have continued to focus on market quality for our customers, which has positively impacted our time at the EBBO, with market shareholding steady between 76% and 77%. The fee reduction that we put in place in March combined with clearing price changes made by LCH.Clearnet effective July 1st, which we passed through directly to our customers, has made our platform more competitive, and our net capture rate for trade is stable versus the second quarter. LCH.Clearnet will further reduce clearing fees on January 1, and again these will be passed through directly to our customers. Overall, on our MTS, we are beginning to make some headway, but it remains early days for these initiatives. With SmartPool, we have seen volumes grow nicely during the summer in response to a reduction in the minimum order size criteria, and through the connection of more clients.
Most of the major banks who are now onboard are in the pipeline. The university of tradable stocks on the platform is also being expanded with the addition of mid-cap stocks. Migration to UTP in September has provided a stable, technical environment for the platform, boosting the number of connections and ease of connecting. For NYSE Arca Europe, member connections are reaching critical mass, the platform has just moved to London a week ago, creating a stable technical environment and interoperable post-trade solutions are expected before year-end pending regulatory approvals.
Please turn to slide 7. Slide 7 provides an overview of our semi-mutualization of the NYSE Amex options business. In the late 1990s, the Amex options business had a 30% market share. Due to a lack of investment in new technology and the introduction of nimble competition, their market share was only 6% when we purchased in the Amex in October of last year. To stabilize the business and set the foundation for growth, we migrated the business to a new building and a new technology platform, and more recently we put in place a pricing structure that would incent more electronic flow. We cut headcount, we met and in fact exceeded our announced synergy targets, and we have increased market share with the new model in underlying technology.
To take the business to the next level, we clearly need to partner with key players to grow the business. The transaction makes sense for us as it allows us to more closely align ourselves with our key customers and it more closely aligns us with their business with an exchange based model. It does not require any new investment in technology, and history clearly shows that some of the most successful answers have come out of a semi-mutualized approach with the dealers.
For our new partners, the transaction allows them to work with the key player in the options market to develop order types and market structure that will benefit the market as a whole. The transaction allows our partners to extract value from liquidity and order flow, and lastly, to achieve a level of investment based on the evaluation that is manageable, but with high growth potential, given that the partners make up over 40% of the underlying market, they will now make up about a quarter of our business.
Since the second quarter, our market share on Amex has increased from 6.2% to 7.7% in the third quarter, and we finished the month of September at 8.8%. This increase in share has been driven by two factors. First, we saw an increase in share resulting from pricing changes, made effective July 1st, designed to attract electronic flow, and second, in anticipation of the Amex options semi-mutualization, our potential partners have been ramping up their activity on Amex.
Shifting to slide 8, this slide provides you with a detailed schematic, showing how the NYFIX fixed division will fit within our NYSE Technologies infrastructure. Pending closing, NYFIX’s fixed business will expand our NYSE Technologies global product offering and client base. Traditionally, NYSE Euronext has maintained broad and deep relationships and connectivity with the sell side.
With the NYFIX network, we now provide a critical mode of connectivity between the buy side and the sell side at the point of origin in the trade flow process that includes 450 or more buy side institutions, more than 600 sell side institutions, and a connection to stock exchanges and other electronic trade execution venues, such as ECNs, ATS’ and MTS around the world. These buy side and sell side institutions are connected by approximately 14,000 total fixed in IOI channels, and the majority of fixed revenue was earned on a per-channel basis. We will operate the fixed network separate and distinct from a safety network, but overtime, we will look to integrate it to achieve maximum efficiency and scale.
The revenue stream is annuity like in nature, with 95% of it being recurring, with high incremental margins. Regarding the transaction itself, we have received HSR approval. The shareholder vote is scheduled for next week, SEC approval is pending, and we expect to close the transaction sometime in late November.
We are confident with the support of our strong brand and our proven ability to pull costs out, we will be able to grow this business through a combination of cross-selling cost savings and new client acquisitions. In conclusion, before I turn it over to Mike, I would like to say how proud I am of what we have accomplished during the third quarter, and it’s really due to the dedication and hard work of our team around the world. We have achieved a level of stability in terms of our core cash businesses and we have navigated the challenging market conditions over the last 12 months.
