|OCTOBER 18, 2006|
|Knight Capital Group Announces GAAP Earnings of $0.30 Per Diluted Share for Third Quarter 2006|
Despite lower market volumes, the Global Markets segment was solid with $27.5
million in pre-tax operating earnings in the third quarter of 2006
JERSEY CITY, N.J., Oct. 18 /PRNewswire-FirstCall/ -- Knight Capital Group, Inc. (Nasdaq: NITE) today reported GAAP earnings of $31.5 million, or $0.30 per diluted share, and pre-tax operating earnings of $52.1 million for the third quarter of 2006.
For the third quarter of 2005, the company reported GAAP earnings of $24.4 million, or $0.23 per diluted share, and pre-tax earnings from continuing operations of $40.1 million. Results for the third quarter of 2005 include a pre-tax charge of $5.5 million relating to the costs associated with excess real estate capacity in Jersey City. Excluding this charge, third quarter 2005 pre-tax operating earnings from continuing operations were $45.6 million.
Revenues for the third quarter of 2006 were $210.0 million, compared to $184.1 million for the third quarter of 2005.
"Continuing operations" include the company's two operating business segments, Global Markets and Asset Management. Continuing operations also include a Corporate segment, encompassing corporate investments and overhead expenses. Amounts reported as "discontinued operations" include the company's former Derivative Markets business segment, the sale of which was completed to Citigroup at the close of business in December 2004.
"In a seasonally slow market environment, Knight had another great quarter," said Thomas M. Joyce, Chairman and Chief Executive Officer of Knight Capital Group. "Clients have responded enthusiastically to our new and enhanced fee-based businesses designed to leverage Knight as a liquidity center. Our recently added electronic products -- like our direct market access, ECN and electronic foreign exchange offerings -- are providing clients with new choices. The acquisition of ValuBond, our electronic fixed income platform announced in July and closed just after the third quarter's end, is just the latest addition. New clients came on board in all of our Global Markets businesses, and we achieved greater account penetration through cross-selling and an intense focus on client service. Similarly, our Asset Management business outperformed its peers and increased assets under management over 20% since the second quarter with inflows from both new and existing clients."
Q3 2006 Q3 2005 Revenues ($) 210,007,921 184,096,509 Net income from continuing operations ($) 31,460,221 23,963,640 Income from discontinued operations, net of tax ($) - 387,934 Net income ($) 31,460,221 24,351,574 Diluted EPS ($) 0.30 0.23 U.S. equity dollar value traded (in $ millions) 410,525 467,658 U.S. equity trades executed (in thousands) 46,591 50,780 Average daily U.S. equity trades (in thousands) 745 793 Nasdaq and Listed equity shares traded (in millions) 18,824 25,710 OTC Bulletin Board and Pink Sheet shares traded (in millions) 223,830 131,690 Average revenue capture per U.S. equity dollar value traded (bps) 2.2 2.0 Average month-end balance of assets under management (in $ millions) 3,479.5 3,374.6 Quarterly fund return to investors* 4.9% 5.5% * Quarterly fund return represents the blended quarterly return across all assets under management in the Deephaven funds YTD 2006 YTD 2005 Revenues ($) 691,084,953 433,326,452 Net income from continuing operations ($) 110,931,850 24,367,681 Income from discontinued operations, net of tax ($) - 122,007 Net income ($) 110,931,850 24,489,688 Diluted EPS ($) 1.05 0.23 U.S. equity dollar value traded (in $ millions) 1,536,421 1,384,141 U.S. equity trades executed (in thousands) 166,832 151,780 Average daily U.S. equity trades (in thousands) 890 803 Nasdaq and Listed equity shares traded (in millions) 72,357 80,172 OTC Bulletin Board and Pink Sheet shares traded (in millions) 902,500 581,539 Average revenue capture per U.S. equity dollar value traded (bps) 2.2 1.7 Average month-end balance of assets under management (in $ millions) 3,165.9 3,372.2 Year-to-date fund return to investors* 14.6% 5.2% * Year-to-date fund return represents the blended return across all assets under management in the Deephaven funds Global Markets
During the third quarter of 2006, the Global Markets business segment generated total revenues of $145.6 million, compared to $129.4 million in the third quarter of 2005. In the third quarter of 2006, the Global Markets business segment reported pre-tax operating earnings of $27.5 million, compared to pre-tax operating earnings of $24.6 million in the third quarter of 2005.
