Bgc Group Inc (BGC) 2004 Q3 法說會逐字稿

Good morning and welcome to the eSpeed third 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, please press star 1. This conference is being recorded. If you have any objections, you may disconnect at this time. Now I would like to turn the call over to one of your speakers for today, Ms. Kim Henneforth. Ma'am, you may begin.

Thank you, and good morning. Before we begin, I'd like to remind everyone of the safe harbor statements. Statements made 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 effect of the attacks on the World Trade Center, market volatility, the limited operating history of eSpeed and its ability to enter into marketing and strategic alliances to effectively manage 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, and thank you for joining us for our third quarter 2004 conference call. With me today is our Management team Kevin Foley, Paul Saltzman, Lee Amaitis, and Jay Ryan.

Jay will review our third-quarter results, after which Kevin will discuss our progress with respect to the initiatives we addressed last quarter and our strategy going forward. After that I will review our outlook for the fourth quarter, and then we will be happy to answer your questions.

Before I turn the call over to Jay, I'd like to comment on our recent acquisition of ITSEcco. We have added 22 employees to our team. The acquisition was in the fourth quarter of 2004.

The ITSEcco group has designed and built strategically important products that we feel will complement and extend our offerings to our clients. The experience and knowledge of the group is specific to the front-end order routing business and the futures markets. I think they will make a great addition to the eSpeed team.

With that, I'd like to turn the call over to Jay Ryan.

Thanks, Howard, and good morning. For the third quarter, we've reported operating net income of $0.11 per diluted share and GAAP net income of $0.10 per diluted share. The difference between operating income and GAAP net income is a $200,000 charge for a charitable contribution to the Cantor Fitzgerald Relief Fund related to September 11th Charity Day and a $100,000 non-cash charge for business partner securities.

Additionally, we reported revenues of 39.8 million and fully electronic volume of approximately 6.9 million-- trillion. On a sequential basis, operating expenses in the third quarter 2004 of 29.9 million were up $2 million from 27.9 million in the second quarter of 2004.

Increases in compensation and employee benefits, occupancy and equipment, and administrative fees were primarily driven by direct and indirect expenses related to the additions to headcount of 19 during the quarter, for a total employee base of 376 at the end of the third quarter. These increased costs were primarily related to the addition of experienced sales professionals.

Professional and consulting fees also increased due to additional patent-related legal expenses for the quarter and costs associated with Sarbanes-Oxley compliance. Looking forward, we expect fourth-quarter 2004 operating expenses to be between 31 million and 31.5 million, an increase of 4-5% compared to the third-quarter 2004 expenses. These increased expenses will be primarily driven by increased headcount driven by our ecco acquisition, which brings our overall headcount to 402 as of today.

Additionally, with respect to the ecco acquisition's financial impact, it will be dilutive by less than $0.01 per diluted share in the fourth quarter. We expect this investment to become accretive for the year 2005.

Turning to cash, we calculate free cash flow as operating cash flow minus cash used for capital expenditures, software development, and intellectual property. For the third quarter of 2004 we generated free cash flow of 13 million. Net of related party receivables and payables, we generated free cash flow of 13.3 million during third quarter 2004.

This free cash flow is net of 1.9 million purchase of fixed assets. We still expect to receive up to 19.5 million of replacement insurance, once we exceed 6.7 million fixed-asset spend remaining from the first insurance payment of 20.5 million.

As of September 30th, our cash position was 223 million, down 16.5 million from 239.6 million at the end of June 2004. This decrease was primarily driven by 29.8 million of share repurchases and 8.8 million in cash used in investing activities for capital expenditures, software development, and intellectual property, including patent costs.

This decrease was offset by an increase in working capital of 9.3 million and cash earnings of 12.4 million, which includes net income of 5.7, depreciation and amortization of 6.1 million, and other noncash items of 600,000.

So far in the fourth quarter, we have used approximately 12.4 million in cash to acquire Ecco and 2.1 million in cash to repurchase 230,000 additional shares of our stock at an average price of 9.--$9.24. As of today fully diluted weighted average shares of common stock outstanding are 54.2 million.

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

Thanks, Jay. Good morning, everyone. Let me start out by saying we're not satisfied with our current business. I'm going to keep my discussion brief and speak about how we're addressing the challenges we're currently facing and how we will build for our future growth.

I'll begin with our government bond business. We're addressing the competitive pricing issues head on. We're not satisfied with our speed of progress, but we will directly resolve these issues by the end of the first quarter.

