納斯達克交易所 (NDAQ) 2007 Q2 法說會逐字稿

Good afternoon and thank you for joining the 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 today, today's conference, is Mr.

Vince Palmiere, Vice President of Investor Relations.

You may begin, sir.

Thank you, operator.

Good morning, everyone and thanks for joining us today.

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

Following the prepared remarks, we'll open up the lines for Q&A.

If you haven't done so already, you can access the results press release on our website and at the NASDAQ newsroom website, NASDAQ.com.

If you have any follow-up questions, you can always give me a call afterward at 212-401-8742.

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

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

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

Thank you, Vince.

Let me start by saying that we are very proud with our second quarter results as they demonstrate our continued ability to grow our business and dramatically increase profits.

Net revenue increased 16.1% from the prior year period, and represent the 11th consecutive quarter of sequential growth, while our operating income grew to $99 million, a new record high for NASDAQ.

It's also 21.6% higher than the record level that we just reported in the first quarter of this year.

In the first quarter of 2005, we had outstanding results with operating income of $26.3 million.

Last year, we had outstanding results of operating income of $36 million.

This year, $99 million.

These numbers speak for themselves and they represent the tremendous progress that the team here at NASDAQ has achieved.

Our maniacal focus on executing our business plan has allowed us to grow.

Within Market Services, net revenue grew by 18.8% from the prior year.

This was driven by higher market share, higher match volumes and new product innovations.

NASDAQ became the largest single pool of liquidity in which to trade equities during the quarter, a truly significant milestone.

Our match market share of U.S.

listed equities grew to a record 28.8% for the quarter and volume matched in our systems grew 19.7% from the prior year, to a record average of 1.6 billion shares per day.

When compared with other major exchanges across the globe, NASDAQ experienced the highest growth in on book value traded for the first six months of this year, as compared to the same period last year.

Our on book value traded grew 55%, compared to 30% for the LOC, 46% for the Deutsche BORSE, 26% for URANEX and 19% for NYSE group.

Our success in gaining match market share has in fact come at the expense of the NYSE organization.

Prior to their merger as published in the city document, the combined organization predicted NYSE-listed market share of 80% for 2007.

It is currently under 60% with the floor of NYSE under 50%, for NASDAQ listed stocks the organization predicted touch volume in 2007 of 31%.

The current number is around 19%.

Our progress in driving the floor of the New York Stock Exchange into the history books is truly breath-taking.

But most importantly, it is a work in progress.

In July of this year, we have set multiple match records with respect to NYSE volume and we have in fact exceeded 18% on several occasions.

In addition, within our business, we have recently expanded our comprehensive suite of crossing products with a launch of the InterDay and post close cross.

We achieved another record day in the closing cross during the Russell rebalance on June 22nd, as 678 million shares, representing a record $11.7 billion was executed in the closing cross in a record 1.9 seconds.

We also announced plans to introduce an ETF market, supported through designated liquidity providers.

As the largest pool of liquidity, trading 52% of all ETF volume, we are solidifying our leadership position with this effort.

Our success is evidenced by the fact that many of the major specialist units and black box trading firms have committed to this program in addition to our traditional market makers.

Within data products, demand for our products continues to be strong with total new subscribers growing more than 50% from the prior quarter and NQDS subscribers growing more than 8%.

Also, our focus on product innovation was acknowledged, with NASDAQ being recognized by inside market data as the best data provider among security exchanges for the second consecutive year.

Within issuer services, we continued the rapid pace of product introductions within our corporate client services.

In particular, we see that the products that we offer now represent 20% or over 20% of CCG revenue.

And more importantly, they are very rapidly growing.

In the prior quarter, we saw that our revenue increased compared to the year ago quarter by 29%, and very interestingly, quarter on quarter increased by 12%.

So our pace of change, our pace of growth is actually increasing.

In the last quarter, we have turned our attention to products geared for the Board of Directors.

We offer one of the most comprehensive product suites for public company boards.

With the acquisition of Direct Desk, it's a product that will in fact streamline board communications in a dramatic fashion.

We also launched Board Recruiting, a very sophisticated matching system to help companies identify and recruit board members.

These services are in addition to the D&O insurance that we already provide.

Also, within corporate services in the quarter, we announced plans to launch Pinpoint Market Intelligence to provide issuers with accurate and timely analysis of trading.

During the quarter, we continued to build upon our strong first quarter performance for new company listings.

As the pace continues for the highest number of IPOs since 2000.

There were 42 IPOs for the quarter, 14% more than the same period last year, and 71 total new listings as NASDAQ continued to capture more new listings than any other U.S.

exchange.

Now, turning to strategic initiatives, earlier this quarter, we announced our planned combination with OMX.

This transaction will create the world's premier exchange and technology company, bringing together two companies with a common culture and a vision centered around the power of technology in the exchange space.

As the leading provider of technology to exchanges around the world, we have an opportunity to create an unprecedented trading network and product channel for the exchanges.

