Bgc Group Inc (BGC) 2002 Q3 法說會逐字稿

Good morning and welcome to the eSpeed third quarter earnings conference call. All participants will be in a listen only mode until the question-and-answer session. At the request of Hobson Financial, today's conference call is being recorded. If there are any objections, you may disconnect at this time. I would like to turn the conference over to Mrs. Abbey Goldstein.

Hi, good morning. I just want to remind everyone that statements contained in this call which are not historical fact 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 materially from those currently anticipated due to a number of factors which include but are not limited to, the effects of the attack on the World Trade Center, market volatility, the limited operating history of eSpeed 'Inc. and its ability to enter into marketing and strategic alliances, to effectively manage its 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 on form 10-ka, filed with the Securities and Exchange Commission. It is now my pleasure to turn the call over to Howard Lutnick, Chairman, Chief Executive Officer and President of eSpeed.

Good morning everyone and thank you for joining us for our third quarter 2002 conference call. With me this morning Lee Amaitis, our Global Chief Operating Officer and Jeff Chertoff, our Chief Financial Officer. Lee will speak to you about our recent product enhancements and planned product rollouts and Jeff will review our financials a little later on.

Having just recently crossed the one-year anniversary of September 11th, I couldn't be more proud of the dedicated and loyal team of men and women who make up our company eSpeed. It is with this immense pride that I am here today to speak of the strong financial results of our company. We have continued to build eSpeed and we've now focused our efforts on our growth going forward. With respect to our earnings, we reported net operating income for the quarter of $8.7 million, which is 16 cents per share in this third quarter 2002. This compares to a year ago loss of $4.1 million or a loss of 8 cents a share. If we compare our results to the fourth quarter of 2001, and the reason I mention this is because as I said previously the fourth quarter 2001 was the first full quarter after the events of September 11th. You can see that we just about doubled our earnings from the $4.5 million of the fourth quarter 2001 which was about 8 cents a share.

Our net operating margins continue to expand adding another 270 basis points sequentially to over 26% return on revenue. Keep in mind that we have expanded our margins every quarter since we became profitable. In the fourth quarter of 2001, our first quarter we were profitable, we reported 16% margins which then grew to 21% in the first quarter 2002, 24% in the second quarter and now to over 26% in this third quarter. That is an improvement of 10 percentage points in just four quarters. We remain confident that we can continue to expand our margins and we are looking forward to growing to 35% margins over the next two to three years. Our total revenue for third quarter 2002 was $33 million, 17% above the third quarter of 2001 and similarly the fourth quarter of 2001. Our fully electronic revenue increased 45% to $22.8 million, compared to $15.7 million in the third quarter 2001 and the 29% over $17.7 million in the fourth quarter of 2001. The tremendous strength in our fully electronic revenue demonstrates the growth in our core businesses and our electronic trading platform.

I would like to take a few moments now and review with you our four main growth categories. These are our key growth drivers. Our core product growth and their continued expansion. Our product enhancement software. Our product extensions and our new product rollouts. And finally our software solutions and licensing. I'll address our progress in growing our core product as well as our software solutions and licensing. And Lee will update you on our product extension software and our new product rollouts as well as some more product extensions.

I think it is important to remind you how we became the marketplace leader in the nonequity capital market. As most of you probably aware, eSpeed was spun off from Cantor Fitzgerald or spun out of Cantor Fitzgerald in 1999. The creation of eSpeed within Cantor, and Cantor was the leading intermediary for nonequity capital markets, which if you think about it, is the financial world beyond stocks. It was due to Cantor recognizing the need to migrate from an antiquated and inefficient voice brokered business to a fully electronic platform. And it did this in order to become the low cost. And to be the low cost provider, it had to be the most efficient, it had to be less expensive, expandable and most importantly extendable and scalable across products and currencies.

At eSpeed our leading market position and superior technological platform put us in a category of our own in terms of performance and liquidity. We are now focused on the next step in transforming the way people trade. The next generation of products will continue to evolve from voice markets. We have been developing these products and enhancements for over a year and have begun the rollout this quarter.

I would like to spend time today speaking with you about this next phase in market penetration as I discussed the first and the fourth of our growth drivers. First, the extension of our core products and then as I mentioned, I'll discuss software solutions and licensing opportunities. So with respect to our core products, we focus our attention as I mentioned on the nonequity capital markets of world. We view ourselves as the New York Stock Exchange, Nasdaq and AMEX, for the financial world beyond stocks equivalent to all rolled into one. We're serving the rest of the world's financial markets. If you think bonds, interest rates and derivatives, you have the right idea.

