Bgc Group Inc (BGC) 2003 Q2 法說會逐字稿

Good morning. Welcome to the eSpeed's second quarter 2003 earnings conference call. This conference is being recorded. If you have any objections, you may disconnect at this time. All participants will be in a listen-only mode until the question and answer session of the conference. I would like to introduce your host, Ms. Abby Goldstein.

Hi. Good morning. I just wanted to remind you all that statements contained in this call which are not historical 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 these currently anticipated due to a number of factors, which include but are not limited to the effects of the attacks on the World Trade Center, market volatility, the limited operating history of eSpeed's and its ability to enter into market and strategic alliances, to effectively manage its growth and plan the use of its electronic system and to induce clients to use its marketplaces and services and other factors discussed in eSpeed's annual report on the form 10K filed with Securities and Exchange Commission.

I would now like to turn the call over to Howard Lutnick, Chairman, President, and CEO of eSpeed.

Good morning, everyone. Thank you for joining us for our second quarter 2003 conference call. With me today are Lee Amaitis, our Global COO, and Jeff Chertoff, our CFO.

I will briefly review our results for the quarter and hand the call over to Lee who will discuss our operations and Jeff will detail our financial results. Following Jeff's analysis of our financial results, I will spend some time updating you on our new initiatives and provide you with our guidance and outlook for the remainder of the year.

For the second of 2003, our earnings, or fully tax operating income was $8.3 million or 15 cents per diluted share. This quarter markets the first time that eSpeed's net income is reported on a fully tax basis.

While we became profitable in the fourth quarter of 2001, up until this quarter, we've had virtually no taxes because of our net operating loss carry forward. We want to point this out to you because many of you maim sequential and year-over-year comparisons and we want to help you keep that in mind. Jeff will review these details with you and go over our taxes and our GAAP comparisons a little later in the call.

Because of this change in our tax status for comparison purposes, we will focus a minute on our pre-tax operating results. Our pre-tax operating income for the second quarter 2003 grew to $13.9 million or 25 cents per diluted share. That's up 92% or almost double the pre-tax operating income of 13 cents per diluted share that we reported in the second quarter a year ago. Sequentially, our pre-tax operating earnings per share increased 39% from the 18 cents per diluted share we reported in the first quarter of 2003.

Our total revenues for the second quarter were $39.1 million, that increased 28% versus revenues of $30.6 million for the second quarter of 2002. (missing audio begins) Operating revenues from the second quarter of last year exclude $12.8 million one time gain from business interruption insurance proceeds which relate back to the September 11 attacks. (missing audio ends) On a sequential basis revenues up 15% from the first quarter of 2003 which were $34 million.

Our fully electronic transaction revenue up 30% to $27.5 million, versus $21.2 million in the second quarter of 2002. Total revenues from software solutions in the second quarter were 6.1 million and that compares to $4.3 million in the second quarter a year ago, which is an increase of 42%.

Once again, our operating margins have continued to expand. In the second quarter of 2003, our operating margins increased to 35.5% from 29.6% last quarter, which is a 1140 basis points increase from 24.1%, which we reported a year ago. This further increase in our operating margins is a clear indication of the strength of our business model, which means increasing volumes, increasing revenues. And our strong control of expenses lead to operating margins that are well beyond the reach of most companies. I would now like to turn the call over to Lee who will provide you with an update of our operations.

Thanks, Howard. Good morning, everyone. Fully electronic volume for the second quarter of 2003 was $7.8 trillion, a 25% increase over $6.2 trillion for the second quarter of 2002. eSpeed's total electronic volume including fully strong and voice assisted transactions for the second quarter of 2003 was $10.4 trillion up 29% from $8.1 trillion in the second quarter of 2002. This growth compares to 27% increase in U.S. treasury volume for the same period.

Total transaction count for the second quarter of 2003 was 1.3 million transactions, an increase of 25% from 1.1 in the second quarter of 2002. Our business growth is predicated on the four prong strategy, that includes growth in our core government bond markets, spending and enhancing our technology within these markets, new product roll outs and software solutions and licensing business.

This quarter in the U.S. treasury market, one of our core government bond markets, we saw tremendous activity as the record U.S. budget deficit and corresponding debts issuance and bond increase improved the market in which eSpeed operates. We believe the increased U.S. treasury issuance, which began in May of this year is representative of the new U.S. treasury trading environment. With the latest auction calendar released, it is likely the increase in issuance will continue for the foreseeable future. This increase issuance expanded size of this core market and as the leader in U.S. treasury trading eSpeed positioned to benefit from the growth and treasury volumes.

