KCG Announces Second Quarter 2015 Results

JERSEY CITY, N.J., July 31, 2015 /PRNewswire/ -- KCG Holdings, Inc. (NYSE: KCG) today reported a GAAP net loss of $19.2 million, or $0.18 per share, for the second quarter of 2015. Included in the $57.1 million pre-tax loss is an accelerated compensation expense of $28.8 million as a result of stockholder-approved changes made to the vesting provisions of outstanding annual equity awards; debt extinguishment charges comprising a debt "make-whole" premium and  a writedown of capitalized debt costs of $16.5 million and $8.5 million, respectively, as a result of the early redemption of the $305 million 8.25% Senior Secured Notes; and other real estate related charges of $6.3 million. Excluding these items, on a non-GAAP basis, second quarter 2015 pre-tax income from continuing operations was $3.1 million. A reconciliation of GAAP to non-GAAP results is included in Exhibit 4.

* See Exhibit 4 for a reconciliation of GAAP to non-GAAP results.

Second Quarter Highlights

• KCG market making's share of retail SEC Rule 605 U.S. equity share volume increased more than one full percentage point from first quarter 2015
• The percentage of algorithmic trading and order routing net revenue attributable to institutional clients grew for the third straight quarter
• Repurchased 23.6 million shares of KCG Class A Common Stock for $330 million through a "modified Dutch auction" tender offer
• Completed the refinancing of the $305 million 8.25% Senior Secured Notes due in 2018
• Subsequent to the quarter, KCG entered into an agreement to relocate its global headquarters to New York City

Daniel Coleman, Chief Executive Officer of KCG, said, "During the second quarter, KCG continued to focus on strategic clients, completed a tender offer for 22 percent of shares outstanding, excluding restricted stock units, and developed plans to consolidate global headquarters in New York City. The financial results, however, were negatively affected by the deterioration in market-wide volumes and volatility in U.S. equities from the first quarter, heightened competition for retail order flow, and several non-operating items. While we believe KCG is steadily developing into a major multi-asset class liquidity provider, the results do not meet our expectations. As a firm, we cannot assume that the market environment will improve. To generate the right returns for our shareholders, we will continuously review, adjust, and improve how we run our business."

Market MakingThe Market Making segment encompasses direct-to-client and non-client, exchange-based market making across multiple asset classes and is an active participant in all major cash, options and futures markets in the U.S., Europe and Asia. During the second quarter of 2015, the segment generated total revenues of $192.3 million and pre-tax income of $4.4 million. Excluding expenses related to accelerated stock-based compensation of $19.8 million, the segment generated pre-tax income of $24.2 million.

During the second quarter of 2015, consolidated U.S. equity share and dollar volume continued to decline quarter over quarter along with realized volatility for the S&P 500. In particular, retail trading activity declined approximately 10 percent market-wide amid continued strong competition and a narrowing of spreads. KCG's results were augmented by solid contributions from Asian equities, U.S. commodities and European fixed income, partially offset by U.S. fixed income.

Mr. Coleman commented, "Although direct-to-client market making in U.S. equities increased market share and our models performed well, the current competitive environment remains a challenge in terms of revenue realization. We are committed to improving returns irrespective of an improvement in the competitive or macro environment. Outside of U.S. equities, we continued to diversify in select asset classes, add strategies and build scale."

In the first quarter of 2015, the segment generated total revenues of $224.5 million and pre-tax income of $39.3 million. In the second quarter of 2014, the segment generated total revenues of $218.4 million and pre-tax income of $36.0 million.

 

 

Global Execution ServicesThe Global Execution Services segment comprises agency execution services and trading venues. During the second quarter of 2015, the segment generated total revenues of $63.5 million and a pre-tax loss of $9.9 million. Excluding expenses related to accelerated stock-based compensation of $8.2 million, the segment generated a pre-tax loss of $1.7 million.

During the second quarter of 2015, in addition to the decline in consolidated U.S. equity share volume quarter over quarter, ETF trading activity decreased approximately 13 percent market-wide. Also, during the quarter, institutional investors in the U.S. experienced an acceleration in domestic mutual fund outflows. All periods prior to the second quarter include the results of KCG Hotspot up through the date of its sale on March 13, 2015.

