The FINANCIAL — NYSE Euronext (NYSE: NYX) on February 9 reported a net loss of ($1,338) million, or ($5.06) per diluted share, for the fourth quarter of 2008, and ($738) million, or ($2.78) per diluted share, for the full year 2008.
The net loss for the fourth quarter and full year 2008 includes a pre-tax $1,590 million non-cash charge, primarily for the impairment of certain goodwill and indefinite-lived intangible assets related to the merger of NYSE Group and Euronext. The charge adjusts the carrying values of goodwill and indefinite-lived intangible assets to their estimated fair values. The impairment was driven primarily by adverse equity market conditions that have caused a material decline in industry market multiples in the latter part of 2008. This charge has no impact on debt covenants, cash flows, or normal day-to-day business operations. These results are presented in accordance with U.S. generally accepted accounting principles (GAAP).
Pro-forma non-GAAP net income in the fourth quarter was $137 million, or $0.52 per diluted share, compared to $0.65 per diluted share in the fourth quarter of 2007. On the same basis, net income for the full year 2008 was $763 million, or $2.87 per diluted share, an increase of 9% compared to 2007. Pro forma non-GAAP results exclude activity assessment and Section 31 fees, merger expenses and exit costs, impairment charges, gains on sale of businesses and equity investments and other non-recurring items. A full reconciliation of these non-GAAP results is included in the attached tables. Financial highlights include:
Gross revenues were up 21% in the fourth quarter and 19% for the full year, driven by increased volumes across all venues and pricing changes in the U.S. and European cash markets. These changes increased gross revenues, but also resulted in higher rebates to liquidity providers.
Net revenues benefited from higher volumes, but were negatively impacted by new pricing initiatives which resulted in higher rebates to customers, including Pack Epsilon pricing in Europe, NYSE Arca tiered pricing in the U.S., and NYSE pricing changes made in connection with the introduction of the NYSE new market model designed to attract liquidity to the floor of the NYSE. Foreign exchange variances also negatively impacted net revenues by ($55) million in the quarter, but positively impacted full year net revenues by $25 million. Net revenues are defined as total revenues less direct transaction costs comprised of Section 31 fees, liquidity payments, and routing and clearing fees.
Diluted earnings per share in the fourth quarter of 2008 declined by $0.13 or 20%, compared with the prior year, including a $0.07 per share negative impact for currency fluctuations and $0.06 per share impact for planned investments in NYSE Liffe U.S. and NYSE Amex, which was operating at a loss for the fourth quarter.
“During this period of unprecedented market dislocation and uncertainty, we continue to focus on executing and delivering against our key strategic initiatives which will drive our long-term growth,” said Duncan L. Niederauer, CEO, NYSE Euronext. “We recorded revenue growth, grew pro forma earnings per share by 9% in 2008, continued to reduce fixed operating expenses as a result of our non-technology and technology-related savings initiatives and we implemented a new NYSE market model which has stabilized our market share in the U.S. In light of challenging market conditions, we have decided to refrain from stock repurchases at this time, while keeping the Board authorization in place. At the same time, the Board has decided to maintain the $0.30 quarterly dividend for our shareholders through 2009. With these two actions, we are attempting to strike the right balance between capital management and shareholder value.”
Fixed operating expenses from continuing operations were $473 million, compared to $447 million for the fourth quarter of 2007. For the full year 2008, total fixed operating expenses were $1,742 million, compared to $1,709 million in the prior year. Excluding the impact of currency translation, acquisitions and dispositions of businesses, and selected strategic initiatives, fixed operating expenses in the fourth quarter decreased $61 million, or 14%, compared to fourth quarter of 2007. On the same basis, fixed operating expenses for the full year 2008 decreased $146 million, or 9%, compared to 2007. Fixed operating expenses are defined as operating expenses less merger expenses and exit costs, impairment charges, direct transaction costs, and excluding regulatory fine income. A full reconciliation of these non-GAAP results is included in the attached tables.
“In the fourth quarter, we continued to focus on driving the long-term growth of our franchise through investment in new initiatives and the integration of Amex® into our operations,” said Michael S. Geltzeiler, Group Executive Vice President and Chief Financial Officer, NYSE Euronext. “At the same time that we are investing in growth initiatives, we are accelerating our focus to pull costs out of our operations and deliver against our efficiency initiatives, as reflected by the $146 million decrease in pro forma fixed operating expenses compared to 2007. The non-cash impairment charge brings our book value for the Euronext transaction in line with our fair value, which has been impacted by industry-wide multiple compression. Although the outlook is challenging and competitive pressures are increasing, our European revenues grew 13% to $1.8 billion in 2008.”
Other Financial Highlights
Included in the GAAP results for the fourth quarter of 2008 were $94 million of pre-tax merger expenses and exit costs (primarily related to severance charges), compared to $18 million in the fourth quarter of 2007. For the full year 2008, pre-tax merger expenses and exit costs were $177 million, compared to $67 million in 2007.
NYSE Euronext completed its acquisition of the American Stock Exchange (Amex) on Oct. 1. An estimated total of 6.8 million shares of NYSE Euronext common stock were issued for the transaction, it is expected to produce annualized run-rate cost savings of approximately $120 million by the end of 2009 and is expected to be accretive in 2009.
