The pro forma operating loss was $6 million, or $0.02 per share, for the first quarter of 2003. The pro forma operating loss excludes investment gains and losses, the effect of charges related to our recently announced cost reductions, insurance recovery for assets lost at the World Trade Center in 2001, and the related tax effect of these items.(2)
Ed Nicoll, Chief Executive Officer of Instinet, commented: "Under tough first-quarter business conditions both in the U.S. and elsewhere, Instinet made significant progress with our comprehensive plan to reduce costs and deliver technologically advanced products and services in the most efficient manner possible. Over the coming months, we will also seize the opportunity to provide our customers enhanced automated services for the trading of U.S. listed securities, which will allow our fully electronic, unconflicted marketplace to compete more aggressively against the manual, floor-based markets."
Business Highlights
- Our clients traded 31.5 billion U.S. equity shares through Instinet in the first quarter of 2003, up from 15.2 billion shares executed in the first quarter of 2002, and down 14% from 36.8 billion shares executed in the fourth quarter of 2002. The decline versus the fourth quarter of 2002 was due to lower overall average daily market volumes and three fewer trading days in 1Q03. The Island ECN accounted for 12.4 billion shares of this volume in the first quarter of 2003.
- U.S. equity shares executed through Instinet during the first quarter of 2003 consisted of 26.3 billion Nasdaq-listed shares and 5.2 billion U.S. exchange-listed shares.
- Our share of total U.S. equity volume was 15.4% in the first quarter. This compares to 7.1% in the first quarter of 2002 and 16.1% in the fourth quarter of 2002. The decline in our overall market share versus the fourth quarter was due to a shift in the mix of total volume between the exchange-listed and Nasdaq-listed markets, as our share of each market remained level.
- Our share of Nasdaq-listed equity volume was 29.6% in the first quarter, and our share of U.S. exchange-listed equity volume was 4.5%.
- We have achieved a significant portion of our fourth quarter 2002 cost reduction targets. Our annualized fixed-cost base was approximately $563 million in the first quarter. This was $142 million, or 20%, below its level in the first quarter of 2002. (The fixed-cost base excludes variable costs - soft dollar and commission recapture, broker-dealer rebates and brokerage, clearing and exchange fees - and non-operating expenses, which include charges related to goodwill and our cost-reduction initiatives).(2)
Revenues
Total revenues for the first quarter were $240 million, down 10% from the fourth quarter of 2002.
Transaction fee revenue for the first quarter was $255 million, down 8% from the fourth quarter of 2002. Our net equity transaction fee revenue was $152 million, down 9% from the fourth quarter of 2002.(2)
During the first quarter, Instinet recorded a net investment loss of $22 million, resulting primarily from a write-down in the carrying value of certain of the company's non-public investments.
Expenses
Instinet's total expenses from continuing operations for the first quarter of 2003 were $281 million, down 25% from the fourth quarter of 2002. Operating expenses, which exclude severance and occupancy charges of $11 million (included in compensation and benefits, and occupancy) related to our recently announced cost reductions, $5 million insurance recovery of fixed assets lost at the World Trade Center in 2001, and restructuring charges in 2002, were $274 million, or 12% lower than the comparable expenses in the fourth quarter of 2002.(2)
- Compensation and benefits expense was $64 million in the first quarter of 2003. Excluding a $9 million severance charge for our recently announced cost reductions, compensation and benefits expense was down 10% from the previous period, reflecting lower staff levels.
- Brokerage, clearing and exchange fees were $34 million, down 8% from the previous quarter, reflecting lower volume and the integration of Island's clearing in the first quarter of 2003, partly offset by higher international clearing costs.
- Communications and equipment expense was $31 million, down 16% from the previous quarter due to lower spending on equipment, hardware and software, as well as lower costs related to our core communications due to system efficiencies.
- Other expenses were $8 million, down 53% from the fourth quarter of 2002, primarily due to higher bad debt reserves in the fourth quarter of 2002 related to loans made in prior periods to certain companies in which Instinet has strategic investments.
At March 31, 2003, Instinet had net cash (cash and cash equivalents and securities owned less short-term borrowings) of approximately $540 million, tangible net assets of approximately $870 million, and shareholders' equity of approximately $990 million. There were approximately 331 million shares of common stock outstanding.
Cost Reduction
During the first quarter, Instinet announced that, as part of its continuing cost-reduction effort, it would reduce its workforce by approximately 175 employees (or approximately 12 percent of its full-time employees), across its operations, both in the U.S. and internationally. These reductions result from attrition and the elimination of positions. They are expected to produce an estimated $20 million reduction in annualized operating costs. This decrease is in addition to the $100 million cost reduction target announced in the fourth quarter of 2002. As noted above, in the first quarter of 2003 we incurred costs of $11 million related to this cost reduction program.