Mr. Coleman commented, "Despite the market-wide decline in U.S. equity trading activity quarter over quarter, KCG's algorithmic trading and sales and trading teams were little affected. During the second quarter, 18 asset managers began using KCG algorithms and we onboarded an additional 10 new asset management clients. The results in ETFs, however, were affected by the market-wide decline in trading activity."

In the first quarter of 2015, excluding the gain on the sale of KCG Hotspot FX and related professional and compensation expenses, the segment generated total revenues of $79.2 million and pre-tax income of $7.2 million. In the second quarter of 2014, the segment generated total revenues of $85.9 million and pre-tax income of $0.7 million. Excluding $1.9 million in compensation related to a reduction in workforce, pre-tax income was $2.6 million.

 

 

Corporate and OtherThe Corporate and Other segment includes strategic investments and corporate overhead expenses. During the second quarter of 2015, the segment generated total revenues of $6.0 million and a pre-tax loss of $51.6 million. Excluding expenses related to accelerated stock-based compensation of $0.8 million, a debt make-whole premium of $16.5 million, writedown of capitalized debt costs of $8.5 million, and other real estate related charges of $6.3 million, the segment generated a pre-tax loss of $19.4 million.

In the first quarter of 2015, the segment generated total revenues of $7.3 million and a pre-tax loss of $14.3 million. In the second quarter of 2014, the segment generated total revenues of $9.8 million and a pre-tax loss of $22.2 million. Excluding a $2.0 million writedown of capitalized debt costs related to the principal repayment of debt, $0.8 million in compensation related to a reduction in workforce, and a lease loss accrual of $1.5 million, the pre-tax loss was $17.9 million.

During the second quarter of 2015 KCG effected a change in tax status of one of its subsidiaries and as a result reversed a valuation allowance on certain state tax net operating losses and other deferred tax assets. This resulted in a one-time deferred tax benefit of $16.2 million and a corresponding increase to KCG's deferred tax asset.

Financial ConditionAs of June 30, 2015, KCG had $541.3 million in cash and cash equivalents. Total outstanding debt was $495.1 million. The Company had $1.47 billion in stockholders' equity, equivalent to a book value of $15.58 per share and tangible book value of $14.05 per share based on total shares outstanding of 94.4 million, including restricted stock units.

KCG's headcount was 1,045 full-time employees at June 30, 2015 compared to 1,038 full-time employees at March 31, 2015.

During the second quarter of 2015, KCG completed a "modified Dutch auction" tender offer and repurchased 23.6 million shares of KCG's Class A Common Stock at a purchase price of $14.00 per share, for a cost of $330 million, excluding expenses related to the tender offer. The repurchased shares represented approximately 22% of KCG's Class A Common Stock outstanding excluding restricted stock units as of May 7, 2015.

Relocation of Global HeadquartersSubsequent to the second quarter, KCG entered into an agreement to relocate its global headquarters from Jersey City, NJ to New York City. Under a plan authorized by the Board of Directors, KCG will reduce occupied space and consolidate legacy metro area offices in Jersey City, NJ and New York, NY. KCG's new headquarters will encompass 169,000 square feet at 300 Vesey Street, in lower Manhattan. The relocation is expected to be substantially completed at the end of 2016.

As a result of the planned relocation and consolidation of metro New York area offices and a reduction of occupied space in Chicago, KCG expects to incur additional expenses through fiscal year 2016. KCG will record non-recurring, real estate charges of $25 to $30 million in the 3rd quarter of 2015 related to the early termination of leases at 545 Washington Boulevard in Jersey City, NJ and 165 Broadway in New York, NY as well as a consolidation of space at 350 N. Orleans Street in Chicago, IL. Further, the Company will record added depreciation and amortization expenses of approximately $4.5 to $5.0 million per quarter beginning in the 3rd quarter of 2015 and running through the 4th quarter of 2016 as well as added occupancy costs of approximately $1.5 million per quarter beginning in the 4th quarter of 2015 and running through the 4th quarter of 2016.

