Investment Technology's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 1.13 | About: Investment Technology (ITG)

Investment Technology Group Inc. (NYSE:ITG)

Q2 2013 Results Earnings Call

August 1, 2013 11:00 AM ET

Executives

J.T. Farley - Investor Relations

Bob Gasser - Chief Executive Officer

Steven Vigliotti - Chief Financial Officer

Analysts

Niamh Alexander - KBW

Ken Worthington - JP Morgan

Rich Repetto - Sandler O’Neill

Chris Allen - Evercore

Michael Wong - Morningstar

Operator

Good morning. And thank you for joining us to discuss ITG’s Second Quarter Results for 2013. My name is Andrew, and I will facilitate the call today. After the speakers’ remarks, there will be a question-and-answer period. I will provide further instructions before we take questions. As a reminder, this session is being recorded. (Operator Instructions)

I would now like to turn the conference over to J.T. Farley of ITG.

J.T. Farley

Thank you, Andrew, and good morning. In accordance with the Safe Harbor regulations, I would like to advise you that the forward-looking statements we will be making this morning are subject to a series of risks and uncertainties that may cause actual results to differ materially from those statements. These forward-looking statements speak as of today, and you should not rely upon them as representing our views in the future.

While we may elect to update these forward-looking statements in the future, we undertake no obligation to do so. I advise you to read about the risk factors that may affect forward-looking statements in this morning’s press release, as well as in our SEC filings.

I would also like to point out that we will be referring to non-GAAP financial measures in today’s presentation. Reconciliations of these non-GAAP measures to the comparable GAAP measures can be found in this morning’s press release, as well as the press releases covering prior earnings periods.

Press releases and the PowerPoint slides, which accompany this presentation are available for download in the Investor Relations section of itg.com.

Speaking this morning are ITG’s CEO, Bob Gasser; and our CFO, Steven Vigliotti.

To start, I would like to turn it over to Bob.

Bob Gasser

Thanks, J.T. And thank you all for joining us to discuss ITG's second quarter 2013 results. This morning, I’d like to give a brief overview of our quarterly performance, as well as general business conditions. Then I will discuss our cost savings efforts and look at some new developments in our products and platform before handing off to Steve.

Overall, we had a very good quarter, with our highest adjusted earnings per share in almost four years. While the much anticipated Great Rotation into equities has certainly not come to pass, business conditions have improved or at least stabilized, in all of our operating regions.

Our profitability increased across all our geographies as our total revenues grew nearly 10% versus the second quarter of 2012, while our adjusted expenses net of one-time items were just about flat.

In the U.S., bond funds saw $36 billion in outflows during the quarter, the first net drawdown since the fourth quarter of 2008. While international equity funds posted inflows of $18 billion, domestic equity mutual funds actually saw outflows of $12 billion in the second quarter. Although, the domestic net flows remain positive year-to-date.

We saw positive flows in July, but it is too early to call that a sustainable trend. The trend over the past several years is clear. Investors have favored international over domestic equity investment and ITG has worked hard over the past several years to capitalize on this trend and so far this year approximately half of the adjusted earnings we have reported were from our international business.

Our average daily volume in the second quarter was 179 million shares, a drop of 2% versus the second quarter of 2012, while total New York Stock Exchange and NASDAQ average daily volume declined 6% during the same period.

Sell-side volume comprised 49% of our U.S. volume, down from 50% in the second quarter of 2012 and unchanged from the first quarter of 2013. Our average U.S. revenue per share improved for a second straight quarter, from 46 mils per share up to 48, the highest level since the second quarter of 2011.

And while we do not breakout our average buyside rate for competitive reasons, we are pleased to report that it stands at the highest level since the fourth quarter of 2008. Thanks to increased use of high-value services such as POSIT Alert block crossing and clients paying for research in a bundled manner through trading.

And POSIT Alert is certainly seeing increased use, as we continue to gain market share in the buyside block crossing arena. Alert’s average daily U.S. volume was up 41% over the second quarter of 2012 and average trade size ticked up to 33,000 shares.

ITG also performed well outside the U.S. during the second quarter. In Europe, revenue rose more than 40% compared to the second quarter of 2012, well ahead of 8% increase in value traded across Europe during the same period.