On Oct. 1, in connection with the completion of SunGard’s acquisition of a majority interest in GL Trade, NYSE Euronext received €161.6 million ($227.5 million) from the sale of its 40% ownership stake in GL TRADE to SunGard. The results of GL Trade are incorporated in our GAAP results as discontinued operations.
Effective upon closing of the Amex transaction on Oct. 1, NYSE Euronext removed the transfer restrictions on approximately 42 million common shares issued in connection with the merger of NYSE and Archipelago. These shares were previously restricted until March 2009.
As of Dec. 31, 2008 , NYSE Euronext had repurchased 13.4 million of its outstanding shares for a total of $348 million, at an average price of $26.04 per share. Management temporarily discontinued repurchases of shares to preserve capital; however, the Board authorization remains in place.
On Oct. 29, NYSE Euronext announced its intention to carry out a restructuring plan of its European operations in order to reduce fixed costs. The plan includes a proposed net reduction of approximately 200 headcount by the end of 2009 and is expected to result in annual run-rate savings of approximately $23 million in 2010.
At Dec. 31, 2008 , NYSE Euronext had net debt of $2.1 billion. Cash, cash equivalents, investment and other securities (including $84 million related to Section 31 fees collected from market participants and due to the SEC ) were $1.0 billion and total debt was $3.1 billion.
NYSE Euronext will make a $0.30 quarterly dividend per share payment on March 31, 2009 to shareholders of record as of March 13, 2009.
Business and Market Summary
Universal Trading Platform (UTP) made its debut with the successful migration of NYSE Euronext’s European bond market onto the platform, and will be rolled out to all of NYSE Euronext’s markets in the U.S. and Europe in 2009.
U.S. Cash Equities
In the fourth quarter of 2008, the former Amex® equities trading business, now rebranded as NYSE Amex, relocated to NYSE’s trading floor.
NYSE in partnership with BIDS Holdings LP, launched its new block-trading venue, New York Block Exchange (NYBX) at the end of January 2009.
In the fourth quarter, average daily volume was 4.1 billion shares traded, a 44% increase over the same period in 2007, representing the most active quarter ever, with a record 261.7 billion shares traded. For the full year 2008, a total of 894.5 billion shares were traded across all U.S. equities, up 24% compared to 2007.
In the fourth quarter, the NYSE introduced its next generation market model to attract liquidity to the floor of the NYSE. The new model transforms Specialists into Designated Market Makers (DMMs) and also establishes Supplemental Liquidity Providers (SLPs), a new class of upstairs, electronic, high-volume members incented to add liquidity on the NYSE. In part as a result of the implementation of this new model, DMM participation increased from 3.6% in September, to 7.0% in December.
U.S. market share in Tape A securities increased to 43.4% in December, from 42.2% in September. NYSE Tape A market share increased 400 basis points during the same period, driven in part by the success of the new NYSE market model.
The NYSE recently announced plans to roll out new pricing on March 1, 2009. The NYSE fee change will include customer rebates for adding liquidity, while continuing to offer the lowest transaction fees for taking liquidity, which is expected to be rolled out in conjunction with significant NYSE execution speed improvements. The price change builds on the recent rebate incentive program for DMMs and SLPs.
During the fourth quarter of 2008, U.S. market share in Tape C securities reached 19.9% and showed continued growth as compared to 19.2% for the same period a year ago.
European Cash Equities
NYSE Euronext appointed EuroCCP, a wholly-owned subsidiary of the Depository Trust & Clearing Corporation (DTCC) based in London , as clearer of NYSE Arca Europe, its Multilateral Trading Facility (MTF), which is expected to launch in the first quarter of 2009.
SmartPool, the new MTF set up by NYSE Euronext, BNP Paribas, HSBC and J.P. Morgan, began trading services in early February 2009, initially with stocks from 15 European markets.
NYSE Euronext introduced its Single Order Book which aggregates liquidity for each security listed on its Amsterdam , Brussels and Paris cash markets on one single trading line for each security.
In the fourth quarter of 2008, NYSE Euronext’s European cash markets experienced average daily volume of 1.6 million trades, an increase of 20% versus the same period last year.
October 2008 was a record month for NYSE Euronext’s European markets, registering an all-time record 49 million transactions executed. The previous record was set in January 2008, with 41 million transactions executed.
In 2008, a total of 397.0 million transactions were executed on NYSE Euronext European markets, an increase of 23% compared to the same period in 2007.
Global Exchange Traded Products
NYSE Euronext is the world's leading marketplace for Exchange Traded Products, with more that 1,100 ETFs listed on NYSE Euronext markets consisting of 710 primary ETF listings in the U.S. and 396 primary ETFs in Europe.
NYSE Euronext’s European exchanges added 41,472 new warrant and certificate listings in 2008, a 52% increase from 2007.
In the fourth quarter, NYSE Arca added 699 ETPs, including 657 from the acquisition of Amex®, consisting of 426 ETFs, 11 ETNs, and 262 certificates.
