Nasdaq, Inc. (NDAQ) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the NASDAQ OMX Third Quarter 2013 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the call over to Ed Ditmire, NASDAQ's Vice President of Investor Relations. Please go ahead, sir.

Good morning, everyone, and thanks for joining us today to discuss NASDAQ OMX's third quarter 2013 earnings results. On the line are Bob Greifeld, our CEO; Lee Shavel, our CFO; Ed Knight, General Counsel; and other members of the management team. After prepared remarks, we will open up to Q&A. The press release and presentation are on our website. We intend to use the website as a means of disclosing material nonpublic information and complying with disclosure obligations under SEC Regulation FD. I'd like to remind you that certain statements in this presentation and during Q&A 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. Actual results may differ materially from these projections. Information concerning factors that could cause actual results to differ from forward-looking statements is contained in our press release and periodic reports filed with the SEC. I now will turn the call over to Bob.

Thank you, Ed, and good morning, everybody, and thank you for joining us today. We are very pleased to announce a very strong third quarter. And what is noteworthy, this is the first time our acquisitions of eSpeed and Thomson Reuters' IR, PR and Multimedia businesses are fully incorporated in our results. You can see our mix of business is evolving, and we have set a new revenue and operating profit baselines. In the third quarter 2013, revenues reached a record $506 million, driven largely by our Technology Solutions segment, now a $524 million annualized revenue business, as well as our Information Services segment, which set a new high with $472 million in annualized revenue. In addition, with the inclusion of eSpeed, 2/3 of the transaction-based revenue in our Market Services segment now comes from derivatives and fixed income products, with 1/3 now coming from equity trading, a pretty remarkable transformation. Looking at the bottom line, on a non-GAAP basis, third quarter EPS of $0.66 was up 6% over the year -- the prior year with $0.62. Our non-GAAP operating income was up 12% year-on-year. We are on a good course, and we are seeing positive momentum in a continuing difficult environment. We are executing our strategy, and we are in progress and making progress against our targets and objectives we've outlined on our recent calls. This quarter provides further evidence that our strategy to leverage our technology and customer relationships to build profitable businesses, which deliver attractive returns for our shareholders, is working. Our objective is to become an entrenched provider of a diversified portfolio of services to the financial and investment community. When we think about our strategy and objectives, clearly, the integration of eSpeed and the IR, PR and Multimedia businesses of Thomson Reuters are important to these efforts. We're making good progress with each of these, and I'll come back to this later. I want to turn to some of the broad business highlights that defined our quarter and the results we delivered. Our core listing business continue to demonstrate that our value proposition to issuers is compelling. With a recent high of a 59% IPO win rate in what has been a very busy quarter in terms of new issue activity, with activity through the first 9 months of 2013 the highest since 2007, we're obviously pleased about that. We also are having one of our best years on the IPO front, and most recently, we won several high-profile IPOs, including Rocket Fuel, FireEye, Potbelly Sandwiches, Sprouts Farmers Market and RetailMeNot. And just a few weeks ago, we won one of the largest switches of the year in Marriott, a $12-billion market cap company. And in addition to that, Fairchild Semiconductor, another billion-dollar-plus company which chose to switch to NASDAQ from our competitor. What you are seeing in many of our core businesses is a microcosm of our diversification strategy implemented at the corporate level, and there is no better representation of that than our Global Index business. We saw a strong revenue growth in both our index licensing business, which grew 20% and, the first time, has more than half of its licensed AUMs and products other than the queues. Our Market Data business grew 19% due to a combination of organic revenue growth led by NASDAQ Basic, the inclusion of eSpeed market data and higher audit collections. In our Market Technology business, within our Technology Solutions segment, we had several key wins right in the quarter that featured record new order intake and pushed the backlog to record highs. These include Borsa Istanbul, who, in addition to supplying them with our leading technology, we are forming a strategic partnership to help them expand their global presence. Other notable market tech wins include Boerse Stuttgart and Tadawul, which is the Saudi Stock Exchange. Overall organic revenue growth for the company was 4% year-on-year, and we saw organic growth in all 3 of our nontrading segments. With regard to the Corporate Solutions business, which is the other business in our Technology Solutions segment -- they don't think they're the other, obviously the other way around. As I mentioned, we're very pleased with the progress we're making against our plans to integrate the Thomson Reuters businesses. Essential to our efforts has been the global reorganization of the sales team, which enables us to better execute and serve our base of 10,000 global customers. While we already have strong relationships with a long list of clients, our cross-sell opportunity is significant given that the vast majority of our existing customers are using only 1 or 2 of our solutions. In addition, we have been developing a new platform of shared standards, which will provide a uniform and consistent technology framework for integrating core components across our entire product suite. This product -- or the product roadmap that the integration team has been working on will create the next generation of IR and PR platforms. Our mission is to create a stronger industry leader in Corporate Solutions, and we believe we're absolutely on target to do so. Now let me move on to eSpeed, which is a business we are extremely excited about in our Market Services segment. With the acquisition of eSpeed, we're now one of the leading providers of electronic government bond trading. Leveraging our leading technology is core to what we do, and we have established a near-term goal of achieving best-in-class responsiveness for the eSpeed platform, both in terms of latency and the consistency of that latency under varying volume loads. Right now, we think we're on track to accomplish this target by the end of the year, and we look to lever this to improve our market share. Looking forward a bit more, in the first quarter of 2014, we will move the eSpeed matching engine to our Carteret Data center, which will bring it closer to more of our customers and enhance its resiliency. In addition to the work we're doing on the technology front, we've been successful at bringing new market participants onto the platform with 4 new customers since we closed the transaction and another 4 expected to begin trading by year end. Also, we intend to add value to this eSpeed offering by expanding its product offerings. We expect to launch the first of these new products in early 2014. Despite continued record levels of quantitative easing, treasury volumes were up almost 20% year-on-year in the third quarter 2013, and we expect to continue to enjoy market volume tailwinds in the form of both growth and treasury supply and a bias towards higher volatility and turnover of treasuries, something that will be fully realized as QE2 tapers then eventually ends. In the quarter, we also continued to see solid traction in the internal investments we've made in our future. These include NLX, our European interest rate derivatives offering; FinQloud, a cloud-based data storage management solution for the brokerage community; and WorkSpace, our virtual data and product offering. As we move forward through the fourth quarter and into beginning of 2014, we have several areas of critical focus: First, as always, we will continue to manage our franchises with the focus and the discipline, which is our trademark, while ensuring we're meeting our customers' needs. Second, we will continue our strong execution on our plans for both Thomson Reuters and eSpeed. Although they're already contributing to the dynamic evolution of our business and accreting to our investors, it's still early days and we are, in fact, just getting started. That said, we're on a good path to reach growth and synergy targets we have established for ourself. Lastly, we will continue our focused delevering plans so that we can return to our long-term leverage target sometime in the first half of 2014. This quarter represents strong progress in a continuing suboptimal business and political environment. And while we at NASDAQ OMX are proud of this progress, we're more excited by the opportunities that our diversified business model presents to our employees, our customers, our investment -- and our investors. We look forward to our future. With this, I'll turn the call over to Lee.

