NYX: Not Your Grandfather's Exchange

A combination of strong first-quarter volumes combined with better expense management helped NYSE Euronext (NYX - commentary - Cramer's Take) to report decent quarterly results this morning, with operating EPS at 91 cents on $848 million in revenue (net of transaction costs). If we assume that the Euronext merger closed at the beginning of the first quarter 2007, thus providing an appropriate quarterly comparison, total revenue rose 12% year over year, while the 91 cents in operating EPS vs. the 60 cents pro-forma EPS was an increase of 52%.

Today's NYSE is not your grandfather's exchange: The merger-frenzy that has hit the exchange business, causing exchange managements to acquire volume and product diversification, forced the NYSE to acquire Euronext in the spring of 2007, and the Euronext has helped the NYSE by the combination of strong volume with the expense savings finally materializing this quarter. The evolution of NYSE Euronext will continue for some time as global exchanges with volume and product differentiation allow the exchange to diversify away from the core legacy business.

Other first-quarter 2008 financial highlights:

• In addition to total revenue being up 12% year over year, net revenue rose 18% year over year.
• Operating income rose 34% year over year.
• The operating margin was 43%, up from 38% in fourth quarter 2007 and 35% in first quarter 2007.

First-quarter 2008 volume highlights:

• Euronext volume rose 39%.
• U.S. volume rose 26%.
• Liffe volume rose 29%.
• NYSE Arca (the options business) volumes rose 70%.

One analyst noted that NYSE Euronext now has 12 different initiatives under way, and new CEO Duncan Neiderauer noted that he now spends most of his time outside of the U.S. -- both offered as evidence that the exchange business is a transformational business with different products, different contracts, different global geographies and different forms of execution.

Neiderauer also emphasized that the $70 million in annual information technology run-rate savings, which exceeded the $50 million goal, will continue to be a focus of the company as the exchange seeks to control what it can while the business continues to shift. Finally, there was some discussion on the call of NYSE Euronext being registered as a futures exchange, which would put it in direct competition with CME Group (CME - commentary - Cramer's Take) and InterContinental Exchange (ICE - commentary - Cramer's Take), as the company looks to broaden its product offerings.

To conclude, as the shifting sands of the exchange sector forces the company to broaden out its product line and execution from its core legacy business, NYSE Euronext put up a good quarter (certainly better than fourth quarter 2007) on strong volumes. The company has a tough road to hoe in the next few years as the business becomes more generic and focused on cost of execution (being driven by electronic) and the contract offerings amongst the exchanges become more commodity-like. Further discipline on expenses and continued growth in volumes will help NYSE Euronext remain the premier exchange and iconic brand it has always been.

For Gilmartin's preview heading into the NYSE Euronext conference call, please click here.

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At the time of publication, Gilmartin was long CME Group, although positions may change at any time.

Brian Gilmartin, CFA, founded Trinity Asset Management (TAM) in 1995, where he is currently a portfolio manager. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gilmartin appreciates your feedback; click here to send him an email.