納斯達克交易所 (NDAQ) 2005 Q2 法說會逐字稿

[OPERATOR INSTRUCTIONS.] We would like to thank everyone for joining the NASDAQ Stock Market’s earnings teleconference. I’d like to introduce this evening’s conference mediator, Mr. Vince Palmiere. Thank you. Please begin.

Thank you Operator. Good afternoon, and thank you everyone for joining us this afternoon to discuss NASDAQ’s second quarter 2005 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-and-a. If you haven’t done so already, you can access the results press release on NASDAQ Investor Relations and NASDAQ Newsroom websites at www.NASDAQ.com. If you have follow-up questions after the call, please call me at (212) 401-8742.

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 other factors detailed in the Company’s Form 10-K, and periodic reports filed with the SEC. Now, with that, I’ll turn the call over to Bob.

Thank you Vince. Good afternoon everyone, and thank you for joining us to review our second quarter 2005 results. I will start this call with some comments about the second quarter performance, and our outlook for the second half of the year. Then I’ll turn the call over to David Warren, our Chief Financial Officer, who will review our financials, and update our 2005 guidance. Afterwards, David and I will be available to take your questions in the time remaining.

This afternoon, I am pleased to report that NASDAQ delivered a solid second quarter. We reported a 10% sequential increase in profitability, while experiencing an 11% decline in average daily share volumes. When compared to the prior year quarter, our profitability in the second quarter improved nearly 192%, while average daily volumes increased only 1.9%.

This truly reflects our successful cost reduction efforts, and the diversity of our business model. For the quarter, net income was $14 million, up from $12.7 million last quarter, and up almost threefold from the $4.8 million we earned in the second quarter last year. For the third consecutive quarter, we have increased both profitability and gross margin.

Fully diluted EPS for the quarter was $0.13 per share. These results include pre-tax charges totaling $5.9 million, resulting from our continuing efforts to reduce cost and improve efficiencies. Results also include a $7.4 million charge related to the restructuring of the $240 million subordinated notes.

These $13.3 million in total reduced diluted earnings per share by $0.08 for the quarter. Of the $0.08, $0.05 is attributed to the debt restructuring related to the Instanet transaction, and $0.03 to our cost reduction program.

Let us now look more closely at our operational performance. In our issuer services segment, NASDAQ listed 25 IPOs in the second quarter of 2005, up from 20 in the first quarter. And we welcomed the Chicago Mercantile Exchange as a dual listing company.

Additionally, we continued to innovate and expand the services we offer to issuers. Partnering with Reuters, we launched the Independent Research Network. This research network will enable undercover public companies to raise awareness and improve their trading liquidity and valuation, by helping secure coverage from credible, independent research providers.

In the second quarter, we also launched new index products to our portfolio of financial products. We recently introduced a series of four new indices, in partnership with the FTSE Group, that will offer a unique, powerful set of tools, for investors to benchmark selected aspects of the NASDAQ market.

Yesterday we also announced a plan to launch a number of new indices, including a NASDAQ 100 equal weight index, and a healthcare index. Our market services business performed very well in the second quarter, with gross margin increasing from the first quarter, despite an 11% decrease in average daily trading volume.

The successful integration of Brut into our virtual order book contributed to this accomplishment. Of note, we have successfully levered Brut’s routing capabilities to conduct a very successful program for exchange listed stocks. If an exchange listed stock order is not matched internally within our system, the Brut system will route it to the floor of the New York Stock Exchange.

From a customer release date of June 1, we now collectively handle over 100 million shares per day in exchange listed equities. Obviously this rate of growth makes NASDAQ the fastest growing electronic venue for trading New York Stock Exchange listed stocks. This is one of the most successful product launches in NASDAQ’s history. Implementation of Reg NMS will accelerate our progress in this area. Strategic initiatives of this type exemplify the very reasons why we acquired Brut.

Innovations such as NASDAQ’s Closing Cross also continue to perform well. On June 24, during the Russell Index rebalancing, 420 million shares, representing over 5.8 billion dollars of trading activity, traded at NASDAQ at the close. The Closing Cross has quickly established itself as the premier price discovery facility in the country.

Lastly, our successful integration of Brut has laid the groundwork for the integration of the INET acquisition, which was also announced during the second quarter. As anticipated, we have received a second request for information from the DOJ, and we are working to quickly address that information requirement. We remain confident that this transaction will receive approval, and continue to expect that the INET/NASDAQ integration will be completed within one year after closing.

