Bgc Group Inc (BGC) 2002 Q4 法說會逐字稿

Good morning and welcome to the Global Consulting Group eSpeed conference call. All participants will be on listen-only until the question-and-answer session of the call. At that time, you will be instructed on how to ask a question. At the request of Global Consulting Group this conference call is being recorded today. If you have an objection, disconnect at this time. I would now like to introduce your host, Mr. Howard Lutnick, you may begin when ready.

Hello, thank you and good morning. This is [inaudible]. I want to remind everyone that statements that are contained in 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 result to differ materially from those currently anticipated due to a number of factors, which include, but are not limited to the effects on the attack 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 its growth, to expand the use of electronic systems and to induce clients to use the marketplace and services and other factors discussed in our annual report on form 10-K 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 and thank you for joining us for the fourth quarter and full year 2002 conference call. I have with me this morning, Lee Amaitis, our Global Chief Operating Officer, and Jeff Chertoff, our Chief Financial Officer. I will start with a brief discussion of the company’s performance in the fourth quarter and for the full year2002 and then Lee will update you on our operations and focus on software rollouts and product extensions. Jeff will review the financials in greater detail and I will follow on and discuss guidance and outlook for 2003 and we will answer your questions during the Q and A session.

We are extremely proud to once again report we have exceeded our quarterly and full year estimates. eSpeed has surpassed everyone's expectations this year with regard to profitability, especially if you consider the tragic events of September 11th. We would like to thank our shareholders for your continued support and belief in our company, which made us the 25th best performing stock on the NASDAQ stock market for all of 2002. This is still evidenced by our stock's appreciation of approximately 88% from its $8.28 close on December 31, 2001, to its close of yesterday February 10th of $15.59. Our strong performance in the fourth quarter and for the full year 2002 is a testament to the hard work and perseverance of our eSpeed team and it honors the memory of our lost colleagues and friends. Today eSpeed is well positioned and dedicated to continued exceptional performance and growth.

For the fourth quarter of 2002, we reported net operating income of $9.2 million, 17 cents per share. This result is more than double the net operating income of $4.5 million or 8 cents per share which we reported in last year's fourth quarter. Total revenue for fourth quarter of 2002 was $32.8 million, an increase of 17% over $28.1 million in fourth quarter of last year. Fully electronic revenue increased 27% to $22.4 million, up from $17.7 million in the fourth quarter of last year. The increase in fully electronic revenue demonstrates the continued solid organic growth in our core businesses and the strength of our electronic trading platform. Total revenue from software solutions in the fourth quarter of 2002 was $5.5 million, up 34% from $4.1 million in the fourth quarter of 2001. Software solution fees from unrelated parties more than tripled to $2.1 million from $600,000 in the fourth quarter of last year. Software solution fees from related parties in the fourth quarter of 2002 were $3.5 million, that’s unchanged from the same period a year ago.

With respect to our margins, we added another 200 basis points to our net operating margins in the fourth quarter of 2002, expanding our margins to over 28%. In the fourth quarter of 2001, the first quarter we became profitable, we had 16% operating margins, which then grew to 21% in the first quarter of 2002, 24% in the second quarter, 26% in the third quarter and now in the fourth quarter, 28%, improving over the course of a year 1200 basis points of our operating margins.

Last year when we provided guidance for 2002, which was only five months after the September 11th attacks, we expected earnings in the range of 40 to 47 cents per share. Today we are exceptionally proud to report operating earnings per share for the full year of 2002 of 57 cents per share and net operating income of $31.4 million. These results compare to a 2001 net operating loss of $2.6 million or a loss of 5 cents per share. In comparing this year's revenue to last years, keep in mind last year's results included significant voice transaction revenue from Cantor Fitzgerald and software solution fees from related parties, also predominantly Cantor that were lost due to the events of September 11th.

Revenue for full year 2002 was $126.4 million, up 3% from the $122.3 million in 2001. Of that total, fully electronic transaction revenue was up 17% over 2001, to $88 million, software solutions revenue from unrelated parties for 2002 was $4.5 million, up 125% from $2 million in 2001. Software solution revenue from related parties for 2002 was $13.2 million, down 19% compared to $16.3 million in 2001; again, the decline due primarily to September 11th events.

