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The NASDAQ OMX Group, Inc. (NDAQ)

Citigroup US Financial Services Conference

March 06, 2013 9:50 am ET


Eric W. Noll - Executive Vice President of Transaction Services - US and UK


Eric W. Noll

Good morning, everyone. Thank you for joining us today. I appreciate your interest, and I'm delighted to be here today to talk to you about NASDAQ OMX. So as you go through the normal disclaimers out there.

NASDAQ OMX is in the midst of a fairly significant transformation and one that we continue to believe isn't fully understood or appreciated by the investment community. The company, as you may remember, is initially built around our exchange license. But over the past few years, we've been able to diversify away from that transaction-based model into a portfolio really of stable, growing, recurring revenue businesses that admittedly at their core still rely on the transaction businesses that we own and operate, but are built upon that and developing a fairly stable river of revenues coming out of those. The benefits of this transformation are evident when you look at our 2012 results.

Our strong free cash flow was over $0.5 billion. It was generated primarily by our portfolio of these subscription-based revenues, which now account for about 70% of our total, and those revenues increased 4% last year.

So while we're not excited about a 4% revenue growth, but in an environment where U.S. and Nordic cash and equity derivatives volumes were down between 10% and 30%, we still think that was a pretty good result given the headwinds that we faced last year. We're still very committed to our transaction-based businesses. They have tremendous operating leverage, particularly in a recovering volume environment. And while our transaction businesses declined 8% in 2012, a function of lower industry volumes, we're pleased with -- that we've been able to maintain our revenue capture on margins and our market shares within those businesses. And those are really the factors that are within our control.

I would note that in January and February of this year, we are seeing some encouraging signs for volume in our transaction-based businesses. For U.S. equities, we've seen 7 out of the late -- last 8 weeks of positive flows in the U.S. equity mutual funds. First time we've seen a trend like that in about 3 or 4 years. Our U.S. derivatives revenues increased 10% year-over-year in the fourth quarter of 2012, and we experienced continued strong volume in 2013.

In our Nordic markets, in January, the value of our equity shares traded on the market has increased year-over-year, and February is showing continued solid performance there. And our European options and fixed income volumes are also performing well.

I do think that this does reflect what seems to be the early stages and, I would caution you, the early stages of returning appetite for risk assets in the marketplace. So whether they come back to the marketplace in terms of equities or through other instruments, we are seeing what we consider to be some positive trends in that space. I can't say that these trends will continue, and we certainly don't operate our business as if they are going to continue, but we -- these are the most encouraging volume trends we've seen in about 3 years.

I'd also like to -- I also think, if you step back and look at what drives some of this behavior, we're seeing some other stronger trends in terms of consumer financial behavior. Consumers are spending more, they're borrowing more, credit card balances are starting to increase and housing prices are beginning to improve as well, clearly a signaling in activity that people are going back into the marketplace and buying assets again, and that, naturally, in our opinion, has a psychological impact in terms of investors' minds. And we think that's promising for the long-term trends in terms of where volumes go in our marketplace.

At the heart of our -- of NASDAQ OMX is our technology. Our technology capabilities for trading, we think, are unmatched in the exchange space and elsewhere in the marketplace. And we have the technological infrastructure to support what are highly profitable Data, Index and Access Services businesses. We utilize this technology to help other exchanges on a global basis. As you may know, we power with NASDAQ technology over 70 marketplaces around the globe and financial companies to build their infrastructure and power corporate solutions suites for products for public and private companies.

Cost efficiency is also part of our DNA. As we have often said, we view all fixed costs as being variable over the long term. If we come to the conclusion that we will face a weak revenue environment, we're going to look for additional opportunities to reduce our cost basis. In 2012, in the face of what were some fairly significant volume and transaction headwinds, we've reduced our cost by over $50 million on a run rate basis. What this adds up to is a strong record of strong cash flows. Since 2009, we have generated roughly $2 billion in free cash flow, which we used to repurchase 1.2 billion shares of -- $1 billion worth of our own shares. We initiated a dividend currently yielding at about a 1.6% yield, and we reduced our debt by over $0.5 billion and acquired some small attractive assets in the process.

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