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Small Print Trips Up NYSE

A quarterly miss raises questions about earnings quality.

NYSE Group's


fourth-quarter earnings were not pretty.

Though the parent of the

New York Stock Exchange

reported a profit in the quarter, boosted by a lower than normal tax rate, results were hit by charges related to recent layoffs, last year's Archipelago merger and the pending Euronext acquisition.

Earnings quality also soured. Revenue came up short of expectations, while costs were higher than expected due to higher marketing expenses.

In the fourth quarter, the company made $45.5 million, or 29 cents a share, compared with a loss of $20.3 million, or 18 cents a share.

The NYSE's operating profit in the fourth quarter was $70.8 million, or 45 cents a share. Analysts were predicting the exchange would earn 46 cents a share.

Shares of the NYSE, which had been rising steadily since it became a public company last year, stumbled on Friday. Investors were worried about upcoming merger expenses from the Euronext deal. The exchange also is in the midst of changing its pricing for trades on NYSE and NYSE Arca, and compensation for the few remaining specialists on the floor, analysts say.

Shares were down $2.46 or 2.4%, to $99.23.

The exchange took a $34.1 million charge in the quarter, with the cutting of 500 jobs accounting for the bulk of the charge, or $29.2 million, NYSE said. The "acceleration of certain fixed asset useful lives" cost it $2.8 million. The acquisition of Archipelago and its pending deal for Paris-based exchange operator Euronext cost the exchange $2.1 million in the quarter.

Total revenue rose 55% from a year ago, to $658 million.

The exchange has been gradually implementing an electronic trading platform to its marketplace through its "hybrid" market. The move has caused the Big Board to close certain trading floors as it seeks to improve efficiencies and cut expenses.

"Operationally things are fine; it's just the numbers are a little bit messy," says Josh Elving, an analyst at Piper Jaffray. "I'm actually surprised the stock is holding in as well as it is. They had some struggles in the quarter. It's going to be bumpy next two quarters."

Elving, who rates the exchange underperform, added that NYSE's tax rate in the quarter was abnormally lower due to certain rebates.

"They came in with a 26% tax rate, and if you would have applied a 40% tax rate, they would have earned about 36 cents," Elving says. "The 26% obviously is not a run rate."

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NYSE received its final regulatory approval for the Euronext deal on Friday by the Dutch Minister of Finance. It is expected to close on the deal for Euronext in late March. NYSE merged with Archipelago in March 2006.

For the year, NYSE made $205 million or $1.36 a share compared to $40.7 million or 35 cents a share in 2005.

NYSE said it had 206 new listings last year, including


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and the

New York Mercantile Exchange


. The new listings included 28 transfers from other markets and 29 non-U.S. listings, it added.

But the average daily trading volume of NYSE-listed issues in the fourth quarter was 117.3 billion, or 70%, which is down from the year-earlier period of 111.6 billion or 79%.

NYSE's share of trading in Nasdaq-listed issues rose slightly from a year earlier. In the fourth quarter, NYSE traded 24.9% of Nasdaq-listed companies, compared to 22% in the year-earlier quarter.

NYSE Group also operates NYSE Arca, which targets smaller companies that normally would not qualify to list on NYSE's main equities exchange.

Rob Rutschow, an analyst at Prudential Equity Group, estimates that NYSE's core earnings were just 37 cents in the fourth quarter. He rates NYSE neutral weight.

Earnings results reflected flat operating leverage -- that is, the comparison between revenue growth and expense growth -- from the third quarter, "as the new pricing scheme resulted in a modest reduction in transaction fees," Rutschow writes in a note earlier Friday.

"We don't feel the quarter is anything to write home about, and would expect some weakness in shares today given the miss," he adds.