Bgc Group Inc (BGC) 2003 Q1 法說會逐字稿

Good day, welcome to the eSpeed first quarter earnings call. All participants will be in a listen-only mode until the question and answer session of today's call. At that time you'll be instructed how to answer questions. The call is being recorded. If anyone has any objections you may disconnect at this time. I'd like to turn the call over to Abby Goldstein. Abby, you may begin when ready.

I just wanted to remind everyone that the statements contained in today's call which are (inaudible) facts or 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 and its ability to enter into market and strategic alliances, to effectively manage its growth to expand the use of its electronic system and to induce clients to use the systems and other factors discussed in eSpeed's annual report on the 10-K filed with the Securities and Exchange Commission.

I'd turn the call over to Howard Lutnick, Chairman and CEO.

Welcome to the first quarter 2003 conference call. I have joining me today is Lee Amaitis, Chief Operating Officer and Jeff Chertoff our Chief Financial Officer. I'll spend time reviewing with you the highlights from this quarter.

Lee will provide you with details on our operations. Jeff will review our financial results and then I will go over with you our outlook for the remainder of the year. I would like to take a moment to welcome Maureen Murphy, who joins the company as eSpeed's new director of investor relations. Some may already be familiar with Maureen. She joined us from Lehman Brothers where she was a research analyst covering the financial sector.

eSpeed's first quarter net operating income was 10.2 million dollars, which was an increase of 63 percent compared to 6.3 million dollars we reported in the first quarter of 2002. We earned 18 cents per share. That's fully diluted, up 64 percent compared to 11 cents per share fully diluted in the first quarter a year ago. We were not required to pay taxes in the first quarter of 2003, due to our NOL (ph). And Jeff will explain later on in this call we will report fully tax results starting in the second quarter of this year.

For the first quarter, eSpeed's revenue was just over 34 million dollars. That's up 13.4 percent versus 30 million dollars in the first quarter a year ago. Fully electronic transaction revenue was up 4.3 percent, to 22 and a half million dollars, versus 21.6 million in the first quarter of 2002. Pretax net operating margins increased to 29.6 percent in the first quarter 2003 versus 21.2 percent in the first quarter of 2002, and 28.5 percent in the fourth quarter of 2002.

As we continue to deliver on our planned margin expansion, our goal remains to grow our pretax net operating margins to 35 percent within the next two years. This quarter's strong results exemplified the execution of our business strategy and showed the value of our diverse revenue streams.

Our guidance was predicated on our expectations that the federal reserve U.S. treasury average daily volumes both for this quarter and for the year would trade in the range of 400 to 408 billion dollars per year, which was five to seven percent higher than the 381 billion average daily volume which was traded in the fourth quarter of 2002. However, the first quarter was particularly challenging because the Feds average daily volume was up only slightly compared to the fourth quarter and was not up the five to seven percent. With our multiple revenue streams and our four pronged grill strategy in place we continued to perform well.

This is primarily because, while each of our four areas of our strategy is capable of generating significant growth, each area also plays a role in diversifying our earnings. This quarter the flat volume in our core U.S. treasury market was offset by growth in our voice assisted European businesses and adoption of our new product enhancement software.

Lee will speak more about each of these areas in a little bit. But as a reminder to our shareholders, and as a way of introduction to any new listeners I'd like to take a moment to discuss our four pronged growth strategy.

We are the marketplace leader in many of the non-equity capitals of the world. We view ourselves as basically the New York Stock Exchange and Nasdaq rolled into one servicing the financial world outside of stocks. We focus interest rates globally from government bonds to coming interest rate swaps, corporate bonds and Euro bonds and repos (ph).

We just added into our focus foreign exchange markets as well. The non-equity capital markets of the world are multiples larger than equity markets. Some estimate them to be more than five times larger than the equity markets. Our growth strategy is based on four drivers. Core markets, product roll outs, product enhancement software and software solution licensing which includes our intellectual property.

Our core markets, let's talk about our core markets for a second. Our core markets include the U.S. treasury market, the European government bond markets the Canadian government bond markets. Japanese government bond markets. The size of our 91 these markets is very large.