Volumes in POSIT Alert more than tripled in Europe and we saw increased activity from both institutional and sell-side clients across all of our electronic brokerage product offerings.

The investments we’ve made in our low latency infrastructure to attract liquidity, together with reductions in costs from an increased crossing rate, are resulting in a virtuous cycle that is benefiting our bottom line.

In Asia-Pacific we posted record revenues of $12.8 million, while our loss narrowed sharply to less than $400,000. Our total value traded in the region rose 54% versus the second quarter of 2012, driven by higher trading activity across most markets, and fueled by growing demand for electronic trading and liquidity solutions. During the quarter we added Singapore to our POSIT coverage, marking the sixth regional market where we offer POSIT crossing.

In Latin America, this week we launched POSIT Alert for Mexico, the first fully electronic buyside block crossing system in that country. POSIT Alert for Mexico allows institutional investors to access block liquidity which is executed via a dark order type on the Mexican exchange, the BMV.

POSIT Alert complements our existing algorithmic trading tools for both Mexican and Brazilian equities and we intend to expand our capabilities in the region in the second half of this year to round out our emerging market coverage.

In Canada, we held our own in a flat environment, with total revenues down about 1% compared to Q2 2012. As you may have read, we are one of the founding shareholders in a proposed new Canadian exchange, Aequitas, which will focus on competing with the incumbent exchange and hopefully will create opportunities for innovation in the Canadian markets. Our involvement in Aequitas is not material in financial or resource terms, but it demonstrates our support for positive changes in Canadian market structure.

Looking at our overall cost structure, we continue our focus on expense discipline, in order to improve the firm’s profitability. Our second quarter results reflect the full $20 million annual run rate of cost savings from the restructuring we announced in December 2012, and as we have mentioned previously, we expect our ongoing business unit analysis to yield additional cost savings in late 2013 and beyond.

During the second quarter, we finalized plans to close our Israel development center at the end of 2013, resulting in a one-time restructuring charge of $1.6 million. We will transition all the development and support work currently done by the Israel office to a new consulting firm, which is being launched by key members of the Israeli team.

This will enable ITG to benefit from the experience and skill of the ITG Israel team, while improving our overall operational flexibility. We expect this move to save us approximately $2 million annually beginning in 2015 as transitional costs we will incur during 2014 will largely offset any savings next year.

Even as we work to improve our efficiency, we continue to develop innovative new offerings for our clients and to solidify our leadership position in electronic execution and research. Since the last call we have rolled out two new web-based tools for real-time trade performance tracking.

ITG Algorithms Prism, which displays the performance of all ITG algos and Smart Trading Monitor, a sophisticated TCA tool which monitors broker and trader performance. Smart Trading Monitor is powered by our global FIX network, ITG Net, and is fully integrated with our flagship execution management system, Triton, as well as ITG OMS.

We also launched ITG DIS 2.0, an update of our flagship dynamic implementation shortfall portfolio trading algorithm. In addition to rolling out new products, ITG has gained recognition for our existing platform and services. We were recently named Best Agency Broker in a survey of industry professionals conducted by Waters Magazine and FX Week magazine named us best Transaction Cost Analysis provider for Foreign Exchange.

On the research front, ITG recently launched coverage of the department store sector, using our proprietary database to offer monthly estimates, a particularly valuable tool in a sector where public companies have pulled back from providing comparable store sales data intra-quarter. We also made alpha-generating research calls on names such as Apple, Boyd Gaming, Jones Energy and Panera Bread.

Wrapping up, with today’s release I believe it is clear that ITG has turned a corner operationally. We have rationalized our cost structure and built our global execution capabilities so that we can withstand business downturns and maintain our profitability while at the same time pursue an increasing share of the global client wallet.

Barring any serious macroeconomic shocks, I’m optimistic that we are on a long-term path towards improving margins and even stronger client relationships. I would like to thank all of our employees for their hard and sometimes painful work in building a leaner, more resilient ITG.

With that, I’d like to turn it over to our Chief Financial Officer, Steve Vigliotti, to take you through the second quarter financial developments.