Overall, NASDAQ’s strategic, financial and operational achievements in the second quarter reinforce both the evolution of our business model, and our competitive positioning. We continue to execute the plans that we put in place. And they are working. In closing, we are proud of our team’s execution. We’re proud of our results, and proud of the strong financial position we have built.

Now, I’ll turn the call over to David Warren for a financial and operational update. David?

Thanks Bob, and thanks again everyone for joining us this afternoon. As Bob said, I will take you through our financials. And I will provide an update on our 2005 guidance. Starting with our P&L, second quarter 2005 revenue was $219.7 million, increasing 83% year over year, and 21.9% sequentially.

Brut’s operations are included in our results in the second quarter this year, and were not included in the second quarter results last year. Beginning with this quarter, we have made a change to the face of our Income Statement. And I want to review it with you. Since acquiring Brut last September, we have reported transactions executed through Brut on a gross basis, with expenses such as liquidity rebates recorded as a cost to revenues, because Brut acts as principal in their transaction.

Revenues from transactions executed through the NASDAQ systems have historically been recorded on a net basis, with NASDAQ’s other executions reported net of liquidity rebates. However, to comply with NASDAQ’s new limitation of liability rule, beginning this quarter, and going forward, we are changing this practice to record all liquidity rebate payments from transactions executed through the NASDAQ market center as cost of revenues.

This new rule gives NASDAQ the ability, in its discretion, to compensate market participants for technical malfunctions in the NASDAQ market center. The liability is limited by the rule to $100,000 per customer per trading day, $250,000 for all customers in any given trading day, and $500,000 for all customers in any month.

And still I think gross margin still remains the focus. And, accordingly, our second quarter gross margin, which represents total revenues, less cost of revenues, was $130.4 million, compared to $120 million for the second quarter last year, and $126.3 million for the first quarter of 2005.

Let’s look now at the specific performances of our businesses. Issuer services second quarter revenue was $56.1 million, up 9.85 year over year, and up 2.2% sequentially. Annual fee revenue increased during the period, due to an increase in fees for listed companies introduced this year. Also contributing to the year over year increase was revenue from the NASDAQ insurance agency, which was fully consolidated at the beginning of this year.

Market services gross margin was $74.3 million, up 7.8% year over year, and 4.4% sequentially. Second quarter average daily volume, as Bob has already discussed, was 1.78 billion shares per day in the second quarter, up approximately 2% from last year, although down over 11% from the first quarter. Market share for the second quarter was 55.7%, up from 47.9% last year, and 54.9% in the first quarter of this year.

Now, turning to expenses, second quarter total expenses were $104.1 million, a decrease of 6.6% year over year, but a slight increase from last quarter’s level, at $103.5 million. The sequential comparison improves the $7.4 million charge that Bob mentioned related to the debt restructuring associated with the INET acquisition. Absent this charge, we delivered a 6.6% reduction in spending quarter on quarter.

As we have discussed with you each quarter, our second quarter results include pre-tax charges associated with our continuing efforts to streamline operations, reduce operating expenses, and improve efficiencies. Total charges included in total expenses for the second quarter were $5.9 million. And I will go through these charges in detail.

First, $4.7 million of all these charges was non-cash. And all elements of these charges are within the expectations that we issued last quarter. As part of our real estate consolidation plans, we took a second quarter charge of $1.1 million, representing accelerated depreciation on Data Center and other assets.

We also sold our Disaster Recovery Center, and will co-locate our equipment in a state of the art third-party site. We continue to expect charges related to real estate consolidation in 2005 to be between $6.5 and $7.5 million for the entire year. And we have already recorded through the first half of this year $4.4 million in charges in connection with real estate.

In the technology area, NASDAQ took second quarter charges of $3.6 million. Here we changed the useful lives of certain assets, as we migrate to technology and communication platforms in a lower cost environment. Charges for all 2005 in connection with our technology roadmap initiative are expected to be in the range of $12.5 million to $13.5 million for the year. And we have already recorded $7.4 million in the technology area in the first two quarters.

And finally, NASDAQ took a second quarter charge of $1.2 million for severance and related costs. Charges related to work force reduction for this year are expected to be in the range of $3-4 million. And we have already recorded $1.6 million through the second quarter.

