納斯達克交易所 (NDAQ) 2004 Q3 法說會逐字稿

Welcome and thank you for joining The NASDAQ Stock Market's earnings conference call. All participants will be in listen-only mode until the question-and-answer session. To ask a question, please press star one. This conference is being recorded. If you have any objections, please disconnect at this time. Your host for this evening's conference is Mr. Vince Palmiere, Vice President of Investor Relations. Mr. Palmiere, you may begin.

Thank you, operator.

Thank you and thank you for joining us today to discuss NASDAQ's third quarter 2004 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'll open up the line for Q&A.

If you haven't done so already, you can access the results press release on the NASDAQ Investor Relations and NASDAQ newsroom Web sites at www.NASDAQ.com. If you have any follow-up questions after the call, give me a call at 212-401-8742.

Before we begin I'd like to remind that you 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 the other factors detailed in the Company's Form 10-Q and periodic reports filed with the SEC.

And with that, I'll turn the call over to Bob.

Thank you, Vince. Good afternoon, everyone. And thanks for joining us today to review our third quarter results.

I will begin with some comments about the quarter, and provide you with a strategic update. Then I'll turn the call over to David Warren, our CFO, for the financial review. Afterwards, we will both be available to take your questions.

This afternoon, NASDAQ reported a third quarter $5.5 million loss from operations, versus a $7.7 million loss last year. These results include pre-tax charges totaling $22.4 million, resulting from permanent actions taken during the quarter to streamline our operations and to improve the economics of our business model. This remains one of the central objectives for NASDAQ.

On a non-GAAP basis, when you exclude the non-recurring charges, NASDAQ earned net income of $8.1 million, and improved our EPS to 9 cents per share, up from 7 cents per share in the second quarter of 2004. We were able to achieve these results in spite of industry-wide weak volumes, by focusing on all aspects of our business. NASDAQ continues to be successful in reducing its expenses.

Volumes, as I said, continued to be soft and they decreased roughly 10% both sequentially and year-over-year. However, our NASDAQ-listed trading share is improving through the Brut acquisition, through our continued price leadership, and through functional enhancements that we made to our market center.

I would first like to speak to our philosophy on pricing within the NASDAQ transaction services. Our guiding principal is to completely understand our customer's requirements, and to ensure that we are meeting their needs.

Our sell-side customers who are involved in the institutional trading business have seen substantial pressure in the commission rates that they can charge their customers. In the last two years, we have seen commissions melt from 5 to 6 cents per share to 3 to 4 cents per share.

This has put tremendous pressure on our sell-side's customer's financial performance, and they are intensifying their efforts to become increasingly cost efficient. We know that if we are going to be part of our customer's solution and not part of their problem, we had to reduce the cost of transacting on the NASDAQ stock market.

This was one of the major reasons that we adopted a price leadership policy in January of 2004, and reaffirmed that policy with the combined NASDAQ Brut pricing that we announced in October which is effective November 1, 2004.

The second major reason we adopted a price leadership policy is the bottoms up analysis that we did on the cost of delivering in equities order match system to the marketplace.

The cost of developing and supporting an equity trading system is an easily quantified amount, and this cost has declined dramatically over time. We understood that our technology infrastructure would be changing even more rapidly than industry averages over the next 24 months.

We decided to base our pricing on where our technology costs was estimated to be in the 2005-2006 time frame. We developed pricing that considered this declining cost of technology that customers need for more efficient trading, and the ability for the NASDAQ shareholders to earn a fair rate of return.

This pricing certainly does not maximize our short-term profit opportunities. We clearly could have maximized our short-term profit by delaying our price reductions.

Our goal at NASDAQ is long-term performance for investors, customers, and shareholders. The history of this space contains stories of organizations that gambled that they could charge a premium rent for their services based upon the perceived permanent protection of the liquidity in their market.

We know of what we speak. For NASDAQ was a practitioner of this approach for a period of time. There is the siren appeal to this approach, but it is not the approach for building a long-term partnership with your customers.

