Bgc Group Inc (BGC) 2004 Q1 法說會逐字稿

Good morning. Welcome to the eSpeed first quarter 2004 earnings conference call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question and answer session. To ask a question press star one. This conference is being recorded. If you have any objections you may disconnect at this time. I will turn the call over to Ms. Maureen Murphy, Director of IR. You may begin.

Thank you and good morning. I'd like 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 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.

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

Good morning, everyone. Thanks for joining us for our first quarter 2004 conference call. With me are Lee Amaitis, our Vice Chairman, Kevin Foley our new President and Jeff Chertoff our CFO. I will briefly review our results for the quarter. I will then turn the call over to Lee who will discuss operations, which will be followed by Jeff who will detail our financial results. After Jeff I will share with you the outlook for the second quarter and full year 2004. Before we begin reviewing our results I would like to welcome Kevin Foley to the eSpeed team. I look forward to introducing you all to him in the days and weeks to come as he steps in his new role as President of the company. As President Kevin will report directly to me. Foreign exchange, equites, mortgage backed securities and futures. We are thrilled that Kevin has joined our management team. He is a proven leader whose track record of innovation and success will enable eSpeed to further penetrate our existing core markets, expand into new marketplaces and continue to define the next generation of trading technology for the global capital markets. Kevin joins us from his position as the CEO Bloomberg Tradebook which he founded in 1995. He also held the title of Global Head for Foreign Exchange for Bloomberg as well. are also pleased to welcome Paul Saltzman to our executive management team. Paul will becoming on board June 1st as our COO and he will be reporting directly to Kevin. Paul joins us from the Bond Market Association which is the fixed income industry's trade organization. Where he was the number two executive managing the Association's Wall Street relationships as well as market practice initiatives and regulatory and legal work. His experience and relationships across the fixed income market will be invaluable to us as we continue to extend our core business across the fixed income marketplaces. Kevin and Paul add significant management depth to the company. And I am excited to have them join Lee and me as new members of the executive team. Lee's new role as Vice Chair man of eSpeed is a well deserved promotion. A clear result of the leadership commitment and passion that he has shown since September 11th. He has rebuilt the infrastructure and foundation eSpeed's core business, and with this rebuild firmly behind us, Lee will join me in exploring new opportunities to further leverage eSpeed's business and its technology.

For the first quarter 2004, eSpeed reported fully taxed operating income of $11 million which is 19 cents per diluted share. For comparative purposes eSpeed reported pre-tax operating income of $18 million or 31 cents per diluted share in the first quarter 2004. That is a 72% increase over the 18 cents per diluted share reported in the first quarter a year ago. ESpeed's total revenues for the first quarter 2004 were $44.6 million, 31% higher than total revenues of $34 million for the first quarter of 2003. First quarter 2004 fully electronic revenues were $30.5 million, up 36% compared to $22.5 million for the first quarter a year ago. First quarter 2004 pre-tax operating margins grew to a record 40.3% compared to 29.6% in the first quarter a year ago and compared to 36.9% in the fourth quarter just passed of 2003. I would like to turn the call over to Lee who will review the volumes and provide an update on the new product initiatives.

Thanks, Howard. Good morning, everyone. Our fully electronic volume for the first quarter of 2004 was $8.3 trillion. A 22% increase over the $6.8 trillion for the first quarter 2003. ESpeed's total electronic volume including fully electronic and voice assisted transactions for the first quarter of '04 was $11.9 trillion up 27% from the $9.4 trillion in the first quarter of '03. This compares to a 26% 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 first quarter of '04 in the range of 480 to $500 billion. Actual average daily federal reserve U.S. treasury volume was $481 billion.

