納斯達克交易所 (NDAQ) 2006 Q4 法說會逐字稿

Good morning, and thank you for joining the Nasdaq Stock Market's earnings conference.

All participants will be in the listen only mode until the question and answer session. [OPERATOR INSTRUCTIONS]

Your host for today'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 today to discuss Nasdaq's fourth quarter and full year 2006 results.

Joining are Bob Greifeld, President and Chief Executive Officer, David Warren, our Chief Financial Officer and [inaudible] General Council.

Following the 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 at Nasdaq newsroom website at www.Nasdaq.com.

If you have any questions following the call, just give me a call at 212-401-8742.

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

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

With that I will turn the call over to Bob.

Vince, before we get started I believe there is an echo on the line.

Operator, can you come back on, we do have an echo on our line.

Okay, sir, at this point I don't hear any echo.

Are you adjusting the speaker phone at this time?

The speaker phone has not moved and the remote mics are some distance away, so.

Okay, there is no echo on the audience line at all.

Great.

Then we will get started.

Okay.

Good morning, everyone and thank you for joining us today.

My comments today will cover our 2006 fourth quarter and full year results as well as our key initiatives for 2007.

I will also discuss the status of our investment in the LLC.

Following my comments, David will review the financials in detail and discuss our 2007 guidance.

Afterwards, we will be available for your questions.

When looking back at 2006, our improving operating and financial results point to a solid execution of our plan and the strength of our growth initiatives.

We have launched innovative new products and services and harness the potential of our acquisitions to date which have served to improve the competitive positioning and profitability of our company.

Our strong performance this year with operating income up 88% highlights our success in innovating and also maintaining our cost discipline.

It's a discipline that drives shareholder value and one that we will adhere to moving forward.

Now, let me review our fourth quarter results.

A successful quarter which completed a truly exceptional year for our company.

It is the most successful year since we began reporting financial results in 1997.

Gross margin for the quarter was $183.1 million, and represents an increase of 32.1% from prior year and 7% from third quarter.

It also extends our streak of consecutive quarters of top line growth to an impressive nine quarters.

Operating income increased to 68.1 million or 105.1% from the prior year quarter.

Our fourth quarter operating margin was 32. -- 37.2% compared to 24% from the prior year, demonstrating our ability to grow organically through continued innovation while at the same time quickly and successfully integrating acquisitions to drive profitability.

Net income in the quarter increased to 63 million.

An increase of 45.9 million from last year and up nearly 108.6% from the third quarter.

Included in net income for the quarter is a pre-tax gain on foreign currency option contracts of 48.4 million which David will explain in detail.

Now driving these strong financial results are the improvement we continue to make in the operations of our core business.

During the quarter, we completed the migration to our single book platform for Nasdaq listed securities.

It provides market participants with a deeper liquidity pool, improves system performance and greater order interaction.

We continued our success in obtaining switches from NYSE with ETrades decision to switch their listing to Nasdaq.

During the year, companies with a combined market cap exceeding 34 billion moved to Nasdaq from the NYSE marking the second straight year we were able to achieve a net gain of market cap.

OMA became the first Latin American privatized company to list on Nasdaq and we also captured 67% of all U.S.

IPOs for the quarter.

In the quarter, we also completed the acquisition of PrimeNewswire and that service has been fully integrated into our business.

We also achieved new market share highs in trading NYSE and AMEX listed stocks.

Matched market share for NYSE listed stocks increased in the fourth quarter of 2006 to nearly 14% up from approximately 5% in the year ago period.

Match market share for AMEX listed stocks increased to 25% in the fourth quarter 2006 up approximately 19% in the year ago period.

This strong performance in the fourth quarter caps a very successful year for Nasdaq.

We [incurred] the competitive positioning of all of our businesses allowing us to make dramatic improvements in profitability.

Our achievements during the year include receiving exchange approval from the SEC and beginning operations as a National Securities and Exchange, allowing us to finally complete the long process of separating from the NASD.

Integrating INET into our operations and realizing the synergies that result from migrating trading to a single book.

In the past 18 months Nasdaq has successfully integrated 2 ECN acquisitions completing our goal to have the best technology in the industry.

Within issue of services, we celebrated our 35th year as the largest U.S. electronic exchange by launching Nasdaq Global Select.

The market with the highest initial listing standards in the world.

Our success in attracting companies from other markets was extended.

As I already mentioned, we took over 34 billion in market cap from NYSE.

In all, 94 companies transferred their listing to Nasdaq from other venues during the year.

Truly an outstanding performance.

We broaden the suite of services we offer issuers through the acquisitions of Shareholder.com and PrimeNewswire.

Within financial products we expanded our license product offering beginning the year with 400 products in 30 countries and ending the year at 500 products in 35 countries.

And we witnessed tremendous growth in PORTAL, our processing service for 144A eligible securities. 2006 was the busiest year ever for PORTAL with nearly 2700 applications processed.

An interesting note is that during the year equity capital raise pursuant to 144A was approximately $200 billion, far exceeding the proceeds raised in the U.S. through initial public offerings.

And within market services, our market share and trading of all U.S. listed equities increased in 2006 with strong growth in NYSE and AMEX listed securities.

Finally, we continue to build the value of our proprietary data products with total view subscribers increasing by nearly 61% during the year.

Before I turn to the outlook for 2007, and our new initiatives, let me spend a few minutes on a recent offer for the LSC.

As I stated earlier, we have a very disciplined approach to making investments and have been extremely successful maintaining this discipline.

Although we are disappointed that our offer was not successful, we know that every asset has a fair value, our assessment of fair value was influenced by competitive forces that the regulatory change, known as MiFID, will introduce to the European market.