This was a watershed quarter for our global derivatives franchise, with significant agreements that I have alluded to in our futures business and in our options business and the launch of NYSE Liffe Clearing and NYPC in Europe and US respectively. We have made substantial progress in developing our commercial technology business, with the pending acquisition of NYFIX, and I am pleased to note that we are almost fully booked with reservations for co-location services at our new US datacenter in New Jersey. In our space, where our largest clients can often be our competitors, our NYSE Technologies business is another example where we can find ways to cooperate with our customers to provide the global infrastructure for trading-related data and information. We continue to look at ways to reduce our cost base and after cutting through the initial layers of spending, we are beginning to see opportunities to not just cut the fat, but really change the culture and get people thinking about being more efficient and more nimble competitors.
Lastly, during the quarter, we made a very important addition to the management team, with the appointment of Dominique Cerutti as my Deputy CEO and Head of the Global Technology. Dominique will join us from IBM and brings exceptional leadership and management skills to the team and will be instrumental in leading our European operations and driving our growth as a world class technology services provider. Dominique joins us near the end of 2009.
With that, I would now like to turn the call over to Mike for a review of our financial results. Mike?
Thank you Duncan, and good morning everyone. Slide 10 provides our financial results for the third quarter. GAAP EPS was $0.48 versus $0.66 per share in the year-ago period. Third quarter 2009 GAAP net income includes a pre-tax impact for merger expenses and exit costs of $8 million or $0.02 per share versus $30 million or $0.08 per share in Q3 last year.
In Q3 2009, we also reported a net pre-tax gain, stemming from the sale of our stake in BM&F Bovespa, offset by the impact of the disposition of Hugin, and a fair value adjustment to our investment in BIDS Holdings. Including these adjustments, pro forma diluted EPS was $0.53 a share versus $0.51 in Q2 2009 and $0.72 in Q3 2008. The quarter includes a $0.03 per share benefit related to the true-up of our first half effective tax rate for fiscal 2009 from 29% to 27%, as a result of the mix of profits from our global subsidiaries. We expect our effective tax rate to be 27% for the balance of this year.
Pro forma gross revenues were $1 billion, down 10% versus Q3 2008 and 7% versus Q2 2009. Gross revenues were negatively impacted by a decline in global cash equities volumes and pricing changes across our European and US cash businesses. As you recall, Q3 2008 kicked off a period of extreme volatility due to the financial crisis, which translated into record volume levels in the US and Europe.
Net revenues for the quarter declined 14% compared to Q3 2008, were up 2% versus Q2 2009. The increase in net revenue versus the second quarter of 2009 was driven by the positive contribution from NYSE Liffe Clearing of $20 million, increased software and technology sales, and currency fluctuations, partially offset by the decline in cash equities and BlueNext trading volumes. Fixed operating costs were $431 million for the quarter, essentially flat versus the year-ago period, and up $33 million on the prior quarter. The increase versus the second quarter of 2009 was attributable to a $10 million benefits curtailment gain reported last quarter, $10 million in incremental costs related to NYSE Liffe Clearing, and $10 million in currency movements.
Pro forma operating income for the quarter was $197 million compared to $297 million in the third quarter of 2008, and includes a $20 million negative impact attributable to foreign currency fluctuations. Operating income was down $17 million versus Q2 2009.
On slide 11, we show our third quarter revenue by both product line and geography. Our European operations continue to represent the majority of our net revenue base, generating 54% of our net revenues Q3 2009. This was up slightly versus Q2, but down versus the 56% it was in the third quarter of 2008. 51% of our net revenues came from trading activities in the third quarter. This is in line with Q2 2009, but a decrease versus the 58% in Q3 2008. Net trading revenues were slightly higher than last quarter, driven by the addition of NYSE Liffe Clearing revenue, beginning July 30th. Global derivatives trading now represents 30% of the company’s net revenue. When compared to Q3 2008, net trading revenues were negatively impacted by the stronger US dollar, lower net capture rates for the European and US cash markets and overall lower volumes.
