納斯達克交易所 (NDAQ) 2005 Q3 法說會逐字稿

Good morning, my name is Angela and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Instinet Group Incorporated third quarter 2005 earnings conference call.

[OPERATOR INSTRUCTIONS] I would like to turn the conference over to Lisa Kampf, Investor Relations Officer.

Ma'am you may begin your conference.

Good morning, and welcome to the Instinet Group conference call to discuss the results for the third quarter of 2005.

During this conference call, we may make statements that are forward looking in nature.

Our actual results may be materially different from the results anticipated in these statements.

You can find a detailed discussion of certain important factors that could cause actual results to differ materially from our expectations.

In our annual report on Form 10-K for the year ended December 31, 2004, and in other documents filed with the SEC which are available on our website.

Reconciliations to US GAAP of nonGAAP financial measures referenced in this call, if any, are set forth in the earnings release previously distributed or will be made available on our website.

I will now hand the call every to Ed Nicoll, Instinet Chief Executive Officer.

Thanks Lisa.

Good morning.

I'm Ed Nicoll, CEO of Instinet Group.

This quarter Instinet Group earned $0.25 per diluted share, compared to $0.03 per diluted share for the third quarter 2004 and $0.02 per diluted share for the second quarter of 2005.

Excluding the discontinued operations of Lynch Jones and Ryan, net loss per diluted share was $0.02 compared to net income of $0.02 diluted share in both the third quarter of 2004 and the second quarter of '05.

Pro forma earnings from continuing operations per diluted share, which excludes the one-time items detailed in our earnings release was $0.03 compared to $0.02 cents per diluted share both in the third quarter of 2004 and the second quarter of 2005.

John Fay, our CFO, who is here with me today will be discussing the financial results of the Company with you later in detail.

I would like to turn now to review the third quarter performance and drivers for each of our business segments.

Instinet, our institutional broker, earned revenue of $142 million , down 5% from a year ago quarter, and down 2% from the previous quarter.

Market share for U.S. equities in the third quarter of 2005 was 2.6% compared to 2.7% in the third quarter of 2004 and 2.4% in the second quarter of 2005.

While revenue capture per share was $1.34 for the third quarter of 2004, down from $1.52 per share in the year ago quarter and $1.38 per share in the second quarter of 2005.

The average daily consideration traded in non-U.S. equities was the highest ever -- excuse me -- at $1 billion, compared to $678 million a year ago quarter and $907 million in the second quarter of 2005.

Today Instinet is a much more efficient organization than in the past.

What does that mean?

It means that we can now deliver much more effective and focused trading solutions to our clients at lower price points.

We believe that listening to our customers, we can continue to develop and implement technology solutions that both improve their trading results and lower their overall cost to trade.

Now, I would like to turn to INET, which is one of the largest equity pools in the OTC marketplace matching an average of 416 million shares a day of NASDAQ listed volume with a market share of 25.8% in the third quarter of 2005, down from 26% market share in a year ago quarter and the second quarter of 2005.

INET experienced a large increase in US exchange listed volume during the third quarter, with marketshare increasing to 4.5% from 3.9%, in both the year ago quarter and the second quarter of '05.

Going forward, I believe that U.S. exchange listed marketshare will be an interesting metric to watch, as investers and NYSC listed stocks turns to transparent and an efficient marketplaces, such as INET and NASDAQ and their quest for superior execution, and with as little information leakage as possible.

Let me close by spending a few minutes on the pending acquisition by the NASDAQ stock market to acquire all of the outstanding shares of the Instinet Group, which was announced on April 22, 2005.

First, since our conference call last quarter, Instinet Group paid a special dividend to $0.32 per common share on August 15, 2005 to stockholders based upon the net after tax proceeds of the sale of LGR.

Second, the merger agreement was adopted on September 21, 2005 by a majority of our shareholders.

The completion of the transaction is now subject to customary conditions including regulatory approval.

The Company expects that the merger will be completed during this current quarter at which time each shareholder will receive the right to receive approximately $5.10 per diluted share.

Third, Instinet has substantially complied with the second request issued by the Department of Justice on June 17, 2005, in connection with their investigation under the Hart Scott-Rodino Anti-Trust Improvements Act.

