納斯達克交易所 (NDAQ) 2008 Q1 法說會逐字稿

Good day and welcome to the NASDAQ first quarter 2008 earnings results conference call. Today's conference is being recorded.

At this time I'd like to turn the conference over to the Vice President of Investor Relations, Mr. Vincent Palmiere. Please go ahead, sir.

Thank you, Operator. Good morning, everyone, and thanks for joining us today to discuss NASDAQ OMX's first quarter 2008 earnings results.

Joining me are Bob Greifeld, our Chief Executive Officer, David Warren, our Chief Financial Officer, and President Magnus Bocker. Following our prepared remarks we'll open up the line for Q&A.

If you haven't done so already, you can access the results press release on the NASDAQ OMX investor relations and news room websites at www.nasdaqomx.com. If you have any follow-up questions after this call, please contact me at 212-401-8742.

Before I begin I'd 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 and 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. Good morning; good afternoon; good evening. Wherever you are in the world, I do appreciate you being with us today to discuss our first quarter results.

When I spoke to you in February, I wrapped up my comments on a strong 2007 and set out the priorities for a very successful 2008. Clearly, the acquisitions we've announced last year set the foundation for a powerful global exchange company. Key to our success for this year will be our focus and discipline in executing on the integration of these acquisitions and delivering the synergy value to our shareholders.

While we are only two months into our new future as NASDAQ OMX, I can tell you today that we are operating as one global company and executing well on our plans. I can also tell you that our opportunities for growth are the strongest they have been in my time as the CEO.

This morning we reported our first combined quarterly results with net income of $121 million, or $0.69 per diluted share. I will let David cover the details in his remarks and I will spend my time discussing the highlights for the quarter.

In February we closed the OMX transaction, solidifying our presence as a global company. The combination with OMX and our investment in the Gulf region firmly establishes NASDAQ OMX as the world's largest exchange company, with operations on six continents. Our new name reflects a new company, one that is an $8 billion global organization trading asset classes that span equities, derivatives and fixed income.

The NASDAQ OMX organization is defined in the exchange space by our reach and our capabilities. We not only operate the most efficient trading platforms in the world, but we are the technology provider of choice for more than 60 exchanges around the world. We have the deepest bench of leaders in our industry, all focused on the goals of meeting the needs of our customers through product innovation, unequaled service and connectivity around the globe.

In March we announced the launch of our Pan-European market, our first major move as a consolidated company. This market, based in London, will use our INET technology and established customer connectivity to provide a highly liquid plug-and-play trading and routing platform for the most actively traded European stocks. We believe that the recent regulatory changes in Europe, coupled with customer demand for a competitive dynamic, will transform Europe into a marketplace similar to what exists in the United States.

We have been extremely successful in gaining share in the trading of NYSE listed stocks. We are proud of the fact that we matched over 20% of NYSE volume and we have established similar goals for our Pan-European effort. We plan to use the same methodical approach to gain share in Europe that has worked for us in the U.S. and really one in which we are uniquely qualified to succeed.

Turning to the options market, on March 31st we launched our U.S. options market, a new electronic equity and index options market and the first options trading platform to offer true price/time priority. Customer reception has been extremely positive and in a scant five weeks since the launch, we are now trading over 117,000 contracts per day.

We also continue to work on our acquisition of the Philadelphia Stock Exchange. All legal hurdles have been cleared and we expect to close in June, pending SEC approval. I am pleased to report that Philly's volume growth and market share has been tracking ahead of our plan, which of course only heightens my desire to close the transaction.

We also expect to close on our acquisition of the Boston Stock Exchange in the second quarter. As I have said before, with Boston we pick up a second exchange license and the ability to offer a second quote in the U.S. equities market to give us more pricing flexibility, increased market share and better distribution of tape revenue under the SEC's revenue sharing formula.

With Boston we also acquire a clearing business and a point of entry into a business where NASDAQ OMX's reputation for innovation technology -- innovative technology and customer service can bring big returns to our trading customers and shareholders alike.

Moving back to Europe, we continue to move forward on the acquisition of Nord Pool, Europe's largest electricity derivatives exchange and our entrance into carbon trading, an exciting growth area. Nord Pool has experienced year-on-year growth over 40%.

As exchanges around the world seek world-class technology, they continue to look to our market technology business as a preferred vendor. During the first quarter, two exchanges in India, the Bombay Exchange and the India Energy Exchange, as well as the Indonesian Stock Exchange and the Icelandic FSA, have signed technology vendor contracts with NASDAQ OMX.

In April, the Tokyo Commodity Exchange signed a contract with us for an integrated trading and clearing system for commodity derivatives. The value of our technology continues to be recognized by customers across the globe.

I am very pleased to report that we're moving very well on the integration of NASDAQ and OMX. Our technology managers came together quickly to launch our technology roadmap. We have made the major technology decisions that needed to be made and are executing on our plan to integrate our systems to achieve our cost synergies and, importantly, deliver best in class technology to all our customers.

David Warren will go into the details on this shortly, but based on the progress we have made in the two months since the closing at OMX, I am confident that we are ahead of our synergy target for this year and we are upping our expectations of expense synergies to $25 million to $35 million from the $20 million to $30 million we expected in February.

I think you will agree that our growth opportunities are the strongest they have ever been. But I also want to set these opportunities against the strong performance NASDAQ OMX achieved in the first quarter in our core markets and businesses, demonstrating our ability to advance a number of initiatives and highlighting the strength of our management team. We expanded our leadership as the largest single pool of liquidity in the trading of U.S. listed equities, matching a record high 31% of all volume for the first quarter. NASDAQ OMX also achieved new market share highs in the trading of NYSE and Amex-listed securities, matching 21.1% and 36.2% of volume respectively during the quarter.

