Nasdaq, Inc. (NDAQ) Q3 2011 Earnings Report, Transcript and Summary

Lee Shavel - Chief Financial Officer and Executive Vice President of Corporate Strategy Vince Palmiere - Vice President of Investor Relations & Nasdaq Corporate Finance and Head of Nasdaq Activities Robert Greifeld - Chief Executive Officer, Staff Director, Member of Executive Committee and Member of Finance Committee

Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division Brian Bedell - ISI Group Inc., Research Division Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division Michael Carrier - Deutsche Bank AG, Research Division Jonathan E. Casteleyn - Susquehanna Financial Group, LLLP, Research Division Christopher J. Allen - Evercore Partners Inc., Research Division Rob Rutschow - Credit Agricole Securities (USA) Inc., Research Division Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division Howard Chen - Crédit Suisse AG, Research Division Jillian Miller - BMO Capital Markets U.S. Matthew S. Heinz - Stifel, Nicolaus & Co., Inc., Research Division Alex Kramm - UBS Investment Bank, Research Division Roger A. Freeman - Barclays Capital, Research Division

Good day, ladies and gentlemen, and welcome to the NASDAQ OMX Third Quarter 2011 Results Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to your host, Mr. Vince Palmiere, Vice President, Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us today to discuss NASDAQ OMX's Third Quarter 2011 Earnings Results. Joining me are Bob Greifeld, our Chief Executive Officer; Lee Shavel, our Chief Financial Officer; and Ed Knight, our General Counsel. Following our prepared remarks, we'll open up the line for Q&A. You can access the results press release and presentation on the NASDAQ Investor Relations' website at www.nasdaqomx.com. We intend to use the website as a means of disclosing material nonpublic information and for complying with disclosure obligations under SEC Regulation FD, and these disclosures will be included under the Events and Presentations section of the site. Now before I turn the call over to Bob, 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. The actual results may differ materially from those projected in these forward-looking statements. Information concerning factors that could cause actual results to differ from forward-looking statements is contained in our press release and in our periodic reports filed with the SEC. And with that, I'll turn it over to Bob.

I think your statement gets longer every quarter. You're not leaving anytime for the rest of us. Thank you, everybody, for joining the call this morning. I'll begin by spending a few minutes highlighting our third quarter 2011 results, and then I'll update you on our plans going forward. Lee will then walk you through the detailed financials. The third quarter of 2011 was a record-setting one for us. Its net revenues reached an all-time high of $438 million. Non-GAAP net income grew to $121 million and diluted earnings per share came in at $0.67, 34% above our third quarter of 2010 non-GAAP results. The record revenues we generated highlight the power of our business model as we're able to lever increases in trading volume to deliver the fourth consecutive quarter of record earnings. Our ability to grow to revenues -- grow revenues by double-digit rates has been achieved by redefining what it means to operate in each and every one of our businesses, as efforts to broaden our product offering are yielding results. We continue to examine opportunities to provide value to our customers while delivering solid returns to our shareholders, and our record setting results demonstrate the strength of this plan. Slide 4 of our presentation shows that we've done a remarkable job growing earnings over the past 4 years. Non-GAAP EPS of the first 9 months of 2011 are $1.90, up 31% from the first 9 months of 2010. The growth from 2007 reflects an impressive 14% compound average growth rate over the past 4 years, quite an accomplishment considering it was delivered during a period where our industry faced really unprecedented competitive pressures. On Slide 5, we showed that NASDAQ OMX has performed very well when compared to the broad markets. Our earnings per share has more than doubled over the past 4 turbulent years. The S&P 500 Index is up 11% for the same period. Anyone can make their own determination of value, but there is no denying that we have outperformed. On Slide 6 of the presentation, you can see that year-to-date revenues have grown 13% from the same period in 2010, well ahead of the 9% target we've communicated in the past. We've been able to achieve this growth, while U.S. equity industry volumes averaged 8 billion shares per day this year, down 10% from 2010 and well below the 9 billion to 10 billion we assumed when we established our growth targets during our Investor Day. Our ability to grow revenues by double-digit rates has been achieved by redefining what it means to operate in each and every one of our businesses, and efforts to broaden our product offerings are yielding results. Turning to the details of the quarter. In Market Services, revenue increased 20% when compared to the third quarter of 2010. The volumes in all of our products grew year-on-year. In U.S. equities, our matched volume was up 16% to 125 billion shares, the highest level since the second quarter of 2010. We continue to innovate to stay ahead of our competition. One example is the new feature plan for implementation is a minimum quantity order for PSX, which will allow our customers to specify a minimum number of shares they wish to trade. It's the most popular enhancement request we received from customers and is consistent with the price size philosophy of the market. We're also looking to add routing capability into PSX and are evaluating opportunities to add new features to NASDAQ and to BX to ensure that in addition to a speed base competitive advantage, we continue to drive functionality that sets us apart. Within U.S. options, contracts traded increased 35% to a record 312 million, as volumes grew. Volumes are now up nearly 130% since we closed the PHLX transaction. During the quarter, we migrated NOM to the PHLX technology architecture, which is significant because it essentially modifies the distribution channel for NOM. All PHLX market participants now have access directly to NOM, opening up this trading platform to a new group of customers. Within Access Services, revenues grew 33% over the third quarter of 2010, driven by increased demand for services and the addition of FTEN, the low latency pretrade risk management product that we acquired in December of 2010. In a sign that FTEN continues to innovate, they recently received a second patent for technology that allows customers to reduce systemic risk by aggregating, normalizing and analyzing data. Trading in Nordic Derivatives products grew by 23% to the highest level since we acquired OMX, and fixed income activity reached record levels as it were up 26% supported by our migration of bond trading to Genium INET last quarter. Within the clearinghouse, plans for a member default fund are still on track as our plans to gain U.K. FSA approval. Recall that establishing a member default fund should free up approximately USD $100 million in capital once it is established. At NASDAQ OMX Commodities, cleared power contracts in the Nordics continue to experience a challenging environment. However, N2Ex, our U.K. power market, more than doubled their revenue and they also received positive news recently. SSE, Scottish & Southern Energy announced plans to auction all of its power on N2Ex's day-head market. This will provide a significant boost to liquidity and firmly establish a reference praise for our U.K. power derivatives market. Moving onto our Issuer Services segment. Revenues continue to grow on the strength and demand for our Corporate Solutions, which were up 22% from the third quarter of 2010. We continue to expand our product offering in Corporate Solutions by launching Directors Desk HD, an intuitive feature-rich and secure iPad app, which provides directors and executives access to sensitive and timely information on the go. And early this week, we are proud to announce the acquisition of Glide Technology, which specializes in corporate communications and reputation management solutions. The integration of the superb staff and products of Glide Technologies into Corporate Solutions will create the first and only fully integrated workflow solution for Investor Relations and public relations professionals. The IPO front is improving. Our pipeline continues to grow. Groupon, Zynga, TripAdvisor, Jive, BrightSource and Telluphere [ph are moving forward with plans for initial public offerings they have all applied to list on NASDAQ. So we're encouraged by this recent increase in activity. In Market Technology, our business grew 21% driven by revenues from recently delivered projects and from SMARTS, a leading broker compliance solution which we acquired last year. There are number of notable achievements for Market Technology this quarter, including Singapore and Japannext, both going live with NASDAQ OMX trading platforms and a makeover in BM&FBOVESPA and BOVESPA market supervision, selecting SMARTS technology to support all their surveillance efforts. All in all, it was an impressive quarter in almost all segments of our business. Now when you step back and look at NASDAQ OMX in the number of diversified businesses that we have, we are essentially hitting on all cylinders at this point in time. And we're able to hit on all cylinders because we followed a discipline, which is the hallmark of our organization and that is our core belief in the scalable benefits of technology-based business. We spend a significant amount of time and R&D money on technology, and we're proud of the fact that we have an industry-leading trading and clearing platform, which is evidenced by the fact that we provide this technology to more than 70 marketplaces around the global. We're staying true to this core principle as we move forward. Last quarter, I articulated our strategy to move beyond the Matched, which challenges us to evaluate everything our trading customers need to complete. The steps we've taken to pursue this strategy including offering technology solutions for pretrade risk management, colocation services, AXA services, market data, realtime surveillance, everything needed in today's marketplace. Our ability to pursue this strategy is enabled by our technology expertise, and this core technology competency will be used in many diverse and innovative ways in the times to come. Now the beauty of this technology-based businesses is that we built -- that we built is that they are stable and cash flow-generative business that performs well in good times and in bad. Last quarter, during a low-volume environment, we posted record earnings. This quarter, as volume spikes, we're able to, again, perform at a record pace with result being the acceleration of our plans to returning capital to shareholders. Earlier this month, we announced the authorization to purchase up to $300 million of our shares. This action is consistent with the discipline that we've communicated before, that is to explore alternatives that generate attractive returns on capital whether by investing in organic opportunities, making acquisitions or by purchasing our own stock. Going forward, we will remain committed to this discipline. I'll close my prepared remarks by emphasizing the fact that while the third quarter of 2011 was a record one for us, to truly appreciate our performance, one must consider the strength and diversity of the businesses we built and evaluate what we've delivered over the longer term: That is, double-digit annual growth rates, a doubling of our earnings during turbulent times, a truly impressive track record for the team here at NASDAQ OMX. With that, I'll turn the call over to Lee.

