納斯達克交易所 (NDAQ) 2003 Q2 法說會逐字稿

Good afternoon.

Thank you for joining the Nasdaq Stock Market earnings teleconference.

All participants will be in listen-only mode until the question-and-answer session.

As a reminder this conference is being recorded.

If you have any objections, please disconnect at this time.

Your host for this evening's conference is Mr. Paul Warburg, Vice President of Investor Relations.

Mr. Warburg, you may begin.

Thank you.

Good afternoon and thank you for joining us today to discuss Nasdaq's second quarter 2003 results.

On the call is Bob Greifeld, President and Chief Executive Officer;

David Warren, Chief Financial Officer; and Ed Knight, our General Counsel.

Following our prepared remarks we will open the line for Q and A.

If you have not done so already you can access the results press release on the Nasdaq investor relations website and the Nasdaq newsroom on www.nasdaq.com.

Before we begin, I'd like to remind you that certain statements in the prepared presentation, and during the subsequent Q and 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.

I urge you to read the full disclosure statement concerning such forward-looking statements in our press release and the other factors detailed in the company's Form 10-K and periodic reports filed with the SEC.

With that, I will turn the call over to Bob Greifeld.

Bob?

Thanks, Paul.

I would like to thank everybody for joining us today.

I am going to share with you Nasdaq's business mission and strategic imperatives, the methodology we are utilizing for transforming Nasdaq from a great institution into a great for-profit shareholder owned company while maintaining the highest standards of regulatory integrity.

In addition, we will share the actions and initiatives underway as we begin our journey towards fulfilling our mission.

I will then turn the call over to David, who will discuss our financial results.

First, and foremost, my goal is to make Nasdaq the predominant U.S. equities market, the best market for listed companies, investors, and traders.

We will achieve this mission by concentrating our resources towards expanding our listings business to capture an even greater portion of IPO's as well as attracting listings from competitive exchanges.

And we will capture increased trading volume independent of where an issue is traded.

The increased trading volume will allow to us accomplish three objectives: First, it will drive revenue for our transactions service business.

Second, the more volume processed by Nasdaq systems enhances the value of our proprietary data products and increases our share of the total data revenue pie.

And third, it allows us to create the operating leverage that will ultimately translate into shareholder value.

The most important metrics that we will use to judge our transaction business is the percentage of Nasdaq trades that occur within our market.

In the second quarter, that number was 57.1%.

Working from this base, we have implemented a plan to transform Nasdaq from a great institution into a great company.

We are making rigorous people decisions, selecting self-motivated people with inner drive who are focused on producing results and being part of something great.

As part of this transformation process, we are limiting the scope of Nasdaq's investments.

We conducted a strategic review of our business portfolio, and we are now focusing on products and services that are aligned with our goal of being the predominant U.S. equities market.

Towards this end, we have launched a series of initiatives.

First, Nasdaq plans to introduce the financial information exchange protocol, otherwise known in our industry as FIX.

FIX is the industry standard method for financial communication between market participants, converting to FIX will dramatically expand the market potential for Nasdaq execution systems.

FIX connectivity is expected to be available by Labor Day.

Second, Nasdaq has requested regulatory approval for SuperMontage to be anonymous throughout the trade cycle.

The increased - this increased functionality will enable participants to either display their identity or to remain anonymous throughout the trade cycle, from quoting through clearing.

Subject to regulatory approval, we'd expect to roll this capability out in the third quarter.

As part of our talent drive, Nasdaq is enhancing its sales and marketing capabilities across the company.

We have been successful in attracting to Nasdaq a number of high-powered industry professionals.

We continue to seek additional individuals with deep experience and determination to grow the top-line in a very competitive environment.

We have superior products and services and will better leverage our strengths in this area with enhanced effort on sales and marketing.

The plans and objectives outlined above represent an evolutionary process.

We are moving fast but we are taking a disciplined approach that, in the end, we believe, will produce superior results for Nasdaq stakeholders.

With that, let me turn the call over to David to discuss the financial results.