Average daily volume in the fourth quarter of 2008 was 647 million shares, compared to 278 million in the fourth quarter of 2007.
Average daily volume for 2008 was 450 million shares, compared to 252 million in 2007.
NYSE Liffe and LCH.Clearnet Ltd, launched the first exchange-based clearing solution for credit default swap (CDS) index contracts on Bclear and received SEC exemptive relief allowing qualified U.S. market participants to access the joint clearing solution for the CDS market.
NYSE Euronext signed a memorandum of understanding with two major Chinese exchanges, the Dalian Commodity Exchange and the Zhengzhou Commodity Exchange. NYSE Euronext is now working with both exchanges on market development, information sharing and technology.
NYSE Liffe traded an average of 3.7 million futures and options, including Bclear, during the fourth quarter of 2008, a 5% increase from the year ago quarter.
In 2008 NYSE Liffe traded over 1 billion contracts for the first time, an increase of 11% compared to 2007, including a total of 191 million contracts processed by Bclear, an increase of 56%, compared to 2007. Average daily volume on NYSE Liffe for the full year was 4.1 million, up 10% compared to 2007.
A total of 309 million individual equity and 173 million equity index derivative contracts were traded in 2008, representing an increase of 18% and 11%, respectively compared to 2007.
529 million short-term interest rate derivatives contracts were traded, up 8%, and 13 million commodity contracts were traded, up 4%.
The former Amex options trading business, now branded as NYSE Amex Options, will relocate to NYSE’s trading floor in the first quarter of 2009.
NYSE Euronext’s U.S. options platforms, NYSE Arca Options and NYSE Amex Options, registered average daily volume of 2.1 million contracts during the fourth quarter of 2008, an increase of 15.3% compared to the year ago quarter.
An average of 1.8 million contracts were traded each day in 2008. Total volume grew by 37%, outpacing overall U.S. options industry volume growth of 27%.
For equity options trading in the SEC Penny Pilot program, NYSE Arca Options executed 12% of all eligible issues in the fourth quarter, a 4% increase since the pilot began in January 2007.
NYSE Euronext’s U.S. futures business, NYSE Liffe U.S. , traded over 1.8 million metals contracts since its launch in September and executes approximately 22,000 contracts per day. The Options Clearing Corp. will become the NYSE Liffe U.S. clearing house in the first quarter of 2009.
Based on IPO proceeds raised globally in 2008, NYSE Euronext retained its No. 1 ranking among major exchanges, with $45 billion raised, or 37% of total IPO capital raised.
NYSE Euronext attracted the largest IPO in U.S. history, with Visa (NYSE: V), raising $17.86 billion/€11.5 billion, and the second-largest IPO this year in Europe , with EDPR (NYSE Euronext: EDPR) raising $2.42 billion/€1.566 billion.
A total of seven companies from China listed on the U.S. and European markets of NYSE Euronext during 2008, with three listing in the U.S. and four listing in Europe.
The NYSE launched the NYSE Market Access Center , a comprehensive investor relations and market intelligence service for senior executives at NYSE-listed companies.
NYSE Technologies (formerly NYSE Euronext Advanced Trading Solutions Business)
NYSE Technologies is the commercial technology business comprising the software products, network services, exchange solutions and market data solutions developed by NYSE Euronext, including NYSE TransactTools, the entity formerly known as AEMS and Wombat Financial Software. The business provides the investment community with leading electronic trading technology for liquidity center connectivity, trading applications, exchange solutions, market data content & management and low latency trade messaging.
The SFTI Europe network is developed, clients are in the process of being connected, and the network will be fully launched in the first quarter of 2009.
NYSE Euronext completed the integration of the Wombat quoting engine into the NYSE and NYSE Amex markets, significantly reducing latency.
In 2008, commercial partnerships were established with BM&F Bovespa (equities and derivatives platforms); Bursa Malaysia (derivatives platform); Philippines Stock Exchange (MOU and new trading platform) and the Tokyo Stock Exchange (Tdex+ based on LIFFE CONNECT).
NYSE Euronext also announced plans to establish a partnership with the State of Qatar to transform the Doha Securities Market into an integrated cash and derivatives exchange (the "Qatari Securities Market", or "QSM"), while providing NYSE Euronext with a significant presence in the Middle East . As part of the partnership, NYSE Euronext plans to become a strategic shareholder with a Board presence in QSM, while NYSE Technologies would provide management consulting, technology services, and the links between the QSM cash and derivatives markets and the world's largest financial centers.
NYSE Euronext debuted a suite of new market data products in the U.S. and Europe that enables internet and media organizations to disseminate real-time, last sale prices from the company's equities markets free of charge to the public. Also introduced in 2008 were NYSE OpenBook Ultra and NYSE Order Imbalances, products that significantly enhance transparency and speed of accessing data in the trading of NYSE-listed securities.
In July 2007, NYSE Group and NYSE Regulation completed an asset purchase agreement with FINRA pursuant to which the member firm regulatory functions of NYSE Regulation, including related enforcement activities, risk assessment and the arbitration service were consolidated with those of FINRA. The transfer has resulted in a decrease in revenues derived from broker-dealer activities in 2008, compared to 2007.