Bgc Group Inc (BGC) 2002 Q2 法說會逐字稿

Good morning and welcome to the eSpeed second quarter earning conference call. All participants will be on listen-only until the question and answer session of the call, and at the request of Thompson Financial, this conference is being recorded this morning. If anyone has any objections, you may disconnect at this time. I would now like to introduce your host, , you may begin when ready.

Hi, good morning. I'd just like to remind everyone statements contained on this 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 uncertainties which could cause actual results to differ material 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 limited operating history of eSpeed and its ability to enter into marketing and strategic alliances, to effectively manage it's growth, to expand the use of its electronic systems, and to induce clients to use its marketplaces and services, and other factors that are discussed in eSpeed's annual report and on Form 10-KA filed with the Securities and Exchange Commission.

I'd now like to turn the call over to your host, Howard Lutnick, Chairman, CEO and President of eSpeed.

Thanks, Abbey, and good morning everyone and welcome to our second quarter 2002 conference call. I have with me today Lee Amaitis, who's our Global Chief Operating Officer; and Jeff Chertoff, who you may remember last quarter I introduced as our new CFO. Lee will detail some of our business highlights. And this will be Jeff's first time on the call and he will review our financial performance and thereafter he will be available for conversations with investors if you'd like.

Our results this quarter continue to reflect our solid performance and the execution of our strategy. With only nine months passed since the World Trade Center attack, we are extremely proud here that we have rebuilt our company on its foundation, we have put the right team in place and we are turning once again our focus and our efforts on building this company for the future and to make sure that it keeps its place in its future. We are now solidly concentrating on our R&D and new product releases and our overall growth, and we are very, very excited about our prospects.

With respect to our earnings, we had net operating income for the quarter of $7.3 million or 13 cents a share for the second quarter. This compares to a year-ago loss of $700,000 or a loss of a penny a share. And that's the second quarter, obviously, 2001. If we compare to the fourth quarter of 2001 - and the reason I mentioned that is because that's the - that's the first full quarter after the events of September 11th - you can see the company is growing because we had a 63 percent increase compared to the net operating income of 4.5 million, if you compare us to that fourth quarter. For the next -- really just for this quarter and for the next quarter, we will continue to compare it to our financials just as a good comparison to the first quarter after September 11th, because it shows the business -- sort of where we got our footing after September 11th, and where we're going from there.

We continued to generate growth and our profits today are a record. In addition, our net operating margins, and I think this is a part of our business with which we are most proud, our net operating margins expanded sequentially this quarter 300 basis points to 24 percent, and that's over last quarter's 21 percent margin, and even further in perspective, the prior quarter to that -- 16 percent operating margins. So we've gone from 16 percent to 21 percent to 24 percent. That's 800 basis points just in six months. And so we are very clearly moving towards our target of 35 percent operating margins over the next couple of years, two or three years.

Our revenues. Our revenues for the second quarter were 30.6 million, and while that's a decline of 10 percent from 34.1 million a year ago, it is an increase of nine percent from 28.1 million from the fourth quarter of 2001. And I think me and Jeff will go into some of the details of that, but, you know, primarily the decrease compared to a year ago is primarily driven by the events of September 11th. Our second quarter 2002 fully electronic revenue was up two percent, up $21.2 million. That compares to last year, so you can see that the primary driver of the reduction in revenue, compared to a year ago, was voice-based business that was destroyed on September 11th from Cantor Fitzgerald.

And we've increased our fully electronic business 20 percent, compared to 17.7 million in the fourth quarter of 2001, demonstrating the continued growth of the company since that fourth quarter of '01. Our fixed income products are performing very well, and we continued to increase our market position. Our strong growth in the fixed income markets, however, was offset by softer results in the energy space. In the energy markets, last quarter we had anticipated and explained that we saw the business -- the difficulty that many of the market participants were facing, and therefore we did expect a decline in the overall trading volume of that marketplace.

That is what we saw this quarter, so TradeSpark, the company that we provide the technology for, did see reduced volumes and trading and therefore that figured into our factors. But income business, virtually entirely offset it, and that included with our Ice transaction helped us move forward, even in those difficult energy trading environments.

TradeSpark is a long-term participant in the energy market, and we expect after we have now formed the base beneath which TradeSpark will again start to grow. Remember, TradeSpark's initial goals remain the same, which is to convert a very broad voice-based electronic -- voice-based transaction business in energy, which still very much exists, to fully electronic, and getting all the benefits of that. And that business model still is very, very much intact.

With respect to insurance, Jeff is going to go through the details in a little while. I just want to mention that we did recently receive just under $13 million for our business interruption insurance, pretty much as we expected. With respect to our patent, the trial is scheduled for September 9th, and due to the proximity of the trial, I will not be answering questions or talking about the patent on this call. With that, I would like to turn the call over to Lee and so he can go into some more of the details of our business.