This transaction will also provide us with an excellent platform for geographic and product diversification.

It's important to note that yesterday OMX reported again, very strong interim results with earnings per share growth increasing by 50% on a higher transaction volume and higher listings, it clearly demonstrates its strong fundamentals of their business.

Most importantly, since the announcement of the merger, our teams have had the opportunity to work together on integration planning.

The team at OMX, led by Magnus Bocker, in is an incredibly talented group of individuals who share with NASDAQ a culture of operational excellence and innovation.

Our confidence in achieving the goals of the merger have increased since the announcement of the transaction.

We have truly accomplished a lot in the first half of 2007 and we are extremely excited about the second half.

We expect to continue to grow our market share.

But, most importantly, the team that has executed so well will enter an era of increased scope in our activities.

We will bring our maniacal operational focus to the Portal market, to the options market and we'll start our mission as NASDAQ OMX in the second half of 2007.

I look forward to speaking with you about the progress of these exciting changes as we move forward.

Thank you, and I I will turn the call over to David.

Thanks, Bob and good morning, everyone.

We are extremely pleased with our results this quarter.

As operating margins reached 49.8%, demonstrating our ability to drive synergies from our acquisitions while at the same time introducing new and innovative products and services.

Revenues, less the liquidity rebates, brokerage, clearance and exchange fees, which I'll refer to as net exchange revenues, increased to $198.7 million from $171.1 million in the year ago quarter, and $192.1 million from the first quarter.

Within Market Services, net exchange revenues were $127.9 million, up 18.8% from the $107.7 million in the year ago quarter and up 1.8% sequentially.

NASDAQ market center revenues increased 46.5% from the year ago quarter, primarily due to higher execution market share for New York and AMEX-listed equities and higher access services revenues which increased $5.9 million or 45% from the prior year quarter due to increased demand for customer connectivity.

Included in market center, execution and trade-reporting revenues is $73.1 million in SEC fees that were booked, down from $98.5 million in the first quarter and up from $27.3 million in the prior year quarter.

The decline in SEC revenues sequentially is due to a rate decrease implemented by the SEC.

Also, please note that included in cost of revenues is a corresponding SEC fee that offsets the amount included in revenues.

In Market Services, subscriptions revenues increased $1.8 million, or 4.5% from the prior year quarter.

However, you may recall that there were adjustments recorded in the second quarter of 2006 to account for changes in the UTP plan.

Effective February 7, 2006, NASDAQ was no longer required to share NQDX revenue under the plan.

Adjustments to reflect this change were made in the second quarter of 2006 and included some catch-up adjustments to account for first quarter activity.

As a result, Market Services subscriptions revenue were higher by $1.3 million for the second quarter 2006, with proprietary revenues higher by $5.5 million, non proprietary revenues lower by $5.5 million, and UTP sharing lower by $1.3 million.

If you back out the adjustments to normalize to second quarter '06 results, the growth in total Market Services subscriptions revenue is 8%, proprietary revenues increased 19.9%, non proprietary revenues increased 8.4% and UTP plan sharing, 54.7%.

Now, moving to issuer services, second quarter revenues were $70.7 million, up 11.5% from the $63.4 million recorded in the prior year quarter.

Driving the increase in corporate client group is our expanding suite of services offered to listed companies, including shareholder.com, PrimeNewswire, Carpenter Moore, which are included in corporate client services.

This revenue line is up nearly 29.4% from the prior year quarter.

Also, annual renewal fees increased due to a revised fee schedule introduced earlier this year and are up about 15.6% to $31.1 million.

Within financial products, revenues declined slightly, $300,000 from the prior year, but increased $1.9 million or 21.3% from the prior quarter.

Increased ETF licensing revenue is driving the increase in sequential revenues.

Now, let me turn to operating expenses.

Second quarter total operating expenses were $99.7 million, a decrease of 26% year-over-year and a decrease of $11 million or 9.9% sequentially.

The decrease in spending resulted from a reduction in bad debt expense driven by better collection efforts, lower non recurring charges, as well as a reduction in general operating spending.

To give you a bit more color on the sequential comparisons, please recall that in Q1 of this year, we recorded in compensation expense, a $6.5 million curtailment gain related to the freezing of our pension plan as well as a charge of $10.6 million for cancellation of a clearing contract.

Now, turning to the balance sheet, cash and cash equivalents and investments available for sale were $2.3 billion, versus $2 billion recorded at year end 2006 and $1.7 billion recorded in June of 2006.

Our investment in the LOC, which is recorded at fair value, was at $1.7 billion at June 30th, 2007 and now represents approximately 30.5% ownership of the LOC.

We continue to reflect an unrealized gain in our LOC investment, which at June 30th of '07 was at $332.91 million.

Our debt level at quarter end was $1.5 billion, that is senior and subordinated debt and that is consistent with the year end of 2006.

This includes $573.9 million of senior debt, related to the INET acquisition and that number is down from the $750 million of debt that was issued a little bit over a year ago to finance the INET acquisition.

