Bgc Group Inc (BGC) 2003 Q3 法說會逐字稿

Good morning, and welcome to the eSpeed third quarter 2003 earnings conference call. All participants will be able to listen only until the question and answer session of the conference. This conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Ms. Maureen Murphy. You may begin.

Thank you. I'd like to remind everyone of the Safe Harbor statement. Statements on this call which are not historical facts are forward-looking statements as the term is defined in the Private Securities Litigation Reform Act of 1995. Such forward looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors which include but are not limited to the effects of the attacks on the World Trade Center, market volatility, the limited operating history of eSpeed Inc. and its ability to enter into marketing and strategic alliances to effectively manage its growth, to expand the use of its electronic systems, and to induce clients to use its marketplaces and services and other factors that are discussed in eSpeed’s annual report on form 10-K filed with the Securities and Exchange Commission. With that I'd like to turn the call over to Howard Lutnick.

Good morning, everyone. I apologize for my hoarse voice but I've been coaching my five and seven year olds’ soccer teams and I've been basically telling them which way to the goal was, go that way, go that way, so got me a little hoarse. Anyway, thank you all for joining us for our third quarter 2003 conference call. I have with me today Lee Amaitis our Global Chief Operating Officer and Jeff Chertoff our Chief Financial Officer. I'll briefly review our results for the quarter and I'll hand the call over to Lee who will discuss our operations which will be followed by Jeff who will review our financial results and after Jeff I'll discuss with you our guidance for the remainder of the year and review with you the introduction of our guidance in 2004.

Our third quarter results were incredibly strong and a record for our company. For the third quarter 2003 our fully taxed operating income was $10.8 million which is 19 cents per diluted share. Because we did not pay taxes last year, we used our pretax operating income for comparative purposes. Our pretax operating income was $17.7 million for the third quarter 2003, which is 31 cents per fully diluted share which is a 94% increase over the 16 cents per fully diluted share we reported in the third quarter a year ago 2002.

ESpeed's total revenue for the third quarter were $44.3 million, this significant revenue growth represents a 34% increase versus the $33 million we reported in the third quarter of 2002 last year. On a sequential basis revenues were up 13% compared to $39.1 million we reported in the second quarter of 2003. Fully electronic transaction revenue increased to $32.3 million which is up 42% compared to $22.8 million in the third quarter 2002. Software Solutions revenue for the third quarter 2003 were $6.1 million up 27% versus $4.8 million we reported in the third quarter of last year.

Pretax operating margins continued to expand again this quarter increasing to 39.9%, which is up from 35.5% just last quarter and 26.8% in the third quarter a year ago. With 34% revenue growth and our pretax earnings per share growth of 94%, eSpeed's business model, which focuses on its technological leverage and scale, clearly delivers growth directly to the bottom line.

In a few minutes Lee will go into the details with you about our volumes and transactions, but I would like to point out that the growth we saw in the marketplace in the third quarter was ahead of our own expectations. As the market leader in U.S. treasuries, we are uniquely positioned to benefit from this kind of growth. As a matter of fact, we saw our volume growth outpace the average daily Federal Reserve U.S. treasury volumes for the third quarter.

Although the fourth quarter 2003 will be impacted by normal year-end holiday seasonality, remember, Thanksgiving week, Christmas and New Year's reduce quarterly trading volumes for the entire market in the fourth quarter. We are already excited about the increasing issuance in volume growth we expect for the U.S. treasury market throughout the year 2004. We have recently seen mention in the press of the possible reintroduction of a new four-year and seven-year-benchmark notes, as well as dramatic increases in the issuance of the five current existing bench marks.

To give you a sense of the issuance growth, we estimate 2003 U.S. Treasury coupon issuance to be around $580 billion and next year we expect it to jump to over $825 billion of issuance, a huge leap. This coupled with the continued expectation of increasing budget deficits which are now estimated by the press and many economists at between 5 and $600 billion for the year, clearly bode well for eSpeed.

As you have seen from our performance so far this year, dramatic increases in volume and issuance positively impact our business from a very strong profitability perspective. I'd now like to turn the call over the Lee for more details on our volume and some of our product initiatives.

Thank you, Howard, and good morning, everyone. Our fully electronic volume for the third quarter 2003 was $9.6 trillion over a 23% increase from $7.8 trillion in the second quarter of 2003 sequentially. ESpeed's total electronic volume, including fully electronic and voice assisted transactions, for the third quarter of 2003 was $12.4 trillion, up 19% from the $10.4 trillion in the second quarter of 2003. This growth compares to an 8% increase in U.S. treasury volume as reported by the Federal Reserve.