Based on discussions with the DOJ staff responsible for reviewing the NASDAQ Instinet transaction, we understand that, the staff has forwarded its recommendations to senior DOJ officials, and we anticipate a formal decision from the Department of Justice soon.

Last, on August 30, 2005, Instinet Group and Plaintiffs that filed a consolidated class-action lawsuit against Instinet Group, each of our directors and [roters] agreed to resolve the action in a proposed settlement.

On October 25, the Delaware Court of Chancery approved the proposed settlement as fair and reasonable.

Separately on November 30, 2005 the court will hold a hearing to consider an award of attorney's fees and reimbursement expenses.

The settlement is still subject to among other things, final judgment dismissing the consolidated action.

Until this transaction closes, Instinet Group's business will continue to offer investors competitive and technological sophisticated products and services and never lose sight of the fact that our business is built on helping our customers achieve best execution.

And now I turn the call over to John Fay.

Thank you, Ed, and good morning everyone.

I'm John Fay, Co-President of Instinet Group, and Chief Financial Officer.

I will this morning go over our third quarter earnings with you, as well as, highlight our business segment results.

In the third quarter, Instinet Group earned net income of $84 million or $0.25 per diluted share.

There were several NASDAQ transaction related and non-recurring items recorded in the third quarter which affected our earnings, and I would like to start by reviewing these items.

First on July 1, 2005, Instinet completed the sale of Lynch, Jones, & Ryan, the Bank of New York for $174 million, and we recorded a gain, after taxes and fees, of $90 million associated with this sale.

This gain is included in a discontinued operations, where all historic LGR results have been reclassified.

Second, in the current quarter, Instinet Group recorded one-time items as detailed in a table on page 8 of our earnings release of $27 million before taxes.

There were three components of this amount. $6 million in deal-related advisory expenses, $30 million of expenses related to cost-reduction plans, both of which are partially offset by $9 million of investment gains.

So in a pro forma basis, excluding the gain from the sale of LJR, and the one-time items discussed above net of related taxes, pro forma earnings from continued operations was $11 million in the third quarter, or $0.03 per share -- per diluted share, which is up from $6 million or $0.02 cents per diluted share in the second quarter of 2005.

The improved earnings were due to higher gross margin, which equals our revenues less the cost of revenues, primarily at our institutional broker and lowered tax expense provisions.

I would like to look at the markets for a moment and talk about our top-line business performance.

Market volumes in the third quarter in the U.S. weakened from second quarter levels, with US OTC market volumes off 8%.

While markets outside of the U.S. saw growth over the second quarter levels, particularly, in Asia.

Our gross margin at Instinet, the institutional broker, increased in the third quarter compared to the second, and this was due to growth in our US volumes, which is evident by an increase in our US market share in the quarter, over the prior quarter, and stronger volumes in our international business.

Our international business consideration trade increased 11% in the quarter, primarily due to growth in the Asian markets, where we benefit from our local trading office presence, and direct full membership in the exchanges in Tokyo and Hong Kong.

We run a similar model in Europe from our operations out of London, Paris, Zurich and Frankfurt.

Looking at our business US OTC marketplace business, Instinet gross margin was level compared to the prior period, as lower OTC market volumes related to the U.S. market trading that I just spoke about were partially offset by higher lifted volume and higher routed volume.

INET's match to change listed marketshare grew during the quarter to 4.5%, which is up almost 50% from the first quarter of 2005 levels.

I would like to turn to expenses for a moment.

Total direct expenses in the quarter of $124 million were 12% higher compared to the second quarter 2005, and this was primarily due to higher, non-operating items totaling $36 million in the current quarter compared to $22 million in the prior quarter.

If you exclude these non-operating items in both periods, direct expenses were level in the third quarter of 2005 compared to the second quarter.

In the third quarter, the non-operating items recorded consisted of $15 million for facility rent write-offs, $5 million for asset write-offs, both of which are associated with consolidation of office space in the U.S. and in the U.K., and $9 million of severance expense, which is related to future headcount reductions of approximately 75 employees.

I would like to note that these expenses are associated with our ongoing cost reduction plan.

