For the year ended December 31, 2002, the net loss was $735 million or $2.71 per share, compared to net income of $145 million, or $0.63 per share for 2001. The pro forma operating loss for the year ended December 31, 2002 was $8 million or $0.03 per share. The pro forma operating loss for the full year excludes goodwill impairment, restructuring charges, investment gains and losses, discontinued operations, change in accounting principle, and the related tax effect of those items.
Ed Nicoll, Chief Executive Officer of Instinet, commented: "This has been a tough quarter for us, but we are moving ahead to position ourselves for long-term growth and profitability. We are on schedule to reduce our annualized costs by $100 million by the end of 2003, which will result in a leaner and more efficient company. We will also continue to provide our customers with the insight and expertise in the marketplace that flow directly from our combination of professionalism, superior liquidity, state-of-the art technology, and global execution infrastructure. Especially in a challenging economic environment, our customers will demand the most innovative and efficient electronic marketplace. We'll be there to deliver for them."
Business Highlights
- Our clients traded 36.8 billion U.S. equity shares through Instinet in the fourth quarter of 2002, up 113% from 17.2 billion shares executed in the fourth quarter of 2001, and up 39% from 26.5 billion shares executed in the third quarter of 2002. (This includes volume from all Instinet Group subsidiaries.) The Island ECN accounted for 15.5 billion shares of this volume in the fourth quarter of 2002. -- U.S. equity shares executed through Instinet during the fourth quarter of 2002 consisted of 31.2 billion Nasdaq-listed shares and 5.6 billion exchange-listed shares. Island ECN accounted for 13.4 billion of this Nasdaq-listed share volume and 2.1 billion of this exchange-listed share volume.
- Our share of total U.S. equity volume was 16.1% in the fourth quarter. This compares to 7.8% in the fourth quarter of 2001. -- Our share of Nasdaq-listed equity volume was 29.7% in the fourth quarter, and our share of U.S. exchange-listed equity volume was 4.5%. -- Our annualized fixed-cost base was $665 million in the fourth quarter. This was $31 million, or 4%, below its level in the fourth quarter of 2001. Island contributed an increase of $15 million to our fourth-quarter fixed cost base. (The fixed-cost base excludes non-recurring expenses - charges for goodwill impairment, restructuring and insurance recovery of World Trade Center losses-- and variable costs, including soft dollar and commission recapture, brokerage, clearing and exchange fees, and broker-dealer rebates.)
Revenues
Total revenues for the fourth quarter were $267 million, down 23% from the fourth quarter of 2001.
Transaction fee revenue for the fourth quarter was $278 million, down 13% from the comparable period in 2001. Net of soft dollar expenses and commission recapture expenses, and broker-dealer rebates, fourth-quarter net transaction fee revenue declined 34% from the fourth quarter of 2001.
Net transaction fee revenue from U.S. equity transactions for the fourth quarter was $134 million, down 37% from the year-ago quarter due to a decline in revenue per share that more than offset an increase in volume. The decline in revenue per share was primarily the result of a reduction in the broker-dealer pricing schedule that we implemented in March 2002, offset by the inclusion of Island's revenues in the fourth quarter of 2002.
Net transaction fee revenue from U.S. equities traded by U.S. broker-dealers represented approximately 42% of total net transaction fee revenue in the fourth quarter of 2002 compared to 44% in the fourth quarter of 2001. Buy-side institutions trading U.S. equities made up approximately 54% of total net transaction fee revenue in the fourth quarter of 2002 and in the comparable period in 2001.
Net transaction fee revenue from non-U.S. equities decreased from the previous quarter, and consisted of 21% of the total, compared to 18% a year earlier.
Interest income for the fourth quarter was $9 million, down 26% from the comparable period in 2001, primarily due to lower interest rates which affect our securities lending activities, as well as a reduction in cash balances following the payment of our $249 million special dividend in October.
