February 10, 2010 / 2:01 PM / 8 years ago

UPDATE 3-TMX reports net loss but revenue grows

* Q4 net loss C$0.36/share vs. year-ago profit C$0.65

* Adjusted Q4 EPS C$0.82/shr; beats analysts' view

* TMX shares finish up 2.2 pct at C$29.15

* Q4 revenue up 1.2 pct at C$153 mln (Adds details from conference call, quotes, closing share price)

By Jennifer Kwan

TORONTO, Feb 10 (Reuters) - Toronto Stock Exchange operator TMX Group Inc (X.TO) reported a quarterly loss on Wednesday, but investors focused on a stronger-than-expected performance in cash equity trading while quarterly revenue grew, sending its shares up 2.2 percent.

While the exchange operator posted a fourth-quarter net loss, its adjusted earnings, excluding charges, rose more than expected due to strong performances sequentially from higher revenue from issuer services, trading and market data.

TMX's partnership with the London Stock Exchange, which factored in a one-time license fee of C$13.5 million for key technology, also contributed to the revenue increase. In addition to the TSX, the Toronto-based company runs the junior TSX Venture Exchange and Montreal Exchange derivatives market.

"There are challenges from the competing trading venues that are coming through the results. However, TMX Group still remains relevant and is still the listing venue for any equities in Canada," said Kumar Stenger, vice president at McLean Budden, which has holdings in TMX.

"You can have competing venues but TMX is still the dominant venue to trade."

Its quarterly net loss came in at C$26.8 million, or 36 Canadian cents a share, compared with a year-earlier profit of C$49 million, or 65 Canadian cents a share. The loss included a noncash goodwill impairment charge of C$77.3 million related to its Boston Options Exchange Group and income tax-related charges.

Stripping out the charges and including the boost related to the London exchange, adjusted net income rose to C$60.9 million, or 82 Canadian cents a share.

Analysts were expecting a profit of 59 Canadian cents per share, before items, according to Thomson Reuters I/B/E/S.

Revenue rose 1.2 percent to C$153 million, but the result was held back by year-on-year lower cash markets trading and market data revenue, as well as increased expenses related to new technology initiatives.

A key focus for market watchers in recent quarters has been the performance of TMX's cash equity trading, which shrank in the quarter compared to the year-ago period but not as much as expected, said Gabriel Dechaine, analyst at Genuity Capital Markets.

A new pricing model that was implemented in October helped to minimize the negative impact of an earlier fee schedule, which featured rebates to high frequency traders known as electronic liquidity providers (ELPs).

"The trading was a lot stronger than anyone anticipated. They removed that ELP pricing structure on Oct. 1. ... It went from being money losing to just a low-margin product," said Dechaine.

"I thought that it was going to be beneficial for their trading revenues, but it was even better than expected," he added of the October fee model change.

TRADING VOLUMES, DIVERSIFYING

Cash markets revenue was also hurt as the volume of stocks traded on the TSX plummeted 18 percent in the quarter, compared to the same period in 2008. That decrease was partially offset by a 43 percent increase in the volume of securities traded on Venture Exchange for the period.

Thomas Kloet, TMX chief executive officer, said the company operates in an "increasingly competitive market," but said the company is aggressively diversifying its business.

That includes a separate announcement on Wednesday, in which TMX and the Tel Aviv Stock Exchange signed a memorandum of understanding to bolster its relationship and, among other things, advance opportunities for cross listing, which TMX said was reflective of a healthy pipeline.

In December, it announced that Canada's investment dealer community picked a TMX unit to develop a central counterparty service for the fixed-income market.

Kloet also said that while TMX has suffered market share loss, TSX volumes in 2009 actually grew 8.5 percent. It is seeking to grow its revenue across all businesses, he added.

"I'm not limiting the vision to just let's fill the gap," he told analysts on a conference call.

Stock trading volumes have been a key focus as smaller rivals chip away at TMX market share, which fell to just under 80 percent in the fourth quarter, on a volume basis, according to public data.

Alpha ATS, TMX's dominant competitor backed in part by the dealer units of Canada's biggest banks, held around 15 percent.

In an announcement last week, the company said it would cut trading fees for lower-valued securities, a move it expects to enhance its competitive edge.

On Wednesday, TMX announced a dividend of 38 Canadian cents per common share, payable on March 12 to shareholders of record at the close of Feb. 26.

TMX shares finished up 64 Canadian cents, or 2.2 percent, to C$29.15 on the Toronto Stock Exchange, its strongest daily percent gain since mid-December. ($1= $1.06 Canadian) (Additional reporting by Euan Rocha; Editing by Tim Dobbyn)

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