It also includes $481.6 million of debt related to our LOC investment.

I make that point, because I want to underscore the fact that consistent with our plan of finance for the INET acquisition, we have been paying down our INET debt with the cash that has been generated from the increased performance of that combination.

And now, finally turning to guidance for 2007, our outlook for 2007 net exchange revenues are in the range of $775 million to $790 million.

2007 total operating expenses are expected to be in the range of $400 million to $415 million, and net income is expected to be in the range of $171 million to $181 million, including all charges discussed today.

The midpoints of our guidance have been revised upwards by $18 million, on Net Exchange revenue, and $8 million on expenses.

Revisions to the expenses reflect investments in the business including the acquisition of Director's Desk and higher incentive compensation related to our improved performance.

Compared to Q2 levels, expenses for the second half of this year project minimal non recurring charges and slightly higher expenses related to the launch or our options and Portal markets, CCG acquisition and marketing.

So again, let me finish by saying that we are extremely pleased with the performance of this quarter and as Bob has said, remain very excited about the second half of this year.

We appreciate your time this morning.

It's good to be with you.

And operator, we are now ready to take your questions.

Thank you.

The question and answer session will be conducted electronically today.

(OPERATOR INSTRUCTIONS).

We'll pause for just a moment to assemble the roster.

And we'll take our first question from Daniel Harris from Goldman Sachs.

Hi, good morning.

Good morning.

Can you give us any update on the integration planning with OMX as you've gone a couple more months since the announcement.

Has your view on expense synergies or your time frame for realizing those changed at all?

As I said in my prepared comments, we have met with them.

The integration planning is going exceedingly well and we are truly impressed with the quality, the caliber and the motivation of the people involved from the side.

I think the only think we'll say today is that we're that much more comfortable with the commitments we made at the time of the announcement.

Our confidence is that much higher.

But we're not at this point going to change any of the targets.

Okay.

That's great.

Just moving to NYSE listed market share.

Growth through April was really phenomenal, as I think you mentioned in the past.

But it somewhat appears that stabilized over the last three months.

Is there any change that New York has implemented or things that you're doing.

If not, what do you hear from clients on their routing strategy?

I would say that our growth has accelerated in the July time frame.

I made again reference to that in the comments.

We set a number of different match records in July.

We throw an employee lunch within transaction when that hams.

So our expense line on employee lunch is a little higher than we might like but we'll trade that off for the increased market share and we've gone over 18% on several occasions.

So I think the advent of coming out and there's always a delayed reaction, that's coming out, it's certainly going to be an accelerant to our progress.

We're steady ahead.

And we feel very good about it.

And then just lastly, can you give us an update on Portal, any change there and any other initiatives?

Is there any way that we can monitor the progress of those or any impact that we would see and I'm assuming that would be in 2008 at some point?

It would definitely be in 2008.

We need to get the final approval out of the commission.

It's our expectation that we will be live with the Portal marketplace by the end of August.

So that obviously presupposes that we'll get commission approval sometime early mid-August.

We're working very closely with them.

We have been for a number of months right now.

We feel very good about that.

Great.

Thank you very much.

Thank you.

The one -- I'll add one comment.

It's interesting, within the 144A marketplace, we see tremendous growth.

I think on the equity component of 144A issuance year on year, the growth was up in the high 40s with respect to percent.

So it's a dynamic marketplace that we're going to bring significant value added to.

We'll take our next question from Roger Freeman from Lehman Brothers.

Hey, good morning.

How you doing there, Roger?

Good, Bob.

You?

Pretty good.

Good.

I wanted to -- let me follow up to start with on your PortaL comments.

So there are a number of broker dealers that are pursuing their own platforms.

Obviously the Goldman one has been well-publicized.

I think a number of the other banks are looking at them too.

There's been commentary about JPMorgan and FBR, just launched their own Portal.

I know you're kind of working with them.

Can you talk a little bit about how if there's a consortium you're working with where these banks that are building their own platforms will somehow integrate with Portal or are these going to be independent initiatives?

I don't want to speak for the banks.

I would say this, that our approach to the 144A market is fundamentally different than the single dealer platforms that you see developing in the marketplace.

So our approach really, you want to step back in time to think about what NASDAQ did back in '71 to the over-the-counter market.

So we're representing an open access platform where all dealers can participate.

We have the opportunity to discover price in the process.

In addition to that, we will then provide a qualification service which will, I think reduce friction in the marketplace and allow these securities to trade on a more dynamic basis.

So we're the only person approaching it as an industry solution as opposed to a dealer solution and we just think we have the right product at the right point in time.

Is it fair to say that the banks who are -- who are are pursuing their own platforms are also signed up as market makers for Portal?

I don't want to speak for the bank.

I think you see the whole issuance is stronger this year than any year in its history.

That is the 144A registration process and every single bank involved with it uses the PORTAL service very extensively and it will be our expectation, our hope that they would do that as we launch the trading platform for Portal.

