洲際交易所 (ICE) 2007 Q4 法說會逐字稿

Good day, everyone, and welcome to the IntercontinentalExchange fourth-quarter 2007 earnings conference call. Today's call is being recorded. At this time, I would like to turn the conference over to Kelly Loeffler. Please go ahead.

Good morning. To obtain a copy of the Company's fourth-quarter earnings release and presentation, please visit the investor and media section of our website at theice.com. These items will be archived and available for replay.

Please be aware that our comments may contain certain forward-looking statements. These statements represent our current judgment and are subject to various risks, assumptions, and uncertainties as outlined in our filings with the SEC. Actual results may differ materially from those that are expressed or implied in any forward-looking statements.

With us on the call today are Jeff Sprecher, Chairman and CEO; Scott Hill, Chief Financial Officer; and Chuck Vice, Chief Operating Officer. Scott will begin with a review of ICE's financial performance. Chuck will provide an update on clearing and technology, and Jeff will conclude with a brief overview of our growth initiatives. At the end of our prepared remarks, we will take your questions. The call will be followed up with a Q&A, and I would now like to turn the call over to Scott.

Thank you, Kelly. Thanks to everyone for joining us today. I will begin by highlighting ICE's key financial and operating metrics for the fourth quarter, and then I will hand it over to Chuck and Jeff to discuss a few of our key initiatives for 2008.

Let's start on slide 4 with an overview of ICE's fourth-quarter 2007 results. We delivered another solid performance in the fourth quarter including record consolidated revenues of $159 million, up 67% year-over-year. Our operating income increased 50% to $97 million during the quarter. Our operating margin was 61%. Net income for the quarter was $65 million, an increase of 32%, and earnings per diluted share were $0.90.

I would like to take a moment here to talk about a significant element of our 4Q results. ICE's culture is performance-based and our compensation programs reflect this vital attribute. We closed out a great year, one in which we significantly grew revenues, profit, cash, and shareholder value on a strong note in the fourth quarter. Accordingly, we exceeded certain performance measures, which resulted in higher cash bonuses and vesting levels in performance-based equity grants across our employee population.

Our 4Q results also reflect $4.4 million or roughly $0.04 per share of incremental noncash compensation expense, which reflects an accelerated method of expense recognition rather than an even straight-line approach that more closely tracks the actual vesting of those awards for employees. I will be happy to provide further comment on this during Q&A.

Next, on slide 5, I will provide some details about our fourth-quarter consolidated revenues. Transaction revenues comprise our three regulated futures exchanges and our global OTC segment. Transaction revenues in the fourth quarter totaled $133 million, up 60% year to year. These revenues accounted for 83% of our consolidated revenues in the quarter.

Consolidated market data revenues increased 142% to $23 million and accounted for 15% of consolidated revenues. Each of these segments grew as the demand for access to commodity markets increased and as the number of customers in each rose steadily.

We're particularly pleased with our market data revenues, which reflect a modification to our fee structure for view-only screen and continued strong interest and demand for data in the markets we serve.

Turning to slide 6, fourth-quarter consolidated operating expenses were $63 million, up 102% over last year's fourth quarter. As with prior quarters this year, the largest driver of the increase was the addition of expenses for ICE Futures U.S. to our consolidated results. By the end of 2007, the EBITDA margin at ICE Futures U.S. was improved by over 20 points, and we expect continued margin improvement this year.

You may recall that for 2007 we initially projected expense synergies in the $8 million to $9 million range related to the ICE Futures U.S. acquisition. We exceeded that target, with realized synergies for the year in the $14 million to $15 million range. For 2008, we are now forecasting additional synergies of $4 million to $6 million, putting us in the $18 million to $20 million range, up from $14 million to $15 million projected last spring.

Also, as I mentioned previously, our expenses reflect higher cash and non-cash compensation due to the Company's results relative to our 2007 performance targets, and the performance-based nature of our equity program. The impact of this to cash compensation in the fourth quarter was roughly $3 million to $4 million more than a typical run rate we expect entering 2008. We provided guidance on 2008 headcount and non-cash compensation in the earnings release this morning.

Operating expense also reflect the investments we're making to build our European clearinghouse, which Chuck will discuss later in the call. During 2007, we incurred approximately $4.5 million in expenses relating to the development of ICE Clear Europe. This includes $1.9 million recorded in the fourth quarter of last year.

Finally, though not reflected on this chart, I want to point out that our fourth-quarter results also include $1.5 million in interest expense related to the Russell licensing agreement as we detailed for you last quarter. The expense was nearly offset by a nonrecurring $1.4 million lease settlement agreement reached in December.

Now let's move to slide 7 where I will briefly highlight a few of the drivers of our performance. During the fourth quarter of 2007, ICE's average daily volume was a combined 1.5 million contracts for our futures and OTC markets. As you can see, growth in volume and liquidity in our core energy products has continued even during the seasonally slower fourth quarter. We continue to see new customers, electronic trading adoption, increased allocation to commodities, and the addition of new asset classes driving growth across our business.

We made excellent progress in moving the soft commodities futures markets to our electronic platform in 2007. Today, these markets are nearly 90% electronically traded. In March, our U.S. futures markets will join our Canadian and European futures markets in being fully electronic. As you know, though, options contracts will continue to trade in the open outcry environment at ICE Futures U.S.

Next, on slide 8, you can see that the average daily volume for our energy futures business at ICE Futures Europe was 550,000 contracts in the fourth quarter, an increase of 25% over last year. Transaction revenues were $46 million, up 21% over last year's fourth quarter.

For the year, energy futures volumes rose 49% to 138 million contracts versus 93 million contracts in 2006. The 138 million energy contracts also compares to only 36 million contracts traded during 2004, the year before the floor closed in London.

Our 10th consecutive year of record volume was driven by continued strength in Brent, WTI, and gas oil futures. Rate per contract, or RPC, for ICE Futures Europe was $1.27 during the fourth quarter compared to $1.29 in the third quarter.

Now let's look at activity at our ICE Futures U.S. and Canada exchanges on slide 9. ADV for the quarter rose to 219,000 contracts per day, up 26% year to year. Transaction revenues at our North American futures exchanges were $27 million. In the fourth quarter, we established new daily electronic volume records for both our coffee C and cotton futures contracts.

