KCG Announces Second Quarter Results

KCG.com – JERSEY CITY, NJ – KCG Holdings, Inc. (NYSE: KCG) today reported consolidated earnings of $33.6 million, or $0.38 per diluted share, for the second quarter of 2016. Pre-tax income of $54.6 million includes a gain of $33.4 million from the sale of a portion of the company’s investment in Bats Global Markets, Inc. (“Bats”).

⁽¹⁾ See Exhibit 4 for a reconciliation of Total revenues to Net revenues. Net revenues is a non-GAAP measure the company uses to measure its performance as well as make certain strategic decisions.

Second Quarter Highlights

• KCG grew its market share of retail SEC Rule 605 U.S. equity share volume among the leading market makers by more than two percentage points
• KCG BondPoint set a new quarterly record for average daily fixed income par value traded
• KCG recorded a pre-tax gain of $33.4 million from the sale of a portion of its investment in Bats
• KCG grew consolidated revenues 22.2 percent year over year or 9.4 percent after adjusting for the gain from the sale of a portion of its Bats shares
• KCG repurchased 3.5 million shares of KCG Class A Common Stock for $46.5 million and warrants for $14.2 million

Daniel Coleman, Chief Executive Officer of KCG, said, “Despite relatively poor market conditions for most of the second quarter, KCG produced reasonable financial results. KCG market making in U.S. equities had another strong quarter with a revenue capture of 1.07 basis points. In addition, our franchise ETF desk and KCG BondPoint both showed continued growth in revenues and market share. The results were further lifted by a sizeable gain from the sale of a portion of the company’s investment in Bats, a part of the proceeds from which went toward funding more than $60 million in stock and warrant repurchases during the quarter.”

Market Making
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 second quarter of 2016, the segment generated total revenues of $211.8 million and pre-tax income of $40.5 million.

In the second quarter of 2016, market volumes of U.S. equities were muted due to uncertainty over impending market events and the macroeconomic outlook. For the quarter, average daily consolidated U.S. equity dollar volume rose just 1 percentage point year over year. Average daily retail SEC Rule 605 dollar volume declined approximately 8 percentage points over the same period. A rise in market volatility was largely confined to the final week of the quarter. The lack of conviction extended to market volumes of U.S. equity futures and options contracts. Outside of U.S. equities, market-wide trading activity also declined in European equities, U.S. Treasuries and currencies from a year ago.

Mr. Coleman commented, “Although the market for U.S. equities was relatively quiet until the tail end of the quarter, KCG Market Making produced strong results. The performance of quantitative trading models and market share gains of retail order flow drove the performance. Notwithstanding, lower realized volatility constrained results as did the broad declines in market volumes for certain asset classes and products year over year.”

In the first quarter of 2016, the segment generated total revenues of $258.9 million and pre-tax income of $75.5 million. Included in first quarter revenues is a $2.9 million gain from the sale of assets related to retail U.S. options market making.

In the second quarter of 2015, the segment generated total revenues of $192.3 million and pre-tax income of $4.4 million, which included accelerated stock-based compensation expense of $19.8 million resulting from stockholder-approved changes made during the quarter related to outstanding equity awards.

Select Trade Statistics: U.S. Equity Market Making

Global Execution Services
The Global Execution Services segment comprises agency execution services and trading venues. During the second quarter of 2016, the segment generated total revenues of $68.1 million and pre-tax income of $1.7 million.

In the second quarter of 2016, institutional trading activity was tempered in anticipation of the June Federal Open Market Committee meeting and the “Brexit” referendum in the U.K., affecting U.S. and European equity market volumes. Market-wide trade volume of ETFs rose just 1 percentage point year over year. Conversely, the retail bond market was particularly active as corporate bond transactions under 250 bonds rose 31 percentage points year over year.

Mr. Coleman commented, “The subdued institutional trading activity affected KCG Institutional Equities in both algorithmic trading and sales trading. Despite only a modest rise in market volumes of ETFs, however, the franchise ETF desk performed well. KCG BondPoint set another new record for trade volumes in part on the strength of recent market share gains in municipals.”

In the first quarter of 2016, the segment generated total revenues of $76.4 million and pre-tax income of $6.3 million.

In the second quarter of 2015, the segment generated total revenues of $63.5 million and a pre-tax loss of $9.9 million, which included accelerated stock-based compensation expense of $8.2 million resulting from stockholder-approved changes related to outstanding equity awards in the second quarter of 2015.

Select Trade Statistics: Agency Execution and Trading Venues

1. KCG Institutional Equities average daily U.S. National Market System (NMS) equity share volume represents trading on behalf of clients covering algorithmic trading and high touch sales trading in single stocks, ETFs and programs. In 2016, KCG modified the reporting of trading volumes within the Global Execution Services segment to remove internal volume generated by KCG trading desks and add volume from sales trading. Prior periods have been recast for this new presentation.

Corporate and Other
The Corporate and Other segment includes strategic investments and corporate overhead expenses. During the second quarter of 2016, the segment generated total revenues of $40.0 million and pre-tax income of $12.4 million. Included in these results is a gain of $33.4 million from the sale of a portion of the company’s investment in Bats. Following the sale, KCG retained a 13.7 percent ownership stake in Bats.

In the first quarter of 2016, the segment generated total revenues of $10.1 million and a pre-tax loss of $21.8 million. Included in first quarter revenues are a $3.7 million gain from KCG’s repurchase of a portion of its 6.875 percent Senior Secured Notes and a $2.8 million net gain primarily related to a distribution from an investment.

In the second quarter of 2015, the segment generated total revenues of $6.0 million and a pre-tax loss of $51.6 million. Included in these results is accelerated stock-based compensation expense of $0.8 million. Also included in these results are charges related to the early redemption of the $305 million 8.25% Senior Secured Notes comprising a debt make-whole premium of $16.5 million and writedown of capitalized debt costs of $8.5 million, as well as other real estate related charges of $6.3 million.

Financial Condition
As of June 30, 2016, KCG had $492.5 million in cash and cash equivalents and total outstanding debt of $452.7 million. KCG had $1.46 billion in stockholders’ equity, equivalent to a book value of $16.79 per share and tangible book value, which includes the value of its assets of businesses held for sale, of $15.63 per share based on total shares outstanding of 86.9 million, including restricted stock units.

During the second quarter of 2016, KCG repurchased 3.5 million shares for approximately $46.5 million and warrants for $14.2 million.

KCG’s headcount was 942 full-time employees at June 30, 2016, compared to 972 at March 31, 2016.

Subsequent Events
KCG announced today that Mike Blum, who joined the firm in January as Global Head of Client Technology, has been named Chief Technology Officer (“CTO”), effective October 1, 2016. Jon Ross, KCG’s CTO, will be leaving the company to pursue a variety of personal projects in the technology space, unrelated to trading and markets. Blum has nearly 25 years of industry experience designing and developing systems and managing global teams within high frequency, ECN, ATS and execution service spaces. Most recently, Blum was CTO at Teza Technologies. Ross will remain at KCG as CTO through the transition period.

Conference Call
KCG will hold a conference call to discuss second quarter 2016 financial results starting at 9:00 a.m. Eastern Time today, July 21, 2016. To access the call, dial 800-753-0487 (domestic) or 913-312-4373 (international) and enter passcode 3402400. In addition, the call will be webcast at http://edge.media-server.com/m/p/9wqdm557. 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 3402400.

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