納斯達克交易所 (NDAQ) 2003 Q4 法說會逐字稿

Good afternoon and thank you for joining the NASDAQ Stock Market's earning teleconference call.

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

As a reminder this conference is being recorded.

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Your host for this evening's conference is Mr. Vince Palmiere, vice president of investor relations.

Sir, you may begin.

Thank you.

Good afternoon and thank you for joining us today to discuss NASDAQ's fourth quarter and full year 2003 earnings results.

Joining me are 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 up the line for Q&A.

If you have not done so already, you can access the results press release on the NASDAQ investor relations and NASDAQ news room websites 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 would like to remind you that certain statements in the prepared presentation and during the subsequent Q&A period may relate to future events and expectations and as such constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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

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

Thank you, Vince.

Thanks, everyone, for joining us today.

I will start off with a brief review of the fourth quarter.

Then I will discuss our strategic plans for this coming year that will solidify NASDAQ's status as the premier U.S. equities marketplace.

I'll then turn the call over to David Warren, our CFO, who will walk you through the numbers.

As most of you have already seen, this afternoon we reported a net loss for the fourth quarter of $21 million versus a net loss of $38 million for the third quarter.

However, when you exclude losses associated with discontinued operations and restructuring charges, our net income on nonGAAP basis was $5.9 million versus $5.5 for the third quarter.

These results reflect evidence of a stabilization in our quarterly results.

When I joined NASDAQ last year, lowering our cost structure w as a primary objective.

As a result of a vigorous review of all our operations, we've been able to reduce our annual expenses from continuing operations by a total of $106 million in 2003 when compared to the prior year.

I believe these improvements in our business model support our role as the premier equity marketplace not only in terms of efficiency but user functionality and also in terms of price, leadership and market quality.

We're proud of our marketplace, proud of the value of more than 250 market makers provide, and proud we offer an opportunity for buyers and sellers to meet without an intermediary.

The review of our operations also accomplished the following.

First, it concentrated our efforts only on products, services and initiatives that help NASDAQ achieve its goal of delivering a better solution to market systems, listed companies and investors.

Second, it resulted in the closure of operations that were not contributing to this effort.

These included NASDAQ Europe, the [INAUDIBLE] Exchange, NQLX, a joint venture with the London International Financial Futures Exchange, the Liquidity Tracker automated order routing system, the NASDAQ tool auto management system, And the termination of exclusive rights agreements with PRIMEX.

Third, it allowed NASDAQ to assemble the right team of highly motivated, high integrity industry professionals who are capable of transforming NASDAQ into the predominant for-profit marketplace that best meets the needs of investors.

We now have this talent in place.

Further, we have organized the management team at the executive level so all businesses are working together to achieve a common purpose.

We regard 2003 as the year in which NASDAQ defined its mission. 2004 will be the year in which we ensure we are the best at executing this mission.

To do this, we will leverage the unique competitive advantages that identify NASDAQ as the premier equity marketplace.

As I have discussed with you, NASDAQ has two very specific strategic perspectives.

One, to increase the number our and companies listed on NASDAQ by increasing out share of new IPOs and by attracting companies from other exchanges.

And secondly, to raise NASDAQ's share of trading on domestic markets.

Let me begin with the first objective.

During 2003, NASDAQ took 57 companies public, comprising a market share of new issues of 68.7%, up from 56.7% in 2002.

While neither year was a banner year or a representative one for stock listings, this trend is directionally promising.

Our fourth quarter new issue share was 65.5 with 38 IPOs, and the pipeline going in the first half is continuing to pick up.

NASDAQ is taking several steps to reinforce our stature as the marketplace choice for public companies.

We're continuing improving our trading platform to deliver liquidity, efficiency and speed.

We're creating a comprehensive suite of issue of services.

We continue to develop tradable financial products and listed stocks such as the one Q we launched in the third quarter.

And we are conducting marketing and sales programs to ensure our message reaches our target customer, the public or soon to be public company CEO.

Our reinvigorated sales force is now beginning to hit its stride in this effort.

The positive reception of the dual listing program announced last month for New York Stock Exchange stocks is evidence that this message is getting across.

These companies, all six of whom are leaders in their respective industry segments, recognize the unique opportunity offered by NASDAQ's electronic competitive model.

Let me spend a minute on the dual listing program.

The real purpose of this program is to reignite the debate about the performance of trading markets and the basic services markets provide, which is to bring buyers and sellers together.

The quality of those markets measured in speed, efficiency and the ability to be anonymous, is a concept that is becoming more germane in today's environment.

