Bgc Group Inc (BGC) 2004 Q4 法說會逐字稿

Welcome and thank you all for standing by. And also welcome to the eSpeed fourth-quarter and fiscal year 2004 earnings conference call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). Today's conference is being recorded. If you have any objections, you may disconnect at this time. I am now turning this meeting over to Ms. Kim Henneforth. Madame, you may begin.

Thank you, and good morning, everyone. Before we begin, I'd like to remind everyone that statements contained in this call which are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors, which include but are not limited to, the effects of the attacks on the World Trade Center, market volatility, the limited operating history of eSpeed, Inc., the costs and expenses of developing, maintaining and protecting our intellectual property, including judgments or settlements paid and received and related costs, and our ability to enter into marketing and strategic alliances, to effectively manage our growth, to expand the use of our electronic systems and to induce clients to use our 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. Now I'd like to turn the call over to Howard Lutnick, Chairman and CEO.

Good morning, everyone, and thank you for joining us to discuss our fourth-quarter and full-year 2004 results. Joining me today is eSpeed's management team, Jay Ryan and Kevin Foley. Jay will review our fourth-quarter and full-year results, after which Kevin will talk about some of our progress and our most important initiatives. After that, I will review our guidance and outlook for 2005. Then of course we will be available to answer your questions. So with that I will just move right along and I'll hand the call over to Jay Ryan.

Thanks, Howard, and good morning. For the fourth quarter, we reported GAAP net income of 1 cent per diluted share and non-GAAP net operating income of 9 cents per diluted share. The primary difference between non-GAAP net operating income and GAAP net income for the fourth quarter of 2004 consists of 3.9 million of non-cash charges for impairment of capitalized costs related to eSpeed's Price Improvement software and certain claims of its 580 patent, $600,000 for litigation defense costs and $100,000 for business partner securities.

For the full year 2004, we reported GAAP income of 46 cents per diluted share and non-GAAP net operating income of 55 cents per diluted share. The primary differences between non-GAAP net operating income and GAAP net income reported for 2004 consist of the items mentioned in detail previously, plus an additional $400,000 related to business partner securities and a $200,000 charitable contribution to the Cantor Relief Fund. Additionally, we reported revenues for the fourth quarter of 39.3 million and fully electronic volume of approximately 6.2 trillion. For the full year 2004, revenues were 166.5 million and fully electronic volume was approximately 29.4 trillion.

I'd now like to turn to operating expenses. On a sequential basis, operating expenses in the fourth quarter 2004 of 31.4 million were up 1.5 million from 29.9 million in the third quarter of 2004. These increased expenses were due to increases in compensation and employee benefits, occupancy and equipment, and other expenses, primarily driven by direct and indirect expenses related to our acquisition of ITSEcco Holdings in the fourth quarter, as well as other employee and compensation arrangements. Total headcount grew by 24 in the fourth quarter, resulting in a total employee base of 400 at the end of the quarter. This growth was largely driven by our Ecco acquisition. For the full year 2004, operating expenditures were 115.8 million, up 15.3 million from 100.5 million in the full year 2003.

Looking forward, we expect first-quarter 2005 operating expenses to be between 34 and 34.5 million, an increase of approximately 10 percent, which will be primarily attributable to increases in compensation and employee benefits, occupancy and equipment, and marketing.

With respect to compensation and employee benefits, we expect increases related to several items as follows -- first, there will be increased expenses associated with the amortization of restricted stock, as we transition to less an option-based compensation model to more of a restrictive stock-based model.

Second, we will be increasing headcount related to new hires in technology and sales. In relation to technology, we will be further invest in eSpeed's technical platform to support the growth of our fully electronic businesses, as well as the anticipated growth of BGC and associated voice-assisted revenues. Relating to additional sales hires, we expect further investment in our foreign exchange and U.S. Treasury sales forces as we continue to take advantage of additional opportunities in these products.

Third, we will experience the first full quarterly impact of our Ecco acquisition, and finally we will expect an increase in payroll taxes in the first quarter.

In total, we expect the preceding items will increase first-quarter expenses by approximately $2 million.

Relating to occupancy and equipment, we anticipate increased rent and depreciation and amortization expenses of approximately 300,000 associated with our move to new headquarters. And finally, marketing expenses will be increased by approximately 150,000 as our sales force exhibits at more industry-related conferences and sponsors client-related events.

We expect to maintain this overall level of expense run rate in 2005 given our current revenue projections. Increases in expenses above this run rate will be directly associated with increases in revenues above our projections.

