Investment Technology Group's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Jan.30.14 | About: Investment Technology (ITG)

Investment Technology Group Inc. (NYSE:ITG)

Q4 2013 Earnings Call

January 30, 2014, 11:00 AM ET

Executives

J.T. Farley - Investor Relations

Robert Gasser - Chief Executive Officer and President

Steven Vigliotti - Managing Director and Chief Financial Officer

Analysts

Rich Repetto - Sandler O'Neill

Ken Worthington - JPMorgan

Patrick O'Shaughnessy - Raymond James

Niamh Alexander - KBW

Chris Allen - Evercore

Michael Wong - Morningstar

Operator

Good morning, and thank you for joining us to discuss ITG's fourth quarter 2013 results. My name is Chad and I will help facilitate the call today. (Operator Instructions) I would now like to turn the call over to J.T. Farley of ITG. Please go ahead, sir.

J.T. Farley

Thank you, Chad, and good morning. In accordance with 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 CFO, Steve Vigliotti.

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

Robert Gasser

Thanks, J. T., and thank you all for joining us to discuss ITG's fourth quarter 2013 results. We believe this quarter's financial performance continued to reflect our strategy of establishing a truly global set of product capabilities, while still managing costs.

Revenue grew 9% over last year, driven by higher results in our international segment, including a record quarter for Europe. European revenue grew almost 57%, while the profit contribution from the region more than tripled.

This provided an important offset to the tough U.S. environment. The average daily volume of combined New York Stock Exchange and NASDAQ listed volumes declined 1% compared to the already low levels in the fourth quarter of 2012.

Domestic equity mutual funds posted approximately $11 billion in inflows during the quarter, reflecting in part a rotation from bond funds, which saw outflows of $58 billion. While the inflows are a good sign, we haven't seen that translate into trading volumes.

Competitively, we believe the strong IPO calendar may have negatively impacted us during the quarter, as some trading volume may have shifted to investment banking firms, which were bookrunners on these offerings. International equity funds continued to benefit from the rotation out of bonds, posting inflows of approximately $42 billion during the quarter.

Taking a closer look at our U.S. results, our average U.S. revenue per share rose year-over-year from $0.0043 to $0.0047, but it was down sequentially due to a higher mix of sell-side volume as well as a slight decrease in average buy-side revenue per share. As a reminder, our average rate card is heavily dependent on our product mix and will fluctuate from quarter-to-quarter based on this mix.

Despite the lower overall volumes, we continued to gain traction with our POSIT Alert buy-side block crossing network, with U.S. volume up 3% over the fourth quarter of 2012, and average trade size of more than 31,000 shares. Overall, it was a tough quarter in the U.S., but we were able to maintain profitability, due in part to our product group focus, which led to dramatic improvements in our operating efficiency.

As I mentioned, our international results improved significantly during the fourth quarter, led by Europe. While market conditions were more favorable to our business than a year ago, due mainly to institutional inflows into European equities and a growing demand for dark liquidity, our outperformance reflected the impact of the targeted investments we have made in our infrastructure and products, to expand our client base and grow POSIT's liquidity.

Average daily value traded in POSIT doubled in Europe, while POSIT Alert volume more than tripled during the fourth quarter as compared to the fourth quarter of 2012. ITG now represents more than 12% of total European dark trading, up from less than 5% in the first quarter of 2011.

You may have seen European legislators recently agreed to the MiFID II directives, among them caps on dark pool trading and increased regulatory oversight of algorithms. Our predominant use of midpoint pricing will lessen the impact on POSIT. However, further clarity is needed on how the dark pool caps will be imposed, given the lack of a consolidated tape. Based on our preliminary review, POSIT's market share in any single name in the current FTSE 100 stock universe is under 2%, below the planned 4% cap.

We understand that MiFID II caps on dark trading will exclude block trades executed under the large-in-scale waiver, and if so, this mechanism offers POSIT Alert trades the potential to avoid the caps. Additionally, POSIT is structured as a Multilateral Trading Facility or MTS, as opposed to a broker internalization pool, which gives us an advantage over many other European dark pools under the new regulations.