While the impact of MiFID is not clear and present to all market participants, our experiences with the changes to the competitive landscape after SEC regulatory moves made it impossible to ignore the potential impact in 2008 and beyond.

Many shareholders of the LSC were willing to tender their shares to Nasdaq at prices that our financial model, which reflected the impact of MiFID, could not support.

Many investors were involved with game theory calculations on how to extract the highest price.

In the end, the desires of these LSC shareholders could not properly influence our decision.

We chose not to win this bid.

While winning this bid would provide temporary satisfaction, it would not have been in the interest of the long-term interest of our shareholders.

Financially our investment in LSC has been positive.

The cost to buy our stake was approximately $1.3 billion and the current value of the asset is $1.5 billion representing a 13% increase in value.

Also, the cash generated from [FX] gains and dividends will more than offset the 2006 and 2007 interest expense associated with the debt we assumed to finance estate.

Our investments so far is cash flow positive.

Our total debt decreased by $100 million from the third quarter and we intend to make an additional optional prepayment of approximately $200 million next month.

Going forward, we are evaluating our range of options and for now we will keep all of our options open.

As the largest shareholders of the LSC, we plan to monitor the performance of our investment and the management of the team of the LSC closely.

The current management of the LSC has been successful in their stewardship of the organization and we remain supportive of their efforts.

However, we will not be timid about expressing our opinions.

Looking to 2007, we enter with a stronger core business from which to grow.

While we will continue to evaluate opportunities internationally, we will not lose focus on our domestic agenda.

In 2007, you will see Nasdaq making progress on a number of fronts, each focused on driving increases in profitability through top line growth.

We will continue to grow share in U.S. listed equities specifically in NYSE listed stocks.

Volumes in NYSE listed training continues to grow at double digit rates and our market share in NYSE stocks has increased [yearly] every month since we launched our program in June 2005.

Moreover, with our recent pricing change, our capture rate for NYSE trades has increased as compared to the average rate for 2006.

We also in 2007 will launch our equity and index options market.

This industry does 2 billion contracts per year.

It is growing at 30% per year with opportunities for new players as it shifts depending pricing.

We are confident that we can achieve the same success in the options market that we have realized with our initiative to trade NYSE listed stocks, and we have set a goal for ourselves of 20% market share in the medium term.

In 2007, we will also launch our PORTAL market.

A system allowing for on-line trading of securities pursuant to rule 144A.

The PORTAL market has the potential to be as significant to the capital markets as the founding of the Nasdaq Stock Market 36 years ago.

Our model will be a comprehensive offering including capital formation, trading, and financial data products.

We also will continue our success with launching innovative new products such as the IntraDay Cross, which we expect to roll out in the second quarter.

When fully launched, our IntraDay Cross will be an open access product that will combine the benefits of an anonymous crossing system with the continuous market and Nasdaq substantial liquidity.

We also will in 2007 continue to improve our market share for new company listings and will continue the efforts through acquisitions to broaden the range of products and services we offer.

So, there is much to do in 2007 with initiatives already on deck that can leverage Nasdaq strengths into significant opportunities for revenue.

We expect the exchange space to be a dynamic environment in 2007, and Nasdaq will be an active participant in both domestic and international activities.

We have successfully completed five acquisitions and built a strategic stake in the LLC in the past three years.

This level of activity will continue in 2007.

I'm excited about the possibilities and look forward to speaking with you about progress throughout the year.

With that, I will turn the call over to David.

Thanks, Bob.

I will start by reviewing our P&L.

However, 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 INET, which closed in early December 2005, Shareholder.com, which closed on February 1, 2006, and PrimeNewswire, which closed September 1, 2006.

Fourth quarter gross margin was $183.1 million compared to 138.6 million in the year ago period and $171.2 million in the third quarter of '06.

Within Issuer Services, fourth quarter revenue was $67 million versus $59.3 million last year, up 13% year-over-year and up 12% the prior quarter.

Driving the increase in Corporate Client Group is our expanding suite of services offered to listed companies, including Shareholder.com and PrimeNewswire, which are included in Corporate Client Service's.

Revenue from these services is up approximately 108% from last year and up 26% from prior quarter.

Within Financial Products revenues increased from prior year and prior quarter.

As previously reported, the recent outcome of two court cases has impacted Nasdaq's ability to collect licensing revenue for options traded on Nasdaq's ETFs.

As a result in the third quarter, we established a reserve for these revenues that we were subsequently able to collect during the fourth quarter.

Within Market Services, gross margin was 116 million, up 46.3% from 79.3 million when compared to last year and up 4.2% sequentially.

Within the Market Services gross margin increased $23.6 million or 52.3 from last year primarily due to the acquisition of INET and increases in our market share of NYSE and AMEX listed securities.

When compared to the third quarter, market center gross margin grew 3.5 million or 5.4%.

Increases from prior quarter are primarily related to higher trading volume and new fees for inbound orders.

Beginning October 1st, the SEC permit exchanges to charge for inbound orders that removed liquidity via ITS.

Included in market center execution and trade reporting revenues is $73.1 million in SEC fees booked up from 45.8 million in the third quarter and up $13.9 million last year.

Included in cost of revenues is a corresponding SEC fee that, for the most part, offsets the amount included in revenues.

And, as we discussed before, Access Services revenue declined from prior year due to the retirement of our legacy products, but customer adoption of new Access Service products has resulted in a 6% increase in Access Services revenue from the third quarter.

In Market Services Subscriptions, revenue increased $12.3 million or 45.4% from prior year primarily due to decreased sharing under the UTP plan.

