HALFYR: NZX: NZX 1H Financial Result 2010

17 Aug 2010 5:35 pm

NZX 17/08/2010 HALFYR

REL: 1735 HRS NZX Limited

HALFYR: NZX: NZX 1H Financial Result 2010

NZX 1H Financial Result 2010: Operating Revenue $23.93 million

17 August 2010 - NZX has released its Group 1H financial result showing operating revenue of $23.93 million

The new businesses of agri and energy in New Zealand and the Clear Grain Exchange in Australia showed revenue improvement under challenging global conditions.

In addition, NZX maintained its intensive cost management focus.

"It is difficult to compare directly with the first half of 2009, as the shape of the total business has changed so fundamentally since then," said NZX CEO Mark Weldon.

"That period included the acquisitions of the energy and agri businesses, some of the post-trade systems area and, later in 2009, the Clear Grain Exchange. In addition, there were one-off gains from the disposition of TZ1 and BESA shares.

"However, for an apples-to-apples comparison, were NZX not to have reshaped the business via additional investments in 2009, we would have seen EBITDAF fall by greater than 20%.

"This is evidence that NZX's strategy to grow the company in the related areas of information, markets and infrastructure is positioning NZX well for the future," said Weldon.

This release contains five sections:

I. Summary II. NZX Group Financial Result 1H 2010: Summary Tables III. NZX Group 1H 2010: Performance Breakdown IV. NZX Group 2010: Strategic and Financial Outlook V. Capital Management

I. SUMMARY

Against the most relevant comparable period - the back half of 2009 - NZX's overall operating profit (EBITDAF) grew by 1%. Given the weakness in capital market activities, this is a good result over this period, and reflects the strength of the business model.

Driving the result, NZX saw strong improvements in the agri, Clear Grain Exchange, and energy areas over the period, with revenue across these combined areas growing over 8% in aggregate.

A strong focus on cost management over the period saw a reduction in the level of the recurring cost base by around 6% after one-offs are excluded. The bulk of the fall came in general administration and in employee expense managed down via natural attrition.

Looking forward, Q3 sees the September 6 launch of the Clearing House and a launch shortly thereafter of the derivatives market. The derivatives market will be kicked off with the launch of the Whole Milk Powder (WMP) future. Taken together, these are the last building blocks in NZX's strategic restructure which has seen significant acquisition, disposition, and organic development over the past three years.

NZX is confident of the prospects of its entire business, and all components - including the NZX capital markets franchise.

The focus going forward, therefore, is not on the shape of the business - as NZX now has the information assets, market platforms, and supporting infrastructure to run and operate all the businesses it considers core to its strategy. The focus is, instead, on "making the base work harder" and bringing scale to the highly scalable platforms and operations that exist across the organisation.

II. NZX GROUP FINANCIAL RESULT 1H 2010: SUMMARY TABLES

The summary lines for the NZX Group 1H 2010 financial performance shown in Table 1 below compare 1H 2010 with 1H 2009.

Table 1: Financial Results Summary- against 1H 2009

1H 2010 1H 2009 $ change % change Operating Revenue $23.93 m $18.63 m $5.30 m 28% Operating Expenditure $15.38 m $9.55 m $5.83 m 61% EBITDAF $8.56 m $9.08 m ($0.52 m) (6%) EBITDAF Margin 35.75% 48.72% NPAT $5.68 m $60.76 m * ($55.08 m) (91%)

* If the 1H 2009 NPAT is adjusted to exclude the one-off TZ1 and Besa gains, NPAT for 1H 2009 was $5.73 million, making the 2010 adjusted NPAT result flat against the same period last year.

In addition, a comparison against the second half of 2009 at the operating level is shown below.

Table 2: Financial Results Summary - against 2H 2009

1H 2010 2H 2009 $ change % change Operating Revenue $23.93 m $24.18 m ($0.25 m) (1%) Operating Expenditure $15.38 m $15.70 m ($0.32 m) (2%) EBITDAF $8.55 m $8.48 m $0.07 m 1% EBITDAF Margin 35.75% 35.07%

In this release, where the relevant business line is fundamentally unchanged from 1H 2009 (e.g., listings), that will be the first choice of comparator. Where the business is fundamentally different from 1H 2009 (e.g., energy, agri, post trade) the most relevant comparator is 2H 2009, and that will be used in the commentary.

III. NZX GROUP 1H 2010: PERFORMANCE BREAKDOWN

OPERATING REVENUE

Total operating revenue grew by 28% from $18.63 million in 1H 2009, to $23.93 million in 1H 2010. As compared to the immediately preceding 2H 2009 period, total operating revenue was essentially flat (a 1% decrease).