We're offering our largest bank and investment bank customers a greater percentage of fixed fees in their pricing, in order to increase volumes on our platform and reduce the sensitivity of our revenue to changes in market volumes. These incentives towards greater volumes will result in a decreasing average revenue capture per million from these customers.

Nevertheless, we believe growth opportunities remain for us in the government bond sector. We think that significant increases in program trading will bring more volume and more users to our platform, creating considerable revenue opportunity for us, and we are positioning ourselves and technology for this growth.

The continued rollout of innovations and modifications to our platform throughout the first half of 2005 will position us to aggressively compete for this new business. Additionally, we're confident in our growth prospects with respect to foreign exchange.

We're excited about our FX sales force, and we will continue opportunistically to add sales professionals as we achieve success. Our product has significant liquidity and growing volume, and now we have an experienced sales force in the field, and we expect to reach traction by the fourth quarter of 2005.

And by traction for foreign exchange, I mean that using the fourth quarter of 2004 as a base, the net difference between foreign exchange revenue and expenses will contribute an incremental profit of a penny per share per quarter by the beginning of the fourth quarter of 2005-- by the fourth quarter of 2005.

Now, I'd like to turn the call back over to Howard.

Thanks, Kevin.

For the fourth quarter of 2004, we are expecting operating earnings to be in the range of $0.05 to $0.06 per diluted share. This guidance is based on our expectation that the average daily Federal Reserve U.S. Treasury volume will be between 455 billion and 475 billion for the fourth quarter of 2004.

We have updated our fourth-quarter guidance for three main reasons. We are, number one, aggressively investing in our foreign exchange sales force. Number two, we are investing in our futures product with our acquisition of ecco. And number three, we expect to earn less money with respect to government bonds, because it will take time for our new pricing to produce the higher volumes necessary to offset that price reduction.

While we are facing significant challenges with respect to pricing, we remain committed to being an innovator in our chosen market. It is innovation that has always driven the growth of this company, as it will be innovation that will continue to drive this company forward and make the difference to our growth as we go forward.

With that, I'd now like to turn the call over to the operator so that we can answer your questions. Operator?

Thank you. At this time, if you would like to ask a question, please press star 1. You will be prompted to record your name. To withdraw your question at any time you may press star 2. Once again, if would you like to ask a question, please press star 1. One moment, please, for the first question.

Our first question comes from Rich Repetto.

Hi, guys. Yes, Howard. I guess, first question, or-- I guess it was to what Kevin was saying, that you expected the pricing at the end of the first quarter to -- the pricing issues to resolve. I didn't get the exact wording.

But what do you expect to happen by the end of the first quarter? Is it just that you'll have the new pricing structure in, or you'll expect volume to offset the price decrease by then?

Rich, we expect to have our pricing negotiations with our major customers done by at least the end of the first quarter. And we think, with respect to the fourth quarter, that there's just going to be -- there's a timing mismatch. I mean, you put in the new pricing, and it has some period where there's a network effect that you-- produce guys on these newer pricing deals taking advantage with each other, and we just think there's a lag until the volumes begin to take effect and we see the results then.

So with respect to the fourth quarter, there's going to be this lag that's part of the guidance that Howard discussed. And with respect to the completion of the pricing just of the major banks, investment banks, that do business with us, we're going to have that done and closed by the end of the first quarter.

So I guess what you're saying, then, the market share that you have at the end of the first quarter is what you would expect the market share to be, you know, pretty much for the rest of the year, or am I getting it right?

You know, I'd say that we think we'll begin to see an effect as we get more and more of these guys done, but really couldn't comment on the timing of it into the first quarter as we approach completion. Howard wants to comment on that as well.

I think there are a number of factors, Rich.

First, the pricing issues, which we'll -- basically, we expect our new pricing, as those arrangements are made with our largest customers and a different pricing structure put in for all of our customers, that we will see growing volume. But, of course, at a lower revenue capture at the marginal transaction. So that will have an offsetting component.

With respect to our market share going forward, once the market share were to stabilize, then we expect it to start to rise. The point of the Company is not to just go forward with its current product, even within U.S. Treasuries, and just talk about pricing. We are going to innovate. We have a substantial number of new products and new initiatives within the government bond market, the way our customers will trade, that we think will make a substantial improvement to the marketplace and bring them on to our system, because the product they get trading on our system is better for them.

These customers take huge amounts of risk. They have huge amounts of money on the line, and these prices, while at the margin, if all other things were equal, one price might matter compared to the other at these very, very low prices. So, then, the marginal cost of transacting, for many of these customers, is less than $2 on a $1 million transaction. So, if all other things were equal, that $2 makes a difference.