It's too early to try to quantify any impact from these regulations, but overall we are cautiously optimistic that they will not pose serious difficulties for the trajectory of our European business. We believe the breadth of our dark liquidity capabilities developed over 27 years gives us maximum flexibility relative to our competitors.

With these regulatory changes, barriers to entering the European equity space will likely be raised to new heights. While we are watching all of these developments closely, we do not expect implementation of MiFID II before 2017.

Turning to our Asia-Pacific operations, we posted revenues of $11.4 million, an increase of 19%, while our quarterly loss fell by more than 80% over the prior year period. Our average value traded in the region rose 28% versus the fourth quarter of 2012, outpacing the 20% increase in pan-Asian market volumes over the same period.

We see a big opportunity for POSIT Alert in 2014. It is now live in 30 countries globally, and we expect to add at least two more this year. We are just scratching the surface of the Asia-Pacific dark block opportunity, but anticipate this will be a driver of growth for ITG's AP business in 2014.

In Canada, market volumes were flat, capping a challenging year, which saw some broker dealers exiting the market altogether. Despite this, our revenues grew 4% compared to the fourth quarter of 2012. Even with this outperformance our profitability dipped, due to an accounting charge for employee stock award valuations.

Turning to ITG Investment Research. We recently launched coverage of ADT, Harley-Davidson and Aereo; made alpha-generating research calls on names such as Starbucks, T-Mobile, Groupon and PetSmart; and launched pre-IPO reports on Rice Energy, RSP and EP Energy.

We also hosted two energy conferences in November, which featured only presentations from ITG IR analysts, with no corporate access. These events drew more than 250 clients from institutional investors and private equity firms.

Looking at our overall cost structure, we will continue to focus on product group profitability to improve performance, particularly in U.S. We expect this focus to yield some incremental cost savings both in 2014 and over the longer term. I would like to point out that while we expect our core cost base to decrease with these efforts, we are also evaluating some investments for growth in new business areas, which could offset these savings in 2014.

Wrapping up, I believe our results this quarter and for the full year 2013 demonstrate our ability to improve our performance, even when business conditions are less than optimal, but we are not standing still. We are working to develop innovative new offerings for our clients to solidify our leadership position in electronic execution and research.

2013 clearly raised the bar for ITG, but I remain confident in our teams' ability to raise it once again in 2014. We will continue to be relentless in our pursuit of operating improvement and business opportunities that fit well with our powerful global capabilities.

With that, I'd like to turn it over to our Chief Financial Officer, Steve Vigliotti, to review the fourth quarter and full year financial results.

Steven Vigliotti

Thanks, Bob, and good morning, everyone. A record quarter for our European operations drove a sharp jump in net income during the fourth quarter, capping a full year in which we saw a strong rebound in profitability.

As noted on Slide 8, we generated consolidated revenues of $131.9 million during the fourth quarter, 3% higher than the third quarter of 2013 and 9% higher than the fourth quarter of 2012. We posted GAAP net income of $0.26 per share in the fourth quarter of 2013 compared to GAAP net income of $0.20 per share in the third quarter of 2013, and a GAAP net loss of $0.17 per share in the fourth quarter of 2012.

On Slide 9, we have detailed the non-operating items included in our GAAP results for the fourth quarter of 2012. There were no non-operating items in either the fourth quarter or the third quarter of 2013. In the fourth quarter of 2012, we incurred a restructuring charge related to a cost reduction plan and we incurred duplicate rent charges, while we built out our new headquarters in lower Manhattan.

For the rest of this discussion, all references to results and costs for the fourth quarter of 2012 will be on an adjusted basis, excluding these items.

Slide 10 presents our consolidated results along with separate breakdowns of the results from our U.S. and international operations. On a year-over-year comparative basis, consolidated expenses were up $2.1 million, including the variable costs associated with a $10.4 million increase in revenues.

Our consolidated pre-tax margin was 8.1%, down slightly from 8.4% in the third quarter of 2013, but up sharply from 1.9% in the fourth quarter of 2012. Our consolidated effective tax rate was 9.2% for the quarter, reflecting the high mix of earnings from our international operations and a $900,000 benefit from resolving a tax contingency in the U.K.

