Bgc Group Inc (BGC) 2004 Q2 法說會逐字稿

Good morning and welcome to eSpeed second 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. [Caller Instructions]. This conference is being recorded. If you do have any objections you may disconnect your line at this time. I would now like to turn the call over to Ms. Maureen Murphy. Ma'am, you may begin.

Thank you. Before we begin I'd like to remind everyone of the Safe Harbor statement. Statements made on this conference 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 and its ability to enter into marketing 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 and thank you all for joining to us discuss our second quarter 2004 results, and the outlook for the remainder of the year. Joining me today are eSpeed's management team, Kevin Foley, Lee Amaitis, Paul Saltzman, and Jay Ryan. Jay will briefly review our second quarter results and discuss our expenses. Following Jay, Kevin will talk about some of the initiatives we are currently undertaking. After that, I will review our guidance and outlook for the rest of the year and then we will be available to answer your questions. With that I would like to turn the call over to Jay.

Thanks, Howard, and good morning.

Our results for the second quarter while disappointing were in line with the Company's most recent guidance for the quarter. We've reported GAAP and operating income per diluted share and after tax of 16 cents, total revenues of 42.8 million, and fully electronic volume of approximately 8 trillion. On a sequential basis, operating expenses in the second quarter, 2004, of 27.9 million, were up 1.3 million, from 26.6 in the first quarter of 2004. The increases in compensation and employee benefits, administrative fees, and other expenses were primarily driven by direct and indirect expenses related to executive promotions and a headcount increase of 15, including the additions to senior management for a total employee base of 357 at the end of the second quarter.

Looking forward we expect third quarter 2004 operating expenses to be between 29 and 29.5 million, an increase of 4 to 6% compared to the second quarter 2004 expenses. Direct and indirect expenses associated with a further increase in the headcount and the full quarterly impact of the headcount added in the second quarter will primarily draw this increase. We expect our expansion will focus on the addition of experienced sales professionals, a strategic decisions that Kevin will talk about in a few minutes. We expect our expenses in the fourth quarter to increase somewhat from third quarter levels, as the same factors are fully reflected in our numbers in the fourth quarter, 2004, providing some allowances for normal year end bonus and compensation adjustments.

Starting in the first quarter of 2005, we expect our new quarterly operating expense run rate to be approximately 30 million. We are proactively growing our revenue related headcount in order to better position us for revenue growth in 2005. I will now discuss our cash position. We calculate free cash-flow and operating cash-flow, minus cash used for capital expenditures, software development and intellectual property. For the second quarter of 2004, we generate a free cash-flow of $6 million, net of related party receivables and payables, we generated free cash-flow of 4.8 million during the second quarter, 2004. This free cash-flow is net of a 2.1 million purchase of fixed assets. We still expect to receive 19.5 million of replacement insurance once we exceed the 7.1 million fixed asset spend remaining from the first insurance payment of 20.5 million.

As of June 30, 2004, our cash position was 239.6 million, up 6.6 million from 233 million at the end of March, 2004. This increase was primarily driven by cash earnings of 15.7 million, which includes net income of 9 million, depreciation and amortization of 5.8 million, and other non-cash items of 900,000. Our cash position was partially offset by cash used in investing activities of 8.6 million for capital expenditures, software development, and intellectual property, including patent costs. So far in the third quarter, we have used 19.5 million in cash to repurchase 1.6 million shares of our stock, at an average price of $12.18. As of today, our fully diluted shares outstanding are 55.7 million. Yesterday we announced that the Board has replaced our previous buy back authorization with new share repurchase authorization of $100 million.

Also in the third quarter we entered into an agreement which we had expected and mentioned before. This arrangement will be recognized in Software Solutions. We received a 2.5 million cash payment in July and will receive 1 million in cash on the anniversary date for each of the next 3 years. This agreement will generate revenue of approximately $100,000 per quarter through 2017. While this represents the guaranteed portion of this arrangement, we also have additional upside.

I would now like to turn the call over to Kevin.

Thanks, Jay. Good morning, everyone.

Although we are not satisfied with our second quarter results and the outlook for the remainder of this year, we have a positive view toward 2005, and we are working on several initiatives that we expect will deliver growth next year and in the long-term. I'd like to discuss these initiatives.

In our core U.S. Treasury business we are modifying the combination of variable and fixed commissions of our client pricing agreements, and we are improving client service with our new software enhancements. As we mentioned on our July 2 call, we are offering tailored and flexible pricing solutions that focus on our customers marginal cost associated with trading on the eSpeed platform. We moving from a commission-based model to a model that offers our customers a greater choice of fixed and variable fees. This is a strategic shift from the pricing model the Company has used until now. We are also working on additional software enhancements that we expect to introduce over the next 2 quarters. These software enhancements will be customized and flexible to best accommodate and benefit our customers. We're continuing to roll-out software that helps traders be more productive and improve their trading results. Our initiatives include increased training to ensure traders appreciate fully the benefits of our software enhancements, of price improvement, better sales, and other value-added enhancements.