54% of the trade volume is reported to NASDAQ. This is more than double our closest competitor. With the Brut acquisition, we have added industry-leading routing and connectivity solutions.

A leading competitor's price is 80% higher than our price, 80% of the time. We are well-positioned here at NASDAQ.

The second thing I'd like to speak of is our Closing Cross. It's NASDAQ's end of day single closing price mechanism. It is continuing to see increased activity.

The Dow Jones, Standard and Poor indexes have joined the Russell indices in utilizing the Closing Cross. We expect continued traction for the Closing Cross and began charging fees for transactions in August of 2004.

Additionally, our testing of the Opening Cross, NASDAQ's single price opening mechanism, is going very well. We went live with 10 stocks on Monday and we'll add additional stocks next Monday and we will be fully implemented by mid-December.

We also stepped up our advertising efforts with a new ad campaign launched at the October's Security Trader's Association conference, directed towards our trading customers. This campaign is intended to highlight the inherent conflict that exists in our competitor's business model.

Their agency broker/dealers compete directly with the sell-side customers for the buy-side business. We will never, as NASDAQ, enter into that sort of conflicted arrangement.

Finally, in our Market Services Subscription business, we continue to enhance new data products. To support this new product development we entered into a three-year partnership with HyperFeed to use its data processing ticker plan that will help in aggregating and packaging market information in a highly functional but low-cost solution.

We'll keep you updated on this project as it unfolds.

In our Issuer Services segment, NASDAQ listed 42 companies public in the third quarter, roughly the same number as in the second quarter but up substantially from the 14 IPOs in the second quarter of '03, and this represents 66% of the IPOs that came to market in the quarter.

Based upon our IPO applications in the pipeline, we expect the pace of new offerings in the remainder of the year to remain solid. We do not, however, expect another IPO of the size of Google in the fourth quarter. And we're very happy with the success of that IPO, and certainly the way it's traded in the secondary market.

In the Issuer Services business, we continue to enhance the services suite offered to NASDAQ issuers recently announcing that shareholder.com will offer shareholder communication and corporate government services to the NASDAQ corporate services network.

Further, we are maintaining a strong presence internationally to leverage the power of the NASDAQ brand to foreign issuers, and recently presented a keynote speech at the 2004 Capital Forum and was one of the highlights of the China International Fair for Investment and Trade. And in fact, today, we did have a Chinese IPO come to market quite successfully, it priced at the higher end of the range.

Also, as a side note, I do request that everybody tune in on election night to CNN, which will headquarter its coverage of the 2004 election at the NASDAQ Times Square Market Site location.

Market Site will be CNN's broadcast central, illustrating real-time voting stats and live updates on poll results throughout the election displayed on the Market Site's studio wall and will be sorted by candidate and by state. Now our Market Tower will also project the coverage live in Times Square.

In closing, NASDAQ is building an increasingly strong competitive position. We are completing a smooth integration of Brut's operation which will contribute positively to our results.

We continue to improve the functionality and product offerings both within our trading environment and our Issuer Services segment. We're improving our business model by rapidly adjusting our cost base to the realities of the marketplace.

NASDAQ's continuing objective is to provide investors, issuers and market participants with the highest quality equity market in the world. We remain focused on this mission and committed to driving solid long-term earnings growth.

I'll now turn the call over to David who will discuss the numbers, and our operational initiatives.

Thanks, Bob. And thanks again everyone for joining us today. I will take you through the financials and operational review.

As I've said on previous earnings calls, earlier this year, we reclassified the businesses we sold in 2003, those being NASDAQ Europe and Indigo Markets as discontinued.

This reclassification does not affect third quarter 2004 results, but does impact last year's third quarter. Therefore, as we go through the results today, my comparisons to the prior year, will involve continuing operations unless I specify otherwise.

Beginning with our P&L, third quarter 2004 revenue was $124 million, decreasing 12.6% year-over-year, but up 3.3% sequentially. Brut's operations are included in our results beginning on September 7.