During the fourth quarter of 2013, we posted net income of $0.01 per share in the U.S. on revenues of $75.3 million, down from $0.07 per share in the third quarter of 2013, due to lower volume levels and a dip in our average rate per share, but up from a loss of $0.03 per share in the fourth quarter of 2012.

Our fourth quarter 2013 U.S. results included a gain in our stock loan business that added $2.5 million to other revenue and approximately $1.1 million in after-tax earnings after related cost and taxes. Our fourth quarter pre-tax margin in the U.S. was 1.2%, down from the third quarter of 2013 and up from the fourth quarter of 2012.

As a reminder, the U.S. segment bears nearly all of the firm's corporate costs, which negatively impacts pre-tax margins reported for that segment. These costs, which total approximately $5 million per quarter include among others, the cost of being a public company, intangible amortization, interest expense and the costs of maintaining our global transfer pricing structure. Excluding these costs, our U.S. pre-tax margin in the fourth quarter would have been 8%.

Our combined international businesses posted net income in the fourth quarter of $0.25 per share on revenues of $56.6 million. Our international pre-tax margin rate was 17.2%.

On Slide 11, you can see that our U.S. expenses declined $2.9 million from $77.3 million in the fourth quarter of 2012, due chiefly to lower transaction processing costs associated with reduced trading activity and our efforts to reduce market data and connectivity costs, offset by higher compensation costs, as our compensation ratio increased to 42%, due in part to improved global profitability. Transaction processing cost as a percentage of revenue were down to 12.0% versus 13.2% in the third quarter of 2013 and 15.5% in the third quarter of 2012.

On Slide 12, we provide a summary of our international results. Revenues were up $5.9 million from the third quarter of 2013 and $12.2 million over the fourth quarter of 2012. Our record European revenues continue to outpace the change in value traded market-wide, reflecting our market share gains, while our Canada and Asia-Pacific operations both posted solid revenue growth compared to the third quarter of 2013 and the fourth quarter of 2012. International expenses were higher than the third quarter of 2013 and the fourth quarter of 2012, due largely to the impact of transaction processing and variable compensation costs on higher revenue levels.

The compensation ratio for our combined international operations was 33.9%. This ratio was lower than both the third quarter of 2013 and the fourth quarter of 2012, and reflects in part a yearend adjustment for an increase in the use of deferred compensation in our European business. Combined international transaction processing costs during the quarter as a percentage of revenue were 19.3%, slightly higher than both the third quarter of 2013 and the fourth quarter of 2012.

On the next slide, we track the performance of our foreign segments over the past five quarters. As compared to both the third quarter of 2013 and the fourth quarter of 2012, revenues were up in Canada and Asia-Pacific, while Europe posted record revenues and record pre-tax profitability.

Canada's results were negatively impacted by an incremental accounting charge incurred for cash-settled stock awards of $1.5 million due to the sharp increase in ITG's stock price during the quarter. Starting in the first quarter of 2014, we plan to grant awards to our Canadian employees that will settle in stock instead of cash, which will reduce the impact of these variable charges over time.

On Slide 14, we offer supplementary information on revenues broken out by our four product groups for the last five quarters. The table also includes a corporate group, which primarily reflects investment income that is not directly attributable to any of the product groups.

As you can see from this table, Electronic Brokerage revenues were up both year-over-year and sequentially, driven in part by increased activity in Europe. Revenues for Research Sales and Trading were fairly stable compared to both the third quarter of 2013 and the fourth quarter of 2012.

We saw modest sequential increases in both our Analytics and Platforms groups during the fourth quarter of 2013. As a reminder, roughly half the revenues for these product groups is recurring. The other half is commissions. The Platforms group shares in Electronic Brokerage revenues transacted off the ITG front ends, whether executed with third-party brokers or with ITG.

The slight decline in Platforms' revenue from the fourth quarter of 2012 reflects a decline in revenue derived from our OMS platform, mostly offset by growth in revenue derived from our Triton EMS. The Analytics group recognizes commissions for bundled products ratably based upon fixed subscription amount from cash paying clients. Our focus on product group profitability during 2013 led to improved operating efficiency and will continue to be part of our management process going forward.