The end of this quarter saw our market position decline slightly. We believe the decline was due to the one-time acquisition related volume incentives paid to the owners of our competitor. From what we understand these volume incentives ended in May of 2004 around the one year anniversary of of the acquisition. Once this short-term effect has passed we expect our market position to improve. Driving this improvement will be the adoption of our newest product enhancement, Better Fill, our increased focus on providing customized trading solutions to our clients and the additions to our management team. I'll take a moment to expand on these areas. As an example of how a new enhancement roll-up can affect us we looked to price improvement. Many of you may recall that when we first introduced TI there was a brief period of customer hesitancy. However, any market position pressure we felt was quickly over come by customer adoption. As this trading tool began gaining traction our market position, along with our revenue per transaction improved. We expect to see similar results as Better Fill penetrates the marketplace this second half of 2004. With regard to the rollout of our individualized customer trading solutions we expect that Kevin's track record with respect to extraordinary client service will only enhance our efforts. We are completing development of and the will be releasing these customized trading solutions at the end of the second quarter and the beginning of the third quarter. We are moving from a one size fits all product to a more personalized approach enabling our customers to tailor our technology solutions to his or her needs. We are increasing the flexibility we offer in our software and hardware including our screen configurations and our keyboards. We think these initiatives will have an important impact on the acceptance of our new products in the market.

Howard already mentioned how thrilled we are to have Kevin and Paul onboard. Their combined experience across and products and markets will enable us to truly leverage the opportunities we have identified in new markets like FX, mortgage backed securities and equites. For the first time we are reporting fully electronic volume for our new products in order to provide you with a benchmark to measure our growth in these new areas. These new products include mortgage backed securities, foreign exchange, interest rate swaps, and CBOT futures. In the first quarter of '04 fully electronic volume for these new products was $133 billion, compared to $21 billion in the fourth quarter of '03. For equites, our direct access product routed 85 million shares in the first quarter of '04, up from 56 million shares in the fourth quarter of '03. We are in the early stages of rolling out our new products and we are glad to offer increased transparency in our new product volumes. As expected no single product has yet reached traction but on an aggregate basis we are encouraged by our results. We look forward to updating you on these new products as we progress.

Now, let's update our product enhancements and some of our new product initiatives. Price improvement usage continued to grow in the first quarter. We estimate that more than 20% of our trades contained some degree PI in the first quarter '04 and now over 30% of our users are using price improvement regularly. Better Fill, which is our trading through the stack functionality facilitates execution at multiple prices while respecting the exclusive time of current traders. It allows for execution against limit orders in the book behind the best bid and offer without waiting for a current trade to clear. Geared toward program and high volume traders Better Fill offers enhanced trading execution, increased efficiency and better trading opportunities to our customers. We are rolling out Better Fill to our customers this week and we will continue to roll out over the balance of the second quarter. As with PI we expect trading volumes to increase as more and more customers become comfortable with the new software and begin to rely on this proprietary trading tool. As adoption of this innovative product catches on we expect eSpeed's profitability and market position to grow. In the often run and when issued, the advent of Better Fill enhances our contingent order software. We now have a superior set of technological tools in place to build liquidity, in the often run and when issued markets. On the new product front, we rolled out U.S. treasury repo's in early April. Repo's are repurchased agreements which refer to the borrowing and lending of treasury securities. The eSpeed system offers an anonymous platform for lenders and borrowers to find one another. Gather regarding repo's will be reported with our new product volume in our second quarter results.

We continue to add foreign exchange clients and remain extremely encouraged by our customer contacts. With a market opportunity at $600 million, even a small success in FX could have a tremendous impact on eSpeed. As we mentioned on our last call in the fourth quarter we began hiring performance based sales people to support our foreign exchange efforts. We continue to focus on signing up participant banks and our efforts to attract liquidity provides our strong promise as we anticipate adding additional liquidity fee to the near future. ESpeed system is fully integrated into the Chicago Board of Trade and [Urex], giving users of both exchange direct access through eSpeed's platform. Our strategy here is to continue to focus on our front end access to futures markets alongside the cash markets as we seek become the aggregator of choice in these marketplaces. We have rolled out mortgage backed securities to the highest volume market participants. It is live trading, and we are working on attaining critical mass. We look forward to updating you on our progress.

Our interest rate swaps model is different from our other businesses. It is a direct dealing model where market participants request a price for a particular swap structure and others can respond to it. It is in essence bilateral rather than a multilateral trading platform. We believe this unique model will enable large banks and investment banks to transact business in the interest rate swaps markets electronically. We are now providing metrics related to our equites direct access business. As you can see, it is in the early stages of a new product launch but we are encouraged by the growth from the fourth quarter of '03 and the first quarter of '04. We are adding new clients all the time and we expect that Kevin will help drive this business by leveraging his expertise and experience in the equity execution business.