Last quarter we anticipated the average daily Federal Reserve U.S. Treasury volume for the third quarter of 2003 to be in the range of 440 to $460 billion. The actual average daily Federal Reserve U.S. Treasury volume was $478 billion for the third quarter. We benefited this quarter because of our unmatched leadership position in U.S. treasuries, and where volume grew more than expected and our market position improved as evidenced by our volume growth being ahead of the U.S. treasuries.

As we told you on our last call, we anticipated that our market position would improve in this up market. Because we expect fourth quarter treasury volume to decline, we do not expect to maintain the level of our third quarter market position in the fourth quarter.

I just explained how growth in our core business was a driver of our success for the third quarter. Now I'd like to focus your attention on another one of our growth drivers, product enhancements, which also contributed to our record results for the third quarter. In the third quarter price improvement continued to gain traction with both the number of users and amount of usage per trader.

Almost 25% of our customers use PI, which is represents almost 10% of all treasury trades on the eSpeed platform. PI is already an integral part of the way traders trade. Whereas volume drops -- whereas additional volumes drops to our bottom line and we are extremely profitable for us, along with increases in volume come deviant discounts we off our largest customers.

Our fully electronic average revenue per million for this quarter is slightly above what we reported in the first quarter of this year. Yet fully electronic volumes in this quarter are up 42% over the first quarter. PI has clearly played a powerful role in mitigating the volume discounts that are associated with this 42% volume increase.

Our contingent order software continues its rollout which is helping us enter the off-the-run U.S. treasury market. We are already trading hundreds of millions a day, but for us real traction is in the billions. We think the opportunity remains in front of us with the second phase of contingent orders coming out in December. We are currently laying the groundwork for contingent orders and off the runs in 2004, and will remain focused on penetrating this market as we head into the first quarter.

I'd like to turn now to our new product rollouts and our overall activities are right on track. The eSpeed FX platform is live and we have gotten great feedback and positive customer responses on the technology so far. We believe that our superior technology platform combined with the significant structural settlement changes that have taken place in the market recently offer eSpeed a unique opportunity to transform the FX market by increasing efficiency and broadening market participation to include for the first time the world's banks and investment banks, hedge funds, and other professional trading firms.

The foreign exchange market historically has been extremely different from that of stocks and bonds. While stocks and bonds trade anonymously and have multiple buyers and sellers the FX markets were named give-up, not anonymous, bilateral which means trading is one on one with a counter party and each trade requires a credit check. The settlement structure of the FX market changed with the introduction of CLS, continuous link settlement, creating the equivalent delivery versus payments settlement structure much like that of the stock and bond markets world. This structural change enables eSpeed to offer its business model to the FX market providing anonymity, multilateral trading and workup.

ESpeed is uniquely positioned to leverage our technology and to be successful in the new FX market because we have already integrated into the largest banks and investment banks around the world. Our platform is realtime, all the time, and our technology is fully scalable.

We expect that it will take about three to six months for trading firms to put in place the necessary relationships with clearing banks to work within the new settlement structure that is changing in the FX market and creating enormous opportunities for eSpeed. We are excited about the opportunities for us in the FX and expect to begin to see results in FX in the second half of 2004.

In mortgage-backed securities I have over 20 years of experience. This market is relatively concentrated and our strategy here as opposed to our broad strategy in the FX market is to target the 20 largest banks.

Over the last 10 years the mortgage market has grown rapidly, fueled lately by interest rate reductions and refinancings. Of the volume in this market we estimate about 60% of the trading is in the four Benchmark TBA areas that we are targeting. We will be focusing on high volume and commodity-like Benchmark segment of the market. This model plays directly to our strengths. As we said before, eSpeed will see very little incremental cost related to entering into this new marketplace.

We have commitments from multiple banks and within a month we will be rolling out our mortgage-backed securities platform. We expect mortgages to start contributing to our results towards the end of 2004.

Interest rates swaps are on target with its rollout on schedule by the end of the year. Again in interest rate swaps our strategy is to focus on the largest trading banks and on the most commodity-like products. The Benchmark one to ten-year plain vanilla swaps. In keeping with our strategy we will focus our sales efforts on these bench marks first.

And in the equity world, we are thrilled to announce our entrance into the equity direct order routing market with the launch of eSpeed equities, and Howard will talk to you in more about that in a minute. I'd now like to turn the call over to Jeff to review our financials.