Okay.

That's helpful.

Thanks.

Just coming back to the market share question, I mean, you sort of alluded to this.

There has been a pick-up in your market share on NYC list of securities over the last three week weeks or so.

I'm wondering if there's been any -- a large bank or two, the bulge brackets that have been moving more slow over to you?

The answer is yes.

We have picked up share and yes there are certain banks that are moving flow over to us.

And so we're very pleased with that.

But I do want to put it in context, not just on these one or two banks.

It's been really as I said, breath-taking progress.

And the key thing is that every single one of our customers I think intends to bring more listed flow away from (inaudible) or in the future than they do today.

So the progress has been breath-taking but we're in the middle of it and we expect to continue this progress.

There will be some fits and starts as we go through it.

But the trend line is up unmistakable.

We're very proud to have 18% matched market share.

I don't think there would have been anybody on this call, myself included, who would have predicted that two years ago.

Okay.

Thanks.

Then lastly, can you give us any early update on the InterDay cross in terms of how much volume is going through there?

I don't have the volume number.

I know the percentage increase, Roger, is quite phenomenal.

It's growing from a very small base.

We've got some work to do there but the progress is picked up quite dramatically in the last month and I think the key thing is the growth in shares entered into the cross has grown the most dramatically.

We're up around 18 million shares coming into the cross and I would definitely point you to that as a key metric.

It's no different than we we started our assault on NYSE market share.

We said the match number is not the important number, it's the number that we touched.

And really right now with respect to the cross, it's not actually what we cross, but just to get enough recruited in.

So 18.4 million obviously in the short time we've been at it is quite impressive.

Okay.

Thank you.

We'll take our next question from Rich Repetto from Sandler O'Neill.

First question is on the guidance, I know you guys have been conservative in the past but if I just take what you guys knocked out as the high end for the year, it implies just flat from this quarter when you look at the past couple years, the second half has definitely improved from the first half.

And that's I guess -- I understand you have to be conservative with summer volumes and everything but to have that be the high end I guess is the question.

That a flat outlook be the high end.

I'll let David take that question.

Well, Rich, you've done your math correctly.

Obviously, we do look for a slowdown in the third quarter as we have seen in the past.

And then we also had this year a very strong performance in the first quarter of the year.

So when we net all that out, that's where we are.

We also note that our -- that we expect to the assumptions we had for our guidance for the year, the average daily volume for NASDAQ securities is basically tracking flat from -- in line with the assumptions we put out for the year.

And the volumes on New York are also in line or maybe slightly ahead of our assumptions for the year.

So just feels like the right place for us to be right now.

Okay.

I mean, it just seems like some people have paid attention to it because you get 70 -- about $0.74, $0.75 in the estimates in the first half when you did $0.39.

But any way.

Next question on the LOC -- I'm not going to ask you what your strategy is, Bob.

I guess the question is the value of the LOC.

The LOC's trading at above 14 pounds or it was, when I just looked 15 minutes ago.

They're reporting record earnings and the only benefit it seems from an income statement standpoint you get is on the dividend.

I'm just trying to see, is there any -- are you thinking about -- what are you thinking about there as far as how that's being impacted in the stock price, I guess?

Well, I think we're very aware, Rich, and you're probably one of the few that I think have this insight, is that the value of the LOC as an investment is not being properly reflected in the market capitalization of NASDAQ stock market.

So it's our hope that more people do a thoughtful analysis and come to the proper conclusion with that.

But that being said, it's something that we don't pay attention to that much on a day-to-day basis.

We're obviously about executing our business plans.

Okay.

Last question, Bob, yesterday on the night call or night they announced that Citadel has an investment in direct edge.

And I'm just trying to see how -- what your color or comments might be there, you know, and obviously Citadel is a big market maker.

Yes.

Well, Rich, it's the same comment I have made I think since the advent of.

We will live in an Virginia where competitors will come and competitors will go.

It basically gives them with a protected quote, an ability to get into the business and direct edge has been there, obviously in the space.

And we respect all our competitors and we respond accordingly.

We do recognize that it's not our job to try to prevent competitors from forming.

Our job is to make sure that we're executing our business plan and if we execute our business plan, our business model will allow us to provide a value price to our customers, which will make it uneconomical for those folks to compete with us over a period of time.

And you have seen what we have done with the INET integration coming to a single platform.

I think we've done a fair allocation of the benefits of those transactions to both our shareholders and also to our customers.

And the price we put out and the pricing actions we take in the first quarter really were a statement to that effect.

So direct edge, bats, whoever, they're going to be there.

We have our plan.

We're executing it.

We're obviously delivering to both our stakeholders, our shareholders.

I mean, this performance, the numbers speak for themselves.

I think on an operating basis were up 170% year on year.

We're also very proud of the value proposition and the service level that we provide to our customers.

And that will be the -- I think the lodge term driver of the volume of this organization, this enterprise.

