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

May 10, 2010 | About:

10qk

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Investment Technology Group Inc. (ITG) filed Quarterly Report for the period ended 2010-03-31.

Investment Technology Group Inc. has a market cap of $727.59 million; its shares were traded at around $16.62 with a P/E ratio of 12.59 and P/S ratio of 1.15. 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, Steven Cohen of SAC Capital Advisors, Jim Simons of Renaissance Technologies LLC, Chuck Royce of Royce& Associates.

Highlight of Business Operations:

During the first quarter of 2010, cost reductions in the U.S., combined with improved international operations substantially reduced the impact of lower U.S. market volumes on our results of operations. Our net income for the quarter was $8.4 million, or $0.19 per diluted share. Excluding a $6.1 million pre-tax ($3.5 million after-tax) non-cash write-off of capitalized software development initiatives (see below), our pro forma operating net income (see Non-GAAP Financial Measures) for the quarter was $11.9 million, or $0.27 per diluted share, compared to net income of $12.8 million, or $0.29 per diluted share for the first quarter of 2009. Consolidated revenues were down 6% to $146.7 million compared to $155.7 million for the first quarter of 2009, reflecting a $17.4 million (15%) decline in U.S. revenues to $99.9 million, offset in part by an $8.5 million (22%) increase in international revenues to $46.8 million.

Consolidated expenses were comparable during the three months ended March 31, 2010 and 2009 at $131.2 million and $132.2 million, respectively, due to a write-off of certain capitalized software initiatives. As part of our fourth quarter 2009 restructuring, we made certain changes to our product priorities and wrote-off $2.4 million of capitalized development initiatives that were not yet deployed. As our product development plan continued to evolve in the first quarter of 2010, we determined that additional capitalized amounts were not likely to be used and a further $6.1 million was written off. Excluding this write-off, consolidated pro forma operating expenses were down 5% to $125.2 million compared to the first quarter of 2009, reflecting a $12.3 million (13%) decrease in U.S. pro forma operating expenses to $80.6 million, offset in part by a $5.3 million (13%) increase in international expenses to $44.6 million (see Non-GAAP Financial Measures). This reduction in U.S. pro forma operating expenses related primarily to a reduction in compensation and benefits from our 2009 restructuring, a reduction in 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 primarily due to increased capitalized software amortization expense. 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.

In Asia Pacific, market conditions improved with the rally in equity prices supported by increased market turnover across the region. Asia Pacific revenues were also positively impacted by the allocation of $0.8 million of ITG Net revenue from our European Operations based on the location of the execution of the underlying client transactions associated with these revenues. Regional first quarter revenues increased 61% over the first quarter of 2009 to $8.0 million, resulting in a 19% decrease in our pre-tax loss to $3.9 million. While we continue to gain market share across several markets in the Asia Pacific region, our market share is still a relatively small portion of the entire market and we continue to incur significant pre-tax losses in the region.

In April 2010, we implemented a plan to close our on-shore operations in Japan to lower our costs and reduce our capital requirements. This move will reduce our annual expenses by approximately $4.0 million and will reduce our net capital in the region by more than $20 million. We recorded a one-time charge related to this closing estimated at $2.6 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 desk. As a result, we do not expect a material reduction to our current revenue levels. Over the long term, our Asia-Pacific strategy is to be well positioned to capitalize on what we believe will be an increasingly fragmented market characterized by increased electronic trading capabilities as well as unbundled commissions and advisory services. This move does not impact our future plans related to the recent launch of POSIT Marketplace in the region.

Other expenses increased due to the $6.1 million write-off of certain capitalized software initiatives described above, a $1.1 million increase in capitalized software amortization related to new releases and the recovery of doubtful account provisions in the first quarter of 2009 of $1.0 million. These increases were offset in part by decreases in other costs from our cost reduction efforts including lower amounts of rent expense, telecommunications and market data costs, travel and entertainment and professional services such as legal, recruiting and consulting.

Currency translation increased total Canadian revenues and expenses by $3.0 million and $2.2 million, respectively, resulting in a $0.8 million increase to pre-tax income.

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