Looking at our results against annualized fourth quarter of 2001, that is the first full quarter after September 11th attacks, which is a good base comparison period. Full year 2002 results represent a 12% increase in total revenue from that annualized fourth quarter and a 76% increase in operating earnings. Words cannot express my pride at the way our team has endured. We expected 2002 to be a year of rebuilding. Our people were not deterred and eSpeed surpassed everyone's expectation by growing its profitability, controlling its expenses and rolling out exciting new products. With the software rollouts we completed in the last quarter of 2002, eSpeed is well positioned to move into new markets in 2003 and these opportunities are laying the foundation for our growth that will carry us through 2003 and 2004. I would like to turn over to Lee Amaitis, our Global Chief Operating Officer.

Thank you, Howard. Good morning, everyone. In the fourth quarter of 2002, our electronic volume was $9.3 trillion, up 29% from the fourth quarter a year ago. eSpeed's fully electronic volume for the fourth quarter of 2002 reached $6.8 trillion, an increase of 30% over the fourth quarter of 2001. This 30% increase in fully electronic volumes compare favorably to the 16% increase in Federal Reserve US treasury volumes for the same period. US treasury volumes in the fourth quarter decreased 6% versus the third quarter of 2002. While in the same period, eSpeed’s fully electronic volumes were in line with the market. Our total electronic volumes outperformed the market, declining just 4%.

The significant contributor to the fourth quarter decline in US Treasury volume was the fourth quarter seasonal impact of both Christmas and New Year holidays falling on Wednesday in December of 2002. I think that a third of the traders took off Monday and Tuesday, another third took off Thursday and Friday. One third probably took off the whole week.

Total transaction count for the fourth quarter of 2002 was approximately $1.2 million -- sorry, $1.2 million, up 34% from the first quarter of 2001. The fully electronic transaction count grew 39% over the fourth quarter of 2001 to $1.1 million. In the current quarter, other than the introduction of price improvement, our pricing model has not changed. The US Treasury markets have been expanding steadily over the last 20 years. Over the last 5 years, growth has been extraordinary. Average daily trading volume in US Treasury’s in 1999 was $186 billion dollars per day, increasing 12% to $208 billion in 2000, up 43% to $298 billion in 2001 and up another 24% to $370 billion in 2002. Obviously these numbers convey the huge size and growth potential of our core US Treasury market.

Looking into 2003, with the recent announcement of the new benchmark US treasury, the three year to be introduced in May of this year and the US treasury’s consideration of a monthly five year benchmark option, instead of quarterly, all coming on the heels of expected record federal budget deficits, we feel we remain in a market environment of increasing volumes. eSpeed’s increasing electronic volume and electronic transaction count year-over-year underscore the growth of our core fixed income products. Just as we are leading the conversion of our core markets to electronic trading, we are positioning ourselves to extend our platform to begin the conversion of additional markets from voice to fully electronic.

While eSpeed has grown significantly over the past several years, we envision continued growth over the long term. Our growth strategy is tied directly to our software enhancement such as Super Quads and Price Improvement. Super Quads, which was rolled out in fourth quarter of 2002, enables our clients to have electronic access to more issues and easily add additionalelectronic market places. Price improvement, which was introduced in early January, to meet the strong post-holiday trading volumes creates additional trading opportunities for current clients and allows us to earn incremental revenue on each execution that utilizes the price improvement capabilities. The rollout of these software enhancements positions us for strong growth in 2003 and beyond.

During 2003, the software enhancements will extend eSpeed’s product line into new markets such as [inaudible] US Treasury’s, spread and basis trading of US treasury’s, US agencies, Chicago Board of Trade Futures, euro and dollar denominated interest rate swaps, foreign exchange and the expanded trading of European government bonds. With the technology now deployed on Traders' desktops, we should begin to see growing electronic trading on the eSpeed platform of US Agencies, Treasury [inaudible] and spreads, as well as expanding trading in the European government bond sector in the first half of 2003.

Also in first half of 2003, with respect to our agreement with the Chicago board of trade. Super Quads will allow for network distribution of basis and future trading with seamless front-end integration into this new market sector. The rollout of interest rate swaps in Europe and the United States add foreign exchange, starting with stock forwards and [inaudible] options will start in the second half of the year. Electronic trading of these instruments will begin to show significant impact for eSpeed in the first half of 2004.