Software and technology revenues were above last year, due to the acquisition of the Amex Exchange Solutions business, higher software sales in the current quarter, and the contribution of safety Europe, we now have over 100 companies connected. The decrease in other revenues attributable primarily to BlueNext, our carbon emissions trading business, which experienced a drop in Q3 2009 volume. Drop-off in BlueNext was partially offset by $3 million in treasury revenue earned in connection with the in-sourcing of the NYSE Liffe Clearing business, which we booked in other revenue.
Slide 12 shows the quarterly volume trends for our major trading operations. Q3 volumes were mixed versus prior year and prior quarter comparables. The NYSE Liffe derivative business was up slightly versus Q3 2008, but down significantly versus Q2 2009. With the year-over-year increase, the quarter-over-quarter decline was due to Bclear, which we have separately displayed for you in the chart. As you will recall, Bclear is offered at lower price levels and subject to price caps. LIFFE CONNECT volume continue to harbor around 3 million contracts per day, down slightly versus prior quarter.
However, it’s important to note that we now realized clearing revenue on both LIFFE CONNECT and Bclear volumes. Volume growth for US derivatives year-over-year was fueled by our acquisition of the Amex options business in October 2008. While our volumes in the third quarter were in line with the second quarter levels, consolidated market volumes were down 7%. This translated into increased market share for us, driven by our pricing changes on July 1st, it has attracted higher levels of electronic trading flow, and the announced semi-mutualization of our Amex options business.
Volumes in both the US cash and European cash businesses declined year-over-year and quarter-over-quarter. Our matched market share on NYSE in Tape A have stabilized at 25%, above 24% recorded in September 2008. We also bolstered the organic liquidity of the NYSE, with the addition of several supplemental liquidity providers to the platform as Duncan mentioned earlier. As a result of the expansion of the SSC group, participation increased to 9.5% in September. Although ADV is down in Europe for Q3, market share has stabilized at around 77%, and we remain optimistic for market volume growth overtime.
Slide 13 provides a split of liquidity, routing and clearing fee between our US and European businesses. The European net revenues, the chart also shows comparative currency neutral trading results. Net revenue in the US cash business decreased versus Q3 2008 and Q2 2009. And favorable revenue variance, the prior year is attributed to lower volume, more competitive pricing and higher mix of participation from DMM, NYSE Classic following introduction of the new market model. DMM participation on NYSE Classic in September was 9.1% versus 3.6% in September 2008. Overall, cash trading volumes were up significantly versus prior year and prior quarter periods.
US derivatives revenues rose in Q3 2009 compared to the Q3 2008, due to the addition of the Amex options business, which closed on October 1st, 2008. Revenue was stable quarter-to-quarter. As previously discussed, we made some pricing changes effective July 1st, which we do see. Fee decrease was mutual to revenue as a result of the share gains during the quarter. An increase in the mix of penny power business on Arca resulted in slightly higher rebates during the quarter. All in, the average rate for contract was in line with Q2 2009. The Euro/dollar relationship increased 5% this quarter, but was 5% below last year. Similarly the British Pound strengthened 6% this quarter versus the US dollar and was 13% below last year.
Net revenue for European derivative was down 2% versus prior year and up 23% versus Q2 2009. In the third quarter, European derivative net revenues benefited from two months of NYSE Liffe Clearing revenue. Net revenue also benefited from higher-than-anticipated exercise assignment and settlement fees, and lower liquidity payments during the quarter, due to a more favorable mix. European cash revenues for the third quarter of 2009 were significantly below third quarter 2008 levels due to volumes of around 15% as well as revenue captured declined 42% due to price changes that we have made over the past year. Versus Q3 2009, European cash revenues were lower by 4% and volumes were down 3%, with the average rate per trade holding steady at $0.93 per trade.