And except for a reduction in office space associated with the sale of LJR, they are not directly related to the transaction with NASDAQ.

In terms of deal costs, during the quarter we recorded $10 million in advisory related fees and expenses. $6 million of these were recorded in professional fees, and $4 million was included in discontinued operations related to the LJR deal and shown separately as discontinued operations.

On a year-to-date basis, we have recorded $17 million in deal-related advisory fees.

Finally, Instinet's Group balance sheet had $938 million of net cash in marketable securities as of September 30th, which is up $2 million from December 31, 2004.

Primarily due to the proceeds received from the sale of LJR, offset by the $109 million special dividends, which we paid during the third quarter, as well as changes in operating activity.

At this time, I would like to hand the call back over to Lisa Kampf.

Thank you, John.

Operator, we're ready for questions.

Thank you. [OPERATOR INSTRUCTIONS] Your first question comes from Daniel Goldberg of Bear Stearns.

Good morning.

Hi, Dan.

Can you talk a little bit about the pricing?

It looks like on a sequential quarter basis with an institutional broker and within INET was down in the third quarter and this seems to be a little bit contrary to what are reported, I guess, last week.

There's two components of the pricing, the institutional brokers, and the decline in pricing is very small a percentage, I think less than 2%.

That is really due to mix.

There is nothing significant in that.

I think the real long-term secular trend in price decline, you know, you can see over time has been greater than that, and we expect that trend to continue.

But during the quarter it's really just mix.

And in the U.S. in particular, the third quarter is a difficult quarter.

We get the lower, traditionally lower volumes.

Outside of the U.S. our price on institutional broker actually increased.

Which you can see in the table in our press release.

And that, really again, due to mix with more volume in Asia, where -- where we charge more than Europe and that's just due to the underlying cost.

On the INET side, there really has been no change in pricing at all, again, it's due to mix.

As you're probably aware, INET has pricing on the rebate side that's based upon volume tiers, so as volumes increases, more people hit the tier and get a lower price.

So this is some client mix going on but there's nothing significant in the numbers.

Okay.

And in terms of October volumes are any trends that you've seen in volumes or pricing through October?

Anything there in terms of color?

Well, the markets have been stronger in October as you track, and I would say our performance reflects that.

You know, there's really nothing significant within our business that's different than what's going on in general in October, compared to September.

Okay.

And then on the headcount reductions, I guess quarter-over-quarter, you had a, I think, a reduction of about 150 employees.

I think, 53 or so then were JR, I think you talked about in the release.

Any more color there?

So Instinet basically lost 84 people at LJR and INET actually increased, it looks about 3 people, any color there?

Yeah, that's about right.

That's part of the cost plan we discussed last quarter.

You know, the decline of headcount is primarily on the institutional broker in the corporate areas, and the small increase in INET it really just reflects there on their staffing requirements.

And then you said the $9 million is going to be for 75 additional reductions?

Yes, that's correct.

That will occur over the next 2 to 3 quarters.

Okay.

And then should we expect more beyond that, or should we be done at the point?

I think that is about as far as I'm willing to forecast out at this point, Dan.

And lastly, you mentioned it briefly, the September 9th settlement, it listed three things in there.

A revised proxy that includes new disclosures, and the reduced break-up fee dropping about $10 million?

What exactly is this new disclosure?

Well, I'm not sure it's new disclosure, in our final proxy that was filed, we made changes that disclose additional information about the transaction, which is all on public record has been filed.

So there's not an additional proxy that's going to be filed.

It's been filed prior to the shareholder meeting and the revisions were part of the negotiated settlement.

On that, Dan, when it was actually prepared to break out exactly what those were within the proxy, but basically what John is saying, you've seen -- whatever it was, you have seen it in the actual proxy.

Okay.

And then any reasons for the reduced breakup fee?

Well, it was -- it was a settlement on our part to offer more value to, you know, to our shareholders and by reducing -- by the parties agreeing to reduce the breakup fee, if, you know, part of the logic was that there were other people that were willing to pay a higher price.

And with a reduced breakup fee it would have been easier for someone to come in and provide a more competitive, a higher price if that in fact, if there was in fact an appetite to do that.

