Bgc Group Inc (BGC) 2002 Q1 法說會逐字稿

Good morning. Welcome to the eSpeed first quarter 2002 earnings conference call. All participant should anyone have any objections, you may disconnect at this time. I would now like to turn the conference over to abbey Goldstein [phonetic].

Good morning. Thank you for joining us. This is a reminder, statements contained in this conference call which are not historical facts are forward looking statements as the term is defined in the private securities litigation reform act of 1995. Such forward looking statements are subject to risks and uncertainty which could cause actual results to differ materially from those currently anticipated due to a number of factors which include but are not limited to the effects of the attacks on the World Trade Center, market volatility, the eSpeed Inc. and its ability to enter into marketing and strategic alliances, to expand the use of its electronic systems and to induce clients to marketplaces an services and other factors that are discussed in eSpeed's annual short report an on form 10-K A. with the SEC. I would now like to turn your call over to Howard Lutnick.

Good morning, everyone. Thank you for joining us for eSpeed's first quarter 2002 conference call. Our success this quarter continues to reflect the strength of the people that make of our extraordinary company. We continue to perform beyond expectations and to further strengthen our amazing team. Our revenue for the first quarter increased 7% to $30 million, versus the fourth quarter of last year. As I mentioned last quart, we're going to continue to use the fourth quarter of 2001 as the base comparison quarter for each of the first, second, and third quarters of 2002 because it represents the first full quarter since the events of September 11 and it really is the best comparison for which to look back and to show our growth. Our full electronic revenue significantly grew by over 22%, versus this base comparison quarter, and that grew to a record $21.6 million. This directly demonstrates the incredible growth in our core business. This growth was in large part due to strong volumes across all of our product lines in this first quarter. Our net operating margins grew to 21% this quarter, compared to 16% in the fourth quarter. This is a 500 basis point improvement in just three months. While we do not expect to see this level he margin growth often going forward, we do expect that our overall revenues as our -- as our overall revenues continue to

grow, our net operating margins will continue to expand and this statistic is something that our company is most proud of the our growth of margins, which put us in a unique category of companies. Offer the next three years, our goal is to generate a net operating margin of approximately 35%, and that's our return on our gross revenue. The reason we can continue to expand our net operating margin is because we expect our margins on incremental revenue to exceed 50%. For this quarter, our incremental operating margin waste in a standing 94%. In other words, our revenue increased by $1.9 million, compared to our base quarter, which was last quarter, while our net operating income increased by $1.8 million. As you remember, certain of all variable expenses are reported net against our revenue, equip allows incremental line growth to drop straight to our bottom line. As an example of our tremendous economy to scale, I would like to take a moment and briefly discuss the consolidation that's going on in our industry. As many of you are probably aware, two of our competitors have recently closed down their electronic trading businesses. Their systems were built for one market, but ours is built for any market. ESpeed is clearly the winner here because of the scalability of our technology and the depth and breadth of the markets we serve. The fundamental strategy behind our business model still remains true. That our business and our systems are built and paid for, and if you're not everywhere and covering numerous, numerous markets, you are effectively nowhere. Net operating income of $11.6 million, or 11 cents a share. Our earnings per share beat both the concensus estimates and our own previous guidance. I'm talking about net operating income here because we believe it best reflects the earnings generated from the company's operations. In accordance with GAAP, we reported net income of 5.9 million, which also rounds to 11 cents a share for the first quarter, 2002. That's versus 7.8 million or 14 cents a share last quarter, the fourth quarter of 2001. In the first quarter of this year, our GAAP included a $400,000 charge from business partner securities. In the fourth quarter of 2001, GAAP included a $2.6 million insurance gain, a $1.2 million gain from a payment related to 9/11 and a $400,000 charge again for business partners securities. Again, we ended this quarter with strong cash balances of about $159 million and we still expect insurance

proceeds, which I'll discuss in a moment. Total revenue for the first quarter, 2002 from software solutions was 3.2 million, down from 4.1 million last quarter, but we continue to view the opportunities to license our software as one of the key growth drivers. As expected, software solutions from unrelated parties declined approximately $330,000. Going forward, the license of our intellectual property will remain part of our software solutions business and we will represent -- and we expect to represent it as part of your unrelated party's line. The margins from these intellectual property deals we would expect to exceed 75%, and an example of one of these licensing deals is our ICE/ I.P.E. license, which I'll also discuss in more detail in a moment. Related party software solutions declined approximately $650,000 this quarter, but that was also offset almost entirely by a similar decline in our operating expenses, which is one of the reasons we were able to hold our expenses flat for the quarter. As we see growth in the businesses of can tore, Trade Spark, and municipal partners, which I'll discuss in a moment, we would expect this line item to grow. However, only incrementally. So in the near term as we said before, we expect related party results going forward to remain generally where they are today with a slight increase going forward. Talking about the Wagner patent for a second. The trial with the -- in Dallas, which is with the Chicago board of straight and the Chicago mercantile exchange is now scheduled to begin if federal court in early September. We do have a trial also scheduled in New York, with respect to the NIMAX [phonetic] But that date is generally running slightly behind Dallas, but we remain confident with that as well. Let's talk a moment about the ICE and the I.P.E. deal. In April we announced our first licensing agreement for the use of the Wagner patent. ESpeed's agreement with interContinental exchange which controls the I.P.E., which has the Brent crude [phonetic] contract in England is one of the first that we hope would be multiple agreements with other third parties for licensing of our Wagner patent. Under the terms of the agreement, ICE and I.P.E. will pay a running royalty and a periodic royalty. These include at least $2 million a year, which is periodic royalty, as well as 10% per contract per side or 20 cents per contract traded round trip, whichever is higher. The agreement currently -- is currently in effect and it will run through February 7 of 207 and we hope this is