With respect to our European businesses, eSpeed's voice assisted business benefited from the overall strengthening of the European markets in the first quarter as well as from Canada's growth and expansion within the voice markets. In Europe we have a complementary relationship between eSpeed and Canada's voice brokerage, where eSpeed recognizes gains from the growth of Canada's voice brokerage businesses. As Canada's voice brokerage grows, we will continue to explore ways to work with them to realize gains from this valuable pipeline.

Now, I would like to turn the call over to Jeff to go over our financial results.

Thanks, Lee. And good morning everyone. For the first quarter 2004 eSpeed reported fully taxed operating earnings of $11 million or 19 cents per diluted share. We reported GAAP net income of $10.7 million or 18 cents per diluted share. The difference between operating income and GAAP net income is a $300,000 noncash charge net of taxes related to business partner warrants. Our net operating income also included $7 million in income taxes. For comparative purposes eSpeed reported pre-tax operating income of $18 million or 31 cents per diluted share, up 72% over the 18 cents per diluted share we reported in the first quarter of 2003. For the first quarter our pre-tax operating margin grew to 40.3%, compared to 36.9% in the fourth quarter of 2003 and 29.6% in the first quarter of 2003. Our incremental pre-tax operating margin for the first quarter compared to the fourth quarter was 64.9%. Our year-over-year incremental margin was 74.8%.

First quarter total revenues were $44.6 million representing a 31% increase compared to revenues of $34 million in the first quarter of last year. Our first quarter 2004 fully electronic revenues of $30.5 million increased $8 million or 36% as compared to the first quarter of 2003. Software solutions and licensing fees from unrelated parties in the first quarter of 2004 increased to $3 million versus $2.1 million in the first quarter of last year. Included in software solutions and licensing fees is $2.4 million from licensing the Wagner patent which includes $540,000 as a result of our December 2003 Wagner patent license agreement with NYMEX.

Software solution fees from related parties represents revenue from providing technology support services to Cantor, TradeSpark, Freedom and municipal partners. First quarter 2004 fees of $4.1 million increased $400,000 from the first quarter of 2003. On a sequential basis, operating expenses in the first quarter of 2004 of $26.6 million were up $1.9 million from $24.7 million in the fourth quarter of last year. The increase was primarily the result of increased compensation and employee benefits, professional and consulting expenses and administrative fees. Compensation and employee benefits as a percentage of revenue was 21% for the first quarter of this year. This is in line with the guidance we provided in last quarter's call where we noted that a significant portion of employee compensation is discretionary and performance based. Therefore, compensation can vary from quarter to quarter based on variability in revenues. Our head count at the end of the quarter was 342 employees.

Looking forward to the second quarter of 2004, communication and client networks, marketing, administrative fees and other expenses should remain consistent with the first quarter of 2004 levels. For the second quarter, we expect compensation and employee benefits as a percentage of revenue to be between 21% and 22% and we expect occupancy and equipment and professional consulting fees to increase slightly.

We calculate free cash flow as operating cash flow minus cash use for capital expenditures, software development and intellectual property. For the first quarter we generated free cash flow of $2.4 million. Net of related party receivables and payables, we generated free cash flow of $5.9 million during this quarter. This free cash flow is net of a $7.2 million purchase of fixed assets. We still expect to receive $19.5 million of replacement insurance once we exceed the $7.5 million fixed asset spend remaining from the first insurance payment of $20.5 million. As of March 31, 2004, our cash position was $233 million up $4.5 million from $228.5 million at the end of last year. This increase was primarily driven by cash earnings of $17.4 million which includes net income of $10.7 million, depreciation and amortization of $5.4 million. And other noncash items of $1.3 million these noncash items include $800,000 for the tax benefit from employee stock option and business partner warrant exercises. Our cash position was partially reduced by cash used in investing activities of $12.4 million for capital expenditures, software development, and intellectual property which includes patent costs.

I would now like to turn the call back over to Howard.

Turning to our guidance. The second quarter 2004 eSpeed expects operating earnings to be in the range of 19 cents to 20 cents per diluted share and after tax. This estimate incorporates our expectation that compensation costs will increase as a result of additions to our executive management team. Our earnings guidance is based on our expectations that the average daily Federal Reserve treasury volumes will be between $490 and $510 billion for the second quarter of 2004. For the full year of 2004 with the volumes we have seen year-to-date we are reaffirming our guidance for the year 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% and we anticipate incremental margins will be approximately 75%.