For the year, volume at ICE Futures U.S. and Canada totaled 54 million contracts, an increase of 22% over 2006 levels. In the fourth quarter, RPC for agricultural commodities averaged $2.03 compared to $2.07 in the third quarter.

Moving on to our OTC markets on slide 10, you can see that the segment delivered record transaction revenues of $60 million during the fourth quarter, up 33% year to year. OTC revenues accounted for 45% of fourth-quarter transaction revenues.

Cleared contracts grew to a record 41 million contracts in the quarter and represented almost 80% of our OTC transaction revenue. The use of clearing continues to attract new market participants to ICE who might traditionally not utilize the markets if they were solely bilaterally traded.

Following on the third quarter's record performance, fourth-quarter average daily commissions rose 28% to a record $913,000 per day. Despite the seasonally slower holiday season, trading and hedging activity remained strong during the quarter.

I would like to close on slide 11 and wrap up the year from a financial perspective. We grew our revenue by 83% in 2007. This revenue growth reflects the addition of four new asset classes and five strategic acquisitions. We saw 49% volume growth in our energy futures business, and 22% growth in our agricultural products. Our OTC business, enabled by the Clear concept we pioneered, delivered 40% growth in commissions.

In addition to delivering top-line growth, we also delivered solid margin improvements and strong cash performance. Our core operating margins, excluding ICE Futures U.S. and CBOT related expenses, improved roughly 2 points. And as I mentioned, the margins at ICE Futures U.S. improved significantly over the course of the year.

So, while our combined margins were down due to mix, the underlying margin fundamentals of our business are strong and will continue to improve.

Finally, during the year we also delivered a record $288 million of operating cash flows. We have $261 million of cash and equivalents on the balance sheet. We have low leverage and access to a sizable line of credit.

We believe our 2007 performance leaves us well positioned to continue our success in 2008. We have included a summary of the December 31, 2007, balance sheet and cash flow on page 16 of the earnings presentation. We expect to file our 10-K in the next two weeks.

We have also provided certain financial guidance in today's earnings release as well as in the appendix of this presentation. I encourage you to refer to that material for more detailed information, and I will be happy to address any questions during the Q&A. With that, I would like to turn the call over to Chuck.

Thank you, Scott. I would like to take a few minutes to update you on key trading and clearing technology initiatives. These investments sustain our competitive advantage by delivering the technology performance and functionality enhancements necessary for ICE to remain a leader among global derivatives platforms.

First, we recently announced completion of a multiyear project to upgrade our trading platform and network infrastructure. As a result, average round-trip transaction time in our futures markets, as shown on slide 12, fell to 3 milliseconds, far below that of our competitors. Compared to the average transaction time of more than 30 milliseconds in January 2007, we reduced processing time by 90% in less than a year.

Even on a blended basis, meaning both futures and OTC markets, our average round-trip transaction time dropped to a similarly low 7 milliseconds.

In addition to faster trading times, we further improved reliability by implementing the latest in network redundancy and failover technology between our telecommunication hubs and data centers. This upgrade also added system capacity to handle higher numbers of users, messages, and trades, all of which continue to set new records each month.

Other scalability projects are underway to deliver even greater capacity increases for the trading platform this year.

Second, in mid January, we seamlessly transitioned our primary data center from Atlanta to a new state-of-the-art facility in Chicago. The larger physical space will better accommodate growth in our infrastructure and the number of the co-located customers. Most important, though, the Chicago location makes our markets easier and cheaper to access for the very large number of traders there, while eliminating any telecommunication latency advantage a Chicago-based matching engine might have had.

Regarding clearing, we acquired our first two clearing houses in 2007 and started the buildout of a third, ICE Clear Europe. As a result, our technology team expanded in 2007 to support existing clearing systems while advancing a number of ambitious initiatives. When we acquired ICE Clear U.S. just one year ago, the clearinghouse served only an open outcry trading floor, with little technology for managing real risk in real-time. Within three weeks of closing the transaction, not only did we launch electronic trading for the first time in the exchange's history, but we increased the capacity of the clearinghouse's systems and processes to handle the higher number of trades driven by electronic trading.

We also built and launched a new post-trade management system to improve reliability and offer enhanced functionality for trade give-ups and allocations. This system is set to be upgraded again in the second quarter to provide additional back-office functionality such as average pricing.

With regard to our European clearinghouse to be launched in July, most of the systems work is complete. You may recall from announcements last year that two key systems already used by European clearing banks today will be retained by ICE Clear Europe to ensure a smooth transition. Both are provided by third party Atos Euronext, also known as AEMS.

The first of these is a post-trade management system called TRS that ICE already licenses and has used for many years. The second is a clearing system called CPS that is currently used by ICE at the London Clearing House, but has now been licensed to ICE for its own production use. Integration of these existing systems with existing ICE banking systems is complete, with testing well underway. Back-end billing and delivery systems are also under development and on schedule.

A number of working groups, which include representatives from each clear, have been meeting regularly to review plans and provide feedback. Connectivity and system testing with members will begin in February, and we remain on track for a July launch and transition.

We filed our FSA application in 2007 for recognition as a UK clearinghouse, and all follow-up questions from the FSA have been answered.

From an organizational perspective, Paul Swann, President of ICE Clear Europe, has already filled most senior positions as well as some staff.

The many recent accomplishments of our technology and operations teams are all the more remarkable when you consider that they were implemented with no business interruption while supporting an aggressive M&A strategy. In the last 12 months, these teams integrated three newly acquired exchanges and two clearinghouses, while completing the majority of the work to start up a third clearinghouse. The number of asset classes traded on our platform increased dramatically, and so did our functionality for trading them.

With a technology spend last year of $31 million and a total capital spend since our inception of $80 million, excluding capitalized development costs, you can see that our technology investments are cost effective and highly productive.

I will now turn call over to Jeff.

Thank you, Chuck. We have now heard about our record-setting 2007 performance, as well as the foundation of innovation and technology we're bringing to bear. I would like to take a few minutes to talk about 2008.

Today, we are solidly positioned for the next leg of growth as a global integrated derivatives marketplace. We focus on staying nimble, responsive, and being close to our customers. These opportunities are very motivating for our global team, which has created one of the most innovative exchange businesses in the world in the space of just eight years.