I want to give you a sense of the market opportunity we envision as a result of these rollouts. This US Treasury’s in the past, these markets are currently traded predominantly through voice brokers. As we have seen in the case of US Treasury’s, this creates a very significant revenue opportunity for eSpeed, as we begin to convert these markets from voice to electronic trading. For example, we estimate the current commissions paid to voice brokers trading in off the run US Treasury’s to be in the area of $125 million annually and the commissions for US agencies to be approximately $100 million annually. The market size for foreign exchange is about $250 million and for euro and dollar denominated interest rate swaps, market size range is approximately between $500 and $600 million paid to brokers each year. Combined, this represents enormous total market opportunity of approximately $1 billion. To put this in a better perspective, in 2002, we had approximately $106 million of electronic transaction revenue, while operating in markets with a total voice and electronic opportunity, totaling around $500 million. Those markets included the US treasury benchmark, with a market size of around $250 million, European government bonds with market size of around $100 million, Japanese government bonds around $75 million, Canadian government bonds worth about $50 million.

During 2003, we expect to add markets worth approximately $100 million, tripling our potential served market to approximately $1.5 billion. With respect to our Chicago board of trade relationship as I mentioned, we are focusing on the market for network routing and front-end integration. Howard will discuss this later in more detail. As you can see, there is a significant revenue potential for eSpeed to these new markets. We are confident that with our software rollouts beginning in the fourth quarter of 2002, we are well positioned for vibrant growth in 2003 and beyond. With that, I would like to turn the call over to Jeff Chertoff to discuss our financials.

Thanks, Lee. Good morning, everyone. For the fourth quarter 2002, we posted record results of $9.2 million in net operating income or 17 cents per share. Comparing this quarter to the fourth quarter of 2001, our net operating income grew 106% from $4.5 million or 8 cents per share. As you know, we report net operating income to reflect earnings generated from the company's operations. For the fourth quarter, we reported GAAP net income of $8.8 million or 16 cents per share versus net income of $7.8 million or 14 cents per share in the fourth quarter of 2001. In the fourth quarter of 2002, the differences between operating income and GAAP net income were a $1.2 million credit on the reversal of the remaining portion of the company's September 11th reserve, $1 million non cash write-down of eSpeed's investment in TradeSpark to it’s current carrying value and a $700,000 non cash charge related to business partner Warrens. Comparably in the fourth quarter of 2001, GAAP net income included a $2.7 million insurance gain and a 1 time receipt of $1.2 million, both related to the events of September 11th, as well as other non cash charges of $600,000.

We reported net operating income of $31.4 million or 57 cents per share for the full year of 2002. This compares to a net loss from operations last year of $2.6 million or 5 cents per share. On a GAAP basis, the company reported net income of $42 million or 76 cents per share for the full year of 2002, compared to a net loss of $18.3 million or 34 cents per share for the full year of 2001. The company's full year 2002 operating results exclude net operating income of $10.5 million, including a $1.2 million credit on the reversal of the remaining portion of the company's September 11th reserve, $1 million non cash write-down of eSpeed's investment in TradeSpark, $12.8 million gain on business interruption insurance proceeds related to September 11th, $500,000 charitable contribution for September 11th to the Cantor Fitzgerald relief fund, and $2.1 million in non cash business partner Warren charges.

In 2001, operating results excluded non operating charges of $15.7 million, including a $14.5 million provision related to September 11th, a $2.7 million gain on insurance, and a one-time receipt of $1.2 million, both related to September 11th, $3.8 million loss on consolidated investments and $1.2 million in non cash business partner Warren charges.

Fourth quarter revenue was $32.8 million, representing a 17% increase compared to revenue of $28.1 million in the fourth quarter of 2001. Full year 2002 revenue was $126.4 million, an increase of 3% versus full year 2001 revenue of $122.3 million. Our fully electronic revenue of $22.4 million increased $4.7 million or 27% as compared to the fourth quarter of 2001. Full year total transaction revenue of $105.8 million increased $7.4 million dollars or 8% versus 2001.

Software solutions and licensing fees from unrelated parties in the fourth quarter of 2002, more than tripled to $2.1 million, versus $600,000 in the fourth quarter of 2001. Included in software solutions and licensing fees is $1.8 million from licensing the Wagner patent. $500,000 represents quarterly revenue from Ice under the terms of the licensing agreement and the balance of $1.3 million represents licensing fees recognized as a result of the Wagner patent settlement with the CBOT and CME. Full year software solutions revenue from unrelated parties was $4.5 million, a 130% increase from full year 2001 revenue of $2 million. Software solution fees from related parties represents revenue from providing technology support services to Cantor, TradeSpark, Freedom and Municipal Partners. Fourth quarter fees of $3.5 million were unchanged compared to the fourth quarter of 2001, which was the first full quarter after September 11th. Full year fees were $13.2 million, down 19% from full year 2001 fees of $16.3 million. Full year 2002 revenue was down $3 million because full year 2002 did not include revenue and associated expenses from voice and software solutions that were a part of the pre-September 11th results in the full year of 2001.