Instinet's Chief Financial Officer, John F. Fay, commented: "In the first quarter, we reduced our operating costs significantly compared to the fourth quarter. We are operating in a very tough environment and continue to be focused on looking for cost reductions and efficiencies. We believe that with our strong, debt-free balance sheet, we are well positioned to weather the current market conditions and are focused on transforming to a low-cost organization to better serve our customers."
Operating Review
Important operating achievements during the quarter included:
- Instinet Trading Portal(SM), the company's new front-end trading application, was deployed at over 700 Instinet client sites by the end of the first quarter, well ahead of original deployment targets. By quarter-end, over 25% of Instinet's total institutional order flow was being processed through Portal.
- Newport(TM), Instinet's patent-pending global program-trading and execution management solution, was deployed at 75 clients by the end of the quarter. Customers use Newport to trade in global markets, access Instinet Crossing, implement rules-based automated trading, and route orders to other unaffiliated broker-dealers. Newport is also used actively on Instinet's own trading desks to receive and trade orders on behalf of clients. During the first quarter, shares with a value of $14.5 billion were executed via Newport, an increase of 36% over the previous quarter.
- Instinet Crossing was made accessible through Portal. The functionality allows Portal customers to route orders to the after-hours cross as a destination choice in the Portal order ticket, and provides next-day execution reports. Access to the cross is already a feature of Newport and other Instinet front-ends.
- Instinet began implementing smart-routing for trading in U.S. exchange-listed stocks. The technology will give clients fast, one-stop access with complete anonymity to all major sources of upstairs listed liquidity, including ECNs and ITS-CAES (which combined account for over 17% of average daily volume in NYSE-listed stocks), together with DOT connectivity. The enhancement includes upgraded order-entry functionality.
- Instinet Clearing Services migrated Instinet's U.S. broker business to its new high-performance clearing system, a scalable transaction processing system that significantly increases Instinet's clearing capacities.
- As part of its continuing program to achieve additional cost savings through the integration of Instinet and Island, the company successfully converted Island's clearing to Instinet Clearing Services. This was one of the largest such conversions in Wall Street history, and is expected to significantly reduce clearing costs.
- Other integration developments during the quarter included reduction of office space, rationalization of vendor contracts, optimization of client connectivity and re-organization of internal human resource programs and policies that together are expected to produce annual savings of over $30 million.
Webcast
Instinet will webcast a conference call to discuss its first quarter results at 11:00 a.m. New York time today at http://www.investor.instinet.com. A replay will be available at the same address following the call.
About Instinet
Instinet, through affiliates, is the largest global electronic agency securities broker and has been providing investors with electronic trading solutions for more than 30 years. Our services enable buyers and sellers worldwide to trade securities directly and anonymously with each other, have the opportunity to gain price improvement for their trades, manage their orders and lower their overall trading costs. Through our electronic platforms, our customers also can access over 40 securities markets throughout the world, including NASDAQ, the NYSE and stock exchanges in Frankfurt, Hong Kong, London, Paris, Sydney, Tokyo, Toronto and Zurich. Our customers primarily consist of institutional investors, such as mutual funds, pension funds, insurance companies and hedge funds, as well as market professionals, including broker-dealers. We act solely as an agent for our customers and do not trade securities for our own account or maintain inventories of securities for sale.
This press release is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. (C) 2003 Instinet Corporation and its affiliated companies. All rights reserved. Instinet Clearing Services, Inc. is a wholly owned subsidiary of Instinet Corporation, both members NASD/SIPC, and subsidiaries of Instinet Group Incorporated. INSTINET, the Instinet Trading Portal and Newport are trademarks and service marks in the United States and in other countries throughout the world. Island Holding Company and the Island ECN, Inc., member NASD/CSE/SIPC, are subsidiaries of Instinet Group Incorporated. The Island ECN operates as an entity separate from Instinet Corporation's ECN.
This news release may be deemed to include forward-looking statements relating to Instinet. Certain important factors that could cause actual results to differ materially from those disclosed in such forward-looking statements are included in Instinet's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, and other documents filed with the SEC and available on the Company's website. Certain information regarding trading volumes is also included in Instinet's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 and on the Company's website at www.instinet.com. These statements speak only as of the date of this news release, and the Company does not undertake any obligation to update them.
- Unless otherwise specified, financial results and statistical information referred to in this release include data for Island Holding Company, Inc. following the closing of our acquisition of Island on September 20, 2002.
- See table titled "Reconciliation of Pro Forma Operating Results for 1Q03".
