Bgc Group Inc (BGC) 2003 Q4 法說會逐字稿

Welcome to the eSpeed fourth-quarter and full year 2003 earnings conference call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce your host for today's call, Ms. Abbe Goldstein.

Thank you and good morning. I just wanted to remind everyone that statements contained 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 result to differ materially from those currently anticipated due to a number of factors which includes, 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. I would now like to turn the call over to your host, Howard Lutnick, Chairman, CEO and President of eSpeed.

Thank you for joining us for our fourth-quarter and full year 2003 conference call. With me today are Lee Amaitis, our Global Chief Operating Officer, and Jeff Chertoff, our CFO. I will briefly review our results for the quarter and the year. Then I will hand the call over Lee, who will discuss our operations, which will be followed by Jeff, who will review our financial results. After Jeff, I will share with you our guidance for looking forward and our outlook for the first quarter and full year 2004.

We are pleased to have reported fourth quarter results at the high end of our expectations despite the seasonally slower and lower market volumes in the fourth quarter. For the fourth quarter 2003, our fully taxed operating income was $8.8 million, or 15 cents per diluted share. Because we did not have to pay taxes in 2002, we used our pre-tax operating income for comparative purposes. Our pre-tax operating income was $14.5 million in the fourth quarter in 2003, or 25 cents per diluted share, which is a 56 percent increase over the 16 cents per diluted share we reported in the fourth quarter a year ago.

For the full year of 2003, we reported net income from operations of $38.1 million, or 66 cents per diluted share. This compares to $31.4 million in 2002, which also was not taxed, or 55 cents per diluted share, for the same period last year. On a comparative pre-tax basis, full year 2003 pre-tax operating income of $56.1 million, or 98 cents per diluted share, represents an approximate 75 percent increase over the 56 cents per diluted share we reported in 2002.

eSpeed's total revenues for the fourth quarter were $39.2 million, which was 20 percent higher than revenues of $32.8 million we reported in the fourth quarter of 2002. For the full year, 2003 revenues increased 24 percent to $156.6 million versus the $126.4 million we reported in 2002 last year.

Fully electronic transaction revenues increased to $27.7 million, which was up 24 percent compared to 22.4 million in the fourth quarter of 2002. For the full year, fully electronic transaction revenues increased 25 percent to 110 million compared to $88 million last year. Pretax operating margins expanded to 36.9 percent in the fourth quarter of 2003; that is up from 28.5 percent in the fourth quarter a year ago. For the full year, pre-tax operating margins grew to 35.8 percent; that compares to 25.3 percent for 2002.

Overall, with the increase in U.S. budget deficit, we have strong volume growth in our core markets, which have led us to strong growth for overall results for eSpeed. We believe that our impressive 2003 results of 75 percent profit growth, our 80 percent incremental margins and our ability to generate free cash flow virtually on a par with our income, each of these demonstrates once again the strength, leverage and scalability this Company has as its foundation for growth.

Now turning to NYMEX and its recent license of our Wagner patent. In December, we announced a license agreement with the New York Mercantile Exchange for our Wagner patent. Although Jeff will go into the financial details with you in a few minutes, I would like to highlight that NYMEX has agreed to pay $8 million to us over three years for the use of our patent, which relates to the electronic trading of futures. To date, licensing agreements involving Wagner patent, including the NYMEX agreement, have resulted in about 40 million in scheduled and net payments to eSpeed through 2007. We have now licensed the patent to NYMEX, the Chicago Board of Trade, the Chicago Mercantile Exchange and the Intercontinental IPE (indiscernible) by ISE (ph). With a total investment of approximately $21 million, the return on our Wagner patent has been quite strong. These licenses underscore the values of eSpeed's intellectual property portfolio and reaffirms our commitment to protecting our intellectual property and our patent.

Now let's turn to our 580 patent and BrokerTec infringement matter. This is another example of our efforts to protect our intellectual property. Our patent, which we refer to as 580, protects some of eSpeed's proprietary systems and methods for electronic trading. The court recently found that these systems and trading methods were such an integral part of our competitor's business that it would cause them to lose virtually all of their U.S. Treasury trading volume if they had to discontinue (technical difficulty) pending full trial. We expect the case to go to trial in the first quarter of 2005, next year. Although we are unable to elaborate at this time about the details of the ongoing case, we look forward to communicating with you again regarding our efforts when the time is right.

I would like to now turn the call over to Lee for more details on our volumes and an update on our product initiatives.