Thank you, Bob. Good morning, everyone. The following comments will focus on our non-GAAP and pro forma non-GAAP results. Reconciliations of GAAP to non-GAAP and pro forma 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.nasdaqomx.com. I'll start by reviewing our third quarter revenue performance relative to the prior year quarter. Net revenues increased $94 million to a record $506 million. Contributing to this increase was $78 million or a 27% increase in subscription and recurring revenue, primarily from acquisitions but also from material organic growth. Subscription and recurring revenue now represents 73% of total revenues. Transaction-driven revenues rose $16 million on the inclusion of transaction revenue related to the eSpeed acquisition, partially offset by slightly lower revenue in our legacy trading businesses, in particular by U.S. equities and derivatives. On an organic basis, constant currency and excluding acquisitions, total company net revenues rose $16 million or 4%. I'm now going to go over some highlights within each of our reporting segments. All comparisons will be to the prior year period unless otherwise noted. Information Services, which includes our Market Data and Index businesses, increased revenues by $19 million or 19% to $118 million and operating profit by $14 million or 19% to $86 million. Operating margin was unchanged at 73% compared to the prior year. Market Data had a $16 million increase in revenues on growth in new product sales, in particular, NASDAQ Basic, select pricing actions, such as an increase for Level 2 quotes and mutual fund services, the inclusion of eSpeed market data and higher audit collections, which were $7 million higher than the prior period. Index Licensing and Services grew revenues 20%, with a number of licensed exchange-traded products up 57% to 143 and assets in these rising 70% to $79 billion. One interesting footnote in index is that for the first time, the majority of the assets under management in licensed products associated with our indices are in products other than in our industry-leading QQQ ETF. Technology Solutions, which includes Corporate Solutions and Market Technology, increased revenues by $58 million or 79% to $131 million, mostly because of the impact of the Thomson Reuters and BWise acquisitions, but also due to organic growth at both the legacy Corporate Solutions business and growth in Market Technology. Operating profit increased from $6 million to $9 million due to both the full quarter inclusion of Thomson Reuters and higher contribution from existing businesses. Corporate Solutions revenue saw a large step-up in scale more than tripling compared to the prior period due mostly to the impact of a full quarter inclusion of the Thomson Reuters acquisition and secondarily due to continued organic growth in our legacy Corporate Solutions products, such as Directors Desk, where 232 clients were added, and press release services, which saw a 25% higher volume. Market Technology revenues grew 4%, and order intake at $119 million and backlog at $579 million both set new highs. Significant new business wins included Borsa Istanbul and Boerse Stuttgart, and we also had a strong quarter in terms of SMART surveillance product sales and BWise orders. I note here on our Technology Solutions operating margins, we saw stable margins versus the last quarter, but I also wanted to expand a bit on some of the positives and negatives that canceled each other out in terms of the sequential margin story. We did enjoy the benefit of a full quarter's worth of the Thomson Reuters acquisition, which generally enjoys higher margins than our legacy Corporate Solutions business, but the third quarter see some soft seasonality at both Thomson Reuters and our legacy Corporate Solutions business. We also have some temporarily elevated cost in the early quarters of the acquisitions stemming from temporary support services, professional services fees, et cetera, that will be receding over the next few quarters. We continue to target 20% plus margins in the Technology Solutions segment within the next few years. Market Services, which includes our derivatives, equities and fixed income trading, as well as associated Access and Broker Services, saw a $15 million or 8% increase in revenues to $200 million due primarily to the inclusion of transaction and hosting revenues of the acquired eSpeed business, partially offset by a decline in legacy Market Services revenue. In particular, declines in U.S. equities and derivatives more than offset higher European equities and derivatives. Operating profit increased $5 million or 6% to $85 million, and operating margin of 43% was unchanged compared to the prior year period. Net derivatives and fixed income trading revenues rose 24% due to the inclusion of $18 million in net eSpeed transaction revenues. I'd like to note here that the $18 million is net of $1 million in transaction-related costs, and our reporting has classified such transaction-related costs into a contra revenue item, different than how we showed eSpeed's 2012 results when the deal was announced, with the gross trading revenues reflected in revenues and these variable costs reflected in operating costs. Excluding this change, net fixed income trading revenues were relatively flat from the prior year period as higher industry volumes were offset by lower market share due to share declines that occurred prior to NASDAQ ownership. In derivatives trading, European revenues rose 4%, principally on revenue associated with clearing, but U.S. derivatives saw a decline that more than offset this increase on slightly