the beginning of us interlocking the value of our intellectual property. As an aside, we will be booking that revenue quarterly, and we would expect that revenue to be in approximately the low 400,000, because of payments that we make against that revenue. Let's talk a minute about Trade Spark. Trade Spark had a terrific first quarter and continues to do extremely well. As you can see from our strong three electronic revenue growth, Trade Spark transactions continue to migrate to the fully electronic platform, and that is one of the reasons why our voice revenue declined, but our fully electronic revenues increased with that migration. Also important to Trade Spark is the announcement they made yesterday of the new president, Harry Fry. We know hairy well and we think his appointment will help Trade Spark continue its rapid growth. I just wanted to remind you, there are only two companies effectively already only two companies in the energy trading space in the United States ride now. It's Trade Spark and ICE. The environment between us is extremely competitive. Trade Spark of course is a private company controlled by six of the largest energy companies and ICE is also private. So for competitive reasons, Trade Spark has informed us that they have decided to discontinue releasing product specific -- product and volume specific information on a regular basis. ICE does not consistently for regularly release such information and Trade Spark has now chosen to do the same. Trade Spark believes it could be putting itself at a competitive disadvantage by disclosing its volume and product categories very specifically to its competition. Trade Spark volume numbers on their trade count will still be consolidated with ours and still will be released as part of our numbers. From an overviewpoint of view, we view all products that trade on our system as providing incremental revenue. Since operating margin for eSpeed has low volume for us, its revenue and trading volumes has extraordinary margins for us. Those products are extraordinary as products that trade over the eSpeed platform. Talking about municipal bonds for a moment. Lee Amaitis, who is going to talk a little bit about a variety of our products in a view minutes, I just want to take a minute and talk about the municipal bond market. Tragicically, can tore lost almost all of its municipal bond brokers located in the World Trade Center on September 11. Brian Kelly, who ran can

tore's municipal bond business, survived, although he did work at the World Trade Center, he was not a at his desk that morning and I think it was one of the small miracles that we get to rely upon and go forward. We have worked with Brian to help him set up a separate company. It's called municipal partners. And it's going to operate conceptually much like freedom of Trade Spark. Where eSpeed will provide the support infrastructure and technology for the electronic trading. ESpeed's relationship with municipal partners, while I said will be conceptually akin to our other relationships, eSpeed will generate revenue from support services -- from providing support services to municipal partners and with respect to their electronic trading, we will receive 50 percent of they are electronic trading revenues. The fees from their support services will appear in the related party line of the software solutions because can tore Fitzgerald will hold a 25% stake in municipal partners. This deal is not exclusive with municipal partners, meaning that eSpeed can provide its software to other municipal brokers as well, including if can tore chose to go back into it's own business. With respect to real estate, as many of you may know, we have secured short-term space, we took a two-year lease at 57th and Lexington in New York city and we look forward to getting our team back together in the next few weeks, so I expect most of the eSpeed team to be together there in the month of June. With respect to insurance, we still have 19.5 million remaining in property casualty insurance that we are pursuing diligently with our insurance company and we expect to receive that entire amount over time. We do have $25 million in business interruption insurance, and we are also discussing that with our insurance company, and we will have a more clear view of that and we will discuss that in much more detail on our next call. With respect to our management, I am extremely proud and excited to announce the addition of our new chief financial officer, Jeff Chertoff. Jeff joined us just last week. Jeff's career spans 26 years in key senior level positions at some of the company's largest investment, banking and accounting firms. Most recently, Jeff joined us from being the executive vice president and CFO for Diawa securities, America where he was in charge of financial, regulatory, operational and strategic business issues. He was also the controller, director and senior operating officer of

Salomon Brothers incorporated. Prior to that he was at Bear Stearns and he started his accounting career at Coopers, so we're very excited to have Jeff on board and we look forward to Jeff' he is participation in next quarter's conference call. I would also like to turn the call over now to Lee Amaitis, our global chief operating officer who will spent some time cussing our volume transaction and products. I would like to mention that through the events of September 11, it was really on the shoulders of Lee Amaitis and our London team that eSpeed was able to get through those first days in the extraordinary fashion that it is and I would like to personally say how tremendously proud I am of Lee and the entire London team the way they came together and did so quickly and so impressively. So with that I would like to turn the call over to Lee to talk about volumes, transactions and some of our products.

Thank you, Howard. Good morning, everyone. Our transaction and volume figures for the first quarter were very strong. Fully electronic volume for the first quarter was up 14% to approximately $6 trillion versus 5.2 trillion last quarter. Our 14% growth if fully electronic volume significantly out paced all major futures exchanges which had a volume growth of 5 to 7 percent. The feds quarterly U.S. treasury volume which was up only 6%. ESpeed's total electronic volume for the first quarter reached nearly 8 trillion dollars, approximately an 11 percent improvement over the 2.3% trillion dollars. Last quarter, eSpeed's voice electronic volume was relatively flat versus the fourth quarter. Going forward, we expect that voice volume will be consistent with the market. Our plan has always been to migrate voice businesses to fully electronic as we have said many times. The economics for us are better with fully electronic trades than with voice. We continue to see improvements in our revenues and our margins as this migration occurs. Despite the Cantor's and trade sparks human loss affecting the voice brokerage area and in spite of everything that happened in September, our overall transaction account was up over 17% in the first quarter of 2002. With more than 1 million transactions conducted. Our platform is supporting the same tremendous amount of transactions as we were before September 11, and we are still only utilizing 15% of our capacity. We are currently supporting our core businesses, including U.S. treasuries, Canadian government bonds, energy on Trade Spark, European government bonds,

