納斯達克交易所 (NDAQ) 2003 Q3 法說會逐字稿

Welcome to the third-quarter 2003 NASDAQ earnings release.

All participants will be able to listen only until the question and answer session of the conference.

This conference is being recorded.

If anyone has any objections, you may disconnect at this time.

Your first speaker, Paul Warburg, Vice President of Investor Relations.

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

Joining me is Bob Greifelt, President and Chief Executive Officer;

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

Following our prepared remarks, we will open the lines for Q&A.

If you have not done so already, you can access the results press release on the NASDAQ investor relations and NASDAQ newsroom sites at www.nasdaq.com.

If you have any follow-up questions after the call, please contact me at 212-401-8742.

Before we begin, I'd like to remind you that certain statements in the prepared presentation and during subsequent Q&A period may relate to future events and expectations, and as such, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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'll turn the call over to Bob Greifelt.

Thank you, Paul.

I'd like to thank everybody for joining us today.

I'm going to start with a brief update on NASDAQ's financial and operating results during the third quarter, I'll review some of the key steps that we've taken towards fulfilling our objective of becoming the predominate U.S. equities marketplace.

And finally, I'd like to take a little time explaining to you what NASDAQ is doing to address the subject of corporate governance and regulatory reform.

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

Turning to the financial and operating results, as most of you have read, NASDAQ reported revenue of 144.8 million, down 4 percent when compared to the second quarter, a net loss to common shareholders of 40.5 million.

This represents an improvement of nearly 21 percent when compared to the prior quarter.

The results of both quarters include expenses associated with NASDAQ's strategic review initiated in the second quarter.

Backing out the impact of the strategic review in both quarters, NASDAQ reduced total expenses by approximately $16 million, or 10 percent on a non-GAAP basis in the third quarter.

I mentioned to you on the last call NASDAQ's two broad strategic objectives.

First was expanding our listings business and second was increasing the volume of transactions processed by NASDAQ's systems.

Pertaining to the expansion of our listing business, there were 14 IPOs that listed on NASDAQ during the quarter.

This was up from two in the previous quarter.

In general, we're starting to see a modest pickup in IPO volume and IPO registrations.

For example, August and September witnessed the most U.S. registered IPO filings since October of 2000.

It is our mission to make sure that if and when these companies do an IPO, they list on NASDAQ.

To that end, we continue to build out our sales team, recently filling two critical sales positions.

By expanding the listing business, NASDAQ is able to introduce additional financial products similar to the popular QQQ (ph).

Partnering with Fidelity Investments, we recently announced the launch of the ONEQ, an exchange traded fund which tracks the entire NASDAQ composite index.

The initial capital raise was over $400 million and it trades on NASDAQ under the ticker ONEQ.

As for our transactions business, we announced on the last call that we would implement a series of functional enhancements to NASDAQ trading systems.

First was the introduction of the Financial Information Protocol, otherwise known in the industry as FIX.

FIX is the industry standard method for financial communication between trading firms and vendors.

FIX was rolled out in the third quarter, thereby expanding the potential market for NASDAQ trading systems.

Second, NASDAQ received regulatory approval for enhancing the SuperMontages functionality with respect to post-trade anonymity.

Total anonymity enables participants to either display their identity or to remain anonymous throughout the entire trade execution cycle, from quoting through clearing.

Third and finally, we are exceptionally pleased with Instinet's (ph) decision to join SuperMontage.

As mentioned, it is NASDAQ's objective to get as many objectives participants into what I refer to as NASDAQ's Big Ten.

Adding Instinet's liquidity into SuperMontage creates the deepest pool of liquidity in NASDAQ listed stocks.

With respect to NASDAQ's Big Ten, we are going to change the way that we report externally, with respect to market share.

We have to understand that NASDAQ has never been about one execution venue.

NASDAQ has always been about competition.

Competition in NASDAQ exists between market makers, between ECMs and between all participants.

The key measure of our success is what percent of trades trade within the NASDAQ market.

We will on a going forward basis report the overall market share that happens in NASDAQ, and we are fortunate to have an infrastructure which really will validate the numbers that we release.