Net operating earnings for 2004 are expected to be in the range of 80 to 84 cents per diluted share and after-tax. This guidance is based on our expectation that average daily Federal Reserve U.S. treasury volumes will be between $490 billion and $510 billion for the full year 2004 and that we will experience the market's normal seasonality in the third and fourth quarter. As we said last quarter assuming that the British pound remains at current levels our British pound and Euro denominated expenses which have been historically been larger than our British pound and Euro dollar denominated income would negatively impact our EPS by about 3 cents per diluted share after tax for this year. However as we mentioned last quarter we remain comfortable with our full year guidance of 80 to 84 cents because we expect incremental opportunities with respect to a specific software solutions arrangement. Were we to execute the transaction during the second quarter we would expect it to be above the 19 to 20 cents range that we have guided for the second quarter. We remain confidence this transaction will occur during this year and we continue to include it in our full year guidance.

As many of you know, our tax status changed in the first quarter of 2003. Therefore I thought it would be helpful to spend a moment discussing our growth and growth rates. I want to walk through through these calculations with respect to the earnings guidance. Beginning in the second quarter of 2003 we started reporting after-tax operating earnings per share and will be doing the same throughout 2004 and beyond. But because our first quarter 2003 earnings were not fully taxed an appropriate comparison would be to adjust last year's 2003 first quarter number by 7 cents a share for such taxes. Comparing fully taxed 2003 to our full year 2004 guidance we are projecting year-over-year earnings per share growth of between 35% and 4 2%.

So in conclusion, while we have a strong leadership position in U.S. treasuries, it is important to understand that the trading of U.S. treasuries is not about merely just trading treasures. It is all about trading dollar denominated interest rates. eSpeed is well positioned to take advantage of the changing interest rate environment regardless of whether rates go higher or lower. Our revenues come from volumes which are assisted by the uncertainties that these rate changes create as well as the uncertainty that often accompanies an election year. These factors coupled with a large U.S. budget deficit and the conversion of dollar based fixed income volumes over to electronic trading from voice have created a market environment that will be tremendously beneficial to our company. With the addition to Kevin and Paul to our management team, our strong position in the U.S. treasury market, our commitment to the success of our product enhancements and our new products, and increased flexibility that we are adding to our customer software and hardware along with a sales force which is focused on customized solutions for our clients, eSpeed is better positioned than ever. Thank you for spending time with us this morning and we would now like to turn the call back to the operator so we can answer your questions.

We will now begin the question and answer session. Press star one to ask a question. To withdraw press star two. To ask a question please press star one. One moment, please. Our first question comes from Rich Repetto of Sandler O'Neill Partners. You may ask your question.

Hi, Howard. I guess my question is this quarter you have seen by our calculations record revenues, record pre-tax margins record pre-tax income but you did see a market share decline and I was wondering how we are supposed to think about you reporting the best quarter but seeing that incremental drop in market share?

Well, we think there is a short-term dislocation which results from the acquisition related volume earnout from our competitor. We think that, therefore, you might want to look to the post this period or post-May would create a better comparative environment. Basically once the market -- and I would add that once the market has had a chance to fully absorb Better Fill and our product enhancements and how that also is improved by contingent orders I think you will get a better sense of the marketplace and how things will go in the future. But we remain confident in our future and that is why we've reiterated our guidance for the full year.

And how, on the market share, you know, we took a look at the first quarter and compared it with the third quarter because that is where you had like volume, industry volumes, around 480 billion per day and if you take a look at market share, the market share declined about 12% if you compare 1Q versus 3Q of last year, but your average commission went up 11%. I'm just trying to see what you -- you know, you haven't got full penetration. Could you -- you eventually see the average commission exceed any changes in market share? Are we still in the first inning, the fifth inning or the ninth inning with regards to where the average commission can go?

