納斯達克交易所 (NDAQ) 2006 Q3 法說會逐字稿

Good morning and thank you for joining NASDAQ's Stock Market's earnings teleconference.

All participants will be Good morning and thank you for joining NASDAQ Stock Market's earnings teleconference.

All participants will be in a listen only mode until the question and answer session. [OPERATOR INSTRUCTIONS] This conference is being recorded.

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

Your host for this morning's conference is Mr. Vince Palmiere, Vice President of Investor Relations.

You may begin, sir.

Thank you, Operator.

Good morning everyone and thank you for joining us to discuss NASDAQ's third quarter 2006 results.

Joining me are Bob Greifeld, President and Chief Executive Officer, David Warren, our Chief Financial Officer, and Ed Knight, our General Counsel.

Following our prepared remarks, we will 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 websites at www.NASDAQ.com.

And if you have any questions following the call, please contact me 212-401-8742.

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

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

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

Thank you, Vince.

Good morning everyone and thank you for joining us today.

Following my comments on the quarter, David will review the financials in detail.

Afterward, we will be available for your questions.

The third quarter was a very successful quarter for NASDAQ.

We demonstrated our continued ability to focus and to execute on our key operating priorities.

Operating income increased 36.6 million or 116.9% from the prior year quarter.

This increase demonstrates our ability to grow organically through continued innovation while at the same time quickly and successfully integrating acquisitions to drive profitability.

Over the past 12 months, we've made four acquisitions.

However, what's impressive is that our quarterly expenses increased only 4% year-over-year while gross margin grew 31%.

The increasing gross margin for the quarter represents the eighth consecutive quarter of growth.

Although sequential growth was minimal, what is truly impressive is that we were able to grow revenues even though the average daily trading volume in NASDAQ's listed securities declined 13.5% from the second quarter.

Net income in the quarter increased to 30.2 million, up nearly 70% from last year and up nearly 82% from the second quarter, with our diluted EPS of $0.22 per share, representing a record high for NASDAQ as a public company.

In reviewing our accomplishments for the quarter, it is clear that we have delivered value to our shareholders by offering our market participants and listed companies a compelling range of value added products and services.

Within Issuer Services, we've been very successful in attracting companies to NASDAQ. 61% of IPOs in the quarter were listed on NASDAQ and we continue to see success in having companies switch to our market. 76 companies have transferred to NASDAQ in the first three quarters of this year from other markets.

We also completed the PrimeZone acquisition, broadening our growing investor relations and corporate communications suite of products.

We also have repackaged our listing product to include a basic suite of benefits that assist with compliance, shareholder communications and visibility.

And finally, in financial products, PowerShares launched 10 new ETFs on NASDAQ.

Within Market Services, during the third quarter, NASDAQ's trading share of U.S. equities continued to grow, firmly establishing NASDAQ as the largest electronic liquidity pool for U.S. listed equities.

Our match share of trading in NYSE-listed stocks continues to climb reaching 12.1% in the third quarter with September share reaching 12.9%.

Also, as recently announced, in September, our market share in large liquid NYSE stocks continues to improve.

It is now over 30% in more than 100 NYSE-listed companies and in several high market cap stocks, our market share is actually over 40%.

And then although it is still early in the game, we are encouraged by the increased electronic trading of hybrid stocks and our ability to capture market share.

We look forward to the launch of more stocks in the hybrid market and are fully prepared to compete aggressively.

We also announced plans during the quarter to create the NASDAQ Options Marketplace to take advantage of market structure changes expected with decimal pricing.

This should favor NASDAQ's very sophisticated order routing and matching technology.

Expanding into options will permit us to leverage our trading platform and customer network to another asset class.

Pending SEC approval, we plan to launch NASDAQ's Options Marketplace in the third quarter of 2007.

We also continue to grow TotalView, with the professional subscriber population doubling from the prior year, and we enhanced ModelView, our web-based historical data product to include NYSE and AMEX listed data as well as INET liquidity statistics.

During the quarter, we also became operational as an exchange in NASDAQ listed stocks and this week began migrating stocks onto our single platform.

This platform will enable our customers to enjoy the full benefits of the deepest electronic liquidity pool available, improved system performance and greater order interaction.

Operating a single book also creates opportunities for increased innovation such as our planned launch of the intraday cross.

In all, we are extremely proud of our third quarter performance.

Not only is NASDAQ increasing operating leverage, market share and the value proposition we offer to issuers, we are deepening our strong competitive position in the marketplace.

We continue to redefine what it means to be an exchange through our unparalleled fair and efficient market structure that focuses on speed, ease of use and transparency.

Our execution remains strong and consistent and we are on track to achieve our objectives.

I will now turn the call over the David for a review of the financials.

Thanks, Bob, and good morning, everyone.

I'll start by reviewing our P&L and I will go into some detail here on the reasons for the comparisons between sequentially and prior year quarter, anticipating what I expect to be some of your questions.

I do want to note that our current quarter includes results from acquisitions that we made over the past year from the closing date of each transaction and these acquisitions include Carpenter Moore which closed on October 1st, 2005, INET which closed in early December 2005, Shareholder.com which closed on February 1st of this year, and our most recent one, PrimeZone, which closed on September 1st of this year.

Third quarter 2006 gross margin was $171.2 million.

That compares to 130.6 million in the year ago quarter and 171.1 million in the second quarter of this year.

Within Issuer Services, third quarter revenue was $59.8 million versus 55.8 million last year.

That's up 7.2% year-over-year and it's down $3.6 million sequentially.

In the Corporate Client group, the acquisitions of Carpenter Moore, Shareholder.com and PrimeZone drove increases in revenue from the prior year.

IPOs and new listings that came to NASDAQ in the third quarter drove increases in annual fees from the second quarter.

In the third quarter, initial listing fees declined from prior year.

You may recall that we amortized these fees over six years, that the recent decline in revenue is driven by the loss of amortized revenue associated with the large number of initial listings we had in the year 2000.

But we are close to turning the corner where our billings will equal the amount that we amortized in a year.