With respect to our sales efforts, we are aggressively investing in our sales force. Recently we announce a new global head of sales, Stephen Bookbinder. Steve and I worked together at Bloomberg Tradebook for many years where he was the director of sales. We're excited to have him join us at eSpeed to help us further penetrate new and existing markets and to enhance our client service. Under Steve, we're hiring additional experienced and senior salespeople to join our team. In order to attract and retain such a group, we will be offering a higher fixed component of compensation, which will impact our compensation expense line as Jay explained earlier. We feel confident that the expansion of the depth and breath of our sales team with proven professionals will improve customer service and will better position us to cross-sell products and services to new and existing customers and it's going to provide substantial revenue growth.

For example we are putting particular emphasis on our sales efforts in the Spot FX market. We think in software and exchange we have a strong product with real liquidity and now is to add customers. In order to reach our first financial milestone of a penny earnings per share per quarter, which we we define as traction, we're creating a bigger, more experienced sales force for Spot FX. We continue to believe this is a new important market for us, and one that's fully consistent with our long-term strategy and our business model.

I'd like to turn the call back over to Howard to review our outlook for the rest of the year.

Thanks, Kevin.

For the third quarter, 2004, we expect operating earnings to be in the range of 9 cents to 10 cents per share, diluted and after tax. This guidance is based on our expectations that the average daily Federal Reserve U.S. Treasury volume will be between 445 and 465 billion for the third quarter of 2004. For the full year 2004, we expect to generate revenues in excess of 163 million, and expect pretax operating margins to be in excess of 30%. Operating earnings after tax for 2004 are now expected to be in the range of 53 to 55 cents per diluted share. This guidance is based on our expectations that average daily Federal Reserve U.S. Treasury volume will be between 480 and 490 billion for the full year of 2004.

We are at an important crossroad for eSpeed. We are confident of our strategy, which Kevin just outlined, will meet the challenges ahead and provide a strong underpinning for growth in 2005. We have the resources to meet our objectives. We have a strong management team. We have dedicated employees, a supportive Board of Directors, and a premiere -- the premiere customer base. As most of you know, we are fierce competitors. We are dissatisfied with where we are, and we fully expect to grow our company going into 2005. With that we would now like to turn the call over to the operator so we can answer your questions.

[Caller Instructions]. Our first question comes from John Mihaljevic. Sir, your line is open. Please state your company name.

Thank you. I'm with Thomas Weisel Partners. Howard , a question on pricing, can you give us any more detail on how exactly your pricing is going to change, and should we be modeling some decline at least in the near term in terms of average capture per million?

Our strategy is based on the combination of getting paid an ever-increasing amount of revenue from value related transactions and an offsetting decreasing amount from ordinary commission. That balance is something that we had originally thought we could make a smooth transition to, but because of the events of the second quarter that we've already gone through, we have felt that we must address pricing issues directly and continue to add the enhancements over time and bring in that revenue capture over time for our value-added enhancements and the use of getting paid money when we help our clients trade better. How that mix plays itself out is difficult for us to exactly anticipate, but we do expect to change the mix of fixed and variable pricing. Right now we have a low fixed component and a higher variable component. We do expect that shift to be more fixed and less variable, number one. And that will be customized client by client. So I can't generalize it, although I can say we do obviously expect because we don't have it to be a -- expect it to be a smooth transition between our pricing on commissions and our additions of revenue from our value based enhancements that there may well be some revenue per million decline going forward. That's part of what's produced the modeling that produced our guidance. But we do not expect -- we do continue -- maybe the best way to say this, we continue to expect that our business model of having compensation come from value-added trading tools more and more and less and less from commission, the fundamental asset of this Company that others in this industry do not have and because of our intellectual property protection plan we do not think they can have. And so that will benefit this Company in the medium term and long-term. But it's our job to execute on that.

So it sounds like your view of the role of price improvement and better fill really has not changed, and you believe those are key assets for you moving forward.

We continue to believe that price improvement and better fill are key assets and we plan to add more features to that. The new products, the new enhancements Kevin was discussing are primarily focused on additional features that go on top of better fill and on top of price improvement that will enable our customers to use them better and will answer many of the questions that maybe a few of you have heard. Basically these products are fundamental products to our revenue capture goals and the ability to help traders be more productive. And the fact is the commission that they pay is a small fraction of the risk that they take on each given transaction. And so while it may be an incremental decision, the fact is that the amount of money that we can save our customers by assisting their trading P&L will far outweigh the fees that we charge, and we would rather get a small fraction of that savings and reduce the amount they pay us in commission, and we think that's better for them because they are only paying when we add value, and better for us because it will increase our revenue. So we are feature driven now and try to address the better uses of our products for our customers and that's what we expect to roll-out over the next 2 quarters. Really feature driven and focused on adding more uses for the same key initiatives.

Okay. And just lastly, Howard, can you give us a little more color on the reasons behind the change in expectations for the overall market volumes in the second half of the year?