Sequentially, eSpeed's fully electronic volume was up 15% compared to the 19% increase in the U.S. treasury total volume of Germany markets contracts down 4%. Our volume results this quarter positively impact by strong growth in the U.S. treasury market. Because eSpeed is a global company, fully electronic as well as voice electronic volumes were also impacted by this European bond markets categorized by low volatility and lower volumes in the second quarter.

In addition, during the second quarter, (inaudible) was sold by a consortium of banks all of which were our customers and no longer owned by these banks. As can be the case surrounding a deal such as this, there were some factors impacting volumes during the quarter but the sale complete we have seen eSpeed's volumes outpace the U.S. treasury volumes reported for the month of July.

As many of you may remember, the rollout of Price Improvement, or PI began in January of 2003. Price Improvement creates additional trading opportunities for our clients and allows eSpeed to share a small portion of these trading executions. Extremely encouraged by the transaction in the early stages of PI’s introduction into the market. And look forward to growing this business as more and more users recognize the tremendous benefit of this product. In fact, already many users have opted for system level PI which means that eSpeed's computers maximum our customers participation in each trade while minimizing the cost of such participation.

As volume increases over the eSpeed platform the more likely it is that our customers will use the price improvement feature. Simply put, increased usage in PI means more trading, revenue, and profits for eSpeed. PI increases the revenue generated per million. Now turning to an update on product extensions. Our new screen configuration, Superquad 5.3 and new keyboards, fully deployed on desk tops of our customers.

For the first time, When Issued, or WIs and off the run (ph) treasuries are easily accessible to all of our customers. Today traders see the price in volume changes in these securities realtime , right next to the benchmark securities that they trade on our screens all day long. In addition, WI and often runs U.S. treasury has never been easier now to trade now than with the dedicated keys on our new keyboards to trade. With virtually no cost associated with these enhancements, we are initiating growth of our sales efforts to extend our customers trading on WIs and off the runs on the eSpeed platform.

As with our new products eSpeed has just entered into the spot foreign exchange market, which is the cash market for foreign exchange. Spot FX is enormous, with revenue opportunities same size as U.S. treasury market. Like in other products, eSpeed is neutral realtime trading network that will provide anonymous cash market for foreign exchange. ESpeed expects to transform FX market place first time offering anonymity in the traditionally name give out market.

For example, for the equity and fixed income markets traders do not know who is on the other side of their trades. Trades are done anonymously. Currently, spot FX traders must disclose their identity to their trading counterparties. Our goal is to change the FX marketplace by allowing spot FX to trade more like stocks and bonds, by providing the same anonymity.

Furthermore, eSpeed expects to open up the electronic trading at spot FX to a much broader spectrum of traders, beyond the traditional inter bank market participants, which include only the worlds largest trading banks. We expect to include professional trading firms, hedge funds, money managers, proprietary traders and futures trading firms. . In the past, banks sought new ways to distribute prices, and non-bank use respect limited access to the banks liquidity. eSpeed's unmatched distribution capabilities act as conduit to those group of traders. We are expanding our sales force to include regional sales people dedicated to the market opportunity.

Importantly entering into the FX market with liquidity already in place. So far, we have two of the worlds largest spot FX trading banks providing liquidity to the system. We are excited about the opportunities for this in this huge marketplace. Spot FX trading on eSpeed is live today. We will continue to hire sales people and follow rollout in the fourth quarter of this last year.

Keep in mind, any success in FX will be incremental to our existing business. With our bought and paid for system, our expansion has cost us relatively little. Leveraging our technology platform in the foreign exchange has the potential to directly impact our bottom line.

With respect to interest rate swaps, it is still on plan to be rolled out in the second half of this year. While we are pleased announce that we will roll out electronic trading on mortgaged backed securities in the first quarter 2003. Since we will be in the midst of these roll outs at our next quarterly conference call, we will look forward to providing you with more details on both at that time. Finally, in the in a software solutions update, in the second quarter we announced the introduction of Auto Speed Analyst. This is an innovative solution that combines eSpeed's automated trading tool with Unisys (ph) fixed income analytics program analyst. Auto Speed is a program trading interface that allows traders to automate their trading algorithms into an Excel spreadsheet and execute these orders directly into the eSpeed's liquid electronic markets, dividing fixed income traders with grader speed flexible and control.