One last quick question.

You mentioned single book.

David, you brokeraged -- you beat our numbers object brokerage clearance and exchange.

We know a good portion of that is driven by single book.

But I guess, is that a clean number going forward?

If we model that out as a percentage of the transaction revenues, is there anything else going -- it fell by over 20 million.

It is -- it's a clean number going forward, to answer your question.

It reflects the benefit that we have achieved by cancelling the clearing contract and building in operating our own system for that.

Okay.

The other -- there's another important part of it, as I also said in knee comments, is you've got the SEC fees in there which are going to go -- those will go up and down.

The reason they went down this quarter, as I said, was because of a reduction in the rate, the SEC's rate.

Understood.

Okay.

Thanks, guys.

Thank you, Rich.

We'll take our next question from David Grossman from Thomas Weisel Partners.

I know it's difficult to talk about the LOC in a public forum but is there any insight you could give us in terms of if in fact that doesn't work out and you do divest that asset, what do you think strategically that costs you if that's the end result?

It's almost impossible for me to say anything.

In the past I said optionality we researched the word in the dictionary.

We're not sure it's actually a word.

I'm left with no words to say on the LOC.

I wish I could be more forth-coming but it's not possible.

Actually, and maybe a question again back to -- David, you talked about volume growth on NASDAQ flattening out in the June quarter.

I think they're pretty tough comparisons last year.

Do you think the flattening out is more a comparison issue this year and would get back to kind of the mid single digit growth or do you think as we think about the next several quarters, we should kind of moderate our expectations for volume growth?

Well, I'll tell you, our assumption continues to be the assumption that we gave in forming our guidance for the full year, is that it will basically remain at a flattish levels for the year.

But in terms of how you want to look at it, I think that's completely up to you.

I definitely want to -- my answer will be to tell you how we're continuing to look at it.

Okay.

And could you just give us a couple of the cash flow metrics for the quarter, the cash flow from operations, CapEx and D&A?

Yes.

We'll pull those out right now.

We'll come back to those, okay?

I'll add those on sort of at the end of someone's question.

Let me just -- go on to your next question, if you've got one.

On the dividend, it looked like in your pro forma numbers you were adding back a little over $8 million and you reported 14.5.

What were your expectations for dividends for the year and is that just the LOC?

Expectation on dividends for the year as we announced for our guidance was $16 million.

The SEC declared 14.5.

LOC.

Sorry.

And so we recorded that and we would expect to get that dividend paid and received in August.

Okay.

So as I recall, the adjustment on the pro forma number was 8.8 and you reported 14.5.

What is the difference?

I would have thought you would have just netted down to $8 million.

I'm not sure I'm following your question.

Well, if you were at $16 million for the year, I would have thought that would you just take the $14.5, less the pro forma adjustment, you would net down to 8.

But you go below that.

I'm just wondering, is there something else in there?

Your tax effects of 14.5.

Got it.

Okay?

Got it.

Okay.

Great.

Thank you.

By the way, CapEx for the first half of the year was $5.5 million.

And you wanted the cash from operations and I will continue to look for that.

Great.

Thank you.

We'll go next to Patrick Pinschmidt from Merrill Lynch.

Good morning, guys.

How you doing, Pat?

Pretty good, how are you?

All right.

I guess just following up on the InterDay cross, has the early success there impacted your plans for rolling out the continuous block platform?

No.

Very excited about continuous block and the success of the InterDay, the interim success, I should say.

It's a work in progress.

Doesn't make us want to accelerate or decelerate.

That has its own path that we're going on.

Still thinking sometime in the fourth quarter, maybe?

Definitely.

Okay.

And then a couple quick modeling questions, I guess, David in terms of the strategic initiative costs, does that include just LSE or is there some OMX in there in the second quarter?

No, it's just -- what's included in strategic initiatives year-to-date, those were expenses that we recognized in the first quarter and in the second quarter following the lapse of our earlier bid.

So there are no OMX -- there are no OMX expenses in these numbers.

Okay.

And then in terms of the expectations for modest increase in expenses related to the options in the portal platform in the back half of the year, are those sort of one-time ramp-up costs or would those carry through to '08?

It's a combination.

First of all, they're minor, because I think as we have said before, these initiatives are leveraging off of existing technology and existing people, so the incremental expenses are low.

But it is a combination.

And again, I was careful to say it was in comparison to the Q2 levels.

So it's hard to be more specific right now.

But there definitely will be some minor ongoing expenses as these projects ramp up and continue into 2008.

Okay.

Thanks.

And then finally, a question for you, Bob.

You have talked previously about how the deal enhances the strategic opportunities for the combined firm going forward.

Can you maybe update us on your thoughts as to kind of where do you see some gaps in the combined platform and how you might go about filling those, either organically or via potential acquisitions?

Okay.

Let me make sure I got the context of your questions.

First, from a technology point of view, brings to the table tremendous capability across a wide range of asset classes.