You know, as it turns out, July has been slow, at 437, and interestingly enough the numbers of last night were right on the average for the month of July so far. And it difference between a 437 billion per day July and 522 billion of last quarter are clear and apparent. I am not expecting, and we are not expecting, a robust volume growth coming through August unless there is an event in the world which changes the status quo. So we think that the average volume for the next quarter will be comparatively slower. Also we have a late Labor Day, and these have an impact in that the new period of trading -- the post Labor Day period of trading doesn't start until a week has already gone by out of September. So normally where would you see a very robust September, the fact is we have to calculate in a week of the summer extending into Labor Day. But these -- if these statistics were to be better, if the volumes in the Treasury market would be better, that is something that would help our company improve the financial results, and if, obviously, if the markets are slower they make it more challenging. But those are our current view of what the volumes will be and you can certainly monitor them week by week.

Okay. Thanks very much.

Colin Clark, your line is open, sir. Please state your company name.

Good morning. Colin Clark, Merrill Lynch. Hello?

We can hear you.

Great. Looking into 2005 -- actually, first question is with regard to treasury volumes, following up the last question. Is your -- it seems like your expectation for the fourth quarter is for higher volumes than the third quarter. Is that reasonable to assume? I mean, assuming that there is some pricing impact starting to hit in the third quarter, are you assuming a little bit of a bounce in the fourth quarter despite what tends to be a seasonally weak December?

I'm sorry, maybe I missed -- is the question Do we expect volumes to be higher in the fourth quarter than the third?

Yeah. It seems like that is implied in your guidance.

It is and I think it has to do with the fact that July was comparatively slower than generally it is. Usually August is the -- can be the slower period, but after the refunding in August because of the late Labor Day we think it will be slightly bounce in volumes in the fourth quarter. None of this, however, for the next 2 quarters, in the volumes changes our overall view that the increase of computer to computer trading in the U.S. Treasury market will produce, in our view, a doubling of the size of the overall Treasury volumes overt next, say 3 years. So we think a structural change in the trading styles of U.S. Treasury trading generally and the use rather than phones went to computers volumes dramatically rose. In our opinion, from phone to keyboard, I should have said, when keyboards are augmented by computer to computer trading, we think the overall volume of the Treasury business will grow. And much of our product enhancements are focused on that area of the business, price improvement is a key initiative that is focused towards electronic trading. Computers who can recognize that price improvement and will direct their order flow to that area. So we think that will impact over time, and over the next 2, 3 years you'll see a dramatic growth in the overall volume of U.S. Treasury trading generally, and because of these product enhancements and initiatives we think we will get an outside -- our aim and our objective and our goal is to get an outside portion of that increase in the size of the business.

Okay. Looking at '05 with the higher expense base, do you think that your pretax margins can be sustained above the 30% level? Or could that higher expense base impact that margin?

Our investments in our salespeople is predicated on their ability to produce revenue. We are confident that seasoned professionals in the sales arena will bring us new clients, more clients, and more volume. So I think that our view is that we are investing in sales force now. The near term revenue move will produce whatever math they produce on increased expenses versus our revenues, but we expect over time that as our revenues grow they will come at the dramatic marginal profits that we have produced in the past. As Kevin said, we do not expect that our increase in sales force will change our view of incremental margin. Those incremental margins are predicated on revenue growth and these salespeople are out working on producing that revenue.

Okay. Thanks. And what portion of your volume was PI based? In terms of PI usage versus your volume?

PI usage grew about 4 to 5 points over last quarter.

So as a percent of volume, what kind of number is that?

I don't think we say that as a percent of revenue. We generally said the percentage of trades that had price improvement enhancement as part of the transaction, and that grew, as I said, between 4 and 4 percentage points from last quarter.

Okay. I think in the past you've said that PI usage was 20% of volume. And so I'm just trying to get an apples-to-apples in terms of the number, if that's available.

Well, the PI -- the number of users who have used PI during the quarter grew substantially and is now over 40%, over 40% of our users used PI during the quarter. It doesn't mean they use it all the time on any given trade. But that usage continues to grow and the percentage of our trades that included some form of price improvement was -- also grew substantially and as I said grew 4 to 5 points over last quarter. But I don't have the exact numbers in front of me.

Okay. And my final question is just with regard to the pricing model and charging for functionality like PI and better fill, does it make sense in terms of driving overall volume growth over the long-term to charge for that type of functionality? I mean if you look at the equity landscape -- you know, ECNs don't charge for various functionality like paying discretion, hidden reserve, but you are charging for some of these enhancements and clearly they are providing value. But just trying to get a feel from you, I mean, would you be better served possibly offering that functionality for free in the context of what's going on in the equity world, and that's my question. Thanks.

From our perspective there are enormous numbers of features in the eSpeed system that we don't charge for. And those kind of features would be the kind that are consistent with those that you'd see in the equity markets. These are very particular type of features. An example of better fill would be the best bid in the system is a 14 bid. If you touch the button, you've sold them at 14. In the equity markets you've sold them at 14. In the eSpeed market, you get a guaranteed fill, the systems says you've sold them at 14, seeking a better fill, so it guarantees your execution at the price you that intended and the price that is the best available in the market. Then eSpeed system and these enhancements seek to find if it is possible within the world that eSpeed operates in, if it can get you a better price it will actually literally not do the transaction at 14, and will do the transaction at a better price. Therefore getting you a literally a better price than had you wanted.