Going forward, we expect software solution fees from related parties to remain relatively unchanged. I would like to talk about our net operating margin and the leverage of our business model. For the fourth quarter, our net operating margin grew to 28.1%, as compared to 26.4% in the third quarter of 2002 and 15.9% in the fourth quarter of 2001. This represents sequential growth of 200 basis points in the fourth quarter of 2002 and a 1200 basis point increase versus last year's fourth quarter. Full year net operating margins were 24.9% in 2002 and we expect net operating margins to expand 1000 basis points to 35% over the next couple of years.

Comparing the fourth quarter to the third quarter 2002, operating expenses in the fourth quarter of $23.4 million were down $700,000 from $24.1 million in the third quarter of 2002. The decrease was due to actual compensation paid and lower marketing expenses related to the wind down of our advertising campaign. This decrease was partially offset by increases in occupancy and equipment and communication expenses related to our continued build-out.

Looking forward, while compensation and employee benefits declined from the third quarter to the fourth quarter of 2002, we expect this line item to increase to just above third quarter 2002 levels in the first quarter of 2003. Occupancy equipment, professional and consulting, as well as communication and client network should be approximately at the fourth quarter 2002 level in the coming quarter. Higher insurance and patent defense costs will cause other expense to rise and the marketing line item is expected to rise slightly in the first quarter of 2003. We do not expect significant growth in administrative expenses.

Regarding headcount, we ended the year with 319 employees, which compares with a headcount of 312 employees at the end of 2001. We expect to grow our headcount in line with our ability to deliver incremental margins of 60% over the course of the year.

We ended the quarter with a cash position of $188 million, down from $194 million at the end of the previous quarter. This decrease was primarily driven by ordinary year-end compensation and a scheduled payment of $2.75 million to ETS, the former owner of the Wagner patent. We received $12.8 million in insurance proceeds in the third quarter, representing the full amount of our business interruption insurance. In addition, we expect to receive all of the $40 million that we have covered under property and casualty insurance. To date we’ve received $20.4 million and over time we expect to receive the remaining balance covering expenditures for replacement of capital equipment, including computers and related equipment and the build-out of our corporate headquarters. Insurance proceeds will further strengthen our balance sheet.

Our NOL carry forward decreased from $18.4 to $13.5 million this quarter, due to earnings which was partially offset by book tax differences primarily with respect to the exercise of stock options. Although we don't expect to pay taxes in the first quarter of 2003, we expect the NOL carry forward to keep our tax rate under 30% for the full year. Now, I would like to turn the call back to Howard.

Thanks, Jeff. Before discussing our 2003 outlook, I would like to provide some background on a strategic agreement we recently concluded with the Chicago Board of Trade. In December of 2002, we entered into an agreement with the Chicago board of trade to distribute the Exchanges US Treasury products through the eSpeed system. Even though the Chicago Board of Trade is one of largest [inaudible] exchanges in the world, the exchange does not have significant penetration directly on to the world's cash market trader's deck, which is eSpeed's marketplace and real estate. Through this agreement, the thousands of cash traders who have access to eSpeed system will now have access to the Chicago Board of Trade's futures through our Super Quad product, creating an enormous opportunity for both the Chicago board of trade and eSpeed. The cash traders that we will bring to that market will be additive and will compliment the future traders already there. And likewise, we expect the agreement to bring additional future traders to eSpeed's system and of course, our cash markets. eSpeed will route Chicago Board of Trade futures trades over our existing network and we will also offer front-end integration to our clients. eSpeed will derive revenues from transaction fees, from front-end integration fees and from network routing services. The current market opportunity eSpeed is addressing with respect to these revenues is around $100 million, that is the market opportunity that we are addressing and we look forward to our relationship with the Chicago Board of Trade in order to gain traction in this new market segment.

We hope to draw additional exchanges and traders into the eSpeed community in the future through similar deals. We have brought on an extraordinary person to help lead that expansion. Everyone at eSpeed is very excited about the addition of Bernie Weinstein to the team. Bernie is the founder and former chief Executive of ILX, one of the largest providers of market data systems and execution processing in the world. Bernie will lead the expansion of eSpeed software solutions, leveraging our global infrastructure, our electronic trading expertise and our portfolio of intellectual properties to build and grow into the new markets.