Thanks, Bob, and thanks again to all of you for joining us this afternoon.

To Bob's points, we've worked diligently this past quarter to exit non-core business, focusing our resources on product and initiatives that are aligned with our mission.

By narrowing the scope of investments we are effectively reducing the fundamental costs of running the business.

Additionally, we continue to take cost-control measures related to our separation from the NASD.

Now turning to the specific results.

Total revenue for the second quarter was $151.4 million, down 26.2% when compared to the second quarter 2002.

Direct expense was $146.6 million, an improvement of 6.7% when compared to the same period last year.

Total expense was $217.3 million for the quarter, an increase of 14.3%.

Again, compared to the second quarter of last year.

All of this has Nasdaq reporting for the second quarter a net loss of $49 million.

Net loss to common shareholders was $51.5 million, or 66 cents per share basic and diluted.

Included in the second quarter results are strategic review costs, including severance.

These costs totaling pre-tax $59.8 million.

The net impact to Nasdaq is $57.8 million pre-tax.

The difference represents costs absorbed by Nasdaq Europe's minority shareholders.

The net impact to Nasdaq after tax, non-GAAP, is $45.7 million.

The specific products and initiatives include Nasdaq Europe and QLX, and they are outlined in the press release.

Excluding the impact of this strategic review, the net loss for Nasdaq for the second quarter was $3.3 million, which is a net loss to common shareholders of $5.8 million, or 7 cents per share, basic and diluted.

I'd like to now give you a little bit more color into these results comparing, once again, the second quarter of 2003 to the same period for last year, going through business line revenue and drivers.

Transaction Services revenue declined 41.6% to $60.4 million.

Nasdaq continues to feel the impact of cost saving initiatives as trading firms reduce their demand for network access.

Impacting execution services and trade reporting businesses is increased competition from regional exchanges and facilities as well as from pricing pressure.

In Market Information Services, that revenue declined 27.7% to $36.5 million, primarily due to a decline in InterMarket tape fee revenue, as certain ECNs redirected their trade reports and increased UTP revenue sharing.

Corporate Client Group revenue declined 2.5% to $42.9 million, primarily due to annual fees related to the fewer number of companies listed on the market as compared to last year.

The IPO market remains anemic, and there were only two IPO's on the market on the quarter and five year to date through the end of the second quarter.

Other revenue increased 61.1% to $11.6 million primarily due to increased licensing revenue associated with financial products and the exchange traded fund, QQQ.

On the expense side, we continued to drive costs out of the business.

We decreased discretionary spending particularly in professional and contract services, computer operations, travel, meetings, publication and supplies, now that we are operationally independent from the NASD.

And we have eliminated spending on non-core products and initiatives as part of our overall strategic review.

Direct expenses improved 6.7% to $146.6 million from $157.2 million, when compared with the second quarter last year, but increased 1.5% from $144.4 million when compared to the first quarter of this year, primarily due to two things: a $5 million technology infrastructure write-off, as part of the ongoing cost reduction initiative here at Nasdaq; and $2 million related to employee benefit obligations.

Total expenses increased 14.3% to $217.3 million, from $190.1 million when compared to the second quarter of 2002, and 34.5% from $161.6 million when compared to the first quarter of this year.

Again, excluding the impact of the strategic review costs, which I have talked about already, total expenses improved 17.1% to $157.5 million.

That's a decrease of 32.6 when compared to the second quarter of last year, and they further improved sequentially 2.5%, or $4.1 million.

Again, comparing to the first quarter of 2003.

So we continue to make great strides in reducing the overall run-rate expense of Nasdaq.

We will continue, however, to recognize costs associated with the exit of non-core business lines and initiatives related to the strategic review, and in the end we believe that Nasdaq will be an even stronger provider of products and services with our focused approach.

Again, thank you for joining us today.

This concludes our prepared remarks.

And now, operator, we would like to open up the lines for questions.

Thank you, sir.

At this time we are ready to begin the question-and-answer session.