So we think giving that money back to the client and saying to the client , Here, we got you 14 and a quarter, $78 a million, that's where we think we should charge a fee because that service can't be provided by someone else and it's protected also by our intellectual property and we think the mix between charging commissions and charging for that kind of service is one of tremendous strength for us. So I think it's more mix related rather than, should we just charge commission and not charge a value. It's really adding value to customers and having them pay us when they've made far more than that amount of money and then in exchange for that, reducing the amount of commission we charge on a trade where they just hit our 14 bid. And those become, it becomes a virtuous circle.

And, yes, it is a challenge that we are going through to get to that mix related thing. But you have to remember that these assets are only assets that eSpeed has. There is no one else who has price improvement. There is no one else who has better fill. The concept of being in an electronic marketplace with a differentiated set of products that are value related is a fascinating and interesting different business model and one that we both enjoy the opportunity to put into the market and we have the benefit of. And I think that mix is really what you are addressing rather than, are we better off not charging for the good thing and only charge for the commodity product, I think the answer is the other way around and how we get through that mix is really our execution job here, and it's what we are working on every day.

Okay. and if I don't -- let's say I don't want to use PI, yet there's various 40% or there's a certain constituency that is using PI. Am I better served using another system where I'm not being stepped ahead of by those that are using PI?

Actually the opposite. Interestingly the opposite is true. The simple fact is that with respect to price improvement all of our clients receive price improvement. I mean, virtually all of our clients if not all of our clients receive additional money from price improvement. When we talk about the users of price improvement, those are people who are offering price improvement to other parties. They are the payors. The recipients are all parties. So there are substantial amounts of money that you would get from trading on our system because our bids and our offers have diamonds on them, which mean that our bid is better than the competing bid away.

Now some people may have social issues that they don't want the business model to change from the electric business model that eSpeed developed in the first place. But we know that when a computer comes into this marketplace and the computer sees the 14 bid on eSpeed with a diamond, which means it has at least 3, 6, or $9 per million more money available on the bid, it's a higher bid on eSpeed than the 14 bid on the competitor, then the computer is going to send that trade to eSpeed and that is why traders want to put diamonds on the screen, because it's a magnet for that kind of business. So we are working on teaching our clients more and more how to use our features, adding new features that we think would address if someone had that particular view, that we could prove to them mathematically when analyzing their trading, how much money that these features have made them, these kind of features and this kind of analysis we have not done in the past, and we are working so that -- on so that we can sit down and literally show a trader the math that they were able to get into these trades, and they will receive this amount of money, and really go through the details. These features and these products make traders make more money.

We know that is a fact and if we have not done as good a job as selling that to the clients, showing that the to the clients, not even really selling it to them, it's really showing it to them and explaining to it them, it's simply a matter of we haven't had enough hands-on deck, and we haven't had the detailed analysis that we're having our computer people do now, and adding those features to literally show someone, you traded with us, here's how much more money we helped you earn and that's why you should feel good about using our service. You know, the concept of, here's the commission I paid and ignoring, he's the P&L you helped me earn, if we ignore the P&L, everything that's they are a great trader. If you put the P&L black and white and said, if you didn't trade with us, this is what it would would have cost you in your P&L, we that is a dramatic point for us and it will help us grow our business, grow our market share and grow our profit.

Great. Thank you, Howard.

Our next question comes from Rich Repetto. Sir, your line is open. Please state your company name.

Yes, Sandler O'Neill. Hi, guys.

Hello, Rich.

First question is a little bit similar to the first caller. He asked on pricing but I guess if you back into what you're assuming for treasury volumes, if you use your midpoint, second half you get volumes down 6%, but if you use your revenue, you are looking at revenues down 14%. I guess my question is, if it isn't price, what are you assuming for market share and what's market share been in July so far?

Well, there is clearly a mix between price and market share and we, the pricing we charge and how much we receive from our enhancements all of that goes into a mix to how we think we will do given -- financially, given a certain amount of volume. I would point out that in significantly lower volume markets, the amount of opportunity, while the numbers of users may grow, the amount of opportunity of the economics of price improvement and better fill transactions by definition declines, because the volatility is lower and the number of people buying the trade at any given price level is reduced and therefore that has a sliding impact, meaning that the busier the market, the more money we are going to make on these features comparatively, and the slower the market, obviously, the converse is true. But we do, we do have expectations of changing our model to be more fixed and less variable, but that is a customer by customer customized solution. So one cannot determine overall what that impact will be. But we have factored in our view of market share, our view of pricing, our view of roll-outs of these features. And the slower market conditions overall come up with our view of the business.

But there is a strong part of that business that says, last quarter was 522 billion per day and in July so far the volumes have been 437 and we expect the volume for the quarter to be substantially lower than last quarter, and obviously that is led also on top of the pricing issues which we said we are discussing with clients all the time. But that as I said it's more of a mix from variable and fixed rather than, and what that would mean overall to pricing over the middle term will determine about how we do with our revenue capture with respect to our enhanced and our product enhancements and our software enhancements. So that mix may or may not result in lower revenue capture per million. But in the period of time in between the features being rolled out and the pricing there may be some, as I said earlier, there may well be some revenue capture decline per million, but we sort of factored those thing into our guidance.

