Nasdaq Stock Market issued a disappointing 2007 earnings outlook on Tuesday, overshadowing strong quarterly earnings, which dragged its shares sharply lower.
David Warren, Nasdaq's chief financial officer, said in a conference call that 2007 earnings would be $180 million to $190 million, which was below forecasts, but above the $127.9 million it earned in 2006. The lowered guidance translates into about $1.20 to $1.25 a share, well below the $1.51 a share analysts were anticipating, according to a Thomson Financial poll.
Shares fell more than 12% earlier, as the sluggish outlook follows Nasdaq's failed attempt on Saturday to acquire the London Stock Exchange in a $5.3 billion hostile takeover.
"We don't have to do any acquisition to remain competitive," Nasdaq Chief Executive Robert Griefeld told CNBC. "Our financial performance has been incredibly strong and we will continue to execute that plan. But we will look at different (acquisition) alternatives available."
The world's largest electronic equities exchange posted a robust fourth-quarter: profit more than tripled, on higher trading fees and a one-time gain from its 30% stake in the London Stock Exchange. Nasdaq said net income rose to $63 million, or 43 cents a share, compared with $17.1 million, or 15 cents a share, a year earlier. The company had a gain of 19 cents a share from option contracts used to hedge its exposure to the LSE.
Stripping out the gains, the results matched Wall Street projections for earnings of 24 cents a share, according to analysts polled by Thomson Financial. Operating income rose to $68.1 million from $33.2 million a year ago.
Revenue surged 73% to $447.3 million from $259.5 million as the exchange charged more for stock trades and lured more business away from rival New York Stock Exchange. Analysts expected $424.8 million.
Nasdaq's failed bid for the LSE comes as NYSE Group is close to completing its takeover of Paris-based Euronext NV to become the world's first trans-Atlantic exchange.
Griefeld is now under pressure to lay out a European strategy so it's not left behind as exchanges around the world move to consolidate. Already, the LSE said it is in advanced talks with the Tokyo Stock Exchange about a broad alliance, similar to a deal the Big Board has already struck with Japan's biggest stock market.
Greifeld said he "chose not to win" when LSE shareholders agreed to tender their shares to the Nasdaq at a higher price than what was on the table.
"We have a discipline about acquisitions," Greifeld told CNBC. "There's a price that we really can not pay because if you go beyond that price you are really diluting your existing shareholders."
However, he reiterated that Nasdaq "will do a transaction" in 2007.
With the number of shares trading daily in the U.S. approaching 5 million, the NYSE and Nasdaq are slugging it out for market share. They have been fighting for more stock listings, sometimes even persuading companies to defect from one to the other.
The Nasdaq continues to make strides in stealing market share from the NYSE. The exchange reported its share of trading of NYSE-listed stocks rose to 13.9% from 12.1% in the third quarter and 5.7% from a year earlier.
The New York-based exchange's share of trading in its own listed stocks dipped to 46.5% from 48.7% in the third quarter, but was up from 32.9% a year earlier. The NYSE late last year rolled out an electronic trading platform designed to maintain market share and increase speed.
Nasdaq's fourth quarter results included expenses of $4.6 million as it cut staff and discontinued the use of some technology. The exchange recorded a $29.4 million gain from options contracts used to hedge its LSE investment. However, the Nasdaq traded out of those contracts and expects a $7.8 million loss during the first quarter as the dollar gained against the British pound.
Revenue from transaction fees and the sale of market data almost doubled to $380.2 million. Last year, the Nasdaq began charging brokerages more to execute trades of NYSE-listed stocks.
It reported revenue from listing fees and providing other services rose to $67 million from $59.3 million last year. The Nasdaq has acquired other businesses such as investor relations during the past few years to diversify product offerings to the nearly 3,200 companies that list there.
For the year, profit rose to $127.2 million, or 95 cents a share, from $55.1 million, or 57 cents a share, in 2005. Revenue increased to $1.66 billion from $879.9 million in the previous year.
This was the highest profit since the Nasdaq began reporting results in 1997, when it was operated by the nation's broker-dealers and not yet a public entity. The 35-year-old exchange went public in 2005 after its acquisition of the Inet electronic market.
This year is expected to be challenging for the Nasdaq as it faces unprecedented competition, and calls from investors to not be left behind as rivals get bigger. New competitors like electronic platform BATS Trading has picked up increasing market share from the Nasdaq by offering cheaper prices to execute transactions.
In addition, the exchange faces continued pressure from the NYSE as its electronic system -and ownership of NYSE Arca - becomes more competitive. The Big Board's acquisition of Paris-based Euronext, which operates five regional exchanges across Europe, will also expand its reach and diversify products.
The Nasdaq hoped to do much the same with its attempt to takeover Britain's biggest exchange. However, less than 1% of LSE shareholders backed the deal.
The U.S. exchange, which is banned by British law from making another unsolicited bid for a year, must decide if it will unwind its stake or continued to be the LSE's biggest shareholder.