We made a pricing adjustment for equity trading effective September 1, so we would expect slightly lower capture rate in Q4, and we see the full effect of the pricing change. Slide 14 provides a harmonized year of operating expenses. This chart, which we produce each quarter, reconciles our operating expenses, segregating the effects of foreign currency variations, portfolio changes, and one-time IT integration costs. This is consistent with our 2009 expense guidance and synergy projections. On an adjusted basis, underlying fixed costs have continued to decline throughout 2009. After adjusting for foreign exchange variation, incremental spending attributed to portfolio changes for the acquisition of Amex and other new business initiatives like NYSE Liffe U.S., NYSE Liffe Clearing, and SmartPool, pro forma fixed operating costs during the third quarter declined $31 million or 7%. Year-to-date through September, adjusted fixed operating costs were down $121 million or 10% compared to the prior-year period.
On slide 15, I will address our expense outlook, share with you some initial thoughts for 2010. Our previous full-year 2009 fixed cost guidance was $1.728 billion. Based on our year-to-date spend of $1.25 billion, we expect to be considerably below the guidance figure, despite the weakening of the US dollar.
Looking forward to the fourth quarter, we expect cost to remain significantly below the prior-year levels. That said, we expect Q4 expenses to be above Q3 levels, reflecting the fourth quarter impact, the additional cost from Liffe Clearing, NYFIX, a weaker dollar and planned investments in issuer services and marketing. As part of our technology harmonization initiative, we have finalized an agreement with Invest Northern Ireland to support our efforts to create a center of excellence in Belfast for the delivery of innovative technology solution. The agreement arrived for up to 9.6 million pounds of support for capital and personnel investments.
In 2010, we have continued to focus our efforts on cost reductions, through our existing technology and non-technology related savings plan. Headcount as of September 30th, 2009 was 3,399, down 4% from June 30th and 10% from December 31st, 2008. The social plan that VRIP communicated in the second quarter will result in further staff reductions in Q4 and through the first quarter of 2010. We have also reduced a number of contractors supporting the business.
Looking ahead for revenues, we are excited about the prospect to a more meaningful revenue contribution, some of the initiatives that we launched this year, specifically a full-year contribution NYSE Liffe Clearing. NYFIX, our technology investments and the semi-mutualization initiatives. NYSE Liffe Clearing is on track to meet or exceed the annualized $100 million revenue target announced at the time of the transaction, with $20 million revenue realized in the first two months of operation.
We hope to close the NYFIX transaction by the end of November and are in the final stages of negotiation to sell the US broker dealer. As Duncan stated earlier, we announced definitive agreement to sell a stake in our US futures exchange NYSE Liffe U.S. The announcement is signed and will close pending the SEC review and approval, at which time we will receive cash from our partners for their stake. And moving to the Amex options framework, we will maintain control of the entity and consolidate its results on our financials.
In 2010, we will debut our new datacenter. The current plan is to begin migration of clients to (inaudible) in April and Mahwah in June. The launch of the new data centers, we expect to see new revenue streams including co-location. Due to the importance of the migration process for clients, we will experience an increase in duplicate data center and one-time integration costs related to the migration, as we won parallel data center environment for a good portion of 2010.
Additional guidance on 2010 will be provided during our fourth quarter earnings call in February. Slide 16 shows the incremental revenue costs from new initiatives for each of the first three quarters and for full-year 2009 guidance. In the third quarter, new initiative revenue was driven primarily by the prior-year acquisition of NYSE Amex and the new revenue associated with NYSE Liffe Clearing. Revenues for BlueNext carbon trading operations have tailed off during the third quarter due to lower volume. Another factor impacting revenue was the exclusion of Exchange Solutions, as we recognized the one-year anniversary acquisition in the third quarter.
The European NTF and NYSE Liffe U.S. have contributed minimally to year-to-date revenues, and we expect them to increase their contribution overtime. Incremental cost of the new initiative decreased in the third quarter, largely due to Amex now being fully integrated at a significantly lower cost base and anniversary of Exchange Solutions in the third quarter and Wombat in March. This was offset by additional NYSE Liffe Clearing cost in the third quarter.