Thank you, Howard. Good morning everyone. I will speak first about our volume and transaction count. Our fully electronic volume for the second quarter of 2002 reached $6.2 trillion, essentially flat with the second quarter 2001, and an increase of 20 percent versus the fourth quarter of 2001. Our market position was quite strong, illustrated by almost five percent increase in our fully electronic volumes sequentially, compared to the Fed's U.S. Treasury sequential volume increase of just over three percent.

In fact, our fixed income business grew even more than our overall results indicate since these total volumes figures also include this quarter's lower volume from TradeSpark, as Howard has mentioned. eSpeed's total electronic volume for the second quarter of 2002 was $8.1 trillion, down almost 26 percent versus a year ago, due entirely to the loss of Cantor's voice business in New York as a result of 9/11, and up nearly 12 percent from the fourth quarter of 2001. Total transaction counted nearly 1.1 million transactions for the second quarter of 2002 was up just over 1 percent versus the same quarter a year ago, and over 21 percent, compared to the fourth quarter of 2001.

Relating to our business mix, this quarter our full-year electronic volume increased faster than our revenue due largely to the strong performance in our fixed-income business. Our business model is comprised of multiple streams of revenue, including trading from a both fixed-income and energy.

Breaking down our revenue mix in a bit more detail than we have in the past, our energy business has a higher revenue per transaction than our fixed-income business. With the strength of our fixed-income business, and the recent difficulties in the energy sector overall, we saw this result in a lower overall revenue per transaction. But because our entire infrastructure runs on a fixed cost model, high-volume lower-priced products and low-volume higher-priced products are equally as profitable for eSpeed.

In pricing, as we have previously mentioned, the fixed-income market continues to perform well and we continue to gain ground on our core businesses in those markets, improving our market position. We have felt absolutely no price pressure. In fact, the recent increase in fixed-income trading has provided an opportunity for more of our customers to increase their trade volume on the eSpeed platform and therefore qualify for our volume discounts. We have been offering volume discounts for years, and we are very excited that we have signed multiyear deals with virtually all of our large customers.

The more these customers trade, the more benefit they receive from these type of deals. Not only do these multiyear deals encourage trading on the system, but they also protect us from any pressure on pricing in the future. We simply offer our best customers a discount for being our best customers.

In software, looking at software and products, our current rollout is serious software. We are very excited to be introducing it to our clients. Having been developed over the last year and a half, is a new suite of software covering a broader range in terms of types of products: maximization, treasury spread, direct dealing and much more.

This, by far, is the broadest global release eSpeed has ever introduced into the market. We're able to release such an expansive offering because our technology team is now fully integrated around the world. In addition, this total integration has allowed us to further control our expenses, which are reflected in our strong profitability and improving markets.

With that, I'd like to turn the call over to Jeff to provide some more detail on our financial results.

Thanks, Lee.

Good morning everyone. I'm glad to be speaking with you today and I look forward to getting to know many of you.

I'd like to talk about our financial results. For the second quarter we posted record results of $7.3 million in net operating income, or 13 cents per share. That compares to a net operating loss of about $700,000, or one cent, for the same period last year.

Comparing this quarter to our fourth quarter which, has Howard has mentioned, we will continue to use as our base comparison quarter, our net operating income grew 63 percent from the fourth quarter's net operating income of $4.5 million, or eight cents per share. As you know, we report net operating income to reflect earnings generated from the company's operations. Our results, second quarter to fourth quarter, show tremendous growth.

Let's talk about our net operating results compared to our actual GAAP results. For this second quarter, we reported GAAP net income of $19.7 million, or 36 cents per share. The difference included about $400,000 related to non-cash charges associated with business partner securities and also recording and receiving $12.8 million of proceeds from our business interruption insurance.

I'll talk about the insurance in more detail later, but it's important to know that the insurance proceeds of $12.8 million approximately covers our original September 11th provision of $14.4 million. Getting back to the GAAP numbers, for the second quarter of last year, the difference between our net operating loss and our GAAP loss was non-cash charges of about $300,000 related to the business partner securities, and in the fourth quarter, the difference represented a $2.7 million gain related to our business property insurance. A one time receipt of $1.2 million also related to September 11th, plus an additional $600,000 primarily associated with business partner securities.

I'd like to talk about our net operating margin, and the leverage of our business model. As Howard previously mentioned, for the second quarter our net operating margin grew to 24 percent as compared to 21 percent in the first quarter of 2002, and 16 percent in the fourth quarter of 2001. This represents tremendous sequential growth, and an 800 basis point increase from the fourth quarter of 2001. Basically our product is a frictionless digital product with no conventional cost of goods sold, and our R&D cost built in to our cost structure.