Finally, in financial products, revenues declined from prior year and prior quarter.

As reported in our second quarter 10-Q, the recent outcome of two court cases has impacted NASDAQ's ability to collect licensing revenues for options traded on NASDAQ ETS.

This is the first quarter in which we witnessed this impact.

However, this loss of revenue is expected to be offset by new revenue that we expect to receive from transferring the sponsorship of our ETF to PowerShares as recently announced.

This is pending SEC approval.

Within Market Services, gross margin was $111.3 million, up 48.4% from 74.8 recorded last year and up 3.3% sequentially.

Third quarter average daily volume, as Bob had mentioned, was 1.85 billion shares per day.

That was up from the 1.65 billion recorded last year but down 13.6% sequentially.

Market Center gross margin increased 21.9 million or 50.6% from last year, primarily due to the acquisition of INET, increases in ADV and increases in our market share of NYSE and AMEX listed securities.

When compared to the second quarter, Market Center gross margin grew $6 million or 10.1% increase, despite a decline in ADV that I just talked about.

The primary driver of this increase is related to a reduction in clearing costs associated with INET transactions.

INET trades are now cleared through NASDAQ's existing clearing broker and as a result our cost to revenues were reduced.

Included in Market Center execution and trade reporting revenues is $45.8 million in SEC fees booked, up from $27.3 million in the second quarter and a $7.4 million booked last year.

Remember that included in cost of revenues is the corresponding SEC fee that for the most part offsets the amount of revenues we collect.

NASDAQ operations as an exchange, which became effective August 1st of this year, driving the increase from the second quarter.

And as we disclosed before, access services revenue declined from prior year due to our retirement of a legacy product.

Customer adoption of new access service products has resulted in an increase in access services revenue from the second quarter.

In Market Services Subscriptions, revenue increased $11.4 million, up almost 42% from prior year, primarily due to decreased sharing under the UTP plan.

During the first quarter of this year, INET began to migrate trades to the Market Center, increasing our UTP market share.

Also, NQDS or level two revenue is no longer included as shareable revenue in the UTP plan.

You may also recall that second quarter UTP revenue sharing was lower by approximately $1.3 million, due to the recovery of first quarter NQDS revenues.

Excluding this adjustment, Market Services revenues were flat in Q3 when compared to the second quarter with increases in proprietary revenue offsetting a reduction in non-proprietary revenues.

Non-proprietary revenues declined due to fewer non-professional subscriptions.

The increase in Other Market Services revenue from prior year is due to the contract we have with NASD to support operations of the OTCBB which became effective on October 1st of 2005.

And the decline from the second quarter is because we waived testing fees as market participants began testing for single book integration.

Now turning to expenses, third quarter total expenses were $103.3 million, an increase of just 4% year-over-year, but down an impressive 23.4% sequentially.

The year-over-year increases are due to the recent acquisitions that Bob and I have already discussed.

Included in third quarter expenses are 4.8 million of charges associated with our continuing cost reduction program and the INET integration.

I give you some detail on this 4.8.

As part of our technology road map, we recorded charges of $3.4 million in the third quarter, all of it recorded to depreciation and amortization.

In compensation and benefits, we took 900,000 charge in severance charges and outplacement costs in the third quarter and in the G&A expense we recorded $0.5 million in real estate consolidation charges for the quarter.

Now let me turn to the balance sheet briefly.

Cash and cash equivalents and investments and investments available for sale, which includes our investment in the London Stock Exchange, at quarter end were $1.9 billion.

That's against $1.7 billion recorded last quarter and $345 million at the end of the year 2005.

Our investment in LSE is recorded at fair value and remains at 25.4% of total outstanding shares, this number including the effect of the LSE's recent buy back of stock.

This week we began migrating stocks to our single book platform, which when completed will free up between 75 and $100 million of required reserves, reducing the amount of cash required for that operation.

Our debt level at quarter end was $1.6 billion, equal to last quarter and up from what we recorded year-end, reflecting the debt issued to fund the investment in the London Stock Exchange.

And now let me take -- turn to our guidance.

We are revising our 2006 guidance today.

We have increased our anticipated 2006 gross margin to the range of 675 to $680 million.

That's up from the previous range of 645 to 655 million, this reflecting the continued strength in our core businesses.

This represents growth of approximately 29% from the $526 million reported in 2005.

Our outlook for total 2006 expenses is now in the range of 466 to $471 million.

That's down from prior guidance which was in the range of 475 to 485.

Included in total expenses we anticipate recording total pretax charges of approximately 55 to $60 million, approximately 42 to 47 million of which relates to the INET integration and our ongoing expense reduction efforts, including $49 million that we already recorded in the first half of the year.

Less than $7 million of these charges are cash expenses.

And the breakout of these full year charges is as follows. 6 to $7 million relating to real estate consolidation, 6 to $7 million relating to workforce reductions, 30 million to $33 million relating to our technology road map effort, and the $29.9 million charge taken in the second quarter for refinancing of a credit facility and the early extinguishment of debt partially offset by a $2 million foreign currency gain.

Coming down to the bottom line then, we now anticipate 2006 net income to be in the range of 87 million to $91 million and that's revised up from our prior outlook that was between 68 to $78 million.

And this outlook compares to $55.1 million which was the net income that we reported for all of 2005.

So that is the wrap-up on the numbers.

I will just add very briefly that in support of what Bob said that we are very pleased with our performance this quarter and very excited about the opportunities available to us.

This is a pretax margin of 40%, which definitely I think shows the tremendous progress we've made in a very short period of time.

Bob and I are now ready to take your questions.

[OPERATOR INSTRUCTIONS] We'll go first to Niamh Alexander with CIBC.

Thank you very much.

If I could -- congratulations on the quarter.

If I could ask you about hybrid three.

We're kind of in the very early stages yet with just two stocks.

But are you looking for a quicker ramp up of market share grab when they roll out more stocks into hybrid three.

Well, the only thing I think we'll say today is we are encouraged by the results that we've seen so far.

But let's make it very clear that it's a limited number of stocks for a very short period of time.