Looking ahead to the fourth quarter, we expect incremental revenue from NYSE Liffe Clearing. In the cost front, we expect little to no increase in costs as new initiative spending will be more than offset by the year-over-year savings from Amex. Additionally, depending on when we close the NYFIX transaction, we may have incremental revenue and expenses associated with this initiative during the fourth quarter. NYFIX fixed business has been growing steadily and recorded approximately $35 million in revenue and $9 million of operating income in the first half of 2009.
Slide 17 details our cash debt position as of September 30th 2009. September 30th, our gross debt was $2.9 billion. Cash and marketable securities were $500 million and net debt was $2.4 billion as of quarter end. The $2.9 billion of debt included $2.2 billion of long-term debt at a weighted average cost of 5.3%. The remaining $700 million short-term debt consists of commercial paper at an average cost of less than 0.5%. During the quarter, we spent $109 million on capital expenditures, including $57 million related to our data centers. We also paid the $355 million termination charge to LCH.Clearnet regarding the NYSE Liffe Clearing. Year-to-date through September, we spent a total of $320 million on capital expenditures.
Additionally, we paid a net $101 million in Section 31 fees to the SEC during the quarter, reflecting the semi-annual payment of these pass-through charges. In the fourth quarter, we expect to close the NYFIX transaction and also anticipate some cash inflows from the sale of a portion of the NYSE Liffe U.S. and Amex option business. With $0.5 billion cash on hand and $2.7 billion in committed bank facilities, we are in a strong liquidity position.
With that, we will now open the line for your questions.
(Operator instructions) And our first question comes from the line of Howard Chen from Credit Suisse. Howard, you may proceed.
Howard Chen – Credit Suisse
Good morning everyone.
Good morning Howard.
Howard Chen – Credit Suisse
I just had a question on capital management. Mike, you spoke about the strong liquidity position and we can obviously see this cash flow you are generating, as you and team sit down and think about what you want to get accomplished over the next year, can you just touch upon the capital management and maybe specifically the dividend into 2010?
We certainly understand that there are many constituents managing our capital and we are constantly balancing our balance sheet with our shareholders and evaluating with the appropriate level of capital. We do believe that the level of debt, gross debt that we are out in the third quarter is the high watermark. We knew we are going to be increasing our debt a little bit this quarter with the NYSE Liffe Clearing payment. As we have talked about in the past with regard to dividend, our dividend has been committed at $1.20 a share for the year through December of this year. We indicated that in December is when we sit down with our Board, we go through our 2010 [ph] and business plans and we will make an appropriate decision on our dividend for fiscal 2010 at that time.
Howard Chen – Credit Suisse
Okay, thanks. I will hop back in the queue.
And our next question comes from the line of Mike Vinciquerra from BMO Capital. Mike, you may proceed.
Mike Vinciquerra – BMO Capital
Good morning guys and congratulations on the success in the US options market. I just want to ask a question, you explained kind of where the Amex share is coming from, but Arca, according to our stats has also been gaining our share. I know box changed its pricing during the quarter, is there anything else you can point to that’s leading to that renewed success over at Arca options?
I think you identified, it’s probably a combination of box, probably in the order types that we introduced into the Arca platform, but you are right. Overall, we will be making some progress on the Arca platform.
Mike Vinciquerra – BMO Capital
Fair enough. Thanks guys.
And our next question comes from the line of Don Fandetti from Citigroup. Don, you may proceed.
Don Fandetti – Citigroup
Hi good morning. Duncan, I was just curious how you view the regulatory outlook if it’s a net positive or a net negative for NYX – potential upside versus volume risk high frequency and others?
I think it’s a question we are asking ourselves a lot and we get answer a lot. So, I will start, Don, and then Larry who is just in Washington again a couple of days ago. So, I think he’s got an update as well. I think it’s pretty clear that on both sides of the Atlantic, the regulators are going to be looking at market structure in general, and I would say, you know, our arguments on both sides of the Atlantic continue to be grounded in what I warned in my remarks, which is nothing too dramatic, but we would like to see a level of the playing field. And if we are going to have competitors, we like to be able to compete fairly and evenly with them. So, I think from our point of view, maybe this is too optimistic.