To put this in perspective for you, the nonequity capital markets are multiples larger than the U.S. equity market. Some people suggest they may well be 10 times larger. Not only are our markets enormous, but they are growing at an impressive pace. And you can see this evidence in the growth of the federal reserve volumes which grew year-over-year 50%. To put it simply, the pie we operate in is getting larger and larger. Our core markets, which are U.S. treasuries, European governments, the Canadian nonequity capital markets, Japanese government, Euro bonds and foreign exchange options to name a few, all are expanding. And volatility in the markets benefit the company. Market volatility is a friend of eSpeed.

We are focused on expanding our market share and growing our business proactively. And we are proud that our volumes and market position have increased ever quarter across 2002. We expect our core markets overall to continue to grow, and where there are expanding product base, which Lee will discuss in a minute, we will continue to work hard to improve our market share and position across these global markets. A recent example of our continuing penetration into our core markets is that we are pleased to announce that we have signed the deal this quarter with UBS Warburg, one of the world's major global fixed income liquidity providers. This deal, along with last year's Deutsche Banc deal, demonstrates that the world's largest market makers use eSpeed's distribution systems and connectivity to the world's fixed income traders, to bring them transaction volume. They have chosen eSpeed technology platform to distribute their prices electronically.

With UBS Warburg's prices electronic prices for U.S. treasuries, European and Japanese government bonds, as well as U.S. agencies now available on eSpeed's trading platform, market participants will have access to a greater pool of liquidity. This agreement serves to grow eSpeed's already strong position in the government securities markets, and to grow our business now in the U.S. agency markets and assist us with respect to the off the run treasury sector as well. We're honored that UBS Warburg chose eSpeed, enabling us to continue our focus on relationships that allow us to provide the leading marketplace globally in exchange for fixed income securities.

Now I'm going to turn to our portfolio of software and intellectual property rights and patents, which is another key component of our future growth. We have recently begun to express some of this value and we expect going forward and we will continue to grow these assets. In August, we announced the license of the Wagner patent to the Chicago Board of Trade and to the Chicago Mercantile Exchange. Each of the Chicago Board of Trade and Chicago Mercantile Exchange agreed to pay eSpeed $15 million, $5 million each up front and $2 million each per year for five years. We will be amortizing these payments over the remaining years of the Wagner patent and Jeff will explain that in more detail in a little bit. This is of course in addition to the licensing agreement we made with Ice-IPE.

We also have a Wagner patent trial with the New York Mercantile Exchange scheduled for the first quarter of 2003. And because of that ongoing litigation, we will not discuss any NYMEX or Wagner issues at this time. The revenue from the licensing of our intellectual property will continue to be accounted for pro rata under our software solutions and licensing fees with unrelated parties category. Please keep in mind that we have a portfolio of intellectual property rights and patents. Including the Lawrence patent that we feel will continue to create significant shareholder value.

I would also like to mention the terrific addition of Al Weis to our board of directors. Al was the former chairman of the New York Board of Trade as well as the New York Cotton Exchange and we are sure he will add tremendous value and insight to our team. I would also like to extend from all of us at eSpeed our best wishes to our friend, Senator Frank Lautenberg. Senator Lautenberg joined our board in October, but with his recent win in the New Jersey Senate race, he will be back in Washington and we all wish him continued success in the Senate. I would now like to turn the call over to our Global Chief Operating Officer, Lee Amaitis.

Good morning everyone. I would like to first review with you our volume and transaction counts this quarter. After that, I want to continue along the line that Howard began and discuss two or more of our growth drivers. In particular, I want to tell you about our expansion into the additional fixed income products and the continuing rollout of our software enhancements that will power our growth into the next year and beyond. Starting with volumes, this quarter our total electronic volume was $9.7 trillion dollars, up 28% from the third quarter a year ago. And up 34% versus the fourth quarter 2001, our base comparison quarter. eSpeed's fully electronic volume for the third quarter, 2002, reached $7.2 trillion an increase of 64% versus the third quarter of 2001. Which compares favorably to the federal reserve reported increase of just over 50% in U.S. treasury trading volumes this year-over-year.