During the quarter, Instinet recorded a net investment loss of $20 million, resulting mainly from a write-down in the carrying value of some of the company's non-public investments.
Expenses
Instinet's total expenses from continuing operations for the fourth quarter of 2002 were $372 million, up 36% from the comparable period in 2001, with our acquisition of Island accounting for 55% of the increase. Excluding the $62 million restructuring charge in the fourth quarter of 2002 and the $1 million restructuring charge in the fourth quarter of 2001, expenses were $310 million, up approximately 14% from the fourth quarter of 2001.
- Compensation and benefits expense was $61 million in the fourth quarter of 2002, down 28% from the comparable period the previous year, reflecting substantially lower staff levels, partially offset by an increase due to our acquisition of Island.
- Soft dollar and commission recapture expense fell 14% to $50 million from the fourth quarter of 2001. Higher commission recapture revenue from plan sponsors was offset by lower soft dollar revenue in line with a decrease in trading volumes.
- Brokerage, clearing and exchange fees were $37 million, down 8% from the prior year's quarter, reflecting lower regulatory fees and increased trade compression, partially offset by an increase due to our acquisition of Island.
- Broker-dealer rebates, introduced in March 2002, were $57 million for the fourth quarter of 2002. -- Communications and equipment expense was $37 million, up 11% due to accelerated charges associated with the migration of clients off our proprietary high-speed network and onto the Radianz network, and the inclusion of Island for the fourth quarter.
- Depreciation and amortization expense was $25 million, up 16% from the year-ago quarter, primarily due to the amortization of intangible assets, which arose from our acquisition of Island, offset by the exclusion of goodwill amortization as a result of accounting changes. Balance Sheet
Cost Reduction
During the fourth quarter, Instinet commenced a cost-reduction plan to reduce operating costs by $100 million on an annualized basis by the end of 2003. As part of this plan, the company reduced its workforce by 300, or approximately 17% of its full-time employees, both in the U.S. and in its international operations, and consolidated office space within the New York City area. A restructuring charge of $62 million was recorded for the fourth quarter in connection with these measures.
Instinet's Chief Financial Officer, John Fay, commented: "We have implemented a plan to produce a leaner and more efficient cost structure. We intend to look for more savings from the integration of Instinet and Island as the year progresses."
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 600 Instinet client sites by the end of the fourth quarter. This was well ahead of the company's original year-end deployment target of 400. Portal now contributes approximately 20% of Instinet's total institutional order flow. On its peak day so far (in December 2002), the system processed nearly 35 million shares. Instinet aims to double the number of customers using Portal by the end of 2003.
- Newport(TM), Instinet's patent-pending global program-trading and execution management solution, was deployed at 50 clients in the U.S. and Europe by the end of the quarter, more than twice as many as in the previous quarter. Customers are using Newport to trade in global markets, to access Instinet Global Crossing, to implement rules-based automated trading, and to route orders to other unaffiliated broker-dealers. In addition, Newport is used actively on Instinet's own program-trading, sales-trading and working-order desks to receive and trade portfolios and discretionary orders on behalf of clients.
- The company completed the first phase of interaction between the Instinet and Island order books, using our Smart Router and IOC technology to give each system's customers seamless access to a combined virtual book. The migration of U.S. FIX customers to our new, faster FIX protocol, ITFI-Lite, was completed. Instinet also shifted its quoting to the Alternative Display Facility.
- In January 2003, the company completed a significant component of cost-saving when it successfully converted Island's clearing to Instinet Clearing Services in one of the largest such conversions in the history of Wall Street. The company expects to significantly reduce clearing costs subsequent to the conversion.
Webcast
Instinet will webcast a conference call to discuss its fourth 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 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. We also provide our customers with access to research generated by us and by third parties, as well as various informational and decision-making tools. Unlike most traditional 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.
1 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.
2 See table titled "Reconciliation of Pro Forma Operating Results
Please click here for financial tables.