As I am sure you can see from the results this past year, we are well positioned to continue our growth going forward. Each of the markets in which we operate is large and growing, as Lee mentioned. In the course of 2003, we will expand the market opportunity with respect to the markets in which we operate from a $500 million addressed market to $1.5 billion addressed market by expanding our platform into new markets and additional market opportunity. As we said earlier, our core market US Treasuries increased 24% year-over-year to average daily trading volume of $370 billion per day in 2002. While US treasury volume in the fourth quarter 2002 was up over 15% compared to the fourth quarter of 2002, eSpeed's fully electronic volumes were up over 30% for the same period. Throughout 2003, we will introduce and rollout products that will further increase our overall served market and provide for expanded market opportunities. With these developments, the dedication of our employees and the recognition by our customers in the marketsof our global desktop real estate, we are building a solid platform for our growth and performance by eSpeed into the future.

Looking out into 2003, we expect to generate revenue in excess of $145 million for the year, which is an increase of approximately 15% over our 2002 revenues. In 2002, the company had net operating margins of about 25%. In 2003, we expect to expand our net operating margin by about 500 basis points to 30% for the full year of 2003. We expect this margin expansion to continue beyond 2003 and as Jeff said, we anticipate reaching margins of 35% within the next two years.

Based on our current shares outstanding pretax operating earnings per share for the full year of 2003 are expected to exceed 80 cents per share. For the first quarter of 2003, operating earnings are anticipated to be in the range of 18 to 19 cents per share. Please remember that this guidance is premised on estimated US treasury volume growth of approximately 5% to 7% for 2003 and the first quarter. With that, I would turn back to the operator so that each of us can answer your questions and we appreciate you joining us for this call.

Thank you, sir. At this time, we are ready to begin the question-and-answer session. If you have any questions, press star 1 on your touchtone phone. You will be announced prior to asking your question. If you want to withdraw your question, press star 2. Once again, to ask a question, press star 1 now. We will wait a few moments to tally up the questions. Sir, our first question comes from Charlotte Chamberlain from Jeffries and Company. Your line is open.

Good morning. Congratulations on a fine quarter and an astounding year. I have lots of questions and I will try to follow-up with some of the housekeeping ones. With respect to what you are doing with the CBOT, which sounds very exciting, with that product, are you planning to really go head-to-head with Globex that the CME is doing? And the revenues from Globex seem to be around $20 million. I am wondering how you get to the $100 million opportunity. And then if I could have a second question, the treasury trading seems to be bouncing up nicely after the hugely anemic December where it was like $300 a day and now it is around $377. But, still the average for January is really only up about 2% over the average for the whole year. I was wondering if you could give us some color on what we should expect for seasonality in treasury trading this year and when you expect this five -- monthly five-year to kick in and the new three-year, when we should see pick-ups in trading from those two? Thanks very much.

Okay. With respect to the Chicago Board of Trade arrangement, maybe I could explain the marketplace. Globex is the system that the Chicago Mercantile exchange uses to literally process its transactions. Globex's system integrates with front-end service providers who are small -- tend to be small software companies that provide front-end integration. eSpeed is really focusing on the front-end integration, order routing part of the business. The Chicago Board of Trade announced it is currently using Urex’s system for its back-end and now it will switch to Life's London Future Exchange back-end. The front-end is currently provided by a variety of small software companies. eSpeed has the access and desktop real estate at a large group of thousands have access to thousands of cash traders of interest rates around the world. So, we will be receiving transaction fees from those, but it will be a small part of the larger transaction fee that the Chicago Board of Trade receives because that’s its market. We will receive hopefully front-end integration fees and order routing fees. The collection of these fees, transaction fees, order routing fees and front-end integration fees currently are an operating market of $100 million. You’re basically going into business of front-end integration, order routing and bringing transactions to the Chicago Board of Trade. That’s a model that partners us with exchanges and leverages the current network we have. It doesn't require us to have additional cost as we go after additional revenue. For our customers, this brings more uses for the system and allows us to add new customers to let us trade -- some of them trade more futures and less cash, allowing them to come on our system, as well. It is $100 million market opportunity just for the Chicago Board of Trade. That market opportunity will grow as we add additional exchanges to the network.

