Edward J. Nicoll, Chief Executive Officer of Instinet Group, commented, "We had a good first quarter driven by robust global markets. Moreover, we began to see the benefits from the separation of our two primary businesses, our newly focused management teams, and our distinct approaches to each customer base. Instinet, our global institutional broker, continued to capitalize upon its sales trading expertise and sophisticated technology tools. INET, our electronic marketplace, increased relative market share in the stronger U.S. markets and successfully completed the task of consolidating the order flow of our two ECNs into a single marketplace. As we continue to innovate and deliver superior services across our businesses, we will also continue to focus on reducing our direct costs."
Financial Performance
Instinet Group
Revenues
Total consolidated revenues for Instinet Group, net of interest expense, were $313 million for the first quarter of 2004, up 21% from the first quarter of 2003 and up 11% from the fourth quarter 2003.
Expenses
Total expenses for the first quarter of 2004 were $280 million, down 18% from the fourth quarter of 2003, which included approximately $81 million of costs associated with our restructuring and intangible asset impairment.
Cost of revenues were $173 million, 15% higher than the fourth quarter of 2003 primarily due to increased transaction volumes. Cost of revenues as a percentage of total revenues increased to 55% from 53% primarily due to increased routed share transaction volume at INET, our electronic marketplace.
Direct expenses were $117 million for the first quarter of 2004, down 4% from the fourth quarter of 2003.
- Compensation and benefits expense was $60 million in the first quarter of 2004, up 17% from the previous quarter primarily due to higher variable compensation associated with increased profitability and higher revenues partially offset by a decline in our employee base.
- Depreciation and amortization expense was $15 million, down 19% from the previous quarter primarily due to lower amortization of intangible assets and leasehold improvements resulting from our restructuring plan implemented in the previous quarter.
- Occupancy expense was $9 million, down 23% from the previous quarter, primarily due to lower rent associated with the declines in our headcount over the past year.
- Professional fees were $5 million, 42% lower than the previous quarter primarily due to lower consultant and legal fees.
John F. Fay, Chief Financial Officer of Instinet Group, commented, "Instinet Group benefited from stronger markets and the steps we have taken to grow our businesses. While the equity markets strengthened globally, they continue to be marked by strong competition. We intend to continue to focus on providing our customers efficient quality trading services and on managing our cost base."
New Segment Reporting
During the first quarter of 2004 we completed our business restructuring plan to separate our two primary businesses. As we previously communicated, for the first quarter of 2004 we are providing segment financial information for the following business segments:2
- Instinet, the Institutional Broker, which includes our U.S. and international institutional agency brokers as well as Lynch, Jones & Ryan, Inc. and our clearing broker, Instinet Clearing Services, Inc.
- INET, the Electronic Marketplace, represents the consolidation of the order flow of the Instinet ECN and the Island ECN.
Instinet, the Institutional Broker
- Instinet reported net income before income taxes of $18 million for the first quarter of 2004, up $11 million, or 162%, from the fourth quarter of 2003.
- Instinet's customers traded an average of 112 million shares a day in the first quarter of 2004 up 4% from 108 million shares a day during the fourth quarter of 2003. Average daily consideration in non-U.S. equities for the first quarter of 2004 was $932 million, a 53% increase from the fourth quarter of 2003.
- Total revenues, net of interest expense, were $199 million for the first quarter of 2004, up 7% compared to the fourth quarter of 2003, primarily due to higher transaction volume in U.S. equity securities as well as non-U.S. equities associated with stronger global market volumes
- Cost of revenues as a percentage of total transaction fees were 45% in the first quarter of 2004 compared to 46% in the fourth quarter of 2003.
- Gross margin of $110 million for the first quarter of 2004 was $9 million, or 8%, higher than the fourth quarter of 2003.
- Direct expenses of $92 million for the first quarter of 2004 were down 3% from the fourth quarter of 2003.
- Instinet completed the launch of its two key U.S. equity trading products in the first quarter: Continuous Block Crossing (CBX), and Proactive SmartRouter. Together, they have allowed Instinet's institutional clients to trade blocks directly with each other while at the same time using intelligent routing technology to enable the simultaneous posting of orders for U.S. equity securities in multiple liquidity pools.
- Instinet is currently developing a U.S. securities intra-day crossing services (IDX) for the automatic matching of orders at a specified price. Expected to be launched in the second quarter of 2004, IDX will act as a complement to CBX, creating an alternate liquidity pool for broker-dealers and institutions who wish to execute block trades.
- INET reported net income before income taxes of $6 million for the first quarter of 2004, up $1 million, or 24% from the fourth quarter of 2003.
- INET reported a NASDAQ-listed equity share volume of 508 million shares per day in the first quarter of 2004, up 23% from the previous quarter. INET's share of the total market in NASDAQ-listed equity trading was 25.0% in the first quarter of 2004 compared to 23.6% in the previous quarter.
- Total revenues, net of interest expense, were $120 million, 17% higher than the previous quarter primarily due to higher overall average daily matched volumes and higher market share in the first quarter of 2004 compared to the fourth quarter of 2003.
- Cost of revenues as a percentage of total transaction fees were 75% in the first quarter of 2004 compared to 70% in the fourth quarter of 2003 primarily due to increased transaction volume routed to other market destinations as part of our routing initiative.
- Gross margin was $30 million for the first quarter of 2004, level with the fourth quarter of 2003.
- Direct expenses of $24 million for the first quarter of 2004 were down 5% from the fourth quarter of 2003.
- Effective February 9, 2004, INET completed the consolidation of the orderflow of the Instinet ECN and the Island ECN creating the largest ECN.
- In the first quarter of 2004, INET remained focused in its routing strategy by continuing to be a low cost provider while offering a competitive routing product using Instinet's SmartRouter.
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