Of the $5.9 million in Q2 charges, $4.6 million is recorded in depreciation and amortization, $100,000 is reported in occupancy, and $1.2 million is reported in compensation. For all of 2005, we continue to project a total of approximately $22 million to $25 million of pre-tax charges associated with our cost reduction initiatives. And, as we’ve indicated in the past, the majority of these cost savings for the next three years are identified. And we have very detailed plans in place to achieve them.

Now, turning briefly to our balance sheet, cash and investments at quarter end were $550.3 million, up very substantially from the $345.6 million recorded at the end of the first quarter. During the second quarter, we received proceeds from the issuance of the $205 million subordinated note, held in escrow pending completion of the INET acquisition.

Further, we reported $10.2 million in mezzanine equity to account for the fair value of the warrants issued with the subordinated debt that was issued or restructured in connection with the financing of the INET acquisition. These are classified as mezzanine equity, because the warrants are rescindable until the acquisition closes, at which point they will be recorded as permanent equity.

Finally, we also redeemed $36 million in NASD preferred stock. Finally, this afternoon, we are revising our 2006 guidance to reflect strong first half performance and our expectations for the remainder of the year. We are raising our net income guidance to $47 million to $51 million, in that range, for the year, which is approximately $0.45 to $0.49 per diluted share.

This EPS guidance includes the impact of the $22-25 million of one-time charges I’ve just discussed, and the impact of these charges is in the range of $0.12 to $0.14 per diluted share. We are now providing EPS guidance on a fully diluted basis, not on a basic basis.

We are also lowering our guidance on total expenses. Total 2005 expenses are now projected to be in a range of $403 million to $413 million. Prior guidance had been in the range of $408 million to $418 million.

Finally, we are raising our guidance for gross margin in the range of $492 million to $502 million, up from $480 million to $490 million. And on gross margin, we are being prudent with our guidance, in light of what we expect for the balance of the year.

Our plans to transition customers off our legacy access services to a more efficient connectivity has proceeded at a slower pace than expected through the first two quarters, but is expected to accelerate through the balance of the year. This transition reduces both the revenue and expense associated with this service, and will improve our profitability in connection with this service when completed.

And also, trading volumes did fall, as we mentioned, from the first quarter to the second quarter, and are historically at their lowest level in the third quarter. This concludes my prepared remarks. Again, Bob and I are very pleased to be with you here today to report what we feel has been very strong performance for NASDAQ in the second quarter. And we look forward to taking your questions.

[OPERATOR INSTRUCTIONS.] Justin Hughes.

Good afternoon. I don’t ever expect to be first on these calls. I wanted to ask about the listed business. You still there?

And it looks like that line has been disconnected. Please stand by. We’ll dial out. Justin Hughes, your line is open. Please ask your question.

Are you there now?

Yeah, hi Justin.

Okay. I was dropped off the call there for a minute.

It’s alright. We just had a little technical glitch. We’re back on.

Okay. I wanted to ask for a little bit more details on the routing you’re doing on the listed business. I was surprised to see such a high number that you mentioned in the press release. I think you said 100 million shares.

How has that been ramping up? I think it’s only been in a couple months. I am just wondering how many people are connected, and what do you expect to roll out on connectivity? And finally, how many actual executions are happening of that 100 million?

Okay, one is certainly it’s an impressive performance, and one that we’re very excited about. And that’s 100 million shares that we’re providing the routing, where the customer gets the execution, or we’re providing the execution within our own venue.

Right now the system was in beta in the late April/May timeframe. We rolled it out in June. We do have a backlog of customers that want access to this system. So we’re just in the process of making sure the technology is in place. So we’re not making any predictions going forward. But we’re certainly excited about the progress that we’ve made. And we also know that there are additional feature functions that we’re putting into the product, which will also continue to support the growth in the product.

What percentage of the way would you say you’re through the process as far as connecting people? Are you 50% of the way there?

I wouldn’t hazard a guess precisely. But it is below 50%.

Okay. Thank you.

Rich Repetto.

I guess first question, I’ve got to see if David is sandbagging on the expense side here. If the low end of your guidance is $403 million on expenses -- that’s correct, right?

Yes.

And thus far, half way through the year, you’ve spent 207.6. Now -- and will there be any more debt restructuring charges? Because I would subtract that 7.4 million off the 207.6. That seems reasonable to me. Am I? Is that a reasonable assumption?