The third quarter fully electronic volume also represents an increase of 39% over the fourth quarter of 2001. The total transaction count for third quarter of 2002 reached $1.2 million transactions. Up 50% versus the third quarter of 2001, and up 41% versus the fourth quarter of 2001. Our fully electronic transaction count made up almost all of our transactions at $1.1 million, up 74% versus the third quarter 2001 and up 43% versus the fourth quarter of 2001. We continue to experience no price pressure as our volumes grow, more of our clients benefit from volume discount arrangements that we have had in place. This structuring improves our revenue, our profits, our volumes and our market position. Our electronic volume and electronic transaction count underscore the continued growth we have achieved in the electronic trading ouf our core fixed income products.

eSpeed has changed the fixed income markets. The technological capacity of the eSpeed platform has brought incredible speed, distribution and cost savings to the trading of fixed income financial instruments and U.S. treasuries in particular. In just a few years, we have seen the electronic trading of these benchmark instruments completely replace traditional voice brokerage trading methods. eSpeed's ability to extend the cost achieved by more efficient electronic trading methods across the additional fixed income products, will be an important part of our future growth.

We are the leading marketplace for U.S. treasuries. In the nonequity capital markets virtually all interest rate related products trade at a spread to treasuries. Or at a price or rate compared to where U.S. treasuries are trading. This category of interest rate related products constitutes a market of over $2 billion of currently voice brokered revenue opportunity. This includes interest rate swaps, corporate bonds, mortgaged backed securities, repos, municipals, agencies and off the run governments. Our objective is to create the same opportunity that eSpeed has realized in benchmark treasuries across the whole range of additional interest rate related financial instruments.

These additional products are not new to us. Our management team has had many years of extensive experience as well as broad based knowledge in these markets. And as liquidity builds in the new products, we hope to see the same snowball effect that we witnessed with the electronic trading of U.S. treasuries. The reason we expect to succeed is straightforward. First, we are the leader in U.S. treasuries, the basis for trading of all other interest rate products. Second, we are already integrated with the market makers and the traders across the country and around the world, provide the liquidity in these additional fixed income instruments. And third, our software sits on the most valuable real estate in the market. On the desks of interest rate traders at major banks and investment banks around the world.

Let me talk a little bit about this desktop real estate in the context of our other growth driver. The software enhancements that we are rolling out this quarter. We have priceless shelve space on the desks of the fixed income traders of banks globally. In that same space we already occupy on the trader screens. We release our products and expend our core products like those I mentioned. Our unmatched connectivity is one of eSpeed's most valuable assets and a significant barrier of entry for others. We are currently rolling out a new screen configuration which we will call Super Quads. With the enhanced platform screen, the Super Quads will give traders, along with eSpeed's unparalleled access on their desktops, our expansion into additional products such as spreads and off the runs will be seemless. There are limited costs involved in our pursuing these new markets.

Another software enhancement we're rolling out this quarter is called Direct Dealing. Which enables traders to trade directly one to one, one to a few and one to many. Direct Dealing is especially effective for the trading of less liquid products where continuous type markets are not readily available. We are confident that as we continue to roll the software enhancement out to our clients, the electronic volume over the eSpeed platform will build in the less liquid markets.

Our third software enhancement is price improvement. Price improvement contains sophisticated software that accomplishes one critical thing. It allows the trader the opportunity to get a better price with a single keystroke. Finding traders better prices allows eSpeed to earn a small percentage of the improved price. This software has the potential to add significant revenue and profits. Our software enhancements will make it easier for traders to participate in and drive the volume, growth in the fixed income markets beyond the U.S. treasury market. A rollout of these enhancements will take place throughout the fourth quarter so we can visit with our clients on an individual basis and provide the attention that all our customers deserve. With that I would like to turn the call over to our CFO Jeff Chertoff.

Thanks, Lee and good morning everyone. I would like to spend some time talking about our financial results. For the third quarter we posted record results of $8.7 million in net operating income or 16 cents per share. That compares to a net operating loss of $4.1 million or an 8 cent loss per share for the same period last year. Comparing this quarter to our fourth quarter 2001, which we continue to use as our base comparison quarter, our net operating income grew 95% from the fourth quarter's net operating income of $4.5 million or 8 cents per share. We report net operating income in order to better reflect earnings generated from the company's operations.

Our results from the fourth quarter to the third quarter show healthy growth. In comparing our net operating results to our actual GAAP results for the third quarter, we reported GAAP net income of $7.7 million or 14 cents per share. The difference is made up primarily of $540,000 related to noncash charges associated with Business Partner Securities and a $500,000 contribution related to our September 12 charity day in which the company donated its commissions to assist the families of those employees we lost. Looking at the GAAP results for the third quarter of last year, which is the September 11th quarter, we report a net loss of $22.9 million, or 42 cent loss per share. The difference between our net operating loss last year and our GAAP loss last year were noncash charges of $3.9 million on the post September 11th write down on investments, $517,000 related to Business Partner Securities and a $14.4 million provision for the events of September 11th.