With respect to your second question, the three-year note which will become a new treasury benchmark is expected was recently announced by the Treasury. We will expect it to come out in May. That addition of a new benchmark, given eSpeed's strength within the trading of benchmarks is a very exciting market change for us. That, coupled with the treasury's announcement that it is considering monthly five-year options and that on top of as Lee said, record budget deficits which are currently in the last budget, simply mean there will be more to trade and more benchmarks to trade them against. An additional benchmark will move some of the off the run business that currently occurs between the two year and the five-year note directly into eSpeed's strength, which is the benchmark. So, the anemic trading volume of December, which Lee pointed out that the traders took vacation at the end of the year and which we expected, has come back reasonably in January. We expect the ramp-up of the volumes over the course of the year to come with the increasing federal deficits, the increase of the issuance and the benefit of a brand new benchmark, the three-year note.

So, when should we see -- when should we really start to see the 5% to 7% increase that you are assuming? When should that really hit in these markets? January seems to be about 2% above the '02 averages.

Remember, volatility is a friend of the company. So, any change in the world's expectations, the stock market expectations, global conflict, any of those issues creates volatility, which can change any given month or any given quarter dramatically. We see the base underlying setting those aside, the base underlying market should grow over the course of the year 5% to 7% and it may well -- the three year notes and monthly five-year notes should make that a very solid premise. Volatility is a main driver for the business, but we from our perspective, we see the increase in deficits and the new benchmark as being part of that basic solid underlying growth that we should see growing solidly throughout the year.

Okay. Thanks.

All right. Our next question comes from Matthew Park from Thomas Weisel Partners. Your line is open.

Good morning, Howard. Two questions; one, how would you rate the conservatism of your '03 guidance given in the past you have been fairly conservative in looking out and trying to hit or exceed the guidance? Second, could you tell us more about the acceptance among traders of your price improvement features? Thank you.

With respect to guidance, I think that after the events last year of September 11th, our view is one that the year would be rebuilding. Making sure we have technical foundations and [inaudible] in which to carry us forward. I think the year really extended really was much more growth oriented than we had anticipated. The strength of our team and how well they came through September 11th, really created a unity amongst them that was able to have us really focused on growth in the second half of the year. That was not something we had counted on. I think our current guidance is really what we think and it assumes certain growth in the marketplace, which we think is reasonably expected at this time. We think this is actually what we think of our guidance and if the markets volumes are greater, then it should be easier for us to make our numbers or exceed them. If volumes are less it will be more challenging for us to use the new products that Lee spoke about in the growth drivers that we have to make up the difference. But, that is sort of our base and we are comparing and it feels like that is what we are seeing at the current time. With respect to price improvement, I would like to have Lee spend a minute and answer that.

The price improvement product; we launched as I said before early in January and basically it was launched at the strong post holiday trading volume. It is new technology. It has been out for just over a month and the marketplace is growing accustomed to it. All the traders are learning to use it, they are learninghow to improve their business on using the new software. We're excited about the prospects. So far, so good. Everybody has been anxiously using it and learning how to use the technology.

Thank you.

And we have the next question from Rich Repetto from Putnam Lovell. Your line is open.

On the deal with CBOT, could you get more specific on the transaction? I think this is the first you mentioned about the transaction fee, how much will you get paid per transaction of futures contract?

Rich, I am not at liberty to discuss the exact specifics of the arrangement other than we will be receiving transaction fees and we expect to receive front-end integration fees and network routing fees. Those are the three ways we make money as we rollout that product with the Chicago Board of Trade and with our customers, the specific details I think will become more precise. As of the moment, the exact way we will roll out and market that product has not been announced. So, those would be the three ways we make money and how they flow together, I think, will come together with the Chicago board of trade and our customers.

Okay. The second question would be on the guidance of about $20 million of incremental revenue in '03. You already have a pretty fair amount of what we can identify from the patent agreements. So, could you tell -- that looks like around $9 million. Of the other $10 to $11 million, can you talk about what comes from new product? Some of the rollout of the new product or are we looking at that as a fill-in between the increase in treasury volumes that you are predicting?