But if you can help those customers get a better price, well, that is fundamentally more important. So we are going to continue to innovate, and we expect our market position and our market share to grow based on those innovations, more so even than pricing. But we will meet the pricing challenge head on.

Okay. And then, Howard, you know, prior, we had talked a lot about sales people and being highly, highly variable as you put new sales people on to grow new products, and specifically FX. So, has anything changed, or is this -- you know, this is just as far as the incremental expenses from the expanding sales force here, is it still on this highly variable compensation structure?

I think it did change. And I think your point is right, which is that in the past, we had always talked about the classic that the more customers would create more liquidity, which would create more customers, which would create more liquidity. And then we could naturally ramp up our sales force along with our customers. And those would-- the two, the revenue and the expense for sales, would be naturally connected.

As it has turned out, the connectivity we have with customers, our relationships with customers, and our way of doing business has now created much more liquidity on our platform at this early stage than we ever would have anticipated. And so with that liquidity in hand, I mean, we have more liquidity than we could have imagined with the number of customers we have.

So we have made a considered decision to ramp up our sales effort to hire experienced sales professionals and to compensate them in order to move this process substantially more quickly. Yes, it is not matching revenues to expenses in that highly variable model as we normally would have done.

But I think that comes directly on the heels of the substantial opportunity that we see in front of us and that we want to move quickly to capture that opportunity while we have the liquidity that we have. Because it is, you know, it is an extraordinary thing to have liquidity and to be able to continue to add customers to that list. So the sales force has recently been assembled.

As Kevin said, we're very excited about its prospects, and incrementally we've discussed we are going to continue to add opportunistically to the sales force. But we expect if you take 2004, the fourth quarter, and compare it to the one year from now, we'll see our earnings will go up a penny, because even if we add new sales people, we expect our revenues to exceed any new costs coming forward from our incremental cost in foreign exchange by the penny by a year from today.

Okay. So, I guess what I'm hearing is it sounds like you view yourself as being ahead of plan on the FX side and just going to put more investment into it.

Last very quick question, Howard, is on the market share. You know, we've seen it drop, you know, quarter to quarter. But even within the quarter it dropped in August down to about 20%, then rebounded in September. Is that just purely, you know, that there were stronger volumes in September, and that effect of having stronger volumes -- is there anything to be taken from that, or is that just sort of a month to month bounce based on volumes?

I think our -- from a macro perspective, the -- you know, the pricing issues and our customer issues, and the use of our system and our innovations, as we do new things, things change. And, so really, you know, we're taking it slowly. We're taking it on a month-by-month basis. The seasonality issues, the election issues, all these sorts of things, from a macro perspective, don't change our particular view, and no one month changes our particular view.

We are addressing pricing issues with our large customers and innovations to make trading on our system the superior place to trade. It has been that way, and as we continue to roll out our innovations, it will, in our opinion, certainly remain that way. But we are addressing the pricing issues which have addressed the volume issues. Those things go hand in hand.

But on a pricing point, maybe this will be helpful, which is many of you look at average price per million. And I do want to point out we have a fixed price component to our pricing for most of our largest customers. That fixed price component, we are increasing that fixed price component and decreasing the variable component.

Another way of saying that is, the more volume that you do, you're going to get an ever greater volume discount than you got in the past. That means that we will have a cushion on decreasing volumes in the marketplace, but that does not bring us more revenue, and that is not our objective. And we will have a lower average revenue per million, the larger our volumes.

So if our volumes were to decrease, whether the market was slow or for any reason, our average revenue will stay comparatively higher than it would otherwise seem, because we're ending up giving out less of the volume discounts, which add to our revenue, which is not our objective. So, as we reduce our price, we are reducing our price at the volume discount end. And, therefore, the more volume someone does with us, the less expensive their per-transaction charge is, but the more revenue the Company will get.

So it positively aligns our interests with our customers’, and that's why we think as we get arrangement by arrangement, deal by deal, with our customers, we think that our volumes will grow, our market share will improve. But that would be offset by decreased average revenue per million that comes along with that.

Okay. Thank you very much, Howard.

Our next question comes from John Mihaljevic from Thomas Weisel Partners.

Good morning. Howard, was wondering if could you help us a little bit on the '05 model. I know you're not giving '05 guidance. But, given the changes to the run rate, looking at Q4, you know, how should we be thinking about op ex and where that goes next year versus this year?

Did you say operating expenses?

Yes.

Well, I think Jay has guided our view of operating expenses for the fourth quarter, which are 31 to 31.5. I would not expect, on just an ongoing basis, that those expenses-- I think we're comfortable with that level of expenses.