So it's impossible for any reasonable conclusion.

But I just say we're encouraged and we look forward for the roll-out of all the stocks onto hybrid.

Okay.

That's helpful.

Thank you.

One other question for my model, if you would.

With regards to the brokerage and clearing fees, they seem to kind of pick up as a proportion of the transaction revenues there.

Can you help me understand that, please?

Well, I would say this.

As we go to a single book, you realize that we'll be matching more and more of our volume within our own matching engine and we'll not have to clear those trades.

So you'll see a different dynamic in that line item as we continue on a progress with single book.

The one thing, David, the one thing that I would add, which I spoke to a little bit in my comments, in that line item you have a combination of clearing fees but you also have the contra for the SEC 31AC's.

So you've got a couple of things working there.

We don't go into the details but clearing fees are going down.

You have the 31A fees which are going up.

And we have the offset in that line.

Okay.

That's very helpful.

Thanks so much.

I'll get back on the line.

We'll go next to Rich Repetto with Sandler O'Neill.

Hi, guys.

How are you doing there, Rich?

Good.

Congrats on a strong quarter here.

Hey Bob, I'm just wondering, with the integration, we saw the expenses come down.

But I am trying to see where we are.

I know the tech, if I'm right, the technology road map still continues through '07 and I guess the question is are we -- besides the one book in clearing savings, are there more expenses to come out from -- in regards to INET or related to INET?

I think, Rich, the answer is yes.

As I think you understand, we have started the process to single book.

We'll conclude that in the fourth quarter and then the savings from going to single book will lag that event by three months or so.

So we certainly have more savings that we'll see as we complete the move to single book and the statement that we'll make is that the road map that we presented going back in 2005 is the road map that we will execute to.

So the dollars you had in '05 stand as the valid guide post.

David, you want to add anything?

No.

Okay.

I guess I risk wasting my second question but I'll ask it on in regards to consolidation, there has been activity in the exchange space domestically.

I guess it certainly hasn't been in equities.

Do you see any impact to views on global consolidation from what's gone on this week, I guess, with the CME and CBOT?

I think you did waste that question there, Rich. [ LAUGHTER ] The answer is no.

We don't see any impact in our thinking.

Okay.

I'll get back in the queue.

We'll go next to [Rob Brookshell] at Prudential Securities.

Hi.

Good morning.

How you doing there, Rob?

Good.

I was hoping that you might be able to give us a little bit more color on the liquidity rebates this quarter, why those are lower, and what your expectations are there going forward with your New York volume growth.

Yes, it's directly related to the fact that this quarter had a lower average daily volume than the prior quarter.

Was 13% lower.

Okay.

So that's the only thing.

Can you talk about pricing at all in terms of what you're seeing and what you're expecting?

There's been some price changes at New York and I saw that you guys are beginning to aggregate trades for smaller participants.

Can you just make some comments there?

Well, I think you are seeing a space in transition as New York tries to migrate to the modern era with electronic trading.

We have a very clear view of what our value proposition is.

We have a very clear view of our technology advantage.

And we understand that pricing will change in time but I think it's important to look at really the increased effectiveness of our platforms and the increased profitability.

We've managed to achieve both objectives and we expect to do that in the future.

Okay.

But I mean, in the near term, do you see any changes in pricing?

I guess that's what I'm getting to.

I'm not going to comment on future pricing actions.

I just say that we expect to continue to gain share and we expect to continue to meet our customer's needs in a more profound basis while increasing our returns for our investors.

Okay.

Thanks, I'll get back in the queue.

I'll go next to Ken Worthington with J.P. Morgan.

Hi, good morning.

Your execution and trade reporting revenue per shade traded went up quite a bit this quarter while the liquidity rebate per share traded was actually flat or flattish.

What were the dynamics that caused this to happen?

Does it have anything to do with fewer customers hitting your tiers or what's going on there?

Yes, it has -- that is an important part of it.

Volume goes down, fewer customers hit the tiers, and that is the result of it.

And that is definitely a part of our operations and you do see that sometimes in a quarter where you're lower in volume from the prior quarter.

Interesting.

So the business has some like automatic smoothing features.

Exactly.

It has a bit of a safety valve in it.

Okay.

Great.

My second question is in the 343 million of Market Service revenue, what portion is really generated from your New York-listed business?

Is it possible to get a sense there what is traditional NASDAQ and what is traditional New York?

It's not something that we break out so it's really hard for us to go into that right now.

Can you give us like a ballpark, bigger than a bread box, a third, 10%?

I think, as David said, we don't break it out right now.

We're just obviously proud of the success we've had.

As I mentioned during my opening comments, our match market share is in the upper 12s at this point in time, so it's really remarkable in terms of what we have accomplished in the last year, but we at this point in time, don't break out the two transaction components.

Ken, you can probably get it doing the math.

You take our capture by the volume and you look at routing and add something for market data.

You could get close to it yourself.

Yes, we've tried.

We just wanted to see if we could get a confirmation.

Thank you.

Next we'll go to Patrick Pinschmidt with Merrill Lynch.

Good morning, guys.

How are you doing, Patrick?

A quick look at the sort of the core operating expenses, sort of the implied guidance for the fourth quarter indicates a small uptick versus the third quarter.

Does this relate to some of the INET order book integrations, expenses there that won't be in the non- operating bucket?

The one thing I'll say is the fourth quarter has traditionally been a quarter where our marketing spend increases.

That will continue again in 2006.

Yes, that's an important part of it, and I think you could also infer from our guidance that our nonrecurring would increase a little bit in the fourth quarter over the third and that would be -- what those would be would be additional charges as compared to the third quarter for the technology road map and expense that we would take in connection with single book.

But the key delta in terms of operating expenses, it would be the marketing side, right?

Yes, exactly.

I mean, everything else is, I think, under control and I think if you look at where we are in terms of core operating expenses, where we are this quarter as compared to prior quarter, we're down about $6 million, and that's due to a reduction in bad debt through more better recoveries and better collections and continuing declines in computer operations and depreciation and amortization as we continue to execute on the road map.