Thanks, Lee, and good morning, everyone. For the third quarter 2003 eSpeed reported fully taxed operating earnings of $10.8 million or 19 cents per diluted share. We reported GAAP net income of $10 million or 17 cents per diluted share. The difference between operating income and GAAP net income is a $400,000 annual September 11th charity day contribution to the Cantor Fitzgerald relief fund that's net of taxes and a $400,000 non-cash charge net of taxes related to business partner warrants.

Our net operating income reflects $6.9 million of income tax expense. For comparative purposes, eSpeed reported pretax operating income of $17.7 million or 31 cents per diluted share, up 94% over 16 cents per diluted share reported in the third quarter of last year.

For the third quarter our pretax operating margin grew to 39.9% compared to 35.5% in the second quarter of 2003 and 26% in the third quarter of 2002. Our incremental pretax operating margin for the quarter was 73% sequentially.

Third quarter revenues were $44.3 million, representing a 34% increase compared to operating revenues of $33 million in the third quarter of 2002. Our fully electronic revenues of $32.3 million increased $9.5 million or 42% compared to the third quarter of 2002. Total transaction revenues of $37.6 million increased $10.2 million or 37% compared to the third quarter of 2002.

In the third quarter of 2003 Software Solutions and licensing fees from unrelated parties increased to $2.3 million versus $1.3 million in the third quarter of last year. Included in Software Solutions and licensing fees in this quarter is $1.8 million from licensing the Wagner patent. Software Solution fees from related parts were $3.8 million for the third quarter which represents a 12% increase compared to the revenue of $3.4 million in the third quarter of last year. We expect the same general level of revenue from these sources for the remainder of the year.

Comparing the third quarter to the second quarter of 2003, operating expenses in the third quarter of $26.6 million were up $1.4 million from $25.2 million in the second quarter of 2003. The increase was due to additional compensation costs which was related to our increase in revenue. Occupancy and equipment also increased primarily related to our computer maintenance expense.

Looking forward, our total operating expenses should decrease slightly from the current levels into the fourth quarter. Our compensation and employee benefits, professional and consulting fees, and occupancy and equipment should decrease in the fourth quarter while marketing and communication and client networks should remain flat. Other expenses will increase slightly in the fourth quarter, and we do not anticipate a significant change in administrative fees.

While the income tax provision in the third quarter was $6.4 million on a GAAP basis, the actual tax amount due was only $4.6 million, primarily related to the tax benefit from employee stock option exercises. For the fourth quarter of 2003 our income tax provision will be based on an effective tax rate of approximately 39.4%.

With respect to cash flow, I'd like to point you to the financial data attached to our release that now includes a cash flow statement as well as a computation of free cash flow. We calculate free cash flow as operating cash flow minus cash use for capital expenditures, software development, and intellectual property. Our revenue growth, coupled with our control on costs, translate into strong cash generation.

And for the third quarter we generated free cash flow of $17.2 million, net of related party receivables and payables, we generated free cash flow of $18.5 million for this quarter.

Our capital expenditures for the quarter were $2.7 million. We estimate that our capital expenditures for the year, 2003, will be less than $10 million. We received $20.4 million last year from our property insurance, and this will have covered our capital expenditures for this year. We still expect an additional $19.5 million of replacement insurance that will cover our capital expenditures for 2004.

As of September 30, 2003, our cash position was $217 million which represents an $18.3 million increase for the quarter. This improvement of our cash position was primarily driven by cash earnings of $18 million, which includes net income of $10 million and non-cash expenses of $8 million, working capital of $6 million, which includes $3.4 million received from the CME and the Chicago Board of Trade as part of the Wagner patent settlement, cash received on the exercise of employee stock options of $1.1 million, which is partially offset by capital expenditures, software development, and intellectual property of $6.8 million in the aggregate.

Please remember that during the fourth quarter of 2003 we expect to pay annual bonuses to our employees which we have accrued for since the beginning of the year. And these payments will reduce our operating cash flows towards the end of the year. Now I'd like to turn the call back to Howard.

Thank you, Jeff. For the fourth quarter 2003 we now expect average daily Federal Reserve U.S. Treasury volume to be in the range of $425 billion to $435 billion per day. We anticipate taking into consideration, one, traditional seasonality of the fourth quarter, specifically that is the Thanksgiving week, Christmas and New Year's holidays; two, that there are two fewer trading days in the fourth quarter comparing it to the third quarter; and three, that October's average daily Federal Reserve U.S. treasury volumes were already down 8% from the third quarter average. All of these factors are likely to result in the sequentially lower volumes and revenues for the fourth quarter of 2003. So for the fourth quarter we expect to generate operating income in the range of 14 cents to 15 cents per share fully diluted and after tax.