I think we view our growth rate I guess from our perspective is driven by our new products, which is a price improvement and the incremental value that we earn from clients who use those capabilities, you know, we have [inaudible] all the products that Lee mentioned. As we roll them out, our objectives have been that we have multiple paths in which we think to make our revenues. Many times it is three or four different business lines coming out at the same time that anyone of them if they hit strongly, will help us make our numbers for the year. Then, we have a reasonable approach that it is likely that we will either get more pieces of each of them or some will be more successful quickly because the pick-up rate for products are coming as they come. We don't control them. We basically have lots and lots of things going, which Lee talked about. Price improvement is already out. Lee, do you want to pick up on that?

What I mentioned before. Remember we did $106 million in revenue in transaction revenue out of the marketplace that we estimate to be $500 million. There is still plenty of growth in the marketplace we are operating in today. Then, we will add the new products to get into another perceived marketplace we estimate another $1 billion. There is plenty of opportunity to pick up business. Still in the existing market we are in today on growth, and piecing together the arrangements that we have, we think basis trading is going to very exciting in the future. We think that off the run Treasury with new issues coming out will be exciting. Push volume more toward benchmark platforms. The connection of the two with Super Quad will lead us in the right direction.

Okay. My question was sort of trying to identify -- I am not sure if you give this, the target or objective is in new products? You know, would you be happy if you got $5 million from new products in '03, other than -- this is independent of the growth in the treasury market.

Rich, our goals running the company are to make as much money as we can with what we are capable of. That’s our objective. We try to guide generally with what our goals and objectives are and what we think given the world around us is reasonably expected. But, that comes from many different directions. This company has been very successful over the last more than three years in delivering on what it saw into the future, including after the events of September 11th, having a good view of our strength and profitability into '02. What we have done is said, look in the space we are in today and the way products are rolling out and what is reasonably likely to happen over the course of the year, we think we will produce $145 million in revenue and have 16% top line revenue growth and 40% earnings per share growth. We think that is a very strong company. We have lots of things going as you know and Lee spoke about what is rolling out. If they pick up earlier, it will make things easier. If it takes longer to get customers to use them, it will become more challenging. That is what we face everyday. For the last three years this company has been public, we have been successful in meeting the challenges and keeping ahead of the curve. We think electronic trading is the future of the non equity capital markets. We cannot feel it more in our hearts that that is the future. Once we get hold on electronic trading, there is a snowball effect that comes. We have seen it in treasury and we think we will see it in other marketplaces. Those will then be step transactions in which we then operate from higher level, which this company has done over the course of years. We simply believe electronic trading is the future. We feel we are well positioned to go after the non equity capital markets in those spaces and will do it as quickly and best as we can.

Okay. Thanks. Two very quick -- I know it has been -- I spent some time here. Two quick admin clean-up questions; Jeff, on employee comp, can you give more color on the reason it dropped this quarter? Seems like every quarter we guided up with an increase and this quarter we seen it drop. That is one. The last question; would be on the tax rate. What tax rate once you do use your NOLs, what federal tax rate would you guide us to from there? That is it.

Regarding the compensation question. Last quarter when we were talking about the operating expenses, we mentioned that in the fourth quarter we expected a change as a result of the final true-up of what we accrued versus what we paid. And that is exactly what that was. I think we're conservative in how we accrued during the year and then there is a process like in every firm, where we actually pay what we -- each employee. That was the adjustment that you see. And in our remarks this morning, we talked about where that compensation line item would increase to the levels in the third quarter of 2002. So, that's what you should expect to see going forward. In terms of the tax rate, because of the NOL, and as we mentioned, we don't expect to pay taxes at least into the first quarter. Our tax rate should be just below 40%. So, when you look at the NOL and compare it to the actual expense on a yearly basis or an annualized basis, we're saying that our effective tax rate should be around 30%.

Okay. Thank you.

And again, if anyone has a question, please press star 1 on your touchtone phone. We will wait a few minutes to tally the questions. And our next question comes from Colin Clark from Salomon Smith Barney. Your line is open, sir.

Good morning, could you comment on Europe in terms of what you saw this quarter and your outlook in that part of the world in '03?

This is Lee. I mentioned before that the European government bond market, we see some expansion in going forward. I think that making the comparisons between the US and Europe is obviously a difficult challenge and always has been. There is no true benchmark in Europe. We do focus a lot of the electronic trading expertise on the German market. They are fluent. Basis trading is growing everyday. The depth of liquidity between futures and cash is not in the same balance as the US, but it is starting to catch up as we see more people trading [inaudible]. Exciting product for us will be interest rate swaps. We think interest rate swaps will become into a big business, as I mentioned before, global transactions that are paid by brokers in the range of $500 to $600 million. There is a big forward revenue to go after. It is a fully-voiced brokered market. We think we can crack that with our technology. We feel foreign exchange is another big opportunity for us. It will be something that we see as a value to the eSpeed platform. All this related to Super Quads which brings it to a finger touch away from every trader in the world.