This concept of quality has meaningful implications for shareholders and issuers, particularly given that boards of directors and CEOs are increasingly in tune to the impact trading environments have upon their shareholders.

NASDAQ possesses the highest quality trading environment available, and we will continue to extend our lead on this key differentiator.

Our markets have lower spreads, faster trades and higher execution quality.

To be specific, in the trading of S&P stocks, on average, NASDAQ spreads are 1.2 cents compared to 1.76 cents at the New York Stock Exchange.

Our trade execution averages 6.7 seconds versus 18.4 seconds at the New York Stock Exchange.

And finally, shares executed at or inside the quote on NASDAQ, 91% of the time compared to 82% at our leading competitor.

Next, I will turn to our second objective, raising NASDAQ's share of trading on domestic markets.

Our percent of shares printed to NASDAQ listed companies in the fourth quarter was 56.7%.

Down from 62% in the third quarter.

Obviously, this is not the direction we want to see.

But you must please note this decline is not due to a reduction in participation in NASDAQ's marketplace but to the ability of some participants to move internalized trades to print facilities at regional exchanges.

We are, however, optimistic about our long term prospects.

We have recently started a revenue sharing program that includes tape revenue under current rules.

This program started in January of 2004.

We believe this will increase our participation in this part of the market.

Additionally, based upon reports about the SEC proposed rule-making released yesterday, we believe that the distribution of market data revenues will better match the actual value contributed by our marketplace.

Finally, we're taking several additional steps to raise our share in 2004 and beyond.

First, in January, we implemented a very competitive pricing structure, designed to offer incentive to liquidity providers and direct more trades through NASDAQ.

We have reduced pricing and are now a price leader.

We will continue to see price pressure in the foreseeable future.

And we intend to be a leader in that competitive environment as we continuously lower our operating cost base.

Also in 2004, we'll introduce market structure changes designed to stabilize and increase our market share.

These changes will be kicked off in the first quarter with the institution of an electronic closing auction.

This closing auction process will involve the conversion of trading to NASDAQ stocks at the end of the day to an agency market that captures the closing price mechanism and liquidity involved and generates a single closing price.

This new closing auction should leapfrog current industry solutions and offer a superior mechanism, yielding improved price recovery and transparency to the benefit of all investors.

This is a highly innovative program that NASDAQ is uniquely positioned to implement and should have a solid positive impact on mutual funds and indexes.

Also in the first quarter, we'll launch intermarket trading of listed stocks on Super Montage.

This will offer trading desks the ability to transact all listed stocks for the New York Stock Exchange or NASDAQ in a seamless fashion on the same trading platform.

Further, we will introduce an access fee cap which has been approved by the SEC and establishes a finite cost for participating in NASDAQ.

As we go through the year, we will continue to role out additional structural innovations, including an electronic opening auction and return of advance auto exported types.

These structural changes should draw significant attention back to NASDAQ's platform and raise its standing as a trading imperative helping to capture additional share.

In 2004, our goal is to continue building the momentum we began last year towards the reinforcing NASDAQ's identify as the premier marketplace.

We are focused on steadfastly improving all of our operating metrics through the execution of our strategy.

We plan to maintain our price competitiveness by continuing to drive down NASDAQ's operating costs.

We will maintain our status as the most efficient trading platform and the strongest issuer servicer.

And we will continue to review our real estate assets and our technology backbone as David will discuss in a moment.

Finally, we will move forward with our separation efforts from the NASD.

In sum, we intend to be the most open, competitive and fair market in the U.S. for all investors.

Now I will turn the call over to David to discuss the financial results.

David?

Thanks, Bob, and thanks again to everyone for joining us today.

Beginning with this quarter's release, we have reclassified the businesses we exited last year, specifically NASDAQ Europe and IndigoMarkets, as discontinued operations.

Therefore, all the references I will make today will be to results from continuing operations unless I specify otherwise.

Fourth quarter revenue for 2003, $138 million, decreased 23.5% year-over-year, but decreased only 2.7% sequentially.

Among the components of revenue, fourth quarter transaction and services revenue of $53.6 million decreased 32% year-over-year and was down only 1.3% sequentially.

We continue to feel the impact of competitive pressure on trading and reporting revenue.

Fourth quarter market information services revenue of $32.5 million decreased 33.5% year-over-year and 8.2% sequentially due primarily to higher [INAUDIBLE] revenue sharing.

Fourth quarter Corporate Client Group revenue of $42.8 million decreased slightly, 2.3% from last year, as listing fees decreased due mostly to companies falling out of compliance with NASDAQ's listing requirements.

Fourth quarter financial products revenue of $7.6 million increased $0.3 million from last year due primarily due to growth in the size of the QQQ trust.