The most exciting time for us is now because we have Better Fill walking up to the plate. We sort sort of have the combination of what obviously is something that we've worked on for some time. Price improvement was early last year and now Better Fill is being rolled out now. I think -- I think our key view is that Better Fill will improve our average revenue per million. It is a trading tool that allows our customers to get a better price execution than they put into the system. Our view of our business is that we can add value-added trading tools, proprietary tools to our system to helped the world's fixed income traders trade better and that if we help someone trade better that having us earn a little bit of money on that massive size, you know these trillions of dollars of trading, is a better business for us and a better business for our customers. So I think that while I can't say for certain that these proprietary trading tools will -- while I can say they will increase our revenue per million I cannot say that that will definitely over ride either whatever modifications happen in market share over time or whatever the natural volume discounts that we give our customers for trading more size. But we can say that our product is significantly different than the products out there that compete with us. We have better proprietary trading tools. We are not seeking the commodityization of this product. We are the value added higher margin business. We have a differentiated product and we think that puts us in a unique competitive position across the board and we are very excited by the fact while price improvement has been successful and still has quite a long, long way to go I would not suggest it is past the third inning and its future, I would suggest that however, Better Fill has only just begun.

And one last question following up on this, Howard. You know, it seems like you stress value-added and these proprietary trading tools. Your the only one that I can see in the electronic trading market where the commission is going up and you have these tools. And I guess if you could, can you -- we don't see this in the equity markets. Can you contrast fixed income versus the equity markets and why, you know, you are able to use these tools to effectively increase the commission I guess is bottom line?

I think the difference is we have been leader in the fixed income space and in the ability of assisting clients of trading fixed income for a long, you know, for more than a decade and that the revenues are going up but the commission or the price, the head line price is relentlessly going down. The clients actually are not paying more as a commission eSpeed is earning more money for assisting clients in getting a better price. That is a completely different model. If you think about that model for a minute, which is obviously what eSpeed has thought about for a long, long time the key to this model is that when you are a in marketplace that trades trillions of dollars a quarter to assist your clients in getting a better price when their P&L is millions and millions a day is a far better place to be than charging X dollars per million volume so we are doing both. We are providing a superb product to the world's fixed income traders but we are also adding tools that help them trade better and that is why our revenue capture per million is going up but make no mistake about it, our commodity -- you know, the price that we charge as a commission based on volume always goes down because we have volume discounts and the bigger the volumes they trade the less they pay on average per million. So it is a really -- it is the right mix. The head line price goes down, but the revenue goes up because we have helped the clients have a better P&L and that is where the company is positioning itself. That is where it is going and that is why, you know, we are so excited about Better Fill and what Better Fill will do for contingent orders because that will be yet another proprietary trading tool that can now assist us in helping our clients make money and us earning money and doing so.

I guess and this I promise is the last one. I guess specifically does the regulatory environment in the fixed income allow you to do this stuff versus the equity markets where we haven't seen people come up with tools that were more or less sustainable? And that is it. Thank you.

I know that the regulatory environment in fixed income allows us to do this and with respect to equites I guess the best thing to say is -- stay tuned.

Thanks.

Our next question comes from John Mihaljevic of Thomas Weisel Partners. You may ask your question.

Good morning. On market share, trying to get a little bit of a better sense. You guys said that your voice assisted volumes grew so strongly partly due to Europe. So if I were to look at your treasury volume growth from Q4 in fully electronic as well as voice assisted can you give us a sense for, you know, what kind of growth you saw there, I guess overall market volume was up 14% and I'm trying to get a sense for, you know, what the gap there was in term was of your -- in terms of your own growth?

I don't think we have ever broken out our numbers in that particular way. But I think what we do publish is our fully electronic volumes and our voice assisted volumes on a monthly basis. And then we point to the average daily Federal Reserve volumes as a good benchmark. Those Federal Reserve average daily volumes are only for 22 banks but certainly those 22 banks are investment banks are good benchmark or water mark on which to gage market movement. As Lee said, we saw a reduction in market position a slight reduction in market position from the first quarter compared to the fourth quarter and he did say he thought that was from a short-term dislocation which was related to acquisition-related volume earnout.

Okay. And then on new product. Obviously growing very strongly off a small base. Can you give us any sense of what kind of volume would get you into the ball park to be able to say that you have got traction with at least one of the new products?