lower industry volumes and market share compared to the prior year period. Net equity trading revenues fell 2% as European equity revenue growth of 17%, a product mainly of industry volume, was more than offset by a 14% decline in U.S. equities on lower industry volumes and market share. In Access and Broker Services, revenues fell $1 million or 2% to $65 million due largely to muted demand for ports and co-location, partially offset by the addition of eSpeed hosting revenues and growth in newer products like Microwave. Listing Services, which includes U.S. and European listings, saw a $2 million or 4% increase in revenues to $57 million, principally on higher European listing fees, which reflect higher market capitalization there. In U.S. listing fees, results were flat as higher fee revenue was offset by lower revenues associated with events at the market site facility, which is undergoing a renovation. Operating profit decreased $1 million or 4% to $22 million, and operating margin of 39% was down 3% versus the prior year period. U.S. IPOs priced in the quarter doubled to 64 from 30 in the prior year period, and our IPO win rate increased to 59% from 57% in the prior year period. In addition to having a productive quarter in terms of both new issue activity and a very strong win rate, we gained as many switches as we saw depart at 4. Non-GAAP operating expenses increased by $73 million from the prior year, with the vast majority of the increase from the 2 acquisitions. Organic expenses, excluding the acquisitions and assuming constant currency, rose 7% this quarter, consisting of a 6% increase in core expenses and 1% due to higher GIFT spending. That organic increase is higher than normal due largely to timing issues around certain compensation items, which affected different quarters in 2013 compared to 2012, and elevated professional service expenses associated in part to managing certain support functions during the early months of the acquisitions. Year-to-date, organic expense growth was 2%, about half of which is the impact of the higher GIFT budget. Moving on to 2013 expense guidance on Slide 20. We are narrowing our guidance range for 2013 now that we are 3 quarters through the year, and our new guidance is $1,120,000,000 to $1,135,000,000 compared to the prior $1,120,000,000 to $1,160,000,000 guidance range. We are lowering the new initiative forecast of $45 million as we ended up funding fewer projects than we originally anticipated when we communicated the original $50 million to $60 million range at the beginning of the year. And our core expense forecast has narrowed onto $1,075,000,000 to $1,090,000,000 from the previous $1,070,000,000 to $1,100,000,000. Non-GAAP operating income in the third quarter of 2013 was $202 million, up from $181 million in the prior period. Non-GAAP operating margin came in at 40%, down from 44% in the prior year period, primarily the result of larger contribution from the lower margin Corporate Solutions businesses due to the Thomson Reuters acquisition plus increased levels of internal investment -- internal initiative investment and, in particular, NLX. Net interest expense was $30 million in the third quarter of 2013, an increase of $8 million versus the prior year due to increased borrowings associated with our acquisitions. The non-GAAP effective tax rate for the third quarter of '13 was 34% at the low end of our 34% to 36% guidance range. Going forward, we continue to expect our tax rate to be in the 34% to 36% range. Non-GAAP net income was $113 million or $0.66 per diluted share compared to $105 million or $0.62 per diluted share in the third quarter of 2012. The $0.04 increase in our EPS reflects a $0.02 improvement in our core operating profitability, a $0.05 benefit from acquisitions, net of financing costs and a $0.01 benefit from foreign exchange, partially offset by $0.03 of increased spending on GIFT initiatives and $0.01 higher due to a fully diluted share count increase. Moving on to the balance sheet on Slide 22. We are showing our debt structure and our debt maturities. Our higher debt and leverage versus the prior year reflects the completion of our acquisitions of Thomson Reuters at the end of May and eSpeed at the end of June financed largely with debt, while both our debt and leverage declined versus the second quarter of 2013, reflecting debt paid down in the quarter since those acquisitions were funded. In the third quarter, the company paid down $98 million in debt, including retiring the $93 million convertible bonds, but changes in FX led to a $31 million increase in the U.S. dollar amount of debt on the balance sheet netted to a $67 million decline in total debt quarter-to-quarter. Our gross debt leverage fell to 2.9x from 3x last quarter, consistent with our original expectations, and we continue to expect leverage to return to the mid-2s range within 3 to 4 quarters of the closing of the acquisitions, so before the end of the second quarter in 2014. Please bear in mind there is some seasonality to our cash flows and in addition to the fact, the third quarter is generally a soft earnings quarter due to lower activity levels. NASDAQ gets a specially strong cash flow in the first quarter due to payments of annual listing fees in that period. Once we reach our mid-2s gross debt to EBITDA leverage target, which, again, we are progressing according to plan on -- and expect to complete by the end of the second quarter of '14, we'll enjoy flexibility to return or deploy capital where it generates the highest returns for our shareholders. Thanks for your attention, and I will now turn it back over to Ed.