Good morning, everyone. Fully electronic volumes for the fourth quarter of 2003 were $7.5 trillion, an 11 percent increase over the 6.8 trillion for the fourth quarter of 2002. eSpeed's total electronic volume, including fully electronic and Voice-assisted transactions, for the fourth quarter of 2003 was $10.3 trillion, up 11 percent from 9.3 trillion in the fourth quarter of 2002. This growth compares to an 11 percent increase in the U.S. Treasury volume as reported by the Federal Reserve over the same period. The Company had anticipated average daily Federal Reserve U.S. Treasury volume for the fourth quarter of 2003 in the range of 425 to $435 billion. Actual average daily Federal Reserve U.S. Treasury volume for the fourth quarter was 422 billion.

For the full year of 2003, fully electronic volumes was $31.7 trillion, a 21 percent increase over $26.2 trillion for the full year 2002. eSpeed's total electronic volume for 2003 was $42.5 trillion, up 21 percent from 35.1 trillion in 2002. This growth compares favorably to the 17 (ph) percent increase in U.S. Treasury volume as reported by the Federal Reserve over the same period. You can see from these results over the course of 2003 and in varied market conditions, as compared to 2002, eSpeed's growth outpaced the overall market with respects to volumes and market position.

On a quarterly basis, with strong volumes in the market during the third quarter of 2003, our market position increased dramatically. With seasonally slower volume in the fourth quarter of 2003, our market position stepped back somewhat. However, looking forward to the first quarter of 2004, with increased market volumes, we are already seeing an improvement in our market position.

During the fourth quarter we continue with the development and rollout of a number of new products and product enhancements. I will give you an update on these initiatives now. In the fourth quarter, price improvement, or PI, usage continued to grow. As we have explained in high-volume market conditions, like those we saw in the third quarter, there are more advantages and opportunities to using PI than in more seasonally quiet quarters like the fourth quarter. Even in mid to lighter volumes, due to seasonality in the fourth quarter, we estimate that more than 25 percent of our customers use PI, and that those PI trades represent approximately 10 percent of all of the trades on the eSpeed platform.

Foreign exchange. Our foreign exchange rollout -- we continue to roll out our foreign exchange and are encouraged by our initial client-customer contacts. Starting in the fourth quarter, we focused on hiring commission-rewarded sales people to support our foreign exchange efforts. We continue to estimate the sales cycle in respect to foreign exchange clients to be approximately six months. We believe eSpeed's technology will be able to truly transform the FX marketplace by providing anonymity and netting (ph), thereby increasing efficiency and dramatically broadening market participation, much in the way Direct Access changed trading in the equity markets. eSpeed offers a solution that complements the needs of foreign exchange traders. We are anonymous, global, real-time, all the time, scalable and offer superb value proposition. Our product is much less expensive than any other system. We are committed to the foreign exchange market and we will update you as the year progresses. We remain on track to see results at the end of 2004.

Currently, the business of off-the-run and WI U.S. Treasuries, or when-issued U.S. Treasuries, are still voice brokered. We strongly believe, just as we transformed the U.S. Treasury benchmark market, that it is a matter of time until the inevitable transition from voice to electronic trading occurs with these products. We have the technology and distribution in place, and with current voice brokerage commissions being paid at approximately $10 per million, we are excited about the value proposition of offering low-cost electronic trading in the off-the-runs and WIs. As we have done in the past, we expect to lower the price per million in the market as we facilitate the transition from voice to fully electronic trading. In order for us to best tackle this market, we are initiating a specialized sales team to exclusively focus on these particular products. We expect to add four or five professionals in the coming months.

Another area of opportunity for us is the European government bond market, or the EGB market. Similar to our efforts in the off-the-runs and WIs, we continue to work on the transition of voice to electronic trading. Current settlement process for each of these in Europe is fragmented, expensive and inefficient, which is impeding the growth of the cash markets. As the settlement process becomes more efficient, the cash markets will catch up to futures and other derivatives market, which are currently much more liquid. As this change occurs, eSpeed will be able to leverage Cantor strength in the voice brokerage of EGBs in Europe, having voice-based liquidity immediately available to us.

The eSpeed systems fully integrated into the Chicago Board of Trade and Eurex in January. This gives users of both exchanges direct access through eSpeed's platform. This combination of cash and futures market is a significant advantage for all traders using eSpeed's front end. Its integration extends eSpeed's exposure and access to additional U.S. and European traders, and has the potential to create greater crossover transactions between cash and futures markets.

We opened mortgage-backed securities at the end of 2003 and already have a number of key participants who have agreed to support our system. We are focusing on the highest-volume market participants, which we estimate to be represented by 15 banks and investment banks to provide liquidity and market-making. We expect to see results in the fourth quarter of 2004.