We have what is known as the UTP plan, and under SEC rules, the UTP plan provides a real-time record of every share traded in its market through a central consolidator.

That consolidator is the SIF (ph).

This information is then distributed to the investing public over a consolidated trade feed.

The data collected and distributed by the SIF is a complete record of every share traded in each of NASDAQ's issuers in each market center.

That data is used to determine each market center's respective market share for data revenue sharing under the UTP plan.

What is particularly important is the market data revenue and expenses covered under the UTP plan are audited by an independent auditor.

The audit verifies the gross revenues, as well as the distribution of net revenue to each market center, based on each market center's percent share traded and the trades executed in NASDAQ issues.

This number shows the health and the vibrancy of the NASDAQ market and it will be the number that we use going forward.

Turning to corporate governance and (indiscernible), NASDAQ continues to take a leadership role to finding the issues and advocating market structure reform designed to create a flexible framework that breeds innovation and results in quality capital markets that investors can trust.

First, I'd like to point out that the SEC approved NASDAQ submission for revised corporate listings standards.

Equally important are the efforts that we are making on market structure.

It is our premise that the market structure reforms should be viewed from the perspective of the individual investor and that the individual investor is best served by free choice, competition and fundamental fairness.

NASDAQ is addressing three critical issues.

One is the reform of the trade-through rule (ph), two is the need to separate the regulator from the market center, and three is he need to have uniform regulation of the marketplace.

The trade-through rule (ph) is a 23-year-old provision of an SEC approved plan for trading New York and AMEX listed securities.

It forces investors to send their orders to four base markets through an old linkage instead of allowing investors to decide for themselves whether they wish to route their orders to a faster, more transparent electronic market.

The trade-through rule stifles investor choice by preventing investors from deciding which element of a trade is the most important for their transaction, best price or speed.

Second at NASDAQ, we believe that a regulator must be independent from the market.

And as most of you know, NASDAQ is in the process of separating from its regulator, the NASD (ph).

We believe in a transparent marketplace.

To that end, NASDAQ abides by the same rules and regulations of other public companies, including all SEC financial and operating disclosures, adherence to Sarbanes-Oxley and regulation FD.

Exchange registration will remove any remaining hint of potential conflicts of interest with NASDAQ's regulator, as well as streamlining the governance of the NASDAQ market.

NASDAQ will not complete this task of separation until it becomes an exchange.

Finally, we believe in uniformity of regulation.

There should be uniform rules across all markets that trade NASDAQ stocks.

One example is some (indiscernible) are allowing market participants to trade in sub-pennies.

The danger here is that some investors have the ability to quote and trade in sub-penny increments while others do not.

Sub-penny quotes imply the reemergence of hidden markets, which the SEC strove to eliminate through the order handling rules.

Sub-penny trading accounts were approximately 16 percent of the trading the NASDAQ listed stocks.

We think this could further erode investor confidence in the belief that Main Street and Wall Street do not play by the same rules.

In instances such as sub-penny trading, NASDAQ is simply calling for uniform treatment and wants to avoid the prospect of a two-tiered market.

NASDAQ has issued a wide paper discussing market structure reform in greater detail and we encourage all interested parties to read it.

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.

In the third quarter, NASDAQ continued to transition away from the NASD inherited systems and infrastructure, as well as continuing our transition process of exiting noncore businesses, which we outlined for you in our results last quarter.

The narrower scope of investments and the streamlined infrastructure have resulted in a much slower (ph) ongoing cost base for the Company; in fact, more than $20 million lower in direct expenses versus last quarter alone.

Turning to the specific results, and in this discussion, let me just say that I will be using sequentially to refer to comparisons for the second quarter 2003 and year-over-year to refer to comparisons made to the third quarter of 2002.

Total revenue was 144.8 for the quarter, as Bob has already mentioned, down 4 percent sequentially and 27.2 percent year-over-year.

Direct expense was 125.7 million, a sequential improvement of 14 percent and 17 percent year-over-year.

Total expense was 190.4 million for the quarter, a sequential decrease of 12.4 percent, but at roughly 10 percent, 9.8 percent increase year-over-year.

All of this comes down to a net loss for the quarter of $38 million.

Net loss to common shareholders was $40.5 million, which is a loss of 52 cents per share basic and diluted.