As you know, we spent much of the last several years assembling a diverse exchange business with sophisticated but accessible technology to serve our rapidly-growing customer base. Our products such as crude oil, sugar, cotton, and the US dollar index are relied upon in dozens of countries around the world.

We are truly global, as the only derivatives exchange today with a U.S., European, and Canadian derivatives business and clearing operations. This alone offers us a tremendous amount of flexibility to address the needs of our customers. However, I will give you some additional reasons why 2008 has the makings of another landmark year for us.

I won't spend time specifically recounting our five acquisitions, the multiple new strategic relationships, the four new asset classes, and the 60 new products that we added in 2007. Suffice to say that what we accomplished in 2007 provides a strong tailwind as we enter 2008. I will cover a few of the more obvious growth drivers such as clearing, the Russell Indices, and M&A, for example; but there are many more than we have time for today.

Let's start with M&A since I view this as a core competency of the Company. The futures, over-the-counter, and risk management sectors continue to be populated with opportunities; and we remain open-minded about the ways to enhance our model. We haven't taken our focus off of M&A. Just yesterday, we signed an agreement to acquire a leading-edge options technology called YellowJacket. YellowJacket offers a unique peer-to-peer quoting system for negotiating structured products like options, and will be integrated with our strategy to move the over-the-counter options markets to our screens. A press release will be released during this call providing more information. This transaction is just one example of how we will continue to be an opportunistic and financially disciplined acquirer.

Next, as Chuck discussed, we are well underway with all aspects of execution for our global clearing strategy. We have completed the technology development side, and we're on track for integration in the coming months with implementation in July. We're currently in the process of seeking regulatory approval in the UK, and we hope to have this recognition in the first quarter. We will continue to share additional information with you over the course of the next few months.

ICE pioneered clearing in over-the-counter markets. With our acquisitions last year, we now have our own clearing infrastructure to complement our vibrant over-the-counter and futures markets. We see tremendous demand from our customers and from other markets for additional cleared products and services.

Today, we're in the process of building a well-capitalized, sophisticated, clearinghouse network. With the innovation we have brought to these markets today, we are well positioned to serve additional markets outside of our current product set.

Our risk management goals are to provide more products backed by financial safeguards to the growing derivatives markets. Our business goals are to provide more products and services for FCMs and their customers to create new profit opportunities for the industry which drives our business. At the intersection of these two objectives are innovation and competition, which have been the growth drivers of the global derivatives industry.

Another substantial growth initiative is the transition of the U.S. Russell Index futures market to ICE in 2008. This is another example of leveraging the assets we acquired at ICE Futures U.S. This exclusive arrangement will take us into the growing market for equity indexed futures. Activity in equity indexed products has never been greater, and last year volume in Russell Index futures exceeded 60 million contracts, with average daily volume of 270,000 contracts in the Russell 2000 Mini in the fourth quarter.

We're working to transition some of the Russell volume in advance of the start of the exclusivity period in September and continue to expect volumes to ramp up in the back half.

We're making good progress on the transition on a number of fronts. We're forging relationships with many of the key users who are active in Russell futures. We're developing cross margining agreements and other incentive programs. And we're developing new functionality to support additional strategies in these markets.

So we have talked a bit about some of the bigger-picture initiatives where management is spending our time. However, equal among them is responding to the organic growth opportunities in our core business, which is extremely robust. In fact, for the month of January we are on track to achieve a record-breaking month in both OTC and futures businesses. Our U.S. and European exchanges experienced daily volume records this month.

Based on the knowledge we have gained from our customers in the daily operation of our markets, we continue to believe it is early in the long-term development and expansion of commodities as an asset class. We continue to see solid growth as a result. We have seen little if any evidence of liquidity issues in our markets.

What we have seen in our energy markets are high prices, followed by recession fear, which has led to volatility that is inherent in the energy business. Amid this market turmoil, we still hear financial institutions expressing a desire to expand their commodities trading desks.

In addition to those we have discussed, we have a number of other initiatives underway for this year. In February, we will begin hosting NGX's markets on our platform. This transition will bring key energy traders from Canada on to the ICE platform. Importantly, for the first time NGX will also begin clearing physical gas products in ICE's U.S. markets.

Also in February, we will expand our risk management services with the launch of ICE Risk. For the first time energy market participants in the futures and over-the-counter markets will have access to a real-time risk management package that is integrated into the ICE trading platform. This business is a result of our acquisition and integration of Commoditrack last year.

This year, we also intend to unlock the potential in the foreign exchange markets at our U.S. futures business. This is the world's largest traded segment, and we have a strategy to serve the unmet institutional needs of that market.

Last year, we expanded our relationship with McGraw-Hill Platts to include not only assessments of the physical oil markets on the ICE platform, but partnering in the forward pricing curve business as well. These industry relationships and OTC services are a valuable part of ICE's total value proposition.

We also continue to put a lot of energy and focus on expanding into energy and commodity options. Our acquisition of Chatham Energy in October has gotten us into this space and together with the in-house options technology that we're developing and our recent acquisition of YellowJacket, we're looking at capitalizing on the combined expertise. We will have further updates throughout the year in this area.

Finally I would note that we expect our substantial technology enhancements to support more activity in our markets, whether it's through faster trading times or increased distribution. We're seeing the same healthy customer pipeline that we have seen in the past couple of years, so we will continue to scale our infrastructure accordingly.

In closing, I think you can see the breadth and the depth of our market. It speaks to our ability to grow and serve a rapidly-expanding number of customers. The opportunities before us are numerous and truly exciting. ICE has never wavered on its entrepreneurial approach to building a business.

As the founder of the Company, I can tell you that each year it remains exciting for me as an entrepreneur, surrounded by other entrepreneurs, because of the unique approach that we take to century-old businesses. We have managed to resist the status quo and to use our differences as strengths. As a result, we remain on the leading edge of tapping new markets, new technologies, and identifying growth opportunities.

We believe our unique combination of futures and over-the-counter products plus clearing, technology and risk management, makes us extremely well positioned to grow and serve these new customers.

As always, I would like to thank our ICE employees and our customers for a very strong quarter and for meeting the challenges of a very demanding year. This concludes our prepared remarks and now let me ask our operator, Felicia, to queue your questions.

(OPERATOR INSTRUCTIONS) Daniel Harris of Goldman Sachs.