Japanese government bonds, repos, European bonds and F.X. options. All these products are available to trade globally. We are getting a lot accomplished. Our development team is back on track, creating and introducing new product as well as major enhancements to our existing technology. During the first quarter, we reintroduced products, including U.S. agencies and rolled out European repos and European energy. Our European repo product contains new technology, enables to connect to all different netting facilities, allowing for single access to multiple liquidity pools. We added enhancements to our software, including dynamic tradeable pages, which allows customers to automate their security selections. Early we also introduced the Japanese language version of our J.2B. business product. In addition, we launched fully electronic trade of Euroxs [phonetic] futures, so our customers can trade cash and futures together. All of these enhancements are driven by our desire to deliver customer focused services and products on a global scale. Highlights in the current quarter include the he reintroduction of our municipal bond product currently being used as M.P.I. as Howard mentioned. Also, we are introducing a new product suite for treasury spreads and swaps. This technology provides multiinstrument pray trading the customer directed spreads. Our technology will provide an electronic trading instrument with simultaneous multi-transaction capability that can compete with the complex voice market transactions. This is an excellent example of how the depth and breadth of our products help to expand our leadership position. No words can express how proud I am to be addressing you here today alongside Howard. This is truly an extraordinary company, made up of a team of people who have already achieved amazing results. I look forward to talking to you about the many exciting things that eSpeed will accomplish in the months and years to come. With that, I would like to turn the call back over to Howard.

Thanks, Lee. I would like to go through with you all our four growth drivers that we focus on at eSpeed. Number one is our product reintroductions. While our software remains intact after September 11, we have -- we have modified our software to focus on fully electronic trading and we plan to reintroduce those products over the balance of the year 2002. So some of those products would include zero coupon U.S. treasuries, mortgage securities and corporate, are the examples of the

products that we plan to reintroduce in a more fully electronic format throughout the balance of 2002. Software solutions. We are -- we remain convinced that licensing our software to single banks, single investment banks, single energy trading companies to do business with their customers, think of that as a dealer to a customer business model. We think that has tremendous opportunity for us. And it comes with tremendous margins, because our software is fully paid for. Our intellectual property. You all familiar hopefully with our wagner patent, the Lawrence patent that we acquired and our other intellectual property. These properties can and will produce us significant licensing fees, and we expect to either try to earn money from them from licensing fees or, of course, with one of the key reasons we purchase these patents is to form joint ventures and create other alliances and other transactions, where we will put eSpeed's global electronic trading engines along with other businesses to drive our business going feared, so intellectual property will both come with either licensing fees or joint ventures and other allowances. Finally. Finally, product enhancement software. Many people look at us and talk about only our market share. You should understand that even within the markets that we operate, there are tremendous abilities for us to expand and extend within even those current product lines. For example, we can expand dramatically, even within the business of U.S. treasuries. As Lee just pointed out, the complex spread area of U.S. treasuries, which is currently only a voice market, is a tremendous opportunity for us to expand even within the market of U.S. treasuries, so we will expand the breadth of penetration within our markets and we expect to go try to grow our market share. Another part of our product enhancement software, which we plan to go rolling out, is maximization software, which I mentioned before. We were just about to roll out that software, we were very close to rolling out that software before September 11 and now we expect over the course of of the balance of the year to reintroduce maximization software to remind you, maximization software would allow our customers to request from our computer to implement their trading strategy and try to improve upon their trading strategy and get them a better price and with that we can charge a slightly higher fee, which will add to our margins, because, of course, the software is already built and paid for and is already in the

marketplace, so any incremental fee we charge will go right to our bottom line. So those are our four growth drivers that we are focused on now. We remain comfortable with our revenues in ex excess of $24 million. Last quarter I projected to you and we discussed that our operating expenses would increase no more than 5%. I am proud to say that expenses were unchanged for this quarter, compared to last quarter. So looking more closely at our expenses, you'll note that our largest increase was in our marketing expense, which grew $1.3 million. Many of you will see firsthand these marketing initiatives with the launch of our upcoming joint advertising campaign with Cantor Fitzgerald. The campaign is geared toward expanding our market reach and adding new customers. We expect our marketing expenses for the second quarter of 2002 to be generally consistent with these first quarter numbers. With. With respect to our other operating expense lines in the second quarter, we expect compensation and employee benefits to increase slightly, as well as a slight increase in occupancy and equipment. Professional and consulting fees we think will continue to trend down as we continue to hire more people and bring them internally. Communications and client networks as well as administrative fees again should increase a bit, but while our operating expenses will continue to grow slightly, we continue to expect to hold our expense growth to to around 5% or less in the next quarter. Our net operating losses -- our net operating loss carry forward current stands at $51.2 million, so we do not expect to pay taxes throughout the balance of the year. We are raising our guidance and tightening the reins for the remind are of 2002. We expect net operating earnings per share for the full year of 2002 in the range of 43 cents to 48 cents per share. And for this second quarter, we expect to generate net operating income of between 11 sent a share and 12 cents a share. As everyone knows, and you can read in the papers, even today, the energy market is facing unprecedented challenges in light of the Enron bankruptcy and credit down grades of our large industry players. As such, the visibility and the future the entire energy market trading place has become more cloudy. We are confident that the energy trading marketplace is an extraordinary place for opportunity and growth. However, the timing of that has just become more clouded. Even with these issues, we are confident the growth plan we have just

described for eSpeed and our guidance. Again, I would like to remind you that our guidance is based on our current business as it stands today. Keep in mind, specifically this guidance does not factor in the huge potential upside if our new products and new software rollouts gain traction this year. It doesn't include any licensing opportunity from Wagner or other intellectual properties that we may be able to achieve through the balance of the year. With that, we would like to open the call up for Lee and myself to take questions.