During the first quarter of this year, INET began to migrate trade reports to the market center increasing our UTP market share.

Also, [NQDS], or Level II revenue, is no longer included as sharable revenue in the UTP plan.

Increases from third quarter are primarily due to higher total view and level 1 subscriber populations offset somewhat by higher UTP plan revenue sharing resulting from declines in market share of Nasdaq listed securities.

Now turning to expenses.

Fourth quarter total expenses were $115 million an increase of 9.1% year-over-year and 11.3% sequentially.

The year-over-year increases are primarily due to the recent acquisitions that I mentioned previously.

Expense increases when compared to the third quarter are primarily due to the full quarter inclusion of PrimeNewswire, compensation accruals, higher marketing spending for the fall campaign, and normal bad debt expense versus a recovery in the third quarter.

Included in the fourth quarter are $4.6 million of charges associated with Nasdaq's cost reduction program and INET integration.

As part of our technology road map, we recorded charges of $3.3 million in the fourth quarter all of it recorded to depreciation and amortization.

In compensation and benefits we took $1.3 million charge in severance and outplacement costs in the fourth quarter.

Included in fourth quarter is an unrealized $48.4 million pre-tax gain on foreign currency options contracts that we entered into to hedge the foreign exchange exposure on our bid for the LSC.

This gain had the effect of increasing our diluted earnings per share by $0.19.

As our offered expired this past week and this contract was settled, Nasdaq will be recording some expense in the first quarter since the dollar did strengthen slightly against the pound from year end.

As a result, we anticipate that we will recognize a pre-tax charge of approximately $7.8 million in the first quarter.

Also during the fourth quarter, we recognized $7 million in dividend income related to the payment of an ordinary dividend by the LSC.

Now turning to the balance sheet.

Cash and cash equivalents and investments available for sale were 1.95 billion versus 1.9 billion recorded last quarter and up from $345 million at year end 2005.

Our investment in the LSC is recorded at fair value of $1.576 billion.

This is against a cost of 1.335 billion adjusted for the May 2006 capital return.

At December 31, 2006, our unrealized gain on our LSC investment was $241 million, reflecting the appreciation of fair value in foreign currency.

Our debt level at quarter end was 1.5 billion, down from 1.6 billion last quarter reflecting an optional prepayment made in November, and has Bob has said, we expect to pay down our senior debt by approximately $200 million next month.

And now let me turn to 2007.

Our outlook for 2007 total gross margin is in the range of 755 to 775 million.

This guidance assumes relatively flat volume in Nasdaq listed securities and growth of about 20% in NYSE listed securities when compared to 2006 volume.

Conservative against other estimates but appropriate at this stage of the year. 2007 total expenses are expected to be in the range of 390 million to 410 million.

I realize that expenses appear to be higher when comparing our current guidance to the guidance we provided a year ago.

That guidance was based on the reduction in technology expenses we expected to realize following the INET integration and did not assume any acquisition or investment activity.

Let me spend a moment discussing some of the items that are included in 2007 guidance.

As discussed during our earnings call last quarter, we delayed the retirement of one of our legacy acknowledging platforms resulting in $11 million of incremental expense for '07.

We've also decided to exit the Phase 3 clearing contract that we have with SunGard.

Also resulting in an additional $11 million of expense in 2007.

The INET platform has the clearing technology allowing us to exit this contract.

This action will result in a reduction to our costs of revenue of approximately $2 million per quarter beginning in the second quarter of this year.

PrimeNewswire was acquired in 2006 resulting in annual expense of approximately 8 million.

Finally, we announced new initiatives such as our options exchange in the PORTAL market that are adding marginally to our expense base.

Bringing that all together we expect net income to be in the range of 180 million to 190 million in 2007.

Included in net income is the $7.8 million charge for the foreign currency call options that I previously mentioned as well as approximately $18 million in dividend income.

Now let me wrap up by saying that we are very pleased with our performance this quarter and for the full year, and I, along with Bob, remain very excited about the opportunities available to us, and now we are ready to take your questions.

Thank you. [OPERATOR INSTRUCTIONS] We'll go ahead and take our first question today from Rich Repetto from Sandler O'Neill.

Good morning, guys.

How you doing, Rich?

Doing okay.

First, just on the guidance, David, the 180 to 190 million in net income, does that includes all cost related to the LSC and I guess, assuming you carry the position for a full year or for '07?

Yes, that's the assumption in the guidance.

Okay.

The key point, Rich, just is, we maintain optionality with respect to the LSC stake, but the guidance we've given is just assuming that we have it.

I fully understand.

And, that is my second question, Bob.

The press has taken a nice little field day of trying to position this thing as a losing proposition.

I was going to just see if you could walk through what are your options and how you see the outcome or the benefit to Nasdaq of the different options that you have?

Yes.

Rich, it's impossible to go into too much detail.

I will just say that first and foremost we maintain optionality.

As I said in my prepared remarks, we will watch our investment closely.

We will watch the performance of the management team closely and we'll be timid about expressing our opinion.

There is a wide world out there, Rich, and as I think I made in clear in my comments, that we'll continue to do what we have done in the past.

We had five transactions done in addition to the stake building in the LSC in the past three years, and I think the past is prologue to the future.

Okay.

Maybe just one last question on it, Bob, because you did say some things in the prepared remarks that might have touched off a little bit of new information.

You sort of alluded to the fact that you wouldn't pay up.

You stayed disciplined.

That you wouldn't hurt shareholders, and that presumes that there was some talk and negotiations with people about a higher price.

And at least from the outside reports it wasn't communication with the LSC management.

Could you just expound on that a bit why the statements you wouldn't pay up where -- what was the basis for those?