We estimated about 725 million dollars a year, which is driven by convincing the traditionally brokered businesses into fully electronic trading. We allow traders around the world to trade faster, cheaper and more efficiently. The markets are large. The markets themselves are growing quickly, and we are the market leader.

Our built-in paid for matching systems, real time global trading network and desktop real estate are the major trading banks of the world drive our economies of scale and substantial profit margins as we extend out our market penetration across these businesses.

Our second growth driver is our product roll outs and new products. We have entered into markets that are extensions of our core U.S. treasury benchmark businesses. These include off the run U.S. treasuries and U.S. agency notes and bonds as an example. In addition to those extensions, we are entering whole new markets that would include the interest rate swap market and the foreign exchange markets.

Lee will provide you with an update on our recent rollouts of foreign exchange and interest rate swaps as well as some discussion about our Chicago Board of Trade futures as well. We were able to enter these new markets because of the scalability of our technological platform. With our low marginal costs associated with entering these new markets, the upside potential for eSpeed is significant.

Currently our forecasts do not include any assumptions for the positive impact of these new products. If and when we get traction in the electronic trading of foreign exchange rates or interest swaps for example the size of our business could change dramatically. Our third growth driver is product enhancement software. Three most innovations in this area are price improvements, Super Quads or direct dealing. All enhancements are made with our customers in mind.

We study our clients' technological needs and we provide solutions that help them trade faster and smarter. Price improvement, PI, began rolling out in the first quarter. We have hundreds of traders enjoying the benefits of PI and dozen of traders using PI literally for every single trade they do. We are pleased with I, began rolling out in the first quarter.

We have hundreds of traders enjoying the benefits of PI and dozen of traders using PI literally for every single trade they do. We are pleased with the transaction that PI has generated so far. Our fourth growth driver is software solutions. In addition to licensing our technology and our private label basis we've licensed our Wagner patent from the intellectual portfolio of properties.

The most recent example would be the Chicago Board of Trade and Chicago [inaudible] Licenses of the Wagner patent and previously we did license the patent to ICEIPE as well. With respect to the patent and NYE mechanics the litigation is continuing which is why I can't comment further. I'd like now to turn the call over to Lee for an update on our products and markets and an explanation of how volume volatility and issuance positively impact our business.

Thank you, Howard. Good morning, everyone. For the first quarter of 2003, eSpeed's total electronic volume was 9.4 trillion dollars, up seven percent versus a trial I don't know in the first quarter of 2002.

Our fully electronic volume was 6.8 trillion a 13.7 percent increase versus 6 trillion a year ago. Year-over-year eSpeed's growth outpaced the fed reservers quarterly volumes with electronic volume up 17 percent compared to the federal reserves U.S. treasury volume up increase of approximately nine and a half percent.

On a sequential basis the federal reserve reported U.S. treasury volumes up only four tenths of a percent basically unchanged from the fourth quarter. While eSpeed's fully electronic volume was also basically unchanged and down three tenths of a percent.

We attribute this to the first quarter release of price improvement and the time it takes with any significant new release for traders to get adjusted to the new software. However eSpeed's total electronic volume outpaced the Feds eight tenth of a percent. With respect to our revenue our fully electronic, revenue grew to the initial traction of our first quarter release of price improvement software which I'll discuss later.

Our total transaction count for the first quarter of 2003 was 1.2 million an increase of 19 percent over the first quarter of 2002. I'd like to begin the quarter's business update with reminder increase in volatility, volume and issuance, each positively impacts our business.

In the first quarter of 2003, we saw volatility in the European marketplace due substantially to the uncertainty surrounding the war create strong growth in our European voice assisted electronic businesses.

As I just mentioned the Feds U.S. treasury volume was virtually unchanged in the first quarter versus the fourth quarter of last year. Furthermore, in April, the Feds U.S. treasury volume was down about six percent to an average daily trading volume of 358 billion per day.