Revenues from transactions executed through Brut are reported on a gross basis with expenses such as liquidity rebate, reported as cost of revenues, because Brut acts as principal in their transactions. Revenue from transactions executed through the NASDAQ systems will continue to be recorded on a net basis.

Third quarter gross margin then was 114.8 million, compared to 141.9 million in the third quarter of last year, and to $120 million in the second quarter of this year.

We look at our businesses in two segments, Market Services and Issuer Services. And I will comment briefly on the revenues from each.

Market Services third quarter gross revenue was 73.3 million, down 18.3% year-over-year, but up 6.4% sequentially. Gross margin for this segment was 64.1 million, down 4.8 million, or 7% sequentially, due primarily to lower trading volumes.

Third quarter volume averaged 1.56 billion shares per day, versus 1.75 billion shares per day in the second quarter.

Turning now to the Issuer Services segment, third quarter revenue was 50.6 million, basically unchanged sequentially and year-over-year. At quarter-end, there were 3,287 companies listed on NASDAQ, versus 3,367 the year before.

Annual fees, as well as fees from new shares and initial listings were all fairly comparable with prior periods.

Turning to the expense side, third quarter total expenses of $123.7 million decreased $31 million, or 20%, year-over-year, and were up 11% sequentially. As Bob has mentioned, our third quarter results include $22.4 million of pre-tax charges associated with our continuing efforts to streamline operations, reduce operating expenses, and improve efficiencies.

Excluding these charges, expenses for the third quarter on a non-GAAP basis decreased $4 million, or 4% from this year's second quarter.

Let's walk through these $22.4 million of 2004 third quarter charges, and I will also discuss our plans to take an additional net charges of $11 million in the fourth quarter. I will also say that of the 22.4 in the third quarter, 4.8 of that are cash-related, and the $11 million in the fourth quarter are all non-cash.

NASDAQ took 4.4 million charge for severance and related costs reducing the work force to 891 employees at quarter end. This head count reflects the integration of Brut. We plan to eliminate an additional 80 positions in the fourth quarter.

As part of our real estate consolidation plan, NASDAQ plans to sublease surplus office space at its One Liberty Plaza headquarters located in New York, resulting in an estimated loss on sublease of $12.8 million in the third quarter, and an additional charge of $5 million in the fourth quarter of this year.

In response to market opportunities, NASDAQ updated its plans for facilities in Maryland. As a result, NASDAQ plans to sell an owned facility in Maryland, and will take a charge of approximately $9 million in the fourth quarter 2004.

In the third quarter 2004, NASDAQ released a sublease loss reserve of $1.9 million, net of rental payments, associated with a leased Maryland facility that the Company had previously decided to vacate.

Additionally, in the third quarter, NASDAQ recorded $1.1 million in incremental depreciation expense associated with data center facility assets, due to a change in the estimated useful eyes of these assets and will incur an additional $3.4 million in the fourth quarter in connection with this activity.

The Company estimates that total 2004 charges associated with real estate consolidations to be approximately $29.4 million, with the remaining 17.4 to be incurred in the fourth quarter of this year.

In the technology area, as previously announced, NASDAQ changed the estimated useful life of certain assets and changed the lease terms on certain operating leases associated with its technology and telecommunications platforms, as we migrate to lower cost environments.

This change resulted in incremental depreciation and amortization expense of $5.6 million in the third quarter of 2004. In the fourth quarter, NASDAQ expects to incur approximately $8 million in additional charges related to its continuing review of technology operations.

And finally, it's expected that negotiations related to NASDAQ Europe obligations will be completed in the fourth quarter of this year, and as a result, we expect to report the release in the fourth quarter of approximately $15 million of liabilities that were previously recorded, recorded last year, to satisfy potential claims.

Turning to the Preferred Stock dividend, Series A Stock, NASDAQ obtained a waiver from the NASD for the third quarter, reducing the coupon on this security to 3% from 10.6%. A benefit of 3 cents per common share.

NASDAQ and the NASD are in the process of finalizing an amendment to the terms of the Series A Preferred Stock. This coupon reduction is one of the terms of this negotiated amendment.

