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Investment Technology Group Inc. Reports Operating Results (10-Q)

August 05, 2010 | About:
10qk

10qk

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Investment Technology Group Inc. (ITG) filed Quarterly Report for the period ended 2010-06-30.

Investment Technology Group Inc. has a market cap of $685.4 million; its shares were traded at around $15.73 with a P/E ratio of 13 and P/S ratio of 1.1. Investment Technology Group Inc. had an annual average earning growth of 1.7% over the past 10 years.ITG is in the portfolios of Third Avenue Management, David Dreman of Dreman Value Management, John Keeley of Keeley Fund Management, Columbia Wanger of Columbia Wanger Asset Management, Columbia Wanger of Columbia Wanger Asset Management, Paul Tudor Jones of The Tudor Group, Bruce Kovner of Caxton Associates, Jim Simons of Renaissance Technologies LLC, Chuck Royce of Royce& Associates, Steven Cohen of SAC Capital Advisors, George Soros of Soros Fund Management LLC.

Highlight of Business Operations:

funds. Our net income for the quarter was $7.5 million, or $0.17 per diluted share. Excluding $7.7 million in pre- and post-tax charges related primarily to restructuring and goodwill impairment in the Asia Pacific region (see below), our pro forma operating net income (see Non-GAAP Financial Measures) for the quarter was $15.3 million, or $0.35 per diluted share, compared to net income of $20.3 million, or $0.46 per diluted share for the second quarter of 2009. Consolidated revenues were down 8% to $155.3 million compared to $168.0 million for the second quarter of 2009, reflecting a $13.9 million (11%) decline in U.S. revenues, offset in part by a $1.2 million (3%) increase in international revenues to $47.2 million.

In comparison to the first quarter of 2010, both our revenues and our pro forma operating net income were higher. The $15.3 million of pro forma operating net income increased 28% over the $11.9 million of pro forma operating net income (see Non-GAAP Financial Measures) during the first quarter of 2010. The $11.9 million of pro forma net income during the first quarter of 2010 excludes a $3.5 million after-tax write-off of capitalized software. Revenues were 6% higher than the $146.7 million generated during the first quarter, boosted by a 16% increase in total U.S. executed volumes. The increase in U.S. volumes was attributable in part to the May volatility spikes, when the CBOE Volatility Index (VIX) hit a peak for the year of 48.2, increased flow associated with our services related to the Russell reconstitution and the expansion of our net executions business.

Consolidated expenses during the second quarter of 2010 of $136.0 million were comparable to 2009 levels of $134.0 million as the impact of cost saving initiatives was offset by restructuring and goodwill impairment charges in the Asia Pacific region. Excluding these charges, consolidated pro forma operating expenses were down 4% to $128.2 million compared to the second quarter of 2009, reflecting a $7.7 million (8%) decrease in U.S. pro forma operating expenses, offset in part by a $1.9 million (5%) increase in international expenses (see Non-GAAP Financial Measures). The lower U.S. pro forma operating expenses related primarily to a reduction in compensation and benefits from our 2009 restructuring including lower performance-based compensation, reduced telecommunication costs from the consolidation of our third-party network providers and reduced transaction processing costs, offset in part by higher general and administrative costs from capitalized software amortization. The growth in our international expenses related primarily to increases in infrastructure costs in Europe and Asia Pacific to support these growing businesses and the currency effect on our Canadian Dollar expense base, where the U.S. Dollar weakened approximately 13%.

In April 2010, we implemented a restructuring plan in our Asia Pacific operating segment to close our on-shore operations in Japan to lower our costs and reduce our capital requirements. This strategy will reduce our annual expenses by approximately $4 million and will reduce our net capital in the region by more than $20 million. We reduced the capital deployed in Japan during the second quarter of 2010 by $17 million and expect to reduce the balance by year-end following the surrender of our dealers license from the Japanese Financial Service Agency in July 2010. We recorded a one-time charge of $2.5 million for employee severance, contract termination costs and non-cash write-offs of fixed assets and capitalized software. We remain committed to the Asia Pacific region and will continue to offer Japanese trading services to clients via our Hong Kong operations, and as a result, we do not expect a material reduction to our current revenue levels from this move. Over the long term, our Asia Pacific strategy is to be well positioned to capitalize on what we believe will eventually be an increasingly fragmented market characterized by increased electronic trading capabilities, unbundling of commissions from research and advisory services and the need for trading advisory services. This move does not impact our future plans related to the recent launch of POSIT Marketplace in the region.

The ongoing redirection of fund flows out of domestic equities and into other asset classes continues to significantly curtail the equity trading activity of our core institutional client base. After a relatively quiet first quarter, when domestic funds received a modest $5.2 billion in net inflows, net flows out of domestic funds resumed in the second quarter with a net $21.4 billion withdrawn according to the Investment Company Institute, accelerating in May following the heightened equity market volatility and concerns related to the European sovereign debt crisis. This follows consecutive years in 2008 and 2009 when net flows out of domestic equity funds were substantial at $151.4 billion and $39.5 billion, respectively. Although the combined market volumes of NYSE and NASDAQ-listed securities were relatively flat compared to the second quarter of 2009, our total U.S. executed volumes were down 7%, as much of the overall market volume was attributed to the increased presence of high frequency trading firms, which do not typically use our trading services. In addition, during periods of reduced trading by traditional asset managers, our share of such volumes comes under greater pressure since our clients generally earmark over half their commission dollars for services such as investment research and new issuances. Also, a greater percentage of our business during the quarter was from high turnover, lower

In Asia Pacific, market turnover was down compared to the second quarter of 2009 despite higher equity prices. While Asia Pacific revenues were positively impacted by the shift in the attribution of $0.6 million of ITG Net revenue from our European Operations, commission rates decreased and second quarter revenues declined 2% from the second quarter of 2009 to $7.8 million. Asia Pacifics results also included restructuring charges of $2.5 million and a goodwill impairment of $5.4 million, as described above, resulting in a pre-tax loss of $12.0 million.

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