Thanks, Bob. Good morning, everyone. Our GAAP net income for the third quarter of 2011 was $110 million or $0.61 per diluted share. Results this quarter include $9 million of pretax expenses associated with the debt extinguishment and mergers and strategic initiatives, and $5 million of tax expense related to a true-up of our 2010 tax return liabilities and the corresponding effect on our net deferred tax liabilities. When excluding the impact of these items, our non-GAAP diluted earnings per share for the quarter reached a record high of $0.67, an increase of 34% when compared to the third quarter of 2010. Net income reported on a non-GAAP basis was $121 million, an increase of $20 million or 20% when compared to the prior year quarter. Reconciliations of GAAP to non-GAAP results can be found in the attachments to our press release and in the presentation that's available on our website at ir.net.omx.com. Turning to our third quarter operating results. Net exchange revenues reached their highest levels ever coming in at $438 million, representing an increase of $66 million or 18% when compared to the third quarter of last year. Within Market Services, revenues were $300 million, an increase of $51 million over prior year results. Cash equity revenues were $67 million, up $4 million, primarily due to higher U.S. industry transaction volumes. Net derivative trading and clearing revenues were $84 million for the third quarter, up $24 million or 40% due to higher volumes within our PHLX and NASDAQ OMX options markets, and to higher volumes within our Nordic Derivatives business. For the quarter, revenues within Nordic Derivatives were comprised of $11 million up from energy and carbon products, $16 million from stock and index derivatives, $5 million from fixed income products and approximately $1 million from other revenues and fees. In Access Services, revenues were $60 million for the quarter, an increase of $15 million or 33% from last year, is due to the inclusion of results from FTEN, which was acquired at the end of the fourth quarter in 2010 and the continued growth in our core services. Within Market Data, revenues were $83 million for the third quarter, up $7 million when compared to the third quarter of 2010, driven by higher tape plan revenues, increased demand for proprietary products and stronger European Market Data revenues. And in Issuer Services, revenues were $92 million for the quarter, up $7 million when compared to the third quarter of 2010. Driving this growth is increased demand from listed companies for our Corporate Solutions services. Also contributing to the growth are higher revenues from listing fees and the Global Index Group. Turning to Market Technology. Revenue was $46 million for the quarter, up from $38 million in the third quarter of 2010. The increase in revenues is primarily due to the inclusion of SMARTS, which was acquired in the third quarter of 2010. Looking forward, for the fourth quarter of 2011, we expect Market Technology revenues to be in the range of $44 million to $46 million. Now turning to expenses on Slide 10 (sic) [11], you can see that our total non-GAAP operating expenses for the third quarter were $234 million, representing an increase of $31 million or 15% when compared to the third quarter of 2010. The increase in expenses is primarily driven by the inclusion of results from FTEN, SMARTS and Zoomvision, which were acquired second half of 2010. Expenses associated with these acquisitions contributed approximately $10 million for the quarter. Also contributing to the increase in expenses was the impact of changes in the exchange rates of various currencies as compared to the US dollar, which has the effect of increasing expenses by $10 million. So when you exclude the impact of FX and costs associated with these new acquisitions, our core expenses increased $11 million when compared to the third quarter last year. Looking forward for the full year 2011, we expect total run rate expenses to be in the range of $915 million to $925 million. This guidance excludes approximately $75 million of non-GAAP expenses for the year. The increase in guidance for non-GAAP expenses is primarily related to costs incurred in support of our tender offer for the convertible notes. Overall results for the quarter yielded non-GAAP operating income of $204 million, an increase of 21% over prior year results as operating margins came in at 47%, up from 45% in the third quarter of 2010. Moving on to net interest expense. In the third quarter, it was $27 million, an increase of $4 million from the third quarter of 2010. This increase is due primarily to the issuance of senior bonds in December 2010, the funds from which were used to partially finance the repurchase of shares. We recently refinanced our credit facility and repurchased 335 million of the 2.5% convertible notes that were outstanding. Specifically, we entered into a $1.2 billion senior unsecured 5-year credit facility to refinance an existing $450 million term loan, lowering the rates to LIBOR plus 137.5 basis points and drew down $250 million from a new revolver within the new credit facility to purchase the convertible notes. The rate on the revolver is also LIBOR plus 137.5. The remaining $85 million needed to complete the purchase of convertible notes was drawn from cash on hand. On Slide 12 (sic) [13] of the presentation, we provide our debt obligations at the end of the third quarter and also provide a column to reflect our pro forma debt obligations following the transaction I just mentioned. You can see that our debt obligations declined from $2,213,000,000 at the end of the third quarter to $2,151,000,000 following the close of our tender offer for the converts. This decline is consistent with our announced plan to reduce total debt obligations by $120 million in the fourth quarter of 2011. The remaining optional debt payments and an $11 million quarterly principal payment will be made before the end of the quarter. Collectively, these actions reduced NASDAQ OMX's overall borrowing costs, extend the maturity profile of our debt obligations, increase our revolver borrowing capacity and generate positive earnings per share returns. Finally on the income statement. The non-GAAP effective tax rate for the quarter was 33%. We expect the tax rate to be in the range of 31% to 33% going forward. Now turning to the balance sheet on Slide 13 (sic) [14]. Cash and cash equivalents and financial instruments at the quarter end were approximately $993 million. Of this amount, approximately $431 million is reserved for regulatory requirements and other restricted purposes. During the quarter, we used $27 million for capital spending purposes, bringing our total capital spending for the year to $51 million. Before we open the call to questions, I want to briefly discuss the recent share repurchase authorization that Bob referenced. Earlier this month, our board approved a plan to purchase up to 300 million of our outstanding shares. This action follows a successful share repurchase plan that was executed in 2010, during which we purchased 37.8 million shares of NASDAQ or 18% of our total outstanding shares for $797 million or approximately $21 per share. Purchases under the new plan will be funded from cash flows generated by our business, and while our amounts purchase may accelerate or slowdown from time to time, it is reasonable to expect that we use between $50 million to $75 million of cash generated each quarter to support the execution of this buyback. This amount is subject to cash needs for internal investment opportunities and acquisitions that generate higher potential returns than our cost of capital as well as the market price for our stock. This is consistent with our goal to use capital to generate attractive returns for investors, and we believe that this plan is one way to provide those returns. In closing, let me reiterate that we are very pleased with the results this quarter. Building upon the positive steps made in prior periods, we continued to take actions to improve our balance sheet and return capital to shareholders. We reduced our leverage ratios, refinanced our credit facility, lowered our borrowing costs and announced plans to repurchase shares. The strength of our business model and the strong cash flows, which it generates, leave us well positioned to continue to evaluate growth opportunities and deliver returns to investors. Thank you, and I will now turn it back over to Vince.