Now, turning briefly to the balance sheet, the cash and investments at quarter end were $267.6 million, down from $445.3 million last quarter. This decrease results largely from the Brut acquisition, partially offset by lower cash expenses, and higher cash receipts from our Issuer Services segment.

In 2005, we project that our one-time charges in connection with our ongoing expense reduction efforts be in the range of 20 to $25 million.

And finally, I mentioned it when I went over the cash, but let me just also say that cash EPS, on a GAAP basis, was 11 cents per share for the quarter. Excluding the $22.4 million of one-time charges, cash EPS was 28 cents per share for the third quarter.

This concludes my prepared remarks. Again, I thank everyone for being with us today. Bob and I are now ready to take your questions, so operator, if you would please open up the lines and begin this process.

Thank you, if you would like to ask a question, please press star one. You'll be prompted to record your name. To withdraw your request, press star two. Once again, if you would like to ask a question, please press star one. One moment, please. Our first question comes from Charlotte Chamberlain from Jefferies and Company. You may ask your question.

Charlotte?

Hi. It's Charlotte. Can you hear me now?

Yes, we can.

Sorry about that. Just a couple of housekeeping issues. Could you give us the book and the tangible book value attributable to common shareholders this quarter and in the June quarter, please?

Charlotte, let's just repeat that. We're going to calculate it for you.

Okay.

We're having a hard time hearing you. I just want to make sure I got your question.

Is this any better?

Yeah, much better.

Okay. What I was looking for is book and tangible book attributable to common shareholders both in the September quarter and in the June quarter.

Okay.

I get something like 24 cents for book value this quarter but I just want to make sure that I was doing that right.

Okay. We will calculate that.

Okay.

You said you had some other --

Oh, yes. So little questions, so little time. Okay. Of your cash balance went down rather dramatically from the June quarter when it was 224 million, to 48 million, and I assume that that was due to the Brut acquisition.

Yes. But -- go if we get the starting point right.

But you say, right, that's just the cash and cash equivalents. But, is that the 48 million that you were referring to?

Yes.

Okay.

Well, 222 in the June quarter, and then it looks like it's 48 million this quarter.

Right.

Okay. And the question was, I assume that that was due to the Brut acquisition?

Yes, as I said, that was due to the Brut acquisition. You also obviously, when you look at our total cash, you need to look at total cash and investments. Which in my remarks said it was a 267.6 for the end of the quarter.

But the drop in cash is related to the Brut acquisition, but again, partially offset by lower cash expenses, and higher cash receipts from our Issuer Services segment. We really do think of cash and cash equivalents and investments as all part of our liquidity, available for operations.

Okay. So there is nothing that you need, let's see. Are you, forgive me. Are you self-clearing at this point?

Well, NASDAQ doesn't have a clearing operation. As a market center, we don't require one.

Oh, okay.

Brut, as a broker/dealer is self-clearing for its broker/dealer transactions, sell-side transactions.

Okay. All right. So these investments are also available and so you're, I'm sorry, so your total cash and cash equivalents this quarter versus last quarter?

The total cash and cash equivalents this quarter is 267.6 million.

Right.

Where it was last quarter was 445.3.

Okay. So the 240 million that is due to Hellman Friedman next June, that would presumably come out of the 267?

Yeah, well the maturity is May of 2006 and that would be come out of our liquid assets. So that would come out of, you know, cash, cash equivalents, and/or investments.

Okay. And they don't have any ability to accelerate that?

No.

Okay. Okay. And I know this is going to be difficult, but I don't need this answer to the second decimal place. If Brut, if NASDAQ had operated Brut from the beginning of the quarter through the end, as opposed to, it was really just one month, can you give us an idea what the pre-tax contribution would have been?

They're looking at the numbers, but you know, certainly, Charlotte, we haven't looked at it that way. We closed September 7 so it was less than one month that we owned them.

Well, can you just --

Yeah, I'm getting the answer, Charlotte.

Okay. Great.

Any other questions while they're looking, Charlotte?