The way you’re deciding it. Yeah. But it is included in total expenses, obviously.

Well I guess I would just say we’re at a $200 million run --

You know, at this point in time, we don’t -- there are not a lot of debt restructuring charges that are in the works right now.

Well, I guess my point is, it seems like you’re at a $200 million run rate of expenses. And the low end of the expense range is 403.

Right. Here Rich, one thing I’ll say is, as you know, we have an expense roadmap that takes us out through ’07. And there are different step-functions in that roadmap. And we do not get to the next major step function until the latter part of the fourth quarter. And there are target increases that we have for investments in our activities during the second half of the year.

Okay.

I mean that’s the answer Rich. Again, we look at this thing, as you know, over out through the end of 2007. And there are inflexion points in it.

Yeah. I think this is actually a good situation to have, when you’ve got -- you know, you’re not at 55% of expenses, halfway through. I guess that’s the point.

Yes.

Second is, the add back on -- to get, there’s an after tax interest expense add back. Is that correct David, to get the property EPS calculation?

Yes.

I don’t know if you mentioned it. If you did, I missed it.

I didn’t mention it. We can get it for you. Yeah. The interest expenses is 3.3 -- 2.3, I am sorry.

And that’s the after-tax, where you add back?

That is the after-tax, which you would add back. 2.3 for the quarter.

Okay. And I guess I’m just trying to understand -- the revenues were up slightly quarter to quarter. And I haven’t been able to sort of get my hands around with the volumes being down, what was the driver of the revenues? Again, a good situation. But just trying to understand what drove it.

We’ve alluded to some of it, which was in the access services transition, that we see it at a slower pace than we anticipated for the first half of the year.

But I think the overall comment, Rich, is we have a diverse business model. And it’s been our experience that there’s too much focus on the average daily volume. And I think this quarter should basically put that sort of discussion to rest, because clearly the 11% decline is substantial. But we had a strong performance in our businesses.

Yes. Particularly in issuer service.

Okay. And then I guess the last question would be bigger picture Bob, you’ve had more time, I guess, to digest or get to think about the Instanet or the INET acquisition. And I was just trying to see what other -- has there been anything? Is there anything else you can share about, that you’ve learned in bringing the two platforms together? Relative to what you’ve already told us. And I guess that’s it.

I think the direct answer is, since the last time we spoke publicly, we have grown more comfortable and confident that the date that we established for a complete integration, and that date being one year from the date of closing, is very do-able. And we certainly would put plans together to try to over-achieve and make that happen sooner rather than later.

Okay. And then as far as the date of -- at least close. I hear what you’re saying, a year after, you’re getting more confident about that. Any more confidence in regards to closing? I know you’ve got sort of the antitrust issue. You’ve also got exchange status out there. Any updates on either one of those two issues?

Well, certainly with respect to the DOJ, the only thing that we can say and the only thing that we can do is to make sure that we respond to their information request in an expeditious fashion. And we have a tremendous effort internally here, and externally with firms that we’ve hired to assist us in that effort. But we certainly cannot predict when the DOJ will see themselves clear to approve this transaction.

On the second point, with respect to our exchange registration, there is essentially two components of the registration. One is the rule book for our exchange registration. And the second was an agreement that we made with the NEC with respect to internalization. One of the agreements is out for comment. And we’re, again, optimistic that the second part will go out for comment in the relatively near future.

Okay. Thanks guys. And great quarter.

[Carmelle Barker].

Hi. Actually [Carmelle] is over with Weisel. Most of my questions have already been answered. But I was just wondering, as far as the 7.4 million charge, what line item is that in?

It’s in Other Expense, G&A.

Oh, it’s in G&A. Okay. So that explains the big bump up. Okay great. That’s it. Thank you.

Charlotte Chamberlain.

I was a little bit confused. You said that the loan that you are putting on for the acquisition of INET, that in fact that’s one of the reasons why the cash balance went up. I thought that that -- you wouldn’t get any cash until the deal was actually done. Or maybe I just misunderstood what David was saying.

We issued the 205 million in notes in April. And we have escrowed those funds in anticipation of a closing. So that’s actually our cash. It’s just escrowed. So we obviously would report it as cash on our balance sheet. But it’s not available to us for liquidity purposes.

So it’s hedged in some way? You’ve bought like Treasuries or something?