While 381 billion daily average in the fourth quarter of 2002. However, we expect that the U.S. treasury's massive issuance which began in May will drive U.S. treasury market growth for the balance of the year. As the U.S. treasury recently announced starting in May there will be substantially increasing the U.S. treasury issuance, while the number of U.S. treasury bonds being sold to the market.

Additionally they've announced they will be increasing the frequency of the options when they [inaudible] Bounce to marketplace. In other words they're increasing the amounts of bonds and how often they become available. We're well positioned for these issuances and frequency which will create enormous volume in benchmarks where we're the market leader. We expect to see significantly more favorable market conditions than you have seen in the recent months.

We already encouraged by the first few trading days of May where we have enjoyed increases in our benchmark trading volume. Last week we saw the introduction of the new three year benchmark. This new three year adds to the existing two, five, ten and 30 year U.S. treasury benchmarks in the marketplace.

It will be auctioned quarterly with 22 billion issued in May alone. In addition to the new benchmark the treasury department has announced the five-year benchmark currently auctioned quarterly will go to monthly auctions with 18 billion issued in May. The ten-year benchmark will go from quarterly auctions to eight times a year with 18 billion issued in May.

For your information, the two-year benchmark which is auctioned monthly issued 25 billion in the month of May. This increase in auction frequency not only increases our benchmark trading but creates another opportunity to trade these benchmarks on a when issued basis. During the week when a new benchmark is announced, but before it is actually auctioned, each issue is issued on a one issue or WI basis. Traditionally quarterly auctions WI's trade four weeks per year. One week for each quarter and for each benchmark. With auction frequency increasing from quarterly to monthly, availability of WI's increases the 12 weeks per year. The dramatic increase in WIs and benchmarks increases trade fog eSpeed. Trading WIs has been made even easier with launch of Super Quads spring configuration which I'll discuss in a few minutes.

We recently completed the development of our FX product and began to define these technology to few eastern customers. We'll continue to roll out to other customers throughout the end of the year while we're excited about the prospects of this new product we don't expect foreign exchange to impact our businesses until the mid of 2004.

Early in the second quarter we began the development of CPLT Futures, Inc.. and conducted our first electronic Futures (inaudible). All BLT customers can access the largest most liquid cash and futures markets on the same screen for the first time. We're looking forward to growing this business and I will walk you through the progress in the coming quarters.

We continue to work in our interest rate swap product we're still on track to roll out in the second half of the year as I previously said. The new markets we're expanding into are five to 600 million dollars per year opportunity, and are predominantly voice (inaudible) is defining our leadership position in the electronic transformation of the non-equity capital markets provides us with a number of significant opportunities as we proceed into 2003.

We are pleased to report that our technology releases are doing well. And the fourth quarter of 2002 conference call we discussed the roll out of price improvement. PI. We released our PI software January of 2003 and it continues to gain great traction.

Additionally the increase in WIs increases an increase in arbitrage trading we expect the U.S. treasury influence to have a positive impact on the PI usage as well. We recently introduced Super Quads 5.3 in the second quarter that will further improve the trading screen configuration we offer to our clients around the world. This enhancement offers traders easier access to additional security and enables them to trade a wide range of issues. I'd like to now turn the call over to Jeff for our financial results.

Thanks, Lee. And good morning everyone. For the first quarter of 2003, we posted record results of 10.2 million dollars of net operating income or 18 cents per share. Comparing this quarter to the first quarter of 2002, our net operating income grew 63 percent from 6.3 million dollars or 11 cents per share. We report net operating income to reflect the earnings generated from the company's operations.

For the first quarter, we reported GAAP net income of 9.5 million dollars, or 17 cents per share versus net income of 5.9 million dollars or 10 cents per share in the first quarter of 2002. In the first quarter of 2003, the difference between operating income and GAAP net income was $700,000 of a non-cash charge related to business partner warrants. Comparatively in the first quarter of 2002, GAAP net income included a non-cash charge of $400,000. For the first quarter, our pretax net operating margin grew to 29.6 percent, as compared to 21.2 percent in the first quarter of 2002.