However, as Kevin said, we are going to opportunistically add sales professionals. But those will then, again, become more aligned with the additional revenue coming in. So I don't think, to the extent we added sales professionals, which increased our expenses, that we would expect that to come with an offsetting revenue increase along with those sales professionals.

So, from a forward-looking expense perspective, I think we are comfortable with the investment that we have made, and we are excited about that, and now we are going to work hard to make sure that investment pays off for us.

Okay. And then, on the top line, obviously we're now quite a bit below the run rate that you had in the first couple of quarters of this year. Looking to next year, can you give us any sense for how much of an offset the new products could be, now that you've sort of said you expect traction by the fourth quarter? What does traction imply there, in terms of revenue for Forex and the other new products?

Well, the way -- because the model changed, meaning that we've decided to invest in our sales force in order to capture the opportunities in front of us with our dramatically improved liquidity in our Foreign Exchange product, we tried to explain traction now as, if you take where we are now in the fourth quarter, so the expenses that we've just described, the guidance we've just described, sort of setting that out as a baseline, we are saying that we will add whatever expenses we add in foreign exchange, we expect that our revenues will grow ahead of whatever new investment we make, additional sales people we hire, and the growth we invest in in '05, we would expect our revenue for the fourth quarter to exceed that, compared to this quarter by at least a $0.01 a share.

So we're expecting it to then start to kick in, and that we would expect to continue thereafter, and then we can talk about the growth rate and guidance. But we are investing aggressively in this space. This is the largest financial capital market in the world. It is, by far, the most exciting opportunity in front of the Company.

We have liquidity coursing through the system. The quotes on our system, really, all day, every day, are extraordinary, and we think this is the opportunity for us. So, I'll try to say one more time, which is taking us from our base today, whatever investment we make in additional sales capacity for next year, we expect our revenues to exceed those costs from this quarter as a base, to add one penny a share in the fourth quarter of '05.

So that we will not be limited in our investing, which is important to us because this is the opportunity for us. We do not want to be limited in our investing, but we are confident now to say that we think the revenue growth will surpass even our investing by at least a penny a share a year from today.

Okay. And then you mention you expect this recent acquisition to be accretive in '05. Can you give us a sense for what kind of revenue you expect from that condition?

Well, I think -- I don't think we've actually modeled that out. I think it's -- it adds to our product offerings and futures. We think that is a substantial market.

There are a tremendous number of users in that space, and the -- and its dilutive effect in the fourth quarter I think we can naturally, through normal operating expense efficiencies, we can move them to an accretive position within the Company, and then it becomes opportunistic from there. With our ability to help them scale, they should become a substantial company over time, but I can't say I have -- I can put a finer point on it until we get to know everything better.

But we think they have great products, and we are very excited about their products, and we think they're going to make a substantial addition to the Company. But we are, again, confident that they will turn accretive in 2005, and then to the extent of that, I think we just want to get a little bit of experience with them under our belt before we start to guide it going forward.

Okay. Just last question, on Forex, real quick, it seems like you already have a good quote on your system and liquidity there. Can you give us just an update on any new providers that might be coming on or any other initiatives you have going in Forex?

Well, you are right, we have an impressive quote (indiscernible) offer of substantial size pretty much all day every day, and that is what we define as liquidity. Meaning, if a bank or other customer, hedge fund, wanted to transact, foreign exchange, they could come on our system right now, or anytime later today, and get their business done easily, quickly, and at the best market in the world, certainly equal to it, and often we have the best market in the world. So that is a great position to be in.

We add customers -- that's why we have the sales force. We're trying to add customers all the time. The sales cycle, however, tends to be longer because of the structure of foreign exchange and how things settle.

CLS, that's Central Clearing Organization that was set up last year, enables us to be in this business, but, for example, hedge funds need to select a prime broker. That prime broker has to be part of the C L S system, then they can come on line, and that whole process just takes some time, but we are working hard. I mean, we obviously are confident in our ability to add substantial numbers of clients or we would not have been adding aggressively to the sales force we have. So we do expect new customers to come on all the time, and I would expect them to be broadly distributed across the spectrum of who you would consider small, medium, and large. I don't think we're focused on any one of those categories. We've been adding sales people to try to focus on all of those categories. So we're moving as quickly as we can, but we think the opportunity is directly in front of us, and we are out the gate and running hard, and it is very, very exciting.

Thank you.

Our next question comes from Colin Clark of Merrill Lynch.

Good morning. Just real quick with regard to the quarter again and your revenue assumptions there, it sounds like there's going to be some expected pricing impact.