Thank you, sir. At this time, we're ready for questions. If you would like to ask a question, please press star 1 now on your touch tone phone. You will be announced prior to asking your question. To withdraw your question, please press star 2. Once again, to ask a question, please press star 1 now.

I'll wait one moment to take questions. Our first questions come from Ken Wilkinson of C.I.B.C.

Where did your transaction volume growth came from. It seems like your volumes were up 11% sequentially, much greater than that of the interbroker dealer treasury volume growth for the industry. Are you primarily taking market share in existing products or is it the rolling out of new products which is really allowing for the growth, and make you can quantify a little more how much freedom in Trade Spark are contributing here.

Sure. I'll start with we saw an improvement in volume across our product lines and especially in our U.S. treasury markets and European government bond markets. So just looking at the benchmark of the fed volumes, which were 6 percent, we did see an improvement of our market position and some of the volume in the U.S. treasury market space. With respect to Trade Spark, Trade Spark saw a migration as has been the business model of this company all along from the voice based trading to fully electronic trading, and that is why the voice based line declined and that was the powering event that pushed even higher our fully electronic trading line. So those were the two best drivers, growth in our core business compared to the market indices as well as migration primarily in the area of trademark from voice to fully electronic.

Are you saying that you're taking market share in the U.S. treasury market?

Well, since we don't -- since our

-- the other people in the U.S. treasury space don't announce their volume figures, specifically, we can't -- we don't articulate exactly market share, but we viewed our market position as expanding because our volumes in U.S. treasuries exceeded the growth of that of the fed volumes, so within that specific category, we saw our market position improve this quarter, yes.

Any idea where it's coming from? I know you said you don't know what other people or other companies are reporting, burr any sense?

Well, I think, you know, eSpeed's market position within the U.S. treasury market is very, very strong for the issues that trade quickly. So the 30-year, the 10-year and the 5-year are the very, very -- are the places where eSpeed has a very strong market position. We also continue to add new users on a very consistent basis, and I think that -- you relentless extension of our product across the world, including, for instance, we recently added customers in Australia and new zoo land and by adding new customers on to the same liquidity pool, we continued to grow our market position, so I think it was new users, and improved market position overall with our current users that powered us to greater numbers and greater market share within this quarter.

Great, thank you, Howard.

Thank you, our next question comes from Rich Wasserstrom [Phonetic] of U.B.S. Warbuck.

Eric Wasserstrom. How are you.

Hi.

Actually, Lee, I know you said that the voice volumes will be consistent with the market, but do you have any particular outlook that you're -- that you guys are targeting internally?

Well, as I said before, the tragic loss of our people in the United States has put us in the position to where our voice business has to grow outside of our areas. One of the things that we mentioned last quarter was we were going to expand our business to other broker dealers or other brokers in the interdealer market, which had consistently viewed Cantor Fitzgerald as a competitor. In the last few weeks, we actually had discussed these things with other people. And I think that that's a future growth for us in the voice area, where people will connect to the eSpeed platform and view it as more the over the counter exchange type of program.

Just to add to that, I think Lee's point about adding other interdealer brokers or people who consider themselves traditionally Cantor's

competitors, we will only see that volume in the fully electronic line of eSpeed. However, it is effectively replacing the voice brokers that Cantor provided, so I think we view that -- we don't view anything material happening going forward to our voice business other than the continued migration from voice to fully electronic, which we hope will occur because that is revenue enhancing for us, but from an overall business perspective, we just don't see anything else material happening other than that migration.

Okay. But I mean, more broadly speaking, is there a particular market outlook that you guys are assuming as a base case for this year?

Can you say that again, I'm sorry?

In other words, when you're modeling internally, what assumptions are you making about the state of the markets for the remainder of the year?

As I think we've consistently done, we expect the markets toous be consistent. We never -- we never look for the markets to make our numbers for us. Generally, we figure they'll be two good quarters a year. One slow quarter a year, and one average quarter per year and we never -- we never look when we -- when we produce our guidance internally, for the market to grow at all. We view the markets volumes as flat when we do our guidance.

Okay, so that's the assumption that you continue to make?

Yes.

Great. Howard, I'm afraid I didn't fully understand what occurred with the software solutions, the unrelated portion of the software solutions revenues this quarter.

That -- I had said last quarter that we had expected the unrelated parties line to decline because we had received our last payments from visible markets and some other deals that had fallen away in the fourth quarter, so we had expected the unrelated party software solutions line to decline by this amount. Nothing happened other than what we expected. I will point out that next quarter, you should expect this line to grow by somewhere around $440,000, and that would be the amount that would be added quarterly from the Wagner license, from the ICE/I.P.E. deal and that's where that number will fall.

Got you. Speaking of the ICE deal, the revenue that you guys take in, if I recall, you're keeping about 87.5% and paying out 12.5%; is that right?

I think that's generally correct. We do get to offset some of our expenses, but if you do view that deal generally that way, that's right.

: Okay. And the payout that you're making goes to whom?

The payout would go to the owners of the patent, which had a company called E.T.S., which included a variety of partners of Susan Wagner's.

Got you. Okay. Great. Just one last thing, the cash number that you guys reported in the press release was 159 million, but the -- I think the number that was on the balance sheet that was e-mailed out with the release was a different number. Could you explain the difference. I think it says 7 -- basically 752.5 million.

I'm looking at our -- oh, I'm sorry. If you look at the balance sheet, you'll see that the cash and cash equivalents were 752,000 and repos, which we put our cash so they are guaranteed by U.S. treasury, was 158.1 --

Got you.

Leading to 159 in total cash and cash equivalents.

Thanks very much.