Through our relationship with Unisys, Auto speed analyst goes one step further by embedding sophisticated analytics with markets leading tools into fixed income trading with compel interface. These new product allows traders to model and execute market making, relative value and sophisticated proprietary strategies in one work sheet--all in realtime giving traders the real tools they need to create fast and efficient program trades.

In addition to the comparatively small licensing fees that will be recognized in software solutions revenue, the real upside is the expected growth in volume. We expect the benefits and the impact with this increase by the middle of 2004.

Now I would like to turn the call over to Jeff to review our financial.

Thanks, Lee. Good morning, everyone. For the second quarter of 2003, eSpeed reported fully taxed operating earnings of $8.3 million or 15 cents per diluted share. We reported GAAP net income of $8.1 million, or 14 cents per share. The difference between operating income and GAAP net income is a $200,000 non-cash charge, net of taxes, related to business partner warrants. Our operating income included $5.5 million in income taxes, as this is the first quarter in which eSpeed has reported results on a fully tax basis.

For comparative purposes, eSpeed reported pre-tax operating income of $13.9 million or 25 cents per diluted share-- up 92% over the 13 cents per diluted share reported in the second quarter of last year. Sequentially, pre-tax operating earnings improved 39%, from 18 cents in the first quarter of this year. For the second quarter our pre-tax operating margin grew to 35.5% compared to 29.6%, in the first quarter of 2003 and 24.1% in the second quarter of 2002. Our incremental pre-tax operating margin for the quarter was 75%.

Second quarter revenue was $39.9 million, 29% increase compared to operating revenue of $30.6 million in the second quarter of 2002. A year ago, we had business interruption insurance proceeds of $12.8 million, so our GAAP revenue in the second quarter of last year was $43.4 million. Our fully electronic revenue of $27.5 million, increased $6.3 million or 30% compared to the second quarter of last year. Total transaction revenue of $32.4 million increased $6.8 Million, or 27% versus the second quarter of 2002.

Software solutions and licensing fees from unrelated parties in the second quarter of this year increased to $2.2 million versus $800,000 in the second quarter of 2002. Included in software solutions and licensing fees is $1.8 million from licensing the Wagner patent. Software solutions fees from related party represent revenue from providing technology support services, to Cantor, Trade Spark, Freedom and Municipal Partners. Second quarter fees of $3.9 million represented a 12% increase compared to revenue of $3.5 million in the second quarter of 2002.

Going forward, we expect the same general level of software solutions related party revenue. Comparing the second quarter to the first quarter of 2003, operating expenses in the second quarter of $25.2 million were up $1.3 million from $23.9 million in the first quarter of this year. The increase was primarily due to increases in compensation and intellectual property costs.

We continue to add sales force head count, as Lee mentioned and we ended the second quarter with 332 employees. The increases in the amortization of intellectual property legal fees, are associated primarily with the Wagner, 580 and other patents. Occupancy and equipment also increased due to our continued systems and network expansion. Looking forward, our total operating expenses should increase slightly from the currently levels, into the third quarter.

Our compensation and employee benefits should increase as we continue to build our organization, especially in our sales areas. Professionally consulting fees should increase in the third quarter while occupancy and equipment and communication and client network should remain relatively flat. Marketing expense will remain relatively consistent into the third quarter and we do not anticipate a significant change in administrative fees or other expenses.

Cash and cash equivalents increase $23.5 million versus the prior quarter to $198.6 million as of the end of June. This was primarily driven from income, non-cash expenses, including depreciation and amortization, tax benefits, which I will discuss in a moment and collection of receivables.

Now I would like to review our tax status. During the second quarter of 2003, we had $13.5 million of taxable income, which resulted in a standard income tax provision of $5.4 million at a 40% effective tax rate. After applying the tax benefit from our remaining NOL, of $2.8 million and recognizing a $1.3 million benefit on employee stock option exercises, our current income tax payable is only $1.3 million.

The difference between the income tax provision of $5.4 million and the $1.3 million liability actually due, improved our cash position by $4.1 million. In the third quarter, we will accrue for income taxes at a 40% effective tax rate and now that our NOL carry forward is fully utilized we expect to pay this amount less the tax benefit realized from employee stock option exercises.