"Knight's Global Markets performance was solid in a third quarter that was not only seasonally weak, but historically weak," Mr. Joyce said. "Dollar value traded was at its lowest since the third quarter of 2004. In fact, the overall market environment did little to inspire trading, as demonstrated by steep declines in volume on the exchanges. Given these poor trading dynamics, Knight's revenue capture was aided by our automated trading systems. Fee and commission revenues reflected the lower volumes, as expected, but Knight's institutional commission rates remained steady. Our sales traders continue to distinguish Knight from the competition in their commitment and flexibility in working orders on behalf of clients, without the proprietary trading that has become commonplace in the industry."
On October 2, 2006, the Company announced the completion of its acquisition of ValuBond, Inc., a privately held firm that provides electronic access and trade execution products for the fixed income market, in an all-cash deal for $18.2 million. The results of ValuBond will be included within the Global Markets segment for the fourth quarter of 2006.
During the third quarter of 2006, the Asset Management business segment, Deephaven Capital Management, generated $50.5 million in asset management fees, compared to $42.0 million in the same period a year ago. In the third quarter of 2006, Asset Management reported pre-tax operating earnings of $18.4 million, compared to pre-tax operating earnings of $15.7 million in the third quarter of 2005. Asset Management had approximately $3.8 billion under management at September 30, 2006, up from the $3.4 billion under management at September 30, 2005.
"Our Asset Management segment had an exceptional third quarter," Mr. Joyce continued. "Deephaven Capital Management's investment managers and analysts successfully uncovered market opportunities, driving a third quarter blended return that reversed flat second quarter performance and was stronger than their market neutral peers. At the same time, new investments in the Deephaven funds boosted assets under management to the $3.8 billion mark. Knight continues to negotiate with Deephaven's management. Their current employment contracts expire on December 31, 2006."
In the third quarter of 2006, the Corporate segment reported pre-tax operating earnings of $6.2 million, compared to pre-tax operating income of $5.3 million in the third quarter of 2005. Included in the third quarter 2006 results is a pre-tax gain of $7.2 million, or approximately $0.04 per diluted share, related to the sale of a part of the company's equity ownership in the International Securities Exchange, Inc.
The company's corporate investment in the Deephaven funds earned $4.8 million pre-tax during the third quarter of 2006, down from $14.6 million pre-tax during the third quarter of 2005, reflecting the impact of the company's planned reduction of its investment. As of September 30, 2006, the company had $186.7 million in cash and cash equivalents and a $203.0 million corporate investment in funds managed by Deephaven.
The company had $955.0 million in stockholders' equity as of September 30, 2006, equivalent to a book value of approximately $8.97 per diluted share.
During the third quarter of 2006, the company repurchased 585,000 shares for approximately $9.4 million under the company's $495 million stock repurchase program. To date, the company has repurchased 39.6 million shares for $329 million. The company cautions that there are no assurances that any further repurchases may actually occur.
Copies of this earnings release and other information on the company can be obtained at the company's website, www.knight.com. The company will conduct its third quarter 2006 earnings conference call for analysts, investors and the media at 9:00 a.m. Eastern Daylight Time (EDT) today, October 18, 2006. To access Knight's earnings conference call, please dial 800.500.0311 for domestic callers or 719.457.2698 for international callers. When prompted, provide the passcode, which is 3049760. The conference call will be webcast live at 9:00 a.m. EDT for all investors and interested parties on Knight's website. In addition, the company will release its monthly volume statistics for September 2006 on its website before the start of trading today.