We have tight controls over our fixed costs, and as our revenue continues to climb, we expect to see that our incremental margins, we expect to see that our incremental margin will increase, and that our bottom line will grow. We also believe that going forward, growth in volume and transactions will not correlate to a proportionate increase in expenses. As an example, our incremental operating margin for the second quarter of 2002 was over 100 percent versus the first quarter of 2001. Our revenues increased two and a half million dollars, while our net operating increased $2.8 million. Again demonstrating that our incremental top line growth dropped straight to the bottom line.

I'd like to discuss revenues, and again, we don't believe a year over year comparison is as meaningful as looking at our fourth quarter, since after September 11th our company fundamentally changed. Second quarter revenues of 30.6 million were down three and a half million dollars, or ten percent, compared to the second quarter of the prior year. But comparing it to the fourth quarter of 2001, it increased by nine percent, again showing growth over compared to our base comparison quarter.

Our fully electronic revenue of 21.2 million increased about 400,000, or two percent compared to the second quarter of 2001, and 3.6 million, or 20 percent as compared to the fourth quarter of 2001.

The software solution fees from related parties is a type of revenue that represents where eSpeed provides technology support services to Cantor, TradeSpark, Freedom, and municipal partners. Going forward we expect the same level of revenue from these sources - from these services.

Software solution fees from unrelated parties increased 600,000 over the second quarter of 2001 and 180,000 versus the fourth quarter of 2001. The $180,000 increase was primarily driven by the fees we received in the current quarter from ICE of about $500,000 per quarter or at least $2 million per year.

In order to understand the current direction of our operating expenses, I'd like to talk about the second quarter in comparison to the first quarter of 2002. The operating expenses of 23.2 million were slightly down versus the first quarter of 2002 operating expenses of 23.7. Just looking at the more significant changes, professional and consulting fees were down as we hired permanent employees and reduced our reliance on outside professionals. Communication and client network expenses increased as we built out our network and improved our connectivity.

Looking forward and talking line by line, our compensation - employee compensation and our employee benefits should increase slightly as we continue to rebuild our organization. Occupancy and equipment expense may also increase slightly as we build out our current space and add hardware.

Professional and consulting, as well as communication and client network, should be within their current range in the coming quarter. Marketing expense will remain constant during the third quarter and decrease as we wind down expenses related to the marketing campaign. We also do not expect significant growth in our administrative fees and our other expenses.

As Howard has mentioned, we expect to hold our expense growth to less than five percent for the rest of 2002.

As you know, as our earnings are reported on a pre-tax basis because of our NOL, our NOL carries forward currently stands at $25.6 million, so we do not expect to pay taxes for the remaining balance of the year.

Looking at our balance sheet, at June 30, 2002, our balance sheet remains strong with $167 million of cash. And since the end of the quarter we received the full amount of our business interruption proceeds of about $12.8 million, brining our cash and cash equivalents to $180 million.

Talking about our insurance, we did receive the $12.8 million of business interruption insurance. And in addition, we expect to recoup all of the $40 million that we had under the property and casualty insurance. To date we received $20.4 million and over time we do expect to receive the rest to replace equipment and money to build out our headquarters.

I would now like to turn the call back to Howard so he can share with you our outlook for the rest of 2002.

Thank you, Jeff. And we appreciate you joining and being part of our investor relations team going forward. I would like to remind all of you that eSpeed benefits from volatile markets. The way we've said it before is, volatility is a friend of this company, and such volatility like we've seen so far in the third quarter benefits the company. But also keep in mind that seasonality remains a part of our business. The August holiday season in the U.S. and Europe does generally decrease trading volumes, and in the fourth quarter, you have the Thanksgiving and Christmas holidays, which also tend to reduce trading volume in those quarters.

Our guidance always keeps those things in mind, that seasonality has been in place for my entire career, but again, volatility overrides this seasonality, so we keep an ordinary course year as our assumption. That being said, for the full year 2002, we continue to expect our revenue to exceed $124 million, and our operating expenses to increase by less than five percent. Net operating earnings per share for the third quarter are expected to be in the range of 11 to 12 cents, and for the full year, that allows me to raise my guidance from 43 to 48 cents to 47 to 50 cents. So our full year 2002 guidance is now raised to 47 cents to 50 cents per share.

We are raising our guidance for the second half of 2002 because, as we mentioned, our market position continues to strengthen in our core businesses. Almost a year after September 11th, it is with great pride that we are here today, with our company rebuilt, poised and focused for growth in the future and releasing, as said, the most serious piece of software we think the company has launched in its history. So we are very excited about our outlook, and we look forward to answering your questions.