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 fourth quarter of 2004, we generated negative cash flow of approximately 1.3 million, primarily due to the payment of our annual employee year-end cash bonuses. For the full year of 2004, we generated free cash flow of 23.1 million.

As of December 31st, 2004, our cash position was 209.7 million, down 13.4 million from 223.1 million at the end of September, 2004. This decrease was primarily driven by 13.6 million of cash used in the acquisition of Ecco, 2.1 million used in the repurchase of shares, and an additional 11 million used in investing activities. This decrease was offset by cash earnings of 13 million, which includes non-cash items of 6.8 million for depreciation and amortization, and 6.3 million for asset-impairment charges.

For the full year 2004, we used 31.9 million in cash to repurchase 2.9 million shares of our stock. As of today, our fully diluted weighted average shares of common stock outstanding are 54.1 million.

I'd now like to discuss certain non-operating items and insurance proceeds. In the first quarter of 2005, we expect to record litigation expenses in excess of 2 cents per diluted share related to the recently concluded jury trial regarding our 580 Patent and our defense against patent infringement. This expense will be considered a non-operating item in the presentation of our non-GAAP results.

We still expect to receive up to 19.5 million of September 11th-related replacement insurance once we exceed the 5.2 million fixed-asset spend remaining from the first payment of 20.5 million. These amounts will also be recorded as non-operating gains in our non-GAAP results as we move into and build out our new headquarters. Additionally, we received 3.1 million of proceeds in connection with the September 11th-related grant in the fourth quarter, which will some time in the future be recorded in our income statement. This amount will be reflected as a non-operating gain. I would now like to turn the call over to Kevin.

Thanks, Jay. Good morning, everyone. I'd like to talk about the opportunities that lie ahead for us this year. The team at eSpeed is fully focused on the improvements we are making for our business.

First, let's talk about the core business in U.S. Treasuries. eSpeed is a pioneer, an innovator and a leader in the electronic trading of U.S. Treasuries. And we look at this business both as a foundation for our Company and as an area for its growth.

Our foundation business includes (technical difficulty) customers, and current revenue from these customers. Our treasury business is a cash generator, which provides us with the flexibility to invest in growing our business. Preliminary indications show us that efforts we are making to improve our position in the U.S. Treasury business are on track.

The two most important changes we have made in our core U.S. Treasury business are one, we've moved toward more fixed, less variable pricing arrangements with our major accounts. And two, we have removed the Price Improvement future.

With respect to our client pricing arrangements, we told you we would complete the process of renegotiating these agreements by the end of the first quarter. And I'm pleased to say that we are nearing completion of this process. Although each arrangement is customized to best suit our clients' needs, we are satisfied that we are meeting our own goals with respect to the economics of each of these new agreements.

In January, we announced the strategic decision to remove Price Improvement from our technology platform. Although there are tools and functionalities associated with the Price Improvement technology that we still think are valuable. Price Improvement had a negative perception among some market participants, and therefore, we chose to remove it from our platform. Removal of Price Improvement has been very well-received by our customers. Although we expect a near-term reduction in revenue, we believe we're now better positioned for volume and revenue growth in the longer term.

So let's turn from foundation to growth. A key driver in our treasury business will be an expansion by our customers in the application of sophisticated technology to treasury-traded. More firms are adding blackbox trading to their trading mix. Experience in other asset classes has shown blackbox trading brings with it increased trading volumes from traditional customers across the marketplace as well. By 2008, we believe this structural change will double the trading volumes in U.S. Treasuries compared to 2004 levels. We are strategically positioning the technology and service of the eSpeed platform to capitalize on this market change and growth.

Another important growth area for eSpeed is foreign exchange. Our FX product is a real-time, all the time electronic trading system with liquidity, depth and narrow bid-as (ph) spreads today. We are in the process of adding new clients. We think this is a huge opportunity for us, with the FX spot market estimated to be 4 times larger than the U.S. Treasury market.

We offer a unique trading platform provides FX spot traders a better way to trade. ESpeed is the only truly neutral, anonymous, multiple-buyer, multiple-seller wholesale electronic market. We offer immediacy, and provide an order-driven marketplace where participants can place their own bids and offers.

But to create and grow our FX business, we've made and discussed earlier the decision to hire an experienced and dedicated sales team. We are making progress. For example, for the fourth quarter 2005, we reported fully electronic volume for new products of 32 percent over the third quarter, 2004. And we've seen activity in our market that we think confirms that we do in fact offer a better way to trade. For example, our average trade size -- in the fourth quarter was approximately $6 million per trade, which we believe is 3 to 4 times larger than the average trade size and the traditional wholesale markets in FX. We believe our average trade size is substantially larger than the industry average, because of our unique ability to provide traders anonymity.

