* $24.9 million charge for merger and acquisition related costs associated with NASDAQ's lapsed offer for the London Stock Exchange.
* $10.6 million charge included in general, administrative and other expense related to a NASDAQ clearing contract. NASDAQ's single trading platform includes functionality that enables NASDAQ to discontinue the use of services provided under the contract.
* $7.8 million loss on foreign currency option contracts purchased to hedge the foreign exchange exposure on the acquisition bid for the London Stock Exchange. A $48.4 million gain was recorded in the fourth quarter 2006 for foreign currency option contracts. As a result NASDAQ's cumulative gain on foreign currency contracts is approximately $40.6 million.
* $6.5 million gain associated with NASDAQ freezing its employee pension plan and Supplemental Executive Retirement Plan (SERP), included in compensation expense.
Excluding the above items and an additional $2.1 million in other charges, net income calculated on a non-GAAP basis was $41.8 million versus $26.2 million for the first quarter 2006 and $33.0 million for the fourth quarter 2006. Non-GAAP diluted earnings per common share were $0.29 for the quarter versus $0.22 for the first quarter 2006 and $0.23 for the fourth quarter 2006.
Operating income was $81.4 million for the first quarter of 2007, an increase of $39.6 million, or 94.7%, when compared to $41.8 million for the first quarter of 2006.
Gross margin, representing total revenues less cost of revenues, was $192.1 million in the first quarter of 2007, an increase of 18.6% from $162.0 million in the year-ago period, and up 4.9% from $183.1 million reported in the fourth quarter of 2006.
NASDAQ's Chief Executive Officer, Robert Greifeld commented, "Our first quarter results demonstrate our ability to improve profitability by focusing on the execution of our business plan. Gross margin increased for the 10th consecutive quarter and operating income reached the highest level ever recorded at NASDAQ. Share volume matched in our systems reached record highs and NASDAQ had its strongest performance in IPO listings since the height of the market in 2000. We are extremely confident in our ability to continue to grow our business and remain excited about the future."
Recent Highlights
* Quarterly operating income reached the highest level ever recorded for NASDAQ, increasing 94.7% from prior year and 19.5% from prior quarter.
* For the quarter NASDAQ attracted 79.2% of all IPOs, with proceeds totaling $6.3 billion, or 67% of the $9.5 billion raised across all U.S. exchanges.
* Achieved new market share highs in trading of U.S. listed equities. NASDAQ matched a record high 28.8% of consolidated U.S. listed equities in March. Matched market share for NYSE-listed stocks increased to 15.9% in March 2007, up from 7.7% in March 2006. Matched market share for Amex-listed stocks increased to 31.4% in March 2007, up from 23.4% in March 2006.
* Completed the transfer of sponsorship functions for the QQQ and the BLDRS ETFs to PowerShares Capital Management. This transfer expands the distribution channels for the funds and brings greater investor access to these dynamic products.
* Completed the migration of trading for non-NASDAQ stocks to our trading platform, effectively completing the INET integration.
2007 Outlook
NASDAQ expects the following results for the full-year 2007:
* Net income in the range of $165.0 million to $175.0 million for the year, including the impact of all charges noted above.
* Gross margin in the range of $755.0 million to $775.0 million.
* Total operating expenses in the range of $390.0 million to $410.0 million.
"We're extremely proud of our first quarter operating results," commented NASDAQ's Chief Financial Officer, David Warren. "By migrating trading to a single platform we've effectively completed the INET integration and have demonstrated our disciplined approach to integrating acquisitions. I'm pleased to say that all revenue and cost objectives identified at the time of the INET acquisition have been achieved. This success is clearly illustrated in the strong growth in operating income."
Financial Review
Total Revenues and Gross Margin -- Gross margin increased 18.6% in the first quarter to $192.1 million, up from $162.0 million in the year-ago quarter, and up 4.9% from $183.1 million reported in the fourth quarter of 2006.
Market Services
Market Services gross margin increased to $125.6 million, or 22.1%, from prior year, and increased 8.3% from prior quarter.
Issuer Services
During the quarter Issuer Services revenues increased 12.7% to $66.4 million from the prior year quarter and decreased 0.9% from prior quarter.
Total Operating Expenses
Total operating expenses decreased 7.9% to $110.7 million from $120.2 million in the year-ago quarter and decreased 3.7% from $115.0 million in the prior quarter. First quarter 2007 expenses decreased from last year primarily due to the completion of the integration of the INET acquisition, which resulted in NASDAQ migrating all trading to a single trading platform. Expenses decreased from fourth quarter 2006 primarily due to integration savings and the recording of a gain associated with freezing the employee pension plan and SERP, offset somewhat by the charge related to a NASDAQ clearing contract.
Loss on Foreign Currency Option Contracts
Included in first quarter 2007 results is a $7.8 million loss on foreign currency option contracts that NASDAQ entered into to hedge the foreign exchange exposure on the bid for the London Stock Exchange. A $48.4 million gain was recorded in the fourth quarter 2006 for foreign currency option contracts. As a result NASDAQ's cumulative gain on foreign currency contracts is approximately $40.6 million.
Strategic Initiative Costs
Included in first quarter 2007 results is a $24.9 million charge associated with NASDAQ's offer for the London Stock Exchange. These charges include $18.4 million of capitalized costs as of December 31, 2006 and subsequent expenses of approximately $6.5 million.
Earnings Per Share
First quarter earnings per diluted share were $0.14 versus $0.16 per diluted share in the year-ago quarter, and $0.43 in the fourth quarter of 2006. NASDAQ's weighted average shares outstanding used to calculate diluted earnings per share was 151.8 million in the quarter versus 128.0 million in the year-ago quarter and 152.1 million in the fourth quarter 2006. The outstanding share count increased from the year-ago quarter primarily due to the issuance of approximately 18.5 million shares in equity offerings in the second quarter of 2006.