Steven Vigliotti

Thanks, Bob, and good morning, everyone. The improvement in our business that began in Q1 continued into the second quarter as our focus on margin improvement and global expansion drove earnings higher on both a sequential and a year-over-year basis.

As noted on slide seven, we generated consolidated revenues of $139.3 million during the second quarter, 5% higher than the first quarter of 2013 and 10% higher than the second quarter of 2012.

We posted GAAP net income of $0.13 per share in the second quarter of 2013, compared to GAAP net income of $0.22 per share in the first quarter of 2013 and a GAAP net loss of $6.40 per share in the second quarter of 2012.

On slide eight, we have detailed the non-operating items included in our GAAP results for the first and second quarters of 2013, and the second quarter of 2012. In the first and second quarters of 2013, we incurred duplicate rent charges stemming from the build-out of our new headquarters in lower Manhattan of $1.3 million and $1.2 million, respectively.

In the second quarter of 2013, we also incurred a charge upon the completion of the headquarters move of $3.9 million, which includes a reserve for the remaining lease obligation.

In addition, in the second quarter of 2013, we incurred a restructuring charge related to the closure of our Israel development facility of $1.6 million, offset by accrual reversals related to prior restructurings of $1.7 million. The closure of our Israel development facility also resulted in a one-time tax charge of $1.6 million associated with the anticipated withdrawal of capital from Israel.

In the second quarter of 2012, we incurred goodwill and impairment charges of $274.3 million. Excluding these items, we generated adjusted net income of $0.27 per share in the second quarter of 2013, $0.24 per share in the first quarter of 2013 and $0.05 per share in the second quarter of 2012. For the rest of this discussion, all references to results and costs will be on an adjusted basis, excluding these items.

Slide nine presents our consolidated results along with separate break downs of the results from our U.S. and International operations. On a year-over-year comparative basis, consolidated expenses were up only $300,000 even with a combined increase in transaction processing and compensation costs of $4.5 million associated with increased activity.

Our consolidated pretax margin was 11.4%, up from 9.3% in the first quarter of 2013 and 2.9% in the second quarter of 2012. Our revenue growth is giving a significant boost to our pre-tax income, demonstrating the improved leverage in our model. On a year-to-date basis, more than 50% of incremental revenues generated over the pro rata 2012 level were realized in the pre-tax line, even after adjusting for the $20 million annualized cost savings initiative enacted in the fourth quarter of 2012.

During the second quarter of 2013, we posted net income of $0.12 per share in the U.S. on revenues of $84.6 million. While that is down from $0.14 per share in the first quarter of 2013, please recall that our first quarter U.S. results included a tax credit of $1.2 million, or $0.03 per share which applied to the full year 2012, but was booked during the first quarter of 2013 due to retroactive changes in tax legislation.

Our second quarter pre-tax margin in the U.S. was 10.0%, higher than both the first quarter of 2013 and the second quarter of 2012. Please note that the U.S. segment bears nearly all of the firm’s corporate costs, which negatively impacts pre-tax margins reported for that segment. Our combined international businesses posted net income of $0.15 per share on revenues of $54.7 million. Our international pre-tax margin rate was also higher at 13.5%.

On slide 10, you can see that our U.S. expenses declined $4.5 million compared to $80.7 million in the second quarter of 2012, due to lower compensation costs reflecting our cost reduction measures, lower general and administrative costs due to continuing efforts to reduce those costs and lower market data and client connectivity costs.

Our U.S. compensation expense ratio was 37.8%, unchanged versus the first quarter of 2013 and lower than the 40.5% in the second quarter of 2012. Transaction processing costs as a percentage of revenue were 13.5% versus 14.1% in the first quarter of 2013 and 13.2% in the second quarter of 2012.

On slide 11, we have provided a summary of our international results. Revenues were up $3.8 million over the first quarter of 2013 and up $9.7 million over the second quarter of 2012 due to a strong performance in Europe as well as record revenues in Asia Pacific.

Expenses were higher due largely to higher transaction processing and variable compensation costs. The compensation ratio for our combined international operations was 35.2%, lower than both the first quarter of 2013 and the second quarter of 2012. Combined international transaction processing costs during the quarter as a percentage of revenue were 20.3% compared to 19.9% in the first quarter of 2013 and 19.6% in the second quarter of 2012.

