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KCG ANNOUNCES FOURTH QUARTER 2016 RESULTS
today reported consolidated earnings of $196.2 million, or $2.47 per diluted share, for the fourth quarter of 2016. Included in the fourth quarter pre-tax earnings of $309.9 million is a pre-tax gain of $331.0 million from the sales of substantially all shares of Bats Global Markets, Inc. ("Bats") owned by KCG.
Daniel Coleman, Chief Executive Officer of KCG, said, "During the fourth quarter, we monetized a longstanding investment in Bats through a swap of substantially all of our stake for all KCG shares and warrants owned by General Atlantic. After the transaction plus additional open market purchases, KCG's shares outstanding declined to 67.2 million from 86.2 million from the prior quarter and the number of warrants outstanding decreased to 5.1 million from 13.2 million. Since the merger, KCG has returned a cumulative $835.7 million to equity stakeholders. Our focus on creating value for stockholders enabled KCG to increase tangible book value per share to $18.71 as of the end of 2016. From an operating perspective, revenues in the fourth quarter fell below our expectations reflecting the continuation of a difficult trading environment. However, a rise in revenues on an operating basis from the prior quarter reflects the improved market conditions starting in November."
In 2016, KCG continued to distinguish itself as an emerging, independent, pure-play, technology-driven intermediary in liquid financial instruments. Growth in core segments of market making and agency-based trading outpaced market volumes. The firm undertook an initiative to re-engineer the trading architecture. KCG reduced the ratio of compensation to net revenues year over year to 42.2 percent. In addition, the firm returned $364.7 million to equity stakeholders through repurchases of shares and warrants during the year.
Mr. Coleman commented, "KCG's long-term growth is aligned with profound, secular changes in technology, regulation and competition. We are concentrating on attaining scale to enable us to grow without creating significant costs. In the past year, we've undertaken a re-engineering of the trading architecture while managing revenues in a difficult operating environment. In 2017, we're focused on returning our revenues to previous levels, changing our infrastructure and returning capital to shareholders when prudent."
The 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 fourth quarter of 2016, the segment generated total revenues of $168.3 million and a pre-tax loss of $8.5 million.
In the fourth quarter of 2016, investors remained defensive at the outset and continued to reduce exposure to U.S. equities. A period of heightened trading activity around the U.S. election dissipated quickly. For the quarter, consolidated U.S. equity volume remained flat year over year while realized volatility declined and bid-ask spreads tightened. Despite continuing strong competition, KCG Market Making grew market share of retail SEC Rule 605 U.S. equity share volume by 5.0 percent to approximately 32.4 percent.
Mr. Coleman commented, "A predominantly one-way market carried over from the third quarter, which can prove difficult for quantitative trading models. The depressed market volatility, however, was a surprise given events. While the financial results for the quarter disappointed, KCG Market Making's presence in the retail and broader U.S. equity market is as strong as ever. Additionally, revenue capture per U.S. equity dollar value traded returned to levels slightly above average in November and December."
In the third quarter of 2016, the segment generated total revenues of $136.1 million and a pre-tax loss of $13.8 million.
In the fourth quarter of 2015, the segment generated total revenues of $168.2 million and a pre-tax loss of $5.1 million, which included charges related to asset writedowns of $14.2 million.
The Global Execution Services segment comprises agency execution services and trading venues. During the fourth quarter of 2016, the segment generated total revenues of $75.5 million and pre-tax income of $4.5 million.
In the fourth quarter of 2016, an upsurge in the major market indexes failed to generate meaningful institutional trading activity. Despite the market conditions, KCG Algorithmic Trading grew U.S. equity share volume among the 25 largest U.S. asset managers by 49.5 percent year over year. KCG MatchIt increased average daily U.S. equity share volume by 30.5 percent year over year. KCG BondPoint grew market share of corporate and municipal bond transactions under 250 bonds by 1.8 percent and 3.1 percent, respectively, year over year.