It’s invested in a restricted account. So it’s completely secure.

Okay. And can you tell us the interest rate on that, so we can -- ? Does that -- ? Does the interest rate on that come into P&L? I mean if it’s in a restricted account, I mean does it have any P&L impact?

Yeah. We’re investing it at LIBOR plus 25.

And what’s the charge on it?

Well, the charge on the loan is 3.75%, on the 205 million subordinated debt.

Okay. And then also, with respect to the INET transaction, there’s a convert that gets issued? Is that right?

There were -- well, the $205 million that was issued is a convertible subordinated note. There were also warrants that were issued in connection with the $205 million note, as well as the $240 million worth of debt that was restructured.

Okay. And then is there also $275 million that’s yet to be taken down?

$275? Oh, I’m sorry. There is, yes. There’s a commitment. There’s a commitment provided by J.P. Morgan and Merrill Lynch, that was secured as part of our proposal to Instanet to provide $750 million in senior debt for the INET acquisition.

Okay. And has -- ?

So, as we move forward on that, we’d be in the process of syndicating that and putting that on our books as we move forward, and as approval comes for the acquisition.

And have any more specific terms been put on that in terms of is it LIBOR plus 25?

No. The deal, that deal, is fully committed by those two banks. And as I said earlier, and will say again, it is a very competitive rate. And we will certainly be disclosing that rate once we get through the syndication process. But all I can say for now is that it’s an attractive rate, and it’s LIBOR-based. And I will also add, as I said before, that it’s LIBOR-based because as bank debt it gives us the full flexibility to be able to take that debt out, with cash generated from operations, as we move forward.

So we’re just not at this point going to be getting ahead of the syndication process by discussing the terms of that. But I will tell you that those terms are set. So the spread to LIBOR is set. And we’ll certainly be making those terms available once the loan goes through syndication.

Okay. This makes it a little difficult for us to forecast, to do the P&L modeling.

I absolutely appreciate your position. But I think that you can understand that we want to get through the syndication process first.

Yeah, I can. But if the spread to LIBOR is set, I mean I don’t quite understand why you can’t just tell us what the spread to LIBOR is, and we can make our own assessments about where LIBOR is going to be. I mean if it’s set, and everybody knows it except the people on this end of the call, that’s your prerogative.

Well, no. That’s where I would disagree. The only -- the people that understand what the spread is are the two banks that bid on it and have committed to it. Nobody else knows about it Charlotte.

Oh, okay.

Okay? I mean I really want to be clear about that. I’ve been very consistent with this. I have not told anybody, because I am very committed to both J.P. Morgan and Merrill, that we’re going to work through the syndication of this loan. And then the terms of it will be disclosed.

Right.

Okay. And do you have -- ? At one point, Bob, you were in the Federal Register or something saying that you had expected that the exchange status would have happened June 30. Do you have any update on when you think that might happen?

Well, again, it’s impossible for us to predict with complete precision. I just would say that there is a strong support within the staff of market reg, and with the commissions that our exchange registration has the clear path to go forward. And we continued to work with them on what I would call the fine details.

[Richard Herr].

Just maybe take a step back, and maybe speak a little bit about INET and your plans for which technology assets you’re planning on keeping, and some that would be some degree marginalized. I know in the -- when you announced the deal, you said about $43 million of expenses in 2005 related to closing the deal and other expenses. Do you foresee any write-downs coming? Any technology write-downs this year? Or has maybe the deal closing later than originally anticipated affecting that?

Well, I think the point we made is that I think we made an assumption certainly when we presented this back in April as to the transaction closing. But I think the point is that at closing, we certainly do expect some one-time charges that would occur in that period, in the quarter of closing. And those really will be same, irrespective of when the transaction -- within a band, those will be pretty much the same irregardless of when it closes.

We have a clear path, where we will consolidate the technology. We will be running the NASDAQ stock market on one platform, that will represent tremendous efficiency for our customers, and really a better financial outcome for our investors. And we’re going to proceed very quickly with the plans.

Absolutely. So I guess just for our own purposes, in thinking of your total expense projections, that doesn’t include any kind of one-time items at the end of the year?

No.

No.

The expense projections are standalone NASDAQ.

Okay. Thank you very much.

So, I mean what we disclosed previously is still the incremental expense. It just -- that’s just for whatever closing date you assume.

Rich Repetto.

