Nyse Euronext (NYX) today reported net income of $108 million, or $0.44 per diluted share, for the third quarter of 2012, compared to net income of $200 million, or $0.76 per diluted share, for the third quarter of 2011.
Results for the third quarter of 2012 and 2011 include $18 million and $29 million, respectively, of pre-tax merger expenses and exit costs. In the third quarter of 2012, our GAAP effective tax rate included a discrete net deferred tax benefit of approximately $12 million, principally related to the enacted reduction in the corporate tax rate from 25% to 23% in the United Kingdom. Excluding merger expenses, exit costs and discrete tax items, net income in the third quarter of 2012 was $108 million, or $0.44 per diluted share, compared to $186 million, or $0.71 per diluted share, in the third quarter of 2011.
"In the third quarter, we continued to execute against our strategy and deliver on our multi-year growth commitments, known as Project 14, which we believe will drive a step-up in the underlying earnings power of the company in the coming years, even if trading volumes remain lackluster," said Duncan L. Niederauer, CEO, NYSE Euronext. "We are investing in future growth drivers like NYSE Clearing and this quarter we launched new futures contracts based on MSCI global indices and the Russell Europe SMID 300 Index. Additionally, we are moving into adjacencies in the governance and compliance segment with our acquisition of Corpedia. Turning to the efficiency stream of Project 14, we are diligently pulling costs out of the platform with expenses running solidly below prior year levels. Lastly, we are continuing to return capital to our investors through dividends and share repurchases."
"Our results for the quarter reflect the traction that we are gaining with our efficiency efforts. Against our Project 14 goals, we have taken $82 million out of our expense base year-to-date, which exceeds our 2012 objective of saving 25% of the total $250 million cost reduction plan. This puts us ahead of our full-year 2012 cost guidance," commented Michael S. Geltzeiler, Group Executive Vice President and CFO, NYSE Euronext. "Turning to the capital front, we resg to the capital front, we resed Michael S. Geltzeiler, Group Executive Vice President and CFO, NYSE Euronext. "Turning to the capital front, we restructured our investment in Qatar, avoiding $80 million in future payments, we repurchased 16 million shares year-to-date and we refinanced a portion of our outstanding debt at very attractive levels. The latter will result in annual run-rate interest expense savings of approximately $15 million and $24 million in 2013 and 2014, respectively. All of these actions are repositioning the company for an anticipated return to growth."
THIRD QUARTER 2012 CONSOLIDATED RESULTS
Total revenues, less transaction-based expenses, which include Section 31 fees, liquidity payments and routing and clearing fees (net revenue), were $559 million in the third quarter of 2012, down $145 million, or 21% compared to the third quarter of 2011 and included a $20 million negative impact from foreign currency fluctuations. The $125 million decrease in net revenue, on a constant currency basis, compared to the third quarter of 2011 was primarily driven by lower average daily volumes ("ADV"), mostly attributable to the derivatives business. Third quarter of 2011 financial results benefited from extreme market volatility in Europe and the U.S. driven by the European sovereign debt crisis and the U.S. debt ceiling issue. Market volatility since the third quarter of 2011 has significantly declined, reaching multi-year lows in August of 2012.
Other operating expenses, excluding merger expenses and exit costs, were $388 million in the third quarter of 2012, down $28 million, or 7% compared to the third quarter of 2011. Excluding the impact of new business initiatives and a $10 million positive impact attributable to foreign currency fluctuations, other operating expenses were down $29 million, or 7%, compared to the third quarter of 2011. Year-to-date on the same basis, other expenses are running $65 million, or 5% below prior year levels.
Year-to-date, Project 14 savings are $82 million, which represents 33% of the total $250 million expected to be saved by the end of 2014, running well above the 25%, or $63 million, expected for the full-year 2012.
Operating income, excluding merger expenses and exit costs, was $171 million, down $117 million, or 41% compared to the third quarter of 2011 and included a $10 million negative impact attributable to foreign currency fluctuations.
Adjusted EBITDA, excluding merger expenses and exit costs, was $235 million, down $125 million, or 35% compared to the third quarter of 2011. Adjusted EBITDA margin was 42% in the third quarter of 2012, compared to 51% in the third quarter of 2011.
Loss from associates is primarily related to New York Portfolio Clearing. Net (income) loss attributable to noncontrolling interest consists primarily of net income attributable to NYSE Amex Options which was partially offset by the net loss attributable to NYSE Liffe U.S.
Based on current projections for profits and changes to UK tax rates, we now expect our non-GAAP effective tax rate to be 24% for the full-year 2012. In the third quarter of 2012, the 21% effective tax rate reflects a tax rate true-up to adjust the year-to-date tax rate to 24% from 25%, which added $0.02 to third quarter 2012 diluted earnings per share.