In my prepared statements, and this reflects what happened in real life.

We had ongoing discussions with the LSC shareholders.

And those discussions obviously had an element of price to them.

We did not talk to LSC management or the LSC Board but we clearly, during the period of time, spoke to the LSC shareholders.

Understood.

But the -- so the rules of engagement here precluded anything from happening based on their conversations though, correct?

Yes.

Rich, I would say the bid has lapse and that's backward looking.

I think what's important in terms of us going forward is we will maintain the discipline that we have.

We recognize there was a temptation to pay more.

It's not what we are about.

As you know better than anybody, Rich, when you have a regulatory change such as MiFID coming in, it tends to reorder the competitive landscape and it was impossible for us to not to reflect some of that in our models.

And time will tell what the impact of MiFID will be.

Understood.

Understood.

I guess now looking forward with these -- the guidance that you gave for '07, one of the things that certainly on a investor's minds is BATS and market share issues.

I talked to one large order for provider yesterday that said he was -- had 115 million shares he was keeping on BATS even with the February -- I guess the point is, how do you see -- what is the way to combat, counteract BATS, and then what's the imbedded assumption, I guess you said flat market, I'm assuming flat market share?

Okay.

We said many times before that the SEC rules, Reg NMS, will certainly encourage competition in the space.

So we here at Nasdaq recognize that it's not our job to prevent competitors from forming.

It is the hallmark of a good and dynamic marketplace for all participants.

Our job is to make sure that we leverage our technology and the efficiencies of our technology with our scale of order flow to reflect a true value proposition for our customers.

And that's what we are intent on doing.

I think the pricing that we put in January and February will reveal itself.

Now what we cannot do is respond to business models that are not substainable.

It is not our job to respond to an unsubstainable business model.

So, our experience has been, if an organization is not profitable, in time you see that that organization will lose interest in the space.

So clearly we have a competitor who has chosen to lose money.

We respect that as a competitor strategy and we respect them as a competitor.

But the fact is, that it's not in the interest of anybody in the space to have efforts, exchanges, ECNs that are not substainable in the long-term.

So, what we are saying is we pay attention to it.

We are prepared to compete on a rational basis and we respect the competitor.

I think it's important to note that our pricing that we put in place in January is incredibly competitive.

At the higher tiers that Nasdaq offers our pricing is equal to the BATS pricing.

So, we are able to do that -- do that because we are, in fact, leveraging our scale, we're leveraging our technology efficiency and we can provide a return to our shareholders at the same time.

Understood.

One last quick black and white just question on the income statement.

David, D&A --

Mr. Repetto, will you please press star-one once again, please.

And Mr. Repetto, your line is back open.

Please continue.

Very last question.

The D&A went down quarter to quarter, we were expecting it to go up a little bit, just any color there?

And that's it.

Thank you.

Thank you.

Well, the color is that we were able to, as I said, the guidance that we gave on our expenses was the implementation of our technology road map, and we did accomplished that in a large measure in 2006, we did not see saving D&A and going to -- in particular, and you will see at times savings in comp ops and data.

Thanks, guys.

We'll now we'll take a question from Richard Herr with KBW.

Good morning, guys.

How are you doing, Rich?

I'm doing okay, how are you?

All right.

Just also maybe again on the guidance.

Does that include the LSC dividend income? [inaudible] number?

It's an assumption as I think I said about 18 million.

That could be a little conservative.

They've already declared dividend that would pay us 14.

But we are not looking to project beyond -- not that much more beyond what's already been announced.

Okay.

And David, last year I think when you gave us guidance, you guys were pretty conservative and I understand why that was the case.

Do you feel that once again on the expense side you are being a little bit conservative here?

It seems like the numbers are a little bit higher than we were expecting.

Well, first of all, we had tended to be conservative.

I think what we are trying to be this year is a little bit more accurate.

As we have worked on taking expenses out and of getting better systems here.

I think we were able to do that.

When I gave the -- when I gave some of the detail on guidance, I pointed to a number of things that occurred in 2006 that have us spending more for certain acquisition activity and certain investments.

And with respect to the Phase 3 contract, certain additional cost reduction initiatives that we identified in 2006.

So, I think that that reflects our best sense of where our spending is going to be for 2007 right now.

We -- there are certainly some opportunities to save.

And we will obviously be looking at those as the year goes on.

That's helpful.

And then if we could turn the course to strategic items.

I mean, notwithstanding -- Bob, what can you offer us in terms of other interesting things that appeal to you, not only the U.S. but globally.

I mean, Nasdaq has an outstanding franchise, in our view.

You've got -- you trade over 50% of the U.S. equity market and there is a lot of franchise value here.

We understand that London management doesn't want to talk to you.

But, are there other potential managements out there that do want to have a dialogue with Nasdaq and where do you stand on those?

The answer is yes.

And I think there is very few that really do not want to talk to Nasdaq.

So, Rich, in my prepared comments, it's probably as far as it can go, I think it was fairly direct.

I said, yes, we have a track record of doing transactions, and most importantly to our investors, we have a track record of doing them quite successfully.

We are very proud of the fact that we said we are going to get to a single book within one year of closing and we accomplished that.

So, there are opportunities out there, and it runs really across the spectrum and across the globe.

And we will be involved with transactions in 2007.

Thank you so much.

Thank you.

We will now move on to Scott Appleby with Deutsche Bank.

Mr. Appleby, your line is open.

Please go ahead if you have a question.

If you using a speaker phone, will you please pick up the handset at this time.

Scott, are you there?

Hearing no response we will move on to Ken Worthington with JPMorgan.

Hi.

Good morning.

How you doing, Ken.