Our first version of our technology platform for interest rate swaps has been released in Europe. The feedback has been positive and we are encouraged by this market opportunity. Our focus throughout 2004 will be on the 12 to 16 banks and investment banks that create the liquidity in this marketplace. We also remain excited about our entrance into the equity capital markets. With the launch of our new order routing system that we announced on the last call, we have just begun the marketing process and sales cycle and now have clients trading daily. We will continue to provide you with updates with respect to our equity business during the year. Now I would like to turn the call over to Jeff to go over our financial results.

Good morning, everyone. For the fourth quarter of 2003, eSpeed reported fully taxed operating earnings of $8.8 million, or 15 cents per diluted share. We reported GAAP net income of $8.6 million, which was also 15 cents per diluted share. The difference between operating income and GAAP net income is a $300,000 non-cash charge net of taxes related to business partner warrants. Because of the use of our NOL, we did not pay taxes in 2002. For comparative purposes, eSpeed reported pre-tax operating income of $14.5 million, or 25 cents per diluted share, up 56 percent over the 16 cents per diluted share we reported in the fourth quarter of 2002.

We reported net operating income of $38.1 million, or 60 cents per diluted share, in the full year of 2003. That compares to net operating income last year of $31.4 million, or 55 cents per diluted share; and the full year of 2003 included an $18 million provision for income taxes. On a GAAP basis, the Company reported net income of $36.1 million, or 63 cents per diluted share, for the full year of 2003 compared to net income of $42 million, or 74 cents per share, for the full year of 2002. Remember, our 2003 earnings include income taxes and our 2002 results were not taxed and included a onetime insurance benefit related to September 11, which I will detail in a moment.

The difference between GAAP and operating results in 2003 are a $400,000 charitable contribution for September 11th to the Cantor Fitzgerald relief fund, and $1.6 million in non-cash business partner warrant charges; both are net of taxes. In 2002, the difference between GAAP and operation results are a $12.8 million gain on business interruption insurance proceeds also related to September 11; a $1.2 million credit on the reversal of the remaining portion of the Company's September 11 reserve; a $1 million non-cash write-down of eSpeed's investment in TradeSpark; a $500,000 charitable contribution for September 11 to the Cantor Fitzgerald relief fund; and $2.1 million in non-cash business partner warrant charges. For comparative purposes, eSpeed reported pre-tax operating income of $56.1 million, or 98 cents per diluted share, for full year 2003, up 75 percent compared to 56 cents per diluted share reported last year.

Fourth quarter total revenues were $39.2 million, representing a 20 percent increase compared to revenues of $32.8 million in the fourth quarter of 2002. Full year 2003 revenues were $156.6 million, an increase of 24 percent versus full year 2002 revenues of $126.4 million. Our fourth quarter 2003 fully electronic revenues of $27.7 million increased $5.2 million, or 24 percent, as compared to the fourth quarter of 2002. Full year fully electronic revenues of $110 million increased $22 million, or 25 percent, versus 2002. Software solutions and licensing fees from unrelated parties in the fourth quarter of 2003 increased to $2.5 million versus $2.1 million in the fourth quarter of last year. Included in software solutions and licensing fees is $1.9 million from licensing the Wagner patent, and it also includes it's (ph) less than $100,000 as a result of the recent Wagner patent settlement with NYMEX. Starting in the first quarter of 2004, we will recognize a total of $540,000 per quarter under the NYMEX settlement.

Full year software solution revenues from unrelated parties were $9.1 million, more than double the full year 2002 revenues of $4.5 million. Software solution fees from related parties represents revenue from providing technology support services to Cantor, TradeSpark, Freedom and municipal partners. Fourth quarter 2003 fees of $3.8 million increased $300,000 from the fourth quarter of 2002. Full year fees were $15.1 million, up 15 percent from the full year 2002 fees of $13.2 million.

On a sequential basis, operating expenses in the fourth quarter of 2003 of $24.7 million were down $1.2 million from $26.6 million in the third quarter of 2003. We are down $1.9 million -- excuse me -- from $26.6 million in the third quarter of 2003. The decrease was due to lower compensation and employee benefits, professional and consulting expenses and a decrease in other expenses. This decrease was partially offset by increases in occupancy and equipment and administrative fees.

Compensation and employee benefits as a percentage of revenue was 21 percent for the fourth quarter of 2003 compared to 22 percent in the third quarter of 2003. For the full year of 2004, we expect compensation and employee benefits will be approximately 21 percent to 22 percent of revenues, versus 23 percent for the full year of 2003. With a significant portion of employee compensation being discretionary and performance-based, compensation can vary from quarter to quarter based on variability in revenues.

