Nasdaq raises guidance

Second quarter 2006 results include the following pre-tax items:

• $20.9 million in charges related to the early extinguishment of debt and the refinancing of a credit facility, both realized in connection with NASDAQ's investment in the London Stock Exchange.
  
• $17.9 million in charges associated with NASDAQ's cost reduction program and INET integration.
  
• An $8.2 million foreign currency gain associated with NASDAQ's investment in the London Stock Exchange.
  
• $9.2 million of dividend income related to the payment of an ordinary dividend by the London Stock Exchange. NASDAQ's investment in the London Stock Exchange is accounted for in accordance with Financial Accounting Standard No. 115, Accounting for Certain Investments in Debt and Equity Securities (FAS 115).

The impact of these items on net income was $13.0 million or $0.09 per diluted share.

Gross margin, representing total revenues less cost of revenues, was $171.1 million in the second quarter of 2006, an increase of 31.2% from $130.4 million in the year-ago period, and an increase of 5.6% from $162.0 million in the first quarter of 2006. Second quarter 2006 represents the seventh consecutive quarter of gross margin growth.

NASDAQ's Chief Executive Officer, Robert Greifeld commented, "Solid execution of our growth strategy throughout the organization drove NASDAQ's strong top line performance. During the quarter our trading systems continued to handle more market share and we further increased our potential for future growth through the introduction of new products and services such as the Global Select Market, the IPO Cross, and NASDAQ Market Velocity. This continued progress enhances our already strong competitive position. Looking into the second half of 2006, we are maintaining our consistent focus on innovation and execution that anticipates and responds to the needs of our customers."

Recent Highlights

Recently achieved a new single day high in trading NYSE-listed stocks, with 11.8% matched market share on July 19, 2006. Matched market share for NYSE-listed stocks increased in the second quarter 2006 to 8.3%, up from 7.0% in the first quarter 2006. Matched market share for AMEX-listed stocks increased to 24.8% in the second quarter 2006, up from 22.3% in the prior quarter.

• Made an investment in the London Stock Exchange resulting in the ownership of 25.3% of outstanding shares.
• Received SEC approval of NASDAQ's phased approach to Exchange Operation. NASDAQ plans to become operational as an exchange in NASDAQ-listed securities on August 1, 2006, and in other exchange-listed securities after September 1, 2006.
• Launched the NASDAQ Global Select Market, a new listing tier with the highest initial listing standards in the world; and launched a corresponding index to track the new tier.
• Recorded a record in the Closing Cross on June 30th through the calculation of the entire family of Russell indexes during its annual reconstitution. Approximately 690.8 million shares representing $10.5 billion were executed in 5.1 seconds.
• Launched the IPO Cross, an automated trading facility designed to provide a fair and transparent executions process to trade IPOs based on supply and demand.
• Unveiled NASDAQ Market Velocity, a proprietary, real-time data product that detects "noise" in NASDAQ stocks and alerts traders to events before they affect price and volume information. NASDAQ Market Velocity is part of NASDAQ Market Analytix, a package of data products that provides new levels of transparency to trading activity in NASDAQ systems.
• Agreed to acquire PrimeZone Media Network, a privately held press release newswire and multimedia services firm, enhancing NASDAQ's investor relations and corporate communications suite.

Charges Associated with NASDAQ's Cost Reduction Program and INET Integration

As mentioned above, included in total expenses for the second quarter 2006 are pre-tax charges of $17.9 million relating to NASDAQ's continuing efforts to reduce operating expenses and improve the efficiency of its operations, as well as to integrate the INET ECN.
These charges include:

• Technology Review - NASDAQ recorded expenses of $9.9 million in the quarter associated with its technology review, in which it changed the estimated useful life of some assets as it migrates to lower cost operating platforms and processes.
• Workforce Reductions - NASDAQ recorded charges of $2.6 million in the quarter for severance and outplacement costs.
• Real Estate - NASDAQ recorded charges of $5.4 million in the quarter as part of its real estate consolidation plans.

2006 Outlook

NASDAQ is raising guidance for the full-year 2006:

• Net income in the range of $68.0 million to $78.0 million for the year, including the impact of charges associated with NASDAQ's cost reduction program, INET integration, and losses on extinguishment of debt noted below.
• Gross margin in the range of $645.0 million to $655.0 million.
• Total expenses in the range of $475.0 million to $485.0 million.
• 2006 total expense projections include approximately $60.0 million to $70.0 million of pre-tax charges associated with NASDAQ's continuing cost reduction efforts and INET integration.