Our unique ability to seamlessly integrate our dark pool liquidity with our transparent matching services allowed us to grow both services. Our dark pool liquidity trades over 350 million shares per day and is a significant opportunity for an increased capture rate in our transaction business in the second quarter and beyond.

Our leadership in providing value added services to listed companies is providing a compelling case to CEOs to evaluate their listing decision in favor of NASDAQ OMX. On April the 28th, Computer Associates, a $12 billion market cap company, switched from NYSE and began trading on the NASDAQ Global Select Market under the ticker symbol CA.

We traded record volumes on the Nordic Exchange during the quarter. In January 2008, average daily derivatives trading volume reached a record 789,000 per day. This record was eclipsed two months later in March 2008 when average daily derivatives trading volume topped 800,000, a 25% increase over March of 2007.

Cash equity trades in January climbed to a new record high of 267,000 trades per day, an increase of 61% over the prior year. And in February 2008, new record high average daily trading volume was achieved for fixed income derivatives when an average 158,000 contracts traded.

And as these volumes reached record levels, our technology performed flawlessly. The strength of our technology was recognized by our customers as they moved increasing amounts of volume to our systems with sub-millisecond response time.

Let me conclude by saying that NASDAQ OMX is established as a formidable global exchange and technology company. We are well positioned for a successful 2008. We will execute on the integration of OMX, Philly, Boston, Nord Pool and all other opportunities. The moves we are executing this year will set the stage for powerful growth in 2009 and beyond.

NASDAQ and OMX have each earned a reputation as proven integrators who can stay focused and deliver value to our shareholders and our customers. Based on the progress we have made in the two months, I am confident that we can be even more successful together.

I will now turn the call over to David, who will walk you through the specifics of our performance.

Thanks, Bob, and hello, everyone. Thanks for joining us today. It's great to be with you.

Let me start by noting that our first quarter results include OMX from February 27, the date that our transaction closed. I will quickly touch on our reported results and then turn to our pro forma non-GAAP results, which are provided for comparison purposes. The pro forma results reflect the financial results for both NASDAQ and OMX as if we were a combined company for the periods discussed.

On a reported basis, revenues less liquidity rebates, brokerage, clearing and exchange fees, or net exchange revenues, were $278.3 million, operating expenses were $145.3 million, net income at $121.4 million, and diluted earnings per share at $0.69. Included in these results is a pretax gain of $26 million associated with our investment in Dubai International Financial markets, or DIFX. This is a one-time gain resulting from the write-up of the trademark rights we are granting to DIFX.

There is also a pretax gain of $35.3 million related to foreign currency hedges we entered into for the acquisition of OMX and for our planned acquisition of Nord Pool. Approximately $8 million of this amount relates to a forward contract on the Norwegian crown for Nord Pool and we are required to mark this contract to market going forward. When you exclude these gains as well as $800,000 in after-tax M&A related expenses, earnings per share on a non-GAAP basis for the first quarter were $0.48.

Now turning to our pro forma results, net exchange revenues were $382.7 million for the first quarter of 2008, up 12.8% when compared to $339.2 million for the first quarter of 2007 and up $3.6 million when compared to $379.1 million for the fourth quarter of 2007.

And I should say at the outset that, as everybody knows, during the period the Swedish crown has appreciated against the U.S. dollar. So as I give these comparisons, if you compare from the -- if you do the prior year comparisons Q1 to Q1, the net income benefit to NASDAQ is $0.02 per share, a benefit of $0.06 on revenue and an impact of $0.04 on expense.

There is still a benefit sequentially but it's less obviously given the relationship between the dollar and the crown. It is $0.01 on net income, $0.02 on revenue and $0.01 impact on expenses. So I just want to cover that up front as I go through these comparisons.

Now, back to the comparisons. Within market services, net exchange revenues were $267.2 million, up 17.6% from the $227.3 million we reported a year ago and up 9.3% sequentially. Market center net exchange revenues were $192.8 million, up 19.5% from the $161.4 million in the year-ago quarter and up 12.7%, or almost $22 million sequentially. The increases when compared to both periods are primarily due to higher volumes and record market share in both our U.S. and Nordic markets.

Total U.S. listed equity volume matched on NASDAQ increased to 153.7 billion shares in the first quarter of 2008, up 61.5% from the first quarter of 2007. Increases when compared to the fourth quarter of '07 are primarily due to higher traded share volumes and reduced fees associated with clearing transactions. During the quarter, NSCC reduced their clearing charges and issued us a rebate for past clearing activity. At the same time, they have reduced their current fee schedule so that we expect the benefit of this rebate to continue going forward.

Finally, included in execution and trade reporting revenues in the first quarter of '08 are $91.1 million in SEC Section 31 fees compared to $98.5 million in the first quarter of '07 and $99.3 million in the fourth quarter of '07.

In our Nordic markets, revenues increased when compared to both the first quarter of '07 and the fourth quarter of '07. Driving revenue higher when compared to both periods is higher cash equity and derivatives transaction volumes, offset somewhat by lower cash equity value traded and lower cash equity transaction fees implemented at the first of the year.

For the first quarter of '08, the number of equity transactions per day grew by 32% from 179,000 to 236,400 when compared to the same period in '07. For the same periods, the value of equity trading per business day declined 9.9% to SEK44.5 billion. The number of traded derivatives contracts per day increased 9.1% to 754,900. Also contributing to increases in revenues, as I mentioned before, are definitely the improving exchange rates of the crown versus the dollar.