Just a follow-up. The EPS guidance David, of 45 to 49, that includes any changes to share count between now and year end?

Yes.

Okay. And then I am going back to the original question. We’re halfway there, more than halfway there at 26 cents. So I guess you’re being, I guess, cautious on any negative market conditions on that low end.

As I said, I think it is the right thing for us right now to be prudent with respect to gross margin. In terms of the access services transition, and the third quarter volume.

We’re entering the low volume quarter. And we obviously have to get through August. And we do go through a transition with access services.

And I think that the other thing, which I didn’t mention in my remarks, but certainly is true, is that for the remainder of the year, we’re going to have a full quarter worth of valuation with respect to the warrants, because those were not issued at the beginning of April. And also, as you said, we’re taking into account our projections on our stock price, going out through the end of the year.

Understood. Thank you.

[OPERATOR INSTRUCTIONS.] [Max Bowie], your line is open.

I am wondering, do you break out market data revenues?

Max, can you hold on one second? This is Vince. If there are no other questions from analysts, then we will go to the media portion Max, and you can ask your question.

Oh, okay.

Thank you very much.

Just hold on one second. Any other questions from analysts operator? Alright, well that concludes our call.

Great. Thank you Vince. Thank you David. And look forward to reconvening in three months time. And then we will go quickly into the media call.

Great. Operator, are you going to put us into the media portion of the call?

Yes, just one moment. We will now move to the media portion of the conference call, with Ms. Bethany Sherman.

Hello everyone. This is Bethany Sherman, head of Corporate Communications at NASDAQ. We’ll now begin the media portion of our call. If you’re with us, obviously it’s Bob Greifeld, David Warren, and Ed Knight. And we’d be happy to take your questions.

[OPERATOR INSTRUCTIONS.]

Max, I think you had a question, if you’re still on the line.

[OPERATOR INSTRUCTIONS.] In the meantime, I have a question from Gaston Ceron.

This is Gaston Ceron from Dow Jones. I hate to make you cover ground you already covered during the analyst portion of the call, but just from a real safety point of view, I mean it seems like the earnings were pretty good. Revenues certainly went up pretty sharply year over year. I mean is this mostly connected to Brut, which I don’t think was included in the Q2 ’04? Or is there something else?

Well, truly what’s impressive about this earnings results, Gaston, is that the transaction business had 11% decline in average daily volume. So that was the hole that NASDAQ as a combined entity had to dig out of in order to post these gains. So it means, in I think a very clear and direct way, is that we are a diversified business model. And our other businesses contributed very strongly within the quarter.

When you’re talking about the 11% decline in average daily volume, what’s the base day you’re working from? Because didn’t average daily volumes rise year over year? Or are you looking at something else?

Year over year, the average daily volume increased just shy of 2%. And the 11% I am referring to is quarter on quarter. That was the decline.

Right. But I guess when I was looking at the year over year comparison, it’s true that Brut was not included in 2Q ’04. Right?

Right.

Okay. So I guess what I’m looking at, it’s a very sharp increase in revenue from last year’s second quarter to this year. I mean how much of that was related to Brut, would you say?

Yeah, I don’t think we could look at it that way precisely. But I think that on your question, I think to ascribe all of it to Brut, certainly or a large part of it to Brut, certainly is not the way to look at this. We have, as Bob said, a number of businesses that are all performing very, very well.

Okay.

And so you had solid performances. Certainly Brut was helpful. It’s not activity that we had last year. But you also had gains in issuer services. And you had gains in all of our other businesses that are contributing to this performance. I think the other thing you have in terms of our profitability increase is the fact that we continue to execute on our expense base (inaudible).

Right.

And that has always been an important part of our profitability growth strategy, is to grow the top line as well as to continue to get our expense base in line.

Gaston, you see that corporate client group had a very strong quarter as compared to 2004. Their revenue was up 11.7%. They went from a base of 41.2 million to 46. So they, and other operations within NASDAQ, had a strong quarter.

And I am sorry Bob, the person who spoke just before you just now --

That was Dave, Gaston.

David Warren is the NASDAQ Stock Market CFO.

Right. And one final thing before I give somebody else a chance to ask a question. With regards to the -- so on the -- on the plans for INET, so you’re saying that you still feel pretty comfortable, I mean reiterating what you said earlier. I just want to make sure I heard right. So you still feel pretty comfortable that you’ll be able to integrate the companies fully within a year of closing? Is that right?