Okay.

And in terms of the INET order book integration you mentioned sometime during the quarter, can we ballpark that maybe mid quarter, year-end or -- ?

I think mid quarter is a good estimate.

We started this week.

We have, I think, 20 stocks. plan to go to 200 next week, and we evaluate the progress.

But mid quarter is a good guess.

Okay.

Thank you, guys.

We'll go next to Christopher Allen at Banc of America Securities.

Hey, guys.

Solid quarter.

How you doing?

Just a couple of questions.

Can you give us an update on the recent increase in listing fees?

I know you guys go through the SEC approval process [inaudible] that?

Yes, would say this.

The right way to think about that pricing action is really first and foremost of us bundling in additional services and really redefining what a listing product is.

So we made a number of different acquisitions and set up a number of different joint ventures in the last several years and this represent the first time we're bringing that into the core product set.

So we're very excited about it.

It represents a win-win where our customers get additional value and it represents additional revenue for us.

And when should we think about timing on that?

We're shooting to have it effective with the 2007 billing cycle.

And then just on the price increases, I mean the price changes that came across this morning in terms of your DOT routing caps for New York-listed orders.

Just what kind of prompted that, you lowered the caps for checking the book and for not checking the book and also changed the liquidity rebate a little bit.

I'm just wondering what was the thinking there?

The first thing I would direct you to is that our monthly cap changes really is a result of our tremendous success in offering DOT routing to our customer base.

So we fit within the NYSE cap and to the extent that we have more customers who want to use us for their DOT routing, we have the ability to pass those savings on to those customers and you see our normal type of customer will have their maximum reduced from 60,000 to 25,000 per month and then somebody who uses us just for DOT routing from 100 to 75,000 a month reduction.

So just indicative of the success, we have the ability to, I think, please our investors by having incremental revenue while also driving down the cost for the market participants.

On the other side, with respect to the added liquidity tier, clearly we want to incent people to work both sides of our market, that is, to provide liquidity and also to remove liquidity.

So if somebody is not providing any liquidity to us, their rate will in fact go up.

But they have a self help where they can provide liquidity and go down to the $0.07 per 100 share rate.

So we think it's a wise pricing move and look forward to a positive result in the marketplace.

Just based on third quarter volumes from our NYSE-listed, would the change in caps have materially impacted the revenues?

I wouldn't classify it as material but I think it will be a positive impact.

Great.

Thank you very much.

We'll go next to Josh Elving with Piper Jaffray.

Good morning, nice quarter.

Quick question regarding the guidance for the full year.

Does that include any potential of a London dividend in the fourth quarter?

No, it does not.

We did have a dividend that was declared and paid and we booked that in the second quarter but at this point in time we are not including that in our guidance for the full year.

Okay and then second of all, as far as the INET charges are concerned.

They were a lot lower in the third quarter than I was expecting.

How far through those are we and how much do you expect left in the fourth quarter?

I think you can infer a little bit from the guidance that we will go up a little bit in the fourth quarter where we should probably be more, a little bit north of five or so, five to six, and then I think picking up on an answer Bob gave to an earlier question, as we go to single book, the road map implementation does continue from '06 into '07 so we would expect to see some additional charges in the first quarter of 2007.

When we announced that we have completed the conversion to single book, you could reasonably expect that three months after that, we will be retiring certain legacy systems.

They will no longer be required.

So clearly there would be a one-time charge as we affect the retirement to those legacy systems.

But we are definitely very far along on it, executing on-plan, clearly more than halfway done, and as Bob said, it will continue into the first quarter of next year.

Great.

Thanks.

And I guess on the real estate charge, was that a lot lower than you had expected at 0.5 million versus 5 or 6 million, I think, is what we were expecting before that?

No, that was actually about what we expected.

In the second quarter, we took a charge related to our sale of our data center in Connecticut and --

I thought that was going to be booked in the third quarter.

Right.

So that's really just a timing situation.

It came in basically a quarter earlier.

Great.

Thank you very much.

Thank you.

And we'll go next to Daniel Goldberg with Bear Stearns.

Good morning.

In terms of the listing fees, you recently raised them, which I think you mentioned earlier.

But I'm just curious what was the thought process there?

I guess we would have expected that you guys could have raised them more particularly on the larger cap gains versus where your prices are versus the NYSE.

Understand.

We don't really see this as a raise of the price, per se.

We really see it redefining the product.

We've added a number of different capabilities into the product.

To the extent that a listed company avails themselves of a significant number of those products, it will certainly be incremental value to them.

If the company chooses not to use any additional products and/or services, then it will be a price increase.

But our goal is obviously to get the customers to use the additional products and services as part of our strategic desire to represent a more and more of an important supplier to our listed companies.

So it's an important strategic move for us.

Okay.

And then second question would be regarding non U.S., not necessarily on the consolidation front, but opportunities I guess organically to grow with the changing regulation and it seems like a more prevalent opportunity for crossing networks.

What are your thoughts there potentially building out your crossing network outside the U.S.?

The first thing we think about is how many opportunities we have here domestically in the businesses that we have chosen.

In each and every one of our businesses that we pursue today, really have an exciting growth environment that they're competing in.

In addition to that, in the quarter, as you know, we announced that we are getting into the options marketplace.

And I think in true NASDAQ fashion, when we say we're going to do that, we're quite serious about it and we'll spend significant time and effort in making sure we execute that plan well.

And we obviously are continuing to be quite proud of the progress we've made as we've transformed this organization.

So we don't have any direct comment on what it may or may not mean for crossing networks.

We certainly are aware of what's transpiring.

We're aware of the big boat initiative but it doesn't really come into our day-to-day orbit.

Okay.

Thank you.

We'll go next to Roger Freeman with Lehman Brothers.

Hey, good morning, Bob, Dave, Vin.

I just want to come back to pricing for a second.

So with the announcement this morning, I mean, 100,000 shares as a minimum threshold to get the better take rate is a very low threshold.