On Slide 15, we are presenting for the first time, supplementary pre-tax income information for our four product groups and for our corporate function for the full year 2013. While we are only providing this information on a full-year basis, we will provide it on a quarter-by-quarter basis going forward.

Please note that we are still primarily organized by geographic regions for the purpose of allocating resources and measuring performance, and thus expect to continue to use geographic regions as our reportable segments. This supplementary product group financial information is intended to provide more transparency into the drivers of our business.

You'll notice that pre-tax margin for our Electronic Brokerage group is the highest of the four, perhaps not surprising given the scale of that group. Electronic Brokerage, Platforms and Analytics all saw margin improvement in 2013, due in part to the increased focus on product group results. The margins are lowest in the Research Sales and Trading unit, but please note that this group comprises not only ITG Investment Research, but also our high-touch portfolio trading and sales trading efforts on a global basis.

On Slide 16, we have presented our U.S. volume and rate capture statistics. Average daily executed volume was down 4% versus the third quarter of 2013 and down 18% versus the fourth quarter of 2012. Our average overall revenue capture rate per share dipped from $0.0049 in the third quarter of 2013 to $0.0047, due to an increase in the sell-side mix as well as a slight dip in average buy-side trading commissions. The percentage of sell-side volume rose to 53% from 51% in the third quarter of 2013.

We ended the quarter with $261.9 million of cash and cash equivalents on our balance sheet, almost unchanged from $261.6 million at the end of the third quarter of 2013. Our excess cash on hand over and above what we need for regulatory capital, debt payments and compensation liabilities was consistent with the third quarter at approximately $60 million.

During the fourth quarter, we repurchased 212,000 shares for $4.2 million or $19.65 per share. This amounted to 43% of our earnings during the quarter. As a reminder, our buyback program has reduced shares outstanding, net of issuances, by more than 17% over the past four years.

Looking forward, I would like to offer the following observations. As previously guided, our stock repurchases will be made more on an opportunistic basis going forward and will depend in part on market conditions. While repurchase levels may not be directly tied to our level of earnings each quarter, we do expect to maintain at a minimum, the level we repurchased this part quarter to offset dilution from issuances under our stock-based compensation programs. As of December 31, we had 3.4 million shares available for repurchase under our current buyback authorization.

Regarding current business conditions, our average U.S. daily volume for January was approximately 160 million shares at an average rate generally in line with the fourth quarter 2013 average. In our combined international business, our average daily commissions in January were approximately 10% better than our fourth quarter average, driven primarily by continued growth in Europe.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes today from Rich Repetto with Sandler O'Neill.

Rich Repetto - Sandler O'Neill

Thank you, as you promised the segment margins. And I know you did mentioned, Steve, in the prepared remarks that there were more cost efficiencies, but we also thought, with the full margin, sort of analysis by segment, that there might be additional cost saves. Is there potential for more cost saves with the full disclosure of the segments now? And also is there potential, Bob, I guess given the outlook in the U.S., so the performance in the U.S.?

Robert Gasser

As I said in my prepared remarks, Rich, we were relentless in terms of focusing on operating performance. We certainly believe that in the coming year we have some opportunities to continue to reduce costs and improve the operating performance of those units. And now you will see, you will obviously get more granularity in terms of exactly where it's coming from.

But clearly we continue to look at market data, we continue to look at our infrastructure, we continue to look at connectivity. Regionally within the Asia-Pac we think there is some very, very good opportunities to share some best practices cross-border. So we feel very confident and very optimistic that we'll continue to abstract marginal improvement.'

Steven Vigliotti

Richard, as I mentioned the results that we provided by product group here are the full year results. And for electronic brokerage, platforms and analytics, there were meaningful costs savings and margin improvement in all three of those due to the focus we had on improving product group profitability this year. You will be able to see now going forward when we present this information quarterly, you will be able to track our progress in each of these groups on a go-forward basis.