A couple questions on the listing business, if I may.

First question is, you appear to be having some unusual success with Chinese IPOs.

What about your marketing effort in China is leading to this success?

And why is Sarbanes-Oxley, for whatever reason, not appearing to be having an impact on these Chinese companies?

Right.

A good question, and we were certainly very proud of our success in China.

I think we were closing in on 40 Chinese companies listed on our market, and we're also quite proud of the fact that they trade quite well in our market.

I think when we approached China, we have two structural advantages going for Nasdaq.

One is the obvious brand affiliation, companies in China want to be identified with American growth, innovation and entrepreneurship, and that's clearly speaks to our brand.

Secondarily, the Chinese companies tend to be fairly rigorous in their evaluation of the quantitative differences of the market.

And when we get into a quantitative discussion of how our market performs for investors, we tend to do very well.

So those two factors lead to our success.

With respect to Sarbanes-Oxley, when you have these companies that want to be innovative and growing, Sarbanes-Oxley really diminishes as a concern.

So we clearly have a sweet spot that we've identified.

The state owned enterprises in China Sarbanes-Oxley is a crushing blow to our efforts there.

But for the companies that really have a lot of growth in front of them they know how to put the processes in and can form to those restrictions.

Okay, thank you.

Second question is on the domestic listing side, it appears as though the number of companies that have migrated from Nasdaq to the New York Stock Exchange, start to increase in the second half of 2006.

What's behind this trend and anything that you see in the future that may mitigate that trend like we have seen in the past couple of years?

Well, one is I would not put on -- call it a trend.

Certainly any losses is one too many for us.

But I would say with respect to the future, what becomes compelling is the amount of volume that we are trading in the stock.

When we have traditionally competed for companies to switch from New York, we were involved with fairly lengthy discussions with respect to the market structure advantage and the spread differentials.

And that relatively arcane knowledge is only an interest to so many people.

But when you can speak directly to the fact that we are trading 40% of your stock even though you list it on the NYSE.

That information people can readily process and understand and wonder why if NYSE is so good that investors are avoiding them.

And then questioning why are they paying really the excessive tax to list on NYSE.

So, I think that's going to be a compelling message going forward.

And I will try the last one for a trend.

We believe that the trend in dual listing seems to be reversing, at least anticdotally, both domestically and internationally, do you see that as a trend and if so what is behind that?

Well, when you talk about our international efforts, you see there are pockets of great success, China being one.

We had some breakthroughs in India and Mexico last year.

And we continue to do well in Israel.

So I think it's really a country-by-country basis.

The main line European countries are probably the most difficult for us to get dual listings at this point in time.

It really depends on a number of factors, the maturity of the home market is certainly one of them.

We'll now take a question from Daniel Goldberg with Bear Stearns.

Thanks.

Good morning.

How we doing, Daniel?

Good, thanks.

Bob, is there any more color you can give us on some of your conversation.

I mean, you spent a lot of time over in London with LSC shareholders.

Anything more there that may have been a reason that they hesitated in terms of tendering shares other than just price?

Well, I think you can read the shareholder registers as well as I can.

The long term holders of the LSC had sold their shares to us prior to the bid or really simultaneous to the bid.

And the registers filled what is known as merger [aug] fliers and/or event players at this point in time.

There wasn't a lot of discussions with respect to the fundamental value of the enterprise.

There was clearly lot of game theory discussions going on.

And as I said in my prepare remarks, at the end of the day, that doesn't serve our shareholders well.

We were guided by really the drivers that we have to put into our model to get to a next net result.

And then, David, on the earnings guidance or expense guidance, just quick back [inaudible] calculation looks like about $1.20 assuming flat share count, is that -- or am I missing something because the consensus numbers are now closer to $1.50.

Just trying to understand that.

You need to -- you need to add back the interest expense with respect to getting it fully diluted.

That's the first thing.

Okay?

Okay.

And then I referenced a number of things with respect to our 2007 expenses that we do see as nonrecurring.

The $11 million expense that we will have on the HP technology.

Then the $11 million expense -- one time expense on exiting the Phase 3 contract which is expected to produce savings.

So, those are two of the large things that I referenced in our 2007 expenses that are clearly not a part of our ongoing expense base.

Good, that's helpful.

Then just lastly, any more information or update on the options business rollout?

How that's going?

Is there any early results that you've seen from $0.01 pricing that might be more encouraging for you and would you also think about acquisitions in the options space?

The first thing is we have, obviously, the system development proceeding.

And that's important to note that our market model for options will be very similar to the cash equity market model.

That is an open access, price time matching agent, and that simplifies our technology challenge quite dramatically.

The second point is we have filed with the SEC to gain approval to become an options marketplace and I think as we previously stated our goal is to be live with this by the end of the third quarter of 2007.

We'll now move on to Don Fandetti with Citigroup.

Hi, good morning.

Quick question.

Most of my questions have been answered.

On your guidance for matched Nasdaq volumes, would you view that -- are you being conservative or do you think there is some risk around that for the holding?

And what gives you the confidence you can maintain that going into a more competitive environment?

First of all to be clear on what I said, I was really talking about [ADV].

I did not -- I was not intending to go into additional detail with respect to match rates.

We have not given that in the past.

The only reason I went into volume assumptions is that I feel that in our modeling of '07 we are more conservative than some other estimates that are out there.

That's a long answer to your question, Don, which I feel like I really did not go into projections for market share.

Great.

Is there -- could we get a sense of sort of your conviction and your ability to kind of maintain the current matched Nasdaq volume?

Or just not prepared to comment on that.

We're not going to comment directly on it.