The weighted average diluted shares outstanding in the third quarter of 2012 was 247 million, down from 263 million in third quarter of 2011. During the third quarter of 2012, a total of 4.7 million shares were repurchased at an average price of $25.46 per share and year-to-date a total of 15.9 million shares have been repurchased at an average price of $26.66. The current repurchase authorization had $128 million remaining as of September 30, 2012.
At September 30, 2012, total debt was $2.5 billion. Cash, cash equivalents and short term financial investments (including $24 million related to Section 31 fees collected from market participants and due to the SEC) were $0.4 billion and net debt was $2.1 billion at the end of the third quarter of 2012. The ratio of debt-to-EBITDA at the end of the third quarter of 2012 was 2.4.
On October 5, 2012 NYSE Euronext closed on the public offering of $850 million 2.00% notes due in October 2017. The proceeds from this offering were used to fund the purchase of $336 million of our outstanding $750 million 4.80% notes due in June 2013 and €80 million of our €1 billion 5.375% notes due in June 2015 and for other general corporate purposes, including the reduction in outstanding commercial paper. The refinancing is expected to save an annualized $15 million and $24 million in interest expense in 2013 and 2014, respectively.
Total capital expenditures were $41 million in the third quarter of 2012 and $125 million year-to-date.
Headcount as of September 30, 2012 of 3,061 was 16 below year-end 2011 levels despite the addition of 99 employees from the acquisition of Corpedia in June of 2012.
The Board of Directors declared a cash dividend of $0.30 per share for the fourth quarter of 2012. The fourth quarter 2012 dividend is payable on December 28, 2012 to shareholders of record as of the close of business on December 14, 2012. The anticipated ex-date will be December 12, 2012.
THIRD QUARTER 2012 SEGMENT RESULTS
Derivatives net revenue of $164 million in the third quarter of 2012 decreased $62 million, or 27% compared to the third quarter of 2011 and included a $4 million negative impact from foreign currency fluctuations. The $58 million decrease in derivatives net revenue, on a constant currency basis, compared to the third quarter of 2011, was driven by lower average daily trading volumes. While market conditions continue to be challenging for derivatives trading, the third quarter of 2012 was a strong quarter for new product development and growth initiatives which will benefit the company in the future:
• NYSE Euronext and Bank of China Limited recently signed a Memorandum of Understanding to work together and consider mutually beneficial business ventures. The agreement will strengthen NYSE Euronext's banking relationship with Bank of China and NYSE Euronext will provide guidance to Bank of China which will establish itself as a General Clearing Member of the London market of NYSE Liffe. With the increased importance of the renminbi (RMB) in the capital markets, both parties will work together to develop and launch RMB denominated products and explore the potential for RMB to be used as collateral in NYSE Euronext's new clearinghouse in London.
• New York Portfolio Clearing, LLC ("NYPC"), a joint venture of The Depository Trust & Clearing Corporation and NYSE Euronext and a market leader in derivatives clearing, announced that J.P. Morgan Securities LLC and BNP Paribas Securities Corp. will join the expanding group of firms enjoying the capital efficiencies generated by the NYPC model.
• Swapnote product ADV in the third quarter of 2012 increased 26% compared to the third quarter of 2011 and increased 30% compared to the second quarter of 2012. The growth in ADV was primarily driven by a new market making program designed to expand liquidity in the product. Additionally, ADV in Medium Gilt futures increased 62% compared to the third quarter of 2011 and increased 108% versus the second quarter of 2012. The increase was driven by the re-launch of the Designated Market Making Program for Short and Medium term Gilt futures.
• NYSE Liffe launched 3 year mid-curve options on Euribor and Sterling in July 2012. The Euribor 3 year mid-curve option is the fastest growing new product for NYSE Liffe on record with open interest approaching 385,000 contracts and ADV of 23,000 contracts in first few months of trading.
• NYSE Liffe was the first European exchange to launch futures contracts on the Russell Europe SMID 300 Index on its market leading wholesale derivatives service, Bclear, on October 1, 2012. The Russell Europe SMID 300 Index contains the 300 most rapidly tradable constituents from the small- and mid-cap opportunity set in developed European markets.
• NYSE Liffe U.S. announced the addition of three new futures contracts based on MSCI global indices. The addition of mini MSCI Canada, mini MSCI Emerging Markets Latin America and mini MSCI World index futures offers customers more flexibility and control in implementing their desired exposure to key global markets and provides accessibility to a wider range of in-demand global economies.