Rich Repetto - Sandler O'Neill

But there's no set targets for 2014 by product group profitability or is there?

Steven Vigliotti

None that we're going to provide today.

Rich Repetto - Sandler O'Neill

And then, Bob, the European profitability is notable, outstanding. And I guess going forward, given the contribution from Europe, is it potential for say, volume metrics, revenue cap can start from Europe as well, given there was $0.25 to $0.26 in the quarter?

Robert Gasser

I think we've probably gone about as far as we're going to go for the time being in terms of, for instance, the disclosure of POSIT growth, et cetera. POSIT Alert within that is obviously becoming more important, given the MiFID II regulations and the block exemption that we believe will exist. So I think we'll continue to give out that information.

And I think, most importantly, that one thing to remember about the U.S. is that U.S. is a pretty heavy contributor of volume to Europe and it has kept the pace in terms of Europe's growth and the contribution that comes out of the U.S. And it's also a very important contributor to the AP region. So I think the U.S. remains a strong area of focus, but it also has been a significant contributor to the global results and clearly we do look at this now as a global enterprise.

Rich Repetto - Sandler O'Neill

Very last, quick one, Steve, the one-timers in the quarter, I think you said Canada, the cash stock award or something like that, and then you also said, I thought U.S. would have had 8% margin and if not for and I missed those one-timers as well.

Steven Vigliotti

Well, those are all one-timers. So the 8% adjusted margin, if you will, for the U.S. reflected a carve-out of the corporate costs, because all of those are born by the U.S. segments. So when you compare region-by-region, we just want you to keep in mind that pretty much all those corporate costs are sitting in the U.S.

Rich Repetto - Sandler O'Neill

And Canada, would that be viewed as one-time cost?

Steven Vigliotti

So in Canada, let me give you a little color on that. So in Canada, the awards we've issued as part of our compensation program to Canadian employees, because the various tax reasons in the past are to be cash settled, not settle with the issuance of stock. As a result we have from time to time, variable charges on those awards depending on the movement of our stock price, because we have to make a cash payment equal to the value of that stock.

And as you know, we had a larger increase in the stock valuation during the fourth quarter. And as a result that variable charge over and above what it would have been, had it been just pure fixed rate accounting like we have in all the other regions, added about $1.5 million to cost in Canada.

Operator

Our next question comes from Ken Worthington with JPMorgan.

Ken Worthington - JPMorgan

First on POSIT, and really POSIT in Europe. So more than any other business, it seems like in POSIT liquidity, because clearly you've got 12%, I think you said 12% dark share in Europe, but it seem as market share goes higher, the value proposition strengthens.

So in terms of customer penetration, like it would seem you're in a sweet spot. Do you see things accelerating here, because as POSIT gets bigger and there is more liquidity in the pool, it becomes more valuable and you see that's kind of pile-on effect in, I guess where are we in that kind of customer pile-on effect, like it would appear to be growing nicely. Is it sixth inning, seventh inning and at what point do you start to push up again some sort of constraints on that? I think I got like 10 questions in there.

Robert Gasser

Yes, exactly, and a statement maybe. So I think that just looking at POSIT Alert, and particularly in Europe, but we do look at it as a global business as we indicated. And we do think that there is significant opportunity to do much of the same in AP, maybe on smaller scale, but we really are very excited by the Asia-Pac potential there.

But on European POSIT Alert side, I think that we continue to see great momentum as Steve alluded. In the January, these guys have started, right where they left off and more. So we're feeling very good about that. We do think that the flexibility, the model, particularly, block liquidity and the block exemption is really, really important now and have scarcity value with regarding the potential changes.

And I think dating back to probably the May and August, November calls last year, we talked about the notion of deploying this new global ticket in front-end and an one point of access to the globe through that. And we believe that we have caught up and potentially surpassed our main competitor there in terms of functionality, capability, ease-of-use, overall client experience.

So I think we're in the fifth or sixth-inning of the POSIT Alert revolution there in Europe. And the team, I've got to give the team, I just have to commend them, they have done an exceptional job of laying the groundwork over the past several years and now harvesting on the investment. And so I do believe, we've got more run way.