If you would like to ask a question, please press star 1.

You will be announced prior to asking your question.

If you would like to withdraw your question, press star 2.

Once again, to ask a question, please press star 1.

Surely there must be some questions out there.

One moment, please.

Our first question is from Richard Kerr of K B W.

Hi, good afternoon, guys.

Thanks for the business update.

And hello to you, Bob.

How are you doing there, Richard?

I'm doing well.

How are you?

I'm doing very well myself.

Good.

Good.

Just had a couple of quick questions.

Just if you can maybe give us a little color on how you see the process of the SEC exchange approval coming along, you know.

Is it a year off?

Is it two years off?

And also maybe if you can kind of give us some more of your thoughts on what more you can do with the SuperMontage.

Obviously introducing the anonymous feature is terrific.

Anything else you can think of improving the functionality of it to increase usage?

Thanks.

Okay.

All right, Richard.

With respect to your first question, it's impossible for me to give a precise answer on that.

The only thing I really can say is that we remain cautiously optimistic this commission will step up to our application in the relatively near future.

With respect to your second question, the features that we're adding to SuperMontage bring us really at full capability with respect to probably about 90% of the market.

There are always features that you need to add, but those features address a smaller and smaller number of market participants.

So with the ones that we're planning for the third quarter release, we'll get up to a high-level functionality.

I see.

Okay.

That's helpful.

Also, I guess thinking more strategically, is there any kind of thoughts you can give us on, you know, what you see that would, you know, enhance the Nasdaq business now that you're focusing on just the U.S. equity markets in terms of, you know, other acquisitions or players out there you'd like to see under the Nasdaq umbrella?

Well, the first thing to talk about is that we've got four fairly discrete businesses within Nasdaq.

The first is what we call CCG, which is our Corporate Client Group.

And we think we have a lot of opportunity there to really bring the Nasdaq message out to the companies, whether that be IPO companies, companies listed on other exchanges, or existing Nasdaq companies.

The dash-5 stats that have been mandated by the SEC show very good results for our market, and those results span net effective spread, liquidity, speed, and the ability for the market to withstand trading volume without moving.

So we have great opportunity to bring that message out, and we think that will portend very good things for CCG.

With respect to our transaction business, you know, as I said in my prepared remarks, we concentrate on the percent of trades that happen in Nasdaq.

We did 57% in the second quarter.

We expect to improve upon that.

We cast a big tent.

There's a number of different ways we can improve upon that number, and we're really trying to execute on multiple cylinders, and I think you will see us do a number of different things to make sure we truly are the big tent.

With respect to our data products business we have a new pricing policy on the ViewSuite product and we expect that that will create additional demand for the content.

And with respect to financial products, we continue to do very well with the Q's, and I'm sure you recollect in the second quarter we made an announcement with respect to the EQ's, and that's the European trading mechanism for our Q product, and we think that will do well.

So we've got good plans in place for the four major business lines and we'll look forward to what the future will bring.

Terrific.

Thank you very much.

I'm glad to see the Nasdaq is, you know, refocusing back on the U.S. markets, and hope to see, you know, some more encouraging results in the future.

Thank you, Richard.

Our next question is from David Shoaldiner of Azakusa Holdings.

Hi.

I was wondering.

There have been two recent write-ups, one by Business Week and another by Traders, which seem to be quoting a lot of, I guess, unquoted sources about the problems with the -- or the challenges on the exchange registration.

I wonder if you could kind of cast any light on these articles?

Well, with respect to exchange registration, as I've been saying, we're cautiously optimistic that the commission will, you know, complete their deliberations sometime in the reasonably near future and we'll be able to move forward.

With respect to, you know, the Business Week article, I thought it was very interesting to note, one very prominent money manager talking about how it was a lot better to trade Microsoft, a lot easier and more effective to trade Microsoft, than it was to trade IBM on a competing exchange.

I also thought it was very interesting to see that the average spread in Cisco was so much lower than the average spread in AT&T, which again trades on a competing exchange.