Thank you, Lee. Operator, we'll now take questions.

[Operator Instructions] Our first question comes from Howard Chen of Crédit Suisse. Howard Chen - Crédit Suisse AG, Research Division: Bob, just wanted your thoughts on regulation. Drum beat appears to be getting louder on proposals such as financial transaction tax in the Eurozone, interoperability, high frequency trading. So wanted just your realtime views on each of those and any level of concern that some of this conversation may leak further into the side of the Atlantic.

Okay. The first I'll say with respect to the transaction tax, we're certainly in a position to communicate what was experienced in Sweden. They tried that x number of years ago, and it obviously had bad effects on the market. So I think we've got strong support within the Swedish community, and thinking this is not a good concept. And the way that EU works, it doesn't take too many member states to able to create some real issues there. So we think it's bad policy. There's hard proof supporting that claim, and we intend to communicate that. So we think that would be a long, hard road in that context. Your second part was I think about high frequency trading. The first thing I would say is you have to have a basic understanding what our role is as an exchange. We are here to discover price. We do that by welcoming all commerce into the market. We have fair access standards. We have to admit all players, quite different than the dark polar internalization strategy, which is a different role. So it's not our job to qualify what is good liquidity, what is bad liquidity. Our job is to bring all liquidity together, and that's where the magic of price discovery happens. So I think that's a widely held belief across all regulatory bodies not just in Europe and the U.S. but all the parts of the world. That's our role, and it's just hard to see a construct where you're going to try to penalize one kind of behavior over another. Howard Chen - Crédit Suisse AG, Research Division: And interoperability, Bob, across multiple products?