Given our strong actual results for the third quarter and the fourth quarter guidance I just mentioned, we are maintaining our full year 2003 operating income guidance in the range of 65 to 60 cents per share diluted -- 65 to 67 cents per share diluted and after tax. For the full year of 2003 guidance is predicated on the expectation that average daily Federal Reserve U.S. treasury volume for the year would be between $436 billion and $439 billion per day.

With such strong results in 2003, we are confident looking ahead into 2004. For the full year 2004 eSpeed expects to generate revenues in excess of $185 million and expects pretax operating margins to exceed 41% and we also anticipate incremental margins will be in the range of 75%.

Net operating earnings for 2004 are expected to be in the range of 80 to 84 cents per share diluted and after tax. This guidance is based on our expectation that average daily federal reserve U.S. Treasury volume will be between $490 billion and $510 billion per day for the full year 2004 and that we will experience the market's normal seasonality in the third and fourth quarters.

Because our tax status changed in the first quarter of 2003, I want to take a moment and go through the growth calculation for our earnings guidance. As most of you know, beginning in the second quarter 2003 we started reporting after-tax operating EPS and we will be doing the same in 2004 and beyond. But our first quarter of 2003 earnings were not reported on this basis. Therefore, it's important to remember that in order to make an accurate comparison year-over-year, one needs to adjust our first quarter number by what would have been our effective tax rate of 39.4% which is 7 cents a share.

Taking into account this tax adjustment, you can see that we are projecting a year-over-year earnings per share growth rate in the range of an impressive 33 to 45% earnings per share growth for next year.

In 2004 our results will begin to include reasonable expectations for some of the new product enhancements and product rollouts that Lee mentioned a little earlier. For example, with a rollout of contingent orders the opportunity ahead of us is that it also further enhances price improvement. We need to even better traction with our price improvement customers.

An example of how contingent orders works to enhance price improvement is something we call better fill. With better fill the system will provide traders an extra second or two to hold the price and determine whether or not the system can execute at a better price for the customer. This type of enhancement is well suited for program trading. Such program trading, or black box trading as some people call it, those trades today represent a significant and growing number of trades on the eSpeed platform. With potential success and traction in this better fill category this percentage could further increase and take PI to its next level.

Now turning to our other important announcement today in addition to announcing a great third quarter, we are proud to announce our entrance into the equity market. We have launched a new order routing system for the institutional equities market. eSpeed's new product which is called eSpeed Equities provides an intelligent order routing and execution platform that affords equity participants multiple points of entry and simultaneous electronic access to the world's largest exchanges, market makers, and ECNs.

ESpeed's entrance into equity order routing is another new product example where we will leverage the company's highly scalable built-in, paid-for global network, and management technology infrastructure to offer superior execution at efficient price discovery for institutional equity participants. Because our incremental costs for entering this market are minimal, we can become the low-cost provider in this space.

Looking ahead, we expect 2004 to be characterized by tremendous budget deficits in the U.S., dramatically increased issuance of the existing bench marks, and the possibility of increased issuance of new benchmarks, and an average daily federal research U.S. treasury volume growth of between 12 and 17%. We also expect in 2004 we will gain traction in our PI or price improvement and contingent order product enhancements as well as a new applications for each of these product enhancements that we're rolling out.

Our guidance assumes reasonable growth in U.S. Treasuries and reasonable initial success in some of our new products. There is nothing extraordinary that is priced into our 2004 expectations. We are well situated to begin 2004 and we look forward to extending or solid leadership position next year and beyond. With that I'd like to turn the call over to our operator so we can answer any of your questions.

Thank you, and if at this time if you would like to ask a question you may do so by pressing star 1. To withdraw or cancel your question, simply press star 2. Once again, that's star 1 if you have a question. And our first question will come from Rich Repetto with Sandler O'Neill.

Hi, guys. Congratulations on a fine quarter. Howard and Lee, you did get into a little bit more specifics on PI and the impact, and your market share, obviously, has improved relative to the market. I was just trying to see, if it wasn't -- just to get a little bit deeper, would it be safe to assume that if it wasn't for PI, market share would have been flat and that's the difference? That's the incremental? Can we get that deep into the numbers or not?

I would say it this way, which is without price improvement, our average price per million would not have maintained its level from the first quarter to now given the huge volumes that we have grown on the 42%, so that price improvement has mitigated the entire, effectively, the entire volume discounts that would have been seen in the market over the last two quarters. That's not to say that it will mitigate it always at 100%, so if volumes from here continue to grow, we would expect that our average price would slightly decline but obviously mitigated by price improvement success.