Well, we'll define traction as a new product earning us 1 cent per share per quarter. So until one of our products earns us 1 cent per share in the quarter we won't consider it having traction. It is just a good way for us to describe together what you care about and what we care about on the same metrics. Obviously inside the company each client, each set of transactions, the momentum, I mean all these things matter tremendously to us. However, we will say we have traction when we are earning 1 cent a share per quarter and that it is sustainable, that it is something that we are confident that will stay with us and therefore we can guide upon it going forward. We know very well that as soon as we say we have traction in a particular product the next question we will be asked is okay what is the growth rate of that traction and I will be prepared along with Kevin and Lee to discuss that at that time. But I think while you correctly point out we have given the details so you can follow where we are, we agree with you that it is off a low base but we want you know how we're doing so you can see it and we can talk about it.

Okay. Real quick on capex. $7 million Q1 seemed a little high. Any estimate for the full year capex?

Talk about the capex and the increase in the capex really represents the buildout of our infrastructure and it is primarily related to the concurrent computing system in London. And then in terms of the levels for the next quarter, we expect it to go -- to revert back to the normal levels. But at this point we really don't have a full year estimate of our capex expenditures, especially as we near entering into our new headquarters and we really have to work through those numbers. And it is just -- it is really timing.

Okay. Then, Howard, maybe just the last question on the market structure itself with companies like Trade Web and Market Access doing pretty well, I mean do you see the structure changing at all from, you know, broker to broker -- sort of interdealer to, you know, customer to broker? Is there going to be an opening up there, and how are you guys positioned for any kind of change in market structure?

The market structure difference, there are -- the two companies you mentioned are customers doing business with dealing banks. So the banks make prices and the customers react to the prices made by the banks. That is a complementary business model to our model so each time those banks make a price and they trade with a customer, they then execute against that transaction either by hedging or by trading and taking off that interest rate risk. So the better those companies have done the more electronic the business between banks and its customers, the more electronic the business of laying off that risk is with another bank is more likely to occur so we have rooted for those companies for quite some time because it assists our business. With respect to market structure to the extent one were able to open that market structure to have a be a direct access market structure, that would work for us period full stop. That would be superb. We have as you know, direct dealing software we have billed software to be able to provide that type of product. Our first usage of that particular type of software, Lee just mentioned on the call today we're utilizing that software in our interest rate swap model to let banks do business directly with other banks on that same kind of model but we are ready for it if and when the opportunity comes and any opening of market structure would suit us just fine.

Okay. Thank you. Nice quarter.

Colin Clark of Merrill Lynch. You may ask your question.

Good morning. Could -- I guess first of all, the price improvement. You mentioned 40% of customers are using PI. I think that is up from something like 25% last quarter. What about the percent of volume, the percent of your volume that PI is being used for, I think it was 10% last quarter?

Just to clarify, I said that the 30% of our users are now using PI, not 40.

Okay. Sorry.

So it has increased but we figure it is around 30% that are using PI regularly.

Okay.

And 20% of our trades contain some degree of PI at this point.

Okay. And can you spend a second just discussing exactly what Better Fill does and if you can elaborate on the pricing at all? Is it similar pricing to PI?

With respect to what Better Fill does, Better Fill actually is a functionality that allows people to access prices that are -- that are in the stack, which means that if you look at the U.S. treasury market trade on a regular basis you will see that benchmarks trade at a rapid pace so if program traders come inside to try to access a price that is in constant trade state meaning that the five-year bond will be trading at a lot of velocity. There are no prices accessible to that program. What we have done is create a software that allows people to access prices that are below that trade state price, so there are multiple prices available for people to trade on whether you are a program trader or just someone watching the screen. So it allows you to enhance your ability to -- to trade and access liquidity because you will be seeing prices below the stack or the listed price that is actually in trade state. What is also does is that it creates the liquidity flow between people in terms of saying, okay, I want to be able to access a limit order so I want to be able to sell something at or buy something at a better price so you can leave an order. And when you place that order you -- we will -- the software actually allows you to confirm a price and then if the computer can actually find you a better price in the time period allocated, then we will fill you at the better price. And then -- and there has -- it has a similar type of increment to PI attached to it.

Okay. Any sense of -- on the opportunity in terms of usage?