Conference CallKCG will hold a conference call to discuss second quarter 2015 financial results starting at 9:00 a.m. Eastern Time today, July 31, 2015. To access the call, dial 800-401-3551 (domestic) or 913-312-0726 (international) and enter passcode 3586698. In addition, the call will be webcast at http://investors.kcg.com/phoenix.zhtml?p=irol-eventDetails&c=105070&eventID=5196957. Following the conclusion of the call, a replay will be available by selecting a number based on country of origin from a list posted at: https://replaynumbers.conferencinghub.com/index.aspx?confid=7898269&passcode=7898269 and entering passcode 3586698.

Additional information for investors, including a presentation of the second quarter financial results, can be found at http://investors.kcg.com.

Non-GAAP Financial PresentationsKCG believes that certain non-GAAP financial presentations, when taken into consideration with the corresponding GAAP financial presentations, are important in understanding operating results. Selected financial information is included in the non-GAAP financial presentations for the three months ended June 30, 2015, March 31, 2015 and June 30, 2014 and for the six months ended June 30, 2015 and June 30, 2014. KCG believes the presentations provide a meaningful summary of revenues and results of operations for each of the three and six month periods. Reconciliations of GAAP to non-GAAP results are included in the schedules in Exhibit 4.

About KCGKCG is a leading independent securities firm offering investors and clients a range of services designed to address trading needs across asset classes, product types and time zones. The firm combines advanced technology with exceptional client service across market making, agency execution and venues. KCG has multiple access points to trade global equities, fixed income, currencies and commodities via voice or automated execution. www.kcg.com

Certain statements contained herein may constitute "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are typically identified by words such as "believe," "expect," "anticipate," "intend," "target," "estimate," "continue," "positions," "prospects" or "potential," by future conditional verbs such as "will," "would," "should," "could" or "may," or by variations of such words or by similar expressions. These "forward-looking statements" are not historical facts and are based on current expectations, estimates and projections about KCG's industry, management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Any forward-looking statement contained herein speaks only as of the date on which it is made. Accordingly, 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 including, without limitation, risks associated with: (i) the strategic business combination (the "Mergers") of Knight Capital Group, Inc. ("Knight") and GETCO Holding Company, LLC ("GETCO"); (ii) difficulties and delays in fully realizing cost savings and other benefits of the Mergers and the inability to manage revenue capture and sustain revenue and earnings growth; (iii) the sale of KCG Hotspot; (iv) changes in market structure, legislative, regulatory or financial reporting rules, including the increased focus by regulators, the New York Attorney General, Congress and the media on market structure issues, and in particular, the scrutiny of high frequency trading, alternative trading systems, market fragmentation, colocation, access to market data feeds, and remuneration arrangements such as payment for order flow and exchange fee structures; (v) past or future changes to KCG's organizational structure and management; (vi) KCG's ability to develop competitive new products and services in a timely manner and the acceptance of such products and services by KCG's customers and potential customers; (vii) KCG's ability to keep up with technological changes; (viii) KCG's ability to effectively identify and manage market risk, operational and technology risk (such as the events that affected Knight on August 1, 2012), legal risk, liquidity risk, reputational risk, counterparty and credit risk, international risk, regulatory risk, and compliance risk; (ix) the cost and other effects of material contingencies, including litigation contingencies, and any adverse judicial, administrative or arbitral rulings or proceedings; (x) the effects of increased competition and KCG's ability to maintain and expand market share; and (xi) the announced plan to relocate KCG's global headquarters from Jersey City, NJ to New York, NY. The list above is not exhaustive. Readers should carefully review the risks and uncertainties disclosed in KCG's reports with the SEC, including, without limitation, those detailed under "Risk Factors" in KCG's Annual Report on Form 10-K for the year-ended December 31, 2014, Quarterly Report on Form 10-Q for the quarter-ended March 31, 2015, and other reports or documents KCG files with, or furnishes to, the SEC from time to time.

 

 

 

 

 

 

 

 

 

 

 

 

 

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SOURCE KCG Holdings, Inc.