I'd like to talk about our net operating margin and the leverage of our business model. Because we have a frictionless digital product, that is, we don't have any product to warehouse or ship, and have a built and paid for infrastructure in which the investment in our technical foundation has already been made, we have been consistently able to expand our operating margins as we grow our revenues. For third quarter, our net operating margin grew to 26% as compared to 24% in the second quarter of 2002 and 16% in the fourth quarter of 2001. A 270 basis point expansion sequentially. Our margins expanded 1,000 basis points from 16% in the fourth quarter of last year.

Fundamental to our business models is extension in scale and our ability to add new products or increase our volume on current products without additional marginal costs. Our software is proprietary and our significant research and development expenditures are already built in to our operating cost structure. As you have seen, we have tight control over our operating expenses. As revenues climb, we expect that our incremental margins will continue to expand as our bottom line continues to grow. Our incremental net operating margin for this quarter was 61%. We expect our incremental revenue new growth to come with over 50% returning to our bottom line.

I will now turn to revenues. Our third quarter revenues of $33 million were up $4.8 million or 17% compared to the third quarter of the prior year. And comparing it to the fourth quarter of 2001, the increase was also 17%. Our fully electronic revenue of $22.8 million increased $7.1 million or 45%, compared to the third quarter of 2001 and $5.1 million or 29% as compared to the fourth quarter last year. Software solutions fees from related parties represents revenue from providing technology support services to Cantor TradeSpark, [INAUDIBLE] and municipal partners. Third quarter fees of $3.4 million were down $1.4 million versus the third quarter of last year. These fees are lower due to the reduction in support necessary post September 11th of last year. The fees are consistent with those of the fourth quarter of 2001 and going forward, we expect the same general level of revenue from these sources.

Software solutions and licensing fees from unrelated parties was up $600,000 or 93% versus the same quarter of the prior year and up $700,000 or 114% versus the fourth quarter of 2001. Included in software solutions and licensing fees is $949,000 from licensing the Wagner patent. $500,000 represents quarterly revenue from Ice-IPE under the terms of the licensing agreement that includes at least $2 million per year in licensing fees. As a reminder, the Ice-IPE agreement was entered into in March 2002 and runs through February 2007. The additional $449,000 represents one month of revenue in licensing fees recognized as a result of the Wagner patent license with the CBOT and CME.

As Howard mentioned, as part of settlement, the CBOT and CME each agreed to pay eSpeed $15 million for a total of $30 million. Each $15 million payment included $5 million paid up front in this the third quarter of 2002 and $2 million per year for the next five years. Of the $30 million, $5,750,000 may be paid to ETS as part of our purchase arrangement with the former owners of the Wagner patent. And at least $24,250,000 will be recognized as licensing fee revenue taken ratably over the next four and a half years. We expect that the CBOT and CME licenses will generate quarterly revenue of $1,347,000.

In the third quarter, eSpeed did receive the $10 million in up front payments from the settlements and in October, we paid $2,750,000 to ETS, the former Wagner patent owner. Our operating expenses of $24.1 million this quarter were up $900,000 versus the second quarter of 2002. The change was driven primarily in other expenses by an increase in the amortization of legal fees associated with the Wagner patent settlement. However, annualized year-to-date operating expenses of $94.8 million are up less than 1% compared to annualized fourth quarter 2001 operating expenses of $94.1 million. As you can see, we have strong control of our expenses.

I'd like to take you through our operating expenses line by line to help you understand their direction. Our compensation and employee benefits will remain relatively consistent next quarter. Occupancy and equipment, professional and consulting as well as communication and client network should also remain generally in this quarter's current range or maybe slightly higher in the coming quarter. We expect our marketing expense to decrease during the fourth quarter as we reduce some spending relating to the marketing campaign. We also do not expect significant growth in administrative fees or other expenses from this quarter's figures.

We ended the quarter with a strong cash position of $194 million, an increase of $27 million from the previous quarter. The increase in the cash was primarily driven by our net income of $7.7 million, $10 million in up front payments from the CBOT and CME related to the Wagner patent licenses. $12.8 million in business interruption and insurance proceeds that we accrued for in the previous quarter. And partially offsetting this were the additional legal costs related to the Wagner patent defense and other increases in capitalized assets.