I think -- I think the more volatile the marketplace, the more likely the opportunity. And I think that the usage of this and how it will factor in to the markets because we are just rolling it out now, I just don't think we have a sense of all of the different ways it will be used in the market. We do, however, feel just from our conversations much the same way we did with the price improvement software that it seems to be the type of product that will feature well until clients' P&L and therefore I think it will be adopted and then once people fully absorb how to use it and get comfortable with it, I think its growth rate, you know, we expect it to be successful going forward.

And -- okay. And my final question is with regard to your new equity initiative, can you touch on what, you know, I guess what -- what differentiates your service from a lot of the other, you know, equity routing services out there? And also, what type of pricing you're going be using for that product? Thanks.

Currently, the model for our equity product came from that eSpeed obviously does an enormous amount of different types of routing and electronic trading across the fixed income space and with that experience and expertise we were able to modify that system by hiring a few people to help us direct that towards the equity business and then reutilize a number of the assets that we had in the fixed income electronic trading space in the equity space. What it allowed us to do was really add very low incremental cost into the space with a tremendously competent product. And so we are the low cost producer, the marginal cost for us of providing the service at a very high level of execution is very competitive. And so with that we went into the business. So, we're now with the addition of Kevin and some real focus on the equity products we're going to start looking at proprietary trading tools, high value execution for our customers and start to move our business and equites back in line with eSpeed's business in fixed income which we want to be the high margin, high value player as well as providing of course, you know, a real low cost solution to those who seek just commodity electronic trading. But I think that with our capacity to deal with electronic trading, program and portfolio trading and our knowledge of every type of trading strategy that is available across fix income and now with Kevin's addition in equites as well, I think we really have a full complement of products to roll out in equites and I think, again, this is just the beginning of what is available to us but I will point out that, you know, the costs of building these products are already in our numbers because the development staff is already on our team and therefore the marginal cost of us rolling out these products and extending across this platform is very low and I think that is part of what keeps us so very much excited for our future growth here.

Can you give us any sense in pricing? A penny, less than a penny, more than a penny per share? Any sense there?

I think the best way to look at product is it depends on what the client is looking for and what type of services the clients want. If the clients are only looking for commodity execution then eSpeed will have to be competitive with the alternatives out there from a quality of product standpoint and what the services the client wants. As we have sought to do in the fixed income space the key is to create the kind of products at that time clients want that assist the client in trading and therefore the client is willing to pay a differentiated price for a differentiated product and I think that that is where eSpeed has lived. That is where eSpeed will be successful. It doesn't mean that because of our low marginal cost we could compete on price with any one in the world because our marginal cost of being in the equity business is so low and I think that we think that the way to make significant amounts of money is to have that value added on top of that business but we can stand toe to toe with any one and because this is marginal to us meaning it is already in our expenses now it is a question of how much money we make there is only upside in the equity business for us.

Okay. Thank you.

Charlotte Chamberlain of Jefferies Company. You may ask your question.

Good morning. My question has to do about I assume the competitor you're talking about is ICAP. And as I read it, the initial consideration that expires on April 22-- or expired on April 22nd had to do with additional shares and so there is -- there are two questions I have. One, assuming they do or that they did earn the earnout, they would end up owning more ICAP and therefore presumably would benefit more as owners if they send more business to ICAP. And the second thing is I read the SEC final decision on the ICAP BrokerTec merger -- they -- excuse me -- they specifically excluded treasury so any kind of -- I mean there was no fee agreement in terms of how much they would send to ICAP on treasury. So any kind of loss of market share because of that, it wasn't covered. I was wondering if -- but on the other hand I may be totally wrong and you're talking about another competitor but if it is ICAP I'm kind of confused and could you please add a little clarity in terms of what you're talking about in terms of what expired recently. Thank you.

You know, again, it was -- it is our view that -- well, number one, there is only one electronic competitor in U.S. treasuries in the U.S. and so with respect to them, they had a -- there was a short-term -- we -- we believed there is a short-term dislocation in the market which -- which was created by their acquisition-related volume earnout and that earnout as Lee said was around the anniversary of the acquisition. That is when this expires and we think that once you are past May you will see a better comparative environment. That coupled with, of course, the rollout of Better Fill and the absorption period for the marketplace to absorb and to fully understand how Better Fill will improve their busy I think will put you in a much better position to view, you know, market share, market position, revenue capture per million, going forward. But make no mistake about it, eSpeed is very much focused on being the high---[inaudible] And being the value added company and proprietary trading tool company that we are providing to our customers.