Our capital expenditures for the quarter were $1.3 million. We estimate capital expenditures for the year to be between $10 million and $15 million, as we build our new corporate headquarters in the fourth quarter. We received $20.4 million last year, from our property insurance and this will have covered our capital expenditures from last year and into 2003. We expect the remaining $19.5 million of replacement insurance will cover our capital expenditures beginning in 2004.

I would like the turn the call back to Howard.

Before I share our outlook with you, I would like to update you on some of our new initiatives. In the area of product extension and product enhancement opportunities. An important part of our growth strategy has been to extend and enhance our core products and that was something Lee touched on.

Price improvement is an example of these product enhancements. Lee just mentioned how successful our price improvement product has become and how it continues to gain traction. And I would like to introduce additional enhancement to our system which is called Contingent Order Software. Most bonds trade in relation to, or as a spread against, U.S. treasury benchmark securities in the U.S.

Two of the most common examples of this kind of trading are one, called rolls, which are the selling of the older off the run security on the condition that you purchase in combination, the corresponding new on the run benchmark going out of the security into the new bench mark.

And another example would be curve trade--hen traders trade the bench mark of one maturity corresponding selling the bench mark of another maturity. An example would be buying the two year note, and correspondingly, selling five year note at the same time in a combination trade.

Our contingent order software enhancement which will be rolled out during the third quarter which provide traders the ability to execute these multiple part trades or spreads on the eSpeed platform with proprietary, never miss guarantee. As an example, if a trader was trying to roll a position from old five year note into new bench mark five year note, the technology let's trader sells the off the run, the five year note, if, and only if the trader can simultaneously buy the new bench mark five year note at their desired spread.

The key to this software is that our matching engine itself will provide the never miss guarantee transaction processing. We believe this new functionality will make eSpeed markets and off the run markets more accessible and efficient and fair compared to the existing voice brokered spread trading that dominate the off the one and WI markets today. As this market moves toward electronic trading, traders will be able to execute spread or combination trades in the open market rather than paying voice brokers their static spreads.

We believe the contingent order enhancement which we will release this September will provide eSpeed another step toward automated the off the run U.S. treasury marketplace. Just to remind you, in terms of size and revenue opportunity, the off the run U.S. treasury marketplace we estimate to be roughly 40% of the size of the entire benchmark U.S. treasury volumes revenues (inaudible). So while there are no additional fees for traders associated with trading using our Contingent Order enhancement over eSpeed, we expect this as this software gains traction we will see increase in volume traded on the eSpeed platform focused on off the run spread trading, WI trading, and curve trading as well.

Spending a moment on our intellectual property. With regard to our intellectual property, we continue to increase eSpeed's leadership position in innovative technology, by adding patents to our intellectual property portfolio and leveraging these patents to enhance our shareholder value.

The latest additional to our intellectual property portfolio was granted in the second quarter. It is patent number 6,560,580 which we call for short the 580 patent. The 580 patent is tiled automated auction protocol processor. It was issued on May 6, 2003, and expires in 2016. As part of our commitment to protect our technological innovations, on June 30 eSpeed, the patent’s exclusive licensee, filed patent infringement suit against Broker Technical LLC and Broker technical ICAP and their technology provider OM technology and asked for a preliminary injunction. This motion for preliminary injunction is scheduled to be heard in federal court in Delaware in October of 2003.

As an update, the Wagner patent litigation with Nymex (ph) is still outstanding. For those of you listening who may be new to our company, we have already licensed the Wagner patent to the Chicago mercantile exchange, the Chicago board of trade and, ICE IPE for total of at least $40 million paid over the remaining 4.5 years of that patent's life.

I would like to review our outlook for the remainder of 2003 and spend a moment on our cash position. and talk about the strength of our balance sheet. Specifically, with the strength of our balance sheet and our strategy for our $200 million we have in cash and cash equivalents, and that number is likely to increase further as the company continues to grow its profitability and our cash flow.

Over the past few years the financial markets have seen significant consolidation, and we expect this trend to continue. eSpeed's leadership position in the fixed income markets and our strong and improving cash flow cash position and strong balance sheet, along with our proprietary global network and the scale and capacity of our technology and matching engines can only better our market position.

When the time is right, eSpeed will be able to play a key role in shaping these markets in which it operates. With respect to our guidance, we are excited about the outlook of our company from all of our growth drivers.

First, our core products, which Lee mentioned. In our core government bond products we expect to improve our market position as well as directly benefit from the increasing treasury issuance in the U.S., which creates an environment of increasing volume and revenue growth. Secondly, our product extensions, which include strong traction with introduction of price improvement plus potential next year of traction in off the runs which will be assisted by our new contingent order enhancement.