Our incremental pretax net operating margin for the quarter was 59 percent. First quarter revenue was 34 million dollars, representing a 13 percent increase compared to revenue of 30 million dollars in the first quarter of 2002. Our fully electronic revenue of 22.5 million dollars increased $900,000, or four percent as compared to the first quarter of 2002.

Total transaction revenue of 27.7 million dollars increased 1.5 million dollars, or six percent versus the first quarter of 2002. Software solutions and licensing fees from unrelated parties in the first quarter of 2003 increased to 2.1 million dollars, versus $300,000 in the first quarter of 2002.

Included in software solutions and licensing fees is 1.8 million dollars from licensing the Wagner patent. $500,000 represents quarterly revenue from ICE under the terms of the licensing agreement that includes at least $2 million per year in licensing fees, and the balance of 1.3 million dollars represents licensing fees recognized as a result of the Wagner patent settlement with the CBOT and CME.

Software solution fees from related parties represents revenue from providing technology support services to cancer, trade spark and MUNS partners. First quarter fees of 3.6 million dollars represented a 28 percent increase compared to revenue of 2.9 million dollars in the first quarter of 2002.

Going forward, we expect the same level of revenue from these sources. Comparing the first quarter to the fourth quarter of 2002, operating expenses in the first quarter of 2004 million dollars were up $600,000 from 23.4 million dollars in the first quarter of 2002. The increase was primarily due to higher business insurance costs and an increase in the amortization of legal fees associated with the Wagner patent settlement. Occupancy and equipment also increased due to our continued building.

Looking forward, our total operating expenses should increase slightly from the current levels into the second quarter. Our compensation and employee benefits should increase as we continue to rebuild our organization and add head count. Our head count at the end of the first quarter was 322. Occupancy and equipment may increase as we build out our current space and add infrastructure. Professional and consulting fees should decrease in the second quarter while communication and client networks should increase as we grow our network.

Marketing expense will remain relatively consistent into the second quarter, and we do not anticipate a significant change in administrative fees. Expected growth in other expenses will be primarily driven by an increase in the amortization of legal fees associated with the Wagner and other patents. Cash and cash equivalents decreased 13 million dollars versus the prior quarter to 175 million dollars as of March 31st, 2003. This was primarily driven by our net income, offset by treasury stock repurchases, software development, patent legal defense costs and the reduction of the company's payables.

We expect to receive all of the 40 million dollars that we had covered under our property and casualty insurance. To date we have received 20.4 million dollars and over time eSpeed expects to receive the remaining balance which will cover our expenditures for capital equipment, that includes computers and related equipment, as well as the build out of our new corporate headquarters.

The almost 20 million dollars of expected insurance proceeds will further strengthen our balance sheet. Starting in the second quarter, we will be reporting our results on a fully tax basis at an estimated effective tax rate of 40 percent. Because of our remaining tax NOL, our taxes payable in the second quarter will be reduced by approximately 2.8 million dollars, which will further strengthen our cash position and our balance sheet.

Now I would like to turn the call back to Howard.

Thank you Jeff and Lee. We're reiterating our 54 cents per share full year and fully diluted after tax guidance. Just as a reminder eSpeed will report fully tax results beginning in the second quarter of 2003.

Our guidance for each quarter and for the full year continues to assume that the average daily federal reserve U.S. treasury volume will trade in the range of 400 to 408 billion dollars per day, which is five to seven percent higher than the 381 billion average daily volume that we saw in the fourth quarter of 2002. We remain confident in our guidance because of our growth drivers.

Our multiple revenue sources and the massive treasury influence planned for the rest of this year. eSpeed will benefit significantly from the launch of the three year benchmark which let mentioned as well as the increasing auction frequency of both the five-year and ten-year benchmarks.

We are also repeating our guidance for pretax net operating margins of 30 percent, growing to 35 percent as I mentioned before within two years. We expect our pretax incremental margins to remain in excess of 60 percent, which means as our revenue grows, 60 percent of each additional dollar of revenue will increase our pretax profits. For the second quarter of 2003, we expect to earn between 11 and 13 cents per share fully diluted and fully taxed.