It’s hard for me to imagine that the regulatory landscape certainly in the US could get a lot worse for us. I would think almost any change that kind of evens up the playing field or spreads the burden of surveillance or increases the transparency for some of the other venues, or gives us an ability to innovate it at the same pace that they do, it’s hard for me to think they are going to come up with some ideas that aren’t good for us. The only counter to that is if away from the SEC and regulators in the EU, if there is a tax policy and a transaction tax in the regulated markets got any kind of traction, which we are told is not going to, I think that would certainly put a damper on volumes in all venues regulated or unregulated.
Don Fandetti – Citigroup
Okay. Thank you.
Larry, you want to add anything to that or –?
I think that sums it up pretty well. I think we are viewing this as positive optionality meaning it really couldn’t get too much worse. And in most cases where we are asking for hidden unreasonable nor is it extreme. I think we are really very pragmatic about it. We are not trying to change major market practices, we are not saying dark holes are bad or evil, we are not saying civilization is bad, although really thing is you just sort of look at what costs we are making other burdens that are on these different venues and make sure that they are similar. As Duncan outlined, I think the transaction tax would clearly change the landscape, if they decided to clamp down on high frequency trading, which we don’t think is appropriate in any way. But that would have detrimental effect not only us but on the overall market and for US investors in general as volumes decrease sharply and spreads widening.
And just so we are not misunderstood, when Larry said that which we think is inappropriate anyway, we mean regulation of high frequency trading, not high frequency trading itself, okay. Just we keep sharing from the rooftops, that this is just technologically enabled market making in the 21st century and I think the regulators are going to look at it, just because it’s so much of a part of the volume today. But our guess is they might ask for some reporting around it or something like that, but I don’t think we are going to see any major initiatives that are going to strive for high frequency market making.
Don Fandetti – Citigroup
Okay. That’s helpful. Thank you.
And our next question comes from the line of Rich Repetto from Sandler O'Neill. Rich, you may proceed.
Rich Repetto – Sandler O'Neill
Good morning guys.
Good morning Rich.
Rich Repetto – Sandler O'Neill
I guess since I got my one shot here, on the expense front, the perception here is maybe, is there some of the things, and I will be more specific but like the US fee rep, the European social plan, I am not sure on the data center, but some of this stuff is being pushed back or delayed. And the reason why I am asking is I am seeing, I understand the incremental expenses in 4Q related to the currency and Liffe Clearing and NYFIX itself, but it just feels like I thought the European social plan will be in place by year-end?
Yes, I will just, hi Rich. As we had mentioned, the social plan was finalized in the second quarter, but the staff reduction was going to happen over a period of time. We indicated that we expected only about $12 million of the projected $37 million of savings from that becoming in fiscal 2009. So, the plan is finalized, but the staff reduction is taking place over a period of time. When you sit there and look at the fourth quarter, as we introduced new initiatives, we introduced – in the fourth quarter, we close on NYFIX, we will continue to reconcile it, but we will be incurring some additional cost to the new initiative that have revenues considerably above those cost levels.
I think this reconcile back to the second quarter which is what I did. We did have – the 398 was rather low, we did have that curtailment gain which we indicated was one-time in nature in the second quarter. If we take the curtailment gain, Liffe Clearing and the foreign exchange out, the third quarter is in line with the same number as the second quarter expense space. So, you could say we probably did save $4 million, $5 million or $6 million in people costs in the third quarter versus the second.
We also have, not everyone of our costs are straight line through the air. We are making investments in our issuer services and there is some costs like marketing that aren’t uniform as you go through the year. So, there were some increases in this quarter of a couple of million dollars that might have offset the savings, but nothing is being delayed. The plan is firming and as I think we have indicated the staff reduction initiatives will take place between now and through the first quarter of 2010.
Rich Repetto – Sandler O'Neill
Okay. Thank you.
And our next question comes from the line of Daniel Harris from Goldman Sachs. Daniel, you may proceed.