Thank you. The next question comes from Rich Repetto [Phonetic] of Putnam Lavelle. [Phonetic]

Hi, Howard. I've got a question. You know, the stock has had a nice run. I'm just trying to take a look at if you're going to give us any guidance for 2003, either revenue or earnings growth going forward.

Not as of -- not as of yet on this call, but we will consider that for later -- certainly later in the year.

Okay. Well, then, if not, you know, say quantitatively, how about just where you see the big areas of growth, just nonquantitatively.

Well, if you remember from last quarter, what we said we would do this year is we would take a conservative view of our business because we didn't have -- we had lost our sales force, you know, we had -- the events of September 11, we thought it prudent of us to basically use the year of 2002 as a foundation building year, meaning we could make the kind of numbers of -- which are now 43 to 48 cents, which was far in ex zest of what people had been expecting before, and view that business not with the type of growth that the company had relied upon in the past, but rather use this year strictly to make sure hour product were rolled out, for introducing our

products, reintroducing our soft wear but not rely on the takeup rate and that's why I ended my comments by pointing out that the guidance that we provided is predicated on the business that we see in front of us today, and the upside in that would be traction, you know, significant traction from any of our software releases or even some license deals, so I think what we are doing is we are taking this year and relatively conservative approach that pro cues 43 to 48 cents. It's a nice thing to be able to say you're taking a conservative approach when you're earning these kind of numbers from where we've been and that then sets us upstreamly well to have all of the products that we've released this year, plus the software improvements that we've made, the product enhancements that we've made, the product maximization software and things like that that will power our growth back in 2003, so we are tremendously excited about our growth prospects in 2003, but we prefer not to put a number on it as of yet because I do want to make sure that I get my sales force in order, that we bring in the kind of people, an then I can examine together with our management team and with Lee the kind of numbers we can make on a quarter by quarter basis next year and I just think it's prudent for us to wait to make sure we have our team in place so we can articulate very specifically that rate of growth, but you will expect us and we will, I think, move aggressively forward in 2003.

Okay. I guess just the last question. On products that you do roll out, you know, you mentioned the zeros and corporates and mortgages, you know, which product do you think -- you have the biggest opportunity to, you know, gain immediate traction, you know, this year.

Richard, this is Lee. I think that the product that we just talked about that's going to be coming out, rolling out in the second quarter, which is the U.S. treasury swap and spread product, that's an area of the business that has been -- as we spoke before, traditionally voice brokered, so any volume would be increased immediately. Now the software is actually very -- the technology is actually very unique in the sense that it takes anything against another object, so basically you could pry one item against many and then do multiple trade. So what would happen is you'd see a lot more velocity of trading and that's internally within existing core business that we have, so I think as Howard was saying before, I think the growth of our company, initially to short term here, would be that

we will increase our core business and add new technology to increase the velocity of turnover for us.

Okay. Great. Thanks, guys.

The next question comes from Jordan Heimowitz [Phonetic] of ASOP [Phonetic] capital.

Good morning. Several questions. First of all, your voice electronic volume and transactions were both up. Yet the revenue was down. Can you explain this?

Yeah. I think that the modification, remember when people do the math between our volume and our revenue, it tends to -- the change tends to be because of product mix. I have said on our conference calls and Fred said for many years on our conference calls that we have not seen any price pressure and we not modified our price. What that would come from is, as an example in this quarter, the movement in our energy space from voice transactions to fully electronic transactions, those -- some of those products that moved electronically were relatively higher priced product per volume. The margin doesn't change. Because we earned the same margins on products that trade in small volume that charge a high price as products that trade in high volume and charge a low price. So it's not greater margins. It's simply products that charged a higher price per million converted to fully electronic, and that's why you'd see the price, the value or revenue earned per million invoice decline. It's simply a product mix rather than any real fundamental change at the company. We continue to not see any price pressure, and we have not modified our price and we do not expect to modify our price in the coming quarters.

Okay. Which leads into the second question, which is are, basically what you're saying is even though you're doing a lot more transactions invoice electronically, the lower volume dollars amounts to the price is going down and they're less profitable. The question is, you said and all the indications are that your 14% and your -- all the industries were up 6, 7%. How much of that growth is Trade Spark?

Well, just to respond to one comment there. They are not less profitable. And I think that is a very important thing that understand about the company, which is that because we have a built and paid for technology infrastructure, the margin and cost of us doing transactions because our fulfillment fees are netted against our revenue is

preciously low, and so we can make the same margins on a product that charged $1 a million as a product that charged $100 a million. Obviously, the product that charges $100 a million will trade less often than a product that charges $1 a million, but the product remains the marginal profit for us on those businesses would be the same. He okay. So that's number 1, that, you know, gross volumes, volumes matters to us, rev knee matters the most, we could do -- if we focused on overnight repo and one hour energy trades, our volumes would spike through the roof, but our revenue per million or per mega watt traded would decline, but nothing would have happened other than we would have added products that didn't charge a lot per transaction. That's all. But our margins would be the same. So that's why we always point out that the division between volume and revenue is not the right 1. It's really a matter of how is our revenue growth growing and that's why we tell you if we'll change our price so you can factor that into your equation. If we don't change our price, obviously that's not affected. With respect to Trade Spark, Trade Spark had a very good quarter and its growth was improved as far as we were concerned because not only did it grow from an overall perspective in terms of its volume and number of transactions, but also it grew from a migration of voice to fully electronic trading, meaning that of -- the whole business grew, but within that business, less was done by voice than had previously been done, and far more had been done electronically, so that is obviously a benefit because eSpeed only receives 35% of the revenue that's transacted by voice, but it receives 65% of the revenue that's transacted electronically, so it's almost a doubling of our revenue opportunity as companies migrate to fully electronic trading, and that is something that eSpeed encourages and pushes, so eSpeed was -- Trade Spark was a key reason why the volume and revenues in fully electronic outpaced our overall volumes. However, the revenue mix was very attractive and it was exactly along the business model that eSpeed is pursuing.