Recently in the fourth quarter, eSpeed paid $2,750,000 to ETS, the former owner of the Wagner patent from the $10 million in up front payments from the CBOT and CME. And to remind you, we pay our employee bonuses in the fourth quarter which we accrue during the year. Our earnings are reported without tax because of our net operating loss carry forward going into the fourth quarter and after our third quarter earnings. Our NOL currently stands at $17.9 million and we do not expect to pay taxes for the remaining balance of the year.

Talking about our insurance, as I mentioned, we receive $12.8 million in business interruption insurance proceeds in the quarter. And that represents the full amount we expect to receive for business interruption insurance. In addition, we still expect to receive additional property and casualty insurance. To date, we have received $20.4 million of our $40 million of coverage. We expect these insurance proceeds to offset capital expenditures, including purchasing computers and equipment and building out our permanent New York location. These insurance proceeds clearly will augment our already strong cash position. I would now like to turn the call back to Howard so he can share with you our outlook for the rest of 2002.

Thanks, Jeff. We would like to remind all of you about the seasonality of our business with respect to the fourth quarter. This year in particular we are facing a particularly inopportune holiday schedule. With both Christmas and New Year's coming on Wednesdays, we expect traders will be taking off time from work both before and after each of these holidays. This has the potential of impacting two full weeks of trading as opposed to our more usual seasonality of two long weekends.

Looking ahead for remainder of 2002 we still expect to generate revenue in excess of $124 million and maintain our operating expenses as Jeff said -- generally consistent with this range as you saw in the third quarter. We are raising our earnings per share guidance for full year to a range of 55 to 56 cents per share and that compares to our prior guidance of 47 to 50 cents a share. For the fourth quarter 2002 specifically, we expect to earn, earnings per share in the range of 15 to 16 cents. With that, I would like to turn the call over to the operator and the three of us are available to answer your questions. Operator, are you there?

Thank you, sir. If anyone would like to ask a question, please press star 1 on your touchtone phone, and to withdraw your question please press star 2. Once again, to ask a question, please press star 1 on your touchtone phone. Once again, if anyone would like to ask a question, please press star 1 on your touchphone phone. Our first question from Charlotte Chamberlain of Jefferies and Company.

Good morning and congratulations on a fine quarter. Your last comment kind of explains why the upside that you seeing is so low. Since you're going to have a full quarter's worth of benefit from the licensing, which should add about 2 cents to the fourth quarter, and since treasury issuance seems to be up at least 10% from where it was from the third quarter, it sounds -- are you really saying that you really expects these traders to take that much time off, that it would offset that kind of improvement? And second question, did you buy back any shares in the quarter and what are your plans to do that? Thanks very much.

With respect to the December or the fourth quarter seasonality, the example to start with this Thanksgiving where the Friday after Thanksgiving tends to be one of the slowest days of the year because virtually all of the traders take off. The Wednesday before Thanksgiving is relatively slow. We have experienced over the years that when Christmas and New Years are on Wednesdays, basically, the Monday, Tuesday, Wednesday and Thursday Friday period, half of the entire business takes off one set half the other set and then again, there will be another Monday, Tuesday before New Years where the same thing happens again. So it really does take of the 62 trading days this quarter, it takes effectively 10% of the trading days effectively out of the market. So you have correctly pointed out that the Wagner patent license would improve the quarter, but the inopportune seasonality which happens every so often would effectively offset that just for this quarter.

Howard, let me just follow-up on that. Seems to me that it's not like me impulse shopping for Christmas. I mean, presumably these people have to get something done, and whether they crumpet into a couple of days or expand it, isn't there a certain amount of business that has to get done? Is that much of it purely just on impulse?

No, it is not about impulse, it is simply if the world's traders are not at work, their volume of trading decreases dramatically. And when half of the world's traders don't come in because they are on vacation, it reduces the volume considerably. For example, last year the slowest trading day of the year as you would have expected in 2001 was September 13th, which was the first day the markets reopened after the events of September 11th. The second slowest trading day of the year was December 31st of last year. And then the third slowest day was September 14th, obviously. So what happens is the seasonality at the end of year can be very slow and Wednesday holidays tends to be particularly slow. And of course we are being conservative with respect to planning for seasonality because this is the very end of our quarter, you know, to have the last six days of the quarter be very, very slow, inordinately slow compared to other years. It is just reasonable for us to be relatively conservative.