The revenue highlight was the growth across agri and energy by 7% as against NZX's first six months owning these businesses in 2009. Offsetting this, a fall in activity in capital markets as compared to the record levels of capital raising experienced in 2009 saw revenue across all the cash markets listing and trading categories decline.

Growth in new business areas thus counter-balanced softness in listings, trading and market data, to keep overall revenue at a stable level over the consecutive six month period.

Detailed analysis by revenue category is shown below:

Listings

Total listings revenue was $4.80 million in 1H 2010, 7% lower than the $5.17 million generated in 1H 2009. The main driver of this fall was a sharp reduction in total capital raised, from $4.56 billion in 1H 2009 to $1.78 billion in 1H 2010.

A comparative breakdown of each of the listings revenue categories is given in Chart 1 below.

Chart 1: Listings Revenue

Trading

Total trading revenue was $3.04 million in 1H 2010, 25% higher than the $2.44 million seen in 1H 2009 and 18% higher against 2H 2009 trading revenue of $2.58 million. This was driven by sharply improved revenue growth from the Clear Grain Exchange to $530,000 in 1H 2010. Clear revenue was $310,000 in Q2, a 35% increase on Q1. The revenue growth in Clear reflected improvements in the business operations and sales approach in a period of overall lower market activity than the seasonal high Q1 period.

Cash market trading, however, reflected weak overall capital market activity levels, and was slightly down in 1H 2010 compared to 1H 2009, with the average number of daily trades falling to 2,165, from 2,190 in 1H 2009.

Market Data

Market data revenue was $4.66 million in 1H 2010, 24% lower than in 1H 2009. The main drivers of market data revenue are terminal numbers and the NZD/USD exchange rate (approximately 70% of NZX's data terminals are priced in USD). The average number of terminals was 7,233 in 1H 2010, as compared to the average number of 8,989 in 1H 2009. The average monthly exchange rate of the NZD against USD was materially worse at 0.71 in 1H 2010 compared to 0.57 in 1H 2009.

Post Trade Systems and Services

Post trade systems and services revenue of $3.60 million in 1H 2010 was a 9% increase on 2H 2009 revenue of $3.29 million. Revenue from post trade activities in the energy area drove the gain, balancing a slight decrease in revenues from equities settlement.

Agri

Agri revenue grew slightly as against 2H 2009 (at $5.33 million compared to $5.29 million). Revenue in this area is trending upward, and grew 10% from Q1 to Q2 this year.

Energy

Energy revenue was $1.40 million in 1H 2010, a significant increase from the $1.02 million generated in 2H 2009. The energy business continues to achieve consistent top line growth, with Q2 2010 24% higher than Q1 this year.

Smartshares

Smartshares revenue was $1.10 million in 1H 2010, exactly flat with the 1H 2009 performance of $1.10 million.

OPERATING EXPENDITURE

Total operating expenditure was reduced by 2%, from $15.70 million in 2H 2009 to $15.38 million 1H 2010. Normalising 1H 2010 costs for one-off restructuring costs, operating expenditure was managed down by 6% compared to 2H 2009.

Employee, Contractor and Related costs

Employee, contractor and related costs were up 1% on 2H 2009. This increase includes approximately $800,000 of one-off employee, contractor and related restructuring costs incurred over the reporting period. Adjusting for this, employee, contractor and related costs fell $700,000 or 9% as against the immediately preceding period.

Information Technology

Information technology costs were up 25% from 2H 2009 at $459,000. The increase reflects a one-time step up in licence fees for the Trayport trading system. NZX's Trayport licence expires in July 2012, when NZX will have greater choice of potential providers of trading systems than previously, with around eight potential providers, versus the three feasible contenders in 2005.

Professional Fees

Professional fees fell 4% to $1.04 million from the immediately preceding period.

Marketing, Printing and Distribution

This expenditure relates mainly to the cost of printing and distributing agri publications, and was down 16% on 2H 2009, at $2.01 million. This reflects the beginnings of a move to a more subscription based model, and more accurate distribution, reducing variable costs in this area.

Fund Expenditure

An internally developed funds administration system was built and implemented in Q1. That system has driven a successful reduction in fund expenditure by an annualised $300,000. As a percentage of revenue, this shows up in a fall from 50% in 1H 2009, to 34% in 1H 2010.

General Administration

General administration costs were reduced by 14% from the immediately preceding period to $1.73 million, reflecting a consistent management cost focus.

BELOW THE EBITDAF LINE

1. Change in Value of Investments

A non-cash gain of $1.30 million was recorded for the first six months of 2010. The bulk of this was an unrealised exchange gain on NZX's position in Markit.