And in market services subscriptions, revenues were $66.3 million for the first quarter of '08. That's up almost -- over 14% when compared to the first quarter and up slightly by $400,000 sequentially. Both of these increases due to higher subscription levels and increased demand for our data products in both the U.S. and in the Nordics.

And within issuer services, revenues increased 8.3% to $86.2 million from the first quarter and decreased 6.6%, or $6 million, from the prior quarter. Corporate client group revenues were $74.7 million for the first quarter. That's up $4 million or almost 6% when compared to the prior year, but down $6 million from the fourth quarter.

The increases in our revenues from the prior year are driven by increases in the revenues we are receiving from our corporate client services and they reflect increasing customer demand for the products and services that we offer through the acquisitions we made of Prime News Wire, Shareholder.com, Carpenter Moore and new products such as Director's Desk.

And the decline in the fourth quarter -- from the fourth quarter is primarily due to a reduction in the total number of listed companies. And in the Nordic markets, revenues increased when compared to the first quarter of '07, helped by improving exchange rates.

In financial products, revenues were $11.5 million for the first quarter of '08. That's up $2.6 million, or 29%, from the first quarter and down slightly sequentially. The increase from the prior year is due to higher license revenues associated with our licensed [ETS].

And finally, within market technology, revenues were $29 million for the first quarter compared to $31 million for the first quarter of '07 and $42 million for the fourth quarter of '07. Declines when compared to the fourth quarter of '07 are due primarily to higher than normal activity recognized in that period.

And I'd like to add some clarification to a factual statement in our release. We anticipated the possibility of some temporary declines in sales activity in the first quarter. I think this is a natural and prudent choice for customers to take when there is a merger, particularly when two world leading technology companies come together. But we have acted quickly, as Bob said, announcing our technology roadmap within only seven weeks of closing, which I regard as unique in our industry.

And the response from our technology customers has been positive, both in the speed with which we arrived at our decision and the quality of the technology solutions that we will now offer as a new company. And you can see this. Customer activity continues to be high, with large orders driving order intake to $46.7 million in the first quarter of '08, 16.2% higher than the $40.2 million we realized in the first quarter of '07.

If I turn now to operating expenses, total operating expenses increased 5.1% to $229.4 million. That's from $218.3 million in the prior year. And they declined about 2% sequentially from $234.1 million. The higher expenses when compared to the first quarter are driven primarily by higher compensation expenses resulting from a larger employee base and from increased retention expenses. Also contributing -- well, declining expenses when compared to the fourth quarter of '07 are driven by lower marketing expenses, as the fourth quarter is typically a strong period for our advertising programs.

Our pro forma tax rate for the quarter was $36.2 million. That was compared to an average of $32 million for '07. I would like to also say that going forward we expect our tax rate to be in the range of the pro forma of last year.

And now if I turn to the balance sheet you'll note a number of changes related to the combination with OMX. These changes are in cash, goodwill, intangibles, debt obligations and shareholders equities. Cash and cash equivalents at quarter-end were approximately $736 million, down from $1.3 billion recorded at the end of the year.

And finally, as Bob said, we are increasing our expectation for full year expense synergies that we will achieve by the fourth quarter of this year to $25 million to $35 million, up from $20 million to $30 million that we announced to you back in February.

During our last call I also mentioned that our synergies from the Phil Ex deal would be $50 million within two years of closing and we remain confident in our ability to achieve this target. And of course I'll have more to say on this once we close the transactions.

So in summary, we're quite pleased with our efforts this quarter. It reflects a lot of hard work from our employees around the world. We're glad you're here with us today.

And at this point, I think, Operator, we'll take your questions.

Thank you. (Operator Instructions)

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

Hi. Good morning. I guess, first of all, with respect to OMX, can you sort of lay out -- I know you sort of talked about this in generalities around the technology roadmap and the integration plan. Can you give us any update on sort of I guess what's happened so far, what's going to be happening over the next two or three quarters?

And then also with respect to technology, is it right to assume that the INET technology becomes the high velocity exchange platform and then the OMX technology is the outsourced version that you're selling?

One is we're very comfortable with the fact that we've made the big decisions and the synergy targets that we've given out are certainly within our grasp to achieve. And we're more comfortable with that statement now than at any time in the past. So we're moving along with that.

With respect to the platforms, clearly the INET platform brings great capability with respect to cash equities and high volumes and the combined organization will use that as a product where it best fits. But also, within our stable we have a number of different technology platforms that bring unique advantage in what they deliver to the marketplace.

So I think the key point to focus on is that we will have a single platform, a single platform of excellence for a given task. And that won't mean there'll be one -- only one platform but only one platform for the given function. And clearly, we'll make sure that we have best of breed in every area that we compete in.

Okay. I guess, I mean, what is the technology roadmap that you've communicated to customers that we're holding off on making investment decisions?

Well, first off, we said that -- as David said, we think some of the customers would hold off just because the merger was happening, not with respect to our technology roadmap. And I think it's also important to note that in the market technology business it will tend to be somewhat lumpier than other businesses that we have in that certain quarters you'll have a big order; in other quarters you will not. And that's just going to be a fact of life with it.

But with respect to the roadmap, we've certainly put out internally and we're in the process of communicating to our customers exactly what we're doing. We will certainly look to take full advantage of the Genium platform that OMX had in its stable and we're going to look to take full advantage of the INET technical architecture. So if you wanted to come up with any sound bite from today's call, you could say that the combined enterprise will standardize on a Genium platform powered by INET.

Okay, that's helpful. And I guess on the European ECN strategy, can you talk a little bit more about plans with respect to pricing approach?

And then also, as you think about this, what are the biggest obstacles that you need to overcome or what are the biggest concerns that you have about being able to build market share? Is it clearing? Is it customer acceptance? How do you sort of think about that?

