The Nasdaq Stock Market, Inc. ("NASDAQ(r)"); (Nasdaq:NDAQ), today reported third quarter 2006 net income of $30.2 million, or $0.22 per diluted share, an increase of 69.7% from $17.8 million, or $0.16 per diluted share, in the third quarter of 2005, and 81.9% from $16.6 million, or $0.13 per diluted share, in the second quarter of 2006.
Gross margin, representing total revenues less cost of revenues, was $171.2 million in the third quarter of 2006, an increase of 31.1% from $130.6 million in the year-ago period, and up marginally from $171.1 million reported in the second quarter of 2006.
NASDAQ's Chief Executive Officer, Robert Greifeld commented, "Third quarter operating income grew an impressive 116.9% through the continued execution of our strategic plan. We've been able to improve profitability through successful acquisitions and gains in market share, while maintaining our expense control discipline. Significant gains in our share of trading in NYSE-listed stocks have been achieved, with our matched market sharing growing to 12.1% in the quarter, up from 4.7% in the year-ago quarter. We are on track to reach our 2006 objectives through continued innovation and consistent execution."
Recent HighlightsContinued success in obtaining switches from other markets, with 76 companies transferring their listing to NASDAQ during the year.Completed the acquisition of PrimeZone Media Network, enabling NASDAQ to offer information distribution and multimedia services as part of its Corporate Client services.Began migration to our single book platform, which when completed will provide market participants with a deeper liquidity pool, improved system performance and greater order interaction.Announced plans to introduce the NASDAQ Options Market in third quarter 2007, pending SEC approval.Became operational as an exchange in NASDAQ-listed securities on August 1, 2006.PowerShares Capital Management LLC launched ten new exchange-traded funds (ETFs) on NASDAQ based on FTSE RAFI fundamental indexes. NASDAQ also has agreed to transfer its sponsorship of the QQQs to PowerShares, significantly expanding sales distribution of the QQQs and opportunities to further build its investor base.Secured two new TotalView Enterprise licenses allowing distribution of TotalView data to momore than 57,000 additional non-professional subscribers, and grew professional subscribers 7% from prior quarter and more than doubled them from the year-ago quarter. Enhanced ModelView, NASDAQ's web-based historical data product, to include NYSE- and Amex-listed data as well as INET liquidity.
Charges Associated with NASDAQ's Cost Reduction Program and INET Integration
Included in total expenses for the third quarter 2006 are pre-tax charges of $4.8 million relating to NASDAQ's continuing efforts to reduce operating expenses and improve the efficiency of its operations, as well as to integrate INET. These charges include:Technology Review - NASDAQ recorded expenses of $3.4 million in the quarter associated with its technology review, in which it previously changed the estimated useful life of some assets as it migrates to lower cost operating platforms and processes.Workforce Reductions - NASDAQ recorded charges of $0.9 million in the quarter for severance and outplacement costs.Real Estate - NASDAQ recorded charges of $0.5 million in the quarter as part of its real estate consolidation plans.
NASDAQ is raising guidance for the full-year 2006:Net income in the range of $89.0 million to $92.0 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 $675.0 million to $680.0 million.Total expenses in the range of $466.0 million to $471.0 million.
2006 total expense projections include approximately $55.0 million to $60.0 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 $30.0 million to $33.0 million in charges primarily related to NASDAQ's decision to migrate to less expensive technology operating platforms.Approximately $6.0 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 $7.0 million in severance expenses associated with NASDAQ's plans for workforce reductions.$20.9 million in charges related to the early extinguishment of debt and the refinancing of a credit facility, and an $8.2 million foreign currency gain related to our investment in the London Stock Exchange, both recorded in the second quarter.
NASDAQ's Chief Financial Officer, David Warren, commented: "NASDAQ's third quarter results highlight our ability to quickly and efficiently integrate acquisitions, allowing them to contribute to improved margins. When coupled with revenue growth derived from our product innovations and our ability to reduce legacy operating expenses, we have created an effective business model designed to drive growth in profitability. We are now in the final steps of our INET integration and, once completed, fully expect to realize all deal synergies. Our continued ability to execute to plan allows us to improve our outlook for the remainder of 2006."
Q3 Financial Review
Total Revenues and Gross Margin -Gross margin increased 31.1% in the third quarter to $171.2 million, up from $130.6 million in the year-ago quarter, and is up marginally from $171.1 million reported in the second quarter of 2006.
Market Services gross margin increased to $111.3 million or 48.8% from prior year, and increased 3.3% from prior quarter.
NASDAQ Market Center gross margin increased from the year-ago quarter primarily because 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 the year-ago quarter due to the retirement of legacy products in December 2005. Increases from prior quarter are primarily related to the reduction in clearing costs for INET transactions. INET trades are now cleared through NASDAQ's existing clearing broker, thereby reducing cost of revenues for the quarter.Market Services Subscriptions revenues increased from the year-ago quarter 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, effective February 7, 2006, NASDAQ is no longer required to share NQDS revenue, thereby reducing the amount of revenue shared with UTP Plan participants. This change is also the primary driver for the growth in proprietary revenues and the decline in non-proprietary revenues when compared to the year-ago quarter.Other Market Services revenues increased from prior year due primarily to revenues earned 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.
During the quarter Issuer Services revenues increased 7.2% to $59.8 million from the prior year quarter and declined 5.7% from prior quarter.Corporate Client Group revenues increased from prior year driven primarily by revenues generated from recent acquisitions, which are included in the Corporate Client services line.NASDAQ Financial Products licensing revenues decreased from the prior year and prior quarter due to a decline in licensing fees associated with options traded for NASDAQ licensed ETFs. As reported in the second quarter 2006 10-Q, recent court decisions have impacted NASDAQ's ability to charge a license fee for options that track NASDAQ ETF's.
Total expenses increased 4.0% to $103.3 million from $99.3 million in the year-ago quarter and decreased 23.4% from $134.8 million in the prior quarter. Third quarter 2006 expenses increased from last year primarily due our recent acquisitions of INET, Carpenter Moore, Shareholder.com, and PrimeZone. Expenses declined from second quarter 2006 primarily due to higher charges in the prior quarter related to our cost reduction program and INET integration, the early extinguishment of debt, and the refinancing of a credit facility. Partially offsetting second quarter 2006 charges was the realization of a foreign currency gain related to our investment in the London Stock Exchange, also recognized in the second quarter 2006.
Earnings Per Share
As stated above, third quarter earnings per diluted share was $0.22 versus $0.13 in the second quarter of 2006 and $0.16 per diluted share in the year-ago quarter. NASDAQ's weighted average shares outstanding used to calculate diluted earnings per share was 150.8 million in the quarter versus 145.2 million in the second quarter 2006 and 119.4 million in the year-ago quarter. The outstanding share count increased from the year-ago quarter and prior quarter primarily due to the issuance of approximately 26.5 million shares in equity offerings in the first and second quarters of 2006.
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