2. Depreciation and Amortisation

Depreciation and amortisation was $2.15 million in 1H 2010 compared to $1.84 million in 2H 2009. The increase is largely the result of amortisation on the grain trading administration and settlement software acquired in Q4 2009. The amortisation period for this software is 10 years.

3. Interest Income/Expenditure

1H 2010 saw a fall in interest income to $18,000 from the $220,000 interest income in 2H 2009.

STRATEGIC INVESTMENTS

1. Link Market Services

Link Market Services had another strong operating performance. Revenue for the six months to June 2010 was $2.48 million, an increase of 13% over the same period in 2009. Tight control of costs saw EBITDA of $620,000 for the same period, a 13% increase on the prior comparable period.

As a 50% shareholder in Link, NZX received $350,000 in after-tax cash from Link over 1H 2010. This is shown as a change in the value in NZX's investment in Link on NZX's balance sheet and does not go through NZX's P&L.

2. Appello Services

Q2 saw improvement on Appello's Q1 results with the business now at around a breakeven level on a cash flow basis.

IV. NZX GROUP 2010: STRATEGIC AND FINANCIAL OUTLOOK

A. STRATEGIC OUTLOOK

NZX has, in the last 12 to 18 months, embarked on a disciplined growth programme. NZX made acquisitions in the agriculture, energy and information areas, and has made substantial organic investments in clearing and derivatives.

Management is confident that, post the launch of the Clearing House (September 6) and futures market, NZX now has the full set of platforms, products and people to generate top line growth that shows increasing operating leverage and margin expansion.

The focus hereafter is therefore on "making the base work harder" and generating consistent top-line growth from these assets. In that regard, NZX has launched the following initiatives:

Revenue Growth

Management's focus will now move from project delivery to sales. NZX expects to be able to deliver total revenue growth of between 8% and 10% in 2H 2010, as compared to 1H 2010. Growth in annual listing fee revenue - expected to increase from $2.89 million to $3.30 million over this period - will account for 20% to 25% of the expected revenue growth over this period.

In addition, when capital markets rebound - expected Q4 2010 through the entirety of 2011 in terms of capital raising - the operating leverage achievable from NZX's platforms will see profit grow significantly faster than revenues.

Improving Cost Outcomes

Substantial P&L costs have been incurred attendant to the launch of the Clearing House and the derivatives market. While some of these will continue to occur through the remainder of the year (e.g. market maker rebates for derivatives trading), the total cash cost of operations will continue to be managed down over the next six months from 1H levels. A change will be seen, however, on the employee P&L line, where an estimated annualised $1.75 million will be expensed rather than put on the balance sheet.

Organisation

The organisational focus, as noted above in "Revenue Growth", has now shifted from a project focus to a sales focus. NZX now has a wide range of products, and a substantial customer base. Work on increasing the distribution and value of these products will be a continual focus in every business area over the next 12 months.

B. FINANCIAL OUTLOOK

2010 Operating Revenue Outlook

Listings

2H 2010 listings revenue compared to 1H 2010 is expected to be higher, reflecting both annual listing fee increases effective from 1 July 2010 and increased capital raising. Revenue from IPOs and secondary listings is expected to be 10% to 15% higher in the second half than the first half, with the bulk of the 2H increase expected in Q4. Longer term, NZX remains confident of the capital raising outlook.

Trading

NZX expects daily cash market trades to remain at similar levels to the first half, reflecting a view that the current liquidity challenges affecting global markets will remain over this period. A small bump is expected from derivatives related Participant fees. NZX is also launching several initiatives, such as the recently announced trading fee cap, to improve domestic market liquidity.

NZX will soon launch its Whole Milk Powder futures product. The interest shown in the product - particularly overseas - has been very encouraging. Success for 2010 will be defined by solid early trading and open interest that builds momentum throughout the year. The financial impact will be limited in the initial financial period given it is a new product. However, a successful launch will be of substantial strategic and financial value. Derivatives liquidity globally has continued to grow at a time when global equities activity has slowed. Further product development and launch will also be in NZX's control, with a well planned programme of supporting products to be launched over 2011.

The transactional revenue from one contract traded will be approximately two thirds clearing and one third trading, with Participant fees and market data contributing revenue over and above this. Average transactional revenue from one contract of Whole Milk Powder - the first product to launch - is expected to be between NZD $3 and $4 per contract. The launch of derivatives is also expected to reduce downside volatility in terminal numbers, as bundled cash and derivatives market data has a broader range of users.