Well, I believe that represents some fundamental opportunity for us. Clearly when you look at the European landscape, we have a clearinghouse; we're building our capability there; and we're establishing a member default fund, which would be consistent with European conventions, and we think that's a -- great opportunity for us to lever that in the future. And we think interoperability would be a great accelerant to our progress there. Howard Chen - Crédit Suisse AG, Research Division: Great. And then my follow-up is on Corporate Solutions. Was just hoping you all could dig in a bit more on the great growth trends you've been seeing over the last couple of years. Could you give us a flavor maybe how penetrated you are amongst your issuer set average products that each customers had and how those numbers have kind of grown over time?

Well, I'll respond by saying with the Glide acquisition, we have dramatically expanded the market that we look to attack. So when you look at the space that Glide is in, there's existing competitors that have over $0.25 billion a year of revenue. So it's the biggest base that we stepped into within Corporate Solutions. And the space that $0.25 billion a year revenue is predicted to grow at a healthy growth rate. So we have a lot of headroom, and we're going to integrate the Glide into our globe newswire product. And as I said in my prepared comments, build the first integrated solutions for corporate communications and also sentiment analysis. So we've got a lot of headroom. Direct answer to your question, we can get back to you on it, but we are, I would say, at this point still in probably the third or fourth inning in terms of penetration.

Our next question comes from Rich Repetto of Sandler O'Neill. Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division: I guess, first question is maybe not on such a bright topic, but on IDCG. So Bob, it looked like, this, at least, might have hit a speed bump or some of the issues with Jefferies. I'm just trying to see whether you still see this as a viable solution as a key player in the space, and are you as committed IDCG as you were say 18 months ago.

Yes. The first I would say is Jefferies is a side issue that has nothing to do with the prospects for IDCG as a business. And Rich, you've been listening to these calls for a long time, and as I've said consistently, we believe the opportunity for IDCG will come together when the regulatory impact is real. And the definition of real is that it doesn't actually have to be legally enforced, but there's a date certain and the industry knows it's happening. So we, obviously, have not hit that point, but we're getting closer to that. So we remain committed to IDCG. We are in discussions with, I think, increasingly a serious dealer community that knows the date, while it's not in 2011, will probably be in 2012. And it's important to recognize that IDCG has the proper licenses, has the best technology, has the best risk management capability for this marketplace. And I think it's recognized by an increasing number of people. Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division: Okay, that's very helpful, Bob. And I guess the next question would be on the buyback and, I guess, capital in general. Lee, you talked about, I think it was $50 million to $75 million in buyback. And I guess the question is, why not a bit more given your cash flow? What will you do in -- I guess about timing as well, if you do get $100 million release from Europe, when do you expect that and will that be filtered towards a buyback as well? And how do you look at that versus what you have sitting in the revolver right now?

Rich, I think your points are valid, and I think Lee established at $50 million to $75 million is an expectation. It's a target. But I think sometimes we can do less, sometimes we can do more, depending upon what the opportunities are and what our particularly cash flow situation is.

Yes. And Rich, what I would say is in situations -- and I would characterize the fourth quarter to this extent that we do have some excess cash flow that is built up. And so in certain periods, you could see us above that. I think the release of capital from the clearinghouse in Europe, we continue to expect in the first quarter of 2012. And so in situations like that, where there is excess capital that's available to us and we don't have a sufficient return by investing that in the business or acquisitions, then our intention is to return that to shareholders. So I think what we want to do is set some level of expectations in normal circumstances from the capital that we're generating each quarter. But that as we come into excess capital, it could clearly be above that, and that's subject to market conditions on the price and then just overall demands for cash within the business. Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division: And just how do you look at that versus what you carry on the revolver, is that a priority to get that down or not?

At this point, we're quite comfortable with where our debt levels are. I don't anticipate, at this point, any significant reduction in debt levels from where we are pro forma for the tender, which we -- which I went through on the -- which we went through in my remarks and which you'll see on Page 13 of our investor presentation.

Our next question comes from Chris Allen of Evercore Partners.

One thing I just wanted to talk about a little bit was the operating margin, obviously, at record levels. I'm just wondering what -- is there an opportunity to expand it from here? Looking at the incremental revenues, the $100 million versus the $80 million incremental expenses, the 20% margins from FTEN and Zoom and some of the other deals, are those -- when we kind of think about those businesses, is there a room for margin expansion, or are they just more additive to the overall revenue pie? And just any thoughts in terms of where margins can go from here would be great.

Yes. I would say this as a general comment as we get into some of the nontraditional exchange businesses, we have a different margin goal for those businesses. We've communicated that to, obviously, investors many times in the past. So it's not realistic for a software technology business to have the margin similar to our market data business, not going to happen there. So as that revenue pie changes, then than will represent some overall margin pressure. But obviously, our estimation is that doesn't make it a bad business. In terms of your question, I'll ask Lee to amplify it. There's always room for margin improvement. And when you look at our businesses we have, and we've talked many times about Market Tech and Corporate Solutions where they are lower margin businesses, but they are certainly in, I think, still relatively early stages of becoming more efficient in getting some benefits of scale. So we do expect those margins to improve in the years to come, but do not have expectations that will approach some of our other traditional businesses.

Yes. And clearly the operating leverage that exists within our Transaction Services business is that it's the primary driver of our operating margin improvement potential. But also embedded within the business, I think, are a number of businesses that we've identified that are new initiatives, some of which are acquisitions that were clearly entered into with the expectation that we would be able to substantially improve the margins in those businesses as we develop them, as we leverage our technology and as we see growth within the businesses. And so we will certainly expect margin gains within those businesses that will accrue to our overall earnings growth. But as Bob indicated, some of those businesses aren't necessarily at the same margin level as our existing Transaction Services or listing businesses or data products businesses, but they still represent very good earnings growth opportunities for the business as a whole.