With that we're ready to take your questions.

We're ready for the question and answer session. If you would like to ask a question press star followed by the 1. To withdraw your question it's star 2. At this time press star 1 on your touch tone phone now.

Our first question comes from Charlotte Chamberlain from Jefferies and Company.

Good morning and congratulations on fine results given in what the treasury did. Two questions. First, as you know, the CBOT and CME have agreed to let the CME do the clearing for the CBOT. Does that create any opportunities for eSpeed given your relationship with them for treasury futures? In other words, that instead of having to have two margin accounts, clients now only need to have one, will any of the trading that is done on a CME specifically on the Euro dollar account contracts, especially on their electronic platform, do you see any spill-over.

And the second thing has to do with your guidance. I mean your results are absolutely remarkable, given that the treasury trading was flat. And would these additional issues and going from four when issued weeks to 12 for the new issue and -- I guess the new issue goes to four for the three year and the five-year goes to 12 and then you have the additional two-year. I guess I don't quite understand why you're still guiding for 54 cents, given that you clearly outperformed on the fundamentals on the first quarter. Thanks very much

Okay. With respect to your first question, Charlotte, the Chicago Board of Trade's announcement that it would clear with the Chicago Mercantile Exchange I think creates for those who trade the CME versus the Chicago Board of Trade significantly less margin costs due to those transactions. Those customers include many of eSpeed's largest customers and therefore if that frees up their capital from those transactions, they will have more capital effectively to trade other products as well.

So I think the spill-over effect will be an improvement in efficiency of costs market trading and futures which will therefore improve the possibility of more trading with us. But I want to remind you that that combination and any impact that, positive impact it may have with us doesn't take effect until January '04 I think our relationship with the Chicago Board of Trade will put us in a unique position to the extent there is any benefit to make from that for us to pick it up. But again that only begins in January of '04

Right. But you do see that there could be or there should be, anyway, some positive spill-over to the cash markets from the greater efficiency in the futures?

I do think there's a positive spill-over but I think it's comparatively ancillary but it's still beneficial generally. And with respect to your second question, last year for the fourth quarter conference call we guided our results predicated on the treasury market growing five to seven percent on an average daily volume growth.

So taking the fourth quarter number, growing that number five to seven percent for the year, we have the first quarter flat, which was a challenge and from the publicly released volume figures from the fed for April, those volume figures were down six percent or so.

So you have the first four months of the year creating a very challenging market. We, as Lee said, we're reiterating our guidance because we think the issuance in May will make up a substantial part of the decline in April and we think that the general market presence over the rest of the year will pick up enough to wipe out which has been lousy market conditions for the first four months and improve those conditions over the balance of the year.

So we're pretty much saying, as we had expected when we made this guidance last quarter, that the market conditions before the fed comes out and U.S. treasury comes out with their new issuance, will be weaker but then they will improve by the new issuance and therefore we feel confident we will be able to stick with our numbers and make them due to the massive issuance coming out

Okay. Maybe I'll call you again off line. The treasuries were flat and you performed as you guided. So if in fact the treasury gets back on track in terms of the volumes, it would seem that extrapolating, you should do a whole lot better.

That's why -- I'm not going to talk to you off line, Charlotte. But one of the reasons we have our business strategy and our multiple prong drivers is that in some quarters, as for instance in this quarter you saw the treasury volumes were flat, but our European voice-based businesses, as Lee mentioned, improved over the quarter. Sometimes those things go back and forth. So in future quarters it may well mean issuance in U.S. treasuries volumes will be up but volume in [inaudible] will come across it. So while issuance does not directly relate to more volume, we think that the relentless set of auctions that have been announced for the U.S. treasury are a positive result for us.

I think basically we had looked for an average of five to seven percent and we looked for our growth drivers to diversify our revenue streams and therefore we want to make sure that we can deliver on the things that we guide to and we feel confident that even with the first four months of this year being, having U.S. treasury volumes flat for the first quarter and then down for April, that this volume, for instance, in May, which we think will be strong, will make up the down market in April and will level itself out. If April hadn't been down, it would be different. But the fact is April was down 6 percent. We think May will make up that difference

Just one more if I can. Broker tech and ICAP finally got together. The press seems to think this is a new competitor to you. Is it really a new competitor to you, the combination of ICAP and broker tech?