Stephanie, can you please queue the Q&A?

[Operator Instructions] Our first question comes from Rich Repetto with Sandler O'Neill. Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division: I guess this quarter is a little bit more difficult because you get the acquisitions coming in, a little bit more moving parts. And just the first, a cleanup on them to try to clarify some things, but on the eSpeed, what was the Market Data because we can see the $18 million in the fixed income trading, but what -- was there other contributions to Market Data, I think, you referred to in the prepared remarks? The other question, Lee, is, your expenses looks -- you beat us on expenses materially. And I'm -- when I take just the 7% increase from last year, 3Q '12, I'm, Lee, coming up with $57 million in expenses from the acquisition. That's down below the run rate of the $65 million you guided to. I'm just trying to see whether that's to do with GIFT spending or trying to explain the lower expense run rate that you reported in the quarter.

All right. So Rich, I'll take the first question as Lee prepares for the second, a more difficult question. So when you look at the eSpeed numbers, we obviously have, as we do with basically all acquisitions, made a part of NASDAQ OMX. So the co-location services revenue and the Market Data revenue is separate from the transaction revenue. I think to get to the nut of your question, we had $99 million in revenue on a gross basis. I think the quarter was slightly below that pace if you add back co-lo and Market Data, but that's expected given it was the third quarter.

And Rich, on your question, the -- when you look at it versus the prior quarter, I think, probably, some of the gap here, you're looking at third quarter versus the second quarter, acquisitions added about $39 million of additional expenses. We had a benefit of about $6 million lower expenses due to lower GIFT spending from the second quarter, and we had an increase of about $4 million of expenses on the quarter related to some higher compensation. So I think overall, it's probably lower GIFT spending that accounts for some of the differences here.

And the general comment I want to make is that we operate under the structure that we look for effectiveness first and efficiency second. So with respect to the acquisitions and, in particular, Thomson Reuters, we're at the effective level. We're not at the efficient level yet. That's not -- well, it not was our goal for this quarter, the last quarter or possibly this quarter, but we obviously would get there as we go into 2014. So it's exciting as the numbers are strong, but we have a lot of work left to do, and we obviously will get it down as we get into '14. Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division: Okay. And then one sort of follow-up on the strategic side. Bob, BATS and Direct Edge announced a merger, and I was just trying to see how you view that competitor -- now a combined competitor. And they've talked about -- well, your Market Data is extremely strong, but do you see that -- now that they have more material market share, has that been any sort of an issue on Market Data and the proprietary -- and the growth you're seeing in proprietary market data?

Well, we were the innovator in this space with NASDAQ Basic, and we have 1,000 customers now and a commanding position, and it's our job to continue to work and improve that product. So we like our positioning. We certainly think that BATS and Direct Edge and NYSE, for that reason, also will try to compete with us, but it feels good to be the innovator in the space who has a strong position of incumbency and we're not going to rest on our laurels.

[Operator Instructions] Our next question comes from Howard Chen with Crédit Suisse. Howard Chen - Crédit Suisse AG, Research Division: I had 2 follow-ups on the recent acquisitions as early progress looks pretty positive. First, on Corporate Solutions, Bob, you spoke about the cross-selling opportunity on the enhanced product suite. I was just wondering if you had thought about framing out opportunity and discussed the sales and distribution you have in place. And is that where you want it to be in order to kind of execute on that opportunity set?

Yes, I would say this. The effort to combine the sales teams has been definitely ahead of pace, and you see it's essentially -- Dawn [ph], as I'm looking at Anna as I'm answering that question. She is shaking her head also. So that's good. And I think we will probably give you more granularity as we advance in time. I would say that Directors Desk is the hot product from the ex-Thomson Reuters people. Automated board books is a hot segment, and to be able to lever that additional channel with that proven product, I think has been successful so far and I think it will be remarkably successful as we go forward in 2014. Howard Chen - Crédit Suisse AG, Research Division: Okay, great. And then shifting over to the business you acquired from eSpeed, you spoke about 4 new customers onboarding during the quarter. Could you talk about the nature of these customers, how meaningful you think they can be and just what's the universe of other new customers because I think a lot of people out there think that this business was relatively saturated and mature amongst the customer set?

No. I would say -- and I'm looking at Eric as I say this, but we have, I think, a material opportunity to expand the customer base. One is that given the relationships that prior eSpeed had, there were certain customers who chose not to deal with the platform, and I think we, as the new player coming in, have the opportunity to change that. In addition, as we set for the announcement of the deal, that as you move the customers into Carteret and make it very easy and facilitate the onboarding of those customers in Carteret who are not customers of the eSpeed platform, we'll see some pickup from there. So we're excited about that. We're on with the plan. Howard Chen - Crédit Suisse AG, Research Division: Just a quick follow-up on that, Bob. What was the -- can you just remind -- what's the limiting factor of why these customers may not have been there with the prior owner?