Ken Worthington - JPMorgan

In terms of kind of customer penetration, like if you look at, I don't know, the [ph] McLaughlin, big commission payers are there, are you still kind of building out, are you hitting half, are you hitting 90%?

Robert Gasser

No. I think there is still some gaps. There's still some places, where I think we can close the market share, that we can gain some market share. And then there is late adopters. And certainly amongst the continental European big institutions, there are some big names there in the [ph] McLaughlin lists that are just now staring to really embrace the concept.

Ken Worthington - JPMorgan

And what other, in terms of the buy-side, sell-side mix, as we look at kind of 4Q, what were the key drivers? I assume it was kind of a decline in buy-side rather than a surge in sell-side volume, but I could wrong. And then with volumes at least for the industry kind of rebounding in 1Q, does that bode maybe well or poorly for the mixes we think about the current period.

Robert Gasser

I'll let Steve answer the first question, I'll answer the second question. I think we're up to a very solid start in the U.S. As I said, in Europe, we're off to a fantastic start. AP and Canada are about where we left off. So I think we're in good shape. And to the mix issue, I'll let Steve talk us.

Steven Vigliotti

Ken, both buy-side and sell-side volumes were off sequentially from Q3, although as the math would indicate, the buy-side was off more sequentially then the sell-side was.

Robert Gasser

And just to remind everybody, I am absolutely still focused on the rate card, right. So this notion that within our full service product capability with institutions now, this is a great time of the year, the turning point. We're reviewing 2013, our results and our relationships, and partnerships, and thinking about 2014, and are there places where we can continue to improve on that with existing clients. And that's something that I've been spending a lot of time and energy personally on. And I believe that we still have opportunities to improve on that.

Operator

Our next question comes from Patrick O'Shaughnessy with Raymond James.

Patrick O'Shaughnessy - Raymond James

So following-up on that last question, the modest rate card compression that we saw in the U.S. in the fourth quarter, how much of that was just a function of the mix shift towards the sell-side and how much was just seemed to more competitive pressure out there?

Robert Gasser

It's about half and half, about half of the $0.002 drop related to the increase in mix from the sell-side, and the balance again related to just a slight, as we said, a slight decline in the average buy-side rates.

Patrick O'Shaughnessy - Raymond James

And then a little bit of housekeeping. Steve, I think you mentioned to that the quarter-over-quarter increase in other revenue was attributable to securities lending, did I hear that right?

Steven Vigliotti

You did, yes. We had a gain in our securities lending business, which pushed it up about $2.5 million higher than the usual run rate there.

Patrick O'Shaughnessy - Raymond James

And should we expect that that's kind of a more of a one-time gain in nature?

Steven Vigliotti

Yes. I wouldn't expect that going forward after related costs and taxes that added about $1.1 million to earnings.

Patrick O'Shaughnessy - Raymond James

And then, I guess just getting back to POSIT. And POSIT in Europe and POSIT in Asia, could you just talk about what's the competitive landscape over there looks like for the product, because obviously here in the U.S., I think that we all know there is a ton or dark pools and a ton of competition in that space. Can you talk about what you're seeing over in Europe and over Asia that gets you optimistic about what your opportunity over there is?

Robert Gasser

I think in Europe, it really is ourselves and Liquidnet head-to-head. We're the only blocks matching alternatives there. As I've said, I do believe that MiFID II has basically shaken and stirred the market quite a bit. It's not going to be implemented for three years. That's our estimate in terms of the timeline. But while in the interim, I think that those assets become very valuable and I think most importantly the flexibility of our model in terms the improved price we have block liquidity that's unique to us.

In the U.S., you guys know that we have an alternate capability that has the ability to trade for spread. There is all kind of things that we can pull out of our tool bag to address the regulatory environment there. In Asia, I think it's very early innings for us. Liquidnet has a significant lead in the business, perhaps not had much competition. But now obviously we aim to change that. And I think it is green shoots in Asia-Pac.