We continue to invest in foreign exchange and we continue to expect the net difference in foreign exchange revenues and expenses will contribute an incremental profit of a penny per share per quarter by the beginning of the fourth quarter of 2005.

Now let's turn the call back over to Howard to review our outlook for the rest of the year.

Thanks, Kevin. For the first quarter of 2005, we expect to report revenues in excess of $37 million and operating earnings to be in the range of 3 cents to 4 cents per diluted share. This guidance is based on the Company's expectation that the average daily Federal Reserve U.S. Treasury volumes will be between 540 and $550 billion for the first quarter of 2005. For the full year of 2005, we expect to generate revenues in excess of $150 million. This guidance also includes the expectation that the average daily Federal Reserve U.S. Treasury volumes will be between 540 and 550 billion, and that would be the average for the full year.

We anticipate that throughout 2005, we will see the positive effects of the changes that we put in place last year. We are confident that we have an excellent team in place to deliver on our strategy. eSpeed's 400 employees are working as hard as ever to deliver results and build growth. We are focused on improving our client service. We are offering tailored pricing options, and we provide innovative technology and innovative solutions. What we are focused on now and what we need to do is execute.

With that, I would like to turn the call back over to the operator so we can answer your questions.

Thank you, sir. (OPERATOR INSTRUCTIONS). Rich Repetto.

Sandler O'Neill. I guess the first question is on the guidance. You know, we have 3 to 4 cents for the year and expenses are -- I thought I heard Jay say that that was going to be the run rate for the year. And we got one quarter of the revenue at 37 million here in the first quarter. So I guess other than the penny for new products, we could take this run rate out for the year. I guess is what -- the numbers, the way it looks to me. Is that correct?

Well, so just to be clear, we guided 3 to 4 cents for the first quarter on revenues in excess of $37 million. And then for the full year, revenues in excess of 150 million. I mean, what we see in front of us now, we guided, and obviously as you heard Kevin go through, we are driving towards a significant number of places and initiatives that should drive growth. But we are not going to guide them until we can deliver upon them. So while we are going to work hard on growth throughout the year, we are guiding what we see right now. And then as we build it and as we deliver on it, we will talk about it at that time.

Okay. So in the absence of that growth, but not building in that growth, then, the numbers that I'm talking about is by taking out the first-quarter guidance out for the full year, would be reasonable numbers. If you don't build in that excess growth.

You know, I haven't -- that's your role to do. We haven't -- basically we said we are comfortable with our expenses where they are. And as Jay say, we don't expect our expenses to grow beyond this level unless they come with associated revenues. And we are comfortable saying our revenues will exceed 150 million. So with that, I've got to place that in your court. But that's why we tried to give you enough tools to sort of make your own decisions. But certainly, we are going to work on growing this company, and we are going to be focused on our foreign exchange initiatives, our treasury initiatives, and a variety of innovations that we think will help us deliver growth. But you know, for us, it's execution now; we have to go out and do it.

Okay. And just a couple of other follow-ups, Howard. On the Price Improvement, you know, you said a near-term reduction in revenue. Could you explain -- I'm just trying to get my arms around -- I guess that would be from a lower commission rather than lower market share. Or is it a combination -- or how would you envision this happening?

Well, as we said, the Price Improvement feature increased our revenue capture per million. That, coupled with the repricing of our business, which we've talked about. Although the last couple of quarters, which Kevin mentioned, we were heading towards completion of it at the end of the first quarter. We expect to reduce our revenue capture per million. All other things being equal and the volumes that we are now, in the range of 15 to 20 percent lower. That produced the lower revenues which we just guided to, which would produce the earnings for the first quarter that we just discussed. So that's sort of how you get there.

And then from there, because we have custom and tailored pricing to a number of our clients, our average revenue per million on increased revenues and increased volume, that average will decline. And on decreased revenues and decreased volumes, that number will grow. So it goes contrary to the kind of ordinary thinking, but you're going to have to get your arms around that kind of thinking, which is, if you have a fixed component to your pricing and your volumes go up, your revenues will go up, but your average will go down. And since we are obviously driving towards higher revenues, and our expenses are -- our baseline expenses are fixed and obviously these new expenses are discretionary, meaning we've added the people that we want to add because we are pursuing growth in an aggressive fashion, that we will have huge economies as we grow.