And, Howard, any even -- I know you don't probably have this number but any ballpark number you would think that your average price, you know, per mil would have gone down 10%? 15%? Given the volume increases that you've seen?

Can you say that again, Rich? I'm not sure I got it exactly.

Because of the tiered pricing, like you said, the average price would have declined, given your high volumes but it hasn't, it's actually gone up a bit, so what would it -- if you didn't have PI, any feel for how far it would have declined given, you know, the incremental volume you've seen?

I think that's just too specific into our exact revenue calculations than I'd like to get into. I think the general concept you've got right, which is it's very clear if you compare our volume in the first to the third quarters that you can see our average price stayed relatively consistent, and we don't want to break out the exact PI numbers, but you can see them. You know, you can see the effect of PI in that comparison.

Okay. And then next question, any reason why you didn't include any revenue? I'm assuming you didn't include any revenue or upside from FX, mortgage back or interest rate swaps. Any reason why you didn't include anything from that, the new products?

Well, I think what I said was that we have reasonable expectations with respect to their introductory revenue. These are brand new products. We tend to be aggressive in discounting in the initial stages. And Lee discussed the timing with respect to when things are going to be rolling out and when we expect the revenues to start, to begin, but these are initial rollouts and we want to be reasonable in our expectations with respect to 2004.

So there is some small incremental revenue budgeted in for those products.

Effectively, but because we are -- you know, we are building the foundation and the base for our 2005. I mean, so really these new products we get to work on them for a year in order to really have them online for 2005 and to power our growth in 2005, and I think that's one of the strengths of the company, that we can guide 33 or 45% earnings per share growth and not have much of new products based in that guidance, but really have 2004 to build that foundation to have these products drive us in 2005.

Okay. And very last question, any update on the litigation between you and brokered tech (ph) or I-cap (ph) in regards to the actual trading box and software? Keyboard?

I think all I can say is that there was a preliminary injunction hearing. There are more papers due between now and the end of the year, and I don't think I can comment beyond what's already in the public record.

Okay. Thank you.

Thank you, and our next question will come from Charlotte Chamberlain with Jeffries & Company.

Good morning. Looking at I-len (ph)your stock's down about 7.3% from where it closed last night, from my perspective, it would seem to be that certainly the third quarter was huge. Next year looks huge. And in between we have this black hole to oblivion of the fourth quarter, which I thought about and I thought about, and I just can't see why the huge, huge negative leverage here. You're forecasting treasury volumes down 12.8%, and earnings down 24%, and that's -- I don't think anybody is -- you know, really has a patent on forecasting treasuries, but certainly what you know down to the second decimal place is what your business is running at, and if that's what you're really telling us, that your run rate is at a rate of down 24%, then that's something I think we would really like to hear about. So if you could talk first of all about this negative leverage.

The second thing is if you could give us end of quarter fully diluted share count and if you could possibly forecast for us what we should use for fully diluted share count in '04 -- I'm sorry -- in the fourth quarter and '04. Thanks.

I'll start with a comparison that I think you'll find helpful. In the second quarter of this year treasury volumes were approximately $450 billion per day, and our earnings per share were 15 cents. In the fourth quarter we have estimated that volumes in the range of 425 to $435 billion, so lower volumes will produce, as I said, the 14 to 15 cents of our guidance. So we're actually showing in that example the leverage of the model and how both our market position improvement and price improvement have driven better results to our bottom line.

It's simply a matter of if treasury volumes are down, sequentially our revenue is going to be down sequentially, but we're talking about all of the different markets and models, why we think treasuries will be up next year, why we have so many different products and opportunities next year to grow our business, why we are confident and excited about 2004, and the fact that the end of this year always has Thanksgiving, Christmas and New Year's, and October was weaker than expected. Of course, August was much stronger than was expected, so actually our year was pretty much in line with what we said. I mean we’re really excited about 2004, and that's where we're looking. So we'll get through these -- you know, the holiday season because that's always there, and then off we'll go into 2004 with tremendous growth.

Well, I understand what you're saying. Certainly last year the treasury volumes average daily were down 3%, but more importantly, your volumes were absolutely flat. I mean, what I'm talking about with negative leverage is that this quarter there was an 8% increase in U.S. Treasury volumes and your pretax margin went up 4 percentage points, from 35.5 to 39.9, and now you're saying if we have a drop-off of 12%, that basically we lose almost three quarters of what we gained. I mean, that's the negative leverage. And I mean are the costs, you know, not -- are you not able to cut costs or why this huge negative leverage?