Okay. I guess what I'm taking from that, Howard, is that in July because of lower volumes, market share likely declines from June levels. Is that fair?

I just don't think I'm going to talk about the next quarter on this call. I understand your question, but I'm not -- I'm not going to get into it. We are going to talk about the second quarter and go forward from there. Except for the fact that I have guided a view, our view of the third quarter.

Okay. Then the next question is on the buy back. You increased the authorization. You bought shares in July. If you were to use that entire 100 million authorization, let's just say that -- let's say that the average price is $10. That would, that would equate to 10 million shares you float; I believe it's 20. I guess the question is how aggressive would you be with the buy back, and then you get to the point where you could actually, you could see the view of taking it back in. Is that -- how you think about that?

Our job is to deliver value to our shareholders. We have a strong balance sheet. The price of the stock is the price that the market puts on it. We have a strong amount of cash. We think it is an excellent use of the Company's cash to buy back -- buy stock in our company. Because that produces substantial value to our shareholders. So we are out to grow the business in 2005, and we are out to invest in the Company because we have a confident view of the future of our company and of our business. And so that makes the most sense to our Board, to show that confidence, the best way to do it is not by talking about it but to say that the Board has authorized those purchases. When and if we by them is an entirely different matter, which I am not going to discuss on this call other than you should know that the Company has authorized the buy back and the Company can by back those shares if it chooses to do so. And that will decrease the amount of shares on which our future growth will be based and I think that will improve the financials of the Company. So I don't think the issues that you raised are really in front of the Company for the current minute other than to say we plan to grow our revenues, to grow our profits, and to invest in our company. And if there are opportunities for us to buy back the stock, we may well do so.

Okay. Understood. Last question, in the past when we've talked about expanding the sales force, we talked a lot about just very highly variable compensation with little if no, the way I understood it, with no expense to the Company, only if they performed would they get paid. And I guess the question is, have we shifted from that strategy because now we see expenses still going up. I know you're investing in a stronger sales force, but have we shifted the strategy now to get more experienced salespeople to handle, I guess, different issues whether it be deeper penetration or regain market share on the treasury side or to really you found maybe it wasn't successful in the FX using the people that you had. Has there been a change in the hiring strategy of the sales force?

Rich, I can take this on. It's Kevin Foley. Look, I'll take on Spot FX first. We have a great product and it has great liquidity. And we need more customers. And we have confidence that when you add proven professionals, you are adding revenue associated expense. I don't think our philosophy has changed that there has to be revenue associated with any sales compensation expense, but we just think the time is now, and it's the time to be proactive with respect to the Spot FX product. And in our core product, Howard talked about in some more detail about our initiatives, but in addition to the senior management that we've added, we are adding some proven people to the help tell our story. We are getting out on the floors of our customers, and we are explaining the benefits to them of the enhancements and its simply a matter of being proactive in the current environment and supporting the other things that we're doing to strengthen our core products. So that's sort of the view for both the new product and the core product. We feel that it's revenue associated and we are stepping on the gas a little bit to the ramp on to the highway, especially with respect to the Spot FX.

Okay. I mean I guess the question revolves around when you say proven professionals, is that different from the hiring -- because you got expenses going up, revenues coming down, I know there's a lot of other factors than just the hiring in FX. But at least that's, someone from the outside that's the way it would appear, that it isn't just all highly variable comp, now you are hiring professionals where you have to pay something more from a fixed or up-front standpoint.

I think what's happened is that we had a reasonably long-term view of our sales cycle and as Kevin said the quality of our product and foreign exchange is higher now than we had anticipated, and I think Kevin put it just right which is we are going to step on the gas. And the best way to hit the gas in our collective opinion here now is to higher much stronger people and not have it be so only revenue related where you get a certain class of salespeople we're going to now have a much stronger sales team who have a part of a strong fixed price component to their compensation. And I think that we will produce more revenue associated with that. So we are stepping on the gas now and that's the best way for us to say.

Okay. And I do have one last question. Is now -- Howard, you talked about the computer to computer trading and your expectation of very strong growth there. I guess my question is, is there a chance that, now there's a choice of 2 platforms out there, there has been a choice for while. But if the computerized trading goes to your platform is there a risk that it alienates the human beings that are actually trading treasury where they go to a platform where they don't get picked off by a computer? Is that a risk? Do you even see that as something that you're concerned about?

No. We think that historically we have been the drivers of change in these markets. We drove change to electronic trading when there were a group of people who thought that was not the right thing to do. And thought electronic trade would go never come to the treasury market and obviously that's not true. And we think that computer to computer trading and program and portfolio trading, which are commonplace in the equity markets, will come to the bond markets and add dramatically to volume in the bond market as they have in the equity market. We are the people who produce the tools. We are the people who give the tools to the computers to come and trade with us and we are the people who are producing the tools give to the traders who use key boards to keep them up with the computer to computer trading.