Daniel Harris – Goldman Sachs
Thanks very much. Duncan, I was wondering, you talked a couple of times during the call about the 77% of share that you have in Europe, and I just wanted to get your updated thoughts, you know, a couple of months or this much through the year at this point the last time we heard from you, how sustainable is that given the market structure differences in the US, but certainly what we have seen in Canada recently have shown that market share is starting to tail off significantly after time in the US. So, that’s been the history. So, just wanted to get your updated thoughts on European share and trends from here?
Thanks Dan. A couple of observations. Number one, as you have heard us on this call before, I think something we have tried really hard to do with our European platform is to not repeat the mistakes that some of us think the US incumbents made here. So, I think our market share is flat and open. The investment we made in technology has left us in a position where even the upstarts can’t really say with credibility that they are any faster than we are, because I think our turnaround times are just as fast. I think we have got a regulatory landscape there that is going to be a lot less excited about repeating the outcomes in the US.
So, I think if you talk to the regulators in Europe right now, well they are going to – I am not pretending, they are going to return us to our monopoly position, we will have people with whom we will have to compete, but I don’t think the European regulators have any interest in creating what they view as a free for all and it’s been the final outcome here. So I think those are all – I think we have done some of the right things. We have been realistic on price. We have gotten our clearing fees down. We made the investments in technology, we have got the right market structure. So, I think we have had a much more successful 2009 than I think people probably would have thought, but it’s not lost on us, that the two or three venues with whom we compete are going to continue to be viable competitors.
I think we are going to happen to keep doing the best we can to be cognizant of all those things that I just mentioned and making sure we are playing as much offence as we can. I think the regulators are going to have a lot to say in 2010 about what the competitive landscape is going to look like. I think you have to also remember that the 77% we reported, that’s only under reported transactions. I am sure there’s a lot of internalization in Europe that isn’t captured in any of this basics we or anybody else has. So, maybe it’s not an apples-to-apples comparison with the US anyway where everything is reported in captured.
Daniel Harris – Goldman Sachs
Thanks very much.
And our next question comes from the line of Roger Freeman from Barclays Capital. Roger, you may proceed.
Roger Freeman – Barclays Capital
Hi, good morning.
Roger Freeman – Barclays Capital
I guess on, let me just ask about market share, the stabilization you talked about. So, we have seen a couple of quarters of improvement, really across the board for you, share coming out of that direct, there’s a lit bit out of internalization, I guess the question is what do you think is, are you seeing anything from the customer base that’s reacting to some of the noise around regulation that’s impacting that share? And then secondly, on kind (inaudible) cash, can you just comment on how you view the floor buildout that you are working on now panning out in terms of the interest level, are you getting from independent brokers that basically set up shop down there and do you see that as being a potential meaningful revenue contributor?
Great, all good questions. I think in the New York Classic model, what we have seen is the maturing of the new market model, which really it is in the back allocation for both DMMs and SLPs, when they are back to almost 20% participation rate, which is really back to where we were pre-Reg and that. Those guys are really contributing volume finally. I think there is some weariness in the other price points in the market whether that’s faster edge and even that, they are just sort of fighting against each and other and you have seen a little bit into marker version.
To be honest, we were fighting in Classic, the fact that US market volumes are actually not or haven’t been very healthy, particularly if you adjust for the concentration in the top ten names. And that was actually dilutive to our New York Classic market share, because it’s not as little agency of a platform, it’s not a high rebate platform. So, we don’t attract the same kind of activity. Over the summer in particular, we saw such a high concentration in Citi and in Bank of America and some of the other names. That was – but we felt we held in there, and as that phenomenon started to see which has happened in the last month or so, we have seen our market share pick up.
So, we are pretty encouraged by it. We are not complacent by any means. We know that this is just a knock-down-drag-out quite unquestionably has no round limit to it. In terms of the floor, we think it’s the natural evolution of what we have been trying to accomplish here, which is the first thing we really did was trying to make the technology and the rule base much more consistent with today’s high touch high-tech tradeoff that you are seeing in the marketplace. When we got here, technology was too slow, it was too expensive, the model didn’t allow a correct participation or efficient participation by our liquidity providers.