I mean, I -- fine. Let's say that the treasury volumes go down and I understand what you're saying, but the point is you're showing huge negative leverage, and I want to know -- I mean, are people just going to stop hitting the PI key? Are they going to -- I mean, what are they going to stop doing on the revenue side and what isn't getting cut on the cost side?

Well, we have -- I mean, the driving force of our model and the driving force of incremental margins, the last quarters of in the mid-70s and guidance of next year of incremental volumes, incremental revenue driven to the bottom line of 75% is based on a fixed cost model, that we have a strong investment in our technology; our costs do not tend to rise materially with volume but they don't tend to drop materially with volume.

So if there were a holiday season in a sequential quarter which had volumes drop off, then our revenues might drop, but only with an attendant small decrease in our expenses, but that model remains the fundamental foundation of our guidance next year that says as we grow our revenue to over $185 million, we'll bring 75% of each new dollar to the bottom line.

That's incredible leverage. That's what's driven us to having a 40% increment -- you know, 40% operating margins on our entire business. I mean, we think our model is the right one. We love our model. In fact, that one particular quarter we'll have seasonality in it is not going to really change our view. And that's what leads us to our confident view of next year. I will hand it over to Jeff to answer your second question.

Hi, Charlotte, it’s Jeff. Our guidance for the fourth quarter and for the full year of 2004 assumes fully diluted shares outstanding of $59.1 million.

So that's average fully diluted both for the fourth quarter and for all of '04.

That is what our guidance is based on.

Howard, just one more, just one more go. Okay? From the third to the fourth quarter of '02 average daily treasury volume went from 393 to 391, and yet your pretax margin went from 26.8 and 28.5. That's the fuddlement (ph), is that you've had situations where the volumes have gone down and in fact your margins have grown, and the question continues to be in my mind since you've shown us that even when volumes go down that your margins can go up, what is different this time?

I think the simplest way to describe it is if volumes go down sequentially, then it is likely that our revenue will go down and our EPS will go down, but that's in line sort of effectively with the market. We have said, and I think Lee mentioned this, that we have such a strong market improvement, market position improvement in the third quarter in such a strong upmarket that we do not expect to maintain all of that in the down market in the fourth quarter simply because we tend to do better in better markets. Our margins, however, don't change and they don't go down. They're simply a factor of how much revenue we can drive through our model.

Okay. Hopefully we can talk offline. Thanks.

Thank you. Once again, that's star 1 if you have a question. And our next question will come from Colin Clark with Merrill Lynch.

Hello. Good morning. Volumes are obviously pretty challenging to predict. You had mentioned the benefit of the new issuance and the increased frequency in auctions. Can you give us any sense of what your assumptions are in terms of the impact of interest rates on volumes next year that go into your 2004 estimates?

We tend to not focus on nor address interest rates movements being a factor in the volume. We, Lee and I, have been in this market for a long, long time, and we have never needed an interest rate movement to drive volumes. Volumes have been growing with the massive issuance and new bench marks, and we feel very good about, because of the massive budget deficits, the massive requirements of funding next year, that the continued growth rate in U.S. treasuries will stay with us for a good long time to come.

Okay. Well, is your assumption assuming the full impact of the new issuance or are you kind of -- is there a higher expectation of growth in terms of what the new issuance market could bring and you're assuming something a little bit more conservative? Just trying to get a little bit more on that.

Well, I think we gave a reasonable estimation in our opinion of what we think average daily volumes will be next year, went through what we think the issuance will be, and sort of what are the factors that led us to that view, and that's where we're comfortable in providing you guidance for 2004 in the overall picture so that's what we based our view on and I think it's reasonable based on our experience and our knowledge in the market, that we can give you that kind of strength of guidance of 33 to 45% EPS growth next year.

Okay. Did you -- the market share penetration was very significant this quarter and a lot of it had to do with the PI, it sounds like. Any meaningful penetration in the off-the-run area?

This is Lee. I mentioned in the earlier that we're trading probably in the hundreds of millions, and although we don't find that to be where we see traction, we think traction is when we get into the billions, but we have contingent orders, has put us into a better position in terms of entering into the U.S. treasury market and the offering market. We have another rollout of contingent order software in December which, again, we're counting on putting us into a stronger position for the off-the-run business.

Okay. And one last question. I was a little bit surprised to see you're getting into the equity order routing business just given the competition and the space and the pricing pressure there. Just curious if you can provide a little insight into what you see as the opportunities, what makes your product unique, when the product could be rolled out.