Yeah. That is our public statement, and our commitment to the marketplace.

But I’m saying you still remain pretty comfortable with that.

I remain more comfortable. I am more comfortable today than at the time of the announcement.

Great. And to Rich’s question, I mean what’s -- do you have a best guess, or even like a general target with regards to when the deal might close? Because, for example, I mean for context, in another deal that also faces similar scrutiny, [PNYC] [ph] and [Archipelo], I mean they’ve generally talked about the first quarter of next year. I mean well understanding that, you know, you can’t predict exactly when. But do you have something like that, like a first half, the first quarter?

We’re just not comfortable making that sort of prediction. The DOJ has to do what they have to do. The only thing we can control is the speedy response to their request, and to help them with the analysis.

Okay. Thank you.

Thanks Gaston.

[Max Bowie].

I had a question about market data revenues. I am curious as to whether you broke those revenues out at all from the market services division, and perhaps whether you can give us an indication of how those specifically have increased since the acquisition and integration of Brut.

Well, what I have in front of me is the market data revenues quarter on quarter and year on year. And that I can certainly describe to you. Just sort of market services subscription revenues, net of revenue sharing plans, increased 17%, to $25 million from $21.5 million in the year ago quarter, and increased 1.6% quarter on quarter, from $24.8 million to $25.2 million.

And those figures represent the -- ? They represent market data revenues?

Yeah. Net (inaudible).

So it was strong quarter for market data.

Mmm-hmm. And can you give an indication of how Brut has contributed to that?

No. We don’t break it out that way. You have to understand that -- and we’ve owned Brut since September of last year. And it is integrated into the NASDAQ organization. And it’s really not discernible, one from the other at this point in time.

Okay. Thank you very much.

Edgar Ortega.

Good evening. Edgar Ortega from Bloomberg News in New York. I just had a quick question, that kind of steps aside from the kind of quarter to quarter results, maybe (inaudible) idea. You obviously have the INET acquisition going forward, and Brut under your belt. You talk about reducing costs. Can you help us understand how these two elements fit into your plan to compete with the New York Stock Exchange that might be -- is in the process of expanding itself?

Well, first and foremost, we here at NASDAQ are about developing the proper business plan for the NASDAQ stock market, and then ensuring that we execute that business plan to the best of our ability. To the extent we do that, our shareholders and our market participants will be well served.

Our mission post-INET acquisition is quite straightforward. Our goal is to be on one platform, have that platform be widely recognized as the state of the art within the industry, provide superior liquidity, speed of execution, and price performance through that platform, have that single platform be able to trade equities, whether they’re listed on the NASDAQ stock market or the New York or the American Stock Market.

So we’re about executing that plan, and communicating the advantages of the NASDAQ stock market to our issuer companies. And, as I said, if we do that, we’ll all be well served.

I guess what I am trying to ask is if you think perhaps continued cost reductions are a way where you can match forces against other rivals in the industry, or if perhaps acquisitions are something that you might increasingly look toward in order to have a little bit bigger size.

Well, Edgar, this quarter really is a good indication of where we want to go, and what we want other quarters to look like. You saw an increase in our revenue, and a decrease in our expenses. That’s a happy and positive situation for our investors and our market participants.

So we clearly see opportunities to continue to reduce our expense base. As we’ve communicated many times before, we do have a roadmap that takes us out through ’07 that we are methodically following. In addition to that, we have a number of plans in place to grow revenue. The INET acquisition is certainly a key part of those plans. But they are not the exclusive program that we have in place.

So a number of great opportunities on the revenue side, and certainly substantial opportunities still on the expense side.

Okay. Thank you. May I ask just a quick follow-up on your decline in daily average volume? To what do you attribute that? Why such a steep quarter on quarter comp here?

Well, and that is not the average daily volume decline for us, but the market as a whole.

Okay.

So that 11% ties to the fact that there was a very strong trading environment in the first quarter, most notably in January, and that tailed off in the second quarter. We do not have any direct day to day control on how many shares trade in the market. If we did, Edgar, I tell you we’d make it higher. So it’s something that we live with. And it is what it is.

Okay. Thank you.

Thanks Edgar. Operator, do we have any further questions?

Our next question comes from [Megan Davis].