NASDAQ continued to recognize costs associated with its previously announced strategic review.

These costs in the third quarter totaled pretax $49.3 million, and these products and initiatives are detailed in our press release.

Excluding the impact of costs associated with the strategic review, NASDAQ reported a net income of 700,000 -- 0.7 million for the quarter and a net loss to common of 1.8 million, or a loss of 2 cents per share on a non-GAAP basis.

And now providing more detail into these results, business line revenue and drivers were as follows.

Transaction services revenue declined sequentially 10 percent to nearly 42 percent year-over-year to $54.4 million.

NASDAQ continues to feel the impact of cost savings initiatives from trading firms, impacting the execution services and trade reporting businesses are slightly the lower average daily volumes, increased competition from regional exchanges and facilities, as well as pricing pressure.

Market information services revenue was relatively unchanged sequentially, but declined 28 percent year-over-year to 36 million.

Corporate client group revenue declined sequentially nearly 4 percent from 7 percent on a year-over-year basis to $41.2 million, primarily due to annual fees related to the fewer number of companies listed on the market as compared to last year.

Other revenue increased 13.8 percent, both sequentially and year-over-year to $13.2 million.

One factor here was the receipt of a business interruption insurance claim related to the events of September 11th.

That was a little bit around $2 million.

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

Direct expenses decreased more than 20 million to 125.7, an improvement of 14 percent sequentially and 17 percent year-over-year.

We decreased the level of infrastructure required to operate our business through headcount reductions, through deductions in discretionary spending, particularly in professional and contract services, but also in travel, meetings and all other areas.

Particularly in the area of headcount, I would note that at the end of the third quarter, our total numbers stood at 1029.

That is a 20 percent reduction from where we were at the beginning of the year, a drop of about 262 positions.

I think more importantly at the officer level from the beginning of the year to the end of the third quarter, we are down 35 percent as we continue to take efforts to flatten the organization and make it more efficient.

As I mentioned, total expenses decreased 12.4 percent sequentially, but increased 9.8 percent on a year-over-year basis to 190.4 million.

Included in the second and third quarter 2003 numbers are costs associated with our strategic review.

Excluding the impact of these strategic review costs from both quarters, total expenses improved 10.4 percent sequentially and over 19 percent year-over-year to a figure of 141.1 million on a non-GAAP basis.

We continue to make great strides in reducing the overall run rate expense of NASDAQ, and we anticipate recognizing an additional costs associated with the exit of noncore business lines and initiatives related to this ongoing strategic review effort of approximately $20-$25 million through the balance of the year.

Those are for actions taken to date.

In the end, we believe that NASDAQ will come out of this an even stronger provider of products and services with our more focused approach.

This concludes our prepared remarks.

I think at this time, operator, we would open up the call to questions and answers.

(Operator Instructions).

Christopher (indiscernible), ABC Radio.

Excuse me -- we have a media portion of the call.

This is reserved for analysts.

So we would welcome you on the call following this discussion.

Okay.

Is there is separate number for that?

Yes there is.

We can give that to you off-line.

Look it up on the Web site.

It's on there.

Fred Wadler (ph), Eagle Capital.

It looks like you did a good job of cost cutting here.

I don't know if you can go into any more detail, in terms of the line items.

It looks like professional and contract services have come down quite a bit.

I was wondering if there is anymore there or anything else you can discuss, with respect to the other line items.

And then anything you can discuss also with respect to the direction of the 16.5 percent number for volume executed on NASDAQ, and also the prince number, 47.5 percent, if any of the other initiatives that you have, fixed compliance and others, can make you feel that those numbers will (indiscernible) more positively?

I will take the first part of your question on the expense side.

Thank you.

We do feel it is good progress.

The major areas of decrease, both sequentially and year-over-year, have been in compensation and in contract services.

And with respect to where we're going as we go forward, as you know, we don't really -- we're not in the practice of giving real specific guidance about where we're going.

But what I would say on this is that we are just continually involved in a review of our business and practices.

And wherever we see opportunities to do things in a more efficient way, in a way of driving more expense out, we will do it.

But I think that we made significant progress this year with the strategic review.