First quarter 2004 expenses for occupancy and equipment, communication and client networks and marketing should remain consistent with fourth quarter 2003 levels. We expect professional and consulting and other expenses to increase in the first quarter of 2004. We do not expect significant growth in administrative expenses. Full-year operating expenses of $100.5 million were up $6 million, or 6 percent, compared to full year 2002. This was primarily driven by an increase in occupancy and equipment and other expenses, partially offset by a decrease in marketing and professional and consulting expenses.

As of December 31, 2003, our cash position was $228.5 million, up $11.5 million from $217 million at the end of 2003. This increase was primarily driven by cash earnings of $17 million, which includes net income of $8.6 million, depreciation and amortization of $5 million and other net non-cash items of $3.4 million. These non-cash items include $1.8 million for the tax benefit from employee stock option and business partner warrant exercises. The change in our cash position was also increased by an initial $2 million cash payment received from NYMEX on the Wagner patent litigation settlement, and cash provided by financing activities of $8.7 million in relation to exercise of options and warrants. Our cash position was partially reduced by cash used in investing activities of $10.5 million for capital expenditures, software developments and intellectual property, including patent legal costs, and year-end bonus payments. We still expect an additional $19.5 million of replacement insurance that will cover our capitalist expenditures for 2004. I would now like to turn the call back over to Howard.

As we look toward the future, we believe programmed trading, driven by black box models and computer-to-computer integration, will be the next significant structural change to impact our markets. Regardless of the level of U.S. Treasury issuance, we expect this change to dramatically expand market volumes over the next two to three years. In the same way eSpeed transformed voice brokerage to fully electronic trading, we expect to be the leader in the transition from fully-electronic keyboard trading to computer-assisted program trading. Inherently, program trading creates an increase in volume because of the computer's ability to perform increasingly complex trades in a matter of just milliseconds. We are working to take full advantage of this change in the marketplace. Product enhancements like Better Fill (ph) are designed for this purpose. Better Fill is geared towards program traders and we will be able to offer increased speed efficiency and cost savings to our customers, which will improve our bottom line.

Turning to guidance, for the first quarter 2004 with respect to our guidance, eSpeed expects operating earnings to be in the range of 18 to 20 cents per diluted share in after-tax. This guidance is based on our expectations that the average daily Federal Reserve treasury volumes will be between 480 and $500 billion for the first quarter of 2004. For the full year 2004, with the volumes we have seen year-to-date, along with the expectation of increasing federal budget deficits, we are reaffirming our guidance for 2004.

For the full year 2004, eSpeed expects to generate revenues in excess of $185 million. We expect our pre-tax operating margins to exceed 41 percent and we anticipate incremental margins will exceed 75 percent. Net operating earnings for 2004 are expected to be in the range of 80 to 84 cents per diluted share on after-tax. This guidance is based on our expectation that average daily Federal Reserve U.S. Treasury volumes will be between 490 and 510 billion for the full year 2004, and that we will experience the market's normal seasonality in the third and fourth quarters.

Because eSpeed is a global business, dramatic changes in currency rates can impact our results. For example, the British Pound appreciated from $1.62 per pound to approximately $1.87 per pound during the last several months. With this unusually large move downward in the dollar, we saw our British Pound and euro-denominated expenses, which have historically been larger than our British Pound and euro-denominated income, move unfavorably for us. We currently estimate that if exchange rates were to stay at these levels, our 2004 earnings would be negatively impacted by about 3 cents per diluted share after-tax. However, we remain comfortable with our guidance, because we expect incremental opportunities with respect to software solutions or other arrangements to offset these potential currency impacts during the year. Over the next two to three years, the growth of our British Pound and euro-denominated income streams compared to our expenses in Europe should mitigate and potentially eliminate these currency risks.

Since our tax status changed in the first quarter of 2003, I thought it would be helpful to spend a moment discussing our growth and our growth rates. I want to take a moment and walk you through the growth calculation for our earnings guidance. As most of you know, beginning in the second quarter of 2003, we started reporting after-tax operating earnings per share, and we will be doing the same in 2004 and beyond. But because our first quarter 2003 earnings were not fully taxed, an appropriate comparison would be to adjust our 2003 first-quarter number by 7 cents a share. Comparing fully-taxed 2003 to our full year 2004 guidance, we are projecting year-over-year earnings per share growth of between 35 and 42 percent.