Well, one, with respect to pricing, we are not going to take an incremental approach. So on a net basis, the pricing we bring to Europe will be very similar to the pricing that we have here in the States. So if you look at the capture rates in Europe today, they run five to 10 times what we charge here in the States. And as I said, we won't be incremental. We're going to come right in with U.S. style pricing. We'll certainly reward provision of liquidity.

On the second question, and I hate to phrase it this way, but we don't see any obstacles in our way right now. We have a clear path. Whether that be from a clearing point of view, we have a number of different I think very qualified competitors, of which we'll choose between them. We certainly have customers who are cheering on our efforts and look forward to a new competitive dynamic in the European marketplace. So we have a clear path.

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

Good morning, guys.

How you doing there, Rich?

Doing okay. I guess my first question is trying to look at this quarter, the first quarter where you've combined with OMX and you got the pro forma results for the whole quarter. And you've mentioned a couple of things that are different forward, like the tax rate, David. That -- so, first, I guess the question is what things besides -- and I think the tax rate would add $0.03 in the quarter, if I'm calculating right. But are there any other things that -- other than we know volumes can change, et cetera, but are there one-time items or anything materially different, like interest expense, that will change quarter to quarter?

Well, the interest expenses, obviously we did very well on that financing so the benefit of that I think is already reflected in the debt that's on our books. To your question, there's definitely the tax rate. And as I said, I do expect that to go down. And depending on the composition of our revenue between -- as we move forward between European and U.S., obviously we will benefit from that tax structure and the lower tax rate.

I think the other important part is if you parse through what we're seeing on the synergies, if we're going to exit $25 million to $35 million lower in run rate spending annually, that really means that our run rate spending Q4 of this year, if you just take the midpoint of that, is going to be $7.5 million lower than where we are right now.

Got you. Okay.

I mean those are the two things we can highlight today. And as we said, we're a month into results and two months into operations, so we're positive about what's happened to date and there's definitely a lot of upside.

Okay. And then the efficiency or the improvement, I guess, from the -- on the debt servicing side. Has that -- did that all flow through? Like, what -- quarter to quarter, what should we expect on the interest expense line?

Well, it's been running around 5%. I'm not sure that's the -- is that your question or is it -- you want to state it differently?

Well, I guess the overall interest expense was $22.6 million in the quarter but some of the convert and debt was reconfigured in the quarter. So is that number likely to come down going forward or stay the same?

Well, it's reflected in the pro forma, Rich. Hold on a minute, I'm just looking for it.

Okay, so that interest expense is as if --

The pro forma assumes that we had done the acquisition as of January 1st of '07 at the rates we negotiated.

Understood, okay. Okay. And then I guess my last question, just more broader and strategic I guess, for Bob, you know, we are seeing things heat up. You got a big opportunity it looks like in Europe, as you sort of execute on the playbook that you already did here in the U.S. on the listed side. But you also see some competition heating up here, Bob, on the NASDAQ side. So I'm just trying to get your -- see how it's balanced, at least in your mind, the opportunities versus the competition abroad and domestic.

Well, certainly we're trying to replete -- repeat our playbook in two areas right now. One is our organic option strategy and we're clearly ecstatic that we've gotten to 117,000 contracts after a soft roll for the last five weeks. And we're -- I think we have a clear path with PEM to make a real difference in the European marketplace.

Now, here in the States, we see certainly great opportunity. We see that the competitive dynamic is what we expected it to be. And we are taking a number of different steps. One is we have under-utilized asset in our arsenal right now and that is the dark pools. So right now NASDAQ trades about 350 million shares per day in our dark pool. And our fundamental advantage is our dark pool is completely integrated into our continuous market.

And it's clear when you look at what the other dark pools are charging, they're charging orders of magnitude higher than what we get for those similar transactions. So we certainly see great opportunity for increased capture in that business and, Rich, as I'm sure you saw with our pricing action effective in May, that was a recognition for the first time of that opportunity. So we see that from a financial point of view having, I think, a very positive impact on our side.

In addition, you'll see us take steps with respect to clearing, where we will step out of the clearing process for our customers and we mentioned that. That will cut down the expenses in a significant way. And I think you saw in the Wall Street Journal article that we're going to route to other dark pools. And essentially that's part of our general change in our routing strategy, which will then cut down the expenses quite dramatically.

So we're very, very optimistic that the profitability in the transaction business is quite positive as we look at the balance of the year. We obviously continue to see great opportunity in Tape A and Tape B to continue to gain share. We certainly see that as New York has melted down, their share on the hybrid from 39% at the beginning of the year now to 31%, that they're reaching a point of no return, which will be great opportunities for us.

So we study that business very closely. We pay close attention to it. It's well led by Chris Concannon and team. And I think we've got a very effective strategy, one to increase in gain share and probably most importantly have some fairly dramatic impact on the profitability of that business in the quarters to come. So we feel good about that.

Great. Thank you. That's very helpful.

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

Thank you. Good morning. I wanted to ask a question on the options side, obviously a big pickup here and I can see the stats you're talking about, Bob, on the OCC side. So impressive start.

Two things. Number one, how many different contracts are you guys currently listing? And, number two, do you have a sense for your share of volume in penny names? My guess is you're doing probably better in penny names right out of the gate than you are in the traditional options.

Yes, good questions. I don't have our stats for penny names and we'll have them in the future. I would say today we're trading about 90 underlyings, so we clearly have a lot more to roll out. It has been a soft roll. And we have a lot of customers who are in process of hooking up and other customers are hooked up who want a particular change to the system, which will release that much more volume.