What about market share? I mean, in terms of where market share is kind of tracking in October? Is there any assumption of, you know, lower market share or market share that's at third-quarter levels implied in your fourth-quarter estimates?

I think those -- I think they have a contra-setting result, meaning that certainly in the short run if we were to -- if we're able to make the right deals with our customers, then what would happen is our initial revenue might decline until their volumes grow, but, of course, those two things offset.

So lower price will bring higher volumes, but at lower revenues, and vice versa. So I think the guidance sort of takes into effect both positions.

We are not, and have not, chosen to make a broad-based modification to our pricing, but actually do it customer by customer, and Paul Saltzman has been heading up that charge. And he's really engaging all of our customers individually and specifically, knowing their trading, knowing the things they want, and really hitting it directly on point. And I think that makes for a much -- it takes longer than we expected, but the result is much more important for the long term for us than it would be to try to do something quickly that would dislocate relatively too quickly again in the future.

So by being precise and getting it right, it is taking us longer than we thought. But, of course, the result we think that will come from the end of it will be much improved. So I think what we've done in the fourth quarter is try to do them both.

To the extent we get our pricing in, then we'll have our market share rise, and, of course, if we don't get as much of a pricing in, then our market share won't grow as much as we had expected, and we're doing that all off our comparisons. So I think that's where we are.

Plus, we know that when we first have a price change we don't get the initial volume jump right away. Those things don't initially offset, as Kevin said there is a timing difference as those things sort of feed their way through the process.

And so, I think we've done the best we can to sort of estimate that for you and give you a sense of our thinking. But, make no mistake about it, we are working very hard to have this company be successful, and we are out there every day working on that. And we want to grow our market position and our market share and have the right price for our customers that drive that for the Company.

Okay. Thank you. Can you comment on usage rates for price improvement and better fill this quarter, and if they -- did they help to support the average fee per million, or was that more just the volume discounts?

We saw a slight up tick in PI participation. Keep in mind, I think as Howard said, our last earnings call, just about all our users, all our users participate in price improvement in some fashion.

They're doing trades where they receive price improvement or trades where they make price improvement to get into the trade. But I think it's -- the up-tick of the average (indiscernible) is probably more due to market volumes than anything else. So, the reason why we expect that number to turn around and go down as we complete these deals and see an increase in our trading volumes with the government bond sector.

I don't know if there's any traction in the better fill functionality, and also just your general thoughts on the -- how these new functions, PI and better fill, are going to impact the average fee per share. I mean, I know that you had previously mentioned that, you know, there could be some offsets to some of your price changes. Do you still see that being the case?

With respect to better fill, better fill is something -- it's not a product that you use, it's a product that jumps in for you when you need it. We sort of consider it here like antilock brakes.

They kick in when you need them, and what happens currently in the system -- and this will give you a sense of where we're going -- is that it just gets you the better price and puts it on the trade. And as it turns out, a number of our customers think that the reason they got that better price was because, you know, a couple of nanoseconds before they hit the button, a better price came in.

We've not been giving our customers a clear indication of when they're actually getting the better price and why they got it. As we do that meaning as we do that that the client went to sell them at 10.5 and they ended up getting 11, instead of just printing you got 11 to actually say to our customers, so they see it clearly, you sold them at 10.5, the system got you 11, and here's why. I think you'll get a much, we'll get a much better value from the product that we give the customer, it’s sort of like putting in antilock brakes, not telling anybody really that they've got it. And it just stops better when they need it, but they didn't really understand how much better off they were because of it.

So, I think as we do a better job explaining the value of our system and showing our customers, I think they'll just appreciate it more, but it's not the kind of thing that's there for an uptake. It's there when it's possible for the system to get you a better fill, and that's the beauty of that. Our software enhancements generally will add revenue to the company when they're used.

But we expect in our pricing to address if some of our customers, for instance, there’s nothing about our product that is not on the table.

So, if people want to discuss the price in general, want to include different types of our enhancements, both those we have and those we are coming with, in order to make their pricing more attractive, we are doing it on a customer-by-customer basis. And we think that combination of tools and pricing and customization will produce the right result with each of our customers.

So, we may well include some of our product enhancement pricing in our overall model but it will all go to the same effect which is to give the customer what the customer wants and earn for the company the appropriate fee for the Company as well which will drive our bottom line, our market share, and our grow.

That's helpful. Thanks. Lastly, the BGC spin-off. Can you comment on how you see that helping eSpeed in terms of, from what I understand, BGC adding new voice broker desks and off the run treasuries in the agency? Is that in the plans? Where does that stand, and how do you see that helping eSpeed? Thanks.