Continuing to move down the P&L, direct expenses in the fourth quarter of $109.2 million decreased 28.7% year-over-year and 5.5% sequentially, as we reduced head count, increased operating efficiencies and lowered discretionary spending.

Total expenses of $150.7 million decreased 12.2% year-over-year and 2.6% sequentially.

Fourth quarter costs of $28.4 million associated with our 2003 strategic review are included in total expenses.

Our net loss from continuing operations in the fourth quarter, including strategic review costs, was $10.8 million or a loss of 17 cents per common share.

Excluding the $28.4 million in strategic review costs, that income on a nonGAAP basis was $5.9 million or 4 cents per common share for the fourth quarter of 2003 versus, on a comparable nonGAAP basis, net income of $6.2 million, or 5 cents per share for the fourth quarter of 2003 and sequentially $5.5 million or 4 cents per common share in the third quarter of 2003.

Again, we have made terrific strides in streamlining and focusing our operations.

At year end, NASDAQ head count was 956 versus 1,275 at the end of last year, and 1,029 at the end of the third quarter of 2003, down 25% year-over-year and 7% sequentially.

These reductions in addition to other cost-saving initiatives have allowed us us to take $106 million in expenses out of our operating cost base when compared to 2002.

Now, a brief comment on our cash issue.

Cash and marketable securities at year end was $358.4 million.

Down $83.9 million from last year due to payments associated with our strategic review and the prepayment of $150 million of senior notes in the third quarter.

In 2004, we plan to further reduce our ongoing run rate expenses to support our top line market goals.

We will continue to look for opportunity to improve the cost effectiveness and efficiency of our operations, moving forward in our efforts to review our trading technology and real estate assets, and we'll provide additional details on these reviews as we go through the year.

This concludes the prepared remarks that Bob and I wanted to share with you this afternoon.

We are now ready to open up the call and take your questions.

Operator?

Thank you, sir.

If you would like to ask a question at this time, press star one on your telephone touch pad.

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Please stand by while the questions register.

Our first question if from Javier David with Reuters.

You may begin.

Good morning, gentlemen.

Or good afternoon.

How are you?

Hi Javier.

If your question if for media portion of the call.

This is for the analyst.

Thanks so much.

Okay.

Sorry about that.

Thanks for joining.

Once again, that is star one if you would like to ask a question at this time.

Our next question comes from Charlotte Chamberlain with Jefferies and Company.

You may begin, ma'am.

Good afternoon.

Your comments and the written release are a bit confusing.

The press release says that strategic review is complete, but it is kind of vague in my mind, anyway, as to whether the restructuring charges are over.

And David, you said that you would be alerting us this year as to what sounded like restructuring charges having to do certainly with real estate, and I guess with trading platform.

So the first question what should we be assuming about these restructuring charges going forward.

Second question is kind of housekeeping.

Your Q said there were 74 million shares at the end of the third quarter.

It looks like there are 70 million now.

I wanted to get confirmation that that's true.

And we had calculated 38 cents worth of book value.

I wanted confirmation on that.

And the follow-up thing is a bigger gestalt issue.

With the proposals that came out yesterday that the staff of the SEC proposed to the commission, on the one hand, NASDAQ can benefit pretty dramatically from any relaxation in the trade through rules.

But the cap on the ECN fees which presumably would apply to Super Montage as well would seem to mitigate.

And I was wondering if you could kind of go over what you see about the net benefit or challenge NASDAQ of those proposed rules.

Thanks.

This is Bob.

I'll take your first question and your last and turn it over to David for the ones in the middle.

The first question, with respect to restructuring, what you can take from this release is that we have completed the process of reviewing which businesses that we should be in.

So we are comfortable that we aim to win in the businesses that we've chose to compete at.

Now, those businesses we're competing in, we have a continuous process of evaluation and review to ensure that we are always as efficient and as effective as possible.

So that will transpire through 2004 and really beyond.

So we know what businesses we're in.

And we'll continue to evaluate the ones that we've chose to compete in to make sure we're effective.

The second question, with respect to the SEC release, we feel that each of the proposals is at the worst a neutral to NASDAQ and they all have a strong possibility of being a very strong positive for NASDAQ.

With respect to the cap on access fees, our revenue capture per transaction is lower than one million today, so that that cap does not present an issue for us.

And as I said in my comments, we see a trend line where they will be continuing compression in the -- on transactions.

So that's -- that doesn't affect us directly.

But where it does affect us indirectly in a positive way, we think that a one mil cap on the access fee will reduce the amount of trading activity associated with trying to gain rebates.