I don't disagree.

That's why I was wondering.

Is the -- I assume that your- that the - that - on the regulatory fee basis, is there any possibility of Nasdaq -- NASD changing the fee structure or renegotiation of the fee structure, which is -- of course, a very large percentage of your costs?

The first thing I would want to say with respect to the NASD is they truly are the gold standard with respect to regulation.

And effective regulatory oversight of our market is truly part of the core competency that we deliver.

It's important to investors, and it's really one of the key things.

So we're very happy with the regulatory effort of the NASD.

We, like everybody else, would always like to get things for less rather than more.

And I think your direct question was is there opportunity?

I think there's always opportunity.

Okay.

I have one further question.

I guess the question was, do you think there is a substantial opportunity to pick up the smaller issuers or as additional listings as this point?

With respect to smaller issuers, we are very well represented in that market, and we provide a very good service.

We represent an efficient marketplace for them, and we think we'll continue to do very well with small issuers.

Okay.

Well, thank you so much.

Thank you.

Our next question is from Fred Wadler of Eagle Capital.

Yes, hi.

Thank you.

A multi part question.

Anything you can do in terms of buying back the preferred, that's part A.

On the execution side, you know, I'm wondering if either beyond, you know, some of the notable losses which have occurred, if there's a way in which we could track towards the bottoming there?

Same thing on the reporting side.

I'm wondering if you could just discuss some of the metrics there in terms of to figure out where, you know, you may have a bottoming of share?

And in addition, just overall cost cuts, just wondering if there's any way in which you could see yourself cutting back on the $17 million a quarter or so, and it looks like you cut back a little bit in the quarter, to 15-plus million.

Just wondering if that's a trend and wondering if that can go down further and wondering if other costs can go down as well?

Wondering if you would comment on those items?

Dave will answer the preferred stock question.

Yeah, Fred, let me just answer that briefly and then give it back to Bob.

Preferred stock, you know, is -- represents permanent equity for Nasdaq.

I can't give you sort of a forward-looking answer on that.

We continue to look at our capitalization every single quarter in terms of different things that we might do with it, but it is permanent equity for us right now.

And currently stands where it is on the balance sheet.

But obviously look at it, as we do with all of our capitalization, frequently.

Thank you, Dave.

With respect to the next sections of your question, one, the execution side, you know, we believe that with the sales effort that we have in place today, with the product enhancements that we have in place today, that we are in our -- will be, in very short order, in our best position to compete for increased trading volume within our execution systems.

With respect to reporting, as I identified, we're at 57.1% for the second quarter.

It's important for Nasdaq to represent a big tent, and we're actively engaged in a number of discussions that will allow some participants who have, in the past, left our big tent to come back, and we remain cautiously optimistic that we can bring those discussions to fruition.

With respect to cost cutting, I'm not sure of the particular line item you were referring to, and David can clarify, but I'll make the general statement is that we will represent a very efficient supplier of marketplace services and the quest for efficiency really never ends.

It's something that will be part of our DNA, that we'll always look to achieve incremental gains with, and we certainly are hard about that task today.

I was referencing support costs from related parties.

Okay.

That's the [inaudible] reg charge, Frank?

Sure.

We've already spoken of that.

Yeah, I've spoken to that.

The key thing is, NASD is the gold standard with respect to regulation.

They do a great thing for our market.

A lot of our brand is tied up in the fact that we know we've got effective regulation of the market.

Would we like that cost to go down?

Of course we would.

And do we talk to folks about it?

Of course we do.

It's David.

Just maybe add one more thing on the expense side.

It was toward the end of my spoken remarks, and I may have given you so many numbers that you were sort of numb to them all.

But I think that both quarter over quarter, but more importantly sequentially, if you exclude the impact of our one-time charge, our strategic review, we have improved both with respect to total expenses as well as direct expenses.

When we look at the second quarter compared to the first quarter.

Sure.

And do you expect this to be a trend in this way?

If you care to comment just on that.