Also included are charges realized in the second quarter related to our investment in the London Stock Exchange.

These charges include:

• Approximately $36.0 million to $42.0 million in charges primarily related to NASDAQ's decision to migrate to less expensive technology operating platforms.
• Approximately $5.0 million to $7.0 million in non-cash charges related to NASDAQ's plans to exit certain real estate facilities.
• Approximately $6.0 million to $8.0 million in severance expenses associated with NASDAQ's plans for workforce reductions.

The previously mentioned $20.9 million charge and $8.2 million foreign currency gain related to our investment in the London Stock Exchange.

NASDAQ's Chief Financial Officer, David Warren, commented, "As this quarter's results clearly demonstrate, our business fundamentals remain strong as we grew revenue while driving down core operating expenses.

As a result our operating income has improved when compared to both prior year and the first quarter. Excluding non-recurring charges, NASDAQ's operating income improved 21% from the first quarter 2006 and 69% when compared to second quarter 2005. The INET integration and our systems migration to a single book remain on schedule and we remain confident of achieving all of our milestones. Our execution to date and our confidence leads us to increase our 2006 outlook for both gross margin and net income."

Q2 Financial Review

Total Revenues and Gross Margin-Gross margin increased 31.2% in the second quarter to $171.1 million, up from $130.4 million in the year-ago quarter, and increased 5.6% from $162.0 million in the first quarter of 2006.

Market Services

Market Services gross margin increased to $107.7 million or 45.0% from prior year.


NASDAQ Market Center gross margin increased from prior year primarily due to the inclusion of INET results, increases in average daily trading volume, and increases in trade execution market share for NYSE- and AMEX-listed equities. Access services revenue declined from prior year due to the retirement of legacy products in December 2005.

Market Services Subscriptions revenues increased from prior year as less data revenue was shared under the UTP Plan. NASDAQ's UTP market share increased primarily due to the INET acquisition which resulted in INET trades being reported to NASDAQ. Also contributing to the decrease in UTP shared revenue was the removal of NQDS from the UTP Plan, which was approved in the second quarter of 2006 but became effective February 7, 2006. NASDAQ reclaimed shared revenues from the effective date through March 31, 2006 and recorded an adjustment of approximately $1.3 million in the second quarter of 2006. Increases in sales of proprietary data products also contributed to improvements of Market Services Subscriptions revenue for the quarter.

Other Market Services revenues increased from the prior year due primarily to payments made under a contract between NASD and NASDAQ for the operations of the Over-the-Counter Bulletin Board (OTCBB), which took effect on October 1, 2005.

Issuer Services

During the quarter Issuer Services revenues increased 13.0% to $63.4 million from prior year.

Corporate Client Group revenue increased from prior year driven by revenues generated from recent acquisitions including Carpenter Moore and Shareholder.com.

NASDAQ Financial Products licensing revenue increased from the prior year due to higher volume activity for both derivative and third party products as well as increases in third party assets under management.

Total Expenses - Total expenses increased 29.5% to $134.8 million from $104.1 million in the year-ago quarter and increased 12.1% from $120.2 million in the prior quarter. Second quarter 2006 expenses increased as a result of $30.6 million of pre-tax items noted above, including the early extinguishment of debt, the refinancing of a credit facility, the foreign currency gain, and costs associated with the continuing INET integration and cost reduction activities. Similar charges relating to the INET integration and cost reduction activities were included in previous quarters, including $5.9 million in the second quarter of 2005 and $13.6 million in the first quarter of 2006.

Earnings Per Share

As stated above, second quarter earnings per diluted share were $0.13 versus $0.16 in the first quarter of 2006 and $0.13 per diluted share in the year-ago quarter. During the second quarter NASDAQ completed a common stock offering in which it sold 18.5 million shares and used the proceeds to pay down debt incurred to purchase a stake in the London Stock Exchange. NASDAQ's weighted average shares outstanding used to calculate diluted earnings per share was 145.2 million in the quarter versus 109.9 million in the year ago quarter and 128.0 million in the first quarter 2006. The increase from last year is due primarily to the full quarter dilutive impact of the convertible notes and related warrants issued in April 2005 as part of the acquisition of INET ECN, and to the shares issued in NASDAQ's 2006 equity offerings.

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