Thank you, sir. At this time, we are ready to begin the question and answer session of the call. And if anyone has any questions today, please press star, one, on your touch-tone phone and you will be announced prior to asking your question. If you want to withdraw any questions, press star, two. Once again, to ask a question, please press star, one now. And our first question is from from Salomon Smith Barney. Sir, you're on line.

Hi, good morning. This is , actually. Great quarter. First, I had a few questions. First, I was hoping you could quantify for us at present what eSpeed's volume mix was for the quarter in your major markets. How much of your volume is from treasuries, European bonds, Canada, and any other sizable markets worth noting?

We've not -- we've not before delineated the specifics to that level of detail. However, we have said in the past that before September 11th, our treasury business was approximately up around 50 percent of our volumes. And since, obviously, September 11th that number has increased. So while it is above -- it is above 50 percent, we haven't delineated that with more detail as of yet. I would say that trade spark in the energy business remains, as it has, a relatively small component, but one that we expect to grow, going forward, from eSpeed's business.

And we do point out that because it is a fixed-cost model, and that technology is the same for all these varied products, that the way we look at things here, since each dollar of revenue from all of these sources comes into the company effectively with the same cost structure on it, we tend to look at them together.

OK. Is it fair to assume that of the remaining 50 percent or less that the European component is pretty materially in that?

Very much so. I would say if you take U.S. treasuries and our European component, you have covered the line share of the business.

OK. And looking at your voice-assisted revenue trends, I saw that that only fell three percent, but your voice-assisted dollar volume fell about 11 percent. Can you elaborate more on what's going on there?

Sure. The business mix was our fixed-income voice business in Europe continued to grow, but our trade the voice revenue that we received from trade did shuffle the decline, along with the energy markets taken as a whole. So our European voice business was up and the price per million or the price per unit traded in fixed income is lower than the price per million or price per unit traded in energy.

So from a mix perspective, you would see that difference in volume and revenue. But it is simply a mixed business. It has nothing to do with margins. The company gets the same - more than 50 percent increase on marginal revenue from any type of its business. So price per unit is not an impact because we have no cost of goods.

OK. And my last question, acquired this quarter. I'm just wondering what your thoughts are on how that potentially changes the landscape. You know will Wall Street firms that were previously investors with possibly be more inclined to use your platform?

And then just a follow-up to that. Can you give us any insight on the differences between the eSpeed platform and the platform at present that you're hearing from your customer base?

Well with respect to the first part of your question, it's my understanding that they've signed -- and have signed a letter of intent. And so I feel it is too soon for us to talk about what, if any, impact there may well be from that given that it is just a letter of intent, as far as I can tell so far. So I prefer not to comment on that.

With respect to the latter part of your question, I think there are a couple of major features. Number one, eSpeed owns - built its own software; it's our proprietary software. leases software from a third party and does so for a particular set of products.

One of the things that eSpeed has always said is that it's the scale of our software that is fundamental to our economies. Our ability to add new software at our current cost base, or our ability to have new products run on our system without additional marginal cost. Our ability just to add new types of software, new products, with out that same increase in marginal cost. These are the dramatic things that make a difference for eSpeed.

So from a scale perspective, it matters fundamentally, and also a speed perspective. I would say the single comment we get back most from customers comparatively is that trading on the eSpeed platform in fast paced markets is dramatically superior than any other system out in the marketplace today. And I'll encourage anybody to talk to anybody in the U.S. treasury market or European government bond market to discuss with them from a due diligence point of view what their perspective is. Because I think you will find that to be a consistent customers, eSpeed system is simply easier to use and much, much faster.

Great. Thank you.

All right. There our next question now comes from from Putnam Lovell and NPS. Sir, you're online.

Yes. Hi Howard. First question is you mentioned pricing contracts to most of your large customers. And that that would sort of buffers you from price pressure. I just wonder if you could explain that a little bit more, what type of contracts you have, and how it, how it sort of protects you?

This is Lee . The deals that are in place basically offer customers that hit certain volume levels discounts. Now there's a fixed and a variable component. One would drive the other, so if you were in a, if you were in a market that's slowed down, your fixed component of the price deal would keep you from price pressure. And obviously when you're in a fast moving market, the variable will encourage people to trade more because then their incremental price per transaction will go down. So it kind of feeds upon itself, and all, and the majority of our larger customers have in the last quarter, have hit the volumes required to qualify for these deals.

And you haven't seen customers come back at any time and renegotiate the fixed or the variable component of the pricing contracts?

Actually we just went through a whole, signing of a whole new multi-year deals as I mentioned before, and no, we haven't felt that pressure at all.