And I think that the notion of managing liquidity and POSIT and all the things that we do in Europe very effectively, we're looking for more and more opportunities to do them in Asia, because I think everyone can take away one thing from this conversation is that managing liquidity, managing transaction processing costs, managing clearing costs and in the case of Asia, managing your capital are all very, very important to the bottomline impact.

Patrick O'Shaughnessy - Raymond James

And last from me. Steve, so if I take kind of the one-time tax benefit that you talked about. And add that back to your tax rate, I think you guys came in to about an 18% normalized tax rate for the quarter. And obviously that's going to be depended upon the mix of where your revenues come from, but as we think about modeling out 2014, what sort of tax rate are you comfortable with us using?

Steven Vigliotti

I think it's probably best to answer that by breaking it down between the U.S. and international operations. The U.S. tax rate, it's typically in the low-to-mid 40% range. It was little higher this quarter due to the impact of some booked-tax adjustments on lower levels of pre-tax income. As we mentioned in the release and in our prepared remarks, international taxes were reduced by $900,000 this quarter related to the resolution of the contingency.

Excluding that benefit, our international tax rate this quarter was around a 15%. Now this rate is a little lower than Q3's international rate, which is around 20%. And that's going to fluctuate probably based on the mix within the international business. In this quarter, more of it came from Europe, where we have a lower effective tax rate, let's say than in comparison to Canada. So just depending on the mix of the international business, it could be anywhere from 15% to 20% at current business levels.

Operator

Our next question comes from Niamh Alexander of KBW.

Niamh Alexander - KBW

Steve, you mentioned earlier on that you did see a little bit more on the saving side, but you are evaluating investments. So we should kind of expect those savings to report towards investments. Can you expand a little bit on, is it kind of new products or improving kind of the existing products, so what exactly you were thinking about that?

Steven Vigliotti

Over the course of this year, I think you'll get more and more insight into the answers to those questions, which are, I think we're very reticent to talk about things that are not in production or ready for clients to transact. But rests assure that we do believe that we're taking a portion of the incremental value this year than we can take from the expense base. And reinvesting that in what we think will be growth drivers, for not the next year, but the next five years, is absolutely the right thing to do.

Diversify our revenue stream, diversify the client base, diversify the geographies, all those things are very, very important. I mean just look at the geographies, and how important that's become to the firm, but the discipline, the same operating principles apply that there is no initiative within this firm that does not have an income statement and resources that have been identified and they're being measured. Our performance is being measured and there certainly is no unlimited ability to spend on those things. So we're going to stay very tightly focused.

Niamh Alexander - KBW

And Bob, you were talking about diversification there. I mean, is inorganic on the table as well?

Robert Gasser

I wouldn't comment on strategic potential there in terms of other assets. But we don't see seeing anything on the horizon that would be hugely strategic. I don't want to comment on other assets in the marketplace.

Niamh Alexander - KBW

And then, if I could just touch back onto the taxing, Steve. And Asia is getting real close to getting into the block there, and you have a bunch of tax losses, but you could maybe start using the share. You've given us the guidance of like 15% to 20%, but if you can't start using these losses maybe give us a sense of in terms of even the number, the million of dollars, that we could start to apply towards that tax rate otherwise or is 15% to 20% kind of including maybe turning to the block in Asia as well?

Steven Vigliotti

Well, the 15% to 20% I gave, it was basically the range between Q3 and Q4, and how the mix of the international profitability shifted more to Europe in Q4 versus Q3. Obviously, we're not giving guidance specifically on Asia's profitability over the next 12 months. But I will tell you that to the extent we do generate profits, that we have more than $30 million of loss carrying forwards in both Hong Kong and Australia. So on a tax effective basis, those losses could shield about $60 million of taxes combined.

Niamh Alexander - KBW

And then, just lastly going back to the U.S. because the international was phenomenal this quarter, and it seems like they've opted double-digit growth again into the first quarter. But in U.S., it just seems like you've been losing a bit of market share and now you've had a bit of rate card deterioration and you kind of explained so. But is there something else here, is there change in client behavior, is it because the deal environment is so strong, because if that persist then we shouldn't expect kind of more market share from gains for a while, yes, is that fair?