I'm not going to look forward on this, but I think if you look back you will see that we've been coming down sequentially each quarter.

Sure.

Okay.

Thanks very much.

Thanks for answering the question.

I appreciate it.

Pat Hulky of Putnam Lovell.

You may ask your question.

Just looking at the way you calculate the percentage of trades printed in Nasdaq, just trying to get a clarification on that.

Looked like it declined significantly from the prior quarter.

Just wondering if you could elaborate on that?

Yes, it was - the trade printed in Nasdaq, we judge it through what's called our ACT system and the decline was primarily related to Acher leaving the Nasdaq market.

And then secondly, and my final question,is just on the pricing pressures in the marketplace right now.

Can you just elaborate on what pricing pressures or incremental pricing pressures during the second quarter that you guys experienced and what you see on the pricing front going forward with respect to the execution?

Yeah.

I think the primary pricing pressure that we had experienced in the second quarter was with regard to tape revenue through our Act system, where through a competing regional exchange, market participants could get a share of that revenue, and that's, you know, the situation we live in.

So is it that you guys are -- there's a discrepancy between their pricing and yours, and if so is that something that you think that you guys will be changing?

Yeah, the discrepancy is with respect to sharing market data revenue, which has not been the custom, and the SEC has abrogated that for all exchanges, and Nasdaq last year, with the exception of Cincinnati, so we understand that Cincinnati is there, and we will respond.

Great.

Thank you.

Ky Lue of Jefferies & Company, you may ask your question.

Good afternoon.

Couple of questions.

First one is, how would you gauge your expectations for success from your new initiatives?

What should we be looking to to see whether there's progress being made on that?

And I had another follow-up question.

Okay.

Well, you know, the one metric that I have spoken about that's nonfinancial, is the metric of the percent of trades that print in the Nasdaq market, and that's a key thing.

Nasdaq is about competition, it's about having a lot of different players under a big tent, and we want to have as many of those players and as many of those trades print within our market.

Okay.

And I'm not sure if this was covered, by the other expense line, could you elaborate on why that was up about $5.5 million in the quarter?

Yeah, that is where you'll find -- I mentioned in my spoken comments, we had a $5 million write-off for (INAUDIBLE) technology, part of our cost reduction initiatives.

That's just where we took that.

It was 10.4, but it includes a $5 million technology write-off for the second quarter.

Okay.

Thank you very much.

Thank you, Ky.

Julian Romero of Fornick Harrington and Sutcliff, you may ask your question.

Hi.

I was curious whether the announcement that you had hired additional sales personnel was going to be a -- was going to be as part of any effort to create an NASD member firm as an order entry firm that would be able to provide direct Nasdaq access to the buy side.

No.

Sales people were hired to help us with our efforts with gaining additional players back into our tent and to increase our success with our execution systems.

So the marketing is going to be on order entry firms themselves and market makers rather than sort of a, you know, sponsor or provider of direct access to Nasdaq?

We will not be a broker dealer that provides direct access into our market.

Julian, do you have any follow-up questions?

I did not.

Okay.

Once again, to ask a question, please press star 1.

Bob, I'm going to turn it back to you.

Okay.

Great.

Nasdaq is about competition.

History has shown that competition always benefits the customer.

In our case, the investor.

We want more participants, not fewer.

We want to help Nasdaq market participants grow and develop capabilities that match the business climate.

Nasdaq has led and will continue to lead the monetization of equity markets.

We need and want a lot of competitors in the Nasdaq big tent.

That's what we are about.

Nasdaq is here to provide current and potential listing companies a venue for public branding and then provide the market that gives them the best place to grow by offering investors the best efficiency, liquidity, and costs.

I think we have done that well so far, and we look forward to doing that in the decades to come.

We are assembling a great team of focused professionals intent upon taking Nasdaq to new heights.

This is a highly competitive environment, and we must execute in order to achieve our mission of being the predominant U.S. equity market.

I look forward to updating you on our results as we pursue these objectives.

Thank you.

Thank you.