So it's obviously early days. But at this point, it's just going incredibly well. And I will highlight that Philadelphia, as I said in my prepared comments, is certainly performing significantly ahead of what we had modeled as we contemplated this acquisition. So we're obviously anxious to close that transaction.

Okay, thank you. And just to make sure that your pricing on the options right now, it's 45 to take and 30 rebate and you're not offering other incentives that we know of? Is that right?

That's right.

Okay. And just a couple of question on the non-U.S. business, if I could. You guys have new statistical page you're providing for us that doesn't have historical information [from both] equities or derivatives for the Nordic. And I'm just curious, one, are you going to provide those? Number two, when I look back at OMX's statistics that they released last year, they seemed to be a little bit different. Were there some adjustments you had to make based on how you were reporting those numbers?

Certainly we can provide historical numbers in the future. And I'm not aware of any adjustments that we did make.

Well, Mike, let me ask you. Certainly there is historical data that's available on the website. And as we go forward, obviously we'll continue to build out that statistics table.

But let me understand more about the changes you're referring to?

Sure. When I look year-over-year, for instance, in this release you guys mentioned that last year you did 691,000 derivatives contracts. When I look at OMX's release, it says 673,000. It's just some minor differences. I'm just curious if there's just differences in the way you account for things or whatever else.

Why don't I -- I hear your question. Why don't we get back to you?

Yes, off line's fine. I just wanted it for modeling purposes. It's become a little bit more --

Understood.

Okay. And then the only other thing is just the revenue, the non-U.S. execution revenue was about $92 million. Can you give us the rough breakdown between equities and derivatives? OMX also used to give that data as well.

Sure. Let me give you a rough sense of what our revenue will look like post the Nord Pool and post the Philadelphia acquisition. So and again, these aren't exact but they're very close. So post those two acquisitions, our U.S. cash equity business will be about 15% of our revenue. The Nordic cash equity business will be about 9%. Our derivatives business, and that's just global derivatives, will be about 17% of our overall revenue. Global issuers will be 17% also. And market data will be about 19% and market technology will be around 8%.

Great. That's very helpful. Okay, thank you, guys.

Yes. And I'll just make one editorial comment. As we look at these percentages with what the organization will be at the end of June, we're certainly proud of the fact that we have diversified quite substantially into the derivatives space. But we, I think, have a maniacal focus on execution and the cash equity business we believe is a very strong business, has great opportunity for growth and we certainly intend to protect and grow our market share in that space.

And we'll go next to Dan Fannon with Jefferies.

Thanks. Good morning. Could you -- you mentioned the Nord Pool deal closing. Could you remind us when that's expected to close and if you could give us a sense of what the contribution from that business might be when it does get consolidated?

Well, we're expecting a close in the third quarter and we haven't yet broken out the separate contribution for that business.

OMX didn't do that when -- they just gave the historical metrics? They never gave a pro forma earnings or contribution for going forward? It was just the historical numbers?

It did not. They just looked at historical.

Okay. And then in terms of your guys' guidance for the expense synergies and how we look at kind of the contribution from the international businesses going forward, is there any type of hedging strategies that we should be looking at to kind of lock in from a currency perspective?

We certainly can get into this more as our -- as we move forward. But certainly we right now have a -- as a global company, have currency exposures in all the major currencies. And our policy right now is definitely with respect to contracted flows to fully hedge those. And then we also look at and make a determination about probable flows and hedge those depending on different times and different opportunities.

So I guess my general question to you is where we can get certainty into our results with respect to currency fluctuations, we do. We look for opportunities to minimize the risk. And is that -- is there more to your question than that?

Well, I guess as you update us on some of the expense synergies and the potential increases or decreases there, what factors -- will currency play a factor in that?

Well, I think certainly currency is going to play a factor in our transactions going forward. And we will update you on that. The expense synergies that I speak of obviously are absent any currency effects and they are a reduction in our operating expenses going forward. As you know, currency will cut both ways as we move forward.

Okay. And then in terms of the Pan-European opportunity and kind of the offensive tactics you're taking there, are you seeing any change in competition thus far for you in the Nordic region? I know most of the upstarts are targeting some of the larger exchanges, but have you seen any change in the competitive environment for where you guys are currently operating now?

We have not. But we certainly expect that the overall environment will change in time. But so far it's been business as usual in the Nordics.

Okay, thank you.

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

Hi. Good morning.

How we doing, Josh?

Good. Hey, Bob, question, maybe a bigger picture. Now that you have OMX closed and you have this partner in Dubai, do you have any near term or kind of midrange plans to develop that relationship further? Or where do you see that going over the longer term?

Well, definitely. I think we have great opportunity in our relationship with Dubai. As I think everybody's aware, the amount of investible assets in that region increases on a daily basis. And we certainly want to provide an easy, efficient outlet for those investible assets to come into our U.S. customer base and we also want to have our corporate customers have an easy access into that part of the world. And when I say corporate customers, our listing customers from obviously old OMX and the old NASDAQ stock market. So we're working hard on those endeavors.

Okay. I guess going back maybe to a numbers question. With regards to the currency options, that $35.3 million in the first quarter, I understand a big part of that had to do with OMX. David, I think you mentioned that there were some existing contracts outstanding with regard to Nord Pool. Do we expect that to be a significantly lower number in the second quarter as a general rule?

Well, it's unrealized for one thing. So what I said was obviously the contract with respect to the acquisition of OMX has expired and we booked the gain. With respect to the acquisition of Nord Pool, we put a forward on for the -- for Norwegian crowns to hedge our risk in that acquisition cost and the purchase price of that company.

Oh, okay.

So we'll mark that to market going forward. But clearly, at some point, it goes -- as we close the transaction, it comes off the books.