Yes, got it. And is it fair to say that these new businesses inherently have higher returns on invested capital, which is one of the ways you think about it relative to maybe not as high incremental margins?

That's actually the case, Chris. I think that certainly for the marginal element of incremental capital, we see the opportunity, particularly in those organic opportunities for strong returns on capital.

Our next question comes from Patrick O'Shaughnessy of Raymond James. Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division: So you, obviously, had a really strong quarter and you have a lot of the businesses that are growing at a pretty good clip. One business that looks like may have -- I don't want to say stalled out a little bit, but we've seen relatively flat revenues over the last few quarters is the Market Technology business. It's basically done $46 million or so per quarter since December of 2010, that the guidance for next quarter is about $44 million to $46 million. Can you kind of talk about where that business is in its growth cycle and what our expectations should probably be for 2012, 2013?

Yes. That's a great question. One, within the core business, it's a little counterintuitive in terms of how the business works. We have stronger quarters a lot of times when there's a lot of ad hoc customer change request. And if we have a larger contract, which is better for the franchise, then that tends to suppress results in a given quarter. So we pay attention to what is the mix between what we call CSRs and basically trying to get a large license sale into a revenue recognition mode. So that, that is probably the single biggest impact to the numbers there. So in terms of the core business, we think it has reasonable growth prospects and clearly improved margin prospects. We also recognized that we have gone through a market redefinition like we have in all our businesses. So last quarter, we talked about going beyond the matched in our equity business. With Market Tech, when we did the SMARTS acquisition, in particular, we made a strategic move in terms of saying that we have expanded our market that we want to now provide technology to brokers and to regulators. And the SMARTS acquisition right now is running ahead of our board model and it's accelerating at a fairly rapid clip and that we see that we can take the SMARTS surveillance technology beyond just a pure equity approach and beyond just a listed approach to derivatives both over-the-counter and listed. So great opportunity there. So to answer your question precisely, within the core business of selling through exchanges, we think there's modest growth but also great opportunities for margin expansion, and we clearly are establishing beachheads in new markets led by SMARTS and FTEN. Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division: Okay, that's very helpful. And then to follow up on IDCG, I agree that the Jefferies lawsuit probably didn't in and of itself invalidate the business model, but it does raise a question about the pricing mechanism, the IDCG uses to price the interest rate swaps. How do you feel, at this point, that IDCG's value proposition stacks up against the other offerings that are out there?

Well, I think IDCG is basically unique in terms of its approach in the U.S. market in that, as I said before, I think in answer to Richard's questions, when you look at one -- we have the licenses, we have the superior technology inclusive of risk management capability and we have a team of people who really represent the best team in the space. And our solution certainly has the ability to address both the dealer marketplace and the customer-dealer marketplace quite affectively. And so we're there. We're properly positioned, and we're ready to go.

Our next question comes from Michael Carrier of Deutsche Bank. Matthew S. Heinz - Stifel, Nicolaus & Co., Inc., Research Division: The first question, Bob, just when we think about this beyond the matched opportunity, I think it's tougher for most people to get their arms around it, just it's not easy to track volumes and market share. But when we think about the product areas that you guys have been focused on, you've mentioned like pre-trade, post-trade, surveillance. I guess what all do you have today? Any other areas that you still need to kind of add on or add to this the suite of products and services? And then probably more importantly is, what's the client base, like how much penetration have you had thus far? And then what's the competition or the competitive landscape like in that area or how can you differentiate?

Great questions. So one is, you can certainly look to the performance where revenue grew 33% year-on-year, and we're proud of that. And that's part of now a multiyear track record of growth. In the release, I didn't have it in my prepared comments, but we mentioned the fact that we signed QUODD Financial for Market Data. So this represents a strategic move of ours into providing consolidated data feeds, and obviously a great growth opportunity for us. And we're obviously happy to partner with QUODD as our initial customer as we develop this technology. So clearly, we see opportunities there. And I would say in terms of what's our strategic advantage, we have to win on every point solution that we bring to market, and we certainly have to deploy the best technology and services. But let's understand also that we are building upon the match. So I don't want to the team to get lazy by saying, "Okay, we have this great matching system where people need to connect to and I can just throw out random B level services." We have to win it point by point, but we do have a fundamental drawing card that we have, obviously this large presence in our data centers that people want to be connected to. And so it makes it a fairly compelling value proposition. So we have clearly more products we can add to it, but the products we have out there today are still in relative levels of immaturity with respect to penetration, and we do have great opportunity, and it ties back to the definition of a market, which I'll refer to in Market Tech. And we're saying, okay, what does it take for our customers to be in the equity business, and everything they require to be in the equity business is something that we should be providing to them. And that's a significantly broader mandate than what we had a year ago.

Okay, that's helpful. Then, Lee, maybe just on the expense side. In the past couple of quarters, revenues growing, expenses well manage, you continue to generate operating leverage. If we do get into a softer environment for whether it's the economy, the macro backdrop, are there areas that you can pull back on yet still invest in some of these growth areas? Just trying to get a sense at how much flexibility you could have if we get into an environment that's a little tougher.

Sure. It's a great question, and something particularly at this time of year we're spending a lot of time thinking about just given the uncertainty in the markets. And now I can assure you that we spend a lot of time evaluating our cost structure relative to a variety of market circumstances. And so what I would say is that as -- and I think you know, we have operated on a very efficient basis, we've generated a good margins and so success there always makes it even more difficult to find incremental areas to cut expenses. But we do believe that if we continue to see a soft market environment, that we'll be able to manage expenses in a fashion such that we're able to maintain profitability. We are beyond that, taking a very careful look at where there are incremental expenses that we think are necessary for maintaining, extending our platform, growing new initiatives that where we think there are good revenue and earnings opportunities, that we're substantiating the expenses necessary to achieve those to a very real expectation that we'll be able to generate productive revenue and earnings growth out of those. So I think, looking ahead to 2012, our first priority is to make certain that even in a continued or a difficult marketing environment that our cost structure is appropriately sized to our revenue base. But secondarily, that we also don't overlook the opportunity to make the necessary investments that will generate revenue and earnings growth for investors beyond that.