So the -- as it was a benefit that the -- that the plaintiffs sought that we agreed to.

As part of the is settlement.

Okay.

Thank you.

Okay.

Thanks, Dan.

Your next question comes from Roger Freeman of Lehman Brothers.

Hi, Roger.

Hi, can you hear me?

Yes.

Just a couple of questions.

One, it looks like your liquidity payments on a per share basis went down sequentially.

I'm just wondering if that is due to the lower seasonal volumes and customers not falling into those discounted tiers?

Two things really, it's hard to measure that because of the -- because of -- you don't have all of the information disclosed.

But liquidity payments would vary because people hitting the pricing tiers.

Also, the mix between OTC and list business for which the pricing is different.

So I think that it is both and there's nothing significant in there, and our stated pricing is still our stated pricing.

It is just going to vary at different volume prices and mixes.

Okay, thanks, and then, I guess, secondly, with respect, to your listed market share, it was up a lot, and when we look at the daily files, it looks like the NYSE listed market share was up even more.

I was wondering if you could comment about that, is there anything in particular driving that or it that just continued progress and liquidity building?

I think, from our our perspective, it's simply, the trends that we have identified a long time ago, and it -- you know, I think even we are a little surprised by how we continue to see that build rather quickly.

There's no single reason that we can identify behind that, other than just the general move towards more electronic trading in the preference of our customers to trade on our platform when they can, rather than send their flow down to the floor.

So we see from our customers is that they, you know, some of our customers will come to us prior to having to go to the floor.

And as more and more customers search our liquidity pool for liquidity first, then that that's sort of a self-fulfilling prophesy, and we begin to see more and more executed trades on our platform.

Right, and as that happening, are you seeing your match rate on NYC listed is now and maybe how that's trended over in the past couple of quarters?

We don't disclose that.

And we don't think about it that way.

We offer routing to the floor, at very, very competitive rates using our vast technology.

John, can I make sure we're all talking on the same level here?

Because --, you know, when we give you our market share of listed volumes, we're talking, you know, about match volume.

So when we say that we're doing 4.5%, that all matched.

Now, on top of that, how much do we wrap down to the floor?

That we don't disclose, but I want to make it clear, we don't play the games that some people play about saying what is actually executed at INET.

When we tell you that we're doing 4.5%, that's all matched volume, 100%.

Yes, I understand that.

I was just trying to get out of what really the potential is, obviously, you are handling a higher -- a higher percentage than that, and obviously, the ultimate value is in how much you match.

And I know the statistics you report are the matched numbers.

Well, we've seen our rate go up over time, and I think the thing that's really exciting, and I know you look at our daily data.

A lot of you people do.

But when you look at when there is a big day or a big news in the stock, you really can see our market share in that stock increase.

Which is just the benefit of the electronic platform with a lot of volume.

And last thing, have you seen any differences with Orca having an earlier open?

Is that -- do you see when there's -- if there's a stock -- do you see any material differences in market share between you and them that day because they're open earlier?

I can't say that we focussed on this, but you know, but so -- the answer is no, we haven't seen any difference, but that isn't to say that I think that either -- you know, that executive suite we've done a detailed analysis of this.

So, there could be underlying trends that we don't spend a lot of time analyzing.

Okay.

Thanks a lot.

I appreciate it.

Yes, thanks Roger.

There are no further questions at this time.

Are there any final remarks?

Yes, I guess I wanted to just say to you all, thank you.

This is our -- I have some prepared remarks here, this is our last earnings call, may very well be our last earnings call, and in that regard, I just wanted to say that, I particularly, I know the rest of my staff have actually enjoyed these opportunities to come before you on a quarterly basis and publically report on our financial results, our strategies, and our current issues affecting our industry.

These have been healthy and useful opportunities for management to present our vision for the Company to help you, the investigator, get a better understanding of the operations, challenges and opportunities that we have faced.

And I thank you for your interest in our Company over the past few years.

Thank you very much.

A reminder that the webcast call will available for replay later today.

And the transcript should be available on our website later this week.

Please contact me directly with any follow-up questions, at 212-231-5022.

It is also located on the earnings release, and thank you for your participation.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.