On Thursday, November 2, 2006, Knight will provide a live webcast of its annual meeting for Analysts and Institutional Investors. All interested parties can access this event through Knight's website.
Knight Capital Group, Inc. (Nasdaq: NITE) is a leading financial services firm that provides comprehensive trade execution solutions and asset management services. Our Asset Management business, Deephaven Capital Management, is a global multi-strategy alternative investment manager focused on delivering attractive risk-adjusted returns with low correlation to the broader markets for institutions and private clients. Our Global Markets business provides a broad range of customized trade execution products and services across multiple asset classes for broker-dealers, institutions and issuer companies. We continually apply knowledge and innovation to the trading and asset management processes to build lasting client partnerships through consistent performance and superior client service. More information about Knight can be found at www.knight.com.
Presentation of Information in this Press Release
In an effort to provide investors with additional information regarding the Company's results as determined by generally accepted accounting principles (GAAP), the Company also discloses certain non-GAAP information which management believes provides useful information to investors. Within this press release, the Company has disclosed its pre-tax operating income and its operating expenses for certain reporting periods before charges, writedowns and lease loss accruals and discontinued operations to assist the reader in understanding the impact of these charges, writedowns and lease loss accruals and discontinued operations on the Company's financial results, thereby facilitating more useful period-to-period comparisons of the Company's businesses.
Certain statements contained herein constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates and projections about the Company's industry, management's beliefs and certain assumptions made by management. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Since such statements involve risks and uncertainties, the actual results and performance of the Company may turn out to be materially different from the results expressed or implied by such forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Unless otherwise required by law, the Company also disclaims any obligation to update its view of any such risks or uncertainties or to announce publicly the result of any revisions to the forward-looking statements made herein; however, readers should carefully review reports or documents the Company files from time to time with the Securities and Exchange Commission including, without limitation, the risks and uncertainties detailed under the headings "Certain Factors Affecting Results of Operations" and "Risks Affecting our Business" in the Company's Annual Report on Form 10-K.
KNIGHT CAPITAL GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For the three months ended For the nine months ended September 30, September 30, 2006 2005 2006 2005 Revenues Commissions and fees $95,739,820 $74,860,136 $308,790,246 $212,998,365 Net trading revenue 42,845,803 52,348,902 191,105,022 116,821,896 Asset management fees 50,535,992 41,983,284 135,122,744 67,900,813 Interest and dividends, net 5,175,455 1,763,330 11,264,764 6,319,167 Investment income and other 15,710,851 13,140,857 44,802,177 29,286,211 Total revenues 210,007,921 184,096,509 691,084,953 433,326,452 Transaction-based expenses Execution and clearance fees 22,100,471 24,584,539 81,051,228 71,479,360 Soft dollar and commission recapture expense 