With respect to your comment on issuance. Issuance is over time a good thing for the market and a good thing for our business. However, issuance in any one particular period does not necessarily increase or decrease volume any less than or more than when there was no issuance and buy backs of treasury volume did not necessarily decrease volumes. Volatility is the primary driving force in issuance or outstanding debt is over time a very good thing. So, volume traded is much more important than issuance. Although, we like issuance because the more there is out there over time, the more there is to trade. And then lastly to answer your other with respect to shares. We have not announced that we have bought back any stock.

And do you intend to do so?

The board as you know has authorized a share buy back and we consider these things and we are not suggesting one way or the other at this particular moment.

Okay, thank you.

Our next question comes from Matthew Park of Thomas Wiesel Partners.

Good morning. Two questions. One, could you walk through the revenue per the dollar volume? It seems a trend there has been somewhat negative and I think Lee mentioned specifically there is no pricing pressure, so wanted to get some handle on what the mixed shift has been and how you see that going. And then second question is, looking a little further out to '03, you know, we have had a pretty decent trading volume here in the treasury market in particular this year, what do you think would be the driver in the '03, are you getting more optimistic about the future or should we see retrenchment? Thank you.

Well, this is Lee, you correctly point out that the treasury volume has increased. Now, one of the things that people don't actually look at is that the mix of business that is transacted over eSpeed, so our revenues have increased our volumes have increased and our profits have increased. These are the three metrics that we generally use to measure our growth. Just as a reminder as I mentioned before, we give volume discounts to our higher volume customers. And with the increase in the U.S. treasury trading, you know, they have been in a better position to trade more volume on our platform.

The overall revenue per million will change whether it goes up or down is obviously due to the product mix that happens on the transactional business through eSpeed and our volumes and profits continue to increase. Our business is growing, the profits are growing and the number of transactions we do are incrementally getting higher every quarter.

I think with respect to outlook going forward, I think Lee went through the kind of changes we doing with respect to our software that will increase our business. Releasing, putting out new products Super Quads, which is structural, which takes the same real estate which Lee discussed which is on the trader's desks of the banks and investment banks of the world and adds new products to that same real estate which gives us greater opportunity for our customers to trade with us without trying to go out and convince each of the customers around the world to take a new product on to their system. This leverage of our current market position coupled with the direct dealing and the price improvement should improve our business.

Some of those products may well come at a higher mix, meaning a higher revenue per million traded, and therefore it is possible that our revenue capture per million traded will go up because we are trading some lower volume, less liquid products and therefore the mix will go up. We may well trade more volume in U.S. treasuries which is a relatively lower price product comparatively and therefore the mix, the average might well go down. But, since we have no margin -- as Jeff mentioned, since we don't have any cost of goods sold, we don't have anything to warehouse or ship, our margins of over 50% remain on each of those, whether we trade a less liquid product for a relatively higher price or a more liquid product at a relatively lower price. The mix that you would get by adding these all up and then dividing while it is a statistic that you guys seem to watch, is not a statistic that we watch inside the company because we look at each product and we know that less liquid products trade we get to charge a relatively higher price and the converse is also true. And we just try to bring as much volume we can over the eSpeed platform in each quarter, and therefore make as much revenue and as much profits as we can.

That's great. One follow-up. Howard, could you get us -- give us some updates about how the rollouts software extensions and various rollouts are going? I know you have introduced the software during the summer, you talked about it during the shareholder meeting and just wanted to get a handle on what the tracks on use you have seen so far.

As I mentioned before, the rollout continues to go out this quarter. You know, you point out correctly that we are continuously rolling out new products and updating our software version by version. This is the process that is more customer related in terms of visiting a client, showing them what is going to be in the new versions, updating them, how to use it and as we've mentioned in the past, most of this software that rolls out in the vision behind it has been that it makes it very, very easy access for the traders to use. So when we put the individual touch on it in taking it around, these products are being rolled out over this quarter. They will be rolled out virtually over the next quarter and more and more clients will continue to access them. So the concept for us is, we want to do a high level of customer service and since we have so many product enhancements and new products coming out, we are growing customer by customer and our expectation was to have these products completely rolled out through the fourth quarter and then effectively to be looking to those products to drive -- be our growth drivers for next year.

Great, thank you.

Our next question comes from Rich Repetto of Putnam Lovell.

First question, the treasury volume I know was a solid strong quarter for treasuries. I'm trying to see how much of a percentage of that volume of the whole it is now given the move up in treasuries.

