To Our Stockholders
TO OUR STOCKHOLDERS
[photo of David A. Spina and Marshall N. Carter]
DAVID A. SPINA MARSHALL N. CARTER
President and Chief Operating Officer Chairman and Chief Executive Officer
IN 1998 , State Street remained on course, achieving superior, long-term
performance by continuing to execute our strategic plan. We recorded strong
growth in revenue and earnings, achieving our 21st consecutive year of
double-digit earnings per share growth.
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This performance is a result of our strategic investments in the people and
technology needed to promote revenue growth. We are continually developing
the new, integrated products and services that institutional investors, our
core customers, require. Our commitment to innovation is a key State Street
strength. Powerful global financial trends, which we identified several years
ago, are driving demand for our services.
Worldwide, people are living longer. Aging populations are exerting pressure
on pension systems, and causing individuals to think in terms of investing
rather than saving. The quest for higher returns and lower risk is driving
increased cross-border investing and more complex investment strategies. As
discussed in "A Changing World," these demographic, social and market forces
are driving demand for State Street's products and services.
FINANCIAL RESULTS State Street's primary financial goal is to achieve
sustainable real growth in earnings per share. For 1998, earnings per share
increased 15%, to $2.66. Our 15-year compound annual growth rate is 16%. Our
supporting goals are to repeat our revenue growth rate of the
1980s-annualized revenue growth of 12.5%, adjusted for inflation-in the
1990s; and to achieve superior, long-term return on equity, which we have
defined as 18%. Revenue for 1998 increased 18%, to $2.8 billion, contributing
to a compound annual growth rate for the decade to date of 16.9% nominal, or
14.4% real (inflation-adjusted). Return on equity for the year was 20.2%,
exceeding our goal.
A primary driver of revenue growth in 1998 was our new business success.
Existing customers expanded their relationships with us, using additional
services or assigning us responsibility for additional assets or funds. We
also established many significant new relationships. This sales success helps
maintain our momentum.
INVESTING AHEAD IN TECHNOLOGY AND PRODUCTS Revenues are a key determinant of
earnings per share growth; as such, developing our revenue streams is a
management focus. Providing value-added products and services is an important
component of that effort. One of State Street's greatest strengths has been
our consistent ability to anticipate change. We are continuously investing in
technology and people in order to develop essential tools before they are
needed. Our commitment enables our customers to take advantage of changing
industry dynamics.
Technology leadership is one of State Street's key competitive advantages. We
have pioneered products such as State Street Global Link,(SM) the first
real-time, fully-integrated electronic currency and equity trading platform,
which we deliver over Bridge Information Systems's terminals; and
In~Sight,(SM) an application that facilitates decision making and strategic
planning for pension plan sponsors and investment managers.
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6 State Street Corporation 1998 Annual Report
During 1998, we introduced several important new products. These include risk
management tools such as VaR Calculator II, SL PerformanceAnalyzer,(SM) the
State Street Universe, and Askari RiskBook,(TM) all designed to help our
customers make the complex business decisions required by today's investment
environment. We continue to leverage the convenience and economy of the
internet, incorporating web-based tools in our designs. This year, we
launched the SSgA Advice Account,(SM) offering defined-contribution plan
participants personalized retirement planning and investment advice; and
State Street Prime-Meridian(TM) Browser ACH, one of the first browser-based
payment systems.
State Street receives considerable recognition for our technology
achievements. This year, among the awards we won was the prestigious
"Excellence in Technology Award" from the GartnerGroup, a leading information
technology research and consulting firm. More important, our customers
recognize that, by combining advanced technology with market expertise and
global resources, State Street sets the standards for excellence through the
full spectrum of the investment process. Cross-selling products and
value-added services enable State Street to broaden customer relationships.
In 1998, approximately 80% of revenue growth came from existing customers,
with our top 1,000 customers using an average of 5.8 State Street products
each, while our top 100 customers used an average of 10.2 each.
GLOBAL EXPANSION STRATEGY State Street's global expansion strategy is based on
fulfilling the specialized needs of institutional investors worldwide. We are
committed to serving our customers wherever they are, and wherever their
assets are-in any market, in any currency. This year we recorded strong
revenue growth from institutional investors based outside the United States,
primarily driven by new business gains. We expanded our capabilities in these
growing markets as well, establishing an investment trust management and
investment advisory company in Japan and an integrated European bank. We
completed our acquisition of a unit trust trusteeship business in the United
Kingdom, an important step in a key market. There are now State Street
offices in 60 cities in 24 countries, and our subcustodian network spans 86
markets, serving the growing demand for our services around the world.
We are committed to expanding our presence in the global market because we
expect continued rapid growth in non-U.S. markets. We also continue to see
strong opportunities in the United States, a broad, deep and innovative
market for institutional investors. Indeed, our relationships with U.S.
customers are an integral part of our worldwide expansion strategy-as these
customers grow globally, State Street grows with them.
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INITIATIVES FOR FUTURE GROWTH We continue to expand our customer base and
relationships, our markets, and our product offerings. One of the keys to our
future success will be building on our expertise in post-trade services, like
accounting and custody, by adding products and services that address the
pre-trade and trade segments of the investment cycle: research, analysis, and
trade execution tools. The Global Link service suite is a major success in
this endeavor. In 1999, we will continue to enhance that platform. In
addition, we plan to begin trading via Bond Connect,(SM) our advanced,
electronic-execution system for fixed income securities. For our investment
management customers-institutions and individuals around the world-we will
continue to expand our broad array of sophisticated investment strategies.
OUTLOOK FOR 1999 We made excellent progress on our Year-2000 program in 1998.
Our focus for 1999 is on testing internal system compliance and validating
systems from third-party vendors. In January, we accomplished our conversion
goals related to the euro, the new European currency that is replacing 11
existing currencies. During the year, we will work with our customers to
perform the discretionary conversions remaining as the transition to the euro
continues through 2002.
Throughout 1999 and beyond, we will focus on five core requirements for our
continued success. We will work to develop and refine our strong revenue
flows; increase profit margins; develop and manage migration to technology
platforms for the 21st century; manage our controlled expansion into the
pre-trade and trade sectors of the investment process; and increase business
from non-U.S. customers.
GLOBAL LEADERSHIP State Street has established a powerful, global franchise by
focusing on serving institutional investors worldwide. Our market is growing,
driven by fundamental, long-term trends. By focusing on successful execution
of our strategic plan, we will continue creating value for stockholders.
State Street's success is attributable to the efforts of 16,800 dedicated,
talented employees. We applaud their work on behalf of our customers and our
company. We thank you, our owners, as well. We look forward to rewarding your
confidence and support with continued strong financial performance in the
years ahead.
/s/ Marshall N. Carter /s/ David A. Spina
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Marshall N. Carter David A. Spina
Chairman and Chief Executive Officer President and Chief Operating Officer
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8 State Street Corporation 1998 Annual Report