In conclusion, we believe eSpeed's markets in 2004 will be characterized by Number one, the tremendous deficits in the U.S. Treasury market. Number two, average daily Federal Reserve U.S. Treasury trading volume growing between 12 and 17 percent compared to 2003. Three, we will expect to see continued strong issuance across the broad range of U.S. Treasury benchmarks, which are our core products. Four, we expect exciting introductions and the continued adoption of our product enhancements. And five, we expect to continue to roll out our new products across the eSpeed platform. We are encouraged by the strong foundation we have built. We are well positioned for further growth across our marketplaces. We are well situated to begin 2004, and we look forward to extending our solid leadership position next year and beyond. Thank you, and we would now like to turn the call back to the operator so we can answer your questions.

(OPERATOR INSTRUCTIONS) Todd Halky of Sandler O'Neill.

Focus on the foreign exchange business. In the fourth quarter of '04 I guess is where we are saying that we're going to start realizing some results, as well as in the mortgage-backed business. How much of those two segments are in the guidance of 80 to 84 cents currently?

We are currently estimating that only the amount of revenues. So we, I think, have added it together to saying less than $2 million in revenue for the year is made up of new product revenue. Our expectation is that during 2004, we will provide significant discounts and incentives for market participants to use our products, and that traction for certain levels of success of these products are not part of our guidance. So our guidance effectively sets aside our new products, other than maybe for the full year $2 million in revenue overall across all of those new products, and we are really looking for 2005 for that to begin to matter for our economics.

On a quarterly basis running up to the fourth quarter, will we see any volume related to these products, or what is the best way, from our standpoint, to gauge what is going on in these new product initiatives, whether it is waiting for the quarterly updates or any other metric that you would steer us towards to look at to keep track of the progress in that segment?

We have not included traction in any of our new products in our guidance. We will expect to see small amounts of volume. As we have said -- for example, we have traded hundreds of million a day in the when-issued and off-the-run business, and we have said that in the past. But hundreds of millions a day for us is not particular traction. We will keep you updated on these products as we go forward, but we are expecting 2004 to be the year of foundation building for these new products, and we have not included them in our guidance. So it is basically our core products that are driving our 35 to 42 percent growth, plus our enhancements -- our new enhancements in those products, and the volumes in the U.S. Treasury market. And then we have 2004 to build our foundation for all our new products, as we look forward to those coming online, to making us revenue in 2005.

Shifting gears a little bit to the share count. We're seeing the share count kind of trickle up here pretty significantly, actually, during this quarter. Is that something that you think should stabilize at these levels, and actually would you look to kind of engage in that share repurchase program that you announced, I believe it was like a year and a half ago now, to offset some of the increases in the share count?

The share capital, which is included in the fully-diluted calculation, is strictly based on the price of the stock that impacts the (indiscernible) money amount of the options. That is really a moving target. Except I think in terms of guidance, we are using $59.1 million share account in all of our projections.

Because even the basic shares have been increasing here, and I just didn't know what your stance is on the share repurchase program.

The Company does have a $40 million approved share repurchase program, and the Board will consider that use of cash on an ongoing basis.

Thank you.

Colin Clark.

This quarter you are assuming treasury volumes of 480 to 500 billion, which is below the range for the entire year in terms of your projection of 490 to 510. I guess this suggests that you think volumes are going to pick up a little bit more in the middle of the year, particularly in light of the seasonal slowdown you get in the back half of the year. I guess I am just curious what your thoughts are on what is going to drive that growth. Is it the new issuance calendar, and is that expected to be stronger in the middle of the year?

We have seen in the past that the increase in issuance has over the course of the year increased velocity in the trading volumes. So it is sort of the central months. You would have September, October, November, are superb trading months. Also, generally speaking, the balance of the year through the summer tends to be good trading months. So while there are, of course, seasonal slowdowns, we do expect the size of the federal deficit and how that will weigh on the buy-side market will increase the velocity of trading and, therefore, over time continue to increase the volumes that we see in the marketplace.

So we remain comfortable with our expectation that the first quarter volumes will be 480 to 500 billion, and that we think as you mentioned, for the full year those volumes will be slightly higher, 490 billion to 510 billion per day.

Do you happen to have your employee head count for this quarter available?

It is about 330 employees.

Okay. With one more quarter of PI under your belt, can you provide any additional insight on how high you think PI usage could go over time? I know it is currently tracking around 10 percent of your volume.

PI usage has continued to grow each quarter. We expect that as -- one of the most significant changes perspectively we see with respect to PI, and maybe I will just reiterate some statistics that Lee mentioned, which is that 25 percent of the traders transacting on our system have used PI and that 10 percent of our trades include some level of PI in them. I guess one of the substantial changes we see going forward is that none of our electronic computer to computer customers have been inputting PI. I mean they have received price improvement, but they have not used it to better enable themselves to get into transactions. We think that will change over the course of this year, and so that will continue the upward path of PI usage.