Thanks very much. I guess I will kick it off, Scott, if you can actually go through that Q&A part regarding the change in the compensation philosophy regarding the non-cash expenses.

Maybe in addition, it still looks like the comp was much higher than we have seen in the past few quarters. Is this fourth-quarter bump something that we should expect in fourth quarters going on? Or you think you guys will try to manage that and more smoothly expense those numbers throughout the course of the year?

Yes, those are good questions, Daniel. So let me try and hit them. So the first thing, there are two factors that are at play. First, as I mentioned in my opening remarks, the performance-based culture at ICE is reflected in our award and our compensation programs. So, across our employee population, our annual cash bonuses are set relative to certain performance objectives; and our equity award programs also have a performance element in many of those programs.

As we closed out a really strong year with a really good fourth quarter, we ended up having to recognize a higher level of expense in the fourth quarter to reflect our performance relative to target.

In addition to that, as you may know, the relevant accounting instruction around the equity awards is FAS 123; and for plans where you have a performance element and a timed vesting, it is required that you book an acceleration of those expenses. So our employees will vest in certain of our equity awards over three years evenly, but the accounting is to record roughly 60% of that expense in the first year.

So those came together in the quarter to increase the expenses relative to prior quarters.

But getting to your last question, as I said in my remarks, there was roughly $3 million to $4 million in the cash compensation in the fourth quarter that I do not think is reflective of an exit run rate as we go into 2008. I also think a similar amount, $3 million to $4 million in the fourth quarter from a non-cash compensation.

But what I would point you to is the guidance that we provided. So we at the end of the year had a roughly $24 million in non-cash compensation; and our view for next year is that we will be somewhere in the $32 million to $34 million range, as we mentioned in our press release this morning.

Okay. So then if we decided to try and take a more straight-line approach to that rather than seeing this fourth quarter, that is probably the better way to think about it?

For non-cash it is. And for cash, it would be -- the $3 million to $4 million I mentioned, I would adjust for that before I did any P times Q.

Okay, great. Jeff, I was hoping that you could talk a little bit about the difference in what we're seeing in your OTC commissions relative to what we may be seeing in the underlying futures business in sort of the crude and the nat gas here in January.

Based on your comments that you guys are reaching record levels in January, just sort of back into what those numbers may be. It certainly seems that you're growing bigger, faster than the underlying market. I was hoping you could just comment on the differences in what we should be expecting there.

Sure, and I think I did try to suggest to you in my prepared remarks that we're having a very good OTC month. We get a lot of questions suggesting concern in that area. As you know, we put our OTC numbers out each month two days after the close of the month. So you will have complete transparency in a couple of days.

The obvious trends that you're aware of, the secular growth drivers that are going on in the growth of commodities, the globalization, the number of new users, and increased volatility. We have been able to bring a lot of new users into these markets.

But I think, specifically how are we doing this may be relative to peers and expectations, is we really have a very sophisticated technology for dealing with the over-the-counter markets. These are not futures markets, and we offer bilateral trading, as you know, as well as cleared markets. We are putting increasing risk management into the OTC markets. One of the reasons that we decided to buy Commoditrack is that these over-the-counter markets are very complicated and it is very hard for people to get good risk management in them. We're making it easier and easier for them.

We have got really good customer relationships, as you know. We were really a Company that was started with the -- in conjunction with the energy industry. These little deals that we were indicating to you that we were doing last year -- NGX, Platts, building out our back-office confirmation system, and so on and so forth -- are in any one case not necessarily revolutionary. But in total, they continue to open up new avenues, bring in new customers, and are very, very sticky for us. That is just something that we have.

You see separately that Scott pointed out to you that the data revenues in the fourth quarter were exceptional. This is an indication of more people wanting more data at higher prices to do more analytics; and particularly in these niche over-the-counter markets where we have very, very strong distribution and technology and relationships.

I think I tried to indicate to you in our prepared remarks that now we are bringing physical clearing to the U.S. in some of these markets. This is something never been done before in the U.S. We have got this new access to Canada through NGX and so on and so forth. All of these things we continue will be strong drivers.

We have also made a concerted effort, as I pointed out, to get into the OTC options business. The acquisition yesterday of YellowJacket that we mentioned and our previous acquisition of Chatham Energy is helping us there. Yesterday, Chatham had a record for us. We continue to see growth in those regards.

So I think it is all of the -- no one thing; it's the combination of all of those trends and the way my colleagues have been executing in integrating and distributing that business.

Great, thanks. That was helpful. Just lastly here, can you comment a bit on the trends we are seeing in January in the ICE U.S. business? Sugar volumes obviously have been significantly higher than anything we have seen in the past. It certainly looks like there was not a standard bump in the middle of the month.

You know, just lastly on that, because I'm not quite as quick, can you comment a little bit on the different roll month impacts that may impact that business? Thanks a lot.

Sure. I think certainly sugar was very volatile, but really a lot of our soft ag commodities have been very, very volatile. I think it is a combination of things. One is these markets are electronic now for the first time; so the distribution has gotten better and price expressions can be more immediately transferred into a market with electronic trading. While the volatility may have been there, it gets dampened by a floor and the ability to distribute the data out to people.

So, that may be some of it, and it may just be inherent in electronic trading that people are reacting to the same news at about the same time.

Other than that, we did take some actions as an exchange in the month. I can't talk specifically about them other than we were required by our rules and law to take certain action as we got very volatile markets. So, that may be the inference of what you're referring to.

But beyond that, I think we just are in a period where agricultural commodities are in a growth cycle. I have been bullish on ags, I have said that before, I said it in connection with some of our other attempts to get into the ag markets. I think that these are truly global products that have truly global demand, and they lend themselves to the kinds of things that we do in these secular trends that are going on.

Then just anything on the roll month, Jeff? Is there not an impact here in the ags?

Yes, you know, these ag products, they are unique in that they are not necessarily monthly roll. They have different settlement periods. We are moving into the expiration period of sugar where it will go into physical delivery and the exchange rules will push out the speculative interest through position limits and roll into delivery.

So you are in the -- that is a March contract. But you're seeing people adjusting their positions as we get closer to that physical delivery. So again that is one of the things that drives volumes just prior to a roll month; and also any volatility in that period will exacerbate that trend.

Thank you.

Howard Chen of Credit Suisse.

