NYSE Profit Falls 44% on Merger Charges, Trading Decline

NYSE Euronext (NYX), the biggest U.S. exchange operator, fell the most in six months after reporting a 44 percent decline in first-quarter profit, as expenses related to its failed merger with Deutsche Boerse AG (DB1) combined with a slowdown in trading.

Net income fell to $87 million from $155 million a year earlier, the New York-based company said today in a statement. Excluding some items, earnings were 47 cents a share, compared with the 48-cent average estimate of 17 analysts surveyed by Bloomberg. The shares sank 4.9 percent to $25.75, the most since Nov. 1.

European regulators blocked NYSE Euronext from merging with Deutsche Boerse in February, frustrating plans to mitigate a slowdown in stock trading and boost earnings and sales through cooperation on derivatives. Today’s report highlights the challenges that spurred the takeover proposal, exacerbated by a decline in equity volume across American exchanges to some of the worst levels in a decade.

“The lack of diversification in NYSE Euronext’s business model leaves the company’s ability to grow revenue vulnerable to further headwinds and leaves it exposed to ongoing poor volumes,” Peter Lenardos, an analyst at RBC Capital Markets in London, wrote in a report today. “We forecast that around 64 percent of NYSE Euronext’s 2012 revenue will derive from activity related to its cash markets.”

Volume Decline

NYSE said total U.S. cash trading averaged 1.8 billion shares a day, down 23 percent from the year-ago period and 16 percent from the previous quarter. Trading in equities fell as the European debt crisis and concern the U.S. economy was headed for its second recession in three years pushed daily moves in the Standard & Poor’s 500 Index to twice the five-decade average in 2011, according to data compiled by Bloomberg.

Volume fell around the world and across its venues. Average daily transactions in European cash trading slid to 1.6 million from 1.8 million a year ago. Revenue from derivatives was $176 million, down 25 percent from a year ago. The decline was driven by lower trading volume and reduced pricing for individual equity options and index futures, the company said.

European derivatives had average daily volume of 3.3 million contracts in the first quarter, down 28 percent from a year ago.

Challenging Environment

“The macro environment remains challenging,” according to a presentation for analysts from Duncan Niederauer, chief executive officer of NYSE Euronext and Chief Financial Officer Michael Geltzeiler. Still, there are “silver linings,” they said, pointing to new opportunities in derivatives and for the NYSE Technologies unit.

The first quarters of 2012 and 2011 included pretax merger costs of $31 million and $21 million, respectively, NYSE said. Charges specific to the Deutsche Boerse merger were $16 million in the first three months of this year.

“Our first-quarter results reflect the challenging operating environment which carried over into 2012 and will continue to result in near-term headwinds,” Niederauer said in the statement today. “Looking ahead into 2013 and 2014, we are focused on creating value by enhancing the underlying earnings power of the company and solidly executing on the three core pillars of our earnings growth strategy outlined at our investor day.”

Project 14

NYSE executives, meeting with shareholders on April 2, pledged $250 million in annual savings by the end of 2014 and said a stock buyback will be completed this year. NYSE also said “Project 14,” a program aimed at generating more savings, will generate about $90 million from technology and “organizational efficiency.” The firm is buying back $550 million in shares.

“There are no catalysts on the horizon that will precipitate an increase in volumes,” said Simmy Grewal, a London-based market structure analyst for Aite Group LLC. “It’s very difficult to go back to pre-2007 volumes as firms are no longer leveraged like that. And I don’t know if they ever will be again with all the capital requirements. As an exchange, you can cut costs and you can diversify.”

Global regulators have clashed with lenders over the severity of the capital and liquidity rules, which were set out in 2010 as part of an overhaul of banking regulation in the wake of the financial crisis that followed the collapse of Lehman Brothers Holdings Inc. The measures, known as Basel III, will more than triple the core capital that lenders must hold to at least 7 percent of their assets, weighted for risk. They are scheduled to be phased in by 2019.

Standalone Strategy

NYSE Euronext, operator of the New York Stock Exchange, bourses in Paris, Lisbon, Brussels and Amsterdam and London- based Liffe, Europe’s second-largest derivatives market, is focusing on its standalone strategy with shareholders after a year’s work on the merger with Deutsche Boerse.

The exchange has said it plans to spend $85 million moving clearing for London derivatives trades to its own clearinghouse, while retaining the services of LCH.Clearnet Group Ltd. for cash equities transactions. NYSE Liffe Clearing, a central counterparty to all trades on the London-based Liffe futures market, will be operational by the summer of 2013. It will shift clearing for derivatives traded in Amsterdam, Brussels, Lisbon and Paris to the U.K. capital in the first quarter of 2014. The company previously said it would build two clearinghouses: one in London and one in Paris.

‘Big’ Mergers

Last week, Deutsche Boerse pledged to keep costs under control as it takes a break from entering into “big” mergers. Deutsche Boerse said first-quarter net income dropped 31 percent to 146.2 million euros ($194 million) as trading volumes faltered.

Nasdaq OMX Group Inc., the second-largest U.S. equity exchange operator, posted first-quarter earnings that missed analyst estimates amid lower trading revenue. CME Group Inc., the world’s biggest futures market, reported a 42 percent drop in profit from a year earlier. Daily futures and options volume in the quarter declined 11 percent to average 12.3 million contracts.

To contact the reporter on this story: Nandini Sukumar in London at nsukumar@bloomberg.net or NandiniSukumar on Twitter

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net

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