Yes, I think one -- you've got 2 things. One is you had certain relationships that had been, I would think, handicapped through the years that now we as the new player can address; and two is that the equity world is still the widest world out there in fixed income, in U.S. treasuries. Is big, but it's not as big as the customer set that we have here. So we take those 2 drivers and it prevents -- presents us with opportunities. I also want to highlight that we made 3 fairly substantial changes to the platform since the acquisition. And as I said in the prepared comments, we're looking in the fourth quarter to really get us close to parity with the competitor with respect to raw speed and also the ability to perform under stress.

Our next question comes from Patrick O'Shaughnessy with Raymond James. Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division: So my first question is on the regulatory environment and, I think specifically, regulation of op exchange trading. It does seem like there's more conversation as it is more actually looking into the issue of op exchange trading. Can you just kind of give an update of where you see things standing right now?

Well, I would make this general comment. It's that I think the commission is in a better position than it have been in a while to execute on their desires. So I think under Mary Jo's leadership, you have a commission that's focused on getting things done. So I think in the fullness of time, that will be very helpful. And so while the debate continues to go on with respect to what is a proper structure, at the end of the day, we see that any change in structure will be good for us. We, obviously, will sweat the details and advocate for what we think is the right solution for the market, but at end of the day, the most important thing is that something happens, something changes, and my prediction is, with Mary Jo's leadership, we'll get there in some reasonable period of time. Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division: All right. I appreciate that. And my follow-up question...

Yes, I just want to make sure that I'm not speaking for the commission. This is my personal opinion. Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division: Noted. So my follow-up question is moving back to Thomson Reuters. Do you have a data on what the pro forma revenue will look like if you guys would have held that business a year ago? Just kind of curious on what the overall trends have been and the retention of their existing customers.

Yes. I would say this, I don't have the facts in front of me. Lee will think about it. But I think the business has been operating under a similar path as in the Thomson world. So I don't think that we have materially changed that path for the better or for the worse in the period of time that we owned it. Obviously, our job is to make sure we change it for the better. And we have a lot of good things going on, as I referenced, with the sales reorganization and the cross-selling of the products. But that hasn't been a material impact to the revenue arc. So I think you see the same operation of the business as before.

Yes, and I would say, Patrick, it's difficult because we have just -- we're pulling businesses out of Thomson Reuters. We don't have a good kind of accounting comparison from one entity to the other. I think all we can really rely on our -- out of the operational experience that we have with the business right now. So I don't think we can answer that question precisely.

Yes, so the dominant thought I want to leave at this call is these 2 acquisitions are, in fact, accreting to our shareholders today. They're being run in much the same way, or performing much the same way they did before we acquired them. But that gives us, I think, great optimism because we have a whole plethora of plans to improve the operation, to rollout new products, to make some product rationalization decisions, which a lot of these decisions have been made -- more to be made between now and the end of the year, which will have, I think, a fairly dramatic impact on the performance of the business in 2014. So for us, it's just a wonderful position to be in, to be putting scores up in the board with respect to the acquisition, representing, I think, proper purchase price and obviously, beneficial financing. But a lot of what we call the alpha return yet to come. And we're more excited now about the alpha returns we can deliver from these acquisitions than we were at the time that the deals were announced.

Our next question comes from Ken Hill with Barclays.

I had a quick question. I wanted to get back to the GIFT spending here, sort of, the lower outlook going forward. I'm just kind of wondering what drove the change there and how you're thinking about some of the revenue outlook for some of those new initiatives, particularly like NLX, which has been eating up a little bit of the GIFT spend more recently?

Yes, well, one is, the GIFT analysis is clearly from a bottoms up. The merits of the concepts and the business opportunities have to stand for themselves and so that's not governing the budget in a given month, quarter or really, a year for that perspective. So we're very happy that we're funding the right opportunities for us at this point in time. I think the revenue opportunity for NLX is delayed but still encouraging. As for those who watch the market share has seen that there has been some steady incremental progress over the last number of weeks, we do expect further participation between now and the end of the year. And we're watching it very closely and I say over the last 3 weeks, the progress has been encouraging.

I would just add one element here is that the reduction doesn't reflect a defunding of projects that were approved. So we aren't cutting back on the projects that we were excited about that we think have great promise. We do have money that has been set aside at the beginning of the year for new projects that will come through the pipeline. And either there haven't been as many projects or the projects that were presented, we decided, didn't represent good returns or investments at this stage. I think that -- I'm sorry, that, Ken, is what is coloring the difference here as we get to the end of the year.

Okay. A follow-up here is on the Options market share. It looks like the overall market remains competitive. You've got a competitor out there being very aggressive through the back part of this year. I was just wondering if you could comment on how you're thinking about market share going forward? Does it get to the -- some like Cash Equities, where you get to more of a steady-state and you're kind of happy with where it is? Or is it something we can expect you guys to really ramp up and be more aggressive on towards the end of the year here?

Well, happy would obviously be the wrong word with respect to just having steady market share. The qualifying comment I would make is the dividend trades have declined. Absent any regulation, we've seen some clearing firms step away from that business. So if you will isolate out the dividend trades, I think the market share has been very steady over the past number of months or quarters and that is, obviously, in face of renewed competitive threats and pressure. So it's the world we live in and we're very comfortable with it. Our Options team, led by Eric, has been incredibly strong. And I would say that the plans they have in place gives me great comfort. And we do manage the business for both profit and market share. So we're very happy with the progress, I think, on a combined basis for both metrics.