If you -- part what have we do now and part of also we have increased -- and I should have mentioned on the last answer, we also increased our hiring in the IT to focus more on these features, we are adding value-added tools and we are producing these tools to the traders who use our key boards so that they can stay up with the computers. So this is an area of focus of our business, not only to be the place where the computers come because we have a better price and we have a better product and we have the kind of features that a computer will want to use, but also we are the place where a trader who uses a keyboard who needs to compete with that computer, how is he going to be able to compete? And the answer is with eSpeed keyboard and the eSpeed features and the eSpeed default software, and the eSpeed value-added tools, they can program in their way of trading and the computer will -- our computer will attack the markets and in their view and in their way and execute for them with the kind of knowledge and experience that they have and the kind of software trading tools that we have to keep them on top of their game. And we think that is why they are going to fall back in love with eSpeed. That is why they are going to appreciate what we are doing and, again, we may be early in these kind of things but historically while we have been early, I don't recall us being wrong.

Okay. Thank you very much.

Our next question comes from Rich Herr. Your line is open, sir. Please state your company name.

Keefe, Bruyette, and Woods. Good morning, guys. If we can go back to just your pricing initiative. ICAP BrokerTec distributes a basically uniform pricing to all their customers and you are still talking about doing a customer by customer basis. Has there been any thought giving to basically giving out a uniform pricing schedule to all your customers and then charge them based on volume for the straight commodity product?

I don't want to get into the pricing of what our competitor does, but I would point out that I don't think that -- I think that your comment while it may have been a generalization, I think it's public that they have particular deals with the owners before the sale. So I think you should check into that. I don't think that -- I think they do have particular deals for particular people. But as far as we are concerned, we think each of our customers have different needs. Each of our customers trades in a different way and we are intimately familiar with how they trade, and it is our goal and objective to get them to understand how they trade and many of them don't necessarily -- haven't really thought through how these things interact with each other and that is our job which is to really go over with them and show that they can customize a pricing arrangement with us that suits them and suits us and works for the benefit of both companies. And that is our focus. It's really a customer focus. It's a change from a, here's our pricing model that you all have to take. We will sit down with each customer and do it customized and change that mix from fixed and variable to best suit their business goals and objectives, including the competitive issues in front of them. And I think we are doing that now and we are confident that over time we will be successful with that.

Understood. But don't you think that kind of fosters the opinion on some users that someone else is getting a better deal than they are?

I think that we are happy to work with any customers to make sure that they are not -- anyone else is not getting a better deal. Certainly they might get a different mix, but the client can choose that different mix if they wish. There's no reason that one client has to get a better or worse arrangement than someone else. It's really customized for them. It's not higher or lower. Any client can have whatever model they want to have. There's nothing that's only available for client A that's not available for client B. Obviously, those who support us the most, obviously those who do the kind of things that we are interested in, we're sitting down with them and working out arrangements that suit them and suit us. But the fact is I just don't think that is -- that's part of our mix. We've been in this business a long, long time and we feel that this pricing that our competitors use has been a common pricing model in our industry for more than a decade. Every now and again it has been rolled out. It has a short term or medium term impact, but obviously the success of eSpeed and before that, the success of Cantor in voice has been predicated on our ability to come up with different pricing models and the better class of service that has succeeded in our business over that pricing model and I feel no different here.

Understood. Just in terms of the overall competitive environment, obviously it appears we are in the early stages in terms of looking at the pricing structure. Have you seen any response from your competitor looking at their pricing structure and maybe looking at how they are charging their customers in order to counteract any kind of moves you yourselves have made?

I think we are focused on our relationships with our clients and the business that our clients do with us, and it is time for to us stay focused on our relationship with our clients. Kevin has brought with him, and Paul and Lee, have a very strong customer focus. That is our view now, and that is where we are going to focus. We know who the competition is. We know what we need to do to -- what we think we need to do to win in this business and we are going to go out there and do it. But we are very customer focused and we think the ability to be flexible and to work customer by customer will eventually lead to a much better business for us, coupled with the fact that we have features that can produce revenue for is in a different way than our competitor, plus our intellectual property that presumably, our competitor cannot copy to put us in a better position.

Sure. And just moving to the new products, would you consider maybe an acquisition or JV with another interbroker dealer in order to gain some more traction more quickly in some of the new products?

I think the best way I can say this is we are open-minded. There are, there is nothing that is off the table for the Company. There is nothing that we wouldn't consider. We are happy to really consider any possibility and any opportunity. We think that there is an enormous set of opportunities available for us in our core business of U.S. Treasury. We think there is an enormous opportunity for us in the business of foreign exchange. And those are our 2 specific areas of focus. And we do have an equity product. I don't mean to suggest any less for the equity product. We have -- Kevin specifically has enormous experience. Steve Bookbinder has enormous experience in the equity arena, and we've done some hiring in our IT staff that are also tremendously experienced and knowledgeable in that equity arena. But for the time being, we are very, very focused on our core U.S. Treasury business and foreign exchange is the areas of specific focus for our revenue growth going forward.

Okay. Thanks.

Our next question comes from David Chamberlain. Sir, you may ask your question. Please state your company name.

Dave Chamberlain, Tropolay [ph]. Most of my questions have been answered. Just curious, on the -- off the run treasury side, I know that's been a market that's been less penetrated. Can you talk about any initiatives going forward there, kind of increased your participation there?

