Included in the fourth quarter 2006 results are $34.1 million in merger expenses and exit costs consisting of a restructuring charge in connection with a workforce reduction of more than 500 positions ($29.2 million), the acceleration of certain fixed asset useful lives ($2.8 million), and other professional fees incurred in connection with both the acquisition of Archipelago Holdings, Inc. and the pending combination with Euronext N.V. ($2.1 million).
On a non-GAAP basis, giving effect to the Archipelago transaction as if it occurred at the beginning of the earliest period presented, and excluding the merger expenses and exit costs, the net income of NYSE Group for the three months ended December 31, 2006 would have been $70.8 million, or $0.45 per diluted share, a $65.7 million or twelve-fold increase as compared to net income, on a non-GAAP basis, of $5.1 million, or $0.03 per diluted share, for the three months ended December 31, 2005. A full reconciliation of these non-GAAP results is included in the attached tables.
For the year ended December 31, 2006 , net income and diluted earnings per share on a GAAP basis were $205.0 million and $1.36, respectively. This compares to GAAP net income and diluted earnings per share of $40.7 million and $0.35, respectively, for the year ended December 31, 2005 . On a non-GAAP basis, net income increased 188% to $258.8 million, while diluted earnings per share increased 193% to $1.64.
"NYSE Group experienced an extraordinary year in 2006. Beginning with the close of the Archipelago transaction and subsequent secondary offering which established the NYSE Group as a public company, we are successfully transforming the NYSE," said NYSE Group Chief Financial Officer and Executive Vice President, Nelson Chai. "Among other things, we have revamped our transaction pricing, restructured the profile of our business portfolio, including through the implementation of the Hybrid Market and taking full control of our technology expenses as a result of our 100% ownership of SIAC, announced the NASD Regulation transaction, and launched our new options platform. We are delivering against the integration savings previously announced in conjunction with the Archipelago transaction, including a 35% reduction in our workforce. Finally, the pending combination with Euronext will create the first true global exchange group. We have executed against an ambitious set of objectives and positioned NYSE Group for long-term growth while delivering substantial shareholder value.
"Our recently announced agreement to acquire 5% of the National Stock Exchange, India ’s largest financial marketplace, and our strategic alliance with the Tokyo Stock Exchange are a strong start to the new year. In 2007, we will finalize the roll out of our Hybrid Market, deliver against the integration targets in conjunction with the Archipelago transaction and complete the Euronext transaction. We will continue to improve our business model and lead the global transformation of the exchange landscape in order to benefit our investors, listed companies and market professionals."
Other Financial Highlights
Excluding the effect of activity assessment fees and Section 31 fees, the pre-tax margin of NYSE Group on a non-GAAP basis more than doubled to reach 22.9% of total revenues for the year ended December 31, 2006 as compared to 11.1% of total revenues for the year ended December 31, 2005.
In conjunction with delivering merger related savings, NYSE Group total employee headcount was 2,578 as of December 31, 2006, a reduction of 718 positions as compared to total employee headcount of 3,296 as of December 31, 2005 and a reduction of 906 positions since March 2005 when NYSE, Archipelago and SIAC had 3,484 employees on a combined pro forma basis.
As of December 31, 2006 , NYSE Group had $985.8 million of cash, cash equivalents, investment and other securities (including $250.4 million related to Section 31 fees collected from market participants and due to the Securities and Exchange Commission) and no debt obligation.
Fourth Quarter and Full Year Business Highlights
As a result of the completion of the merger between New York Stock Exchange, Inc. and archipelago on March 7, 2006 , NYSE Group operates two securities exchanges - the NYSE and NYSE Arca. NYSE Group is the global leader in listings, cash equities and ETF trading, and holds well established positions in other product categories, including options, fixed-income, Nasdaq and Amex listed equity trading as well as market data.
On June 1, NYSE Group and Euronext N.V. announced their agreement to combine the leading U.S. and pan-European securities trading exchanges with combined $28.2 trillion total global market capitalization of listed companies and average daily trading value of approximately $102 billion as of December 31, 2006.
On November 28, NYSE Group and NASD announced the signing of a letter of intent to consolidate their member regulation operations into a new self-regulatory organization that will be the private sector regulator for all securities brokers and dealers doing business with the public in the United States . The transaction is expected to close in the second quarter of 2007.