Good morning, everyone. Jeff, now that it's official that two of your major competitors are in preliminary merger discussions, can you share with us your initial thoughts on how a CME-Nymex combination potentially affects the competitive landscape; ICE's positioning within that; and maybe your thoughts on future major deals within the space?

Sure. Well, I guess, you are probably aware that ICE as a public company has never had an open outcry trading floor in energy. So we have only been an electronic energy market in that space. So we have been competing in energy, vis-a-vis Nymex, against them on Globex now for two years.

So this looks like it is an event for Nymex shareholders. It does not seemingly change the landscape in terms of the way we go to market in energy and the way that Nymex is increasingly going to market as an electronic participant.

I think that, again, we have very strong customer relationships. [Will] really help build this Company by the industry. And we have always been at a competitive disadvantage when there was a floor-based exchange because we don't have a floor. We don't have the brokers that are on a floor. We don't have the information that disseminates off of a floor.

But as that is diminishing and becoming less important, we are now able to use the strengths and the techniques that we have as an electronic marketplace to enter the energy space against something that looks very similar to what we are doing. So I am bullish on this.

Okay, great. Thanks; that's very helpful. Chuck, with regards to the ICE Clear Europe, thanks for the update. You mentioned that systems testing will begin in February. My question is, how widespread do you anticipate that testing will be among your customer base? What exactly will that systems testing entail?

Yes, I expect it to be very widespread. We have had an operations and technology working group that has been at this for a while. Because we are using some of these same systems that I described, provided by the same vendor in the same data center, same environment, a lot of the testing is really, one, just to confirm that everything that works for them today will work tomorrow. And then kind of the gap testing there is on the back-end -- reports around banking and billing systems that we have built and interfaced, to make sure that they get the same data in the same usable format from us that they are getting it today from other systems.

So that is going very well. Our team in London actually went out and met with each clears team individually to help them design test scripts for their specific business, depending on what customers they had and what products they traded and what their typical use was so that they could focus their resources better on -- during that two-month test time frame on the things that were important to them.

If they were not a clear, set it cleared, all products and had a lot of customers that routinely went to delivery with these products. So, that is going very well. We expect it to kick off on time and to finish on time.

Great, that's helpful. Thanks, Chuck. Scott, two quick ones on the numbers. Apologies if I missed these in the prepared remarks. But is the lower tax rate for this quarter and what you have been experiencing, is that more a function of the work that your team has been implementing? Is it product mix? Or is there something else that we're missing here that maybe reverses itself and brings you back up to the guidance range that you have articulated for '08?

As you might imagine, there are a number of factors that go into the determination of the tax rate. Just as an example, with the acquisition of the Winnipeg Exchange and the accounting for that, as we looked at the recent announcements on Canadian tax rates going forward, that has an impact on the deferred tax liability we booked. So as we made that adjustment, that brought us down slightly under the low end of the range that we had guided.

As I look forward, you have noticed we have been fairly constant in our guidance at 34% to 36%. Again, there are many factors at play there. There is business mix; improving profit in New York, which is relatively higher tax rate; the UK and Canadian governments have suggested rates will come down in '08. So as you mix all of that in, as best I'm able to tell based on our projections for the business, I still think the 34% to 36% range is where we are most likely to land.

Okay. Then final one, can you let us know when the market data fee schedule adjustments went into place during the quarter? I guess what I am trying to get at is, did we have a full quarter's impact of any fee schedule adjustments?

I'm sorry to interrupt you. Yes, we do. It was a full quarter. It went into effect October 1.

Okay, great. Thanks so much.

Please limit yourself to one question. Rich Repetto of Sandler O'Neill.

Hi, guys. I guess just a more direct question to something that was asked earlier. CME-Nymex, you definitely got involved the last time the CME made an acquisition. What are your thoughts of being involved this time?

Well, this is Jeff. I can't comment specifically on M&A activity given the policy we have here. But I will point out a couple of facts that are simply facts.

One is, it has been widely reported that Nymex has been available for sale for quite a long time and had presented quite an opportunity for people interested in the business to have thought about it and review it and what have you. So the fact that it finally traded to somebody in and of itself was not a particular surprise.

Understood. I guess I interpret that there have been opportunities in the past that since it was a property that was sort of well known to be in discussions, I guess.

Yes, I mean, I think we have had opportunities as has anyone in the market for quite some time. There is nothing in my mind compelling about the timing of this merger announcement for ICE.

Okay, understood. I do have one other one I just really want to get in. Chuck talked about the clearing system, the TRS and the CPS system. We have done a little work here. It was very interesting that you use it plus also the London Clearing House uses it as well as Liffe.

I am just trying to see, one, what is the strategic value -- because I think there is some -- in using it?

Then and tying that -- I got to get this question on Project Rainbow. If they ever wanted to try to -- the consortium that is supposedly being put together. But if they ever wanted to compete with you when you do move open interest from LCH, what would be a likely response there?

Well, let me answer the first part. As Chuck did mention TRS and CPS are owned by a French company called Euronext Atos Market Solution, AEMS. You may have seen recently that the New York Stock Exchange, NYSE Euronext -- when John Thane was there, one of the acts that he did was to buy out both the LIFFE CONNECT trading platform and all the related clearing systems from that joint venture company so that they are now under the control of Euronext.liffe.

We license those technologies. In fact, Duncan Niederauer and I have had a number of meetings and continued the work that John Thane and I were doing, to make sure that we have access to those technologies.

I guess anyone seeking to use them will have to deal with Euronext.liffe if they would seek to license them. So my relationship with the NYSE Euronext is quite good. Our exchange in Europe and Liffe have been really brother and sister exchanges, have grown up together in the London markets. We have a lot of friendships and relationships and work together on a lot of common initiatives in the European landscape.

So we feel quite good about the fact that they have taken control of this technology.

(OPERATOR INSTRUCTIONS) Ken Worthington of JPMorgan.

Hi, thank you. Just kind of harping on the ICE Clear, maybe for Chuck, what are the big milestones -- if you can bucket them into big milestones -- over the next six months or so?

Included in that is like what regulatory approvals are still needed? You mentioned the FSA. Are there others? And what is the expected timing on the FSA approval?

Well, as I said, the FSA application is in. The FSA visited us in New York and Atlanta, did extensive due diligence, came back with follow-up questions. We have responded to all of those in writing. They have given us the indication that they have all the information they need, and we are expecting to hear from them in February.