Let's see. Okay. Yes. The NASD, can you give us some more details about this renegotiation? Presumably, they're being willing to cut their dividend payment by two-thirds. What was the, presumably there was an offset to them to make it worth their while to agree to that, and what should we be looking for in terms of that Preferred?

Well, Charlotte, you're correct in saying there's always an offset to a transaction. You know, at this point, we're not at liberty to give you any more details than what's been revealed. But maybe sometime in the future, we can.

Yes, when it's agreed to, it will be disclosed.

Okay. Can you kind of give us a sense, an idea of the direction that this is, I mean it's, it was certainly beneficial to you by 3 cents a share.

It was. And the only general comment that I make, Charlotte, is that the original deal was put together in contemplation of a near-term approval of our exchange registration. And, you know, the new deal that we're negotiating with them would kind of conform to the spirit of that original intention.

Say that again. I'm not quite following that.

Okay. The original note that was put together, the 10.6% was thrown out there as a number not indicative of any rate, but a number that would appear never to have been activated in that at the time the deal was put together with the 3% interest rate, it was contemplated that the exchange registration was relatively near-term. So that's somewhat of the context.

Now, in this particular renegotiation, which is not finalized, but we clearly did get the economic benefit in the third quarter, we're negotiating under the spirit of that same, of that original deal.

Oh, I see. So, okay. So presumably, well, obviously, any initial public offering has been put off. Is there a possibility of the NASD converting their Preferred to Common and simply being the largest Common shareholder?

Charlotte, when the Preferred Stock was issued in 2002, as one of the ways that NASDAQ paid the NASD for their Common that we would repurchase. So they, you know, their intention at that time was not to own any Common of NASDAQ and that that Preferred Stock, as Bob mentioned, would be taken out at some point when NASDAQ issues, raises capital through the issuance of new shares.

When the transaction was put together, as Bob was speaking, that was an event that was planned to happen a while ago. So I think in terms of this transaction, the, I think the only way to really summarize it right now is that the NASD and NASDAQ are continuing in the spirit of that initial discussion and coming up with a restructuring that will work for both parties, and be to the benefit of both organizations.

And I really think at this point it's just that we're getting, it's just too early to characterize it, because it's just not concluded yet, and when it is, we can be a lot clearer about all of the terms, and all of the questions that you're asking, which are really good questions, we can answer.

Okay. Another hypothetical while you're working on the previous one, suppose hypothetically that you and ARCA got together and so this whole problem with the SEC and, I mean obviously they'd have to bless it, but you'd become an exchange that way, or if you say bought the Philly or the Cincy or Boston or something like that. Is that feasible? Is it feasible to do that and still have some appendage subsidiary, whatever, that could still accomplish the internalization for the NASDAQ market makers?

Well, Charlotte, I think the second part of your comment got to the real issue. That issue is internalization, you know, with our exchange application, and a transaction with Philly, ACRA, InstaNet or anybody else --

Well, Instanet wouldn't get you anything --

Neither does any of those transactions get us anything directly. Clearly, we could have had our exchange application approved a while ago if we could see past internalization.

Now, we are of the mind set that internalization does bring value to investors in this country. We study the performance stats. And we think it's important, primarily for retail investors, and for large institutional investors that internalization exists. So we've taken that position, you know, we're in conversations with the Commission, hopefully we can come up with a solution in the relatively near-term.

Okay.

Charlotte, we have an answer for the question you asked earlier.

Okay.

I'll ask Ron Hassen, our Controller, he'll give the answer and let's make sure that that's being responsive to your question.

Charlotte, the net loss that we have right now for the third quarter is 5.5. If we had a pro forma with Brut in it, it would be a $5.4 million loss.

$5.4 million loss?

Right.

Okay. And that -- Okay.

$100,000 benefit.

Okay. So, I remember when you closed on Brut, you said that you thought it would be accretive in 12 months. It sounds, I mean obviously, this is hypothetical, but it sounds as if it was, had it been there the whole time, it would have been accretive in the first three months.