ESpeed provides technology to BGC depending on what type of product eSpeed earns a share of the revenue, so the growth of BGC will be beneficial to eSpeed on its voice assisted line of revenue. BGC is aggressively building its business, hiring staff and growing, and that will accrue to the benefit of eSpeed.

So, we provide technology to BGC, and the better BGC does because we provide that technology, the better we get paid for that. So that's -- you know, their growth and their hiring works well for us, and we think the spin-off from an eSpeed perspective was good because in this particular case, bigger is definitely better.

Can you give us any sense on where -- you know, when a trading desk and off the runs and federal agencies could be up and running?

I don't think I can be more particular. I can't say that BGC has already hired people in the off-the-run U.S. Treasury business already, and I think they have been saying that they are building a substantial trading room which they expect to come on line in the first quarter of 2005. But other than that, they're out hiring people and bigger will be better.

Great. Thank you.

Our next question comes from Raj Sharma of Merriman.

I think I missed the -- was there any revenue guidance for the fourth quarter? I know you gave EPS guidance, but was there a revenue number you were guiding to?

I think what we've done is we've -- let's see. We said our expenses -- Jay said our expenses would be between 31 and 31.5 million, and our guidance of $0.05 to $0.06 I think sort of puts that pretty clearly.

Okay. So I guess, could you break down the expenses for the fourth quarter a little bit? I know that the running rate -- the third-quarter operating expenses were 29.9 million, so is the additional amount of expenses purely from the integration of the new acquisition and the sales force?

Primarily it's sales force acquisition, Ecco acquisition, obviously, 22 headcount coming directly from the Ecco acquisition. Lastly, some technology hiring, because we're always adding to our technology team, and I think you've covered the primary drivers.

Okay. Then were there any additional -- were any expenses due to the trading technologies, you know, patent, or any patent related expenses in the fourth quarter?

Yes.

Do you want to quantify that, or can you? Do you think you want to give some color on that, Howard?

I don't think we go to the granularity of breaking those things out. They're part of the process we need to take care of, but I don't think that's a driver of the company in any fundamental degree.

Okay. Lastly, do you have a nine-month-to-date free cash flow number? Because obviously the free cash flow for the third quarter was pretty substantial when you compare it to the net income.

That -- what sort of -- can you give me a number for the first nine months so I can get a sense of what, on an ongoing basis what the free cash flow generation of the business is?

Hang on one second. I think they've just taken out a calculator. I think we can certainly do it off line, but I think all we're doing is putting – (multiple speakers).

I just want to get a sense if the third quarter was more representative of an ongoing quarter or -- I see that the free cash flows are pretty healthy.

The free cash flow over the three quarters is just about 24 million, which includes 13.3 for the most recent quarter. Just bear in mind this free cash flow does not include the effect of financing activities.

Right. Great. Thank you.

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

Good morning. Lots of questions, but the one that just jumps to mind, the idea that BGC, is that still -- is that totally spun off from Cantor, or is that in any way still owned by Cantor?

It's in the process of -- it's announced the spin-off there, going through the legal particulars of it. And, so, I don't know where they are in the particular legal effect of resolving all issues. But it is being -- it is being spun off. It was announced that it would be, you know, on the way, and they're working through those details now.

And can we assume that when eSpeed became a public company, there was hundreds and hundreds of pages of the relationship between eSpeed and Cantor and the sharing relationship. Should we assume that those go through unchanged with BGC?

Yes.

Okay. Well, then, what strikes me as odd, is I remember in February that you told us that it's your absolute vision, view, and expectation that voice-based off-the-run treasuries is a dinosaur; it’s old, yelling, screaming, it’s silly and it will not exist in the date in the future. So why is BGC hiring sales people to do off-the-run treasuries?

I think the point is that BGC is aggressively pursuing the voice-based businesses, and those businesses which are customers earn spread, and those spread businesses are voice, and the people from BGC expect that for the long term voice businesses will play a substantial role in the business.

ESpeed's view is to create electronic markets in those markets that are commodity based and over time you know my opinion that I think that many markets, as they become more commodity-based, will move electronic. But let's be clear.

The foreign exchange market is quantums larger than the off-the-run treasury market. The equity markets are quantums larger than the off-the-run treasury market. The market in the U.S. Government that is fundamental to us is the benchmark business because that is the commodity market.

So BGC is going to focus on those spread businesses, eSpeed is going to focus on those commodity businesses, and I think that's why it works naturally together. And I think that's sort of the most simple way to say it.