The Office of Fair Trading is another regulatory approval that is ongoing. I think that process will play out in February as well.

From a systems perspective, I gave you some timeline there. The member testing will begin in February, end in April. We are already -- we're staffing up in Europe, we filled key roles, we have purchased production hardware and moved it into our data centers. So all of that is moving very well.

We also -- from a business perspective, we're firming up the commercial terms around clearing membership, clearing membership agreements. Our team in London and in Chicago has visited extensively with the clearers over the last few months, and are firming up what those terms will look like, and expect that to move to fruition over the next month or so as well.

Okay. Has LCH signed off on the transition plan yet?

We are -- one of the obligations of LCH, there is a clearing agreement between LCH and ICE which is obviously confidential. There are, I believe, some redacted versions of those agreements that we filed with the SEC.

But suffice it to say that we and LCH have been sitting down, negotiating what is called the exit management plan which is called for in the agreement, and all the details of how that will work. And that is still in progress.

Jonathan Casteleyn of Wachovia.

Good morning. My question is for Jeff. I am just wondering if you can provide some perspective on the pretty flat trends in open interest in your ICE Futures European business.

Sure. That is a good question and one that we hear people looking at. Let me just say at the start, broadly, as open interest increases it's a good thing for exchanges. It is representative of more people with more positions and is one of the things that you want to make sure has got healthy trends.

But on an individual basis, open interest can go up-and-down in any month irregardless of growth trends. That is what is happening in, we believe, in our UK futures exchange, which is an energy and oil-based exchange.

I think, first of all, let me say we see nothing structural that is leading to the open interest trends that you're referring to. What we see -- and we have talked to a lot of our customers about their trading behavior -- is that the oil industry, which is frankly a very conservative trading industry, because it is where our Brent contract is really the marker where the world's oil price is set. And oil companies in setting the price of oil tend to have pretty conservative trends.

So what we had in the fourth quarter was a $100 oil situation, with tremendous price growth and volatility on the upward side, followed immediately by calls of potential world recession and calls for the U.S. Fed to change its interest rates, which could potentially affect the value of the dollar. Around the world, oil is denominated in dollars.

So one of the first trends if you look at our numbers that you will see is that many of the short-dated positions that are held by the oil industry fell starting late last year and into early this year, as we were going through this mindset change of whether or not oil is going to be fabulously rising or whether it is going to be crashing in a world recession and whether or not the Fed was going to take minor action or dramatic action and change the value of the dollar.

In the last -- more recently in the last few days you see the open interest coming back in, I think as people -- it appears that people are getting an answer to that question and taking positions.

What is interesting is those kinds of trends of $100 oil immediately followed by calls for world recession are very volatile. So we have had a record trading business. What you have is people who are speculating in trading on those short-term trends but aren't necessarily taking a long-term view where they want to hold the position. They're really doing the more intraday and short overnight position trading as opposed to holding a position.

So longwinded way of saying we see nothing structural. It is not in our minds any kind of deleveraging. It is not linked directly to any individual's credit issues. It is simply a conservative industry watching on the sidelines.

It moved from Brent into WTI. WTI is really the world's speculative oil contract. It is the price of U.S. oil; the U.S. just happens to have more hedge funds and other speculators.

More of the funds that do long-only trading, where they have oil as part of an index, for example, that rolls, is benchmarked to WTI. So when the oil industry moves out of WTI, it is harder to see because it is masked by these other types of traders that are in that business.

But Brent is really the oil industry's contract. So you tend to see these kinds of trends first there.

Jonathan, if I could just add a couple of number points. If you look at the total volumes growing 3% to 4%, underneath the covers the gas oil growth remains very strong. The comparisons for Brent and WTI are against, frankly, our best WTI month ever last year and our second-best Brent month. And we're headed towards establishing a new Brent record in the month.

So as Jeff talks about the dynamics, if you step away from the growth and peel back the covers a little bit, you can see that the demand for the products and the volumes that are trading are at or near record levels in a number of our products.

That makes sense. Thanks for that. My follow-up question is for Chuck. I'm just curious. You have put through a litany of upgrades on the technology side. Just in the past, as you layer on new technology, is there any way to enumerate the impact on trading volume? How do you think about that?

Or is it more of a customer experience? Just trying to enumerate your work on the technology side.

I think, Jeff said a little bit earlier about these acquisitions we made in '07, some of them technology related, some not. You started to see some cumulative effects over time. It is hard to break one out and isolate it.

I think as we are doing the things we're doing for the Russell Index, the cross-margining arrangements, you can certainly track the progress of that individually.

Our NGX technology arrangement, there you can track, given that they're NGX markets, that they report separately, you can track how that is doing as well.

One of our big initiatives this year will be continue building out the options platform. We do have our energy options that trade on the platform. There is functionality, there is some volume there. It is quite low. Over the course of the next seven or eight months, culminating at the end of that period, we will be making a number of upgrades to the platform for options trading, where we get -- when we get to late summer, the platform will have more of the mass quote capabilities, high-volume messaging, delta protection for marketmakers, price level distribution, user-defined strategies for options. Things like that.

We will be coupling that in creative ways with this YellowJacket acquisition we've just made to give people a portfolio of tools to use in trading options. Given that when you look around in electronic options trading, beyond the equities world and the derivatives world, there are not tremendous examples of overwhelming success with the mass quote type of trading and options.

So what we're trying to do is rather than force-fit everybody into that, we want to have that avenue as well for trading; but we want to couple that with some other types of front-end and technologies that recognize the complexity of options trading and give people some choices.

So that is the technology improvements that will be going on over the next seven, eight months. Then the new products we will be layering on top of that, of course. We will be launching the ICE Clear -- excuse me, ICE Futures U.S., ag options, and the Russell options. We haven't announced a date yet, but that should be coming up in the next 60 days or so.

One of the ways, Jonathan, that I think about the value we get out of the significant enhancements in the technology space -- the ease of access, the speed of access -- if you look back at the beginning of the year, we were at or near 6,000 simultaneous accesses at a time. By the end of the year, we were above 8,000. Behind each of those accesses can be multiple users. So the platform is easier to access. As it gets faster, we're able to add more and more users who can trade our products.

Chris Allen of Banc of America Securities.