That market remains in the voice brokered market. Average price charged is I think 3 or 4 times the prices that we charge electronically. It's simply a matter of we need to build the kind of liquidity that can compete head to head with the voice market to make price the predominant factor and then that business will be electronic. So that we are attacking from a software perspective and then eventually we will attack it from a market maker perspective. But initially, we think there are still, each time we go into that market we learn more and different things. We add to our software features and components and then it's really going to be a matter of time before we get some market makers on board to assist us in growing that business. It's likely that we will see partners in that business to grow that business and we think that we will over time be successful. But as of now we've not gained any traction in that area and we will see where that goes. But we are continuing to focus from an internal perspective on rolling out more software that will better answer those questions and then we are out talking to our clients about [inaudible] and what kind of partnerships we can create with our customers to be able to grow that business because it is in their interests to move it from voice to electronics.

Okay. And then finally just on the FX Spot business, can you give a little more detail as to what liquidity that you've seen now on the product that gives you more confidence that this is the time to hit the pavement ?

Our product is out and so if one were to get a demonstration of our product they would look at any moment in time, and from time to time the foreign exchange market operates virtually 24 hours a day. It may well be the largest capital market in the world. The best way I can describe our product is just look at it. It's a quote. The quote in the morning, the quote in the afternoon, the quote in the evening, and the quote all night long is impressive, in my opinion. Dollar/Euro we are one or two pips, which the minimum increment is one pip and that's what they call it in foreign exchange, and we are one or two pips wide on substantial size, all day every day. But we are talking -- it's a huge market. We are talking about a market where we need to do tens and tens of billions of dollars for to it make an economic impact for the Company. So we are out adding customers. But the ability, once a customer comes on our system to get done their amount of trading we think is very likely, and that's why we are adding a sales force. We have a superb product and we have a large number of the biggest clients in the world looking at it, and that means if there's bids and offers on the screen, they are going to trade and that's a very, very, very exciting opportunity for us. As Kevin mentioned, we have not reached financial traction as of yet, and we have set that goal as 1 cent per share per quarter, but the product, the product is an excellent product and if you just look at it, you will understand why the Company is so excited.

Can you just -- can you elaborate at all in terms of any kind of clients that you feel that is kind of fully on board at this point in that product?

I think the foreign exchange market is so large it's simply a matter of number of customers. We are aiming for professional traders, so that would be banks, investment banks, futures trading firms, hedge funds, anyone who is a professional trader who wants to bid and offer, buy and sell foreign exchange and interact with the market. We provide anonymity, which is a completely differentiated product to others, and we provide enormous number of trading tools, and in the foreign exchange market, this is not an electronic businesses for other than the interbank market only trading with each other, and I think that's a huge opportunity for us. It's anonymous and it's a broad market and I think that's our benefit.

Thank you.

Lee Sherman, your line is open, please state your company name.

Hi, this is Raj Sharma. Merriman Curham Ford. I had a question about -- Howard, I had a question about the market share dynamics, not simply market share, but [inaudible] the Treasury volume decline expected for the second half, you made some changes in pricing that were a reaction to the earn add issue earlier, and then when the caps for some of these big clients were hit, trading became almost for some of these clients. Now that the market is slowed, and you introduced a new pricing systems, when does this pricing become very competitive again? Is it the beginning of the new year? How are customers responding to your change in pricing strategy? Are they coming on board, or do you think they will reset at the beginning of the new year?

We are actually having those conversations with our clients now. It's not as if we just say, our pricing has changed to X.. We have long-term pricing arrangements with many of our largest clients already. So this is a modification of already existing contracts with them. And so we are having conversations with them now. Those conversations are head up by Paul Saltzman who has been an invaluable addition to the management team and that is what he's driving. So it's not as if we just announced a different pricing model on Monday and that's it. These are a very tailored and flexible solutions on a client-by-client basis and we think that will take time. And so we think that the pricing issue and that mix issue will continue for a good number of months going forward. I don't think this is the kind of thing that is -- that has a change in it in a very short period of time. We think that will then start to produce more volume for us and well have a a better understanding based on how much volume that is and what those particular flexible solutions are we will then have a better idea on how to talk to you about how that mix and revenue capture and how much time that took and what new features we have in place. So these things are in flux now. All I can tell you is that we are talking to our clients, and therefore while we have a commitment to be more flexible with respect to our pricing and to work with clients to meet their needs, we have not -- it's not the kind of thing that you just execute on a Thursday. It will take upwards of a quarter and maybe longer. So we are working on it all the time. But it won't, I don't think, be complete on any particular date certain. It's sort of one of those things that you just work through, and as that works through, we will have much more clarity as to both the growth of our business and the revenue that comes with that business. But I think we are confident in our long-term outlook of that, and that's why the Board has authorized the share buy-back.

Great. Just one other question. Do you have any expectations or any sort of estimate or guidance for the volume traded on your system the seconds half of the year? In terms of the 8 trillion that hit the second quarter, any sort of volume numbers for the third and fourth quarter?

No. I think that all sort of comes together in the financial guidance that we give. But I don't have a particular prospective statement with respect to volume.

Got it. Thank you.

Our next question comes from Charlotte Chamberlain. Your line is open, ma'am. Please state your company name.