The treasury volumes continue to exceed 50% of our volumes, but that is -- that is the level to which we have discussed specifics. Each of the products on the eSpeed platform has the same general fixed expense and so we look at revenue coming across the eSpeed platform is the metric that we use. So we are above 50% and we have been above 50% since the events of September 11th. You may remember prior to September 11th our volumes have fallen below 50% at times. But since September 11th, we have been above 50% and as you correctly pointed out the volumes in U.S. treasuries this quarter were very strong and our position within the U.S. treasury market, you know, in the comparison statistic that you look at seem to have improved compared to the market as a whole.

Okay. Any way to get -- what you said, you used to say it dropped below 50%, so we knew it was right around that 50% level. I'm just -- so any -- anymore incrementally, it is well above 50% up in the 75% or is it just you know, just slightly more than, you know, prior to September 11th?

I think we are most comfortable saying that the volumes are above 50% and that is where we are comfortable saying now, Rich.

Okay. And then, the voice electronic volume took a nice bump up this quarter. I was just trying to -- if you could give a little color behind that and talk, you know, it is coming from the Canadian operation, is it a rebound in Trade Spark, etc.?

The voice increased due to the increase of treasuries. As I mentioned before, everything trades with a spread to the benchmark. Out of Europe, we've seen more activity in Euro bonds. We've seen other products increase their flow. Our, Cantor obviously being a big customer of the eSpeed platform has significant voice business that operates and does its business through eSpeed technology. So the market overall has increased for us and because of volatility, there have been more and more transactions. In Canada, we saw some growth as well, and again, probably related to the volatility in the marketplaces. So, we continue to grow in that area and we are very optimistic about it.

Okay. And then, I guess the last question is on the expense side, you know, very good job controlling expenses. You know, I was surprised in the comp line that it actually decreased quarter to quarter and because you had talked about the new highs, et cetera. Is there anything changing from a bonus accrual standpoint or was that just, you know -- I'm just trying to get the color versus the guidance you had given earlier.

I think that the slight change was kind of across the board. Whether it was adjusting bonus accruals, payroll related items, it is not really one particular item we can account for in terms of one of an increase. And I think that is what is important is that we do look at our payroll related compensation and as we approach the fourth quarter, which is the quarter that we actually pay bonuses, there may be adjustments to that line as well.

Okay. And just one last question. On the NOLs, it looks by our calculations that, you know, somewhere in the first quarter you cross over that line with the second quarter fully being taxable. Will any insurance payments impact moving that time upward where you actually decrease the NOL?

Well, that would -- the property depending on how we receive our property insurance, I'm not certain we will have to examine A, when we are going to get our own insurance, which we seek all the time to try to get the insurance payments quicker if we can, and what the tax implications would be and how we receive that. So I don't think we have a clear view of whether if we receive any insurance payments whether that would have any impact at all on the net operating loss carried forward. We will consider it and get back to you.

Okay. Thank you.

Our next question comes from Colin Clark of Salmon Smith Barney.

Hello, good morning. First one housekeeping question. I was wondering if we could get the number of employees you had this quarter and last quarter?

The current employee count is under 320 and last quarter it might have been about 10 or 15 less.

Okay. And looking at the -- some of the market proxy data, specifically the UREX bond contract was up 32% and that certainly is a proxy for international markets, just wondering if you can comment on eSpeed's trends in overseas trading? Did you see similar volume trends?

We mentioned before in the past that the big driver in Europe is the basis trading market because of the depth of liquidity of UREX and yes, we did see some increase in the basis trading. Again, as volatility increases, it is our friend, and we'll see more and more of these transactions going on. We have made an interesting push into doing business through our voice broker as I said before and then again that volatility increases. So you will see that as EUREX increases or other exchanges get more volatile, we will see different crosses of our business through the European environment.

And did that have a material effect on the voice assisted dollar volume going up?

Yes, it did.

Okay. And my last question, seems that there is a sizable opportunity in federal agencies. I know you had some significant volumes in that market before 9/11. Can you comment on the traction you seeing in federal agencies and what are some key obstacles to migrate in that business to electronic?

Well Cantor Fitzgerald prior to 9/11 had a huge agency business that was voice brokered of which was a client of eSpeed. Unfortunately for us, everyone of those people were killed on the September 11th tragedy. The way forward for us has been to concentrate on our technology. That is one of the reasons for Super Quad. The Super Quad technology will allow people to access the agency liquidity that we have with a very seemingless effort to get across. You don't have to look at a different page, you don't have to call up a different system. You just click a tab and it will show you U.S. agencies or you can actually download it to make it look and feel like you want to see what you really trading. In the same real estate as I mentioned before on all the desktops that we have. So we are look forward to agency product to grow and we understand that it is a big market.