So it will be very tough for competing market centers to pay large rebates when they are capped at one mil at the access fee.

So the extent that the rebates are diminished in their importance in the market wi ll be a direct benefit to NASDAQ.

Okay.

And when you say that your revenue capture is one mil, that's just for access fees.

Is that net of rebates or --

Yeah.

I'm saying net of rebates.

On a two-sided transaction between our rebate and our access fee, we net less than one mil.

Okay.

But -- but your access fee right now is higher than one mil, isn't it?

But what will happen -- and that ties into my other comment -- the rebate will change.

So today, just take for argument's sake, if the rebate was two mils and the access fee was three, you have a one mil capture.

And that's what we focus on, what is the capture rate.

So you could pose a theory that the market could centralize around a one mil access fee and zero rebate.

And it would be revenue neutral.

Okay.

And the fact if this goes to zero, one, that's an advantage for us.

Because at zero, one, the players in the market, the trading activity is there to capture rebates will basically dissipate or disappear.

And we do not currently participate in that trading activity.

Do you see any of your -- the market maker members?

Apparently they can now charge access fees as well.

Do you see that as a possible competitor to NASDAQ at this point?

I see that as a great opportunity for NASDAQ.

As you know, we started with the market makers 30 something years ago.

And we think this is a great announcement and we look forward to working with them to make sure they are able to monetize it in the most effective fashion.

Getting back to that first question.

For modeling purposes, it sounds as though the restructuring costs are going to be lower.

But it doesn't sound as if they are going to go away.

Charlotte, there are, as we said, we're looking at things.

And at this point, we just don't know.

We're looking at a number of different options.

There could be charges associated with these actions.

We just don't know.

As we do know, we will be disclosing those, I think, as we did throughout 2003, trying to give a sense of the judgment taken in the quarter and what we expected to take with respect to our 2003 effort for the balance of the year.

But it is not just -- it is modeling, but by our calculations, you've got about $33 million of common shareholder equity at this point.

And it wouldn't take too many quarters of restructuring charges to run through that.

I mean, it is not just modeling.

It is a question of when that happens.

And I guess there is the subsequent issue of the NASD preferred and whether that gets converted to common.

Right.

Well, I would make just a couple of comments on that, if I could.

The NASD preferred, we are in discussions with the NASD on that.

That does receive on our balance sheet permanent equity treatment.

So that does get replaced with common.

And I think the other thing I would highlight on our balance sheet, and I think we're a little unique here, is our differed revenue, which is, as you know from how we account for it, these listing fees that we take if for IPOs and the listing of additional shares pursuant to FAB 101.

We basically recognize that as we take the cash in the year of the event would recognize the revenue over a four or six-year period.

So we have on our books some 60 -- almost 140 million of deferred revenue, which is going to come into our income statement.

Net of tax.

That's there and there is no risk to that coming in to our income statement over the next four to six years.

Right.

So from a GAAP basis, you still have net worth.

But from a common equities standpoint, it is getting pretty thin.

I'm sorry.

I didn't understand what you said about the NASD preferred counts as permanent equity and therefore it is common or something.

I wasn't following that.

We have to replace that with common equity.

When does that take place?

It takes place -- it takes place at some point in the future when we offer additional equity.

Oh, okay.

Or presumably -- are they from regulatory perspective?

Could they agree to convert it to common?

They could agree to convert it to common.

As I said, we're in some discussions with them on a range of things.

But they could agree to convert it to common.

The point is that it has to be converted into common equity.

Okay.

And then just housekeeping issues on book value.

And share count.

Well, share count is 78.4.

Is basic.

Is the denominator for basic EPS.

Okay.

And what is it on fully diluted?

79 point -- this is for the three months now.

Right.

I'll give you the whole number. 79072432.

Okay.

So that's up about five million shares from the end of the third quarter.

Where do these shares come from?

Maybe we want to talk about -- at the end of the third quarter --

I don't have it here.

I don't think -- I'd like to get back to you on that.

I just don't have -- we'll try to get that.

But I don't think it is up that high, Charlotte.

And I'd be happy to walk through your numbers with ours.

And is it 38 cents for common book values, is that about right?

Yes.

Okay.

Great.

Thanks.

Thank you.

Thank you.

Once again if you would like to ask a question at this time, simply press star one on your telephone key pad.

Those using speaker phone equipment, please pick up your hand set before pressing star one to register their question.

Please stand by while the questions register.

If there's no further questions, we will conclude this call and look forward to talking to you folks in I guess three months time.

Or shorter.

Or shorter.

Okay?

Thanks very much, everyone.

Thank you for participating in today's conference call.

You may now disconnect.