That point of view, I think we'll be you'd a sneakily positioned among all exchanges to provide technology to existing exchanges, to provide technology to upstarts or use that as a lever for our own organic growth strategies.

So we're -- we don't have any gaps per se from the technology based viewpoint after the transaction is completed.

So we're certainly very excited about that.

We clearly see that gives us a platform for the European theater in a number of different ways.

So we're definitely excited about that.

So we will be about taking the assets that are there, integrating them together with NASDAQ, making the combined organization one company that really takes the best of both.

And that will be our focus.

It's not different than anything else we've done with other acquisitions and we will not deviate from that path until our success is essentially locked and loaded.

Okay.

Thank you.

We'll go next to Rob Rutschow from Deutsche Bank.

Good morning, guys.

I guess the first question I have is related to the execution and trade revenues.

If I look at those as a percentage of volumes, they were down about 9% link quarter and so you mentioned the SEC fees and I'm guessing that at least a portion of that is also the lower pricing for your highest volume customers, is that correct?

You are correct.

Okay.

So what I'm wondering is what are the dynamics there in terms of the market share that you're getting from those customers?

Are they allocating more trades to you and are they coming up a greater percentage of your overall matched volume?

Well, I would just make one general comment.

We see as volume goes up, that people will hit higher tiers and as volume goes down, sometimes they miss the higher tiers.

So sometimes the good days are not as good as you think and the bad days are not as bad as you also might think.

But I would say that the pricing that we put in place has been effective and our primary growth has been ton NYSE listed side.

Of that 9% decline, can you quantify how much was the SEC difference and how much is just reflection of the pricing?

The SEC fees were $73 million for this quarter and they were $98.5 in the first quarter.

Okay.

So that's a big piece of it then.

Yes.

And then moving on, I think I had read recently or heard from you that you would not be looking to pursue any acquisitions before you had completed all of the integration of the OMX.

Is that correct?

Well, I have responded to that on my last comment.

I would say this.

We have the ability I think in this organization to do multiple things in parallel.

But there is still a broad sequential order to our progress.

This OMX transaction is transformational to NASDAQ.

It certainly broad owns both our geography and our asset classes and we have made representations and promise toss our investors with respect to synergies.

So we will deliver on those and we will not involve ourselves with something that will prevent us from delivering to those synergies and that means we have to clearly be as I previously said, kind of locked and loaded on how we're going to deliver those synergies before we would seriously consider taking another broad strategic direction.

I guess to follow up on that, is it possible that an additional European acquisition would be at least not -- at least neutral or possibly additive to the synergies you're looking for with OMX?

Well, you know, it's a theoretical question.

It's hard for me to answer.

So in theory the answer could be yes or no.

I would definitely just bring you back to the theme that we have and it's a recurring theme, that we have a maniacal focus on execution and we are executing the business plan.

We have laid out for you an expanded horizon for this organization which would be inclusive of PORTAL, the options marketplace and the successful transformation of NASDAQ into NASDAQ OMX.

That's what we're about.

We will obviously be considering things above and beyond that in the time frames where we know we can master it.

And there's really nothing more I can say than that.

Okay.

One more quick modeling question, if I might.

The licensing revenues were up pretty good sequential in linked quarter.

Some of that is probably seasonal.

Is there anything else going on there?

What run rate should we be looking for?

The question was the licensing revenue quarter on quarter.

What segment?

Financial products.

I think that's -- well, that's certainly a good market.

I definitely -- I don't think what it fully underscores is the continuing work we're doing in that area to grow those products.

And also, the measure of volatility which is also there.

So I would not call it a -- I would not call call it a real accurate predictor of where it's going because we're definitely committed to growing that business.

We'll go next to Ken Worthington from JPMorgan.

Hi, good morning.

First, there is speculation that [Arcer] will adjust the tick rate in its pricing.

If that does in fact occur, how do you expect or what impact do you expect that will have on where traders execute NASDAQ-listed orders and I guess is this a threat to NASDAQ or is this more of a threat to the ECNs?

Well, I would say this, that the price leadership that we have established is most pronounced when you compare our price to Arcer So anything short of a wholesale changing of their pricing, meaning a reduction of 50, 60, 70%, it would be hard for us to see a reasonable customer even contemplating changing any of his behavior.

The gap is that wide.

So we'll see.

They're going to reduce their pricing by 80%, when we'll consider that serious effects.

We haven't had any indication of that.

Thank you.

And then, as the largest shareholder of LOC, can you kind of tell us what your views are of its potential merger with BORSE Italiana and then maybe discuss -- I don't know if it's your intentions or if you've already blocked the stock-based financing, what that -- what impact that will have on the transaction and is LOC a more attractive merger candidate to you if they get it or do not get BORSE Italiana.

Okay.

The first thing I have to say is that we are in the process of analyzing the BORSE transaction.

Certainly as a large shareholder, we have a very strong interest in understanding what that transaction means.