That effort continues as we transition through this year and we will continue to look for other opportunities as we move forward.

With respect to the second part of the question, SuperMontage has positive momentum in the marketplace.

During the month of October, we saw our share increase to 16.7.

With respect to the number that you mentioned, the 44.3 percent of trades, that was the actual for October.

But the number we focus on and the number we will be reporting is that 58.9 percent of the shares that traded in NASDAQ actually went through NASDAQ systems in the month of October.

Thank you very much.

Richard Dole (ph), Dole Capital.

Two questions.

Why don't you list on the NASDAQ national market?

And the second is -- why don't you redeem your high cost preferred stock?

With respect to listing on the NASDAQ market, we certainly see that in our future.

We're not here to give guidance on the exact dates, but you would expect that in the relatively near to midterm.

And with respect to the high cost of the -- talking about the (multiple speakers)

I think the series A preferred -- I will give a little bit of background, not too much review for people, but that was part of -- I think the series A preferred we think of really is part of our overall continuing overall plan in transitioning away from the NASD.

We repurchased about 34 million shares common equity from them in early 2002 when we paid (ph) both cash and preferred stock for that transaction.

We have been in discussions with the NASD on different ways to approach this.

It's certainly something that gets a lot of our attention.

We do have to replace this with equity as we take it out.

So it is not as straightforward as simply redeeming our preferred stock in another context.

And I think in that sense, it relates to be comments that Bob made earlier about our progress at some point and sort of getting a national listing (inaudible).

Thank you.

Todd Halkey (ph), Sandler O'Neill.

A couple of questions here.

The first one is on the market share numbers that we're looking at here.

So when we look at the SuperMontage market share for the quarter, it looks like on average, it was down to 16.5 percent.

And then if we focus in on the number I guess that you guys have been focused on for the last couple of quarters on the share of the overall volume, I guess that is the number, I get 62 percent for the quarter.

That looks like that was down about 10 percent in the quarter.

And so my question is -- when we look at the transaction revenue line, which is also down about 10 percent, you guys alluded to some pricing pressure.

I'm just wondering -- what else is going on in that?

It seems like it's somewhat correlated to the overall share volume, the market share volume, excuse me.

So is that like a direct correlation of that, or what kind of pricing pressures are -- above and beyond that are kind of pushing the total revenue down?

We focus on the share volume and the share volume allows -- the way the rules are structured now, people can participate in NASDAQ and get the benefits of working with the NASDAQ system, but then choose to take internalized prints (ph) and bring them to another exchange or execution venue.

And we see that (technical difficulty).

So we have an unbundling of the actual trade reporting from the execution service.

And clearly, there's price pressure on the trade reporting service, and we are responding to that.

So are you guys -- and with respect to Instinet, they're going to be participating -- I'm assuming -- maybe if you can elaborate on that relationship, how it's going to be.

Are they going to be, within SuperMontage, are they going to be just like any other destination, any other market maker or any other ECN (ph) that does participate, but then their product is still going to be unbundled, I guess from the market data side?

Yes.

I think they still plan, and they have to speak for themselves, but it reminds us that they still plan to print their trades as they do now on Cincinnati.

And again, check with them.

But right now, the agreement with Instinet is with respect to their participation in Montage and their liquidity with the available in Montage.

We think that is certainly the important factor for investors.

So when they use NASDAQ services, they have one aggregated liquidity pool.

The function of trade reporting to alternative venues really is an economic issue for NASDAQ, but it has nothing to do with the actual operation or quality of the market.

So the last question here is we have seen this -- if we're focusing on the NASDAQ's volume market share trends of total shares traded, it has -- there has been a significant amount pressure on it, and it looks like number you gave for October showed a little bit more deterioration in that.

I guess maybe I will answer my own question.

But relationships with Infonet and then trying to increase some penetration into the -- or garner some of the volume that was at Cincinnati that was reported there, are those the kinds of things that you guys are going to do going forward to at least stabilize that market share and try to bring it back up to its historic levels?

It's something we need to focus on.

And clearly, the first focus was to get players back into Montage, because that is the buying and selling experience for investors.

Investors don't necessarily care about where the trade is printed today, that's an unbundled service.