Hi, it’s [Megan Davis] at Reuters. I just wanted to ask you about your cost cutting program. Can you just say a bit more about where the biggest cost cuts are coming from in your business? And you talked about severance costs. I don’t know if you said before how many jobs cuts you’re making. But I just wondered if you could give an update on that.

In terms of the general guidance we’ve given with respect to cost cutting, you need to understand that really the wellspring of the cost cutting comes from our adopting new and more efficient technology. And as we do that, it ripples throughout the organization, with respect to real estate, with respect to the head count required to support technology, with respect to the actual cost of purchase of hardware and or software technology.

So you see NASDAQ going through a fundamental transformation of its technological underpinnings. And that’s driving the vast majority of the cost savings. Not all of it, but the vast majority.

Okay. I mean you have earmarked $3-4 million for severance expenses from the second half. Does that equate to job cuts?

Well, first of all, a clarification. That $3-4 million was for the entire year.

Right.

We already booked $1.6 million through the first two quarters.

Right. So how many jobs does that equate to?

There were about 25 reductions in the second quarter. Do we have the number for the first quarter? It was a small number.

Oh, okay.

At the same time, certainly at the same time we’re -- you know, I think the other part is at the same time we are conducting and going through the technology roadmap, we also made an acquisition at the end of the year of the NASDAQ insurance agency. And we’re still obviously taking steps to grow the revenue at the same time we reduce the costs.

Okay. Thank you very much.

Our last question comes from Gaston Ceron.

Hi, I am sorry. Just a quick follow-up. Thanks. David or Bob, I just wanted to, for comparison purposes, when I was looking at the upwardly revised outlook. So the new outlook is for the entire year, is $47-51 million in net income. I believe the earlier guidance you gave, I want to say back in January or February timeframe, was $35-42 million. Is that right?

Yes. But that was basic. We have -- this is the first --

No, no. I’m talking about net income, not net income per share.

Net income? Okay. Yeah. That was the earlier guidance.

Yeah, so and you just jumped ahead to my next point. So now on a per share basis, you’re saying 45-49 per diluted. But the earlier 35-43, that was basic. Right?

Basic. Yeah. We’re not going to be updating basic guidance anymore.

Fair enough.

Okay?

Understand that in the early guidance we did not contemplate the charge related to the restructuring the subordinated notes in conjunction with the financing of the INET acquisition.

Well yeah, fair enough. But on a net income basis, I mean your expectations were 35 million to 42 million. And now they’re higher. They’re 47 to 51.

That they are.

Okay. Fair enough. And one other things. With regards to [Megan]’s -- following up on [Megan]’s questions on work force reduction, so, like you said David, for the entire year it’s $3-4 million in severance expenses. And how -- ? I didn’t year you when you said how much of that have you already done through the second quarter.

$1.6 million.

Okay. So that would suggest that there’s anywhere from $2.4 million to $1.4 million remaining. No?

Right.

Okay. So --

Yes. That would be the correct math.

Okay great. Glad to know my mind still works. But I guess what I was getting at is that there’s more work force reduction coming in the second half. No?

There is -- let’s be clear, and to pick up on what Bob said earlier, the technology roadmap, just by its very nature, allows us to get more efficient. And when you get more efficient, you’re able to do it with fewer people. You’re able to do it with less real estate. You’re able to do it more efficiently. So as you get opportunities through this technology roadmap. So, yes, there are positions that get -- that are eliminated as part of this roadmap, over the course of this roadmap, as it’s executed out over the next couple of years

Okay. And then lastly, when you talk about getting technology more efficient and things like that -- this is just a question. I have no reason to think that you’re doing this. But are you outsourcing any of the stuff? Whether here in the United States or overseas?

Well, from a technology point of view, there’s -- that’s a broad topic. And there’s many sub-topics within it. And I would just say that outsourcing for part of our technology is something we consider. And it is primarily at what I’ll call the non-strategic aspect of it. That is something a person, the commodity part of the technology curve. And anything that we believe is strategic to the NASDAQ Stock Market, we make sure that it is done by NASDAQ Stock Market employees.

Okay. And then on the stock exchange registration stuff, Bob, I think what you told [Rachel] was that you continue to work on the fine details. And are you still, as far as you can tell, see a clear path for the things to get approved at some point?

Well said.

Thanks a lot guys.

You can quote yourself.

Okay, thank you.

Thanks Gaston. Thanks everyone.

Thanks. Bye-bye.