16,430,944 15,902,532 51,493,959 46,036,887 Payments for order flow and ECN rebates 9,662,643 3,857,048 31,662,062 14,843,211 Total transaction- based expenses 48,194,058 44,344,119 164,207,249 132,359,458 Revenues, net of transaction- based expenses 161,813,863 139,752,390 526,877,704 300,966,994 Other direct expenses Employee compensation and benefits 82,546,389 68,267,912 246,718,114 173,319,157 Communications and data processing 8,483,788 7,969,419 24,525,721 23,934,639 Professional fees 3,737,064 6,056,274 15,212,425 14,388,019 Depreciation and amortization 5,446,285 4,209,028 15,178,859 12,245,859 Occupancy and equipment rentals 3,163,697 3,238,952 9,914,296 10,186,066 Business development 3,371,117 1,616,485 8,627,797 4,617,599 Writedown of assets and lease loss accrual - 5,509,360 8,479,703 10,055,252 Regulatory charges and related matters - - - 2,000,000 Other 2,924,751 2,784,784 13,269,731 8,864,251 Total other direct expenses 109,673,091 99,652,214 341,926,646 259,610,842 Income from continuing operations before income taxes 52,140,772 40,100,176 184,951,058 41,356,152 Income tax expense 20,680,551 16,136,536 74,019,208 16,988,471 Net income from continuing operations 31,460,221 23,963,640 110,931,850 24,367,681 Income from discontinued operations, net of tax - 387,934 - 122,007 Net income $31,460,221 $24,351,574 $110,931,850 $24,489,688 Basic earnings per share from continuing operations $0.31 $0.24 $1.10 $0.23 Diluted earnings per share from continuing operations $0.30 $0.23 $1.05 $0.23 Basic and diluted earnings per share from discontinued operations $ - $ - $ - $ - Basic earnings per share $0.31 $0.24 $1.10 $0.23 Diluted earnings per share $0.30 $0.23 $1.05 $0.23 Shares used in computation of basic earnings per share 102,199,516 101,264,048 101,286,562 104,791,642 Shares used in computation of diluted earnings per share 106,469,308 103,724,202 105,951,813 107,955,922 KNIGHT CAPITAL GROUP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited) September 30, December 31, 2006 2005 ASSETS Cash and cash equivalents $186,734,507 $230,591,067 Securities owned, held at clearing brokers, at market value 551,598,006 380,366,778 Receivable from brokers and dealers 410,866,093 229,828,734 Investment in Deephaven sponsored funds 203,008,086 281,656,753 Fixed assets and leasehold improvements at cost, less accumulated depreciation and amortization 67,000,963 67,656,533 Strategic investments 38,393,130 31,896,425 Goodwill 118,084,040 47,682,880 Intangible assets, less accumulated amortization 61,408,907 29,773,442 Other assets 153,029,080 116,563,732 Total assets $1,790,122,812 $1,416,016,344 LIABILITIES & STOCKHOLDERS' EQUITY Liabilities Securities sold, not yet purchased, at market value $524,896,966 $345,457,499 Payable to brokers and dealers 69,314,171 35,102,415 Accrued compensation expense 163,878,236 117,763,834 Accrued expenses and other liabilities 77,030,897 94,244,447 Total liabilities 835,120,270 592,568,195 Stockholders' equity Class A common stock 1,447,692 1,397,457 Additional paid-in-capital 512,714,027 452,839,356 Retained earnings 764,445,541 653,513,691 Treasury stock, at cost (332,310,837) (294,652,742) Accumulated other comprehensive income, net of tax 8,706,119 10,350,387 Total stockholders' equity 955,002,542 823,448,149 Total liabilities and stockholders' equity $1,790,122,812 $1,416,016,344 KNIGHT CAPITAL GROUP, INC. PRE-TAX OPERATING EARNINGS BY BUSINESS SEGMENT* Amounts in millions (Unaudited) For the three months ended For the nine months ended September 30, September 30, September 30, September 30, 2006 2005 2006 2005 Global Markets Revenues $145.6 $129.4 $515.6 $335.9 Operating Expenses 118.1 