So we think that it could, over time -- and I don't over which period of time -- but over time, we think it can continue to grow upwards to 50 percent of our users providing Price Improvements, but we continue to see an improvement on a quarter-by-quarter basis. As I mentioned, I think when the electronic line box models start to use PI, I think we will see another step up in the usage of that product enhancement.

My final question. I know you have been trying to tap into the off-the-run market and the when-issued market for some time. Any thoughts on when you think you could start to see some results in those markets with this new initiative in terms of hiring some people?

As Howard mentioned, we have seen volume in the hundreds of millions, and although that sounds like a lot, it is not exciting for us to say the word traction yet. I think it is the process of time that takes place, as people feel more comfortable with our technology, we are continuously enhancing the product to be able to have liquidity provided in these products. And it's again the comparability of the transition of voice to electronic trading that is going to make it happen. We went from doing nothing to a couple hundred million to hundreds of millions; obviously, we expect the next step to be where we can see some traction. But I think it's a little too early to say yet.

Okay, thank you.

Charlotte Chamberlain.

Good morning. I wanted to follow up again on your rather dramatic downshift in market share. The market on an average daily basis for treasury volume is down about 14.4 percent, but your fully electronic volumes were down around 19 percent. We have had little perturbations in the past, but this is a pretty dramatic downshift in share. And I was wondering if you could comment on whether you see this as a permanent loss of share. I mean, certainly your guidance doesn't suggest it is permanent. And assuming that it is a one-quarter event, why is it a one-quarter event? Similarly, since your only competitor is really ICAP BrokerTec, what did they do to grab market share?

The second question has to do with treasury issuance. Treasury didn't expand the number of options in their February quarterly release, but they hinted strongly that May, we could see a 20-year TIP and maybe even a 5-year TIP, and suggested that they wanted to shift some of their nominal issuance into TIPS because presumably it is cheaper. You have said in the past that you have 100 percent of the 10-year TIPS bonds. Assuming we did get a 20-year TIPS and they shift, how much would we have to see them either issue in 20-year TIPS or shift for that to move the needle for you? Finally, if I could follow up, I have a couple of quick housekeeping issues after the two more substantive ones.

Starting with the first question. As Lee mentioned in his comments, the third quarter of 2003 we saw a dramatic increase in our market position. I think the statistics were the fed average daily volumes were up 8 percent and our volumes were up 23 percent. As we said at the time, that is such a dramatic improvement in market share we expected in the seasonally slower fourth quarter, we expected some pullback somewhat. And in the fourth quarter, you saw just that and you said (ph) those statistics. So it was in effect two steps forward and one step back. We did say that with the increased volumes that we have seen so far this quarter, we do expect our market division to improve in the first quarter. I think you can see them from statistics for the year that 2003 compared to 2002 was an improved market position -- I think the statistics were the Federal Reserve was up 17 percent and we were up 21 percent, and we expect our market position to continue to improve.

With respect to the concept of there only being two market participants, I would point out that the average daily Federal Reserve volume is across all products, not just benchmarks, and it does not just capture the volume between us and our electronic competitor. That includes all the voice brokers, all of the spread business. As many of you know, when a U.S. Treasury trades, for instance, if a corporate bond were to trade, it often would trade as a spread to U.S. Treasuries. You could include that volume as well. So it includes all volumes across the U.S. Treasury market. So it is not necessarily highlighting so specifically just the market position between ourselves and another electronic participant.

Moving to your second question, with respect to TIPS, I don't recall ever saying that we had a 100 percent market share. We do in fact a very, very strong market position in those products and issuance in those products, certainly those directly constraint (ph) of our product. So while we are excited by the U.S. Treasury announcing more issuance in areas that we are very strong, we await how much size will come and what that will mean for TIPS. In the past historically, the TIP or inflation-related bond issuance has been comparatively small as an issue, and therefore its volatility and volumes have not been as great as their debenture issuance. If they were to start issuing substantial chunks of those, I think it would dramatically change the way they trade. It would improve their velocity and of course that would increase the volumes for us. So we would think that would be excellent.

Let me just follow up. The issue is not that you didn't warn us; you did. The issue is that we had never seen before that your market share would decline more than proportionately with the overall market. That is the thing that was, in my mind, the revelation of this quarter, was that your market share could go down by more than the market went down. And that is what I am asking. You seem to assume that in your mind it is a one-quarter events. But I guess I'm asking please persuade me that it is a one-quarter event. And what happened that you were down more than the overall market?

