For the year ended December 31, 2004, net income was $54 million, or $0.16 per share, compared to a net loss of $74 million or $(0.22) per share for the year ended December 31, 2003. Excluding severance charges, investment gains and losses, contractual settlements, insurance recoveries and net fixed asset expenses, pro forma operating earnings per share for 2004 was $0.12 compared to $0.00 in 2003.(1)
Edward J. Nicoll, Chief Executive Officer of Instinet Group, commented, "This quarter, Instinet Group posted its fourth consecutive quarter of profitability, and for the first time since 2001, Instinet Group recognized a full year profit. Instinet Group's businesses now have a cohesive strategy, talented and focused management teams, technologically sophisticated products and services, and customer-facing teams dedicated to offering the best service in the industry. While our profitability is a significant achievement given the competitive pressures of our industry, we remain committed to bringing down our fixed costs throughout the coming year."
Financial Performance
Instinet Group
Revenues
Total consolidated revenues for Instinet Group, net of interest, were $290 million for the fourth quarter of 2004, down 5% from the fourth quarter of 2003 and up 7% from the third quarter 2004.
Expenses
Total expenses for the fourth quarter of 2004 were $266 million, down 26% from the fourth quarter of 2003 and up 2% from the third quarter of 2004. The decrease compared to the fourth quarter of 2003 was due to lower communications and equipment, depreciation and amortization, marketing and business development and occupancy expenses partially offset by an increase in compensation and benefits expense.
Cost of revenues was $170 million, 6% higher than the third quarter of 2004 primarily due to higher transaction volumes.
During the fourth quarter of 2004 the company began classifying transaction related regulatory fees as an expense in brokerage, clearing and exchange fees. These fees had previously been recorded as a reduction of the corresponding transaction revenue and shown on a net basis. For the three months ended December 31, 2004, September 30, 2004 and December 31, 2003 these regulatory fees totaled $11 million, $10 million and $21 million, respectively. For the years ended December 31, 2004 and 2003, the regulatory fee expenses were $53 million and $61 million, respectively.
Direct expenses were $107 million for the fourth quarter of 2004, up 4% from the third quarter of 2004.
- Compensation and benefits expense was $59 million in the fourth quarter of 2004 up 26% from the previous quarter primarily due to $7 million of severance costs and higher variable compensation, associated with higher profitability and higher revenues.
- Communications and equipment expense was $15 million, down 22% from the previous quarter, primarily due to lower client communication and market data expenses.
- Depreciation and amortization expense was $13 million, down 2% from the previous quarter. The fourth quarter of 2004 included $7 million of accelerated depreciation expense related to the retirement of furniture and equipment, partially offset by a $6 million reduction in amortization due to an adjustment of the estimated useful lives of leasehold improvements.
- Other expense was $1 million, down $4 million from the previous quarter, primarily due to recoveries of aged customer receivables.
At December 31, 2004, Instinet Group had net cash (cash and cash equivalents and securities owned less short-term borrowings) of approximately $956 million, up $181 million from $775 million at December 31, 2003. At December 31, 2004, total assets were approximately $1.7 billion and shareholders' equity was approximately $1.1 billion. There were approximately 334 million shares of common stock outstanding as of December 31, 2004. On December 31, 2004, Instinet Group's total headcount was 1,000 compared to 1,081 on September 30, 2004. Headcount at December 31, 2004 included 824 employees from Instinet, 77 employees from INET and 99 employees from Instinet Group.
Business Segments(2)
Instinet, The Unconflicted Institutional Broker
- Instinet reported net income before income taxes of $1 million for the fourth quarter of 2004, compared to $1 million in the third quarter of 2004. Fourth quarter 2004 results included $6 million of severance charges and $1 million of net fixed asset expenses.
- Total revenues, net of interest, were $175 million, 2% higher than the third quarter of 2004, primarily due to higher U.S. and non-U.S. equity market volumes, partially offset by lower revenue capture per share.
- Instinet's customers traded an average of 108 million U.S. shares a day in the fourth quarter of 2004, up 14% from 95 million shares a day during the third quarter of 2004. Average daily consideration in non-U.S. equities for the fourth quarter of 2004 was $742 million, a 9% increase from the third quarter of 2004.
- Cost of revenues as a percentage of total transaction fees was 50% in the fourth quarter of 2004 compared to 51% in the third quarter of 2004.