OK. OK, and then the guidance on the expenses of five percent increase for the remainder of the year, you know, what's the reference point? I just, the, if you'd clarify that as how ...

I think the way we've said it in the past is we expect our expenses to grow less than five percent, as, and I think as Jeff pointed out, our expenses have been flat to down for the last two quarters. You know, they are, we have a very tight control of our expenses, and we, and we do not expect them to grow significantly. So I think we've sort of said it, the way we've said it it would be outer bounds we're up five percent. But because we have a very hands-on management structure, we do expect that we will keep very tight control of our expenses.

And one of the ways we've been able to grow, I think as Jeff mentioned is that as we replace consultants who helped us post 9/11 rebuild our business with permanent staff, obviously the permanent hires are less expensive than consultants, so our professional consulting fees have continued to drop, and our compensation lines have grown, but not as quickly so we can grow the business. But, and not actually increase our expenses by adding that kind of staff. So we feel very confident that we've got our costs under control, and our ability to grow well affirmed.

OK. And the last question Howard is, you mentioned a few times about the software development and, you know, had a nice bump up to one in the software, its unrelated parties line. Could you talk about more a little bit about the 4.5 suite of products? And is that different than sort of the price improvement modules that you sort of had mentioned the last quarter? Are this all in one package in this 4.5? And then how will it impact that revenues in that line?

The 4.5 version is actually not a revenue model, Rich. It's an addition to our software that will increase volume. I mean, it's not something that we're going to sell. It's basically something that we add to the platform and that will increase the volume of our - of our wholesale client base. So the excitement about it is that what's been developed for the last year and a half combines a lot of ideas that traders have asked for and that, you know, our own team has set and analyzed the marketplaces to make people - I think I mentioned in the last quarter call velocity of trading. And the software makes things trade or offers the ability to trade one against the other in multiple, multiple fashion. So it should increase our volume and velocity with traders.

OK. And maybe I missed this. You probably went over this, but the up tick in software fees from unrelated parties. That was due to what?

That was primarily driven by our - the ICE transaction.

Right, right, OK.

That was the primary driver. So what we've seen in 4.5 is that that software will increase the trading volume and types of trading volume and the price that we receive for certain products. For instance, price improvements, if clients were to select having our technology try to get them price improvement and our average price per million on those transactions would rise. Same customer, same expense, but because the system has done better for them we would receive an increase in revenue per million traded. So you'd see it sort of factor in either in a price per million in more volume growth compared to the market as a whole it would appear on our fully-electronic revenue line.

But 4.5 does arm us in some ways to improve our software solutions business. We did just go live with one customer. The Home Loan Bank just released 4.5 and is using that to sell directly. As you've heard in the past, the Home Loan Bank is our customer for software solutions and they are using 4.5 now to do electronic transactions with their customers. So this is a software solutions - software license that we have signed a while ago and they have upgraded to 4.5. And they are using it to better enable themselves to do business with their customers. And because we receive a small variable component in most of our software solutions lines as well, you would see that the more they use it and the better the product is for them the more revenue we'll receive, and also, of course, the more software sales that we'll make.

So I think 4.5 from Lee's perspective is primarily driven by electronic trading revenue but it will have a small additional component in the software solutions line. And not directly and not initially but those deals will come over time and you'll see about them as we announce them.

OK. And then one last one if I could sneak it in, but it'd be on any guidance or outlook for '03, any comments on that?

Not on this call, but you should expect it in the future.

OK. Thank you.

All right. Our next question now comes from Charlotte from Jefferies and Company. You're on line.

Good morning. Couple of things, specifically with respect to TradeSpark and ICE and the energy trading. I heard what you said that TradeSpark was a component to your revenues, but that payment from Ice for the licensing fee is important. Could you give us some color on what the status of online energy trading is? Certainly, reading it in the press, it sounds like it's under a very dark cloud of investigation, and that basically that market has turned to a voice market. So that's one question. The other issue, with respect to the previous question about and is that I understand and certainly far from perfectly, that main market here in the U.S. is what's called the slots market, which goes from the -- from a previous security to the on the run security. And I was wondering if you have any sense as to what this merger will do in terms of competition there. And then second, I was wondering what eSpeed's main business in Europe is.

And then finally, as we have all the news about certification and options, just as a housekeeping issue, if you could just tell us about certification and what you plan to do in terms of accounting for options. Thank you very much.

Sure. So I'll start at the beginning, which is, in the energy trading space, the issue is not, as far as we can tell, electronic trading versus voice trading. The issue is overall volumes in the market by the end reading firms. And that business certainly, from an overall volume perspective, has deteriorated over the last quarter. I would point out, however, that the volume had increased dramatically once Enron came down in November of '01, so really the torrid rate of growth in the energy space was really an end of fourth quarter, first quarter sort of phenom that then effectively disappeared. And the business that remained thereafter went back to sort of pre-Enron levels.