I'm wondering, are there specific customers that you've been trying to I guess impact with that that have basically been trying to use you for cheap access to the NYSE without providing liquidity?

Well, Roger, I think you can can probably deduce that there are other market centers who are not providing liquidity to us and if they continue to choose not to, then their transaction rate with us will increase.

Okay.

And I guess just sort of tied to that too, given, so if you look at the last couple of weeks since the [ARCA] pricing went into effect, paying a $0.20 rebate, you basically continued to gain share in New York despite paying a far lower rebate.

I'm wondering how you think about that.

Obviously there's an incentive to go over to ARCA but you continue to gain share.

With is it do you think that is attracting the order flow to you?

I think many market participants look at the pricing in an intelligent fashion and when you do that, you clearly have to focus not on just one aspect of the pricing but on both. en you look at our net capture rate, it's clearly the most attractive pricing policy in the marketplace so that's our core value proposition.

Got it.

Okay.

I'll jump back in queue.

We'll go next to David Grossman with Thomas Weisel Partners.

Good morning, thank you.

Looking at just the sequential increase or decline in volumes, taking into consideration May and June were relatively strong, did the third quarter seasonality, was it pretty much in line with what you were thinking and historical trend or did that surprise you at all?

No, I think it was very much in line with historical trends, so no real surprises there.

Okay.

And then just I know David, you talked about the pretax margins.

I think your operating margin was around 40% as well during the quarter.

And now that you're pretty far along in terms of the INET integration and your cost restructuring program, can you give us any insights how we should think about what an equilibrium type of target operating margin should be for the business?

Well, I mean, this question gets asked all the time and I try various ways of answering it without really answering it.

I think at this point obviously where we are with operating margin pretax margin, they're one in the same as I look at that at 40%, is definitely a major improvement about over where we were last year and then in terms of where we go, I think you look at this ---you look at NASDAQ with its technology, you look at the fact that we are in many respects a transaction processing business.

It's really a question of how much volume we can get over our systems and there are plenty of opportunities there with New York.

As we said with New York, we have a number of ways to win but they're all very difficult to predict.

And the biggest one is volume and there's also market share in terms of where that goes and also how things play out in the back and forth on pricing.

So it's hard to say but clearly what we've talked about here today is there's plenty of upside in every single business and there are still opportunities on the expense side as we integrate INET, go to single book and drive the completion of the technology road map out through the beginning of next year.

Okay.

Good.

Thanks.

And maybe if I can just sneak one more in, Bob.

Can you just give us a quick update on the intraday cross and maybe a brief look at what your expectations are for that as you roll that out?

Yes, the intraday cross is certainly dependent upon the successful completion of the migration to single book.

So you could reasonably expect that within 30 to 60 days after the completion of the single book that we will introduce the intraday cross.

Thank you.

Next Mike Vinciquerra at Raymond James and Associates.

Good morning.

Two questions on the competitive front.

The first one back to the pricing side, I just want to get a sense for part of the success you guys have had at NYC I'd have to attribute to your ability to route cheaply to DOT in the event that you don't have the lowest or the best price on the stock.

I assume the NYC is looking at different pricing strategies that could kind of eliminate this loophole.

I also hear some big BDs are also doing something similar, kind of aggregating trades to hit the cap sooner.

So if they change price, you guys have shown quick reaction times in the past to that, do you have a Plan B, C and D behind that in the event that they took the cap away or did something of that nature?

We always know we have to have a Plan B. We frequently have a Plan C, but I'm not sure about D and E. [ LAUGHTER ] So the answer is yes.

Okay.

Fair enough.

Second competitive thing, are you guys have kind of had a monopoly on the print facility for a while.

I know New York has announced that they're going to come out with one.

I think Boston was the other one who said they're going to offer that.

Any concern on that?

What -- can you provide us with a sense for what the revenue generation from the trade print facility is today and what competitive advantage you might have over these new entrants?

Yes, one is I would say this.

We have to recognize that the print facility business for NASDAQ is not material and on the reg NMS, the revenue opportunity in operating print facility goes down by a substantial percent because quotes are valued more highly than trades under reg NMS.

So it's not material today.

It's a shrinking pie.

We have obviously a long record of success as a trade reporting facility.

It has been part and parcel of the NASDAQ marketplace since we were formed 35 years ago.

So we think we know how to do it well and how to price a competitive service so we look forward to competing.

Okay.

Thank you, Bob.

We'll go next to Richard Herr at KBW.

Hi, good morning, guys.

Congratulations on a good quarter.

I guess my first question is really on hybrid.

I'm not sure if you mentioned this before, but could you walk us through how much routing New York is that was doing to you on ASP and EOP?

Yes.

We're not getting into precise numbers like this but I would say this.

We certainly have seen the routing to us increase in the hybrid stocks.

But I will echo back to what I said in the beginning.

It's too few stocks in too short a period of time for us to draw any reasonable conclusions.

Okay.

That's helpful.

And I guess second question would be with the new guidance, is the interest on your SEC fees that you collect from members already included in the new net income guidance?

Yes, it is, Richard.

Okay.

Thank you very much.

Next Moshe Katri at Cowen and Company.

Thanks.

Again, great quarter.

Looking to 2007 and I'm obviously we're talking about moving into a single book and the continued implementation with the road map, the technology road map, would you say that the cost savings from both of these initiatives are going to be a bit more back end loaded in '07 than front end loaded?

I think we're saying just the reverse, that the road map is an effort that we have been working on for the last couple of years and we obviously brought our expenses down by a tremendous amount as part of that initiative.

INET, the acquisition of INET, fit nicely into that road map where we were going to stay on that road map, come out of it with basically the same cost result but with better technology and so as we said, we go to single book and then we are able then to take the final steps in the technology road map of exiting the platforms that we were previously on and that will take us into the first quarter of 2007.

So there would actually be more -- you'll actually see them hitting in the early part of '07 as opposed to being back-ended.

So the outlook seems to be a bit better than at least what we were looking for in terms of cost benefit?

I don't know if I'm--I don't know if we'd say that.