Our next question comes from Matthew Heinz of Stifel, Nicolaus. Matthew S. Heinz - Stifel, Nicolaus & Co., Inc., Research Division: This is a question on the European business. Obviously, a strong quarter for volumes, but it looks like the revenue capture on an FX-adjusted basis was down probably, I think the lowest that I see on record. Just wondering both on the cash side and the derivatives side, if there's anything going on there, any new product introductions or different customers, different customer mix that could be driving that?

Well, yes, definitely. What we have in the Nordics is a pricing plan, which has been successful in retaining a high-level market share, but definitely doesn't help us in a high-volume quarter like we had, and that is our best customers really can hit a maximum that they will pay us in a given quarter. So in the third quarter 2011, we witness an increase in that. And so I say that was a single biggest factor that I point out. So the Nordic business in down market should protects us very well, and the up markets, it provides some level of a ceiling. Matthew S. Heinz - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then secondly on the Access Services revenue, we saw a nice sequential bump there to $60 million. And I believe you said that was due to FTEN. Could you just kind of break down, break that out for us and kind of the talk about how the growth trajectory has been there at FTEN and kind of what we can expect going forward?

Well, one -- as Lee and I guess prepared to answer, one is I would say that the growth was not just FTEN, so all the segments of Access Services really had a strong quarter.

That's right. And so to give you some color on that, of the -- the $15 million increase in Access Services from $45 million to $60 million, FTEN accounted for about $7 million of that, and the balance was really in growth in membership revenues and fixed ports, so related to the core business.

Our next question comes from Jillian Miller of BMO Capital Markets.

Kind of following up on Matthew's question, the kind of core Access Services growth that you've seen. Is that still primarily coming from demand for services in the U.S. or are you may be seeing some of your efforts to sell the colo and the Nordics gain some more traction?

Definitely. The Nordics colo businesses had a very strong third quarter, and they're at probably in early stage of maturation than the U.S. business in what I'll call the pure colo part of the business.

Okay. And then BATS is planning to launch their primarily listings market I think in December and they're reportedly going to waive fees for listed companies that will leave you or New York. Just want to know if you've had any conversations with any of your listed companies that may be thinking about moving. And I guess just more generally, how you view the competitive dynamics in the listing space?

Well, one we have tremendous respect for BATS and the team there, and we certainly are aware they want to enter the space. And we're obviously always looking to improve our product. We certainly recognize that our issue is appreciate the vast number of services we've developed for them over the last 5 years. And I think our competition, BATS and others, have a long way to go to kind of match up to that.

Our next question comes from Roger Freeman of Barclays.

I guess one quick question just following up on Market Tech. The 4Q guidance, 44% to 46%, I guess, really kind of is a little below the -- where you came in the third quarter and just kind of seasonally, usually kind of expect that one to be a bit higher just because of year-end budget flushes. Anything to note on that front that's not happening this year, company budgets are tight?

Roger, I'd tie you back to what I said earlier, it really sometimes turns up what the mix of the business we have in given quarter, in given 6 months, and the CSRs are short-term immediate revenues of the teams involved everything revenue producing. If you're working on getting an implementation done, then you can go a quarter or 2 where all those people's work doesn't really count in the revenue numbers for that quarter.

Okay, that's fair. European derivatives clearing, there's an article, I think, out yesterday about some plans you may have to build something there. Can you kind of -- can you talk to how you view sort of your value add from a greenfield perspective, how you -- what you bring differently to the market than LC, et cetera?

Yes. So that's a good question, Roger. What we spoken about before is our Nordic Derivatives clearinghouse is in the process of transforming itself into a European clearinghouse. And the member default fund, we've highlighted the fact that we free up $100 million, which we're obviously very excited about doing. But more importantly, that will complete the transformation into a European clearinghouse. And what's important to note is as we've worked with our members since our separation from EDX, we've dramatically increased the people who are clearing members. So when you talk about the large global members today, the large global players today, they are essentially members, direct members of our clearinghouse and they were not before. So as we complete this transformation, then we'll be in a position to say, "Okay, what can we do?" And the prior question came up with respect to interoperability to the extent that becomes the law of land that would represent an accelerant for any of our plans. So we want to have a baseline clearing capability. We'd like to be in a position to leverage our one IP content in terms of products that we can develop in the times to come; lever our, obviously, core matching technology in that effort. So here you can see the different assets that we'd like to pull together in the time to come.

And Roger, if I could just come back, I just want to direct your attention specifically to the Market Technology pipeline on Page 9. You can see that of the $473 million in total order value in the pipeline at the end of the third quarter, $42 million is expected for the remainder of 2011, so that gives you some level of confidence around what's there as a base for us to move in to.

Okay, great. And then just lastly, Bob, any thoughts on timing around the consolidated audit trail? And more specifically, I'm just thinking about the costs that are going to be associated with that for the industry. Do you anticipate the vast majority of this borne by dealers or is there going to be an exchange component in here as well?

Well, we certainly don't have complete insight in terms of the timing. But from our point of view, at the exchange level, we're prepared to support whatever regulatory initiative is there, and our systems are in place really to do that. So we don't think about it from a cost point of view. We certainly recognize that with our SMARTS product, we're in a position to be a supplier of whatever requirements developed from these kind of audit trail requirements.