Well, I think the driving force of many of our product introductions is it's based on our leveraged model. That means we built and paid for our matching engines and our network and the networks connectivity to most of the world's largest banks and investment banks. So to start to pursue additional ways of earning revenue over that same system will come with very low incremental cost, so while we are entering into the equity market, you will note that you haven't seen an attendant rise in expense that one would expect when entering into all these different businesses. We get to enter these businesses at very low incremental cost and very low operating costs going forward. Therefore, we think we can be the low-cost provider in the space with a tremendous amount of technological advantage and connectivity at extraordinarily high levels.

So it's really a cost advantage with our view that we can deliver the best technology. You've seen our margins, as a best example I can give you, as we've rolled out all these products, our margins have grown all the way to now 40%, and we have rolled out and are rolling out all of these products, and we've already done the development. Since the development is already in our numbers, I think the only thing we have left to bring is the upside volume of these new products so whether they're small or large, the margins will just come back to us.

And with respect to foreign exchange, the system is live, and that's why I think Lee talked about people moving now to get clearing banks to come onto the market. Mortgage backs will come out in a month, interest rate swaps by the end of the year, and equities is being rolled out now. And, you know, that's what I think is exciting, is that these products have been developed, and the revenue opportunity for them is just upside for the company.

Any sense on pricing of that equity product relative to the competition?

We expect to be low cost provider in this space, and I think it's predicated on volumes and the type of clients we'll be talking to, but we expect because of our low cost and already built and paid for network and the leverage we get from that network, we would expect to be the low-cost provider in the space.

Okay. Thank you.

Thank you. Our next question will come from Richard Bove with Hoefer and Arnett.

Good morning. Going back to this sequential decline in earnings in the fourth quarter, I'm wondering if the issue isn't compensation; in other words, it was indicated that on the volume increase in third quarter compensation costs increased, and I don't know why that should happen if it is fully electronic and nobody is getting paid commissions for the incremental trades going through, and I'm wondering if the issue isn't the split in how compensation is determined between Cantor Fitzgerald and eSpeed. In other words, what percentage of executive income was being paid by Cantor Fitzgerald in prior quarters and what percentage of executive income is now being paid? Was there a shift downward in what Cantor Fitzgerald is paying and a shift upward in what eSpeed is paying to top executives and is that the reason why earnings are likely to drop by 2.6 million; $2.4 million in the fourth quarter pretax versus the third?

Not at all. The -- there is no variability with respect to the Cantor eSpeed relationship. None. eSpeed receives 65% of electronic transaction revenue, period, full stop, with respect to U.S. treasuries traded electronically, so as it worked out, the compensation as we hit certain hurdles, as we compensate people with sales incentives, as we compensate those who work for us who help us hit new thresholds, you will see our compensation rise, but not in a material sense.

I mean, in the same quarter that you saw the compensation rise, you also saw our margins rise. We delivered 73% incremental margins to the bottom line. And 40% operating margin. And of course our EPS has grown year-over-year 94%. So these kind of issues are how we incent our staff. But I don't think they are material with respect to our margins. The issue next quarter is one of volume.

One would have expected October and the auctions in November to have stronger numbers which would have mitigated the seasonality of December. Since October was weaker and it was down 8%, that's what happened. That led us to view the probability that average daily volume for the market of U.S. treasuries would be down; therefore, it would impact our revenues.

Jeff walked through sort of a line by line items of how our expenses would be, and he's done that already, so I think you can see that it's really just volume-based and it's just a fourth quarter event. We expect next year to grow 12 to 17% and U.S. treasuries we went through, and I think none of this has anything to do with Cantor. This has to do with volumes in our treasury market. I think we are very well positioned to take advantage of the huge budget deficits and huge issuance coming our way next year and that's what makes us so excited about ’04.

I guess I still don't understand why compensation should rise on increases in volume when there is no commissions being paid on electronic trades; in other words, the total increase in volume occurred in the electronic area with a small increase in the voice/electronic area, and yet why would compensation go up because you're doing more electronic trades?

Well, A was a relatively small amount; and B, we do have sales incentives and other models that we compensate our employees based on how well the company is doing, but, right, it is not a direct percentage that will have a material impact, and we continue to guide, we continue to deliver this quarter 73% margin, incremental margins, and next year we're still guiding 75% incremental margins, and those you've heard over the last year have grown from when we used to guide 60% incremental margins, so I think it was just a factor of this quarter but I don't think you'll see it impacting our number.

Thank you.

Thank you. Our next question will come from Peter Wade (ph) with SAC Capital. If you're using speaker equipment, please lift your handset.