I think what we're saying is we're executing on plan and we expect it to continue as planned into '07 and conclude.

And then the second question, can you elaborate a bit about your recent corporation agreement with JASDAC?

What does it mean down the road?

Yes.

It was a memo of understanding or memo of cooperation and we're working with them on a number of different fronts but I would just caution that those discussions are at a relatively early phase.

Thanks.

We'll now go to [Scott Appleby] with Deutsche Bank.

Hey, guys, thanks.

Really nice quarter.

Thank you, Scott.

Listen, I'm trying to get a handle on these expenses, Bob, and one of the things that I don't quite understand is how depreciation amortization dropped by almost 7 million.

David, is that number going to continue to go down or some of the costs that you need to write off in Q4, is that number going to go back up?

Well, I'll generally respond to that.

As a general measure, it continues to go down.

Obviously that includes the one-time charges that we take as you were saying.

And infer from our guidance that our one-time charges in the fourth quarter are going to be up maybe 1 million or 2 over what they were for this quarter.

But directionally, D&A does continue to go down because we're putting -- we're continue to accelerate for depreciation.

So the ongoing run rate is lower.

And as I said earlier, as we execute on the road map and continue to work on that through the fourth quarter and into the first quarter of next year, it's going to continue to stay on that downward trend.

Okay.

So when you have write-offs, where do they go?

Do they go -- I just -- I'm sorry, I can't make heads or tails out of these expense numbers.

Well, it depends on -- when we try to give -- I gave some of that in -- I talked about sort of where we put all this geographically on our P&L but the write-offs, the accelerated depreciation is in depreciation.

Write-offs tend to go into other expense.

Okay.

Fair enough.

Just lastly on the revenue side, there was a fair amount of discussion earlier in the year about -- correct me if I'm giving this a wrong name -- but a research network or an independent research network where you would provide research to the 3,000 companies that are public but without research.

Where are those efforts today?

We're making progress.

We signed up our first customer I guess two or three months ago.

I think we're closing in on customer number 10.

And we have published, I don't know how many copies of research as of yet, but it's early days.

The hard part is really behind us and we're making progress right now.

Bob, how is that product marketed?

We have an independent research network.

It's a joint venture with Reuters and they have their own distribution capability.

Next, Howard Chen at Credit Suisse.

Hi, good morning.

Congrats on the quarter.

Bob, you and Chris have spoken about positive customer reaction to your value proposition on the NYSE-listed business before, and we can clearly see it in the market share numbers, but and your competition has stated that there's customers out there that have said that you're competing with them on the aggregation front.

Can you share your thoughts here?

Are you hearing this from your customers at all?

No, we're not, and we want to make it very clear that we do not compete with our customers.

Our goal is to build an electronic liquidity pool that represents a cheaper, faster, fairer alternative than the NYSE and that's what we're about.

So to the extent we route orders to the NYSE floor, that's obviously a means to that end.

So I think our customers know and appreciate that and you can see that by the tremendous progress we've made in the business.

Right.

Thanks.

And my second question, on the revised gross margin guidance for the balance of the year, what have you factored in in terms of near term market share slippage from the single book consolidation on the NASDAQ listed side and do you glean anything from the few names you've shipped it over so far?

I know your longer term thoughts that you think single book consolidation is a good thing, but I just want to get a sense of what you're seeing and baking in, if anything, for the near term?

Well, again, we don't comment specifically on those drivers.

I would just make a general comment that we see with New York the trend is definitely -- has been in an upward direction and all signs would continue to point to that and I think with NASDAQ, I think if you just look to see what's happening, that has stableized to some degree and that's obviously what we expect to hang onto.

Okay.

Thank you.

Next Rich Repetto at Sandler O'Neill.

Okay, I get a real second question here now.

Bob, NYC volumes are up more year-over-year than NASDAQ and apparently I would -- I think you would agree that because there's more electronic trading of NYC stocks and you're taking share there.

And I guess my question is, is how far -- you guys probably have the best contacts, the best view on the algorithmic traders.

How much more do we got to go?

Are they -- ?

We're getting estimates from some pretty knowledgeable people that the volumes are there, they're already there playing and we have other people saying no, there's still another double here left.

I'm just trying to see what you think?

That's a good question, Rich.

I think 60 days from now, 90 days from now, we'll have a basis to make a more intelligent projection.

I would just say that anything you hear today has to be in the context of guesswork.

We obviously in this call are not in the business of guessing.

I would say this, as we look forward to '07, we see that the NYSE volume will grow at a faster rate than the NASDAQ volume and that's probably as far as I can take it with respect to guesswork.

I guess the follow up to that would be, how many of your large algo traders that provide significant liquidity in NASDAQ stocks, how many are engaged in trading NYSE stocks on your platform, even if it was just a general percentage?

A half of them trading listed stocks of the large algo players?

Well, Rich, I would say if I answered the question the way it's asked and gave you a percentage, it could be misleading because with the large algo players as a few that represent a disproportionate share of the volume.

So I would just say this.

Clearly as New York implements hybrid marketplace, there will be more players who can run their models against an electronic market that responds in the format that they need to be successful.

And because of that, it's our prediction in '07, NYSE listed volume will grow faster than NASDAQ listed.

Okay.

Thank you.

Next Christopher Allen at Banc of America Securities.

Hey, guys, just a quick follow-up on the clearing and brokerage fee question earlier.

I was just wondering if you could give us a sense of what's the magnitude within that line of clearing relative to the SEC fees?

Well, the SEC fees were $45.8 million for the quarter.

That's certainly, that's one number that I already gave.

Got you.

Okay.

Thanks.

And that obviously goes up.

Yes.

As we get down through our exchange.

But that's about all I can give you to answer that question.

But I think that probably is enough for now.

Great.

Thanks.

Next Roger Freeman with Lehman Brothers.

Hey, just a couple of follow ups.

On the transfer of the triple Qs over to PowerShares, you suggested that I guess the economics there would offset the loss in licensing fees.

So are you just getting higher basis point percentage on the front?

I think you were getting like four basis points.