And it went -- went really back to the core business model that TradeSpark announced into -- a year earlier in 2000, which was, voice-based businesses are slow and expensive and fully electronic trading and straight-through processing will improve efficiency for the markets themselves, as well as reduce the transaction cost by the participants. One only needs to look at the voice futures pick of the and the gas contracts to see that natural gas trading, which remains a focus of TradeSpark's, still is a very -- more than a viable business, it is a huge opportunity to create electronic trading in those cash markets. The power business, particularly, has been hit by the current set of -- the current set of news has reduced the volume in power trading. But natural gas business remains strong.

So I think converting from voice to a fully electronic remains TradeSpark's goal. I think it has a face now on which to build, and we expect to be growing going forward. It remains a comparatively small component to the company, but because it utilizes the same exact software, each dollar of growth comes with it the same comparative margins as the balance of our business. Which, I said in the past is marginal revenue to the company to come with at least 50 percent margins associated with that to the bottom line.

With respect to your second question, I think the company you're talking about is generally referred to as , which is . And when they talk - and this is just general - but when they talk about their swaps business, as far as I can tell they're rarely talking about intra-U.S. treasury business. I think they're probably talking about interest rate swaps.

So we expect in 4.5 software to be focused on - this is a new software release which will cover the spread business and how generally we refer to the business of trading in older U.S. treasuries to the new issue. When there's a new U.S. treasury issue, people trade it outright and then they take the prior traded issue and they generally trade it on spread.

It is very consistent with most fixed-income products like, for instance, corporate bonds. And most of the voice businesses trade on spread. So the older issue will trade as a spread to the new issue.

Our new software 4.5 release will really be the first time that we have a fully-integrated piece of software that our clients can use with their exact same keyboards, with the exact software that they have on their desks, to be able to trade that spread product. And so really this is a classic example of new fully electronic trading, much, much cheaper, much more efficient, going after the voice business, because that's who does this business now. It is a voice business currently. So that's part of the excitement of why we think 4.5 will do very well for the company.

With respect to Europe, our fixed-income businesses in Europe are doing very well. And, Lee, do you want to just spend a minute and talk about our fixed-income businesses in Europe?

The business in Europe really relates around the future's markets, as everyone knows. I mean the depth of liquidity in the platform is already driven to trading with European government bonds.

Now the - one of the major successes of the eSpeed platform is that years ago we developed basis-trading software. And we were able to convert people into a simpler fashion to do cash transactions versus futures in a single keystroke. So you business kind of grew upon itself there, and we continue to lead in that area.

The marketplace, in terms of European government bonds, is generally led in volume by German governments. Still today it is. One of the things that we're excited about is actually the fact that their customer base is in the process of getting more involved in the cash markets. I think the cash markets are going to see a lot more play going forward.

Our software versions that were coming today make it easier to access these cash prices, to trade them simply keystrokes on their current existing keyboards or mouse-driven platforms.

And then your last part of your question, with respect to certification, Jeff Chertoff and I certified on our 10-Q, which was followed today, and we do expect to certify our financials going forward. And with respect to options, we are currently studying that issue and we will get back to you once we've come up with a decision. But we are indeed studying it.

Just one follow-up, if I may. Who's the, your main competitor in the older treasuries to new treasury market?

Voice, the voice brokers do that business now. There is no successful electronic platform that has captured that market, and that's one of the reasons why we are so excited about 4.5, because 4.5 puts in our current customer's hands the way that they will want to, we think that they will trade spreads, and that kind of business, so that would be net new business for us, that's not something the company has done very little off the run business. All of the voice brokers do that now, and obviously the fully electronic trading, coupled with as Lee pointed out, these long-term volume discount arrangements we have with our customers makes trading on our platform, and building liquidity in those markets now that we have the software which is being released currently, is very exciting for us.

Thank you.

And again, if anyone has any questions at this time, please press star one on your touchtone phone please. Hi there, our next question now comes from , excuse me, from JP Morgan. Sir, you're online.

Hi, great. Great quarter guys. Just wanted to focus for a moment on new products. I know that the 4.5 launch would certainly tease you up for the spread products. Are there other areas that you're looking at, you'd mentioned concentrating on R&D and new products, or going forward. Is there other products that you'd like to highlight?

Sure. The, let's talk about it from a horizontal perspective first, which is the spread product class, which would allow a multi-instrument trading, trading issue A versus issue B in U.S. Treasuries, that would be an example of the two year versus the old two year as a spread. Another example would be a curve trade, the two year versus the five year. But that then, that then gives us the ability, that's U.S. Treasury, but that also, that releases also for European government bonds. It would also be able to allow us to extend into corporate bonds, and the global issues there.