The Clear Grain Exchange will have a quiet Q3, being off-harvest, but a Q4 that is expected to be materially stronger than Q2. Both Q4 2010 and Q1 2011 are expected to be materially stronger than Q2 2010.

Market Data

Terminal numbers have been increasing steadily since bottoming out in February 2010 - increasing by 152 since that time. NZX expects at least a similar increase in the number of terminals in 2H 2010. NZX's average USD revenue per terminal is USD $660 per annum.

Post Trade Systems and Services

Clearing House revenue will be shown in the post trade systems and services line and will be specifically broken out in the commentary. In 2H 2010, a small bump is expected from clearing and initial open interest in derivatives, and from potential new custody clients.

Outside of the Clearing House, revenue growth is expected in the energy post trade area, and in general IT systems and services, where a number of potential new clients are at a decision point on whether to adopt NZX's proprietary systems, under licence and service agreements. There is good upside potentially achievable over 2H in the services area.

Agri

Agri revenue is expected to show a mid single digit revenue increase versus the first half. The increase is expected to occur primarily in the higher margin Agrifax electronic product set, related to, and sold in conjunction with the dairy futures market.

Energy

The energy business is again expected to deliver double digit top line growth.

Smartshares

Single digit revenue growth (circa 5%) is expected in the second half.

2010 Operating Expenditure Outlook

Employee, Contractor and Related Costs

This is expected to increase in 2H 2010 as major projects are completed and less staff time is capitalised. The net employee cost on the P&L is expected to be, on an annualised basis, increased by $1.75 million. This is, however, a cash reduction of approximately $750,000 against the current run rate as contractors are let go post go-live. The increase will be balanced by continual savings in other areas.

Information Technology

NZX's IT costs are expected to increase going into 2011. These have been planned for and previously flagged, and relate primarily to support IT services and licences for the Clearing House technologies (clearing, settlement, custody, margin, risk management). Costs are expected to increase by an annualised $550,000 from the current run rate.

Professional Fees

Professional fees are expected to reduce over the second half of the year. A reduction of between 5% and 10% against 1H 2010 is expected.

Marketing, Printing and Distribution

Initiatives are being undertaken in NZX Agri that will see the variable cost of publications reduce by around 5% as a function of revenue. However, this will not materialise until the first half of 2011.

Fund Expenditure

The initiatives to reduce fund expenditure are ongoing. NZX expects a further 3% to 5% reduction in fund expenditure as a percentage of fund revenue going forward.

General Administration

NZX has identified further projects to reduce costs in this area. Costs are expected to decrease by 5% in 2H 2010 versus 1H 2010, with additional upside possible on the rent line, which is currently in arbitration.

C. BELOW THE EBITDAF LINE

1. Depreciation and Amortisation

The depreciation policy for the Clearing House asset - expected to be $11 million - is a 12-year useful life for accounting purposes. This reflects the nature of the asset (heavy intellectual property component) and actual useful life (expected to be between 12 and 15 years). Counteracting this, other assets that are fully depreciated/amortised for accounting purposes (e.g. Agrifax) will come off the depreciation and amortisation schedule.

2. Taxation

The tax treatment of the software components of the Clearing House and related investments in NZX internal systems will generate a timing differential, with a net cash flow benefit over 2H 2010. The positive tax effect on the difference between accounting and tax depreciation in 2H 2010 is estimated to be approximately $850,000.

V. CAPITAL MANAGEMENT

1. Balance Sheet

The Clearing House was capitalised with $10 million of risk capital in June 2010. In addition, there will be working capital provided to the Clearing House of $2 million cash, although actual working capital needs are expected to be significantly below this level.

2. Share Buy-Back

On 9 July 2010, NZX announced its intention to buy back up to 3,571,428 of its fully paid ordinary shares during the period from 9 July 2010 to 31 January 2011. The buy-back of shares is an opportunity to provide a return to shareholders in excess of NZX's cost of capital. The total number of shares repurchased between 9 July 2010 and the date of this release is 1,240,000.

3. Dividend

The NZX Board has determined that NZX Limited will pay an interim dividend of 3.75 cents per share, fully imputed, for the six months ending 30 June 2010. The dividend will be paid in cash.

Details of the interim dividend are as follows:

Record date: 22 October 2010 Payment date: 29 October 2010

ENDS

Download NZX Statements of Financial Performance and Operating Metrics for 1H 2010 here: http://www.nzx.com/about_nzx/investor_relations

For more information please contact: Rowan Macrae Direct Line: +64 4 496 2874 Mobile: +64 27 472 7599 www.nzx.com End CA:00198466 For:NZX Type:HALFYR Time:2010-08-17:17:35:50

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