Okay. And I guess just one follow-up question to, I think it was Vinciquerra's question with regards to the breakout of revenues in European execution between cash and derivatives trading. Did you offer that or do you have that?

What I said for European cash it'll be 9% of our revenues post the Philly and Nord Pool closing.

Okay. Thank you very much.

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

Thanks and good morning.

How you doing?

Good, thanks. Could I just ask a quick follow-up to the hedging question, David? So I understand your hedge against the outstanding acquisitions. But is it your intent or are you still evaluating whether or not you want to hedge the P&L exposure on a go-forward basis so you'd have kind of FX gains and losses on hedges every quarter?

No. No, we're not going -- we're going -- you want to answer it, [Ron]

Yes. I mean basically what we're going to do is do net investment hedges going forward, which would be the reflection in the shareholders equity, and then let flow through the transaction gains and losses. Economically we'll be in the same place, but the accounting will show up in a transaction related P&L, going through the P&L, and the net investment hedge would go through shareholders equity.

So --

Economically we are going to be hedged, but the accounting isn't going to be as clean as we'd like it to be.

So on a go-forward basis, then, we'll see obviously the impact of currency on revenue, expenses, et cetera. So will there be an offsetting hedge gain or loss in the P&L or is that going to be on the balance sheet?

That's going to be on the balance sheet.

All right, so we'll have to live with the fluctuations every quarter, then --

Yes.

-- on the P&L?

That's right.

I see. And then secondly, and I think we calculate this a little differently than you guys do, but it looked like the net capture rate went down a little more than we thought. And it may be just the way we calculate it. But I was just curious whether, a, did you see the same thing? And if so, are there some aberrations in the quarter? Given a lot of the pricing changes that are going into effect I think for the most part happened after the end of March. So any thoughts on that?

Well, I will say this, that we saw in the U.S. equity business our caps rate declined the most in January and then saw a gradual trend line up for February and March. And that has continued into April and now into May.

Okay, so you see an improvement into May? I'm sorry, Bob.

Yes.

Okay. And just going back to your comment about kind of your pricing strategy in Europe, so would you expect the overall net capture rate trend in Europe, then, to be positive, flat or negative based on the comments that you made about how you're going to enter that marketplace?

Well, I think you'll see it relatively consistent with the caps rate in the U.S.

Okay. And does that take a period of time to normalize or do you think that happens relatively soon?

Well, that's -- we're saying we're not going to go in there with an incremental approach. So we'll lead with a similar capture strategy to what we have in place at that point in time in the U.S.

Now, the actual charging could be different, but our models will try to get us to the same level of capture.

I got it. Okay. And just one other question. Bob, can you just remind us what the impact of getting that second quote in the U.S. market, how that flows through kind of the business and how it all kind of impact the results?

Well, the key thing, and I think I touched on it in my prepared comments, is we in the United States here have a somewhat obscure way to calculate revenue sharing for market data. And that revenue sharing formula, as we learn more about it, has a strong bias towards lower volume exchanges. So to the extent that our Boston [quote] has the ability to gain two to three points of market share, the real interesting point will be how much of the market data pool we're able to claim.

And depending upon the mix of orders versus trades, it could be anywhere from 6% to 9% of the market data pool. So we see that the two things are a benefit because clearly the incremental transactions are just that, incremental, where there's no real change to our cost base. And we'd like to be on the positive side of that arcane formula that we have to live with based upon the SEC's calculations.

Okay, so we really wouldn't expect to see it showing up in the execution side? It would be in the data side?

It'll be in both.

It will? Okay. And just one last question actually for David. Can you just give us the quick kind of cash flow metrics, if you will, for the quarter and any thoughts you have on the year in terms of CapEx and D&A and some of the other non-cash items that get included?

Cash flow from operations was $221 million and that compared to $78 million in March of '07. CapEx I think we'll -- I think at this point and as we come together we'll have more to say on that next quarter. But definitely are managing it well. And in terms of -- I think the pro formas at this point and the reason we presented them to you is I think it definitely presents a good guide from our starting point. (technical difficulty).

Okay, so, I'm sorry. Did you have a CapEx number for the quarter?

I don't have one --

Oh, you don't?

-- for the quarter. About $14 million was for the quarter.

Okay. All right, then.

As I said, I'll update that more as we go forward. I'm just going to know more as we get into the second quarter.

I got it. Thanks very much.

Thank you.

We'll go next to Mike Carrier with UBS.

Morning, guys. Wanted to try to get around some of the noise in the quarter and I realize there's a lot going on and it's kind of early. But when I look at the pro forma numbers for OMX or the non-U.S. ops and then look -- looks like your operating pretax margin was in the low to mid 20s versus OMX's operating around 30, a little above. So just want to understand how much is this due to higher one-time expenses, maybe including some of the retention or any severance versus other issues maybe, like the [light] technology revenues?

That's a big question. We're not breaking it out that way, is the first answer to your question.

Yes, just -- I mean I was just taking if you look at the non-U.S. revs that you give and then last quarter you were just saying if the core NASDAQ revenues or expenses would be running at like $110 million per quarter. So it's just -- it's a rough number and I understand there's a lot going on, but I just didn't know if there were some one-time items on the expense side that maybe just brought it down a little bit.

There were no major extraordinary charges in the numbers other than what I've already highlighted.

Okay. And then just on the Pan-European initiative, you mentioned that your goal is to try to get maybe 5 percentage points of market share in the first year. I just would like to get your view on which markets you expect it to be easiest to get that first 5% from and then what you expect to see on the pricing?