It allows us because interest rate swaps obviously are a fixed versus a variable transaction pool, it would allow us to use that same type of software to expand in the interest rate swap business. So that is, so if you look at it horizontally, meaning that the spread component would go across all of the different types of products. We then, we then have of course the next one, which is direct dealing, which we have mentioned in the past. Direct dealing is eSpeed's way of allowing one customer to ask multiple customers for a price, get back a price, so it would run an instant auction if you will, get back a sealed auction prices from everybody on the platform, and then choose the best one and deal on it.

So that's a one to many, instead of eSpeed's normal markets are many to many open system auctions, this would be sort of a sealed bid one to many market. And that would allow for instance if a client of a big investment bank were to ask them for a price, let's say on 200 million old five year notes, then one of our clients could type in that same request over the eSpeed platform, get prices from the other market participants, and then respond to their own customer. So that's a new way of doing business. eSpeed has never done the one to many and we are excited about that.

And, of course, that type of software, not only does it work for U.S. treasuries, for agencies, again, for corporate interest rate swaps, or European products, it goes very, very well across the board. And as Lee mentioned, this is a global software release, meaning that it is in Europe as well as in America across all our product lines and we are excited about that.

And then lastly, of course, is our maximization of price improvement software which allows clients to ask our system to try to do better for them. And the way we like to explain it is since the system, if they turn it on the system will tell them they cannot do worse than they request, they can only do better. We think it is a type of selection that each and every one of our customers would make because they cannot do worse than what they initially suggested. And so we think that will increase our revenue per transaction. And then again, we will then - it's less obvious, but we will then go work on that maximization software across all of our other products to institute that as well.

So I think those three together so the type of software innovation that we are releasing into the markets and where we can leverage and extend our market into new markets using the same class of software but into new marketplaces and leveraging them back to our benchmark

OK. So the current 4.5 launch is - that software is already engineered to facilitate these various horizontals you just outlined?

Yes.

OK. And can you talk for a moment about TradeSpark and the VMAC arrangement for clearing? You know, what do you see is the competitive advantage of that type of structure versus what some of the other electronic energy exchanges have tried to do?

We are very much focused on the issues, the credit market and capital market issues surrounding the energy marketplace as a whole. We are working closely with the industry participants to try to come up with a solution that they embrace. And so what we have - what we are doing is we are working with - in this particular model, bringing and discussing a model with the market participants. We think they may well like it. If they do then, you know, very much we will be a part of it. And we are trying to design and assist them in designing a back-office process and a credit process that suits them.

So your commitment to this particular back-office credit solution is sort of contingent on your end users, you know, demand and acceptance of it. Is that fair to say?

Yeah. I think that's reasonable to say that the purpose - the purpose of whatever business structure that we pursue would be to have the industry itself embrace it. But because we are out trying to anticipate where the market would like to go to, come up with good ideas and present it and bring it in front of them so that they can consider whether it works for them. I mean, that's exactly what we're trying to do to create the kind of infrastructure necessary to truly grow the business in much the way that we assisted for those many years in building the infrastructure and fixed income that allows eSpeed to have the kind of volumes we have. It is getting out in front of the curve, helping arrange the marketplace as a whole. And then eSpeed, because of its unique structure and cost base, being able to benefit from increased volume levels .

Great. Thank you, Howard.

We now have a question from Jack Pitts from Steadfast Financial. Sir, you're on line.

Mr. Pitts, you're on line, sir.

Sorry.

That's OK.

Morning. What would be the tax rate long term after your NOL's used up?

I think that as far as -- as far as we have looked so far, we think so far we have looked at it and it seemed to be just below 40 percent. So, for those who are using 40 percent, that's certainly adequate for now, and as we put more detail on it, we will come out and talk about it more particularly. But so far, it's 40 percent or slightly below, from our expectations.

Thanks, and what can we infer from the total electronic volume, which looks like it grew about a percent, versus the number you put out for the federal U.S. treasury volume, which grew about three percent, both of those numbers sequentially? Especially when you said that TradeSpark has been traditionally kind of a smaller amount of revenues. Can we get any detail on how you're doing in the actual treasury market in terms of comparing it to the growth of the treasury market itself?

This is Lee. I think I mentioned it before when we talked about our fixed income business, not particularly our treasury business, our fixed income business overall has seen an improvement in the last quarter, based upon the fact that we have customers that have kicked in for the volume discounts. Of course, it then leads to more volume, more people participating on the platform, and as Howard mentioned before, you know, volatility is eSpeed's friend, and there's certainly -- in the markets have certainly been volatile as of late.

