NYSE Euronext Profit Beats Estimates as Costs Decline

NYSE Euronext, the biggest operator of U.S. stock exchanges, reported profit that beat analysts’ estimates as operating costs declined.

Third-quarter net income rose to $128 million, or 49 cents a share, from $125 million, or 48 cents, a year earlier, the New York-based company said today in a statement. Earnings excluding some items were 46 cents a share, beating the 43-cent average estimate from 21 analysts surveyed by Bloomberg. Fixed operating expenses declined to $419 million from $426 million.

Chief Executive Officer Duncan Niederauer has been countering competition for market share and lower trading volume by reducing costs and diversifying revenue. The exchange has cut headcount by 11 percent since September 2009, NYSE said in today’s statement.

“It was an okay quarter with higher-than-expected revenues and better expenses,” Donald Fandetti, a New York-based analyst at Citigroup Inc., wrote in a note to investors. “The beat was driven by higher net revenues, better operating expenses and a lower tax rate. NYSE’s European derivatives, which are a key engine of growth, continue to see muted volumes.”

NYSE declined 2.7 percent to $29.61 at 4 p.m. in New York. Before today, the shares have advanced 21 percent in New York this year, compared with a 5.6 percent gain in the FTSE/Mondo Visione Exchanges Index, which tracks 18 companies. The exchange operates markets in Paris, Lisbon, Amsterdam and Brussels in addition to the New York Stock Exchange.

Rising Expenses

Fourth-quarter expenses will increase, Chief Financial Officer Michael S. Geltzeiler said on a conference call. The shares fell because of the rising cost forecast and because most of the third-quarter improvement was driven by a $21 million tax benefit, Christopher Allen, a New York-based analyst with Ticonderoga Securities LLC, said in an e-mail.

Derivatives trading declined 5 percent in the quarter to $188 million and accounted for 31 percent of net revenue, NYSE said. Sales from cash trading and listings dropped 9 percent to $298 million, while information services and technology solutions revenue was $113 million, a 20 percent gain.

NYSE has a goal to reach $1 billion in technology revenue by 2015. Dominique Cerutti, president and deputy chief executive officer, said today that he already sees about $750 million in organic and business development opportunities, and acquisitions will likely be part of the plan to reach the rest of the goal.

Initiatives

The company is preparing initiatives that include “extending our global network, extending our data service business, building the service platform and one day or another attracting other market venues,” he said on a conference call today. “This is not a long-term dream because we are working on that as we speak.”

Today’s results included $25 million of pretax merger expenses and exit costs and a $21 million deferred tax benefit related to the reduction of the U.K. corporate tax rate, the company said.

“Despite lackluster near-term volume trends, we are focusing on those areas of our business model that are within our control,” Geltzeiler said in the statement. “We continue to develop additional cylinders of growth with new initiatives and our technology services business, we are continuing to reduce our fixed-cost base and are focused on better managing our capital for the benefit of our shareholders.”

Cost Guidance

NYSE said today it now expects full-year 2010 fixed operating expenses to be below the lower end of the currency- adjusted range of $1.71 billion to $1.75 billion.

The company will pay a 30-cent dividend per share on Dec. 31, which represents a pay out of a little more than 50 percent of the adjusted net income, Geltzeiler said in an interview after the call. NYSE doesn’t plan to use the dividend as a profit-sharing mechanism and probably would only increase it if it’s sustainable and after the payout ratio shrinks to a range of about 35 percent to 45 percent.

“We’re no longer in a massive de-leveraging mode and at the same time our cash flows are improving,” he said. “Because we are going live with our two data centers, it means I don’t need to continue to spend the $600 million to $700 million I spent in the last three years on that.”

Buyback Program

Excess cash would be put toward buying back shares before a dividend increase, Geltzeiler said. A $1 billion repurchase program that has about $650 million left was put on hold during the financial crisis, and he said the next step “could be that we eliminate the suspension on the buyback authorization that’s outstanding.”

Nasdaq OMX Group Inc., the second-biggest U.S. stock exchange operator, reported third-quarter profit on Oct. 29 that beat analyst estimates as it gained market share in options, offsetting slower equity trading. Deutsche Boerse AG, Europe’s largest exchange operator by market value, said on Oct. 28 that profit and sales rose and cut its full-year cost forecast. CBOE Holdings Inc., owner of the Chicago Board Options Exchange, posts quarterly results on Nov. 4.

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Nandini Sukumar in London at nsukumar@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.

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