104.8 382.1 313.8 Pre-Tax Operating Earnings 27.5 24.6 133.5 22.1 Asset Management Revenues 50.8 42.3 135.8 68.3 Operating Expenses 32.4 26.5 88.3 48.3 Pre-Tax Operating Earnings 18.4 15.7 47.5 20.0 Corporate Revenues 13.6 12.4 39.7 29.2 Operating Expenses 7.4 7.1 27.2 17.8 Pre-Tax Operating Earnings 6.2 5.3 12.5 11.3 Consolidated Revenues 210.0 184.1 691.1 433.3 Operating Expenses 157.9 138.5 497.7 379.9 Pre-Tax Operating Earnings $52.1 $45.6 $193.4 $53.4 * Totals may not add due to rounding. KNIGHT CAPITAL GROUP, INC. RECONCILIATION OF TOTAL GAAP EXPENSES AND PRE-TAX GAAP INCOME TO OPERATING EXPENSES AND PRE-TAX OPERATING EARNINGS* Amounts in millions (Unaudited) TOTAL GAAP EXPENSES TO OPERATING EXPENSES For the three months ended September 30, 2006 Global Asset Markets Management Corporate Total Transaction-based expenses $48.2 $ - $ - $48.2 Other direct expenses 69.9 32.4 7.4 109.7 TOTAL GAAP EXPENSES 118.1 32.4 7.4 157.9 Net impact of adjustments - - - - OPERATING EXPENSES $118.1 $32.4 $7.4 $157.9 For the three months ended September 30, 2005 Global Asset Markets Management Corporate Total Transaction-based expenses $44.3 $ - $ - $44.3 Other direct expenses 66.0 26.5 7.1 99.7 TOTAL GAAP EXPENSES 110.3 26.5 7.1 144.0 Adjustments: Writedown of assets and lease loss accrual (5.5) - - (5.5) OPERATING EXPENSES $104.8 $26.5 $7.1 $138.5 PRE-TAX GAAP INCOME TO PRE-TAX OPERATING EARNINGS For the three months ended September 30, 2006 Global Asset Markets Management Corporate Total PRE-TAX GAAP INCOME FROM CONTINUING OPERATIONS $27.5 $18.4 $6.2 $52.1 Adjustment: Net impact of adjustments - - - - PRE-TAX OPERATING EARNINGS $27.5 $18.4 $6.2 $52.1 For the three months ended September 30, 2005 Global Asset Markets Management Corporate Total PRE-TAX GAAP INCOME FROM CONTINUING OPERATIONS $19.1 $15.7 $5.3 $40.1 Adjustments: Writedown of assets and lease loss accrual 5.5 - - 5.5 PRE-TAX OPERATING EARNINGS $24.6 $15.7 $5.3 $45.6 * Totals may not add due to rounding. KNIGHT CAPITAL GROUP, INC. RECONCILIATION OF TOTAL GAAP EXPENSES AND PRE-TAX GAAP INCOME TO OPERATING EXPENSES AND PRE-TAX OPERATING EARNINGS* Amounts in millions (Unaudited) TOTAL GAAP EXPENSES TO OPERATING EXPENSES For the nine months ended September 30, 2006 Global Asset Markets Management Corporate Total Transaction-based expenses $164.2 $ - $ - $164.2 Other direct expenses 226.4 88.3 27.2 341.9 TOTAL GAAP EXPENSES 390.6 88.3 27.2 506.1 Adjustment: Writedown of assets and lease loss accrual (8.5) - - (8.5) OPERATING EXPENSES $382.1 $88.3 $27.2 $497.7 For the nine months ended September 30, 2005 Global Asset Markets Management Corporate Total Transaction-based expenses $132.4 $ - $ - $132.4 Other direct expenses 191.4 50.4 17.8 259.6 TOTAL GAAP EXPENSES 323.8 50.4 17.8 392.0 Adjustments: Writedown of assets and lease loss accrual (10.0) - - (10.0) Regulatory charges and related matters - (2.0) - (2.0) OPERATING EXPENSES $313.8 $48.3 $17.8 $379.9 PRE-TAX GAAP INCOME TO PRE-TAX OPERATING EARNINGS For the nine months ended September 30, 2006 Global Asset Markets Management Corporate Total PRE-TAX GAAP INCOME FROM CONTINUING OPERATIONS $125.0 $47.5 $12.5 $185.0 Adjustment: Writedown of assets and lease loss accrual 8.5 - - 8.5 PRE-TAX OPERATING EARNINGS $133.5 $47.5 $12.5 $193.4 For the nine months ended September 30, 2005 Global Asset Markets Management Corporate Total PRE-TAX GAAP INCOME FROM CONTINUING OPERATIONS $12.1 $17.9 $11.3 $41.4 Adjustments: Writedown of assets and lease loss accrual 10.0 - - 10.0 Regulatory charges and related matters - 2.0 - 2.0 PRE-TAX OPERATING EARNINGS $22.1 $20.0 $11.3 $53.4 * Totals may not add due to rounding.
SOURCE Knight Capital Group, Inc.