I just wanted to circle back on the compensation, specifically the non-cash compensation. I apologize if I missed a little bit of this. If you could just explain like whether that is primarily related to bonus payments; or is it just part of overall compensation.

Then, why -- you're implying with the numbers you're giving that it is going to be going up about 39% year-over-year next year. Why would it be going up so much?

On the first part again, the two factors at play with the non-cash compensation are, first, they're performance-based awards, which -- our performance as we closed the year was very strong, so the value of those awards that we provide to our employees was higher; and we had to book the additional expense.

That is exacerbated by the accounting that guides you to -- frankly as you have a performance-based and a time element to your plan, requires you to book the expenses on an accelerated basis. So where our employees are vesting one-third every year, the accounting recognizes 60% of the expense impact in the first year.

So over the three-year period it has no impact, but you recognize relatively more. So to the extent we did better than our performance targets, which we did, that impact is multiplied by the fact that we have to recognize more of the expense in the year.

As you look forward, in terms of where our guidance is, you have a similar impact. We continue to have -- because as I mentioned earlier, ICE is a performance-based culture -- we have got performance-based awards that we have granted going into the year. That will also have this accelerated function and expense.

In addition to that, there is not a year that drops off. So in terms of the new program, that is all incremental from a year-over-year basis, as there is not a plan that existed previously that has now run its course.

So all of that results in the non-cash going up. One thing I would like to point out is if you want to get a view of the performance in the fourth quarter relative to the third, that takes out a little of this non-cash noise, I would point you to the operating cash flow. We did over $100 million in operating cash flows for the first time as a Company. Operating cash flows were up $12 million from where they were in the third quarter.

So I think that gives you a good perspective of the true cash generating power of our model.

Is that how we should think about the level of the performance payments? Is it going to be on a metric like operating cash flow?

It is based on our primary measures of net income and EBITDA and revenue; and then there are also the qualitative measures. Each of us has MBOs that we're responsible for. An example of a big one in '07 was the integration of our acquisitions. As we move into this year, obviously clearing, Russell, options technology are some of the big objectives that will go along with our EBITDA, net income, and revenue objectives.

Niamh Alexander of Keefe, Bruyette & Woods.

Good morning. Thanks for taking my question. I would like to focus on the Russell. I guess there's two parts to it. The expense guidance for the depreciation, thanks for giving us that.

But should I also be modeling a separate line that is volume driven for patent royalty expenses, kind of in line with the previous guidance?

Then on the revenue side, can you help us understand how you are thinking about now maybe a rate per contract there? Because currently customers on CME would be getting a discounted member rate. So how should I think about that going forward? Thanks.

So in terms of the expenses, I think we provided back in the third quarter some good guidance on that. Let me see if I can capture most of it here.

Fundamentally what you're going to see from Russell in terms of expense is for each quarter you will see, give or take a little bit, $1.4 million, $1.5 million of interest expense. Then starting in the third quarter, about $6.3 million of amortization.

That does in fact reflect the fees that we are paying on the volumes that we will get. So there is no incremental expense that you would need to necessarily model in related to volume.

In terms of the volume expectations and the rate expectations, there are too many factors that I can't predict with regards to timing of the move of the volume, interest on the volume, rates, and the mix of who might use them.

What I would, though, point you to is the fact that on the CME platform last year there were over 60 million contracts traded; about 270,000 a day. I think you could get some visibility into what the rates were there, and those would probably provide the best guidance right now in terms of what your modeling expectations might be. Combined with Jeff's comments in the remarks that our expectation is that the volumes will ramp in the back half of the year.

Okay, that is helpful. But just to be clear, then, the expense of the $6.3 million and the $1.4 million does not adjust higher if, for example, volume comes in higher than you're currently (multiple speakers)?

Right.

Okay, that is helpful. Thanks so much.

Rob Rutschow of Deutsche Bank.

Good morning. I guess I am struggling a little bit still with the compensation. If you accelerated the realization of those options costs, but you don't expect the cost to fall going forward, does that mean that you're (technical difficulty) more options at this point or that your compensation expense is going higher on sort of a per-employee basis?

This is Jeff. Let me point out one thing. This culture -- the culture of this Company, which is very entrepreneurial, we have done just amazing things. And part of it is we pay people in stock and we reward them for achievement.

Last year by any measure was an amazing year. It was amazing. You know, I don't know care how you cut it. So we really rewarded people. We hit all these triggers that basically gave people more options. I'm going to let Scott talk about the accounting treatment of that.

But one of the questions that you are asking really is -- do you expect every year to hit home runs? My answer honestly is yes. I really think that is why we are here. I think that is why we have assembled this team. It is how I motivate the team. It is how we recruit people.

So I interject it here because you're asking a very hard question, which is sort of -- do you expect less than stellar performance? And our internal expectations have to be no. We expect stellar performance.

So, you know, now you lay that over on Scott's world where he is trying to account for that and give you guidance; and it's a very complicated subject.

Just to go directly to your question, as you look into next year, the accelerated treatment that impacted this year was for the program -- or impacted 2007 was for the 2007 program. We do also have a 2008 program; the accounting for that won't be any different.

As Jeff said, we do utilize equity as a key motivator for our employees. We have gone even more broad-based in terms of the employees who are going to participate in our performance-based awards in '08 versus '07. So it is a key means of compensation.

We look at it along with cash and along with all the other spending elements within our P&L to ensure that as we move forward and as we grow the business we will continue to also do that, with a focus on expanding our margins.

Okay, I'm not trying to discount your good performance this year. I was more -- if you were to have, say, flat earnings next year, what I'm asking is, would you recapture the increased amount that you're accelerating this year in the subsequent two years of vesting?

That is a two-part question. So the nice thing about the equity accounting is we made a determination on what our '07 performance was, and that is done. And so there is no recapture. That determination has been made.

I said that we paid 60% in the current year; we will pay about 30% of the value in 2008; and roughly 10% in 2009. So there is no recapture that will happen.

If we have flat earnings, which none of us are even focused on that potential scenario, where you would see the impact is our '08 awards would go down significantly. Because as Jeff said, we build plans to hit home runs not foul balls. So to the extent that our '08 performance is not good, then what you will see is a lower '08 payout relative to that equity program.

Edward Ditmire of Fox-Pitt Kelton.