So it's basically one of pricing? I guess, because the volume discounts wouldn't affect fully electronic volume in , would it?

Well, it wouldn't -- not in billions, but I would say that if you look at the component that I mentioned earlier, the fixed versus variable, once you get to a point where your incremental cost per transaction goes down, because you're doing more volume, it's going to increase your volume to get it to a rate that's going to draw it away from other platforms. Because you're going to be in a position to trade with us, and certainly, we see that happening.

So our fixed income business has grown compared to the benchmark of the U.S. Treasury overall volume, which was three percent this quarter, our volume was right at four -- over four percent, 4.7, and that includes a reduction in volume in the energy space. So our growth compared to the industry as a whole was above that. It may not have been a large amount above that, but it was above that as well.

OK, thanks.

All right. We now have a follow up question from from . And you're back on line.

Yes. Good morning. Could you talk? A couple things. First of all, housekeeping, if you could give us just phone numbers, so we could follow up with questions to him. Second issue, what about share buybacks? With $180 million on the balance sheet, have -- I remember last quarter you said that you weren't intending to buy back. I was wondering if that had changed at all. And then with respect to markets, certainly now that the U.S. government is going from a surplus to a deficit, I was wondering if you could give us some guidance as to how much of an accelerator in your business you think that would make.

And the second thing is clearly the fastest growing part of fixed income is mortgage-backed securities. I guess Fannie Mae now thinks that we're going to have a 10 percent increase in mortgage debt this year over last year, and I was wondering to what extent you're in the mortgage-backed securities area and to what extent in that business as might be a positive for you. Thanks.

This is Jeff. I will call you directly after this call and then we can talk about any other specific questions that you have.

Regarding the balance sheet, you mentioned that at the end of June, when we talked about the fact that we also increased our cash balances by the proceeds, we have $180 million of cash on the balance sheet. And as most of you know, eSpeed's board approved the potential buyback of our stock. And I think in response to your question, you may well see activity on buybacks in the future. Of course, that depends on the price and what's happening in the market.

Could you give us some guidance as to what kind of you think is attractive at this point?

We're...

I mean it seems to me if it's not attractive here, where is it attractive?

I really don't have a comment on that subject.

OK.

You asked a question about the mortgage-backed business.

Yeah. The gross - you know now that the U.S. is in a deficit rather than a surplus, how that may accelerate your business. And then also mortgage-backed.

Well obviously when there's more debt issuance our business should accelerate because of the fact that volume on volumes. And the fact that our system is the accepted platform in the field today, we would expect any volatility and any volume increases to boost our own volumes on our platform.

Now as far as mortgage-backs are concerned, that historically has been a voice business. And it still continues today to be a voice business, although we do have the capability of making it electronic, and it is in our plans. We had it electronic pre September 11th, and our focus has been to get into our core business back again, release version 4.5 and then move into the products that we had pre September 11th to put them back on line.

Our software is in tact; it is operational. It's just in a matter of a that turn products back on.

OK, thanks.

And we now have our last question from . Sir, you're on line.

Hi this is again. Just one follow-up question. With regard to the spread product, do you have any sense of the size of that part of the market in terms of dollar volume traded?

We have generally considered that the spread business was half the size of the benchmark business. It does, however, include some benchmark trading because the spread trades by definition often trade versus benchmarks. So what you might see is a company that only did spread trading would say it had a certain - did a certain volume of benchmarks.

But that's not really outright benchmark trading the way eSpeed does it now. It's a combination trade that includes a benchmark. But from a - you know from a size or value perspective, we think it has a revenue opportunity half the size of the overall benchmark business.

And is - what about pricing on that product? Should we assume that that's going to be similar to your just trading treasuries outright?

Well I think generally similar, certainly with those who qualify for our long-term volume discount deals it was all, the price is already negotiated and it falls under those models. I think generally speaking we may see a relatively higher price per million on those transactions going forward. But they also come with two parts, so you get twice the volume when you do those transactions. So we'd see it, you know, you might see it as just increased volume, we would see it as one transaction which has two parts, so we received a higher price per single transaction, but the way it'll probably be displayed is because it's a buy and a sell of a different product, probably will show as just increased volume.

OK. Great, thank you.

And that is it for questions.

Well thanks, thank you all for joining us this morning on our conference call. And we are very much focused on having rebuilt the company since the events of September 11th. We are very much focused on growth and building for our future now. I think you heard it in each of our voices, we're very proud to have Jeff Chertoff be a part of our team, and we look forward to talking to you again next quarter. Thank you everybody. And good afternoon or good morning.

Thank you. And that does conclude today's conference call. All participants, you may disconnect at this time.