Bloomberg article with some new KP comments. Also good analyst comments toward the end.
Knight/Trimark 3rd-Qtr Earnings to Miss Forecasts (Update7)
10/11/99 1:22:00 PM
Jersey City, New Jersey, Oct. 11 (Bloomberg) -- Knight/Trimark Group Inc. said third-quarter earnings will rise
less than analysts forecast as stock trading slowed, cutting orders from the Internet brokers who are the main
customers of the biggest Nasdaq market maker.
Earnings will be 17 cents to 19 cents a share, the company said, less than
the 30 cents expected in a First Call Corp. poll of 10 analysts. It earned
13 cents in the quarter a year earlier. The company's stock fell 12 percent
to a six-month low.
Knight/Trimark gets about half its orders from E*Trade Group Inc.,
Ameritrade Holding Corp., TD Waterhouse Group Inc. and other Internet
brokers, whose trades fell 5 percent to 10 percent in the third quarter,
the first such decline, according to Hambrecht & Quist LLC. Online
investors traded less because of a slump in the Internet stocks they favor,
with the Bloomberg U.S. Internet Index down 9.8 percent in the quarter.
``The first and second quarters were the high-water mark of the
confluence of online trading and Internet stocks,' Kenneth Pasternak,
president and chief executive, said in an interview. ``In the third quarter,
we came down to levels that were sustainable. It was difficult to guide
analysts down because you don't know when the bubble's burst until it
already happened.'
Shares of Jersey City, New Jersey-based Knight/Trimark fell 3 39/64 to 26 3/8, their biggest one-day loss since
Aug. 9. They were the seventh-most-active U.S. issue, with 13.9 million shares traded, more than double the
three-month average.
First Miss
The missed earnings estimate is a first for Knight/Trimark, which began operations just 4 1/2 years ago and now
executes almost one in five Nasdaq Stock Market trades. It's surpassed more established firms like Herzog
Heine Geduld Inc. that have been in business since the 1920s.
Knight first sold stock to the public in July 1998 at a price, adjusted for a 2-for-1 stock split in May, of $7.25 a
share. It peaked at 81 5/8 the day before the split on May 11.
``The bump in the road was the bubble of the last few quarters that created unreasonable expectations' that
revenues would double every year, Pasternak said. ``We're confident that we can continue to grow at 30 to 50
percent a year.'
The company expects revenue for the third quarter to increase 49 percent from a year earlier to about $138
million. From the second quarter, however, that would be down 38 percent from $224 million.
Trades executed in the third quarter rose 95 percent from a year ago to 20.4 million, Knight said. That's down
from second- quarter trades of 21.5 million, however.
Trading in the past three weeks is closer to the second- quarter figure than the third-quarter figure, said
Pasternak. ``We're gaining some ground back,' he said.
Previous Cuts
Analysts at BancBoston Robertson Stephens and Jefferies & Co. had already cut their estimates for
Knight/Trimark twice in three weeks. Knight/Trimark expects to release results Wednesday morning.
The dip in volume by itself doesn't explain the revenue and profit shortfall. Knight/Trimark in the quarter handled
fewer of the kinds of trades that bring the most business.
That's as investors shunned the less-traded OTC Bulletin Board stocks in which Knight/Trimark has a
competitive advantage. Such stock trading accounts for as much as 25 to 50 percent of customer share volume.
OTC Bulletin Board stocks are typically smaller-company issues in which an average of seven trading firms make
a market, compared with 45 for the largest Nasdaq stocks.
``As you go lower in market cap, that's where Knight tends to do well,' said Sean Chin, an analyst at Merrill
Lynch & Co. The firm's revenue per trade likely fell to $6.60 in the third quarter from an average of $9.84 in the
first half of 1999 and $8.52 in 1998, Chin said. Pasternak said the company's long-run average should be
around $8.
Chin today cut his rating on Knight/Trimark to ``neutral' from ``accumulate,' saying the company's revenue
estimate was 27 percent below Merrill's expected figure of $190 million.
Underestimation
``I underestimated the power of the OTC Bulletin Board and the Internet-related stocks they took advantage of
in the first and second quarters,' Chin said.
A less volatile market, with smaller intraday price swings and lower activity in Internet stocks, also undercut
Knight/Trimark's advantage as the biggest market maker able to quickly execute trades in fast-moving markets,
said CIBC World Markets analyst Amar Mehta.
``There was less volatility and volume, especially in August, when there were fears of interest rate hikes,' he said.
``People went to more liquid stocks like IBM, not XYZ.com.'
Knight's revenues were reduced by about $10 million in the third quarter because it introduced a new method of
executing opening trades in Nasdaq stocks at the midpoint of prevailing bid and ask prices, Pasternak said.
Knight's warning is the latest in a series in the stock- trading industry.
Other Reductions
Last month, analysts who cover Reuters Plc cut estimates for the London-based company on concern about
slowing volume at its Instinet trading network. Also last month, National Discount Brokers Group Inc., the
10th-largest Internet broker, which also owns a market maker, warned first-quarter revenue and operating
profit would miss analysts' targets on slowing customer activity.
Shares of the five biggest publicly traded Internet brokers and Knight/Trimark fell between 24 and 30 percent
during the third quarter. That continued declines begun in mid-April, after the companies reported earnings. The
Bloomberg U.S. Internet Financial Services Index fell 25 percent in the quarter.
Earnings reports from Charles Schwab Corp. and E*Trade, the two biggest Internet brokerages, are expected
later this week.
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