On the next slide, we tracked the performance of our foreign segments over the past five quarters. All regions posted higher revenues and improved pretax results in the second quarter of 2013 as compared to the first quarter of 2013, with our losses in Asia Pacific being reduced by more than half.

On slide 13, we offer supplementary information on revenues broken out by our four global product groups over the past five quarters. The table also includes a corporate group, which primarily reflects investment income that is not directly attributable to any of the global product groups.

As you can see from this table, the Electronic Brokerage group saw a sharp jump in revenues, thanks in part to strong European volumes as well as market share gains in POSIT Alert. Revenues for Research Sales & Trading rose in the second quarter due in part to a number of accounts that caught up on expected revenue levels and an increase in project-based revenue.

And we continued to generate steady levels of revenue from our Platforms and Analytics product groups due in large part to their higher mix of recurring revenues. As a reminder, we intend to provide this global product revenue breakout in our quarterly results going forward and expect to offer profitability information by product group towards the end of 2013, likely sometime in the fourth quarter.

On slide 14, we have presented our U.S. volume and rate capture statistics. Our average daily executed volume was down 2% versus the second quarter of 2012 while NYSE and NASDAQ combined average volume decreased 6%. Our average overall rate capture rate per share rose from 46 mils in the first quarter of 2013 to 48 millions mils, even as the percentage of buy-side volume held steady, due in part to increased activity in POSIT Alert and hedge fund clients paying for research through bundled trading arrangements.

We entered the quarter with $259 million of cash and cash equivalents on our balance sheet, up from $233.9 million at the end of the first quarter. Much of this increase can be attributed to higher levels of client funds held in commission sharing arrangement accounts.

Our excess cash at June 30th over and above what we need for regulatory capital, debt payments and compensation liabilities was consistent with the first quarter at approximately $50 million. During the second quarter, we repurchased 675,000 shares for $9 million or $13.31 per share. This amounted to 87% of our adjusted earnings and 177% of our GAAP earnings during the quarter. As a reminder, our buyback program has reduced shares outstanding, net of issuances, by 16% over the past three years.

Looking forward, I would like to offer the following observations. Regarding our balance sheet, we expect to continue to repurchase shares on a regular basis in order to return capital to shareholders. However, we will now take a more opportunistic approach depending on market conditions and the prevailing price of our stock and our repurchases may have less of a direct link to our level of adjusted earnings each quarter.

As of June 30, we had 4 million shares available for repurchase under our current buyback authorization. Regarding current business conditions, we saw a seasonal slowdown in our trading activity in July.

Our U.S. average daily volume for July was approximately 155 million shares at an average rate that was in line with our second quarter 2013 average. In our combined international businesses, our average daily commission levels in July were more than 10% lower than the level seen in the first half of 2013.

And with that, I would like to open the call to Q&A. Operator, please open up the lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions) First question comes from Niamh Alexander with KBW. Please go ahead.

Niamh Alexander - KBW

Hi. Thanks for taking my question and congrats on a strong -- very strong quarter.

Bob Gasser

Thanks, Niamh.

Steven Vigliotti

Thanks, Niamh.

Niamh Alexander – KBW

I’m getting some feedback on call also -- brief and the -- the POSIT Alert, it seems to be the primary driver of the recapturing improvement. And thanks Steve for the updated, it sounds like you are saying rate cards, kind of, holding steady so far versus what it was. What’s going on there with POSIT Alert, why the market share gains, could we see more of this, have you made some changes to the platform, has there been some competitive disruptions, what’s happening?

Bob Gasser

That’s a good question, Niamh. We have been rolling out a global platform so this is a unified point of entry to all of our positive platforms across the globe, all of our alert capabilities there. This used to be a regional of business, in other words, if you were a U.S. based investor, executing into foreign markets, you would have to have separate instances of those alert capabilities.

Today, we’ve unified that into one and we’re now rolling that out very aggressively. And I think the response from clients has been very, very positive. So behind the scenes, we’ve been working on this for the past, I’d say 18 to 24 months, and it’s now coming into production and we’re seeing good market share gains, means tripling that number in Europe is a big, big deal.