CASH TRADING AND LISTINGS
Cash Trading and Listings net revenue of $282 million in the third quarter of 2012 decreased $71 million, or 20% compared to the third quarter of 2011 and included an $11 million negative impact from foreign currency fluctuations. The $60 million decrease in net revenue, on a constant currency basis, compared to the third quarter of 2011 was primarily driven by lower average daily trading volumes.
• European cash ADV of 1.3 million transactions in the third quarter of 2012 decreased 31% from 1.9 million transactions in the third quarter of 2011 and decreased 23% from second quarter of 2012 levels. European cash market share (value traded) in NYSE Euronext's four core markets was 68% in the third quarter of 2012, up from 66% in the third quarter of 2011 and up from 66% in the second quarter of 2012.
• NYSE Euronext announced the launch of a Retail Matching Facility (RMF) on its European regulated cash markets, a new service which enables Retail Liquidity Providers to offer price improvement to retail investors. This initiative, which meets all pre- and post-trade MiFID requirements, will be available in mid- January 2013.
• In the U.S., cash trading ADV in the third quarter of 2012 decreased 39% to 1.6 billion shares from 2.6 billion shares in the third quarter of 2011 and decreased 13% from the second quarter of 2012. Tape A matched market share was 32% in the third quarter of 2012, down from 36% in the third quarter of 2011 and down slightly from second quarter of 2012. Trading off exchange, as reported by the Trade Reporting Facility ("TRF") has increased to 32% of overall consolidated average daily volume in the third quarter of 2012 from 28% in the third quarter of 2011.
• Through the third quarter of 2012, NYSE Euronext was ranked #1 in IPOs both globally and in the United States. NYSE Euronext raised $27.0 billion in total global proceeds on 86 Initial Public Offerings (IPOs). In the U.S., NYSE Euronext listed 57% of all IPOs, bringing 57 IPOs to the U.S. market. NYSE Euronext has steadily captured share in technology-based IPOs. NYSE Euronext listed 50% of the technology IPOs in the U.S., including the recent IPOs of ServiceNow, Inc., Palo Alto Networks Inc., and Trulia Inc. NYSE Euronext also leads the market for Non-U.S. issuers, notably listing the $3.6 billion initial public offering of Banco Santander (Mexico), the second largest U.S. IPO of 2012.
• NYSE Euronext welcomed two additional transfers in the third quarter of 2012, U.S. Physical Therapy Inc. and On Assignment, Inc. Through the third quarter of 2012, 10 companies transferred to the NYSE with three departures from the NYSE and one from NYSE MKT. Since 2010, a total of 40 companies have transferred to NYSE and 14 have transferred to another U.S. exchange.
• Corpedia and Corporate Board Member, both NYSE Euronext companies, announced a partnership to provide corporate directors, chief compliance officers, general counsel, and executives with a robust, integrated suite of governance oversight solutions. The suite features director education resources and online training in key risk areas, comparative tools, and research and Continuing Legal Education programs to help directors and officers achieve the highest standards of corporate conduct and compliance.
INFORMATION SERVICES AND TECHNOLOGY SOLUTIONS
Information Services and Technology Solutions revenue was $113 million in the third quarter of 2012, a decrease of $12 million, or 10% compared to the third quarter of 2011 and included a $5 million negative impact from foreign currency fluctuations. Net revenue in the third quarter of 2011 included $5 million in onetime sales to the Tokyo and Warsaw Stock Exchanges. The $2 million decrease in revenue, on a constant currency basis, excluding the onetime sales, compared to the third quarter of 2011, was driven by declines in enterprise software and market solutions revenue. The decline in revenue year-over-year is the result of the challenging environment for financial services technology sales which has delayed client decisions on purchases of software and connectivity services. To drive the business forward, NYSE Technologies appointed Jon Robson as its new Chief Executive Officer. Based in New York, he reports to Dominique Cerutti, President & Deputy CEO, NYSE Euronext. Highlights for the third quarter of 2012 included:
• NYSE Technologies announced a partnership with Russell Investments to provide technology solutions and server co-location for RussellTick, which includes real time index data for the $3.9 trillion Russell index series. Utilizing the existing NYSE Euronext Global Index Feed (GIF) technology, NYSE Euronext will become the real time distributor of Russell's real time product RussellTick in early December 2012.
• NYSE Technologies is currently revamping global data agreements, including pricing, to better reflect how data is used today. This is anticipated to result in more data products and more favorable pricing and is expected to drive market data revenue higher.
• NYSE Technologies announced that in collaboration with Bolsa Mexicana de Valores (BMV) and Americas Trading Group (ATG) it has built and deployed a state-of-the-art trading infrastructure complete with global connectivity, risk management functionality and direct market data distribution for customers trading in Mexican markets.