I think from our perspective, what happened was the third quarter, we had such a dramatic increase where the Federal Reserve was only up 8 percent and we were up 23 percent, and then going into the slower quarter of the fourth quarter, we do expect on slower period that people -- can effectively spread around their business a little easier than when it is busy. So we expect our market position to step back somewhat. But I don't think that this is the first quarter that we have stepped back, but I would say year-over-year, multiple quarters over multiple quarters, virtually any way you look at it -- if you compare 2002 to 2003; if you compare the third and fourth quarter combined, you would see an improved set of market statistics and market position.

So we feel very good about our market position overall. We feel very good about our first quarter 2004 as the volumes pick back up that our market position picks back up. We are focused, on as Lee, mentioned hiring specialized sales force to focus on the off-the-run business and the WI areas of those products, which, if and when we are successful, will improve our market position. We do expect that our market position will be reasonably strong and solid going forward. We have new products coming out, like Better Fill, that we think will improve our marketplace vis-a-vis all other marketplaces, and we are very excited about our prospects going forward.

Okay, thanks.

(OPERATOR INSTRUCTIONS) John Malhechavik (ph).

First of all, just to make sure I understood it correctly. On the negative impact of currency for '04, so your guidance includes the assumption of the 3 cents in adverse effects if currency rates stay the same, is that right?

Effectively, it does. It assumes that if currency rates stay the same, we would expect that that would be factored effectively across our quarters for the year. But as I mentioned, we do expect in either software solutions or other deals to have similar -- the effect will be a similar offset, meaning a short-term either software or deal or other arrangement that will earn us the money to offset that amount. As I mentioned on the call, we think that as our European government bond business and our European business, for instance our swap business, grows, that the level of Pound-denominated and euro-denominated revenue will continue to increase. And as that reaches the size of our European technology sales force, which is about 145 people, you would see this kind of currency fluctuation issue disappear because our revenues would equal our expenses. And as you know, we produce a substantial amount of dollars overseas because we are very successful in dollar-based U.S. Treasuries 24 hours a day. So we would be earning our profits in dollars but be covering our costs in euro and Pound, and therefore effectively mitigating over the next couple of years these currency fluctuations.

Remind us if you would sort of at what point do you have traction, in foreign exchange specifically, and what are you guys looking for in that segment when you start saying, okay, we will start including this in the guidance?

Traction for us is a term we use were we become confident that the volumes that we are receiving will be consistent and ongoing for the future and that it will be producing together at least a penny a share for our earnings. So those are the concepts that our volume (technical difficulty). It is not a short-term phenomenon. It is not we've hit it for a little while but it won't last. It's both the combination that we expect our market position in that product to last and then start to grow, and then number two, that it will earn us at least a penny a share. Those are sort of the criteria that we use before we use the term traction. Once we then say traction, we will then include it in our guidance going forward, because we have a business that we can rely upon and we can take to you about its growth rate and our expectations.

Howard, on the average revenue per million on the fully electronic side, that should decline slightly over time as your volumes ramp up. In '03 you had sort of sequential increases in that metric due to price improvement. Do you think there is anything left in the way of average revenue going up still or should we expect a reversal to the normal expectation of slight declines?

Our ordinary expectation would be because of our volume discounts with our largest customers, our average revenue per million -- given no mix change, so we're setting aside new products and what that mix modification would be -- so all other things being equal, we would expect our average revenue to decline as our volumes grew. That has been mitigated for substantially (ph) 2003 by growth of our product enhancement software called Price Improvement, which increased our revenue per million transaction and effectively mitigated that decline. We do have going forward the growth of Price Improvement, which we expect to continue to grow, albeit we do not expect it to completely mitigate the volume growth and volume discounts we offer.

Coming forward, we do have at the very end of the first quarter, early in the second quarter, we do have the release of our Better Fill software, which will also begin to mitigate any of the volume discounts going forward. So we would expect ordinarily our revenue per million to decline, especially you should see that from the fourth quarter to the first quarter because the average daily volumes are back up again. And so you should look back to the third quarter as a sense of if the market volumes are going to be there, you should expect obviously our volume discounts to also be there, because those things go hand-in-hand. But going forward, as you get back to that ordinary cycle, you would expect -- and we are looking for Better Fill to be an add-on to somewhat mitigate that decline. But overall, we would expect it to decline as volumes grow.

Finally, Howard, on the guidance of 490 to 510 billion in average Treasury trading volumes per day in '04, are you reflecting in that guidance the expectation of an adverse impact of lower corporate and mortgage-backed issuance that could lead to less hedging activity?