Well, I would definitely direct you to the 20% number as our goal. We'll have obviously checkpoints along the way and 5% is a good round checkpoint. I would say this; the focus I don't think is on a particular market but it's really the high volume stocks. I think those will be the easiest first to gain share in. So we'll look on a Pan-European basis what are the top 200, 300, 400, 500 stocks that trade very actively, stocks where the algos have the ability to really interact with on an efficient basis. So that's going to be our focus.

Okay, thanks.

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

Hey, good morning.

How we doing today, Rob?

Good. First question was on the clearing. Just wondering if you can remind us what sort of initiatives you had there? It looks like the cost on a per share basis went down a little bit. So can you just remind us what you're doing there and if we should see any further benefits or impact going forward?

Well, one, with the Boston and Philly licenses acquisitions we'll be acquiring two clearing licenses and we clearly intend to use one of them. And so our team is hard at work at developing the necessary software and capability to activate those licenses, hopefully not too soon after we close the transactions. And I think we have seen a competitive dynamic as a result of our announced entry into the space and we're pleased to be the beneficiary of lower cost from NSGC.

That lower cost is a benefit reflective of our activities in 2007 and more importantly it's a benefit to us in terms of the transaction rates they're going to charge us for 2008. So I think, as I've said previously on these calls, we have two ways to win by entering the clearing and we're already winning in the first circumstance in that the rates are coming down just on our announcement of coming into the space.

Okay. I was wondering if you could help us out with some balance sheet metrics. It looks like your cash level would go down if you didn't issue debt for the Philly deal. So wondering sort of what the minimum amount of cash you need is -- you need for the business at this point and whether you anticipate any further debt issuance?

Yes, well, the minimum cash we want to run the business is around $350 million right now. Clearly, and just I think to -- as we move forward there we would intend to draw on our committed facility for additional amounts. Again, that is already committed, so the funding for the acquisitions of Philadelphia Nord Pool are already committed at rates we negotiated last year and reflect -- and they're the same rates we had for the OMX debt that we issued. So as we move forward, we would issue additional debt, use some cash but use additional debt to fund those two acquisitions.

Okay. And then, finally, I was wondering if you could give us any sort of guidance as to what the impact might be on depreciation from Nord Pool and Philly?

Yes, we're still -- not at this point -- I mean as Bob said with respect to both of those acquisitions in terms of their performance, we're pleased with how they're doing. They're running ahead of plan and therefore we're quite anxious to get them closed. And as I said in my call -- in my remarks on the call, as we get these closed, as we've done with all of our acquisitions to date, we'll come back and update you on what changes we need to make to our numbers going forward as a result of those.

Okay. Actually, one more, if I might. On the options side, and I apologize if I missed this, can you tell us what the revenues were from NASDAQ options business this quarter and what sort of pricing dynamics you're seeing at Philly at this point?

Well, the options market, we launched it at the end of March so it really was negligible. And we started it at a whole cloth and, as I said, we're quite proud of the fact we're up to 117,000 contracts a day but at zero -- basically zero impact in the first quarter.

Okay. And any change -- any anticipated pricing changes or pressure at Philly?

Again, we haven't closed the transaction but as far as I know today, no.

Okay. Thank you very much.

We'll go next to Brian Bedell with Merrill Lynch.

Good morning, guys.

Hello, Brian.

Just sticking with U.S options, Philly has been gaining share in April and May pretty significantly and coupled with your -- with NASDAQ options marketplace. Could you talk about why you think Philly right now is gaining share just recently and then what your overall share goal is for options, I guess, if you can break it out between NOM --

Right.

-- and Philly.

I hear you. One is I want to just respond to the prior question. We've done a quick calculation. The grand total of revenue we received from our NASDAQ options marketplace in the first quarter was $900. So we're proud to have that $900 and we intend to save it.

I had previously stated with respect to our options market share goal that we wanted to get to 20%. And we're not going to change that goal until we obviously achieve that target. And 20% seems to be a constant number around here because that is our goal for our European strategy and obviously it was our goal for NYSE trading. So we look at the overall market share. We don't -- we will not pay that much attention to the allocation between Philly and our organic options strategy. We have a fundamental belief that both market structures add value in the options space and intend to keep them both going.

All right, okay, so right now Philly's up to, like, 17%. You guys are, like, short of 1%.

Right.

I mean if Philly continues to do well, could you exceed that 20% if you intend to get NOM up --

It's our goal and I think it's obviously within sight.

Okay. And then in the Pan-European marketplace, the 20%, what's the denominator that you're using for -- it is just those stocks, the --

That's a good question. I think we'd have to further define that. But if you were looking for an answer today, you'd probably take the average volume of the 300 most active European stocks would be our defined market.

Okay, great. And then on Tape C, in U.S. marketplace in general you've done obviously a very good job in taking share from the hybrid and in Amex. But Tape C just recently in April and May you've lost a little to Arca and since I guess it's partly due to their pricing strategy, what kind of defenses are you going to enact to either reverse that share from Arca or defend it going forward?

Well, the first thing I would direct you back to is my comments in that we have a number of steps that we're taking that I think will have a fairly dramatic impact on the profitability of the transaction business. And we have always operated here under the premise that we have to allocate back between investors and our customers.

So as we look at these actions that we'll take, we have taken or will take in the second quarter and we see the change in the profit profile, then that will certainly give us flexibility to think about different pricing strategies on our transaction business.

On Tape C typically, I guess, right?

Yes.

Okay. And then just lastly, just trying to understand the Genium product rollout a little more. If you can maybe give the broad timeline now that you've gotten to look at OMX customers much more closely? Say by the end of '08 and then by the end of '09 to what degree do you expect to be rolled out with your customer base on the new Genium plat, the new Genium package?