But, I think, with respect to competitive positioning it's important to note that of the established players we are by far and away the less expensive execution venue.

So [arcopellico] charges at the top end essentially five times our rate.

So we know what we have, that value proposition.

And we know that based upon our efficiencies and our scale we can provide a superior return to shareholders while being that competitive on the pricing side.

We are comfortable with that approach being the approach that will carry us through any competitive efforts that arise.

We'll now move on to Josh Elving with Piper Jaffray.

Hi.

Good morning.

How are we doing there, Josh?

Good.

Just one quick question on the -- within the segment data in the market services section, you look at the execution at trade reporting, looks like it jumped up quite a bit on per share traded basis.

I was wondering if you could maybe talk a little bit about what drove that increase and then also as well the brokerage and clearance fees?

Our brokerage and clearage fees, those are the SEC fees.

We collect fees 31A fees.

So that is a --

I heard you mention that before.

Could you talk a little bit more about that?

Is that just a fourth quarter item?

No.

That is an ongoing -- that's an on going requirement and has increased, obviously as we have become an exchange.

But that basically is a [inaudible].

So you will see in offsets approximately $70 million that is in both the gross revenue as well as gross margin. [inaudible] comes out of cost of revenues and so comes down to gross margin.

So I guess I'm just a little confused and it doesn't make sense, but if you just look on a per share basis from the third quarter to fourth quarter it looks like both the execution in trade reporting line per share jumped quite a bit as well as the brokerage and clearance.

So is that just -- was that just noted in the fourth quarter this time and it's going to continue on in a go-forward basis?

For instance, higher essentially top line, higher bottom line for higher cost where as the gross execution remains relatively flat.

Well, there are a number of other factors in gross execution.

But on your basic question, I don't know where the confusion is.

We're going to charge that certain fee and then we're going to basically conclude it as a cost of revenue as its remitted to the SEC.

What part of the question are we missing here?

I think we can cover that offline.

Thank you.

We will now take a question from Josh Carter with Goldman Sachs.

Hi, thank you so much.

Bob, just wanted to dig in a little bit more on the consolidation strategy.

Appreciate the comments that you intend to be active in '07.

I just wanted to see is this sort of product expansion strategy or continued scale within cash equity?

What are the main considerations that are driving that approach?

Let me say our policy on this, if we do a transaction, it has to, one, be strategically significant, and that can be broadly defined as leveraging existing operations.

So, the leverage point could be on the distribution side.

It could be on the technology side.

It could be on any number of things.

On the second point, the deals have to accrete to our shareholders within a reasonable period of time, for a typical transaction we look for accretion on a run rate by the end of the first year at a 12.43 price which was the price we put on the table for London.

The accretion was longer than our normal model of one year.

So, those are the guide posts that we use as we enter into discussions with any player.

So I guess you considering opportunities across -- across broad spectrums, whether it's within cash equities or product expansion opportunities?

Yes, I think cash -- the options marketplace is -- illustrates our thought process.

Clearly we have an opportunity to leverage the INET technology platform as we get into options.

Our cost to build is not that high.

It's obviously higher than we had -- we didn't have it in our guidance last year but still it's a reasonable number.

And in addition, we have relationships with the major players, the major order flow providers in the options world.

So it's a natural expansion for us.

We have multiple points of contact or leverage.

So you're going to find us making moves that are logical or not questioned with respect to its strategic synergies and its clear points of leverage.

That's helpful.

Thanks.

And that ties in nicely to second question.

I think I heard correctly that you said that your medium term goal for the equity options space is 20% share.

And I guess that sounded aggressive and impressive.

I wanted to see if you could maybe just flush out a little bit your confidence in that or how you came up with that goal and what you think will allow you to achieve that?

Well, it's certainly is a rallying cry goal for the troops, and we firmly think we can achieve it because the options marketplace will go through some basic changes in the years to come.

While you have seen increased electronics in the marketplace, those efforts have really been to solidify past practices with respect to market structure.

As the market transforms to $0.01 increments, you will see those market structures being less able to meet the requirements of the new world.

And that's where we come in, leveraging our technology.

Our technology will be in a position to handle any volume, whether that be market data volume or transaction volume associated with the options marketplace.

And it will be a clear and distinct advantage to come in to a new place, new space and a new time.

And so we put on the table that our goal is to get to 20% market share in the medium term.

And I imagine you expect to be fairly aggressive in pricing to accomplish that goal?

And again, yes.

And again, we can.

We were leveraging the platform that we have.

So the transaction business at the end of the day is a business of scale.

It's a business of keeping your costs low.

And as we consolidated to a single book in December, we are in a great position to go forward.

That's great.

And then final question is related to that just in a different realm within crossing, helpful to hear your comments there and your excitement about that opportunity.

Do you expect that you'll have more of a differentiated product there that will allow you to gain liquidity?

Or do you also intend to -- or maybe in combination, use an aggressive, sort of a low price leader strategy to break into that business as well?

Well, two things.

One, we expect to lead as a low price leader just to get an interest in the product and to get some behaviors to change.

But I think longer term, our structural advantage in that marketplace is going to be the tight integration of our crosses with the continuous market.

In the continuous market we have really the world's largest electronic liquidity pull.

So, the fundamental question is, how do you take the call from market across the market and have it integrated with the continuous market?

And that is what we will do and that will be our structural advantage.

Good.

Thanks very much.

Thank you.

Up next is Patrick Pinschmidt with Merrill Lynch.

Good morning, guys.

Hello, Patrick.

Obviously you've devoted a lot in the past year to looking at the European market and I guess, just, aside from the LSC, is there anything that you can do to leverage your platform in your post MiFID?