Mr. Coleman commented, "At the start of the quarter, institutional investors were mainly engaged in de-risking and fence-sitting. Despite flat consolidated U.S. volume year over year, KCG Algorithmic Trading increased share volume from strategic clients. Additionally, KCG BondPoint continued to integrate with institutional order management systems by launching on Bloomberg to provide terminal users with access to the electronic fixed income trading platform."
In the third quarter of 2016, the segment generated total revenues of $63.7 million and a pre-tax loss of $0.4 million.
In the fourth quarter of 2015, the segment generated total revenues of $70.2 million and a pre-tax loss of $1.1 million, which included a writedown of goodwill of $0.9 million.
The Corporate and Other segment includes strategic investments and corporate overhead expenses. During the fourth quarter of 2016, the segment generated total revenues of $336.7 million and pre-tax income of $313.9 million. This includes a $331.0 million pre-tax gain from the sales of substantially all shares owned of Bats.
In the third quarter of 2016, the segment generated total revenues of $8.7 million and a pre-tax loss of $13.8 million.
In the fourth quarter of 2015, the segment generated total revenues of $25.6 million and pre-tax income of $1.8 million which included gains on sales and writedowns of investments of $19.8 million and $3.2 million, respectively and a $1.0 million writedown of an intangible asset.
On November 17, 2016, KCG announced that it entered into a strategic transaction with General Atlantic. Under the terms of the transaction, KCG sold 8.9 million shares it owned of Bats in exchange for all of General Atlantic's 18.7 million shares and 8.1 million warrants of KCG.
As of December 31, 2016, KCG had $632.2 million in cash and cash equivalents and total outstanding debt of $454.4 million. KCG had $1.36 billion in stockholders' equity, equivalent to a book value of $20.20 per share and tangible book value of $18.71 per share based on total shares outstanding of 67.2 million, including restricted stock units.
In addition to the transaction with General Atlantic, during the fourth quarter of 2016, KCG repurchased 0.3 million shares for approximately $3.7 million under the Company's stock repurchase program.
KCG's headcount was 952 full-time employees at December 31, 2016, compared to 981 at September 30, 2016.
Subsequent to the fourth quarter, on January 18, 2017, KCG's Board of Directors authorized a program to repurchase up to a total of $150 million in shares of the Company's outstanding Class A Common Stock ("Common Stock") and warrants to purchase shares of Common Stock ("Warrants"), subject to compliance with the covenants contained in the Company's debt indenture. This authority replaces and supersedes all previous board-granted authority. Under the program, the Company may repurchase shares or Warrants from time to time in open market transactions, accelerated stock buyback programs, tender offers, privately-negotiated transactions or by other means. Repurchases of shares may also be made under a Rule 10b5-1 plan. The timing and amount of repurchase transactions will be based on market conditions, share price, legal requirements and other factors. The program has no expiration date and may be suspended, modified or discontinued at any time without prior notice. There are no assurances that any repurchases of shares of Common Stock or Warrants may actually occur.
KCG announced today that its Board of Directors has appointed Peter Fisher, Colin Smith, Heather Tookes and Adrian Weller as Directors, effective immediately. KCG also announced that Rene M. Kern and John C. (Hans) Morris have informed the company that they will not be seeking reelection at the 2017 Annual Meeting of Stockholders. It is currently expected that 11 Directors will be nominated for election at KCG's 2017 Annual Meeting of Stockholders, 10 of whom would be independent.
KCG will hold a conference call to discuss fourth quarter 2016 financial results starting at 9:00 a.m. Eastern Time today, January 19, 2017. To access the call, dial 888-812-8589 (domestic) or 913-312-0949 (international) and enter passcode 3024760. In addition, the call will be webcast at http://edge.media-server.com/m/p/pbtshm7s. 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=3402400&passcode=3402400 and entering passcode 3024760.
Additional information for investors, including a presentation of the fourth quarter financial results, can be found at http://investors.kcg.com.
KCG is a leading independent securities firm offering investors a range of services designed to address trading needs across asset classes, product types and time zones. The firm combines advanced technology with specialized client service across market making, agency execution and venues and also engages in principal trading via exchange-based market making. KCG has multiple access points to trade global equities, fixed income, options, currencies and commodities via voice or automated execution. www.kcg.com
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