Instinet Group Incorporated announced net income for the 12 months ended December 31, 2001 of $144.8 million, or $0.63 per share, compared to $148.2 million, or $0.72 per share, in 2000. For the fourth quarter of 2001, net income was $45.7 million, or $0.18 per share, compared to $36.0 million, or $0.17 per share, in the fourth quarter of 2000. Excluding investment gains, restructuring costs and excess insurance recoveries, 2001 full-year and fourth quarter earnings per share were $0.64 and $0.14, respectively.
“Instinet’s underlying operating performance in the fourth quarter was in line with analysts’ expectations,” said Douglas M. Atkin, President and Chief Executive Officer, Instinet Group Incorporated. “Market conditions continue to be difficult, however, and we are taking decisive action to address competitive pressures in the Nasdaq market and enhance our global brokerage offering. We expect our actions will impact earnings in the near-term, but will position Instinet for improved profitability and revenue growth beginning in the second half of 2002.”
Customers executed 17.2 billion U.S. equity shares through Instinet in the fourth quarter of 2001, up 10.8% from the third quarter but down 16.0% from the fourth quarter of 2000.
Instinet’s market share of Nasdaq-listed volume was 11.7% in the fourth quarter, compared to 13.5% in the previous quarter and 13.9% in the fourth quarter of 2000. Instinet’s market share of exchange-listed volume was 3.2% in the fourth quarter, compared to 3.0% in the previous quarter and 3.2% in the fourth quarter of 2000.
Instinet’s annualized fixed expense run-rate in the fourth quarter of 2001 was significantly lower than the fixed expense run-rate in the first half of the year, exceeding the $70 million annualized savings goal set by the company in July 2001.
According to recent independent studies, Instinet is a provider of superior execution quality. In a report published in January 2002 based on data for the 12 months ended September 30, 2001, Plexus Group ranked Instinet first in execution quality in Nasdaq-listed stocks when compared to a universe of the 12 most-active full-service brokers for which Plexus has data. Instinet also tied for first in execution quality in exchange-listed stocks when compared to the same universe. The most recent Abel/Noser Trading Report, published in October 2001 and based on data from the second quarter of 2001, calculated that on average the total cost for Nasdaq-listed stocks executed through Instinet was 7.2 cents per share lower than the average for the universe of brokers for which Abel/Noser has data, and for exchange-listed stocks was 7.6 cents per share better than the Abel/Noser universe average. Fourth Quarter Performance Revenues Transaction fee revenue for the fourth quarter was $320.0 million, down 16% from $380.7 million in the comparable period in 2000. Net of soft dollar and commission recapture expenses, fourth quarter transaction fee revenues declined 21% from the fourth quarter of 2000. Net revenue from U.S. equity transactions decreased 25% due to the combination of reduced Nasdaq market share, an 11% decline in average pricing and lower overall Nasdaq market volume. This was partly offset by $9.8 million in revenue from our ProTrader subsidiary, acquired on October 1, 2001. Net revenue from non-U.S. equities increased slightly and represented approximately 18% of net transaction revenues in the fourth quarter.
Interest income for the fourth quarter was $12.4 million, in line with the comparable period in 2000. Investment income for the fourth quarter was $17.9 million compared with a net loss of $1.6 million in the comparable period in 2000, primarily due to an increase in the carrying value of Instinet’s investments. This gain contributed to a reduction in Instinet’s effective tax rate to approximately 35% in the fourth quarter, compared to 43% for the year as a whole.
Instinet’s total expenses for the fourth quarter were $279.8, down 14% from $327.0 million in the fourth quarter of 2000. Excluding restructuring costs and net costs and recoveries related to the World Trade Center attack, fourth quarter costs were approximately 15% below the fourth quarter of 2000. Contributing to the decrease in expense levels were declines of over 60% in the discretionary spending areas of professional fees and marketing and business development.
Compensation and benefits expense fell 23% to $86.4 million, or approximately 25% of revenue, compared to $112.0 million (29% of revenue) in the fourth quarter of 2000, primarily reflecting lower levels of incentive compensation. Communication and equipment expense decreased by 35%, reflecting the benefit of improved network and systems efficiencies. Soft dollar and commission recapture costs increased 17% over the fourth quarter of 2000, as the company continued to successfully build this element of its business. Brokerage, clearing and exchange fees grew 16% primarily due to the acquisition of ProTrader.
During the fourth quarter, Instinet incurred expenses of $6.0 million related to the ongoing development of its fixed income business.
Business Review and Outlook
Instinet’s core strategy is to grow its business by extending its global brokerage offering, and maintaining and expanding its Nasdaq liquidity pool.
The company’s global brokerage offering is expected to benefit from significant additions to product offerings and trading functionality. For example, Instinet recently introduced new trading functionality to improve customers’ performance and efficiency when executing large, complex orders.
In addition, during the next two quarters Instinet will deploy to customers two important new products. The first product, based on ProTrader technology acquired in the fourth quarter, is a trading application aimed primarily at active fund managers and hedge funds. Instinet also plans to deploy a new program trading application that has been developed in conjunction with passive and quantitative fund managers in the U.S. and Europe. “Instinet’s goal is to continue to provide superior execution quality, both in U.S. equities and in overseas markets,” Atkin said. “These innovative products will make a difference to customers where it counts – by improving their investment and trading performance.”
With respect to Instinet’s Nasdaq liquidity pool, the cumulative impact of market structure changes has particularly affected market makers, an important customer group for Instinet. While market conditions in the Nasdaq market were difficult during the fourth quarter, Instinet believes that there are reasons for optimism moving into 2002. “We have taken concerted action by aggressively reducing pricing to broker-dealer customers while improving our integration with their trading systems,” commented Atkin. “In January, our Nasdaq market share rose from December’s level.”
Given the anticipated impact of price reductions on revenue from broker-dealer customers, Instinet has taken further action to reduce costs. “In the fourth quarter our expenses were at their lowest level since the first quarter of 2000,” said Mark Nienstedt, Chief Financial Officer of Instinet Group Incorporated. “Through continued efforts to improve system and network efficiencies and reduce staff levels in a number of areas, we intend to further reduce our annual fixed cost run-rate by approximately $60 million over the course of the first and second quarters of 2002. These savings will work to balance the impact of our price reductions. We expect to incur pre-tax restructuring costs of approximately $25 million during the first half of 2002.”
With regard to Instinet’s fixed income business, the company announced that it is in detailed negotiations with two major banks that, subject to the signing of definitive agreements, will provide liquidity and product support to Instinet’s fixed income activities. Instinet believes that this will enable the company to build its competitive position in key government and other liquid fixed income markets more quickly. In return, the banks will have the right to acquire an ownership stake in the fixed income broker-dealer operations that are presently 100% owned by Instinet.
Commenting on Instinet’s outlook for 2002, Atkin said: “We are confident that the actions we are taking – our broker-dealer liquidity plan, our new trading products and functionality, and our cost reduction program – will improve Instinet’s competitive position and market share, and contribute to revenue growth and improved profitability during the second half of the year.”