So we're definitely in the informational gathering phase of the analysis.

And we'll obviously come to a considered opinion within the next several weeks.

Okay.

Great.

Thank you very much.

We'll go next to Don Fandetti from Citigroup.

Bob, I wanted to just get your updated thoughts on Project Turquoise and the impact on the London market and whether or not you would allow OMX to be the technology provider give your LOC stake.

One, I would just make a general comment with respect to the European market and we believe that the impact of will encourage and foster more competition in that environment.

So that's a fundamental belief.

It's going to look more like the U.S.

market.

Clearly won't be identical but more like it.

So that statement we can put out there.

With respect to the OMX transaction business, it is certainly one of the exciting things about the OMX organization.

We think it has tremendous potential.

And we also recognize that when you are in the transaction business, you are in the business of providing your technology to customers who won't have the ability to pay and don't provide any reputational risk to the overall Enterprise.

So you provide to all manners of competitors, to colleagues and what OMX does with that transaction business I think is wonderful today and I think they should consider an opportunity like Turquoise as a very positive opportunity for them.

Okay.

Thank you.

It's David Warren.

I wanted to come back onto the call with the information on cash from operations.

I had the first half number.

I want to make sure I had the break-out correct.

The cash from operations for the second quarter, $75 million.

Cash from operations for the first quarter was about $78 million.

Operator, we're ready for another question.

We'll take our next question from Niamh Alexander from CIBC.

Thanks for taking my question.

If I could go back to the options trading offering.

How is that progressing?

Are you still on track for a third quarter launch?

How should we think about the pricing model you're interested there, and organic versus acquisitive in that track?

The options project is moving along and it's moving along quite well.

We actually expected to run into a little more headwind than we have so far.

But I would first say that we're shooting for a fourth quarter launch, early fourth quarter.

And that's been our target for some time and we're on track for that.

So we feel good about the progress we made there.

As I've said, we're coming to the options marketplace as player number seven.

We wouldn't be doing that if we didn't think that decimalization will have an impact on that market like it had on the equities market and we clearly are coming into the market as a change agent.

We will have a market model that does not provide undue benefits to intermediaries.

We'll be an open access model, which will obviously reward the provision of liquidity and allow the liquidity providers to have equal and fair access to the marketplace.

So that's the fundamental driver.

We'll obviously come at it with a modified version of the INET technology, which will represent the fastest and greatest through-put capability of any of the pie forms in the space and be able to process and handle a large amount of data that's generated in that space.

So we're excited about it.

Okay.

That's very helpful.

And just going back to something that was raised earlier.

You talked about competitors that come and go.

Looking at the regional exchanges here.

The last source of revenue is market data.

Now that has been ruled across the brokers, questioning maybe their sustainability.

Is there an opportunity in there for NASDAQ to take some of the revenue away from regionals in the next six to 12 months or so?

I would definitely say there's opportunity.

In terms of organic opportunity of taking share or is there a kind of value in maybe acquiring some share there?

Well, one, is we first and foremost focus as you know on executing the organic game plan.

But we're also open to conversations at many different levels and whether or not they proceed to anything of a meaningful state, nobody can predict.

Okay.

That's helpful.

That's all my questions for today.

Thanks.

We'll go next to Mike Vinciquerra from BMO Capital Markets.

One question on the growth in your market share in the NYSE during July, is any of that potentially related to the reg SHO.

I guess you guys are now free to trade on the down tick and not have to wait for an uptick and you guys were restricted before if I'm not mistaken.

I think the Reg SHO change will help us on the NASDAQ side.

We expect to see some benefit from that in the months to come.

It really has no impact on the NYSE side.

Okay.

Thank you.

And I wanted to go back to Rich's question on the brokerage clearance fees.

When we look forward, I guess this quarter it was roughly $73 million, about 17% of your execution revenue.

Is that reasonable to expect a range of maybe 16 to 18?

I know it fluctuates based on the mix.

I just want to make sure when we're modeling we're thinking about that right with the fee reduction.

That's the right way to look at it with the current rates.

But again, and the current volume.

That's not something -- this again isn't something that we obviously collect for the SEC.

But in terms of where it is now with the changes that the SEC has put out, that's the right way to look at it.

Okay.

And then just on the corporate client services revenue, can you provide any sort of gauge for us as to what percentage of growth year-over-year relates to acquired revenues versus just growth in the business?

Well, I think it's largely acquisitions.

That is essentially what we've been doing and certainly growing those businesses once we get them.

What was the question overall CCG?

In the businesses that we're acquiring.

I think we have been -- what we've been saying in the past and certainly the strategy we continue on, we are acquiring these companies.

They have their own projections, their own growth projections when we evaluate them.

First, we look to make sure they're continuing to drive on the business model that we acquire and then we look for opportunities to put those products further and deeper down our distribution channels with our 3200 companies and to improve the cost platform for the delivery of these services.

And the acquired companies will have a higher organic growth rate than the overall CCG business.

Okay.