Okay. And just looking at your marketing spend, it dropped as Lee mentioned and you are anticipating that to stay at pretty low levels in the first quarter. Beyond that, should we assume that that number stays relatively flat throughout '03?

This is Jeff. We expect that the marketing expense will rise slightly and then remain at that level consistent throughout the year.

Okay. Thank you. One more question. On getting back to the price improvement, you provided details on your revenue projections up 15%. And off of treasury volume up 5% to 7%. Can you provide anymore specifics with regard to the potential impact on your revenues of the price improvement functionality? Is it significant? Is it fair to say it will be pretty material in '03 in terms of the contribution of the future?

Well, price improvement has two features to it. One, it increases the revenue with respect to the current traders and current transactions. So, it's a revenue per million traded improvement. So that it has no marginal cost associated with it. And it should not only increase revenue on transactions that are utilized, but should over time be a competitive benefit in that it shows that we have better prices on our screen than alternative marketplaces have because price improvement is shown for those of you who have seen our product, with a diamond therefore when you see a diamond on an offer you know that that bid is better than the alternative marketplaces could possibly have. That should be a magnet and drawing card for new competitive business to come our way. We especially see it in the early days and products only been out for a month, early days of computer trading programs or those that trade electronically with us, portfolio trades or program trades, tend to go directly to the price improved price most quickly because computers realize they have a better price and a better opportunity. So, we think -- you know, it is still early days. I can't put more color on it. It is one of the many factors that allows us to guide a 15% top line revenue into 5% to 7% treasury volumes. Our earnings are growing by 40%.

Okay. I know it has been on the price improvement has been out for a short period of time. Is it fair to say that the future is being actively used at present?

It is fair to say the feature is being actively used. We have many clients using it. As I said, we think that these things will together help us reach our expectations. But, we think that price improvement will become over time, a natural way and part of the treasury trading business, but with only one month under our belt, I think Lee expressed it well, one month gone and so far, so good.

Thank you.

All right, a follow-up question from Charlotte Chamberlain. Your line is back open.

Thanks. Howard, I was wondering if you could update the[inaudible] suit and your negotiation with NASDAQ Life to license the Wagner patent? And the other issue is the swap business sounds exciting, but with swaps you have counter-party risks. I was wondering how you are going to deal with the counter-party issue in an electronic environment? Thanks.

With respect to [inaudible], because of ongoing litigation, I am not at liberty to comment on that. And we may well be -- there may well be other possible license fees of the Wagner patent and we need to consider them on a case by case basis so unfortunately,I can't comment further on that. With respect to the swap business, I think eSpeed is capable of doing essential counter-party cleared businesses, as well as main give-up businesses where the counter-parties after the trade day, find out the name of the other party and have that loaded into the system, preloaded into the system, these credit limitations. eSpeed has built the system and therefore, that will be the underpinning of how in that marketplace, we can go into the swap business. I think we are very excited about that opportunity. As we said, it will rollout in the second half of the year and we expect it to be significant contributor to '04. If it has capture, it gets in traction earlier. That would be great but that is our current expectation.

Let me make sure I understand. The idea is anybody that wants to trade in swaps will tell you the counter-parties that are acceptable and what limits and that will be built into the software so that whatever swaps they see on the screen, they know ahead of time are already basically pre-approved by them? So, if different people, different businesses have different acceptability that is all kind of customized to them?

Exactly right. It is already built into the system. You see counter-parties and prices that are good to you. Therefore, the electronic system can work instantly.

Okay. This is all in just treasury or also in euro dollars?

Both in US dollar interest rate swaps, European interest rate swaps. eSpeed is a multi currency system and operates in Japan, as well, in Japanese.

Thank you.

That is it for questions. Back to you, Mr. Lutnick.

Thank you, everyone, for joining us on this 2002 full year call. We at eSpeed are tremendously proud of our staff here. We think they have covered themselves with glory the way they have stayed together and come through the events of a year ago. We want to thank all of our shareholders and each of you who stayed with us and had so many kind words for us. Together we are going to carry forward and we are excited about our growth prospects. Thanks for taking the time this morning and I look forward to speaking to you. Bye-bye.

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