Third, our new product rollouts. Our new product rollouts include spot foreign exchange, which Lee mentioned. We are in the rollout phase. We are hiring sales staff currently. Our interest rate swap product, and now our new mortgage backed securities product which will be coming out in the fourth quarter.

Although we are excited about the opportunities of these new products we don't expect any of them to impact our operations until 2004 so we are building through the balance of this year in order to have those improvements come next year.

Lastly, the licensing of our software which includes growth in our software solutions business as well as licensing of the Wagner patent. With sequential revenues and fully electronic volume each increasing 15% in the second quarter, it is obvious that eSpeed benefited from both the enormous growth in the U.S. treasury market, as well as successful introduction of our price improvement software.

All of this considered, we are taking this opportunity to raise our operating income guidance on a diluted basis to a range of 64 cents, to 67 cents per share for the full year of 2003. And that's up from our previous guidance of 54 cents per share. eSpeed's improved guidance is predicated on the company's expectation that average daily federal reserve U.S. treasury volume for the full year 2003, will be between 430 to 440 billion per day. That is raised from our previous expectation that these federal reserve U.S. treasury volume statistics would have been 400 to 408 billion per day.

We anticipate average daily federal reserve U.S. treasury volume in the third and fourth quarter of 2003 to be between 440 billion per day to 460 billion per day. In addition, our guidance assumes that the European bond markets will remain relatively unchanged from the second quarter volumes through the rest of the year.

For those of you who would like to follow these statistics, we have put them up on our web site at eSpeed.com so you can follow them and see them in an easy to find place.

For the second half of 2003, we expect to generate pre-tax operating margins in excess of 36%, and continue to say that incremental margins will have continued to exceed 60%. In addition, we are introducing guidance for the third quarter of 2003, where we expect to generate fully taxed operating income in the range of 16 and 17 cents per diluted share for this quarter. In the second quarter of 2003, the quarter we are talking about here, we earned 15 cents operating income per diluted share when the U.S. treasury average daily volume was 450 billion per day.

As you can see from our guidance, for the third quarter of 2003, we are expecting to earn 16 to 17 cents per diluted share, assuming that the U.S. treasury volumes are in approximately the same range of 440 billion to 460 billion per day. Specifically, we expect to increase our profitability in the third quarter, assuming no real sequential change in the average daily U.S. treasury volumes, because we expect to outperform the market by increasing our market position in the U.S. treasury market, as well as our continued success of our price improvement enhancement.

With that, we would like to open for questions, please.

[OPERATOR INSTRUCTIONS] Our first question today is from Charlotte Chamberlain from Jefferies & Co..

Good morning. Congratulations on a truly splendid quarter. I can't remember a company that reported increasing pricing power in a quarter but certainly that PI function, the magnum PI function, I guess you would call it, was a huge success.

Howard, you've given us so much guidance, and that was really helpful and getting those earnings out right at the close yesterday was hugely helpful so we could prepare our questions. And asking for more, I hope you don't think I'm greedy here.

But, at this point comparing your guidance to '02, you've got 20% sequential revenue growth, 70% pre-tax earnings growth, what about '04? I mean, the products that Lee went through and that you went through. And I've done back of the envelope kinds of analysis in terms of what that could do and certainly there's huge upside. Bottom line, is it reasonable to assume that the 20/70 revenues pre-tax earnings growth is something that's sustainable into '04? Thanks.

Well, I think, first, we are not going to provide guidance of '04 at this time. I think what's important to point out is that our foreign exchange product which we are rolling out now our interest rate swap product coming in the second half of the year now are mortgage backed products in the second half of the year, contingent orders coming out this third quarter gives us a lot of opportunities, continuing of price improvement.

So it seems too early for us to put those things sort of, to numbers. You know, we have lots of products, part of the benefit of the structure of the company with 175 R&D developers, as part of those 332 employees gives us the opportunity to really to be working on lots and lots of new products, and continuing to extend.

So I just think it is too early to say how and what traction those products will gain at this time.

Our guidance is predicated on volumes and the enhancements that we've released. Our guidance excludes foreign exchange interest rate swaps and mortgage backs. So our expectations are that if U.S. treasuries trade in the same range that they are in now, that's what our -- in terms of volumes -- that's what we will earn.