And so we are talking about, I think a very meaningful trajectory there for positive alert on a global basis and really there is only one other incumbent. So it really is a market share gain. For now, although, if obviously block volumes pick up, we’d expect to participate there as well.

But secondarily, I don’t want to dismiss the contribution of research. The bundle rate cards certainly benefited greatly from the increased penetration of the research product. And as Steve alluded, we did quite a bit of project work and some spoke things during the quarter that were very helpful to clients.

We’re seeing good trajectory in terms of our momentum, our client, on institutional voting list. We’re obviously getting a lot of those, as you guys are. We are getting a lot of those back now and meaningful first half improvements there. So, that's -- those have been two very, very positive things for the U.S. rate card and I feel confident we are tantalizingly close to 50. But I feel confident that we will continue to move northwards.

Niamh Alexander - KBW

Okay. So, but right now like so far July is kind of stable, is that it?

Bob Gasser

Stable in July.

Steven Vigliotti

Yeah.

Niamh Alexander - KBW

Okay. And can you expand a little bit on that, Bob, how far -- you talked about the role, this we have to understand better, maybe better traction but are you 70% of the way out in terms of rolling it out to clients or is it (inaudible) users?

Bob Gasser

I think we’re approximately in the U.S. For instance, we are approximately 25% in a way there, if I would have kind of round the number.

Niamh Alexander - KBW

Okay. That's helpful. Thanks. And then if I could on -- and your passive -- the passive money were clearly more fundamental trading volume, if you dig into the volume declines, it seems like fundamental is actually kind of quietly recovering. Within that, your customer, like the passive money managers and I think some equity flows as well as the active, are you seeing still change in behavior there like they are kind of starting to use maybe in addition to made POSIT Alert but using more of your higher fee products. Is that something that you are kind of seeing more consistently now as you progress through the year?

Steven Vigliotti

Yeah. I think you guys have seen, in probably sequence of press releases. We have been building out the high-touch offering in the U.S. We’ve made, I think some very selective investments in personnel. We have the team now. I believe on the field that can continue to grow that high-touch business as a percentage of the total. And I think from an alert perspective as we have been discussing, I think it’s about continuing just to roll out that platform, just execute between now and year end and add more geographies.

And so we still think of Asia Pacific, for instance, as very green fields for us. The Mexican alert introduction in to Latin America, we think Brazil could be a massive opportunity relative. But I think it’s just about, the stake in potatoes at this stage of the game, just absolutely executing on all these initiatives one by one and sticking to our -- and sticking to our need.

Niamh Alexander - KBW

Okay. I appreciate it. Thank you. And then if I could just real quick, Steve, on the capital, you are signaling to us here that we may not be buying back stock that equates pretty much to what we are earning of the quarter going forward. Why so, do you have other uses for the capital or is it more kind of stock valuation or help me think about the rationale for the change?

Steven Vigliotti

Yeah, sure Niamh. I think the guidance we are giving here is not that we are not going to buy back shares is that we’re just -- rather than be stuck to a fixed amount of our operating earnings each quarter, that will going to be a little more opportunistic. I mean, just if you look back a year ago, we purchased three times our operating earnings that we generated in 2012.

So I think we just wanted to be clear on our guidance going forward that while we tend to be active, it’s not necessarily going to be tied quarter to quarter to each adjusted earnings level. And we’re going to look at factor market conditions and the price of stock and be opportunistic as we execute the program.

Niamh Alexander - KBW

And do you have other uses for the -- you started, kind of, maybe look at acquisitions or new hires or …

Bob Gasser

Nothing specific to mention at this point.

Niamh Alexander - KBW

Okay. All right. Thanks. I’ll get back in line.

Bob Gasser

Thanks Niamh.

Operator

The next question comes from Ken Worthington of JP Morgan. Please go ahead.

Ken Worthington - JP Morgan

Hi. Good morning. Maybe a follow-up on Niamh’s question on the mix, maybe how much -- I'm sorry, mix in the rate card. How much higher are the higher fee product in terms of the rate card then the average rate. So as these continue to, if and as this continue to grow like -- how much does that alone kind of drive the rate card higher?