Charlotte, I think the general comment we will make is that we are running ahead of our plans with respect to the integration of Brut into the NASDAQ market, and we're running ahead of our plans in a number of different areas, so we're pleased with the progress so far. We realize that we have a tremendous amount of work in front of us, and we're, you know, eagerly taking on the challenge.

Okay. Changing subjects. The triple Q's. They're an AMEX listing right now. You've said you want to move them to NASDAQ which would reduce the tape revenues from the QQQ's.

Could you one, give us an idea of what your tape revenues were from the QQQ's this quarter, and two, if the QQQ's had been a NASDAQ listing rather than an AMEX, your estimate of what, and what I'm talking about is net tape revenues, in other words the tape revenues you receive minus whatever you pay out. And if you could kind of compare for us the net tape revenue of QQQ's as they are listed on the AMEX now versus if they were on NASDAQ.

Yeah, Charlotte, we certainly prepared for this call, but I'd have to apologize, we didn't prepare that analysis, and you know, we would definitely have to get back to you.

The general statement I'll make is that we certainly appreciate the job that the American Stock Exchange has done growing the QQQ's over the last number of years, but we eagerly await them coming back to their natural home, and, you know, it's our hope that that can happen before June of next year. Our market share in the Q's today is negligible. It would be our expectation that when they come back to NASDAQ, we will gain additional share, and reap some economic benefit from it.

Great. Not to split hairs, but when you say that you have negligible market share, that's in terms of trading QQQ's?

Yes.

Okay. And that's trading QQQ's on what used to be Super Montage which is now called, forgive me, it's The Market?

Well it would have been trading on what is known as the InterMarket system in NASDAQ and that was known as the Market Center.

Market Center, okay. And does that, when you say negligible, does that include the volume traded on Brut?

Yes.

Okay. All right. Okay. Let me just look. Okay. And you were going to tell me book value and tangible book value attributable to Common shareholders per share.

Right. We will calculate that and get back to you.

Perfect. Thank you. Thank you very much.

Thanks, Charlotte.

Thank you, Charlotte.

Our next question comes from David Shuldiner from Essacrusa. You may ask your question.

Hi, I think she covered everything except one point that I wanted to know. In connection with the anticipated reduction of personnel in the fourth quarter, where are those reductions coming from? Is it middle management? Or what area could you kind of give us an idea?

David, the reductions really will span the entire organization, from senior management, middle management, and to rank and file employees, it will span technology, finance, you know, operations, so it's broad-based across the organization.

The reason I asked that, I was just trying to kind of get an idea what the savings might be from that kind of reduction.

Yeah, it is a broadly targeted action and I think that could, I think help with the answer that you are asking. The question that you're asking.

That was it.

Okay. Thanks.

Thanks for your question.

Charlotte Chamberlain, you may ask your question.

Yeah, another housekeeping. I just want to make sure that I've got this right. David, did you say that total for the fourth quarter, we can expect restructuring charges at 20 to 25 million all in including leases and people, and write-downs of software and all that?

Right. Now to clarify, in the fourth quarter, the charges will be $11 million.

Net.

Net.

You have one reversal.

It was a, so the net will be 11 million.

Okay. So it's 20 to 25 gross and what's the reversal?

Well, NASDAQ Europe, there's a --

Oh, oh, the reversal of the, oh, oh, reversal of the liability. Okay.

So let me keep, let me continue to respond here. So for the fourth quarter of this year, $11 million net, and as I also said, all non-cash. And for 2005, for the year, 20 to $25 million of charges for actions we plan to take in 2005.

Okay. Okay. I knew my pen wasn't moving fast enough there. Okay. I think, and presumably, your share count isn't anticipated to change at all?

Well, 78.6 right now, and that's where it is. There's nothing that we have now that would be changing that.

Okay. All right. Great. Thanks very much.

Thank you, Charlotte.

Once again, if you'd like to ask a question, please press star one. At this time, sir, we're not showing any further questions.

Okay. I thank you, everybody, and we look forward to getting back together at the end of next quarter.

Thank you for participating in today's conference call. You may disconnect at this time.