Okay. That's actually a very good explanation. Is there any sense you can give us how much percent or what percent of the numbers -- without giving us the numbers, what percentage was Trade Spark.

We have not broken out any products specifically, and I think the reason we've done that is because, as far as eSpeed is concerned,

the revenue you see from Trade Spark, the revenue we received from treasuries, the revenues from European market, there's no marginal cost difference amongst them between the products. They're operating on generally the same software, so their revenue flows through us, so we don't break out each of these products specifically, and I don't think that's going to change going forward. I think, you know, we look at our total refuse and our total volumes and we try not to help our competition too much in giving them these kind of details, and it's because of these competitive concerns that Trade Spark is taking a look at what it releases and looking at what its competition released.

Thank you very much. Congratulations on a good quarter.

Thanks very much.

Thank you, the next question comes from Larry Catably [Phonetic] of KBW.

I had two questions on the number. One on the balance sheet. Can you just drill down a little bit into what's behind the 9.8 million of intangible assets on the asset side of the balance sheet and why it went up roughly 700,000 during the quarter? That's the first question.

Sure. The intangible assets on the balance sheet are the capitalization primarily the capitalization of our intellectual property, and our patents in particular. We do capitalize the cost of the litigation that is currently going on with -- in two cases. That was already going on when we bought the Wagner patent. That's the case in Dallas against the Chicago board of trade and the Chicago mercantile exchange and the case in New York against the New York mercantile exchange, and then of course that number is depreciated in our operating line, straight lines through the termination of the patent.

Okay. So there's no present valuing of assumed future revenue streams going on there?

That's correct. This is simply the cost of the patent litigation capitalized.

Okay. The second question I had is on expenses. You talked about 5 percent expense growth. Expenses in the quarter were 23.6 million. Does 5 percent growth imply that we should expect expenses to be no higher than 24.8 million in the June quarter? Can you flush that out a little bit please?

I think you're thinking about it correctly, which is we have a very tight control of our expenses. I think that has been one of the

hallmarks of our -- Lee and my management of this company is that we are in very tight control of our spends, and that we are saying we do not expect expenses as you've said to grow more than 5%. Obviously, I said that last quarter. We didn't grow expenses at all. I think that's the high end of what we would do and we hope to hold them to lower than those numbers.

Okay. Great. Thanks very much.

Thank you. The next question comes from Richard Bove [Phonetic] of Hofrey and Arnett [Phonetic]

Hi. I'm trying to get a feel for this energy market. I seem to get a sense that you're saying that you get a larger share of the smaller market, but in essence, two competitors you mentioned are no longer there if I understood that right. You and ICE have the market together but that maybe the elimination of those competitors and what's going on with the balance sheets of these companies is shrinking the size of the market faster than the increase in share that you're getting along with ICE. I wonder if you could explain that.

Sure. First off, the companies that closed down were in the fixed income space. With the instanet closing. So that -- and that consolidation will continue to occur. As I've said, that occurs because these companies go into business and they try to have technology to compete with eSpeed on only one product, and that becomes stifling to them because eSpeed can earn its revenue as we've talked about here from so many different product lines, but that is how we make our money. It's really an economies of scale model and I think when competitors or competitive systems come out without that sort of breadth and economy of scale, they just can't compete either on price in any particular product and they certainly can't compete on scope and get any legs underneath themselves, so that's the main point. With respect to energy, you have to realize, Trade Spark for, you know, Trade Spark started about a year and a half ago. It has done extraordinarily well, better than our expectations at the time that we started the business. I think the market, the market for energy trading and electronic energy trading was moving so quickly and was expanding so rapidly, especially with the turbo charging that happened after the events that were with Enron. But as you all know, you know, reading in the newspaper every day about energy companies is quite unsettling, and I think what will

certainly for the short term cloud the amount of certainty you'll get from electronic trading, but I would like to point out that the majority of the business of energy trading is still voice brokered, and the movement from voice to electronic, just in that core business, is so fundamental and substantial that the tore rid growth from the pure additional electronic trading that came from Enron on line was fantastic, but that has not in any way impacted the fundamental place that energy trading as a business in America is a fantastic opportunity that we have very low cost, and the growth for us will hit our bottom line and will improve our market, so we are very excited about Trade Spark's prospects. We liked it when you read every day in the paper how fantastic energy trading was, but I think we loved no less the prospects for energy trading and for Trade Spark going forward.

The other market though that seems to be growing is the treasury market. I mean, U.S. deficit is now supposedly going to be over $100 billion, you know, this coming fiscal year, I would assume that's got to benefit you in some way.

Well, it never hurts to print it when you want to trade it. But I think, you know, velocity and volatility are friends of this company. And that is what drives the company. Issuance is always, you know, always a benefit for the company, but the key driver of volumes in the markets is going to be volatility. And you know, as long as -- as long as equity markets remain as volatile as they are, as long as interest rates and markets are as volatile as they are, these are just really good market conditions for eSpeed in this country.

Final question. I'm not sure whether municipal partners is something that replaces something that had to be closed down or whether it's a new venture, and what is the outlook for that, because that's also a pretty sizable market.