ESpeed's vision is that those products that are commodity-like, where our customers do not earn spread, should be electronic, they should be quick and easy to trade. And to the extent there is still spread in those transactions, then the clients will want to continue to do them in voice, and BGC will be serving those issues, so will freedom, and we support them, and we look forward to their success.

Okay. I certainly agree with you about the size of the forex market but we've already seen EBS, the biggest broker in Europe in foreign exchange get together with Bloomberg to do an electronic forex transaction. And recently the Chicago mercantile exchange announced a joint venture with Reuters and apparently next month is going to be on the road to sell that product.

This seems just way, way more competitive and harder to break into than off the runs and one issues. And I assume, by the way, that since you're not giving us any per share accretion for off the runs and one issue, that you're presumably not assuming that you don't get traction by the end of '05, in those products?

I haven't broken out that kind of granularity before. Foreign exchange is something we're investing heavily in, and I thought it was something important to discuss so that you would understand why we're investing aggressively in this product.

Our liquidity is exciting. It means the best way to do due diligence on eSpeed's composition is look at the quote. Just look at the quote. Anytime, anyplace, look at the quote. It is an extraordinary piece of liquidity that has created a modification in our model to make us move faster now.

We think there is enormous opportunity in the foreign exchange market because it is a vast market, and as eSpeed does, we do it in an innovative and different way, we are a fully and completely anonymous system, and I think that's pretty exciting, and I'd – I think Kevin would like to say something as well.

Well, just further comment (indiscernible) with respect to foreign exchange, that there's a tremendous amount of change going on in the foreign exchange markets, and that represents tremendous opportunity to enter, because there's a great deal of openness for new solutions.

The fact that there's a lot going on is actually a positive, which is a great buzz about the fact that there's a lot going on and a great deal of receptivity, and we feel that our offering competes very well against the existing or older model competitors as well as some of the new guys coming in that lack a number of the advantages we feel we bring to the table.

Okay. Kevin, you came from Bloomberg, right?

Yes, I did.

So presumably you know the Bloomberg/EBS joint venture. I don't want to take up any more time but could you just be specific as to what eSpeed model does that should be viewed as superior to Bloomberg/EBS?

Charlotte, I have some level of familiarity with a bunch of the things that are going on in the foreign exchange business. Suffice it to say that eSpeed is unique in introducing a totally anonymous, many to many innovative brand-new super efficient trading system into our existing far flung and substantial customer base with the infrastructure, the relationships, through the firewall, all these kind of things, down to knowing this element of our customers' business very well.

And I think the many to many, the newness and the efficiency of our model competes very, very aggressively against the existing or legacy competitors. And I think our advantages of scale and leverage and been there done that compete very, very aggressively against new entrants into the FX space. And I think we're the only guys at that cross roads with the experience and the innovation and the new model and there's been a great deal of buzz about that. I think, in the marketplace.

Okay, thanks.

Our next question comes from Rich Repetto of Sandler O'Neill.

One very quick follow-up, Howard.

When talking about this incremental penny that you get on the FX platform, or I guess in other products, but you define traction as the incremental penny now, before I thought traction was just a penny in earnings. So would that say that even through next year, you still could be unprofitable in either FX or the other products?

What happens is it all depends on the way you look at. From our initial set of how we would define traction I think we would have gotten there in almost every way could you think about it. So we're doing much better than we had anticipated.

However, we have taken the decision to invest aggressively in, you know, that momentum. And so the real question is just to take us from where we are today and rather than sort of try to go back and sort through everything as we've become more aggressive in our investing, we pretty much said, look, from where we are today, we'll make a penny a share more with respect to foreign exchange than a year from today, but that's not going to stop us from investing heavily.

Our objective in the foreign exchange market is not to make a penny a share. Our objective in the foreign exchange market is to make BMH a player in the largest financial market in the world and have that be a material consequence to the Company for the long-haul, and we are investing in that, and that's why we've sort of tried to explain our new thinking.

So you should understand that, you know, we're just doing better than we had thought, and so we're not going to try to harvest small amounts of money, we're going to invest aggressively in making sure that we are a major participant when there's a substantial amount of money to be had.

Okay. Understood. Thank you.

Our next question comes from Charles Page of Citizens Funds.

Couple of quick questions. The lawsuit versus broker tech, what's the schedule there, and any chance of settlement before year end?

I think that it's a legal process that continues, and with respect to the -- I can't really -- I can't really comment, so I think that's the easiest thing I can say is unfortunately I can't comment.

Okay. On the market share question, I guess to what extent do you see that being driven by price, as far as your erosion, or to what extent do you think there are other factors in there, such as broker tech and Icap relations and related earn-out provisions and such?