And have you seen some growth in the margin provided from the businesses you've acquired over the last 12 months?

Yes.

Yes.

Okay.

Thank you, guys.

And we'll take our final question from Edward Ditmire from Fox-Pitt Kelton.

Hi, guys.

During the quarter, we had the issue where the Russell was able to change the licensing requirements of its license for certain equity index futures.

It seems like they were able to or trying to improve the economics substantially in that end and got a substantial upfront payment from the intercontinental exchange.

Do you guys, having a much bigger business in equity index licenses, do you guys see opportunities over either the near or the medium term to get better economics on those products?

Well, within our financial products group, we spent a lot of time and effort in coming up with unique products, most notably the Qs and we do I think well in the licensing side and I think we are excited about the number of innovative products that are coming out where people are building products on top of the really proprietary indices that we develop and we expect that to be a growth area of our business.

Not so much just purely on pricing?

No.

Okay.

Operator, we don't have any other questions it appears?

There are no other questions in the queue at this time.

We'll wrap up the analyst portion of the call, ask members of the media that have any questions just to hang on a minute and we'll begin momentarily.

For those people still on the line, you'll likely receive a notice of an -- you'll likely receive an invitation in the mail regarding our analyst day we're going to host on September 14th.

Just wanted to let you know now so you could mark your calendars.

With that, we'll thank you for joining us.

Thank you.

Look forward to talking to you in three months.

At this time, we'll take questions from the media.

(OPERATOR INSTRUCTIONS)

We want to wait one or two minutes until people get in the queue here.

Okay, no problem.

Thank you.

Operator, this is Bethany Sherman.

We're ready to take calls from the press now.

Once again, (OPERATOR INSTRUCTIONS).

We'll take our first question from Gaston Ceron from Dow Jones.

Hello, Gaston.

Are you there?

Hi, can you guys hear me?

Yes.

Sorry about that.

How are you doing, Bob?

I understand this is our last earnings call together so --

it's definitely a sad occasion.

I wish you well in your future endeavors, that's for sure.

Thanks very much Bob, I appreciate that.

I had a couple quick questions and as usual, just double check a number with David, if I could.

One is, you said that something to the effect of that you are in the process of analyzing the transaction.

And obviously as a major -- biggest LOC shareholder you want to look it over.

What would your alternatives be with regard to that?

You say you're analyzing it.

Could you block it hypothetically?

What could any sort of analysis lead to one way or another?

We have to decide how to vote our shares, Gaston, independent of whether that's a block or not is not material.

The material part is we're a large shareholder and we have obviously the opportunity and the right to vote our view and we have to come to a considered opinion and we're going to do that.

Do you have any sort of notion going in or are you completely sort of up in the air?

We're in the fact-gathering phase.

We have to go from fact-gathering to analysis within the next couple weeks.

Right now, we approach it as we do most all decisions with an open mind, let's see what the fact say and we'll start deciding after that.

How much time do you think you have before you have to make a decision?

The vote is I believe the August 13th.

So we'll have to have made a decision before then.

I don't think we'll wait until the morning of the 13th to have made a decision.

Have you met or spoken personally with LOC management or anyone like that to sort of shape this opinion or not?

I have not met with them.

But I've spoken to them, and David has spoken to Jonathan Howe.

Through this evaluation process we will meet with them and talk about it.

The other thing is just going back to the options strategy real quick, you said you're still shooting for an early fourth quarter launch and you did remark that you expect to be a change agent and then you're going to be player number seven in the marketplace.

You guys see yourself as a change agent in that market.

Just wondering, as the date gets closer and closer, it seems like as of now the NASDAQ strategy seems to build and not buy.

Is there any possibility that could change or are you pretty set on that?

We're definitely going to build and we're going to launch this market as a change agent.

That's our focus.

Beyond that, we consider any and all opportunities that may or may not present themselves.

But we have clearly said we're building.

We're coming.

And we're shooting for early fourth quarter.

Okay.

And lastly, David, if you can just indulge me, just, there was a number I wanted to double check that you said during the call.

I think you were talking about the unrealized gain on the LOC investment.

Was it $332.9 million?

Is that right or --

332.8, I think.

Okay.

Was the number.

That is an unrealized gain.

On the LOC investment?

That reflects -- just to give you a little more color on that.

There's two components to that.

There was appreciation of the investment itself and also an unrealized gain with respect to the foreign currency because the in the time -- over the time that we made the investment, the dollar has continued to grow weaker against the pound.

Okay.

And again, that's $332.8 million, right?

Yes.

Okay, and not to sound stupid, but I take it, how can you sort of realize that gain?

Can you mark the shares to market or anything like that without actually selling them?

How does that work, accounting wise?

We're required to mark it to market.

And as an unrealized gain, as long as you have the asset on your books.

Okay.

That was all I had.

Thanks a lot, guys.

Thank you.

Good luck.

I think that concludes the media portion of the call.

Thank you.

Thank you very much.