No. It is a combination of the voice broker ICAP who did not do benchmarks but primarily did voice off the runs and treasury swaps with the electronic benchmark broker, broker tech. So they're just two competitors, one direct and one indirect, just having one name now

Okay. Thanks.

Once again to ask a question please press star 1 on your touch tone telephone now. The next question comes from Tony Lisa (ph) HLM management.

I was wondering actually if I could just ask a couple of questions, one balance sheet, one income statement. It looks like there was a considerable increase in receivables and decrease in payables. A, could you explain those, and B did that put networking capital pressure on the company that's back and forth worrying about. And if so does it reverse itself next quarter?

This is Jeff Chertoff. I think when you look at the balance sheet and the balance sheet at a point in time, balances on the balance sheet just represent, it's what exists at that particular time. What we expect is that the liabilities will decrease or on a net basis remain at those levels.

So with respect to those two line items, is there anything specific or is it just sort of timing of cash flows?

It's just timing.

Then on the income statement, can you just address what looks like a pretty substantial decrease in marketing and then what is in the other line item and kind of why did that go up a million bucks?

This is Howard. The marketing line compared to last year, we had an advertising campaign which gave the employees of eSpeed a chance to have a platform to say how committed they were to the families of those who were lost on September 11th as well as how committed they were to the company. And as that wound down, our costs of marketing decreased dramatically.

And we don't expect that kind of thing going forward. And with respect to other expense, it's primary driver is that we amortize the patent and litigation costs for the Wagner patent as an example. And they match the revenue as we amortize the revenue of our settlements and licenses over the period of time.

So those two things match each other, the revenue and the expense and the only other addition to other which would be material would be insurance costs. As many of you know the costs of insurance has increased of late and that's reflected in our current numbers. But you've also seen that we have and maintain very strong cost control over the market and I have continued to guide 60 percent incremental revenue. So we still expect to drive our grow revenue to our bottom line

Thanks very much. I appreciate your work.

Once again to ask a question please press star 1 on your touchtone telephone now. We do have a follow-up from Charlotte Chamberlain.

Forgive me I'm sitting at our trading desk that's what all the noise is. Could you go over what the challenges and opportunities of this merger between ICAP and broker tech. Thanks

Well, I think the challenge would be that ICAP is a very large voice broker. And it has both the ability to be involved in other businesses and extend to other businesses but it also has the weakness that it CAP is a very large voice broker. And it has both the ability to be involved in other businesses and extend to other businesses but it also has the weakness that it makes most of its money from voice businesses and therefore it may not be still interested in converting them to fully electronic. Remember part of why eSpeed was spun off of [inaudible] Fitzgerald because eSpeed's goal was to cannibalize the East Brokerage businesses of Canter (ph) Fitzgerald it was a hard decision but one that eSpeed took aggressively and was successful in pursuing.

Another point is that our largest customers no longer have an equity ownership and control. They no longer control one of our competitors. So that is a benefit. We think there are pluses and minuses of it but we will deal with it. It's hard to forecast what will exactly happen. But we plan to wait and see.

But I would suggest that because the largest banks, investment banks are no longer the drivers of broker tech, they will become opportunities for us to partner with them, to work with them and really to open up new opportunities that may not have been available to us while they were the drivers of broker tech and we can look forward to seeing whether we can't make some deals with the largest banks, investment banks of the world and to extend our market reach.

So I think there's opportunities out there. And we'll wait and see. But we're excited about them.

Great. Thanks.

And once again to ask a question please press star 1 on your touchtone telephone now. I'm showing no other questions at this time

I want to thank everyone for joining me this morning. And I look forward to speaking to you again next quarter. And thanks again and have a good day today.

All participants may disconnect. Today's conference has been completed. Once again, all participants may disconnect. Today's conference has been completed