Our next question comes from Niamh Alexander of KBW. Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division: Dividends, I'm sorry if I missed it earlier, but Bob, can I please get an update on your thoughts with respect to dividends because you've clearly kind of laid out the buyback, but I still think you have pretty good capacity to do dividends as well as make some kind of small acquisition along the line you've been doing.

I almost got through the call. I would say this Niamh, that clearly with the cash that we generate, we have great optionality. I would say that we are focused on the buyback in completing that in the proper time frame, and you'd probably see us and the board contemplate the dividend strategy as we get to the back end of the share buybacks. So as kind of our operating philosophy applies to our capital management, less focusing getting the vast majority of it done and then we will have a serious board level discussion about what should be the dividend policy for NASDAQ OMX. Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division: And then, Lee, if I could. I mean, what I'm hearing here is understandably there's not much more to cut on the expenses because the company has been very strong at expense management. And given the mix shift in the business and the resilience that, of the revenue now, there's not much more you could do with the margin outside of just very strong exchange volume quarter. So what kind of ROE are you looking towards when you talk about return on capital? We're looking back over the last few years and that's just been around -- near or below around 10% or so. What is a good return on capital that you could kind of see this business generating given you're a few months there?

Sure. And thanks, Niamh. I would say when we look at -- and we're evaluating, it's difficult, kind of looking historically to even determine what the capital basis. But so I'm looking at it on kind of a cost of -- or return on invested capital for the marginal capital dollar that we're generating in each quarter. And I think that, as we look at our weighted average cost of capital, I think that, that's in the kind of 8% to 9% range. And I think that when we look at cost of equity, I don't think you're far off, and I think we would say we're, probably, in a 10% to 11% cost of equity, which we serve as a -- which serves as a benchmark for us. Now when we look at an acquisition, our expectation is that our returns on that should be well above those hurdles, relative to the business as a whole, which is obviously a much larger or more diverse business. But I would use those metrics for a proxy for how we think about those capital allocations both from an internal standpoint as well as an external standpoint. Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And then just lastly, if I could go back to the P&L, help me understand IDCG. I understand the business you have to continue to invest in initiatives to reinvent yourself, but how much of a drag on earnings right now is IDCG? It's been an initiative for quite some time partly out of your control with the regulatory process? Can you give me a sense of magnitude on the costs? Or maybe is it 1 or 2 points on the margin right now?

No, it's not that high. I would say this: one, is obviously we're disappointed that regulatory process has been delayed, but I do believe it gets more certain; two is the, I think, the net cost to IDCG for us is probably about $0.01 a quarter.

Our next question comes from Alex Kramm of UBS.

Not much left here, but just wanted to come back to the whole recurring revenue story. Now clearly the nontransaction business has been going strong both organically and inorganically, and I think from an investor perspective, you're not really getting a lot of credit for it yet. So I think the biggest issue is people don't really understand this business as well. And I think somebody commented on that earlier, too. So can you may be help us -- when you just think about this business, there's a lot of different opportunities, a lot of other different services, but could you just sum it up to like maybe 2 or 3 things that investors are focused on to really get excited about it or maybe where you're excited about it? And then on the flip side, if we think about maybe Financial Services being challenged right now, or layoffs coming on Wall Street and things like that, how can we be comfortable that those non-transaction businesses actually can withstand it, that they're not in the areas that get impacted there?

Good question. The first thing I would say is we like to highlight that past performance is indicative of future performance, and we've lived through now a tough 4 years. And in that time frame where the S&P has grown 11%, we've doubled our earnings. So clearly we have the ability to perform in both good and bad times. And I think part of that, that ties back to my opening comments is we believe in technology-based businesses. And in difficult times, our technology-based businesses tend to represent a value proposition for our customers. So in the nontransaction business we're really looking at, we certainly see our customers now for the first time saying, "Okay, my explicit cost of trading has gone down but the infrastructure related to being in the business has skyrocketed." And we're in a position to help them reduce their infrastructure costs. And I think in certain respects, the hard times will help us in that regard. So we're about delivering value for our customers, and that proposition works well in both good and bad times.

All right. And then just to shift gears a little bit here coming back to Dodd-Frank and regulatory changes. Obviously, hear the comments about IDCG. But when it, I think, becomes apparent as we move closer that, there's much more opportunities than just clearing interest rate swaps. So just curious how much time and effort you're spending on identifying other opportunities around, I don't know, SEF trading and processing and all this other host of probably challenges that are coming down for the industry and how you could fit in with your Market Technology business and other...

Again, a good question. I mean we, obviously, have a very comprehensive strategic viewpoint of the different opportunities for us. So we do have different thoughts in any of the topics you might mention. But I would counterbalance that by saying that it's been our operating philosophy to make sure that we get done what we started and get that to conclusion before we go furthering off into other direction. So there's a core operating discipline here. So we've got to make sure we put all the wood behind the arrow of what we've chosen to do, and clearly, that's our focus right now. And to the extent we do well in that regard, there will always be subsequent opportunities for us. So we certainly sit here today with probably a greater set of opportunities for us to consider, but they can never ever get in the way of just making sure we operate successfully the businesses we're in today.

Our next question comes from Brian Bedell of the ISI Group.

Just a couple of questions. So first of all, Bob, you talked about the options business in terms of migrating the -- completing the migration of the PHLX to the NOM platform. Can you just talk about what expectations you would have for market share as a result of that over the next couple of quarters, and also what your outlook for the capture rates in that business went up a little bit in the third quarter? Trying to get a sense of where that might go over the next couple of quarters based on...

Yes. I would say this, one is we're in the early days with the NOM migration, and we're in intensive conversations with our customers. I don't think we've established a market share goal for the growth in that, but clearly, it's going to be an accelerant to the progress we've witnessed over the last year or 2. I think in the last quarter, you had a decline in the number of dividend trades, which helped to capture rate, but I don't see any particular change in capture rate beyond the level of the dividends trades changing quarter-on-quarter.