So we have accomplished the important part of it by bringing Instinet into Montage and their liquidity.

Our second focus now has to be -- how do we get the trade reports back into the NASDAQ system?

And it's something we are aware of and obviously have plans to attract people back.

Great.

Thank you.

Charlotte Chamberlain, Jeffries & Co.

Good afternoon.

This is Charlotte Chamberlain.

A couple of kind of housekeeping things.

When you change the way you're going to report your markets here, will you give us say six months worth of comparable numbers the way you have done it so far, and how they would have looked under this new way that you're going to report it, so that we can kind of benchmark the old stuff?

Second, we very much underestimated what your overall strategic review costs were going to be for the quarter, and I was wondering - the 20-25 million that you said for this quarter -- is that everything, or should we be looking for something else, and is there any spillover into 2004?

And finally, with the Instinet display, is there anything that we should be looking for, in terms of revenue enhancements?

Because at this point, all of your major members of NASDAQ have been able to see and execute on all of the markets through their own FIX (ph) system.

And so it is not clear to me how this is something that would get more of them to execute on SuperMontage.

And as a final, final, final -- are there any covenants on your senior or sub-debt that we should be focusing on as you gradually turn around?

In other words, what -- are there any triggers in those debts, in terms of not being able to take on additional debt or whatever that we should be focusing on?

Thanks.

I will answer the first and third questions, I think David will take the second and the fourth.

I think the third question was with respect to Instinet.

We don't give forward-looking guidance, but we will make a general statement that we think the Instinet transaction today doesn't have any material impact on our financials, but on an evolutionary basis, will represent benefit to NASDAQ investors.

So there's no material benefit on revenue.

Is there any incremental cost we should worry about?

No.

The first question is, and I'm trying to make sure I remember it, and that is with respect to the fact that we're showing a percent of shares traded in NASDAQ, we will provide a historical look-back to what that number was.

Okay.

And David is going to talk about -- is the 20-25 million total, and what happens in '04, and then the covenants.

Right.

On the strategic review, as I said in my remarks, the range that we estimated for the fourth quarter of 20-25 million are for actions that we've taken to date.

So it's part of the strategic review that we announced in the second quarter that we're carrying through on, and this really covers events that we, from the carrying standpoint, really can't recognize, and in most cases from an accounting standpoint, cannot recognize as expense until certain actions are completed as part of the overall transition plans, so we project to take those expenses in the fourth quarter.

There could be certainly other actions that we would be looking at over and above the strategic review that would not be reflected in that 20-25 million.

But I am not discussing really any details on those today.

On the other part of your question, this is a plan that we really -- the strategic review is a plan that we intend, in most cases to execute and complete in 2003.

So we do expect that we will complete most of that and take most of those expenses this year.

On the second question I think on the debt, we are in compliance with all covenants, well in compliance with all of our debt covenants.

Presumably, you've gone forward, in terms of your own internal forecast of what trips those covenants.

So for on your own internal forecast, they look okay going forward?

Yes.

We have looked at that and feel real good about where we stand.

Okay.

One last thing.

What is your average fully diluted share count?

We could not find that anywhere on your release.

It is 78.4, is it?

We will get that for you in just a minute.

Okay.

Great.

We can get it to you right now -- 78.9.

78.94 for fully diluted?

Okay, thanks.

(Operator Instructions) David (indiscernible), Azuka (ph) Holdings.

It has already been answered.

Thank you so much.

There are no further questions at this time.

Thank you.

We'll look forward to talking to you in three months.

And as closing comments, it is still early in the game, but we are making progress on numerous fronts.

The macroeconomic environment appears to be slowly recovering as measured by both average daily volume and IPOs.

The functional enhancements to our systems and the bolstering of our sales and marketing organizations we believe will lead to increased market share over time.

The decision by Instinet to join SuperMontage is a big step towards making NASDAQ the Big Ten, the deepest, most competitive marketplace for investors to trade.

And the regulatory reform currently being discussed we hope will create a fair, more competitive marketplace that will breed innovation and choice for traders and investors.

There are challenges in this competitive environment, but we are intensely focused on moving the dial and generating positive returns for our shareholders.

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

Thank you.