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Nasdaq OMX Group (NDAQ)

Q3 2012 Earnings Call

October 24, 2012 8:00 am ET


John Sweeney

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

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


Roger A. Freeman - Barclays Capital, Research Division

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

Christopher J. Allen - Evercore Partners Inc., Research Division

Howard Chen - Crédit Suisse AG, Research Division

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

Gaston F. Ceron - Morningstar Inc., Research Division

Alexander Blostein - Goldman Sachs Group Inc., Research Division

Brian Bedell - ISI Group Inc., Research Division



Good day, ladies and gentlemen. Welcome to the NASDAQ OMX Third Quarter 2012 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. John Sweeney, Vice President of Investor Relations. Sir, you may begin.

John Sweeney

Good morning, everyone, and thanks for joining us today to discuss NASDAQ OMX's Third Quarter 2012 Earnings Results. We're here with Bob Greifeld, our CEO; Lee Shavel, CFO and Ed Knight, General Counsel.

After prepared remarks, we'll open up to Q&A. The press release and presentation are on our website. We intend to use the website as a means of disclosing material non-public information and complying with disclosure obligations on SEC Regulation FD. I'd like to remind you that certain statements in this presentation and during Q&A 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. Actual results may differ materially from these projections. Information concerning factors that could cause actual results to differ from forward-looking statements is contained in our press release and periodic reports filed with the SEC.

And now I'll turn the call over to Bob.

Robert Greifeld

Thank you, John, and I appreciate everybody's time here this morning. I'd like to start by just refreshing everybody's memory with respect to third quarter 2011. That was a quarter where external geopolitical events created higher volatility and volume in the markets. Compared to the third quarter 2011, the third quarter 2012 in both the U.S. and Nordic equity businesses had volume down over 30%.

In that context, our non-GAAP EPS of $0.62 is outstanding. It represents a 7% decline when we had 30% decline in equity volume. When we look at our performance, this strong performance, a major contributor was the high proportion of subscription and recurring revenues that is existent in our business models. That percent is now at 71% of total revenues and these revenues actually grew 2% year-over-year in this tough environment. Now when see $0.62, and again, in the context of the volumes we see in the marketplace, the question we frequently receive from analysts and investors is, "In the face of this continuing pressure in equities, how do we continue to perform at such a high level?"

As previously mentioned, recurring revenue is a major factor, but more important is the many innovative actions taken by our business leaders and colleagues that individually are not typically large enough to be noticed in the context of a quarterly report, but collectively, over time, serve to reinvigorate and reinvent our business model.

I would like to highlight several of these innovative, dynamic actions. I'll start first with N2Ex. This is our U.K. operation, which has 3 separate routes to the power market: a continuous 24/7 market, a business aid clearing platform for over-the-counter trades and a daily auction for day-ahead power.

We are now the reference point for the underlying spot price. We bring the magic of price discovery to the U.K. power marketplace. Becoming the place where the reference price is determined is a definable asset that we will monetize increasingly over time. Our efforts continue to gain traction, and we are actually outperforming internal expectations by a factor of 2. We have cleared twice the spot terawatt hours than we expected as we put our 2012 budget together.

Building upon our success in the spot market, we're investing in a derivatives business for gas and power futures based upon the N2Ex day-ahead indices. To incent this marketplace, we have initiated a futures fee holiday to help make sure we have a very busy futures market, U.K. futures market, going into 2013 when the fees will be reset to normal levels. While it's early days to this market, I would also like to note that the derivatives market is 5x the size of the spot market and certainly gives us substantial room to grow.

Moving on, we're certainly delighted with the launch of BX Options. This is our newest options exchange and we have already attracted over 40 customers. In a relatively short period of time, we have gained about 1 percentage share of U.S. options market and the operation is profitable. I would note that we were able to launch this options exchange with a relatively small investment, without any additional hires and utilizing our current infrastructure. This is just the type of initiative we are seeking to fund through our GIFT internal investment program. We expect BX Options to demonstrate strong, continued growth and to be a solid contributor to our performance in 2013 and beyond.

Our Global Index Group continues to demonstrate strong performance with revenues of $14 million, up $1 million or 8% compared to the prior year. I'm very pleased to report that we've made excellent progress in the plan we outlined for this business at our Investor Day last spring. After 18 months in development, we're excited to be launching our Global Equity Family on our INET-based global index calculator during the fourth quarter. Our team has been highly focused on this effort, and we are confident that we have developed an index methodology that broadly meets the needs of our customers.

Now finally, I'd like to comment on Vanguard's recent announcement to switch many of its funds from MSCI to FTSE. This will result in a significant cost savings for its customers. We applaud Vanguard for the move, and we recognize this begins a new era for ETF providers and an era we recognized when we started development of our global index calculator 18 months ago. We've had initial success with it, and clearly, we think that the new world will play to our strengths as an efficient, scalable indexer. Our INET calculator, combined with our newly graduated Index Weightings & Components, another -- a GIFT initiative by the way, and our transparent rule-based methodologies position us to competitively to address the needs of this new market opportunity.

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