Bob Gasser

Yeah. I think as we alluded to Ken in the prepared remarks, I think it’s a competitive issue for us to talk about in that granular level of detail. I’d love to give you a plug for your model but I think it’s a very slippery slope from that perspective.

Ken Worthington - JP Morgan

Could it be more fuzzy, could it be like, is it substantial, is it somewhat or as you know not too granular?

Bob Gasser

I think, you guys probably have a pretty good understanding of what I fully bundled research rate looks like. And I will -- I can direct you to [garniture], a tab of just about any one else and what a fully bundled research rate looks like versus an execution -- an electronic agency execution only rate. And they are magnitudes, right?

Ken Worthington - JP Morgan

Yeah.

Bob Gasser

So -- and then within that spectrum or within that continuum, there is -- Alert is a very, very viable electronic agency probably the top of the food chain in terms of electronic agency product. And it’s obvious why it is because it’s a -- these are blocks of 33,000 shares as opposed to your average 200 share execution in a lit venue for instance. So but that’s about it as close as I can get I think.

Ken Worthington - JP Morgan

Okay. And then I assume a big part of the rate card is really about the mix, the sell side versus the buy side. So how does that evolve. At what point do you think about capacity is being dear and do you start to change the pricing on the sell side, as the buy side business hopefully continues to recover or is capacity so cheap, that makes it 50-50 probably just kind of stays there indefinitely?

Steven Vigliotti

Yeah. I mean in terms of -- Ken, this is Steven. In terms of the improvement, quarter-over-quarter the mix was identical. So we did see a $2 million increase in the rate even as the buy side rate was consistent from quarter-to-quarter. And as you mentioned, even year ago to now, we’re hovering above or below 50% buy side to sell side mix. So how do we change all that dramatically from period to period, in terms of the overall mix of our business over the last year.

Ken Worthington - JP Morgan

Yeah. And I guess, is the thought that, if probably there is no reason for it to change or is there a reason for it, for you to make changes behind the scenes to adjust pricing that maybe drives the sell side business down as the buy side improves?

Bob Gasser

Yeah. I feel much more confident in our ability to continue to drive the rate card as opposed to the mix.

Ken Worthington - JP Morgan

Okay.

Steven Vigliotti

And Ken, they sell -- even though at a lower rate card and the sell side business is profitable for us.

Ken Worthington - JP Morgan

Yeah.

Steven Vigliotti

One that, it’s a good client base for us, one that we’re happy to serve. So there is no reason for us to manage that down. And I think we’d like to manage it up because it is profitable.

Ken Worthington - JP Morgan

Okay. And then maybe lastly on the kind of, you spoke about the launching of new products and new services in different regions there seems to be a lot going on. How does this kind of flow through the expense outlook? And what are the margins kind of -- how do you think about the margins as these initiatives are invested in and as they kind of ramp in and get traction?

Bob Gasser

I think one of things we’re really gratified by, Ken, is the speed with which the firm inhibited around this business unit focus. And the way it translated into the bottom-line. And what I think, it just meet all of us, that much more discipline in terms of resource and how we project that resource into initiatives, making sure that when we commit to something like, for instance, DIS 2.0 that we have a strong conviction in execution in terms of the commercial value for the firm.

And I think now that the business units have those decision rights, they have control over their resources. There is much more local accountability for all of that. And it just has been seismic in terms of the way we are operating this business.

And so what’s really very gratifying the need is that we can continue this momentum with less resource and continue to put out very competitive offerings. At a time, when I think it’s becoming increasingly difficult for firms in lower volume environment to do that. And let’s face it, we’ve got -- we had a tailwind in Europe, we had a tailwind in Asia Pac but the U.S. and Canada have been -- they have been -- from a macro perspective, not terribly helpful.

Ken Worthington - JP Morgan

Great. Thank you very much.

Bob Gasser

Thanks Ken.

Steven Vigliotti

Thanks Ken.

Operator

The next question comes from Rich Repetto of Sandler O’Neill. Please go ahead.