Well, I think it's a little premature to comment on that. I think you'll hear more from us the next quarterly call. I think for this call I'd have to say suffice it to say that we have made the decisions that need to be made. We recognize the -- I think the wisdom of the Genium approach from the old OMX and we're stepping forward with a Genium platform powered by INET.

And we're in the process of talking to a number of different customers and also finalizing our implementation plans, which will drive us towards the synergy roadmap. So more to come, but that would be the details we're prepared to talk about today.

Okay, great. Fair enough. Thank you.

Thank you.

Thank you.

We'll go next to Chris Allen with Bank of America Securities.

Hey, guys. Thanks for taking the question. Just trying to think about the European opportunity. Unlike in the U.S. where you had hybrid in a static [four-base] pool from which to take market share from, as I understand it, most of the high volume stocks are traded electronically, that are already over there, and now you have some players like Deutsche Bourse getting more aggressive on the algo pricing. I'm just wondering what's -- I mean, how should we think about your ability to take [goal]? What is going to be the mechanism, especially if you have some competitors who are willing to lower prices?

Well, I would say this. We certainly respect our European competitors, but we also understand the deck of cards that they have to play. So as an established competitor, as a public company where they're currently charging sometimes more than 10 times our rate, it will be essentially impossible for them to not under-react to our moves into this space.

And I say that not because they'll be asleep at the switch. I say that because they obviously have to go through their revenue optimization plans for their own -- their own good. And revenue optimization doesn't necessarily mean that you keep 100% of your market share. So we expect to engage competitors. We have fundamental math working our way in that we're leveraging our existing platform. We clearly have the ability to run a low cost environment that we can reflect that benefit back to our customers. So it's, I think, a well thought-out plan and we're ready to bring it on.

The other thing I'll add is that we're introducing into Europe for the first time I think the concept of an intelligent router that will guarantee best execution to orders that we do receive. And clearly we have tremendous, I guess, more experience than anybody on the planet with respect to routing technology and we'll be using that, I think, quite effectively as part of our matching strategy.

Okay. And then just a quick question on the expenses. David, you mentioned before that with the expense saves coming through at the midpoint, $7.5 million, that's what potentially the fourth quarter would be lower than the first quarter levels. Should we also calculate into some natural growth into the U.S. base -- expense base, before factoring in Nord Pool and Philly obviously?

Where would your growth want to come from?

Well, that's what I'm asking. Should we be thinking about growth in any of your -- the U.S. based operations? Compensation, natural compensation, inflation?

No, no, no. No, our synergy plans reflect where we're headed. And to the extent that there's investments in our initiatives, it's already factored in.

Great. Thanks a lot.

We'll go next to Don Fandetti with Citi.

Bob, there's been some pretty good progress on diversifying revenues. Your derivatives around 17%. Do you think about a target there and where might you be in sort of three to five years?

That's a great question. And I would just say this. We're one, focused on operational excellence with everything we do across all our different activities and if we do that, then the different activities -- different opportunities present themselves. So we, as a matter of policy or practice, don't say, okay, we need to be to 25% or at the 30%.

But I will say that in the derivatives space beyond what we've announced obviously with Nord Pool and Philly, there are a number of different opportunities available to us in to NASDAQ OMX and I think we're certainly interested players in the world that will evolve in that space.

Okay. I'll keep it to one question. Thank you.

Thank you.

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

Oh, hi. I just had a follow-up. It's sort of partially been answered. But how do you think about how much market share in Europe and the ECN you need to actually get to to break even? Because the economics here are somewhat more challenging because with the NYSE you had basically a backdoor into [dot] because of the monthly limits. So how do you think about it? That's like 3% or 4% breakeven?

Well, it's probably lower than that, Roger. I haven't quite quantified it. But understand that we're leveraging the strengths of old NASDAQ and old OMX, so we have obviously with the OMX folks tremendous European presence and expertise and then we have the INET expertise and also customers that come along with it. So it's going to be a remarkably small number with respect to the investment that we have to make in this endeavor. We haven't broke it out. I guess, David, we can think about whether we will or not. But so it's not going to take much for us to get to breakeven.

And it's a similar theme that we said with our options market model here in the States, right, so we're again leveraging a platform that works. We don't have to put a tremendous amount of time and effort into making it ready for an options marketplace. So the breakeven point is incredibly high -- incredibly low. I will say it's higher than $900 for the month, though. So we're --

I think, Roger, the only thing I'd add to that is Bob's absolutely right in terms of looking at it in sort of a buildup of the same strategy you had in the options. So the CapEx would be very small. The only other thing that I would just say and it doesn't go at all to the operations, is just we'll have to put a decent amount of cash in for regulatory purposes. But that's going to be expected and we certainly have that cash.

Right.

And just in terms of just the European effort, to put probably a finer point on an answer to a question I gave to a previous caller, to the extent that Euronext LLC or Deutsche Boers reduced their prices by 90%, then it would be a tougher competitive environment for this. But somehow I don't think they're going to do that on the day we start trading stocks.

Yes, I think your point on that was clear. Lastly, do you care to quantify, I know it's only been two months, but what synergies you got -- actually already realized? I believe right off the bat there were things like office space you were consolidating in New York and I think a data center as well that was being consolidated?

I don't really -- I don't want to quantify other than just to say that the reason we were able to up our expectations today is that we're really executing well on our plans. I think you'll see that. It's better for that just to evolve and to just sort of -- we'll show you that in the results as we move forward.

We increased the guidance there on the expense savings, Roger. Is that not enough?

We always want more.

I know that.

All right, thank you.

Okay. I thank you for your time today and look forward to talking to you in three month's time. Thank you.

Thank you very much.

Operator, we're going to hold for a few minutes and let some questions from the media get into the queue.

Thank you.