I was just wondering. I think you touched upon earlier, you said there was $3 million to $4 million of cash compensation expense in the quarter that you considered unusual. Is that right?

Yes.

Could you detail what that is?

I didn't portray it as unusual. Again, it is related to the end of the year performance relative to our performance targets and the objectives that we have set.

What that fundamentally says is the $3 million to $4 million, as Jeff described, is the recognition of a tremendous year and a compensation that goes to our employees for delivering that tremendous year. So what I suggested was that if you are looking to determine an exit run rate for the year, that that $3 million to $4 million would not be reflective of a run rate for our cash compensation.

Okay. Then, is there any chance you guys could give us a sense of trying to understand what kind of performance targets, what compensation and share count would be?

Again, I go back to the comments I made earlier, and hopefully this will address your question. Our performance targets are set relative to our net income and EBITDA objectives, our revenue objectives, and then various MBOs that each of us have, which are reviewed and approved by our Board. And as Jeff said, are frankly our stretch objectives to deliver continued growth for the Company and improvement in our shareholder value.

I do think that this year in the proxy, materials, we are increasingly trying to articulate this to people. So there will be more visibility there. Also, we will try to guide as best we can as we go forward to the extent that we are exceeding -- we're having an exceptional year, I think.

Yes, absolutely. Just as we did in 2007, as we go through the year we will update guidance. I think a part of your question might have been what our expectation on share count was. And that was provided in the earnings release and in the presentation for not only the year but also first quarter.

Mark Lane of William Blair.

Yes, Jeff, what is your expectation in laying out the commercial terms of your clearing strategy in terms of pricing and the different economics associated with it?

Yes, we haven't done that yet, which is why you are asking the question, I assume. We are still developing it, really. We have a small group of major clearers that we're working with to try to figure out exactly the economics of the clearinghouse. And not just the economics as to what we charge, but really how all the risk dollars flow through the business. What do you do about insurances in this age today when people question various insurance ratings, and so on and so forth.

So there is a lot of work going on, on the commercial side right now, with a small group of people that are highly interested in that topic with us. We feel comfortable that the guidance that we've given is still very relevant, which is why we haven't said anything to you specifically about this.

I think that this is something -- we're at the point now where everything is built and the approvals are soon expected. So this is the moment in time when we need to firm that up. We will probably have more to say about it, I would think, in the very near future.

Is there any competitive advantage to holding on to that, those details, to shortly before you launch the -- officially launch the platform? Do you have a --?

Yes, yes, particularly to the extent you are trying to do anything unique and novel in the business.

So we have really focused, like I say, on the technology side of it. We have a very large group of clearing firms. Pretty much, I believe, everybody that has been working in working groups with us to develop all of the minutiae that is required in terms of rule sets and operations and what have you. We pretty much have that done. It was really something we wanted to be able to show to the FSA.

Let me just say as an aside, a lot of people have asked about the timing of these things. The FSA in the course of dealing with our application has had to deal with the Northern Rock problem, which is a major risk problem that involves many of the people that the FSA is using to help in our application.

So we feel like they are back on track now, and expect that we will know the real operational details via this approval shortly.

Mike Vinciquerra of BMO Capital Markets.

Hi, this is Jillian Miller filling in for Mike. I was wondering on the off chance that Nymex became an attractive target for you at some point, could you comment on what challenges you might expect from the Department of Justice, just due to the product overlap between your exchanges?

Well, if you have been covering us for a while, you know that I am not the best judge of Department of Justice activities. And I'm honest in telling you that.

So, I don't want to speculate on the DoJ. It seems to make its way into headlines and applications and quotations. So once burned, I think I will pass on the question, but I appreciate why you are asking it.

Okay, thanks.

Rich Repetto of Sandler O'Neill.

I think I got a follow-up that can clarify at least for me this comp, Scott. The $3 million to $4 million that is not -- that you think exceeds the run rate, would that just be the difference between if you recognized a third of it, of this incentive-based comp, but you are having to recognize 60%? Would that delta be that $3 million to $4 million we are talking about?

It would be the $4 million we are talking about in non-cash, precisely, Rich. The $3 million to $4 million in cash comp is a separate discussion.

Right, right. But the $3 million in non-cash?

It's the $4 million that we put in our earnings release and that I talked about in my comments, you are spot on that that is the impact of the acceleration.

Understood. I know this has gone on long, but just one follow-up on this, because I didn't get an answer (technical difficulty).

Maybe I won't refer to it as Rainbow, but if there was a consortium of FCMs, Jeff, that was going to try to compete with you, with a platform, as you move clearing away from LCH during the summertime, that would also likely impact Liffe as well. I was just trying to see what might -- what would you predict your competitive response on what might be a competitive response? Since you have this relationship now with Liffe and you're using the same clearing system.

Sure. I think -- I don't want to give any playbook on how we deal with competition. But let me make a couple of points. First of all, our agreement with London Clearing House obligates them to transition and cooperate with the transition of our open interest to any designated third-party clearinghouse. So, it just so happens that by using the TRS CPS systems we really are already connected to the whole clearing infrastructure. We don't -- we really are not putting many demands on customers to follow us.

In other words, the positions are already in TRS CPS and they are just, under the way the technology works, going to flow a different way. We are the licensor of that technology and can control the way they flow.

So, as to what competitors might do, obviously somebody is going to have to find a clearing infrastructure; they are going to have to find clearing technology; they are going to have to find systems. London Clearing House is -- generally it's an open model and there are many people that have, let's say energy positions for example, in the London Clearing House. There are many actual energy exchanges in Europe, and there are also many of the interdealer brokers have relationships to put OTC swaps in there.

Those competitive, if you will, forces that are around us, are already at LCH to a certain degree; but because of the operation of our contract and the fact that we are a regulated exchange and we have a regulatory oversight of the contracts that we trade, that has been kind of an irrelevance. The presence of those people has been a largely irrelevant fact in the way we operate. Does that makes sense?

Yes, yes. Thanks a lot, guys.

At this time I will turn the conference back to Mr. Sprecher for any additional remarks.

Great, thank you all very much and we appreciate your interest and coverage in us and all the questions about our compensation. We look forward to another good quarter. We will be putting our numbers out for the month here shortly. I would hope that you will take a look at those as you do your modeling going forward.

So anyway, thanks again. We'll talk to you next quarter.

That concludes today's conference. We thank you for your participation.