Rich Repetto - Sandler O’Neill

Yeah, hi good morning guys.

Bob Gasser

Hey Rich, good morning.

Steven Vigliotti

Hey Rich.

Rich Repetto - Sandler O’Neill

So I guess the first question, this is kind of just sort of learning from the segment and reporting. But your Research Sales and Trading took a nice jump quarter-over-quarter, by almost 3 million on the revenue side quarter-over-quarter. So I guess the question is that the rate card improvement, does that reflect improvements or can reflect improvement both in the Electronic Brokerage and Research Sales and Trade, is it capturing commissions in both segments?

Steven Vigliotti

Yeah. If clients are satisfying research obligations to electronic trading, there will be sharing that goes on, revenue growth that goes in both segments, yeah, Rich.

Rich Repetto - Sandler O’Neill

Okay. So the rate capture, an improved rate capture might also capture improvements in the individual segment as well?

Bob Gasser

Yeah. I mean we don’t keep a specific rate card for each segment because clients will use the product at different services to compensate with different products we offer. But the overall revenue, the improvement in revenue from an improved rate card will be realized from multiple groups.

Rich Repetto - Sandler O’Neill

Okay. Got it. Okay. That’s helpful. And then Bob, lots going on in Asia, excuse me -- while Asia is one where you’re coming close to breakeven here. And I guess the question is when you look at -- what’s going over there, it seems like you continue to build momentum. Is it just continued penetration of products there and then you did touch on Canada -- and U.S. or Canada be in a little bit flat. And then the overall international picture and could you just -- could you touch on Europe with liquid net and this thing with -- agreement with the Deutsche Börse, et cetera?

Bob Gasser

Yeah. I mean, we’re always obviously monitoring competitive developments very closely. We’ll see how it plays out. I feel good about our liquidity management capability in Europe, it obvious, I mean you guys see in the numbers it’s, it is what it is, a XXX Alert number is, I think pretty stunting.

So I’ll let the numbers speak for themselves, right. As I’ve been saying, I think throughout the course of this year, this is the year of Europe. We made significant investments. They’re fully deployed and they’re doing exactly as we intended them to do.

In Asia-Pac, I think, it’s just more adoption of electronic trading, obviously the, we also had a good environment there in terms of volumes. But the big volume jumps happened in Japan and we don’t really have as much exposure to Japan, other markets did well, but not nearly as well as Japan.

But I think overall thematically it’s really about much more electronic adoption. As I said earlier, I think we’re really just scratching the surface with Alert. We’re a relatively small percentage of liquid net volume there, but I’m confident that we’ll continue to grow that particularly with the deployment of the global platform.

And in Canada, I think, Canada is just a challenging market. We’ve seen in other places, we’ll manage our way through it. The Canadian team is extraordinarily good at what they do. They are very entrepreneurial. They are very client centric. Their reputation in terms of the surveys is remains very, very strong. They are number one electronic provider in that marketplace. And so we know that Canada will recover and rebound, and but we’re managing, I think with a lot of sobriety during this particular period.

Rich Repetto - Sandler O’Neill

Okay. Thanks Bob. It’s helpful. And very last thing for me, Bob, you communicated, you could, here it come through so the excitement, I guess what you sort of talked about or trying to describe was the segment, not just reporting but organization as well.

So, I guess, my question is, now that people are looking at cost, maybe a little bit more focused and there is more ownership, et cetera, could we possibly see another program before year end? And then I know you try to make steps to profitability, include profitability in the reporting by year end, is that or is it -- could it come in year earlier? And then the flipside of the question is, can you ever get to the point where some of these groups become siloed or we know we’re near that, yeah?

Bob Gasser

No. I think that the silo, I’ll start with the last question. I think the silo factor is about management, right. It’s about partnership. It’s about making sure that we’re working together as a team. I think we’ve got first-class leaders in the regions, in the business units to help us to do that. Obviously, Steve and I spend a lot of time on that topic.

But I think that the steps we took in December just continue on. It’s just the new way of operating. I wouldn’t and I think what you’ll see is just continual improvement as opposed to that big number that we announced in December, right.