It is uninteresting scenario that one would not have guessed, if we were having the conversation three years ago, that such low short-term -- or short-end interest rates would produce the kind of average daily volume that we have seen in the past year and that we are expecting. But what happened was as interest rates declined dramatically, mortgage refinancing business and their hedging dramatically increased the volumes of Treasury trading. As that dissipates slightly, we would expect ordinary interest rate volatility to step back into that mix. So we are anticipating that mortgage refinancing will decline and corporate issuance will decline, and that the other side of that coin would be ordinary interest rate volatility back into that mix. I mean, if you take a look at the interest rate volatility and the interest rate numbers themselves in the short end of the Treasury curve last year, you would find tremendous interest rate compression in that area. As those rates step back up or interest rate volatility steps back in, I think you'll see that's where we expect the offsetting volumes to come from, and those are traditional volumes.

Great, thank you, Howard.

Charlotte Chamberlain of Jefferies & Company.

Just a couple of follow-ups. Jeff, you said that the cash earnings for the quarter were 17 million. Is that fully-taxed? Also --

Yes.

So that is fully taxed. When you said that PI (ph) was 10 percent of trading, can we assume that that is also 10 percent of the 27.6 million in revenues that you reported for fully electronic?

No, when we say 10 percent of trades -- for instance, I'll give you an example. Let's say we did a transaction where there were five buyers and seven sellers and the transaction was $100 million. Five million of that 100 million could have had PI on it, and that would mean it was a transaction -- one print, if you will, that included Price Improvement. So while 10 percent of our trades include some level of Price Improvement, as a total volume number, the total volume of transactions on the system that have Price Improvement on it would be substantially less than 10 percent. So we have a long, long way still to go in the growth of Price Improvement, and that is one of the tremendous things that excites us, is that as these computer-to-computer and blackbox models start to understand how they can use Price Improvement to their benefit, you will see a continuing growth in the Price Improvement calculation and the Price Improvement usage on our platform, which will continue to participate in mitigating our volume discounts and that will continue to drive our bottom line. That coupled with Better Fill coming forward, I think, which is effectively another way of doing Price Improvement, I think will continue to strengthen our system, both in its competitive advantages over other systems, as well as its ability to assist our customers in getting the kind of trades done they want to get done and their ability to share with us a small piece of that benefit, which will drive our bottom line because of our massive trillions of volume.

The second follow-up again has to do with new products. This is the first time I have actually heard you say about when-issued and off-the-run when and if. The if part took me by surprise. The second thing is that as I understand it, for the August refunding, you were fully up and ready to go on when-issued and off-the-run, and you said in the last conference call that you were at the hundreds of millions of levels, which sounds like where you are now. It doesn't sound like you have made incremental traction at all. And the question is did you make incremental traction at all? And PI, I guess, was introduced in February, and although it is not broken out, you mentioned that it had a measurable contribution to earnings even in the first quarter and certainly in the June quarter. Why is it that when I -- and when-issued and off-the-run are off to what seems to be a particularly slow start, at least relative to PI? Thanks.

I apologize. I was not trying to be Alan Greenspanish in any regard. Let me be as clear as I can. It is my absolute vision, view and expectation that voice-based off-the-run Treasuries is a dinosaur. It is old, it is yelling, it is screaming, it is silly, and it will not exist at some date in the future. This Company is uniquely positioned to transition that marketplace to fully electronic trading. And we are operating all of the time on a business model that tries to drive that business to electronic trading. There is no other market company, no electronic company, that has even gotten the recent traction that we have gotten in that product. However, we are not where we want to be, and we are continuing to work exactly on that. We have decided to add a specialized and specific sales force, which is exclusively compensated by the success in that product, and that is what Lee mentioned we would be hiring -- four to five professionals going forward. I think your analysis was correct in that we tried to make it clear in this call that we have not had a significant change in our marketplace vis-a-vis where we are with respect to off-the-runs and WIs. We have put out new software. We think we are better positioned now than we are (ph) before, as we think each and every month goes by we add software features, we add parts of that mix that we think will inevitably lead to the incredible value proposition of driving voice-based off-the-runs and WIs electronic. We are on it. We are focused on it and we expect it to happen. And it is one of the things that is fundamental to us to achieve. It is U.S. Treasuries, and it is ours to get.

Okay. Can you just tell us so far this year, I guess we have had something like 25 trading days. Are you seeing any incremental traction relative to the December quarter on WI and off-the-runs?

I don't think I'm really in a positioned to comment on that yet, Charlotte.

Okay, thanks.

We have no further questions at this time.

I would like to thank you all for joining me on this conference call. eSpeed had a tremendous 2003 and we look forward to speaking to you across 2004 as we continue our growth and build our foundation for the future. Thanks everybody and have a good day today.