The NYSE Hybrid MarketSM is transforming the NYSE into a fast market with sub-second, fully electronic order executions while still maintaining the NYSE’s historic market quality and potential for price improvement. On January 24, the NYSE announced the completion of Phase III, the largest and most intensive part of the Hybrid Market rollout process, with all immediately eligible NYSE-listed securities trading on the Hybrid Market platform. Phase IV implementation began on January 25, 2007 and is expected to conclude no later than the current SEC Regulation NMS compliance date of March 5, 2007 . Demonstrating the opportunity for customers to choose between an electronic or auction order execution, 20% of share volume is currently handled through trading-floor brokers and specialists utilizing new Hybrid Market electronic tools.
In a recently issued independent report, research firm Elkins/McSherry found that NYSE-listed equities have the world’s lowest all-in trading costs. Additionally, the NYSE consistently delivered lower trading costs than Nasdaq according to all major independent research, including studies by Elkins/McSherry, ITG Plexus and Abel/Noser.
A total of 206 new issuers listed on NYSE Group’s markets in 2006, representing total IPO proceeds of $34.9 billion. New listings included 28 transfers from other markets (up from 16 in 2005) and 29 non-US company listings (up from 19 in 2005). NYSE Group was the market of choice for many of the world’s most recognizable companies, including MasterCard (NYSE: MA), Chipotle Mexican Grill, Inc. (NYSE: CMG), J. Crew (NYSE: JCG), Tim Hortons (NYSE: THI) and NYMEX (NYSE: NMX).
For the three months ended December 31, 2006, compared to the same period a year ago, NYSE Group recorded increased average daily volumes across all categories of securities, including handled volume increases of 4.7% in NYSE-listed issues, 13.8% in NYSE Arca and Amex-listed issues, 24.6% in Nasdaq-listed issues, 27.3% in ETFs, and 29.1% in equity options contracts.
For the three months ended December 31, 2006 , NYSE Group handled 117.3 billion shares of NYSE-listed issues, or 70.0% of the trading in NYSE-listed issues, versus 111.6 billion shares, or 72.4%, and 112.0 billion shares, or 78.7%, for the three months ended September 30, 2006 and December 31, 2005, respectively.
NYSE Group’s share of trading in NYSE Arca and Amex-listed issues was 38.0% for the three months ended December 31, 2006 compared to 38.4% for the three months ended September 30, 2006 and 34.7% for the three months ended December 31, 2005 .
NYSE Group’s share of trading in Nasdaq-listed issues was 24.9% for the three months ended December 31, 2006 compared to 25.5% for the three months ended September 30, 2006 and 22.1% for the three months ended December 31, 2005 .
NYSE Group’s share of trading in ETFs was 44.0% for the three months ended December 31, 2006 compared to 43.5% for the three months ended September 30, 2006 and 40.5% for the three months ended December 31, 2005.
In 2006, NYSE Group made several acquisitions (TransactTools, Matchpoint Trading, and the shares of SIAC formerly held by the Amex) and purchased a strategic stake in Marco Polo to further enhance its technology, trading systems and future product offerings.
In the fixed income arena, the NYSE received an exemption from the SEC to begin trading certain unlisted debt securities of NYSE-listed companies and their wholly-owned subsidiaries, and will leverage NYSE Arca's core matching technology to develop its next generation bond trading platform, NYSE BondsSM.
In the fourth quarter of 2006, NYSE Group completed the launch of NYSE Arca Options, offering automatic executions for customer and broker dealer options orders. As the first exchange to file a detailed plan for new options pricing in conjunction with the SEC penny pilot program that began on January 26, 2007 , NYSE Arca Options introduced a plan designed to reward participants that improve market quality and provide liquidity.
The NYSE also announced that it will create a Trade Reporting Facility for customers seeking a reliable and competitively priced venue to report internally executed transactions in the first quarter of 2007.
The NYSE Composite Index (NYA), which closed the year at a record high, continued to outperform all other broad based indexes again in 2006. Designed to measure the performance of all common stocks, ADRs, REITs, and tracking stocks listed on the NYSE, the NYA finished the year with a gain of 17.9%. This was greater than the 16.3% increase that the Dow Jones Industrial Average achieved in 2006.