Okay. And then moving back to high frequency trading. Can you talk about the profitability dynamics or the impact on revenue capture of those volumes? I guess what I'm getting at is if there's an environment in which some of the business models either shut down or move over to the futures or at least reduce their activity, what type of impact would we see on your revenue capture rates and profitability related to that?

Well, what I would say is that the high-frequency firms have diversified their businesses probably starting 5 years ago, and they are active traders in many different asset classes. So I don't see that as a driver of any change in behavior. Clearly, if they add value to the marketplace and they yield the profit themselves, they will be active in the market. With our tiered pricing, you clearly see that in high volume periods that our upside is not as high as you might think; and then on low volume periods, our downside is not as severe as you might think also. That's just a function of our pricing curve. They are not that applied not just to high frequency guys but any of the large customers.

Okay. So pretty much across the board, across the customer set. So high frequency in and of itself, wouldn't -- other than the volume contribution that they're adding to the platform, that wouldn't dynamically change your capture rates or structurally change your capture rates.

No.

Our next question comes from Jonathan Casteleyn of Susquehanna.

Just another question on your options market share. It looks like you are the market share leader in the third quarter, but that was down about 200 basis points from your second quarter share, and it looks like all so thus far in the fourth quarter down another 200 basis points. So I'm just wondering what do you think is going on within your market share and options?

Yes. I would say 2 things. One, as I said, the dividend trades are less, so that's one aspect of it. And two, is we certainly recognize our competitor based upon a new rule set has an additional capability that's been effective that we need to respond to and we're obviously in the process of doing that.

Okay. So would you expect continued declines inter-quarter until you respond, or how do you think trajectory?

I think you'll see stabilization and -- until we respond. We're not going to recapture it. But I think we have felt the impact of the move and we need to respond.

Okay. And then just -- it seems like there's another batch of naked access rules going through the market in November. I'm just wondering, from your perspective, do you think that could decline overall market volume in cash equities and potentially to be offset by continued growth in Access Services in your Access Services line?

Well, it's kind of a win-win. To the extent that our customers have FTEN, and it has such a low latency pretrade risks and it has no impact on their trading strategies, then the answer is no, it won't impact us negatively on the transaction side but will impact us positively on, obviously, the Access Services side. And that's, obviously, one of the reasons we acquired FTEN, the access rules, naked access rules, whatever you want to call them, will not be just the U.S. phenomenon, it will spread globally, and we've got the leading product to supply. And I'd also, just divert to say that the equity business has been in the forefront of saying, yes, we've got to provide limits on access, but that operating mantra applies across really any listed marketplace, right. So as we saw from the prior question that the high-frequency firms are in a wide variety of asset classes, you can definitely see that the equities are the first people to put in these access type systems, and we certainly see greater growth opportunities providing this to any sort of listed environment.

Great. And then just last question, any incremental detail you can provide on Glide, either consideration value, large, small, medium and then just timeline for accretion on the acquisition.

I don't think so. I'll look at Ed Knight, my attorney, and see what I can say. But it wasn't -- when you look at Glide, it's, has by far and away, the best technology in the space. It was competing against larger players. And clearly, integrating that with Globe Newswire will give us that integrated suite of products. And as I said previously, this is the largest market segment that Corporate Solutions is buying into. It represents, for us, an opportunity to scale the distribution capability. It will typically lever our existing distribution in our corporate group. But in this, we're going to have to augment it because the opportunity is that large.

And I would just add, consistent with our policy in the past, we expect this acquisition, as we do all others, to be accretive within 12 months.

Our next question comes from Rob Rutschow of CLSA. Rob Rutschow - Credit Agricole Securities (USA) Inc., Research Division: I guess a follow-up on the dividend question. Your debt ratios are sort of in line with your goals at this point. Would you need -- if you were to consider a dividend payment, would you need to lower the debt ratios?

No. Rob, we don't believe so. We think that the leverage ratio that we're operating at is appropriate and instituting a dividend as part of our overall capital management plan would not require -- wouldn't expect any change in our overall leverage ratio. Rob Rutschow - Credit Agricole Securities (USA) Inc., Research Division: Okay. Second follow-up would be on the transaction tax. I guess in the event that EU does move forward with one, what would be some of your contingency plans? And would it involve Iceland or some other move to maybe relaunch your MTF?

That's a great question. One is, as I've said previously, I just don't see that gaining any support in the Nordics. So I'm not so sure it will have any support in the U.K., and how that plays out on a European basis or a euro basis, I don't know. Clearly, if it's adopted in the Eurozone and not in other parts of Europe, that would be a great opportunity for us. I don't see the world playing out that way. And I think the weight of the, both the academic research and the real-life experiences will probably bring some level of sanity to that discussion in time. Rob Rutschow - Credit Agricole Securities (USA) Inc., Research Division: Okay. And last question, your proprietary Market Data revenue has been good over the, longer term, over the last 3 or 4 years. Can you talk to us about what's the dynamic there are in terms of pricing pressure and new business?

Yes. I wouldn't say that business experience is a pricing pressure. We run it at a high margin. We're happy with the rate we get. And it's our job to then innovate within the space and come out with additional products. So I don't see price increases, but nor do I see any price decreases. Rob Rutschow - Credit Agricole Securities (USA) Inc., Research Division: So would you say that the increase is predominantly because of new customers?

New customers or product line extensions.

I'm showing no further questions at this time. I would like to turn the call back over to Mr. Bob Greifeld for any closing remarks.

Okay. Well, one, I appreciate everybody's time this morning. And as we've said hopefully, many, many times so you'll remember it, in the last 4 years, we've doubled our earnings. The S&P is up by 11%. Our performance, both in good times and bad times, has been very strong. We're obviously proud of the team here at NASDAQ OMX and proud of the results. And we appreciate your support now and in the future. So I thank you for your time again, and look forward to talking to you as we get into the new year.

Thank you.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.