So, I’m certainly very focused now on ’14. Clearly the mercury, the announcement on Israel is ’15. So that gives you I think some perspective that we’re not thinking about this in one year or six months perspectives. We’re thinking about it in ’14, ’15 and ’16, and so I think we’re in a much better place for constant -- for continual improvement as opposed to one big number.

Rich Repetto - Sandler O’Neill

And the profitability, what do you call it, progressing as you’d expected to meet the year-end targets?

Bog Gasser

Yeah.

Steven Vigliotti

Yeah. We’re still targeting, Rich, sometime in Q4 to make those profitability metrics publicly available.

Rich Repetto - Sandler O’Neill

Great. We’ll be waiting for them.

Bob Gasser

Thanks.

Rich Repetto - Sandler O’Neill

Thanks.

Steven Vigliotti

Thank you.

Operator

The next question comes from Chris Allen of Evercore. Please go ahead.

Chris Allen - Evercore

Good morning, guys. Nice quarter.

Bob Gasser

Thanks Chris.

Steven Vigliotti

Thanks Chris.

Chris Allen - Evercore

Just, I guess, just following on the closing of the Israel development center and again guessing that tied into your comments of doing more with less resources, is the resources provided there, they just going to be handle the business unit level internally there. I mean, just help us think about that moving forward?

Steven Vigliotti

So, I think, as Bob mentioned, the work that’s being performed there today will be transferred to a new consulting firm beginning of next year. So that will continue to be operated out of Israel by a separate third-party company, that we will outsource to and that third-party unit interacts today, like as a part of ITG but going forward we’ll still interact with our business unit heads, not much different than it is now.

Chris Allen - Evercore

Got if. And then we’ve obviously seen some very nice improvement in pre-tax operating margins over the last two quarters? Obviously third quarter is usually typically seasonally slower in the volumes you guys have pointed to on the international side kind of tie into that. Is there a minimum level of pre-tax margins do you guys think you could maintain even in a slightly slower volume environment that we are likely to see here?

Steven Vigliotti

Yeah. Well, I mean in terms of, one of the things as I think I mentioned, Chris, on the call in terms of incremental revenue, we’re generating more than 50% of that is drive into the pre-tax volume. So you can kind of use that if you want as your modeling kind of guidance.

Chris Allen - Evercore

Got it. Okay. Thanks guys. I appreciate.

Steven Vigliotti

Okay.

Bob Gasser

Thank you.

Operator

The next question comes from Michael Wong of Morningstar. Please go ahead.

Michael Wong - Morningstar

Good morning.

Bob Gasser

Good morning.

Steven Vigliotti

Hi Michael.

Michael Wong - Morningstar

So I love your geographic segments have been trended out nicely over the last couple quarters, in general are you more excited about the revenue growth and operating margin expansion potential in your U.S. segment or your international segment?

Bob Gasser

As I said earlier, I think for now I think that the business unit story in the U.S. and I think in terms of a regional story, it’s really Europe. I mean Europe has been on, I think a very, very good trajectory and I think it’s going to -- my feeling is that you’ll see very consistent performance throughout the course of the year there. So that’s the way I would characterize it.

Steven Vigliotti

I think we are excited about both.

Bob Gasser

Excited about both.

Steven Vigliotti

Yeah. The improved margin in the U.S. and the -- from efficiencies and the improved margin internationally from revenue growth, we are excited about both of those.

Michael Wong - Morningstar

Okay. And do you have a general view on your, I guess your transaction cost in Europe and Asia, they can trend lower such as maybe the degree of competition among the exchanges or usage of alternative trading volumes or ability to internalize order flow?

Bob Gasser

Yeah. I think we feel good about our ability to continue to focus on that, to extract as much value as we can from everyone we deal with, right? So and that doesn’t just apply with exchanges and liquidity pools, and it really applies to everything we do, right, and making sure that that there is a critical focus on that, critical self-assessment on that front. So it’s part of, I think, this new way of operating.

Michael Wong - Morningstar

Okay. Thank you.

Bob Gasser

Thank you.

Steven Vigliotti

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Bob Gasser for any closing remarks.

Bob Gasser

Well, thank you for joining us today, and we look forward to speaking with you all in November.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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