Our next question comes from Alex Blostein with Goldman Sachs.

So just following up, I guess, on the last question and just maybe focusing on the Cash Equities piece of the business. It looks like your market share last quarter came down again and then started to recover a little bit in October. So I just want to get a sense of whether or not you have changed anything on the pricing side that's leading to slightly better market share so far in the fourth quarter?

Well, I do like our capture rate in the third quarter. I think you'll see a continuation and possibly an improvement of that in the fourth quarter. So I think the team is doing the proper job of managing profitability versus share. I think we could get into a quarter or 2 where you'll see both of them optimize simultaneously. So we're excited about that. So I think our positioning in Cash Equities is relatively strong and we expect to see improved metrics in the times -- in the quarters to come.

Got it. And then on the -- on Thomson Reuters business, there's a couple of things in the press recently discussing the subsidies that New York Stock Exchange is providing to their list of clients. Can you give us a sense of what percentage of Thomson Reuters revenue has come from NYSE-listed subsidies?

Yes, it's a small percent. I think it's around $11 million. So in the scheme of the operation, it's not large. We had, in our board model, planned for the elimination of that subsidy. I would say that the actual dollar is probably $1 million or so higher than we had in the board model. But I think the good news here is we probably gained multiples of that, with respect to customer goodwill, I think our competitor chose to announce the end of the subsidy in Carteret in a sudden way, it was not popularly received by the customer base. And we were able to step in and back stop that in a quick fashion. So in terms of our overall strategy of cross-selling into these accounts, I think we've come out of this situation quite positive and with a higher level of customer acceptance and goodwill, and I think that will serve us very well in the quarters to come.

Our next question comes from Mike Carrier with Bank of America Merrill Lynch.

Just on the organic growth, you guys mentioned this quarter that you had 4% year-over-year. I think stepping away from the transaction business and looking at the nontransaction side, given that you have these transactions now incorporated. When we start thinking the next 12 months on that organic growth rate of 4%, like, is that sustainable? Do you see some areas where you can beat that 4%? Just want to get some sense in terms of when you're budgeting -- what you think those nontransaction revenues can do in a decent capital markets backdrop?

All right. I was waiting for the last comment and you put it in there. So assuming you have a decent environment, I think, one, from a macro point of view, we think that a single-digit number, mid-single-digit number is a proper target for us. I prefer to think about it from a bottoms up point of view, from a product point of view, what products can we come to market with and what markets can we go after. And that, obviously, can yield us to a larger number if we're able to successfully execute on the business. So direct answer is, I think the mid-single digits is something we think about, but we obviously aspire to more than that as we build our execution plans for these businesses.

Okay. That's helpful. And then just on the cash side, so as we get to, say, second quarter next year -- and just maybe just give an update in terms of when you think about the targets on debt-to-EBITDA, whether it's total debt or net debt. I'm just trying to -- I think when you look at priorities in terms of looking at investing in the business, going back to picking up the buybacks, just want to rank those priorities once we get to your target debt level?

Yes, I would think that conversation is something we'll be happy to have when we get there. Obviously, we have a lot of execution to do between here and now. We're pleased with the progress and we're pleased with the debt paydown we made in this quarter. And we'll continue to do that. But a lot of wood to chop between now and then. And when we get there, it would be the proper time for us to think about it in a fulsome way.

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

Moving back to eSpeed. I just was wondering when those fixed eSpeed contracts come up for renewal, are you trying to restructure them so that there's more of a variable component, just given your volume outlook for treasuries? Or are you kind of happy with having a fixed component? And then also, I'm not sure if this is something that you can tell, but I'd be curious if, like, all those contracts come up for renewal at the same time or if they're staggered over the course of the year?

They're staggered over the course of the year. And fixed contracts, obviously, there's some good to it and there's some bad to it. I think we prefer to see hybrid. Left to our own devices, we'd like to see a fixed element with an upside based upon increased volume. So you somewhat protect your downside, limit your upside. It think we'd be comfortable with that as the outcome.

Okay. And then on NLX, I think you guys said that you'd be kind of evaluating, in the first quarter, whether it's something that you want to keep investing in because it is taking up quite a bit of your GIFT budget. But I thought maybe you could run us through some of the decision criteria there, like, what do you need to see to keep the operation open? Is there a volume or open interest threshold? Does it need to be approaching breakeven or a certain number of clients or -- I'm just wondering if there is some kind of trigger there?

Well, I think the dominant trigger -- and there are many, but if I had to highlight one, I would say this, we have an engaged group of partners that came together, rallied around the team to launch this effort. These partners have varying levels of ability to deploy in a given time frame. To the extent that the partners have done what they could do, meaning, that they were connected and they were giving us the full they could give us, then, that is the time we say, "Okay, let's assess where we're at." So clearly, if we do that and we're at 5% and growing, then, we're very happy. If we're at 1% and stable, then, we're unhappy. So we're working hard to make sure each and every one of our partners is doing everything he or she said that they would do. And we're making progress. And fourth quarter is a big effort. We obviously want to get a lot of it done going in before the system freezes -- it happened in mid-December, and we're going to gauge it as we go along. And one of the, obviously, interesting things with the GIFT council is it approves these fundings, but it also has a fundamental mission to be clinical with respect to its evaluation of the progress and its evaluation of its prospective future. And that's one of the key skill sets we have developed here in NASDAQ OMX, and it's something we think about on a regular basis.