Steven Vigliotti

I think the deal environment is obviously very strong or has been strong, we'll see if that persist. [ph] McLaughlin I think estimates that selling concessions were up 56% year-over-year, that's actually been a big driver particularly for the bulge bracket. And certainly, we know how there is a significant correlation between the quality and the performance of the calendar with secondary commissions for some of those folks, which is well know to everyone.

But I don't know if there's been a significant change outside of that in terms of client behavior or mix within the firm. I'm not talking about the buy-side, sell-side mix, I'm talking about the mix of products and services they use here. I do think that the research offering gives us an ability, as I said earlier, to have these conversations about rate card until we visit them, particularly as we look back on '13 and some of our bigger client partnerships.

So I'm saying when about the U.S., I do think Q4 there is no denying, it was a weak quarter relative to the first three. But I would take that going back to the calendar, I think it's a good thing overall for the market, a good thing from more flow, some volatile growth remain, some excitement around equities in general, and that's for the long-term. For the shorter-term, clearly I think it could affect us a negative visibility in Q4. But January is an improvement over December and we're going to work hard to continue to extract some market share gains and some more volume in the rest of the quarter.

Operator

Our next question comes from Chris Allen with Evercore.

Chris Allen - Evercore

Couple of questions. One just on the Research Sales and Trading margins, no surprise they were the wellest among your different business groups. But if I recall correctly, Ross Smith margins were north of 20%, and I believe Majestic the expectations were for margin in 10% to 15%. I'm just wondering you're happy with drag, if those numbers are roughly correct, you're actually seeing from the high-touch sales and sales trading businesses?

Steven Vigliotti

Well, a couple of things to note there. The product disclosure is on a global basis, right. So in addition to including sales and trading and portfolio trading, it also includes the operations, those operations on the global basis. And other than really North America, we don't have a research offering or much a research offering in Europe and in AP at this point in time. So it is really not. It's hard to compare that those pre-acquisition margins or pre-acquisition expectations to this full product we'll disclose it here, which includes other operations and both from a non-research perspective as well as a global footprint as well.

Chris Allen - Evercore

And you mentioned that you made changes in the European competition with more deferrals. Can you give us any color on that?

Steven Vigliotti

And also we had a very successful year in Europe. And the amount that we have been accruing throughout the course of the year, as we got to yearend for competition, we elected to use more of that to compensate folks over the longer-term with stock. And when you do that, you don't have a current period expense that ends up becoming an expense over future periods, and it was best. So as a result, we pulled back a little bit of comp in the fourth quarter related to that.

Operator

Our next question is from Michael Wong with Morningstar.

Michael Wong - Morningstar

You certainly experienced great growth in your European business, but I am just wondering if anyone has talked about market reforms in Europe like MiFID II or EMIR have affected your European product rollout schedule or increase the reluctance of European training firms to adopt your products and prevented maybe even better results.

Robert Gasser

I don't think it's changed our product development or our plans for continued rollout at all. But to say, I think that we feel very constructive about what we know at this stage in the game, which is looking at the rises there as they currently exists and the potentials, as I said earlier, which is really, really important to note, the block trade exemption. And so remember that we talked about POSIT volumes in Europe, the block volumes are proportion of that, right. So we think there is a lot of flexibility that we have to respond to these changes.

Michael Wong - Morningstar

And just with the U.S. rate card, I am just wondering if you're on-boarding or have any active efforts where you seek to increase your sell-side volumes, as even though I heard your rate card is still incremental revenue and presumably you have excess capacity?

Steven Vigliotti

That's correct. I mean that was the strategy going into expanding for that client base, right. We have the capacity. We felt that we could generate incremental profitability. So that's where our primary focus is to continue to generate incremental profitability. As Bob mentioned, when we look at our buyer-side client base, we are focused on approving the rate card there and looking at the full value of the service that we offer and making sure that we're getting competitive portfolio for that.

Operator

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

Robert Gasser

Well, thank you very much for joining us this morning. We look forward to speaking with you, I believe, it's in the first week of May. Take care.

Operator

Thank you very much. The conference has now concluded. Thank you for attending. You may now disconnect.

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