As far as I know, the earn-out provisions and such have passed. I think there are, you know, the complex issues of customers, price, service, quality, product, all those things as in most businesses. I think that there is a direct relationship, however, in our business, with respect to certain parts or permutations in the pricing model. We are addressing them but we’ve chosen to address it in a case-by-case basis to try to address a longer term view of innovation for our business.

That has succeeded for us in the past, and we've been able to be as successful as we are in this business by working in this particular way, and that has worked for us, but we are very, very aware of the changing market environment, the technology issues that we have led and so we are not relying on that experience that we have in the past. We are just bringing that experience with us as we address new considerations on a step-by-step basis.

But I do think that if we get our pricing model correct, that we will increase our volumes and we'll do so in a way that benefits the company substantially and will benefit our clients as well.

So I think it's mutually beneficial to them both, and I think we are on top of that. And then we will use innovation, enhancements, and other tools that enable our customers to trade better to differentiate the Company from this type of pricing issue, and as we do that, we will separate ourselves from our competition by having a very, very competitive price, but a much better product.

We have been the innovator in this space from the beginning. And it is our expectation, given that what we're working on in the pipeline, that we will be the driver of that going forward. And I think we will provide a product that our clients will find better, and the fact that our pricing is so competitive will make it clear where the volume should go.

Our next question comes from Colin Clark of Merrill Lynch.

One quick follow-up. It looks like your voice-assisted business fared better than the electronic. Revenues were flat, volumes were up nicely, the average fee per million was down. Obviously, there's a lot of products in there. Can you just give us a feel for what was going on in that business and how that plays into your fourth-quarter expectations?

The voice-assisted business is really, you know, we provide technology support. That business is primarily driven by now BGC and also Freedom.

Their businesses have a wide range of mix with them, so their average revenue I don't think is really, you know, broad-ranging mix issues. And I don't think they have -- or I have not heard that they have these kind of issues that we are discussing with respect to the electronic competition in that space, so I just don't think those things are associated with that. I think they are based on size.

BGC, on how many people it hires, but I don't think that's a sort of a fourth-quarter event, since they are outgrowing their business, and I think they have just aggressive seasonality. The voice business tends to be very seasonal with respect to the end of the year, and I think that's also figured into our expectations.

I don't think there's anything particular for me to tell you other than what we've said already on the call, which is we expect BGC over time to grow and that will assist us, but for the fourth quarter, you know, I think the view is seasonality primarily.

Thank you.

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

Can you hear me okay?

Yes, Charlotte, we can hear you. Now we can't. We can't hear you, Charlotte.

Hello?

Now I can hear you.

Okay. The fully diluted share count, 54.2, I think Kevin said that that's as of now, is that the share count that we should be using into the fourth quarter? Last conference call you announced the share -- the 100 million share buyback, and I was just wondering about fully diluted share count for the fourth quarter and into next year.

Well, I think that -- 54.2 is, as Jay said, where we are as of now, as of today, so I think that was trying to give you a sense of where we are now, and the share count will, of course, depend on a variety of factors, including share buyback and I can't really forecast where that will go other than to say our buy back, of course, remains in place, and with respect to anything else we do going forward I can't really forecast that. So I think our point was to let you know where we are today to give you a good sense of where we are, then you can make your assumptions going forward.

Okay. But is it fair to assume that you bought -- I think it was like 2 million shares at 12.15 between June and August, and then I guess you bought it -- about 982 or something since August that you'd be buying at those prices again?

I don't think it's appropriate for me to comment or for me to leave you the impression that you should assume anything. The board makes its decisions and the company makes its decisions on an ongoing basis and reevaluates things all the time. I can say that there is a stock buy-back in place and the company will make its decisions going forward.

The other thing, Jay, is we noticed that the book value and common shareholder equity went down between the June and the September quarter.

Is that entirely because of the share buyback? Because it didn't happen in previous quarters when you bought back shares, and we're just wondering why that step-down in common shareholder equity.

As we've discussed with our cash flows, we bought back a little over $29 million worth in the third quarter, and I think it's fair to say that's the primary driver.

Okay. Because you were buying it back above book. All right. Thank you.

At this time, I would like to turn the call back over to Mr. Lutnick.

Thank you everyone for joining me and joining our team this morning.

As Kevin said, we are not satisfied with where we are, and we are going to work very, very hard and very focused on changing the things that we've discussed today and implementing that model, and we look forward to talking to you again next quarter. Thank you for joining us, and have a good day today, everyone.

Thank you. This concludes today's conference call.