We are getting a higher basis point.

But I think the key part of that announcement is that as we transfer sponsorship of the Qs and really all our ETFs to PowerShares, we expect to have a leverage effect from their distribution network.

We do not have a distribution network.

It does not make sense for us to build that type of network.

And certainly the product is better under a sponsorship of somebody who does have it.

So we think the overall health of the product will improve and clearly we're not upset that our basis point also increases.

Got it.

Thanks.

And then I guess lastly, I just wanted to come back to these trade reporting facilities for a minute.

I mean, Bob, what's your view on this?

Does this end up becoming a zero sum game for everybody?

If the economics are immaterial to you, why do these other three want to get into it and possibly others?

If everybody is just rebating half the revenue, doesn't this get to a point where nobody is making any money in it?

Well, obviously, Roger, I can't comment on what the motivations of others might be.

I would leave you to question them directly.

I'd just highlight that it clearly is not a growth business in and of itself.

It's percent of its share of NASDAQ has declined on a very steady basis for a long period of time right now and there is a large regulatory burden that's associated with running a trade reporting facility.

So one of the counter-intuitive positive impacts to NASDAQ and having more competition is that the actual regulatory costs to us of running our TRF can decline as that cost is split among multiple participants.

So you have that dynamic and the second dynamic which is I mentioned previously is that the revenue share goes down.

I will just conclude by saying it's not material to NASDAQ today in any meaningful way or even in a small way.

And we'll just go forward and compete in that small area of our business.

Got it.

Okay.

Thank you.

Next, Mike Vinciquerra at Raymond James and Associates.

Just one numbers question.

I know, David, you addressed this in your remarks but I didn't catch all of it.

The access service revenues up again this quarter, what's driving that and what's the expected kind of run rate for that particular line?

When David is looking at the numbers I'll just say that with our conversion to the single book, we think that will have an impact on access services and it would be our prediction that we'll see some decline in that in the quarters to come.

Yes, I was just looking for the numbers but I think what I talked about was there was just -- there was just better adoption, there's more adoption from the second quarter to the third quarter in terms of the products.

But we are continuing to transition off of products and as we go to single book, we do expect that there will be some reductions there, just in terms of the number of connections that we're going to have.

So that would give you a sense of why it's where it is and that it will be trending down a little bit from where it is now.

Okay.

Thank you.

Next Drew Figdor at Arbitrage Associates.

Hello?

Good morning.

Hello?

Hello.

Your line is open.

Please go ahead, ma'am.

Hello?

Yeah, I can hear you sometimes.

I can't hear anything.

Okay, Operator, we think we were waiting for Drew Figdor.

Okay, well if's not on the line, I think we're -- Operator?

Yes, I'm here.

We thought we had one more in queue for Drew Figdor.

One moment.

We'll try and go back and open his line.

I wanted to see what you thought of the opportunities to do financing in these markets with the stock having moved up and the great performance.

How do you look at sort of when is the right time to do some of the financing that may be needed for the potential purchase of the London Stock Exchange?

I think we missed the beginning part of your question.

But Drew, can you repeat the beginning part?

Yes, it seems that clearly the market has gotten better and the performance, your performance has been terrific so it seems like my question is really how do you view financing these days, in particular for the potential purchase of the London Stock Exchange?

But it seems like do you view it as debt versus equity and what is your view of that opportunity?

Well, we almost made it through the whole call without a question on London but I'll just say this.

We continue to be very pleased with our investment in London as we have said on a repeated basis, that we recognize that global consolidation is a marathon, not a sprint, and we certainly don't have any comment on financing and the changing conditions.

But we do certainly appreciate the growth in our stock price and I think the recognition of the execution of the business that we have in front of us and our growth prospects.

Congratulations on the quarter.

Thank you.

Okay, Operator, I think that's it for questions.

At this point if any members of the media line, we'll open the line up in a minute for media questions but I'd like to thank everybody for joining us.

Thank you.

We'll talk to you in three months.

[OPERATOR INSTRUCTIONS].

We'll pause for just a moment while we assemble our queue.

We'll go first to [Isabel Cleary] with Financial News.

Hi, nice quarter.

Congratulations.

How we doing there, Isabel?

Okay.

When you started at NASDAQ about three years ago, you seemed very reserved and very cautious.

Lately when I've seen you at events you look like very confident.

So I was wondering whether you could tell me whether there was one particular event that made you feel that NASDAQ had turned the corner?

Definitely there's not one particular event, Isabel.

I think the success story here is just continued and sustained effort over many days and many months and now several years.

What about your play with the LSE?

Any which way you look at that it was a very important play.

Was that the event where you felt like this is starting changing things for NASDAQ, it really puts us in the big league worldwide?

NASDAQ has been in the big leagues worldwide for many a year now, Isabel,so it's a wonderful franchise.

The franchise is doing well.

We are particularly proud of the performance in this quarter.

As you know, summer is a slow quarter and for NASDAQ to have a record earnings quarter in the third quarter is I think something that the, all the stakeholders of NASDAQ should be quite proud of.

So you don't want to say anything about the LSE?

No, I think I've said before, we're very pleased with our investment, we continue to be pleased with it.

I would say that we're certainly not a seller of the LSE shares.

We're very pleased with our investment and like I said, it's a marathon, not a sprint.

Thank you so much.

[OPERATOR INSTRUCTIONS].

We'll go next to [Gaston Cerrone] with Dow Jones.

Hi, how you doing?

Gaston, I saw your photo in The Financial Times the other day.

Very exciting.

I'm sure it helped spike sales. [ LAUGHTER ] Very quickly.

I actually have three questions.

One of them is pretty cosmetic, I'm sure.

Dave, I was wondering this investment in the LSE started at 25.1%, 25.3%, now I just heard that it's 25.4.

What changed the span from 0.1 to 0.4?

The fact is that the London Stock Exchange did announce a share buy back plan.

They have been at various times buying in shares so the total outstanding is going down.

Okay.

So that's what the change between the 0.3 and the 0.4 is they keep buying shares.

That is all that it is.