Our next question comes from Chris Allen with Evercore.

Just wanted -- I might have missed this before. But just, the expense guidance for the full year implies a decent tick-up in the fourth quarter expenses off of 3Q. Is there any seasonality in there? Is there any specific drivers to think about for the quarter?

Yes, Chris, there is. In the third quarter, we do have a lower level of overall on expenses due to it's generally a quieter quarter in the business so we have less associated expenses. So I think the uptick that you see reflects that. It also reflects an expected increase, to some extent, of some GIFT spending in the fourth quarter. And so I'd say those are the 2 primary components that create that situation that you correctly identified with the guidance, that we are expecting an increase in expenses in the fourth quarter.

Got it. And then not to beat a dead horse but going back to eSpeed a little bit. ICAP's volumes were up or BrokerTec's volumes in treasuries are up about 34% year-over-year. So it looks like most of the market share was lost to them. Maybe, is there any specific points that you guys are focused on to reverse the market share deterioration? I know you talked about moving to Carteret, but is there anything else -- whether it was pricing, anything else that you think drove the decline in market share over the last year?

Yes. So let me start with a general comment. What's exciting to us is both eSpeed and the Thomson Reuters acquisitions are providing an attractive return to our investors today and they help contribute to this very strong quarter. That being said, we, ourselves, have not done that much to add to their operational excellence. And that will not be the situation as we go forward in time, thereby, inferring that the returns on the investments, while strong today, will get even stronger. With respect to eSpeed, since we've owned the asset, the market share has been essentially stable. It is not a goal that we have to remain stable at the market share. We are basically launching a multipronged plan to address that. We've highlighted some of the things we've done already. Clearly, the move to Carteret will be helpful. Clearly, the ability to get our system on par with the competitive system, which we think we'll do by the end of the quarter, will be helpful as we go into 2014. And probably, most importantly, is the building and strengthening and rebuilding, in certain cases, of relationships with our customers. And that effort is ongoing and that's all done at the head trader level instead of done at the head of the fixed income division and probably, most importantly, has to be done trader by trader. So we're on with that. So we haven't seen -- in the quarters results we have today, we haven't seen any results of that yet. You will in the time to come. And just as in these quarterly results, you have not really seen, yet, any of the good work we're doing with respect to Thomson Reuters, and you'll see that also. So a very strong quarter. Excites us that right now it's just because we bought assets at good prices with good financing and there's more good stuff to come.

Our next question comes from Chris Harris with Wells Fargo Securities.

First question is a regulatory one. There's been a lot of chatter floating around about whether exchanges should have the ability to self-regulate. And just wondering if you guys could comment, in a worst-case scenario, if NASDAQ lost its ability to be an SRO, what exactly would that mean for you guys?

All right. So one, I would separate out the SRO question from the Listings versus the Transaction business. So I think if there's going to be any serious discussion, it will be primarily around the Transaction business. But I'm not inferring that there will. But in the Transaction business, I think it's very important to recognize that we will have a contractual relationship with these customers. And if we're going to be reliant on the contract, we would be in a position to have a contract very similar to any other transaction processing vendor in the world. And that contract does not subject due to, what I would call, consequential damages. So to the extent that you lose a phone call when you're on the line with Verizon, to the extent that you're trying to do a transaction with the PayPal or anybody, and there is an interruption in the service, then, that's part of the experience of being in the Transaction business for better and/or worse. So in a real sense, the SRO aspect would not have any material change on our Transaction business. And I'm obviously saying that as a nonlawyer but certainly, my firm opinion, having been in the Transaction business just outside of the regulated world, it's the standard way that you operate. So we have a very firm opinion that the immunities, I think, have value for the exchange function, which is fundamentally different than the broker-dealer function, but in particular, reference to the Transaction part of the business, it's not a material set of circumstance or effect.

Okay. Very helpful, Bob. And my follow-up would be probably another hard question, I guess, but some of the technology glitches that have occurred -- certainly, not unique to you guys at all, but just wondering what steps maybe NASDAQ can take -- and then the industry, more broadly, to limit these kinds of events?