And if so, I guess I'm speaking kind of in line with stuff we heard about project turquoise, would that be incompatible with holding on to your stake in the LSC?

Good question.

One, I will try to give you as much answer as I can within the confines of the rules that we operate in.

I think it's widely known around the planet and including Europe that we have the best exchange technology that's available.

Clearly that technology is in demand by a number of different players and we are in the process now post the lapsing of the bid to consider all options.

One option obviously is to continue to hold the stake, the other is to do something else.

And I will have to say that at this point in time all options are on the table and we're not seeing things in an either/or type situation.

Okay.

Fair enough.

And then I guess, David, turning to some of the expense guidance, is it fair to assume the run rate expense level toward the end of '07 will be lower than the annualized guidance or will some of the incremental investment perhaps offset some the one-time expenses that you are expecting early this year?

Well, based on what I've discussed so far, we do have a number of one-times in the total expenses that we are guiding on.

The HP retirement, which is about $11 million.

The one-time charge to exit the Phase 3 contract which is 11.

Plus, we also have in total expenses approximately $8 million as a charge on the sale of the FX contract.

So, clearly those three things are not going to be on an expense base going forward.

I just need to --so based on what we know today, we would definitely see our spending on those facts coming out lower for next year.

That is definitely our goal is to continue to drive operating efficiencies.

So year end '07 all else equal we should be up quarterly run rate about 90 to 95 million?

I haven't done it on a quarterly basis.

But I think that calculation that you are doing sounds about right.

I do want to underscore, as I said in my comments today, that we will be active in 2007 as Bob has said.

We can't tell you right now exactly and specifically how that activity will carry forward.

Clearly, our expenses will need to change as to reflect that activity.

Again, on your question, based on what we know today, we would expect lower spending at the end run rate.

Okay.

And then finally in terms of the 20% volume growth on New York Stock Exchange listed shares, can you maybe give us some context around that?

I mean, are you seeing stuff now in the early going of hybrid that is maybe tempering some of the volume assumptions that most people were expecting maybe a few months ago?

I would say this much.

We have been, I think, consistently on the conservative side with respect to the volume growth we might see at a NYSE.

So, it's playing in line with what we thought, perhaps a tad late, but roughly in line.

Thank you, guys.

You're welcome.

We'll now move on to Scott Appleby with Deutsche Bank.

Thanks.

Hi, Scott.

Looks like you found the phone.

Sorry about that.

I had to call the trading desk.

There you go.

I wanted to try to nail down the -- actually the revenue capture.

Can you talk about that?

What you expect it to be in '07?

Because it seems like your revenues guidance is similar, but it's just the expenses that are going up.

Well, with respect to revenue capture on transaction services, we have not broken that out.

I would say this, that the pricing action that we put in place in January for transaction services is the first time we put U.S. equity pricing in place, represents an increased revenue capture for us on the NYSE side and probably a smaller revenue cash on the Nasdaq side, and depending upon how the volume plays out, that is probably to our advantage going forward.

But with respect to the expenses, I would definitely direct you to what David said.

We are, as compared to our thought process in the beginning of '06, we are funding the options marketplace.

We were funding the PORTAL market, which we have not spent too much time on today, which I think is the most historic event for capital market since the introduction of the Nasdaq Stock Market 36 years ago.

We have been presented with an opportunity to dramatically lower our clearing costs with determination of the Phase 3 contract.

So that's going to hit us for 11 million.

But each and every quarter we will save $2 million.

And as David mentioned, we did make the date for transitioning to the single book in December, but because of certain regulatory delays, the shutdown of the legacy systems was delayed until 2007.

So we certainly had a benefit from that delay in 2006, but it's an increased cost in 2007, I think the last question kind of got to the heart of the issue, as we exit 2007 our expense rate will be lower than the entry point.

You know, this is -- the PORTAL market is news to me.

Is this an answer to AIM?

I guess I don't really know what that means, what the PORTAL market is.

I think it's certainly will be competitive to AIM.

But understand the PORTAL market is a market that is a private market.

It is for qualified institutional investors to deal with 144A securities.

And it's an incredibly large market today that has little or no organizationed secondary trading.

It's a pure over the counter market.

So as I said in my prepared comments, it's kind of revealing when you think of the PORTAL market raising $200 billion in cash, cash equities last year, which is greater than Nasdaq and NYSE's IPO and secondary efforts together.

So this market doesn't have an organized way to trade.

We right now are essentially the registration service for it, and will be introducing trading capability in the marketplace, and we will introduce data products into the marketplace for the qualified participants.

And history being our guide, we see as think of this sufficiency transparency into the marketplace it tends to prosper.

So we are incredibly excited about the opportunity here.

And as a private market, the companies that choose to list on PORTAL do not have the regulatory burdens that you would have in a public market.

So certainly that will be, I think, very attractive to companies domiciled outside of the U.S.

Thanks, Bob.

Talk to you soon, Scott.

We'll now move on to Richard Herr, again, with KBW.

Hi, guys.

Thanks for taking my follow-up.

Two quick questions.

One, does the guidance include the higher -- the new listing fees, David?

Yes.

Okay.

And just secondly, forgive me if you kind of addressed this before, could you give us an update on current thoughts on Regulation NMS and what that means for Nasdaq?

We expecting Reg NMS to come out in the first phase in March, and on NYSE listed I think it represents an acceleration of our opportunity.

At first, a year ago we thought it was a necessary condition.

We have been pleasantly surprised and a certain way shocked with our success in NYSE listed prior to NMS.

But, when we go to full NMS we see that as an accelerant to our progress.

Thank you very much.