Certainly, if treasury volumes are changed from that level or were able to gain traction in any of these new products we will come back and talk to you about that. But until such time, if we have more information with respect to that it is too early to go there.

Just as a follow-up. As I understand it, you day viewed the when issued and the off the run products for the August refunding that took place last week. Could you give us an update on -- Lee said in July, your volumes outpaced the overall treasury volumes, which is a pretty outstanding result. I was wondering how did that refunding go? How did the when issued product and the off the run product work for you during the August refunding?

I mean, we have begun the process. I mean, as Lee pointed out, we've got 5.3 out now across our customer's desk. The keyboards are out. They can see these issues and we have begun the process. You may remember that with price improvement we started working on it really in September we're able to introduce it in January and it gained traction clearly this quarter.

So I think with respect to off the runs, process has truly gun now. We think contingent orders which allows the two parts of that transaction to really leverage against the outstanding liquidity we already have on the system will be a dramatic help to that marketplace. This is a huge marketplace. It is the same customer base, the opportunity is enormous and it is next to us but we've only just begun this quarter. So, you know, we're just in the beginning. So it is a little too early to say.

Remember, contingent orders are being rolled out in September. And I do want to point out, that while the early part of August had the auctions in it, and the volumes for auction periods are always superb, the rest of August will be August. Vacation periods will begin, the traders who use our system will go to places where it is more relaxing given what they have they've just been through in the last six to eight weeks and the volumes at the end of this month will decline as they generally do in this seasonality.

So please keep that in mind because the next set of volume from the Feds will include the auction periods and look for that to sort of pull downward as the normal seasonality of August goes through.

Just one more. Did you cut prices for the when issued and the off the run in your traditional way, namely, 30 to 70% depending on the volume use of your customers?

Generally, that's correct. Which is the WI and off the run pricing compared to the voice brokers who tend to charge between $15 million and $19 a million. Those traders the largest traders can get discount as you correctly pointed out 70% and at sometimes if they do enough volume a 80% discount.

But the average customer would see if you took all of our customers across the board would get at least a 50% discount with the largest users getting between 70% and 80% discount in order to incentive them to the business.

So the value proposition is in there. Software on their desk putting all the pieces to the puzzle to really make electronic trading take that natural business from the voice business. It is a better product. It's a matter of time. It is simply a matter of when, not if.

Okay. Thanks.

[OPERATOR INSTRUCTIONS] Our next question comes from Rich Repetto of Putnam Lovell Securities.

Congratulations on a fine quarter here first. I guess the question, to follow-up a little bit from a prior caller. You get increase EPS going from 16 to 17 and also gave Guidance, the CFO did, expenses would uptick slightly.

So I guess if volumes are going to stay flat you expect to grow more than the market or take market share but can you give us anything quantitatively, you know, to back that up? If electronic volumes only grew 15% versus 19% for the treasury volumes this past quarter.

As Lee said, we saw our volumes outpace the market's in July. And we think both the improvement in market position and the continued strength of our price improvement enhancement success and usage in the market both from producing a revenue a share when we improve those prices for our customers, as well as the attraction that that product brings, making it easier in trade and improve the profitability of the company within the same market size.

So if treasury volumes remain generally consistent that's where we think our profitability -- increased profitability will come from, increased market position and increased success of our price improvement power.

and I guess you've been generally conservative with the guidance. So I guess that's -- to me that tells me that you've got a July and early August, that are pretty robust versus the treasury volume increase.

Well, what we said was that we have seen our volumes outperform the market's volumes for the month of July. I did point out the seasonality of August. And while the first week of August will be a strong -- was a strong week because of the treasury auctions, and I think you all understand during the treasury auctions our business is excellent, the fact the end the August tends to be a vacation period and volumes tend to wane.

Volatility can override that, but generally speaking given what the market's been through in the last weeks, I would expect to see the end of August's volumes to decline and, therefore, that is why we suggested even though July was 480 billion traded per day, that we expect for the third quarter that volume to be 440 billion today to 460 billion per day.

I also expect we continue to expect with this auction calendar that the auction months will be superb but in the fourth quarter, again, we have Christmas and that becomes a mitigating factor as well. But I think what you will see is you will see months with better than the 440 to 460 and then August and December will be seasonally slower and that will blended back these numbers to the levels where we think we're reasonably at now.

So, we are comfortable raising that guidance based on those numbers but you can follow them on a weekly basis to see how the markets are going. And as they go, so far this quarter, we've seen ourselves outperform, which is something we're proud of.