Well, I think what happened, municipal partners, this company with Brian Kelly, it's the equivalent of the reintroduction of eSpeed's municipal bond system from precept pre-September 11, but rather than doing it under the Cantor Fitzgerald umbrella, they are assisting Brian Kelly in setting up a separate company which Cantor Fitzgerald had bought in 2001, giving him back his nameplate called municipal partners and assisting him in getting his feet back under him. Brian lost his brother and 35 of his friends on September 11, and so we are supporting

him in that new business called municipal partners, but if you want to think of it, it is conceptually similar to the reintroduction of the municipal platform, but instead of doing it for Cantor, we're doing it for municipal partners, and it comes with nonexclusivity, meaning that we can license our software to our participants in the market, which I think is part of the new opportunity that Lee mentioned, which is having our software provide the electronic infrastructure for other people who consider themselves historically competitve for Cantor Fitzgerald.

Thank you very much.

Thank you, once again, if you would like to ask a question, please press star 1 now on your touch tone phone. Our next question comes from Justin Hughes [Phonetic] of Robert Stevenson.

Good morning, Howard. First I want to clarify numbers on the press release. For your total electronic volume in March 2001, you're saying 7.5 trillion. When you first reported that number, it was report it had at 11.5 trillion. I just wanted to clarify which number is correct.

I'll -- the other report I have in front of me says 7.5 trillion, so I'll have to look into that for you.

If you look at the monthly numbers, January, February, March of 2001, they add up to the old numbers of 11.5, so I wanted to clarify that the volumes are showing down 30%. Second question, I was wondering if you had an update on the Deutsche deal, those announced last fall?

It continues to operate in Europe effectively. They continue to be a price maker for us, and so it continues to go forward. I don't think I have any -- anything new to say about it, it just continues to go on.

Okay. Did can you add, is adding a significant liquidity, has it been anything -- I guess it hasn't been anything worth talking about at this point?

This is Lee. The marketplace in Europe obviously is a lot different than in the United state where you have a far larger amount of securities traded across platforms. The actual electronic price we get from -- is very helpful in providing liquidity so we have seen growth in the particular areas that they are supporting us.

Okay. And then on municipal partners, since that company was purchased, I think in late 2000, and

now it sounds like it's kind of been, you know, sold back or redone, is there any type of good will writeoff associated with that in any way?

Well, there's not, and eSpeed will continue to have as far as eSpeed is concerned, providing the services to Cantor or providing the services to municipal partners, the only difference is eSpeed will be able to charge a market -- markup on its support services, so those will be more profitable support services than they would have been had the business remained inside of Cantor, and eSpeed is earning 50% of the electronic revenues instead of 65%, but eSpeed does have the ability none -- of none exclusivity, which means it can license its software to others, include if Cantor ever wanted to go back into the business t could do that, or it could license its software to other market participants as well.

Just a final question on the patents. When you go to court in September, let's say in the scenario that you do not win, what happens with the ICE contract? I mean, are they legally bound even if the patent is not legitimate at all? I was wondering, is there any other precedence in which you kind of electronic trading has been patented in the past?

Well, it's certainly -- it certainly would depend, whatever monies we have received from I. speed we have received and there would be no possibility of us returning them. I think the results will, you know, our -- the effect on us would depend on the results of the trial itself, on the final results. And with respect to patents on electronic trading systems, there are multiple, many, many patents on electronic trading systems. That are out there and they've been out there for quite some time, so I don't think this is unique in that effect. It is just particular to the terms of the Wagner method. There are many other patents to that effect.

Okay. If we wanted to do research on it, is there one in particular you would point us to?

No. But I'll see what I can do to help you on that off line.

Okay. Thanks, Howard.

The next question comes from Joe Jolson [Phonetic] of J.M.P.

Howard, congratulations on getting the company back on its feet in such good shape. I just had a couple of questions. You mentioned and we've all been reading in the press about the issues about the energy trading business. And in terms of just the data and the madeup trades, would that show up in

eSpeed in any way in terms of would that overstate your trades, because they trade through your system?

No.

Okay.

The transactions -- it wouldn't.

I'm sorry. I can't --

I said no, it wouldn't have -- it wouldn't have impacted our business in any way.

: Okay. Good. And then a related question to Jordan's question about the, you know, the volumes being up and the revenues not. Would -- I mean, you had mentioned in your overview that you guys were starting to do business with other brokers. Would that be a partial explanation for that trend, that you're basically aggregating some larger volume business?

No. The business that we'll do with other dealer brokers I think is at its youngest stages now, and I don't think it's -- you know, that's -- it's not having a material impact on our business, so --

Okay. Good. Then the last question I had, had to do with the N.O.L. that you have. Now that you've had two excellent quarters in a row, at what point will you have to book an asset, you know, for your N.O.L. on the books and then accrue a tax rate?

Hang on a second. I think -- I think basically the way we're looking at it now, is that we're waiting for the full year to take, you know, to have a full year in our trend in our earnings before we have to examine that particular question, but I will revert to talk to Jeff about that and we'll get back to you individually if that has changed at all.

Okay. Great. Thanks a lot. Congratulations again.

Thank you. The next question comes from Adam Townsend of J.P. Morgan.

Hi. Good morning. Howard, I just have sort of a competitive question for you. Given there was -- it was long talked about the fact that the end of the spectrum of bonds that trade very rapidly, you know, that makes sense and that would go electronic and that the larger, more complicated trades typically would go through voice brokers more, how do you view your competitive position given -- domesticically given you don't plan to hire back voice brokers?

