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Forecast Flattens Nasdaq

A weak 2007 profit target adds to swirling uncertainty.

Updated from 9:45 a.m.


Nasdaq Stock Market's


stock plunged 10% Tuesday after a soft 2007 forecast added to uncertainty swirling about the exchange operator.

Nasdaq's fourth-quarter profit more than tripled from a year ago, thanks to currency bets tied to its failed $5.3 billion bid for the London Stock Exchange. But the company guided to 2007 earnings that were below the Wall Street estimate.

The news comes just days after Nasdaq failed in its nearly yearlong, increasingly hostile bid for the London bourse. With shares of the LSE trading more than 3% above the Nasdaq's offer, only 0.4% of shareholders tendered their shares to Nasdaq.

Since the bid has failed, "all options are on the table" for Nasdaq, CEO Robert Greifeld said on an analyst conference call on Tuesday.

The exchange acknowledged is in discussions with other partners, but was mum on the details.

"There are very few that really do not want to talk to Nasdaq," Greifeld said. "There are opportunities out there. It runs across the spectrum and across the globe and we will be involved in transactions in 2007."

LSE shareholders were looking for Nasdaq to raise its price, but "we could not support and would not support paying a higher price," Greifeld said.

Nasdaq still owns 29% of LSE shares, but under British takeover rules it must wait at least one year if it wants to try for the LSE again.

Greifeld said the upcoming changes to the European regulatory landscape for exchanges and the potential negative impact were "impossible" to ignore in the bid, he said. But going forward, "we will watch our investment closely."

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The exchange will not be "timid" with expressing its opinion to the LSE, he said.

The electronic stock exchange made $63 million, or 43 cents a share, in the quarter, compared to $17.1 million, or 15 cents a share, in the year-earlier period. Revenue rose 72% from a year earlier to $447.3 million.

The latest quarter included a 19-cent-a-share gain on foreign currency option contracts purchased to hedge the foreign exchange exposure on its $5.3 billion acquisition offer.

Analysts were predicting the exchange would earn 24 cents a share on $427 million of revenue.

Operating profit rose 105% from a year ago to $68.1 million.

The exchange said with the lapse of its final offer it has traded out of the foreign exchange contracts. It will record a pretax loss of $7.8 million on these contracts in the first quarter.

"While Nasdaq quarterly EPS includes interest expense to carry the LSE position, we are excluding 'currency gains' of approximately 19 cents per share," in the fourth quarter, writes Richard Repetto, an analyst at Sandler O'Neill & Partners. "On further review, we believe investors should evaluate this issue as currency gains reflect what we believe is a true economic benefit of the LSE investment and an offset to interest expense."

Nasdaq is running into intensified competitors at home as well. BATS Trading, a start-up electronic communications network, has made headway in stealing market share. The ECN has garnered more than 13% of Nasdaq-listed volume and on Friday hit a new record of 336 million trades a day.

But Greifeld is not worrying. Nasdaq's average daily volume in Nasdaq securities rose 9%, to 1.93 billion trades in the fourth quarter.

"We here at Nasdaq recognize that it's not our job to prevent competition from forming," Greifeld said. "Our job is to make sure that we leverage our technology and the efficiency of our technology and scale of order flow to reflect the true value of our customers."

During the fourth quarter Nasdaq's total debt decreased by $100 million to $1.5 billion in the quarter. The gains from foreign exchange and dividends "more than offset the interest related to debt payments, Greifeld said. Next month the exchange plans to make a $200 million prepayment, it said.

The exchange expects a 2007 profit of $180 million to $190 million.

Shares fell $3.16 to $31.94 on Tuesday.