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Nasdaq OMX Group (NDAQ)

Q4 2011 Earnings Call

February 01, 2012 8:00 am ET

Executives

Vince Palmiere - Vice President of Investor Relations & Nasdaq Corporate Finance and Head of Nasdaq Activities

Robert Greifeld - Chief Executive Officer, Staff Director, Member of Executive Committee and Member of Finance Committee

Lee Shavel - Chief Financial Officer and Executive Vice President of Corporate Strategy

Analysts

Michael Carrier - Deutsche Bank AG, Research Division

Roger A. Freeman - Barclays Capital, Research Division

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

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

Howard Chen - Crédit Suisse AG, Research Division

Alex Kramm - UBS Investment Bank, Research Division

Jillian Miller - BMO Capital Markets U.S.

Christopher Harris - Wells Fargo Securities, LLC, Research Division

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

Matthew S. Heinz - Stifel, Nicolaus & Co., Inc., Research Division

Brian Bedell - ISI Group Inc., Research Division

Jonathan E. Casteleyn - Susquehanna Financial Group, LLLP, Research Division

Rob Rutschow - Credit Agricole Securities (USA) Inc., Research Division

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

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the NASDAQ OMX Fourth Quarter 2011 Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Vincent Palmiere, Vice President of Investor Relations.

Vince Palmiere

Good morning, everyone, and thanks for joining us today to discuss NASDAQ OMX's Fourth Quarter and Full Year 2011 Earnings Results. Joining me are Bob Greifeld, our Chief Executive Officer; Lee Shavel, our Chief Financial Officer; and Ed Knight, our General Counsel.

Following our prepared remarks, we'll open up the line to Q&A. You can access the results press release and presentation on NASDAQ OMX's Investor Relations' website at www.nasdaqomx.com. We intend to use our website as a means of disclosing material nonpublic information and for complying with disclosure obligations under SEC Regulation FD, and these disclosures will be included under the Events and Presentations section of the site.

Now before I turn the call over to Bob, I'd 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. The actual results might differ materially from those projected in these forward-looking statements. Information concerning factors that could cause actual results to differ from forward-looking statements is contained in our press release and other periodic reports filed with the SEC. And with that, I'll turn the call over to Bob.

Robert Greifeld

I will begin by spending a few minutes highlighting our results and then update you on our plans going forward. Lee will then walk you through the detailed financials.

For the fourth quarter, we delivered solid results as we grew net revenues, income and earnings per share from prior year levels despite the backdrop of a challenging volume environment. Non-GAAP EPS was $0.63 for the quarter, up 15% from the $0.55 in the fourth quarter of 2010.

For the full year 2011, results were truly outstanding as we set new records across the board. Net revenue and non-GAAP net income grew 11% and non-GAAP diluted earnings per share grew 27% to $2.53. This is a remarkable achievement that caps a 4-year run as we -- in which we have grown our earnings per share by an average of 14% per year and highlights the success of our strategic plan as it was delivered during a period in which we operated in an ultra-competitive environment with weakening, macroeconomic drivers.

During this time, we saw equity trading volumes decline, industry employment levels retrieved and fewer companies going public. When viewed through the harsh reality of this operating environment, our results over the last 4 years reflect truly exceptional performance.

Our ability to grow the business has been achieved by focusing on 3 key elements of our strategic plan: first, investing in new organic growth initiatives; second, making sound acquisition decisions; and three, managing our capital efficiently. The execution of this plan has resulted in the diversification of our business and a broadening of our product offering. This past year was the second consecutive year in which derivatives trading revenue exceeded those of cash equities as revenues grew 18% from 2010 and then as average growth of approximately 15% annually over the past 4 years.

Other areas in which we've chosen to diversify have also grown. In Access Services, revenue grew by an astounding 29% in 2011 and have grown by an average of 24% annually since 2007. Corporate Solutions has a 4-year compounded average growth rate of 14%; Market Technology has a full year CAGR of 12%; and U.S. market data revenues have grown an average of 10% annually.

The chart on Slide 5 of our presentation does a good job of highlighting the success of our diversification strategy. Today, 14% of our revenues come from trading cash equities, down from 23% in 2007, and 2/3 of that revenue is generated from products and services that are recurring in nature. It is this solid base of recurring revenues that provides the foundation for our strong cash flow model, a model that has allowed us to invest in new initiatives and make strategic bolt-on acquisitions while also returning capital to shareholders.

While revenues have grown, it's important to note that we've been able to deliver this growth while maintaining strong operating margins. In 2011, our non-GAAP operating margins came in at 46%, on par with the full year of 2010, but up significantly from a 38% margin we achieved in 2007.

Now turning to the details of the quarter. Within our Market Services business segment, despite a slight decline in industry volumes, we managed to grow our U.S. equity matched volumes by 7% from prior year levels as market share improved.

In the quarter, our total share was 21.3%, up from 19.6% in the fourth quarter of 2010, due primarily to the success of our Investors Support Program known as ISP. This program is designed to attract retail and institutional order flows while rewarding firms that exceeds certain liquidity provision and execution requirements. We're encouraged by the progress of this program and remain confident about its continued success.

Within U.S. options, we witnessed growth in the number of market makers of the NASDAQ Options Market, which we attribute to the migration of NOM to the PHLX technology architecture during the third quarter. We also saw growth in new members of PHLX from those looking to trade in our open outcry market and with our new, improved complex order functionality.

In the Nordics, N2EX continues to grow at an impressive rate. And they ended the year with 34 members and 15 companies trading U.K. power futures. Scottish Power became the third of the 6 large U.K. utilities to commit to bidding arrangements in N2EX's day-ahead auction. This follows earlier commitments from E.ON and SSE. Just last week, Drax Power, the largest independent power producer became the most recent member of N2EX.

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