Okay, okay.

I just wanted to make sure.

And then the other thing, Bob, sort of more market trends.

It seems like the number of IPOs really took a hit this past quarter.

It was only 20 versus 35 in the last yarr and 46 a year ago.

Can you talk a little bit about what kind of trend you guys are seeing there?

Yes, that's a great question.

The third quarter was certainly not as strong as we wanted it to be with respect to IPOs.

For the year, we're on track and I would say this, that the fourth quarter has been very strong so far and we expect that we will continue to see that strong fourth quarter through the latter part of December.

So you expect the four quarter to be stronger than this last quarter in regard to IPOs?

Yes.

And lastly, can you walk me a little bit through the impact, expected impact of hybrid?

I mean there are a lot of questions about that during the analysts call but it was a little bit disjointed.

Can you walk me a little bit through?

It sounds like it will actually be a positive for you guys whereas the NYC sees it as a way for them to get back into the electronic trading game.

So just curious.

Can you talk about that a little bit?

Sure.

We originally thought that the hybrid market was a necessary condition for us to be successful in building our trade matching of NYSE-listed stocks.

Our success was greater than we had ever anticipated pre-hybrid and we revised our viewpoint to say that hybrid would be an accelerant to our progress but obviously was no longer a necessary condition.

We stand by that.

We're anxious for the roll-out of hybrid.

We see it with limited stocks for a limited period of time.

We're encouraged by what we see.

The sooner they can roll out hybrid, the happier we will be.

Right, but how does it help you?

Why would it sort of help your growth?

If it's a way for them to trade more electronically, how would it help you?

It's always easy for an electronic market to deal with another electronic market and if that's the case, then it's easier for market participants to deal with multiple electronic markets.

So when you're in a floor-based market where you have an uncertain outcome with respect to timing of execution and the manner that the execution is going to be filled, it makes it very hard for our market participants and us to basically interact with that marketplace.

What you'll see is hybrid rolls out is the market participants will come to realize that the New York Stock Exchange is basically an ECN and it's an ECN that's not very fast or very efficient.

And then therefore they'll send more trades your way because they want to trade more electronically?

Is that what you're saying?

What's that, Gaston?

So basically they'll be encouraged, if they're going to trade electronically, they'll be more encouraged to do it through you?

Is that what you mean?

Yes.

We have a common method of competition at that point in time.

To the extent they're electronic and they're a slow ECN that actually goes into slow mode at certain times during the day, that's somebody we welcome competition with.

Okay.

So they're basically an ECN that's not very fast, they're not very efficient, even with the fully rolled out hybrid?

Exactly.

Yes.

Their technology from what we can see today as an ECN is certainly not up to what the industry has developed over the last several years and they also are putting into their model as I think you're aware, Gaston, these situations where they essentially turn the switch off and go into manual mode.

So we love competing with a competitor who is slower than us in normal situations and also has these unexplained situations where they go incredibly slow.

Okay.

Great.

Thanks a lot, guys.

Next [Edgar Ortega] with Bloomburg News.

Good afternoon.

I was hoping you could elaborate a little bit more on what your plan changes are in terms of listing fees.

Understand you're trying to provide a different set of services, piggy backing on your acquisitions earlier, but any details you can share about the sort of bundling or how you might go about adding or offering these extra services as part of your listing fees?

Yes.

Edgar, it sounds like you understand, I think, a lot of what we have done.

It's fairly straightforward.

We have a menu of services that are available with the listing product today.

And our customers can choose to avail themselves to use any or all of those services, depending upon their particular set of circumstances, and these services are valuable services.

They come from the acquisitions that we have completed and we think it's a very important redefinition of what it means to have a listing product.

But I mean, it's sort of a complete example you might be able to offer if you listed includes the press release distribution or is it really just kind of a menu of options or -- ?

Well, it's definitely a menu of options and as you know, we acquired PrimeZone so that will be a component of what we offered, Shareholder.com is a component of what we offer, pieces of Carpenter Moore are components of what we offer.

So it's things that we've done, pulled together in a logical fashion, presented in a menu of options for our customers to avail themselves of.

Okay.

Another question, just generally here of on the one hand just looking at the revenue numbers and everything with the acquisition it seems like there's obviously a big increase but seems like expenses kind of a running theme in the quarter, just trying to understand what you think and the expenses were a running theme in this quarter, sounds like you expect those to increase in the next two as you combine the books and you increase marketing expenses, so just trying to get a sense for whether you think you can continue kind of performance you had in this quarter in terms of keeping expenses under wraps?

Yes, I think when you think about expenses, obviously there are total expenses and then there are really what we view as the core ongoing expenses so let's just comment a little bit on those.

What I said in my comments earlier is that the core spending actually had declined $6 million from the prior quarter due to continued efforts on the technology road maps.

We saw D&A come down and computer operations come down and we also saw our bad debt expense go down as we had better collections and some recoveries.

As we go into the fourth quarter, we do expect that there will be a slight increase in our core spending as relates to marketing and we have typically had that increase in prior years where we do tend to launch the campaigns and increase our investment in our brand.

And then as we go into 2007, as total expenses could increase, will probably increase slightly from where they are now as we take more nonrecurring charges as we continue to execute on the road map once we get single book done.

But all of this is designed to drive decreases in core spending.

Okay.

And just a little more detail in terms of the severance you've paid over the last couple quarters, is there maybe a kind of a corresponding headcount number that you might be able to share?

Severance that we have done -- I'm going to grab the headcount number.

If you have another question, go ahead and ask it.

Our headcount we expect the end of this quarter was 910 but that was up from 887 but it's important to recognize here that we're making acquisitions.

These acquisitions are good profitable companies when we buy them and we basically as you've already talked about, we harness those into our CPG activities.

So we definitely are adding headcount with acquisition but at the same time controlling expenses.

Okay.

Great.

Thank you again.

I see there are no further questions so we'll conclude the call and thanks again for joining us.

Thank you.

That does conclude today's conference, ladies and gentlemen.

Again, thank you for your participation and you may now disconnect.