Is there anything you can do similar to the spread product in terms of enhancing the interface to increase that migration to electronic?

The largest volume in agency product trades is the benchmark volume. So if you concentrate on those issues that are benchmarks, all of them trade to a spread to treasuries. And since we consistently have the leading role in the U.S. treasury market, we feel that we will get a deep presence in the agency market because it does trade on a spread basis.

Okay, great, thank you.

We have a follow-up question from Charlotte Chamberlain.

Yes, could you tell us what, if anything, of the revenues came from the off the run treasury product that I understand that you introduced at the end of September? And then also, Howard, I was wondering if you could give us some color in terms of what derivatives trading in treasuries contributed to the overall cash trading. In other words, was all the increase in trading that we have seen over the last 12 months, how much was -- do you think was contributed by increases in derivatives that therefore require hedging in the cash market? Thank you.

Well, with respect to off the run treasuries, the volumes have been while they have begun, and the UBS Warburg deal is an example of how we can start to grow that business, they remain relatively small given the huge volumes of the benchmark U.S. treasury market and the tremendous volatility in those markets and the volumes of those markets. So, what Lee spoke about is the releasing of Super Quads and the rollout of that over tha balance of this quarter, will really be the beginning of how it can be easy for world's traders to trade those off the run issues and it's really next year that we hope to get traction in those products. So this last quarter, third quarter, evens through balance of the fourth quarter. We don't expect the off the runs and spreads to be significant because we are just rolling out this product through the whole period of the fourth quarter. But we will be looking for traction from that next year.

With respect to derivatives, the fact is as Lee mentioned, that the bigger the swap market, the better it is for the benchmark treasuries, the bigger the futures market the better it is for benchmark treasuries, because you correctly point out that the hedging that goes on in the derivative market and in the futures market against the cash market the bigger and broader those markets are and the the better the volatility in those markets, the more volume in benchmarks.

So the connection between all the other interest rate products and the U.S. treasury market is direct. And so we think that that is both good for volume in the U.S. treasury market, but it also is basically the foundation, and which Lee pointed out that we think that we have the advantage to grow into these other marketplaces because we have one of the two legs that each of the transactions needs, which is we start with the treasury leg, now can we grow into other markets like Lee mentioned, the benchmark agencies and on from there. So, that is our business model in Super Quads, price improvement and direct dealings are the ways that we're going to go after those markets.

Okay, great, thank you.

Our next question from Jack Pitts of Steadfast Financial.

Hi, guys. Just wondering if you could break down further the Wagner patent payments as it relates to software and other? I'm just trying to figure out kind of expected it to be higher I guess. I understand that both CBOT and CME were each paying you $5 million so I thought it might be $10 million minus what you paid at ETS.

I think when you look at the settlement and what everybody heard first is the $30 million, but out of that $30 million dollars under the original agreement, we may have to pay ETS $5,750,000. We did pay ETS in October $2,750,000. So first if you take the $30 million, you subtract out $5,750,000, that leaves you at least $24,250,000. The accounting for that amount is to account for that ratably over the remaining life of the patent, which is four and a half years. Since the settlement occurred in August in this quarter, we only recognized one month which was $449,000 and of course if you multiply that by 3, that is the $1,347,000. So in terms of the accounting, you have to look at the total future payments, not the cash flow. That is how we are looking at it and that will explain the $1,347,000.

Okay, that makes sense. I guess so you received more cash than you actually booked as revenues?

Exactly.

And how much -- just from the past -- how much did you pay for the Wagner patent when you bought it from Mr. Wagner?

The purchase price was about $3 billion 250,000.

Okay, thanks.

We have another follow-up question from Charlotte Chamberlain.

Recently Nasdaq announced that in conjunction with Lithy in London, they are going to start trading singular stock futures, including U.S. futures. Have they indicated that they are aware that they need to license the Wagner patent from you and where is the state of play on their doing that in licensing the Wagner patent?

Unfortunately, I'm not at liberty to discuss that at this time.

Oh. Okay. Thanks.

Once again, if you would like to ask a question, please press star 1 on your touchtone phone. I see no further questions at this time.

Thank you, everybody for joining us this morning. And we look forward to speaking to you again. Thanks again, everyone. Have a nice day.

This concludes the eSpeed third quarter earnings conference call. All participants may disconnect at this time.