We have now changed that balance, we have given more technology to the floor traders themselves in terms of third-party algorithms, better algorithms in their hands, the blue line capabilities, all the different things that change the ecosystem to be much more vital, vibrant and healthy. And what we think is that the newly modeling of the floor is perfectly consistent with that, we just give people the capability to run a full-service agency brokerage business using top grade technology including their own, it’s an open architecture from the liquidity exchange, while still having access to the point of sale, which we think also still important. We think it’s a very differentiated model.
All the other models in the US, to be honest, including our (inaudible) are homogenous. We think it’s consistent with the options business that we brought in there, the Amex floor model. So, we have got very high interest levels in terms of existing firms both independent broker dealers and house brokers to be honest, trying to increase their presence on the floor where it has been a steady decrease. We even got an interest from firms that have no floor presence, saying, gee, that’s really interesting, we would be interested in that. And so, I am not sure necessarily whether that’s – we are not trying to raise revenues from having them on the floor, but I think that there will be just a natural effect of them being there using our technology services and also contributing to the overall vibrancy of the floor, the floor and the volume.
Roger Freeman – Barclays Capital
And our next question comes from the line of Mike Carrier from Deutsche Bank. Mike, you may proceed.
Mike Carrier – Deutsche Bank
Thanks guys. One more question on the deregulatory side, if you look over the past, say five to eight years, all the changes on regulation is spurred like a lot of volume in the US, and so, I guess when you are looking at the potential changes, I get the need for transparency among all the different market participants and the platforms, but when you guys talk about the cost of surveillance, like how significant is that, from like percentage of your expense base or like cost per trade? And then, when you look at like market share coming back to the exchange of this similar stuff occurs versus just volumes in the industry, you know not being a strong, I guess what’s your view on that?
We had trouble hearing you, so it’s Duncan, I will try to do the best I can to answer it. I think you are right. Some of the deregulatory moves have created competition are somewhat correlated with the increase in volume, but I think the increase in volume was more tied to things like decimalization, things like Reg and MS etcetera. I think all Reg ATS really led to was taking that same volume that was already destined to increase because of a shrinking minimum price variation etcetera, and I think it’s just fragmented it more, because it really reduced the barrier to entry to at least compete in the trading part of our business.
So, I think it’s hard to draw too many parallels between that and Europe, because I personally think that the way we will see volumes grow in Europe is the market structure is already opening flat, the technology is more than fast enough. If we believe that most of the increase in the last three or four years has come from the high frequency market making community, I think we are extremely well positioned in Europe to capture a meaningful percentage of that given our pricing models, given the technology, and given the market models.
So, I think we are okay there. In terms of the second part of your question, I think what we are simply saying is one of the outcomes of having fragmented market share as you also have fragmented regulatory data, and I guess our view is if you think of our market share in the US market of being, call it, you know, in the high-30s in Tape A and just under 30% if you looked at A, B, and C totally, it’s my view that the SEC should recognize that no one is really in a position to regulate the overall equity market anymore. I think the SEC should appoint someone to do that, and whether it’s the sales or an enterprise to be named later, we are fairly agnostic, but I think a lot of people in Washington think, because of history, we are still on a position to do it and we are not.
And our view is the SEC should decide what the cost of regulation market wide is, and we are happy to pay our share of that in line with our share of the market, and right now, we feel like we pay an exponentially higher percentage of what everyone is spending collectively on regulation than we should. So, in the long run, would it help us on cost a little bit, I suppose so, but right now, we spend probably, let’s say around $80 million a year of the total $1.6 billion, $1.7 billion in expenses. So, that kind of puts a frame or reference around it.
Mike Carrier – Deutsche Bank
Okay, thanks guys.
I think that’s going to be our last question, because we have got some issuers here today, and we also got to do a company-wide webcast shortly. So, we thank you all for dialing in. Mike and Stephen in the team will make themselves available for those of you who want to reach out to them for some follow-ups, and thank you all for dialing in, we will speak to you all soon. Thank you very much.
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.
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