Yes, hi. Sorry about that. You're saying that you're not projecting a continued increase in market share in the fourth quarter. Can you give us some guidance as to what you are expecting in terms of changes in market share for 2004?

No, other than to say in up markets and especially in the third quarter we really had dramatic improvement vis-a-vis the average daily Federal Reserve treasury volumes, and we don't expect in the slower market to have that happen again. In fact, we think it slides back the other way somewhat. It's simply a factor of when the markets are busier, there are times that that our system and our price improvement feature drives people to our network and when it's slower, sometimes it slips back a little bit the other way.

And I'm going to try and go at this one question I think other people have asked. Can you give any incremental guidance as to what reasonable means for the new product stuff in '04 and when that stuff would show up? Would it be in the second quarter? Third quarter? Fourth quarter?

I think the -- you know, what we've done is we've sort of gone through a calculation that has our new products not materially impacting the earnings on the company next year, but collectively they add a little bit. But because they're all new and because we're rolling them out effectively at the beginning of the year, we can't really predict exactly what they'll do, but we figure collectively they'll add a little bit.

We are not looking to the new products to make our numbers next year, and that's why I said we're not looking for anything exceptional. We don't need to create something new to meet the goals that we set out for ourselves. We are simply building that foundation of those new products for the year 2005, and to the extent things go better, we will, of course, be telling you about it and those will positively impact us but we are not relying upon that because there are new products, there are new rollouts, and we want to give them a chance, both to get traction in the market and also please remember that we tend to give strong discounts in the beginning of rolling out a new marketplace in order to encourage people to use it.

Okay. One final question. Do you have any plans to use the -- all the cash that you have generated and have on hand now?

Well, I think our view of our -- the cash position we have is that as the marketplace segment of the world's financial markets consolidates, there will be opportunities presented to us to use our cash effectively in that space, and I think it has suited us well for the moment to continue to look and to listen and to wait for the right opportunity for us, but I think it bodes well for our position because of our network, because of the proprietary nature of our technology, and because of our strong cash position and strong financials, I think we will be uniquely positioned to take advantage of an opportunity when and if it comes along. Of course, we're going to wait for the right one.

Okay. Thank you very much.

Thank you. Our next question will come from Charlotte Chamberlain with Jeffries & Company.

Thanks. The Wagner patent litigation that's still pending with the (inaudible) I was wondering what the status of that is, and also getting back to Mr. Bove’s question, in the proxy statement it said that Howard you and Lee are eligible for bonus payments, and I was wondering, is that something that would hit in the fourth quarter and wouldn't it have been accrued for? Thanks.

Hi, Charlotte. It's Jeff. We accrue for all bonuses, which would include the compensation plan that was included in the proxy statement.

Okay. So --

Throughout the year.

Okay. And what about patent, Wagner patent litigation?

Hi, it's Jeff again. We really can't comment about that at this point.

Well, it was first -- I thought it was supposed to go to trial in the fall. Has it not? I mean, can you comment at all about is it in trial? Is it -- has it been stayed? Did the judge die? You know, what happened?

Charlotte, we really can't comment about that.

Thank you.

Thank you. Our next question will come from Colin Clark with Merrill Lynch.

Hi. Just one more follow-up question. Obviously, the new issuance volume is going to have a big impact next year, and you had commented that the October auction was a little bit weaker than expected. I was just hoping you could provide some additional color on why was it weaker, particularly this time around. Thanks.

Well, the auction calendar, the majority of the auction calendar comes in November, and we just saw that October was slightly weaker and maybe, Lee, you want to comment?

I think that, as Howard mentioned, the majority of the auction calendar comes in November. I don't think there is any real call as to why we saw October weaker or not. It just was something that happened in the marketplace.

Okay. Fair enough. Thank you.

And our next question will come from Rich Repetto with Sandler O'Neill.

Hi, guys. One follow-up to the comp question. I don't know whether it's a fair question or not, but are you able to disclose what percentage of compensation comes, of your compensation, say, the top executives at eSpeed, what percentage comes from Cantor versus what percentage comes from eSpeed?

I don't think that's something that we've ever gotten into before, and I don't expect us to get into it now, but certainly eSpeed's senior executive compensation is disclosed in the proxy statement and the compensation committee of our outside directors determines the compensation.

Okay. Thank you.

And I would now like to turn the meeting over to the moderators for closing remarks.

Again, I'd like to thank you all for joining us this morning and we look forward to speaking to you again shortly. Thanks, everybody, and have a good day today.

This will conclude today's presentation. Thank you for participating, and enjoy the rest of your day. You may all disconnect.