Ed Nicoll, Chief Executive Officer of Instinet, commented: "During the second quarter, trading volumes improved compared to the last quarter, although business conditions remained tough. Instinet continued to make strong progress in its plan to reduce its costs, rationalize its structure, and invest in key technologies and services. To position the company for continuing market challenges, and to capitalize on changing business conditions, we will press on with our cost reductions, but will also separate the company's management and operations along three distinct businesses based on what they do -- the sell-side ECN or ATS, the buy-side value-added brokerage, and our LJR commission recapture subsidiary."
Business Highlights
- Our clients traded 37.1 billion U.S. equity shares through Instinet in the second quarter of 2003, up from 19.2 billion shares executed in the second quarter of 2002, and up 18% from 31.5 billion shares executed in the first quarter of 2003. The increase versus the first quarter of 2003 was due to higher overall average daily market volumes and two additional trading days in the second quarter. The Island ECN accounted for 14.4 billion shares of this volume in the second quarter of 2003.
- U.S. equity shares executed through Instinet during the second quarter of 2003 consisted of 32.0 billion NASDAQ-listed shares and 5.1 billion U.S. exchange-listed shares.
- Our share of total U.S. equity volume was 15.5% in the second quarter. This compares to 8.6% in the second quarter of 2002 and 15.4% in the first quarter of 2003.
- Our share of NASDAQ-listed equity volume was 28.4% in the second quarter, and our share of U.S. exchange-listed equity volume was 4.0%.
- We have maintained our focus on cost reduction. Our annualized fixed-cost base in the second quarter was approximately 14% below its level in the second 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 our cost-reduction initiatives).(2)
Revenues
Total revenues for the second quarter were $285 million, up 19% from the first quarter of 2003.
Transaction fee revenue for the second quarter was $276 million, up 8% from the first quarter of 2003. Our net equity transaction fee revenue was $164 million, up 8% from the first quarter of 2003.(2)
During the second quarter, Instinet recorded a net investment gain of $3 million due to an increase in the carrying value of certain of the company's investments in non-U.S. exchanges, offset in part by write-downs of other investments.
Expenses
Instinet's total expenses from continuing operations for the second quarter of 2003 were $290 million, up 3% from the first quarter of 2003. Operating expenses were $282 million, or 3% higher than the comparable expenses in the first quarter of 2003. Operating expenses exclude an $8 million severance charge included in compensation and benefits in the second quarter of 2003, and $11 million in severance and occupancy charges included in compensation and benefits and occupancy in the first quarter of 2003, both related to cost reductions.(2)
- Compensation and benefits expense was $61 million in the second quarter of 2003. Excluding an $8 million severance charge, compensation and benefits expense was down 4% from the previous period, reflecting lower staff levels.
- Brokerage, clearing and exchange fees were $33 million, down 2% from the previous quarter as lower fees were partly offset by higher volumes.
- Communications and equipment expense was $32 million, up 3% from the previous quarter due to additional charges associated with our migration of clients to a third-party network. We expect this transition to be substantially complete by the end of the third quarter.
- Occupancy expenses were $13 million, down 20% from the previous quarter, primarily due to the consolidation of office space and a $2 million charge for occupancy in the first quarter.
- Other expenses were $8 million, up 7% from the first quarter of 2003, primarily the result of higher bad debt expenses, partly offset by lower discretionary expenses.
At June 30, 2003, Instinet had net cash (cash and cash equivalents and securities owned less short-term borrowings) of approximately $578 million, tangible net assets of approximately $879 million, and shareholders' equity of approximately $994 million. There were approximately 331 million shares of common stock outstanding.
Instinet's Chief Financial Officer, John F. Fay, commented: "We have been focused on reducing our costs and on strengthening the structure of our business to better serve our customers. By delivering on these initiatives, along with our global exchange network and strong balance sheet, we can offer our customers low-cost and technologically advanced products and compete aggressively in this tough environment."
Strategic Developments
During the quarter, Instinet formulated a reorganization plan that includes separating the company's buy-side and sell-side businesses. The purpose of the plan is to add strategic clarity to our businesses and better serve our customers.
The buy-side business will be a global value-added brokerage (VAB) that seeks best execution on behalf of its customers. The VAB will continue to focus on products and services that enhance the trading experience and investment performance of its clients. These may include unbiased access to all major equity pools of liquidity, unconflicted and trusted sales trading expertise along with sophisticated execution tools and strategies, and independent and exclusive research to help improve investment performance. The VAB is expected to cater to both self-directed electronic traders and those seeking sales trading and assisted execution, and to provide for all clients access to domestic and international equity markets, rules-based trading, block trading, portfolio trading and other services.
Instinet's sell-side business consists of an alternative trading system (ATS) comprising the Instinet and Island ECNs and their clearing broker, Instinet Clearing Services. The ATS collects, prioritizes, displays, and matches orders within its member network. Instinet will focus on fully integrating its two pools of liquidity into one, and developing the ATS to offer matching and routing services for its U.S.-registered broker-dealer subscribers. Institutions or non-U.S. broker-dealers will need to be sponsored by a U.S. broker-dealer to gain access to the ATS. All member broker-dealers will enjoy equal access to the ATS, and will be permitted to redistribute access to third parties.
Instinet has put in place a strong business team to manage the reorganization of its business units. Alex Goor, previously EVP for Strategy and Planning, will lead the ATS. The VAB will be headed by an interim joint management team consisting of Ed Nicoll, Instinet's CEO, alongside Mike Plunkett, formerly head of Instinet's hedge fund group, and Natan Tiefenbrun, formerly responsible for products & services for quantitative money managers.
Instinet expects to make additional announcements in the future with respect to our plans for personnel and organizational structure, and the timeframe for implementing such plans. The company also anticipates that it will provide separate financial disclosures for the VAB and the ATS, beginning with the first quarter 2004 reporting period.
Please refer to the table entitled Customer Operating Data attached to this release. Webcast Instinet will webcast a conference call to discuss its second quarter results at 5:00 p.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. Instinet is part of the Reuters family of companies.
Through our electronic platforms, our customers 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 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.
(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 for 2Q03".
Please click here for Consolidated Statements of Operations, Consolidated Statistical Data, Customer Operating Data and Reconciliation Of Pro Forma Operating Results For 2Q03.