Good morning. It's Charlotte Chamberlain with Jefferies. I was wondering if Lee could talk a little bit about what's happening with interest rate swap markets in Europe, and what the outlook is for that. And I also wanted to talk again about Colin's question, the Hanukkah/Santa Claus question. In the past, I know we were quite wrong betting against you last year that volumes would go up in the fourth quarter. They were down 11%, and the year before that, they were down about 3%, and in 2001 they were up, but that was post 9/11. I was wondering -- if what you were saying with respect to Colin's question that you expect the volumes to go up because of black box trading, or -- I just don't understand. You were very, very adamant the last 2 years that fourth quarter volumes have to be lower than third quarter volumes, and it would seem that we have to have these volumes [inaudible -- background noise] 465 in order to [inaudible -- background noise]. And the final question is with respect to the share buy-back. At what price would you consider -- your stock is trading at around $9 this morning. At price would you consider given the amount of cash on your balance sheet, just buying the whole thing back? Thanks.

Well, Charlotte, I will answer the second two and then I will leave Lee to talk about the voice markets in Europe. With respect to volumes, it's my opinion and our opinion as we sit here today that the summer slow down will improve the market volumes -- will improve going into the fall and therefore we think there will be a bounce, that the fourth quarter's volumes will be higher than the third quarter. This is a very macro view, talking about the volumes of the U.S. Treasuries traded in the United States. It's not a particular view, it's a macro view just based on our experience and our best estimates. So we think that the depressed levels of the third quarter volume will improve somewhat in the fourth quarter, simply because the third quarter's volumes levels are so far depressed. That's pretty much our view. With respect to the stock buy back, the only comment I'll make is that the Board has authorized the stock buy back, and we are not going to comment any further than that, on that topic. Then with that I'd like to turn it over to Lee, and Lee can talk about the voice business in Europe.

Good morning. Charlotte, you asked specifically about interest rate swaps, or want to just cover voice in general?

No. Specifically interest rate swap, what's happening.

Actually in the interest rate swap market, you know we do have a product out there that we've been pushing for quite a long time. It doesn't have the traction as we would like it to have, but it's in the marketplace. People have used it. We are investing heavily in our voice business in the swap market because I guess as everybody likes to believe that there still is a hybrid model that will make the market grow. I think that overall we have seasonality in the business, but we've been relatively strong on our businesses here in Europe. We've actually increased a lot of order flow on the swap markets. We've increased quite a bit in the European government bond markets. And I think all of that added to it is again as you all know that's the pipeline to eSpeed. As things progress for us at Cantor Fitzgerald, then eSpeed gets the benefit of the pipeline business, and we will continue to push our electronic products strongly across the European community.

What I was trying to get at was that what we've heard is that the slow down in trading, especially in interest rate swaps, has been far more severe than the slow down in Treasury trading over here. And I was wondering if you could comment on -- since the market in general is going to slow down in interest rate swap trading and government bonds and European government bond trading?

No, I think that the voice markets still remain pretty strong. I do, as I mentioned, I think there is seasonality in the business and the summers seem to come pretty early. Generally we look at August as the slow time, and this summer it actually came in July where the markets kind of slowed down. I don't know from this side if the long Labor Day or the late Labor Day in the United States is going to cause any slow down and tick up here for the September marketplaces. But clearly we haven't seen that much decline in our business. Our business is actually getting stronger in Europe.

Okay. Fine -- oh, one other thing. Howard, you said last quarter that I think it's Mr. Herenen [ph] who does the forecasting of U.S. Treasury issuance for eSpeed/Cantor, that you might be able to tell us what he's thinking in terms of issuance for 2005.

I don't have anything to add currently, but I can check off-line and if there's something that would be beneficial to our shareholders we would be happy to put it out, Charlotte, into the website. I don't have anything offhand for you today, Charlotte.

Okay.

Our next question comes from Colin Clark, sir, please state your company name.

Hi, Merrill Lynch. Just one follow up with regard to the 2.5 million software revenues coming from the software arrangement in terms of how that's going to be allocated. How much of it was allocated to the second quarter and what kind of expectations do you have for the third quarter?

Hi, Colin, this is Jay Ryan. It was zero in the second quarter. The arrangement wasn't completed until the third quarter and will be recognized over the remaining term of the contract in 2017.

Okay, so there's not a one-time impact in the third quarter, it's spread over quarters.

That's right, that's right, the revenue recognition doesn't necessarily match the cash flows.

Okay. Just wanted to get clarity on that. Great. Thank you.

[Caller Instructions].

Operator, we're happy to end the call now. It's all right.

All right, sir, thank you.

Everyone, I'd like to thank you all for joining us this morning. And we appreciate your attention. As I said at the end of my comments, we are fierce competitors, and we have tremendous experience in this space and in this business. We think the tools at the Company's -- we think the people of the Company, the talent of the Company, the tools the Company has in front of us will drive the Company towards growth in 2005. We are confident and we are pushing forward. But we are on the issues and I hope we've explained them well to you today. And we look forward to talking to you again in the future with ever stronger results. Thanks, everybody.

This does conclude today's call. Thank you very much for participating.