I think it's the opportunity, and I feel a best example of that was what Lee talked about, which was as our software has developed and

evolved, we have been adding more and more complex situations capability into the software, so now I think this is really the first time that we will actually have a software product that we're rolling out that can handle the true complexities of combination and spread trades and do it in a way that is simple and easy for our customers to trade. So while the complex spread business of U.S. treasuries is a large business, it is not something that we have effectively been able to go after, because we didn't have the software in place to really go after that part of the voice business, and I think our software has matured enough and our development has gotten to that stage that we are now tremendously excited about the opportunity to go after the next level of depth of voice market, and I think over time that's what you'll see, you'll see our software continue to develop, continue to evolve, and to take on step after step the voice markets and bring the electronic efficiency of eSpeed and electronic trading to the more complex transactions, because they are, in effect, commodity transactions, they're just done in a more complex format and they are consistent, and they can be done in an electronic fashion very effectively, and we are very excited about the prospects, but again, when we guided this year, we've assumed that just the business in front of us will be part of our numbers and that this sort of spread business that, if it were to gain any traction, it would add significant upside to our customers.

What have you received from the customers how receptive they are to that software as opposed to picking up the phone.

The customers are always looking for something that would lower their cost. Now, you know, historically when you're talking about slower products, there's always been a resistance for people to convert to electronic trading, but I think that only refers to the platforms that had one product to offer. When you develop technology like we have where you can cross reference from many different marketplaces to a benchmark of U.S. treasuries or European government bonds, then you're going to increase a lot of market participation. It's a very easy to use. Which is generally what's held back people in the past. I think we've seen some positive feedback from the people that are actually testing it.

: Okay. Great. Thank you.

Thank you. The next question comes from Don Kennedy of D.S. Kennedy and company.

Good morning, gentlemen. Howard, just one question really on the Wagner patent. Since you guys are moving close to actual trial, would you just sort of for all of us review the litigation itself, what you think the length of the trials are going to be and what you expect the outcome to be.

Well, the trial, it's a federal court trial, and federal judges have lifetime on the bench, so it's a federal trial, and the first one will be scheduled in early September in Dallas, Texas. We would expect the trial to last a matter of weeks. You know, while we are confident in the outcome of the trial, we certainly cannot predict it. I think, you know, the benefits and the opportunity and the possibilities are extraordinary. We very much like the Wagner patent, that's why we bought it. We think it is an extraordinary opportunity for us, and you know, as we head into a trial, I can't really say more about it other than to say that, you know, we are very excited about the prospects and I think the license that we did with ICE/I.P.E. clearly shows its value in the marketplace.

Thank you.

Thank you. Our final question comes from John hitch [Phonetic] of [inaudible] capital.

Thanks. I was just trying to gain a little insight on the revenue for voice assisted transactions in the September quarter from about $27 per transaction up to $42 in the December quarter and then back into the 20's, 29.55 for the March quarter and I was trying to figure out waste going on there and then as well the -- if you take the gross dollar amount per trade, of about roughly 15 million, actually it was 16 million in December quarter, that went down to 13.5 in March, what is that -- how is that owe considering, like what's driving that.

Well, it's predominantly all of these sorts of statistics will be predominantly mix related. We had from the third to the fourth quarter the loss of all the Cantor brokers who transacted many different types of products by voice, ranging from treasuries and corporates, foreign exchange options, foreign exchange and energy, there was a broad spectrum of products, and that overall mix had -- if you divided our revenue by the volume, you came up with a statistic based on that mix. With the loss of a broad category of people, effectively what that meant was that there was a decline of that mix, but fourth quarter took on the benefit of an extraordinary amount of growth by Trade Spark in its voice business

with the coupledown of Enron dramatically improved the size of our voice business as we would have expected coming from the events of September 11, so basically we would have thought, the events of September 11 would have dramatically decreased the voice business, but in fact the voice line held up much, much better than everyone expected due to the tremendous growth and increase in Trade Spark's voice business. But now that we have that voice business come into Trade Spark, obviously eSpeed is going to go out and set upon doing its job, which is to migrate voice to fully electronic trading, which has been its business model from the outset, and so what's happened is that migration has started and that move, that higher margin if you will -- it's not really higher margin. The higher charge-in business per million or per volume business into the fully electronic line. It's not higher margin business because, as opposed to most businesses where, if you charged a higher price for product, you would, you know, you would have a higher margin, because our margin of costs are sort of built and paid for. They're effectively fixed and the variable costs are already netted against revenue, our margins are the same for our products that charge a very low price as products that -- and trade a lot of volume as products that charge a high price and trade less. So it was just that natural improvement from trade Spark, which was fantastic in the fourth quarter and migration to fully electronic trading in the first quarter that created the differences.

Would the gross dollar amount per trade be higher or lower on Trade Spark versus, say, you know, the treasuries?

It would be higher.

Right. And that makes sense, because the voice assisted gross dollar amount went down from 16 to 13.5, which would explain the voice to electronic transition.

But you also might have -- and I'm not -- I'm saying this generally, I haven't stud he'd this, but it would be logical that in the electronic world that we made more transactions at smaller size than the voice business, which tries to collect trades and do larger transactions. You know, fewer transactions for larger size, so once you get into the electronic marketplace where people can move more quickly, the same amount of volume might happen in more transactions, so you might get a little different spin on it as we convert from voice to electronic, but the overall business, we saw that

dramatic improvement in the fourth quarter and that pushed into the fully electronic line, which is what you would expect eSpeed to do.

In other words, that would explain on the fully electronic data, the gross dollar amount per trade actually was relatively flat and you're saying that's because maybe there was two trades electronically, if there was one trade formally by voice.

Right. From my experience, that's just sensible.

: Okay. Thanks.

I'd like to thank you all for joining us today. And we very much appreciate your support. We are very proud of how this company has done in handling the most difficult of circumstances. And I'm proud to have posted this call with Lee Amaitis. I look forward to the next call adding Jeff Chertoff to our list of speakers and Jeff would then be available after the next call to spend time with you all and go through the financials. I think we are working aggressively to put our team together, but we are doing so with a view of the long-term and we want to add just the right team for us so we can take this company forward. Thanks again and have a night day everybody.