Okay. Maybe we can discuss this offline because I'm -- and maybe it is just jet lag because I'm here in New York but---what I have read on the SEC website and what I have read at the press release from ICAP. There was no mention or when you talked about your new products, they didn't include in your list off the run and when issued. So the dollar volumes, the 131 versus 21, does that include off the runs and when issued? And if not, where would we see what is happening incrementally in off the run and when issued?

Off the run and when issued trading was not part of the new product numbers. They are listed as part of our along with our other treasury volumes and government security volumes in our fully electronic volumes. With respect to their -- how they did this quarter, we did not have a material improvement in that business line and I think we are focused on the rollout of Better Fill which will then add to our -- add our category of technology tools that will enable contingent orders to become a more complete product and therefore it will be able to -- it will be able to have those tools which will then help us pursue liquidity in off the runs. We do also have, as we said, the addition of Paul to the team, Paul Saltzman to the team, I think will, again, have more management and more conversation with the marketplace in order to find the best way to utilize our tools to create the liquidity in those products. But we are focused on it but as of this quarter we hadn't made any headway.

Our next question comes from Steve [Iceman] of [Brentpoint]. You may ask your question.

I want to press the issue on the market share one more time. When you reported fourth quarter numbers you did have a decline in market share and you were pressed about that and your explanation then was about that there was less volatility and I was at a dinner about three weeks ago that was hosted by Sandler O'Neill which you were pressed about market share and you had some explanations that were similar to the fourth quarter as well as you said sometimes when eSpeed innovates its loss market share. Is this a new explanation that you've just uncovered? Why has this not been mentioned before?

Well, it is -- it is not new. It was public with respect to -- you mean, with respect to the acquisition related volume earnout, it was public a year ago and that earnout was predicated on the year's business. So it does say quite a lot to suggest that it is only at the end of that period that it becomes a factor. That means it wasn't -- we didn't see it as a factor all year and yet we did see it as a factor in the last quarter of its existence. So I'm just pointing out that fact, but it is not new, it just has not impacted our business for the prior periods and therefore it wasn't worth mentioning.

So you don't think impacted you in the fourth quarter?

I did not.

Okay. Thank you.

Rich Repetto of Sandler O'Neill Partners. You may ask your questions.

I just want to ask on the fixed assets that were purchased, what were the fixed assets purchased for $7.2 million?

Actually I would like to just I think Jeff said this clearly I just want to make sure that it is clear which is there is still in the next $7.5 million fixed asset spend after that spend then the insurance will kick in so capex for this company can't exceed this year $15 million because then the insurance will kick in and cover the capex. So while the spend could be higher from a cash flow perspective, it wouldn't have any impact on the company because the $19.5 million of insurance would kick in. An instance of the company's technology is in Europe, it is why the company was able to handle the 9/11 events so well in that we had the ability to run the U.S. treasury marketplace both outside of New York City and New Jersey as well as in Europe, specifically in London. It is where -- and it is obviously in the same area that leaves in this London. We are adding another instance and a location outside of London as well. And that is part of that capital spend, it is really Jeff called it our concurrent computing system and center. It is how we view things. We do not call things disaster recovery. Many of you may have heard me say that most disaster recovery tends to be a disaster. We have unfortunately enormous experience with respect to these type of issues, and our systems are hot and they are running all the time. They operate our systems and that is what keeps our service level so high and we were just adding to that in London just to make sure that we are absolutely rock solid and that is -- was part of our capital spend last quarter.

Gotcha. And just a comment on an earlier question, the BrokerTec agreement excludes treasury bills and off the run coupons. It doesn't say anything about excluding treasury notes.

Thanks.

At this time there are no further questions.

Well, thank you, everyone, for joining us on our first quarter call. I appreciate your time this morning. We are excited to welcome Kevin to the team. We look forward to -- we look forward to Paul joining us June 1st and the company's opportunities as we discussed here are really just coming to the forefront now and we are very excited about our prospects and we look forward to speaking to you again soon. Thank you all for joining us this morning.