Okay. And this is the last question, Howard. You talked about a lot of the new products, the MBS, the spot FX. And I guess my question is, you know, you said it is only a matter of time. But I guess the argument that you would get from some people is that you've had an advantage in converting, the treasury volume because you had that volume in the voice brokerage and traditional market.

Can you give us some more confidence that these new markets which have electronic competitors and have people that are working, you know, to provide electronic solutions, automated solutions that -- and essentially in the MBS and FX, going after new players and not the treasury traders, how you expect to gain material traction to, you know, to increase revenue from what looks like a pretty good year in treasuries this year.

We don't guide on these new products because we are not certain when they will gain traction. However, I think Lee should speak to mortgages but with respect to off the run U.S. treasuries.

I will remind you that prior to September 11 Canter fits Gerald was certainly one of the strongest off the run voice brokers. So it wasn't as if the position eSpeed had when it went public and prior to September 11 was not one that had very strong knowledge and understanding of those marketplaces. So we think that voice markets that charge $15 million to $19 dollars a million and are just in the executions over time do not stand a reasonable chance of standing up against an electronic system that is faster, more efficient, more fair, and charges less than half.

It is the neutrality and speed of newer execution of electronic trading coupled with a dramatically lower prices, for the largest users, can get a 70% discount becomes material factor in moving things electronic. That is why I say it is a matter of time before off the run U.S. treasuries are electronic. It is a matter of time that futures are and we have more experience in mortgages than virtually any executive in this business. I would like Lee Amaitis to talk about our foreign exchange strategy and mortgage bank strategy.

Rich, this is Lee. I think on the -- in the foreign exchange side, the one thing I mentioned on -- in my statement was is that we have a different venue. We have an unique strategy. Foreign exchange trades (inaudible) give up. Cantor, through e-Speed is going to offer principal trading of foreign exchange. That has never been done before and nobody has ever crossed that path. I think that's an unique strategy.

We also have liquidity already. So one of the things that you guys always discuss is who's going to provide the liquidity? Our foreign exchange platform we have liquidity, we have tight prices already live in trading and people can access today.

The key with foreign exchange is going to be sales, getting out into the field, offering the product expansion to people that we haven't had traditionally as customers in the past. And that's a timing thing. That's just a timing think in there. I think that we're pretty excited about foreign exchange. As far as mortgage backs is concerned, mortgages are basically an instrument that prices against U.S. treasuries, like a number of other things in the world that price against the benchmarks.

And Cantor brokers prior to September 11, had a significant market share of mortgage backs. So the expertise sits in the company of how to do the product. You can compare it to off the run U.S. treasury and compare it to a WI. People trade them every day and they trade them at a price that are really not acceptable to the marketplace today because nobody offers an alternative and what we are doing is offering the alternative with the expertise of the knowledge. Marketplace behind us. It is time. It all takes times.

And you know, the fields for mortgage back securities is consolidated into our customer base that exists today. So we are working with them to provide a this service.

Okay. Thanks, guys.

Our next question is from Peter McGraty of Principal Capital.

Hi, Howard, how are you?

Fine.

Quick question. I wanted to expand some more on these new products in particular the FX. Perhaps in terms of the your sales strategy, is the strategy really to penetrate and provide -- become the platform for the major money center banks that are already doing this business?

Or is your initial focus really going to be on these non-traditional players going straight to them and building liquidity there before you become -- before you go after the big boys?

I think it's going to be part of both. The money center banks now when they trade in the interbank market must disclose their identify to the contra party to each and every trade so they cannot have a trading strategy that is not exposed to everyone in the market.

What we expect to have is an alternative marketplace that allows them to trade anonymously and I think that the big money center banks will go between both. Maybe selling where their name is being exposed and buying in the anonymous market and, leaning one way or the other, but hiding what they are trying to do, and now using for the first time, as Lee mentioned since it has never been available before for them to be able to trade foreign exchange. The way the world's banks trades stocks and bonds non-husbandly we think will create a huge opportunity.

With respect to customer base, I think that the fact that we are going to include these professional traders, hedge funds, money managers who trade foreign exchange, I think is an added incentive for the money center banks to make their prices available because that's a client base that they want.

So there are two draws. Hiding what they're doing when they're trading with each other and seeking the, the trading volumes that come from providing prices to these kind of customers. And we think that dual attraction, that dual magnet of price distribution from these banks to this broad set of customers electronically, will be an additional draw and we are very excited about the product and its initial reception.