- Gross margin of $88 million for the fourth quarter of 2004, was $1 million, or 1%, higher than the third quarter of 2004.
- Direct expenses of $87 million for the fourth quarter of 2004 were up $1 million, or 1%, from the third quarter of 2004.
In January 2005, Instinet introduced the only smart order-routing service in the European markets for European equity securities. This service will be initially available for Dutch equities which trade concurrently on Euronext Amsterdam, the London Stock Exchange and on Instinet's CBX.
INET, The electronic marketplace
- INET reported net income before income taxes of $12 million for the fourth quarter of 2004, up $6 million from the third quarter of 2004.
- Total revenues, net of interest, were $121 million, 16% higher than the previous quarter primarily due to higher U.S. market volumes and higher market data revenue in the fourth quarter of 2004.
- INET reported NASDAQ-listed average matched equity share volume of 469 million shares per day in the fourth quarter of 2004, up 17% from the previous quarter. INET's share of the total market in NASDAQ-listed equity trading was 24.6% in the fourth quarter of 2004, down from 26.0% in the previous quarter.
- INET reported U.S. exchange-listed average matched equity share volume of 73 million shares per day in the fourth quarter of 2004, up from 72 million in previous quarter. INET's share of the total market in U.S. exchange-listed equity trading was 3.4% in the fourth quarter of 2004, down from 3.9% in the previous quarter.
- Cost of revenues as a percentage of total transaction fees was 74% in the fourth quarter of 2004 compared to 79% in the third quarter of 2004.
- Gross margin was $32 million for the fourth quarter of 2004, 40% higher than the previous quarter.
- Direct expenses of $20 million for the fourth quarter of 2004 were up 15% from the third quarter of 2004.
INET has recently developed its own routing technology, known as RASH (routing and special handling) which is expected to be substantially launched by the end of the second quarter of 2005. Once fully launched, RASH will enable INET to be fully independent of Instinet's routing technology.
Webcast
Instinet Group will webcast a conference call to discuss its fourth quarter results at 9:00 a.m. New York time on February 4th at http://www.investor.instinetgroup.com. A replay will be available at the same address following the call.
About Instinet Group
Instinet Group, through affiliates, is the largest global electronic agency securities broker and has been providing investors with electronic trading solutions and execution services for more than 30 years. We operate our two major businesses through Instinet, LLC, The Unconflicted Institutional Broker, and Inet ATS, Inc., The electronic marketplace.
Instinet, The Unconflicted Institutional Broker, gives its customers the opportunity to use its sales-trading expertise and advanced technology tools to interact with global securities markets, improve trading performance and lower overall transaction costs. Through Instinet's electronic platforms, customers can access other U.S. trading venues, including NASDAQ and the NYSE, and almost 30 securities markets throughout the world. Instinet acts solely as an agent for its customers, including institutional investors, such as mutual funds, pension funds, insurance companies and hedge funds. Lynch, Jones & Ryan, Inc., Instinet Group's commission recapture subsidiary is also a part of Instinet.
INET, The electronic marketplace, represents the consolidation of the order flow of the former Instinet ECN and former Island ECN, providing its U.S. broker-dealer customers one of the largest liquidity pools in NASDAQ-listed securities.
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) 2005 Instinet Group Incorporated and its affiliated companies. All rights reserved. INSTINET and INET are service marks in the United States. Instinet, LLC (branded Instinet, The Unconflicted Institutional Broker), member NASD/SIPC; Inet ATS, Inc. (branded INET, The electronic marketplace), member NASD/NSX/SIPC; Lynch, Jones & Ryan, Inc., member NASD/SIPC; are subsidiaries of Instinet Group Incorporated which is part of the Reuters family of companies.
This news release may be deemed to include forward-looking statements relating to Instinet Group. Certain important factors that could cause actual results to differ materially from those disclosed in such forward-looking statements are included in Instinet Group's Annual Report on Form 10-K for the fiscal year ended December 31, 2003, and other documents filed with the SEC and available on the Company's website at www.investor.instinetgroup.com.
(1) The comparative quarters also exclude restructuring charges and goodwill and intangible asset impairment. See table titled "Reconciliation of Pro Forma Operating Results for 4Q04" on the Instinet website at www.investor.instinetgroup.com under the heading "Earnings Releases - Financial Tables".
(2) See also "Earnings Releases - Financial Tables" on the Instinet website at www.investor.instinetgroup.com.
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