Moving on now, we'll hear from [Galita Washinski] from Sumitomo.

Actually my question was answered already.

Thank you.

We'll now move on to David Grossman with Thomas Wiesel Partners.

Good morning.

Thanks.

I'm wondering, David, do you happen to have the free cash flow numbers for the quarter and any kind of expectations for free cash flow in fiscal '08?

I will have to get that to you in terms of free cash flow.

I have not typically done a projection on free cash flow for the full year, and that's not something I'm going to look to do today.

But, I can give you where we were at the end of the fourth quarter.

And then in terms of the expenses, I was just wondering, are there any costs associated with the LSC bid that would be considered unusual and nonrecurring in the fourth quarter or in your guidance for next year?

There are approximately $18 million of expenses that we have for the bid that are right now on the balance sheet.

And as we continue to evaluate our options and continue to have discussions with our auditors on this, we need to be able to determine at the end of the day where those ultimately sit.

But, that is the -- that is the number that currently is on the balance sheet.

Okay.

And I know there are a bunch of questions about kind of the expenses going into '07.

But, so if you've got 11 million for the legacy platform and 11 million to exit the contract and 8 million for FX, so is that the $30 million roughly of nonrecurring expenses?

If that's the right gross number, how much of cost savings should we net against that in '07 to get kind of a net unusual number, if you will, for '07?

David, we will look at that, but I would just add, in terms of the numbers you mentioned, certainly the options of the PORTAL market, there is a increased development cost as we launched to go to market.

When you go to market, then your expenses may or may not go up or down.

But the nature of the expenses changes as you go operational.

But, obviously, when you go to market, you have revenue which we don't have right now.

Okay.

David.

We talked already about the fact that we'll save about $2 million a quarter on the clearing contract.

And I think that is the major initiative right now on the cost side.

We obviously are spending a lot of time this year, and our focuses really are on, obviously continuing to look for operating efficiencies, but really looking at things that begin to drive the top line.

Okay.

Great.

Thanks very much.

Thank you.

We will now take a question from Rob Rutschow from Prudential Equity Group.

Hi.

Good morning.

How you doing there, Rob?

Good.

Just a couple housekeeping items first.

You mentioned in the press release that there was some changes in the licensing fees.

I was wondering if there was some annual fees that were pushed into the fourth quarter?

It was $3.5 million for licensing fees that were pushed.

It was in the fourth quarter.

In the fourth quarter of this year?

Yes.

So, that explains then, if you look at it sequentially that's what explains the jump and the result of the collection on that reserve.

Okay.

And just so I'm clear that 18 million that you mentioned, that has not run through the income statement?

No, that has not run through -- that is on the balance sheet.

Then the increase in corporate client services lean quarter, is that primarily due to the acquisition?

Or is there some seasonal activity in there?

The increase in what, revenue or expenses?

Revenue for corporate client services.

Sequentially, you mean?

Yes.

Again, as I said, the biggest driver in that is the corporate services, is the services that we've acquired and introducing those to our listed companies.

Big change sequentially and even bigger change year-over-year.

But that should be a run rate going forward, I guess is the question.

Yes.

And then lastly, I guess, Bob, I think you mentioned that the LSC stake was essentially self-funding.

Can you just kind of talk about what your assumptions are there, and maybe if you can give us a little bit of guidance as to what you expect the debt level to be at the end of 2007?

Sure.

I referred to the fact that on a cash basis, which obviously is incredibly important, it is cash flow positive, and that's driven by the dividends at the LLC pays, and secondarily by the FX gain that we have realized.

So that cash flow positive situation will carry through into sometime in 2008.

Okay.

The question you asked about the actual amount of debt, can you say that again?

Yes.

Just wondering what you guys have in mind in terms of paying down the debt?

And maybe if you can give us some guidance as to what the level should be at the end of 2007?

If you're at 1.5 billion right now.

Well, yes, but look at the senior debt which is basically at 1. -- just a little over -- just a little over 1 billion, 1.60 billion.

I referenced the fact that we expect to make an optional payment of 2 million next month, so that will bring it down to roughly 800 million, 850 million.

So that is really right now where we would be carrying through the year.

However, I think the important thing to underscore is that, we certainly always have opportunities under the documents to make optional prepayments at any time that made sense.

So any follow-up on that?

Or that's, I think, the best answer to the question we have now is just you have to take into account the payment that we will make in March.

Okay.

That's it.

Thank you.

Thank you.

We'll now take a question from Rich Repetto from Sandler O'Neill.

Hi, guys.

One quick follow-up on the assumptions for '07, David.

You mentioned that your listed assumption was 20% up in average daily volume, is that correct?

Yes.

NYSE listed.

Okay, that's NYSE listed.

And what base are you using?

I'm going off -- up from the average of 2006.

Is that around 257 million shares?

We are talking about the overall market volume being up 20%. [multiple speakers]

Okay.

You've talked about -- so you haven't given us what your assumptions are in regards to your market share of that --

No.

Okay.

All right, that's -- that was my follow-up.

Thank you.

Great.

And, at this time there are no further questions.

Great.

Operator, this is Bob.

I just want a point to clarification.

With respect to our discussions with the LSC shareholders [inaudible] that we bid, I think it's apparent to all at this point in time that 12.43 was our price.

We put it out as best and final.

In our conversations with individual shareholders, they put higher prices to us and we did listen to them.

But as we said, at the end of the day we could not support and would not support paying a higher price.

So with that, I appreciate your time today and look forward to talking to you as the year progresses.

Have a good day.

Operator, we will end the analyst portion of the call, and as usual, we will leave the line open for the media, and we will begin that call in a few minutes.

Very good.

Thank you.