Will your interest in serving these non-traditional players directly give the money center players pause as they would otherwise be going directly to the money centers?

We don't think so. In fact, the participation as Lee mentioned of the two of the largest banks, trading banks in the world, participating right away I think bodes well for the business . The businesses--the commodity like businesses, which do not have spread in them any longer are more about execution and distribution than they are about closing the market to market participants who can trade on a level playing field.

And, so, spot foreign exchange is one of those markets that the banks are looking for distribution when they want to buy they want someone to sell it to them and they're seeking that from anywhere in the world that they can find it. And we think that the combination of anonymity and broad global network and distribution will be a great calling card for the marketplace.

And that will then create a better marketplace with more participants trading, large players trading, and will create the liquidity that will change the way foreign exchange trades from this name give up marketplace, which is structurally inferior to a anonymity. And that is where we are headed.

Those two banks you signed up can you name who they are?

No.

and with respect to those, how many those two banks represent right now how much of the FX market? Do you know.

I don't know the answer but one of the beauties of an anonymous system is the anonymity part. Why don't we leave it at that.

You have these two guys signed up and you will make the comment you will do a full roll out in the fourth quarter but what's the difference between what you have going today and the full rollout?

It's really the hiring of the sales staff, the training of the sales staff, making sure that we are integrating to those customers who have asked us to integrate to their back office making any changes his or modifications that they asked for.

We're not actively seeking clients today. We are, hiring staff, training staff, starting to talk to customers. But we expect to have that process complete by the end of the third quarter, and then it's build clients and gets them on the system, train them on the system and get them trading. That's why Lee said he doesn't expect it to be, you know, material this year because we've only just begun and, it's a huge market to penetrate, but the opportunity is also equally in order.

Great. Thanks a lot.

Our next question is from Charlotte Chamberlain of Jefferies & Company.

A couple of housekeeping issues. Lee talked a lot faster than I could possibly write. I was wondering since presumably his prepared remarks are in text form anyway, if it would be possible to put the prepared remarks on from the call up on your web site.

The second thing is cash earnings. I know, Howard, in the past you said the cash earnings are basically GAAP earnings, because your amortization basically equals your capex. But since capex these couple of quarters have been covered by insurance, I was wondering if that rule of thumb still held.

And, finally, as I remember it, you already told us that UBS was one of the four ex-traders. So I am kind of confused about why you won't give the name give up on the second one.

But the second thing is you've often said one of the big advantages that eSpeed has is that you are already through everybody's fire walls. But for these hedge funds and these banks, you don't have that advantage. And is that reasonable to think that even saying that isn't going to have traction until next year is really feasible?

Because you have to get through their fire walls and you've got to get into their software. I was wondering if you quo talk a little bit in more detail about that issue of actually getting through fire walls where you are not there now.

So I'll start at the end and work backward which was, we think that our connection and our connectivity through the fire wall of the banks of the world and their providing liquidity to the system and wholesale liquidity to the system, will be the drawing card of the hedge if you understand funds, and money managers--that they will have access and anonymous access to that liquidity I think is a tremendous draw and that will bring them back.

So I think it is mutual. I think the banks will put the prices up because they know these money managers and pension funds and hedge funds will be on the other side. And the converse is true. I think we have a tremendous opportunity in that regard and I am going to have Jeff talk about your question with respect to our capital expenditures.

Hi, Charlotte. It is Jeff. . The capital expenditures, as we mentioned, have been at the $1.3 million level. In terms of going forward, the property insurance that we received will cover capital expend did I tours from this year into next year and as we build out our corporate headquarters the additional property insurance we expect will cover that.

Bottom line--what was cash earnings for the June quarter?

We increased the cash by $23 million which includes net income and a large part of the net income includes non-cash charges of depreciation and amortization.

So the depreciation and amortization was how much?

the depreciation and amortization -- the depreciation and amortization was about $8 million.

Okay. So we add back in the 8 million and don't subtract the $1.3 so presumably the cash earnings were well ahead of the reported earnings.

Yes.

Okay. And then, finally, would it be feasible to get the prepared marks on the web site possibly.

I think we'll consider your request and Maureen will get back to you.

Thanks so much.

I want to thank you all for joining us this morning and we look forward to talking to you next quarter. Have a good day, everyone. Thanks very much.

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