Yes, that's a great question and deserves a long answer. Let me give you the summary version of it. We always take the detailed question offline. But I would say this. One, is in the Technology business, you understand there's always going to be latent bugs in the code. It's our job to basically isolate and make sure when they happen, they don't have an impact on the world. So coming out of the 22nd, there's obviously a lot of things we have to do with respect to the SIP and how it works in the environment. I think that represents, in certain ways, an opportunity for our Technology business to put forward for a state of the art proposal for the SIP committee to get it up to world standards, like we do with our 70 other customers. We intend to pursue that. I think under Mary Jo's leadership, the industry itself is starting to grapple with what we have to do to live in this interconnected world. And the 60-day clock is ticking, and I think it comes up the 12th of November. And we intend to be ahead of the curve in terms of how we respond to that. So we're excited about that. Post that initiative, it's our strong feeling the industry has to evolve to some type of centralized testing regime. And we certainly referred to the telecom industry and others, where you have the equivalent of an underwriters' laboratory that represents your ability to do nonsequential testing that assures the safety and sanctity of the entire network. So what we're doing now is good, then we have to evolve to the next step of it and the industry will do that. With respect to our own operations, we obviously have looked at, coming after the 22nd, where are there dusty systems that are not paid that much attention to but have the ability to have an impact on the marketplace. And we're intensifying our effort to make sure that we can mitigate and insulate, wherever possible, us from any technology disruptions that can and will happen. And so that's an effort for us. People ask me what's the cost of that and I said, the real cost is not so much a direct cost because we -- clearly, when we see things that have to be fixed, the best people to fix them are the people on the systems today and they generally know exactly what has to be done. So as you look at our increased focus on this resiliency, I would highlight the fact that the cost is going to be primarily opportunity cost. So we will stop doing business things in order to make sure the resiliency in all aspects and all walks of our Technology life is solid and secure. And we're on with that mission today. There could be some minor increase in CapEx but when I look at the problems we're having with the HELP exchange and they said that they're bringing outside people in, then I know that's a longer runway. Clearly, if you don't have the internal expertise for the system, then it's an issue. So what we're looking at can definitely be addressed from our internal resources, but the opportunity cost is also real.

Our next question comes from Niamh Alexander with KBW. Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division: If I could go back to the capital -- and thanks for giving us the kind of explicit guidance on the timing. It's only a few quarters away now and -- when you have more flexibility with your cash. So can you remind us of what is your interest level in European consolidation? There's certainly some compelling arguments to be made from a cost side. Before, I think you've kind of made some public comments about being potentially interested in some new European exchanges if they came on the market. What's your interest level now as you kind of get better visibility on these acquisitions you've already made?

Niamh, I've never heard you be so vague in your life here. What European asset might you be talking about? I don't know. So what I've said publicly before, we would be remiss, if the asset were to become available, to not take a look at it. And that doesn't say that we'd have a strong interest, a medium interest or a low interest, I don't know. The devils are obviously in the details. The reason we have to look at it is we clearly have a European presence today. We have enough processing power in our European data center to handle every European equity trade today without spending a nickel. So you've got that kind of fundamental driver behind it. But these kind of things are just difficult. We're spending 0 time thinking about it right now. And to the extent that the European regulatory political infrastructure wants to do an IPO, the last thing we're going to do is waste any time fighting that train. So we're here. We've expressed to the European people that we know what we're doing in Europe. I think the way we integrated NASDAQ OMX is hailed as a proper way to do a cross-border transaction in Europe. And I think the NYSE Euronext is hailed as the improper way to do it. So we have that kind of fundamental credibility with the European regulatory community. But that being said, we're not spending any time thinking about it and to the extent they want to do an IPO, we wish them all the well with it. Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. Fair enough. And then, if I could just go back to the SIP. And you talked about maybe this could actually be an opportunity if the committee decides that they need to substantially upgrade the systems and to be more like the private system, as it were, is there a potential risk that if you lose the entire role there, that it kind of gets outsourced to somebody else and there's like a revenue stream we should be thinking about attached to that?

Well, there's a revenue stream, there's not profit stream. So I wouldn't worry about that too much. I mean, we've operated the SIP kind of by default, based upon the vestige of our monopoly position pre-Reg. NMS. And when you think about it, we've operated it for -- as it turns out, infinite risk with 0 financial return to it. So we have to -- have a proposal for the SIP that makes sense, that represents a decent margin for us. Not excessive, but more importantly, we have to put forward a proposal where the SIP technology can be brought forward into the 2015-type best-of-breed practices. And it deserves that. At end of the day, it's not our decision whether that's done. It's the decision of the committee. But clearly, we would not have too much interest in continuing in the current relationship where there's no -- the way it's operated, the technology is just fraught -- with too much peril. Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division: Is there a chance or a situation where the regulators could -- nobody wants to hold up their hand and set a lot more money in operating it. But is there a chance that you could be kind of forced to upgrade it without necessarily getting compensated for it?

No. Well, first off, it would have to be the committee, right? So we obviously received the publicity, but we're a member of the committee. So will the SEC force the committee to upgrade the SIP and then, the SIP has to choose who is the vendor to do that, that's a potential. But I would say this, that I think -- and I don't want to speak for the SEC or other market participants, but I think the community, as a whole, recognizes that the SIP is a critical piece of the infrastructure and deserves to have state-of-the-art technology behind it, state-of-the-art support contracts, state-of-the-art service-level agreements between the SIP and the vendor meeting us associated with it. So I don't think there's going to be too much commotion associated with this.

I will now turn the call back over to management for closing remarks.

Thank you. Well, certainly, it was a very strong quarter. As I said in my prepared comments, we still operate in fundamentally difficult times, political climate doesn't help either. That being said, the strength of the franchise -- the diversified franchise continues to reveal itself. The acquisitions helped, as I said a number of times, that we just got started. So they're going to help that much more. And I think the business plans we have in place, the diversification of our revenue and most importantly, the strength of the employees and the management team here at NASDAQ OMX position us properly for the future. We appreciate your support and look forward to talking to you in the days and the quarters to come. So thank you.

Thank you, ladies and gentlemen. That does conclude today's press conference. You may all disconnect and have a wonderful day.