Okay, okay. And the very last question has to do with stock repurchase and buy back, Howard. It dropped off materially in the fourth quarter; I'm just trying to see the reason for that. It went from 1.3 million down to 230,000 shares. And then what's the outlook here in the first quarter and this year?

And then finally the last part of it is, you know, you had a significant amount of cash -- at what level would you -- and I'll be direct but entertain even contemplating buying the stock back in?

Well, we don't and have never commented on the timing of when we buy our stock. I do note for you that we do have $87 million left of our Board authorization to share buybacks. And I think the management and the Board will choose to buy stock on the basis and the timing which it chooses. But we do have that authorization and I think that's the simplest way to say it.

Okay. I guess is there -- I guess the last part of the question on, you know, an analysis or evaluation of you know when does it become feasible, or contemplate buying the stock back in?

Can you say that again, Rich?

I guess the question -- we know you have a large cash position. And when would you start evaluating whether to buy the float back in?

Well, the Board has authorized a significant amount of buyback, $87 million or so is still authorized. So you know the Company clearly has shown where it stands, which is we think buying our stock is a good use of our cash. And the timing of that, you know, we're going to leave to not to discuss on this call. But the Company still has a stock buyback and does expect to be buying stock over the course of the year.

Colin Clark.

Hi, Colin Clark, Merrill Lynch. I just wanted to first touch on your market share, just looking at the monthly numbers, it looks like your market share did continue to decline month-over-month in the fourth quarter. With these changes, the Price Improvement and some of the price changes, are you seeing any evidence of a pickup in the -- so far in the first quarter? That's my first question.

Well, I think those were -- the comments that Kevin made were, while we made changes both to Price Improvement and in pricing our -- the pricing arrangements we have tailored for our clients, while we were putting those in place in the first quarter, as well as, as I said the Price Improvement removal early on in the first quarter, I think it's too early to call it a trend. But as Kevin said, we are feeling positive indications from the market, and so we feel positive. But again, we don't want to call a trend at five weeks of experience. So it's just too soon to tell. But obviously, Kevin's upbeat view was because he feels that things feel good.

Okay.

Just to reiterate what I said earlier, the moves have been well received by our customers.

Okay, thanks. And your guidance, you expect volumes to be up roughly 8 to 10 percent sequentially, but your revenues are going to be down roughly 6-ish based on your guidance, which implies a ballpark-ish kind of 20-ish percent decline in your average pricing from the removal of PI and the price changes in the first quarter. Is that a good way to think about it? And also, you know, will the full impact of these changes be reflected in the first quarter, fully reflected? Or could some of that still spill over into the second quarter? And then also just with regard to pricing, it looks like you had a bump-up in your average pricing per million in the fourth quarter. And I just wanted to get a feel for what was going on there.

With respect to the first quarter, we do, from what we see now, expect our average price to decline between 15 and 20 percent; and that's coupled with the removal of the Price Improvement feature, as well as the new pricing deal that we have done in the business. So the combination of those two have created that pricing.

In the fourth quarter, we still had our Price Improvement feature there. And as we've said, Price Improvement had fans and it had users; and those fans and users were using it in the fourth quarter. And as our volumes declined at the end of the fourth quarter, it showed an average increasing, but it also showed a revenue decrease. So it had that sort of fixed component coming into the mix.

And with respect to your last part of your question, we expect to complete or substantially complete the pricing arrangements. But some of those may well -- and some of them haven't been done; the full effects of them won't necessarily be seen in just this quarter and there will be some carry-forward through next quarter as well.

Okay. And I don't know if there's any way to help us quantify or think about your revenues, and how they may fluctuate under this new fixed-cost arrangement. You know, I assume there's some smoothing in a lower-volume environment and higher-volume environment. Can you give us any feel on how much revenue growth can you get from your core market as volumes rise with a fixed-rate pricing structure in place?

Well, while we have increased the fixed component of our pricing models, we have by no means eliminated it. We are substantially away from eliminating the variable component of our pricing. We have simply offered a tailored solution that basically allows clients to select and choose what they like. Some clients like to have a fixed price. And some clients like to only have variable and some like to a variety of combinations of the two. So we still have a substantial exposure to our volumes, substantial opportunity to take advantage of the growing volumes in the treasury market as a whole. But what we have done is we have basically made an attempt to strengthen our market position or shore up our market position, or grow our volumes by offering our clients who want to have a fixed component the ability to do so, so they can trade much more volume without an increase in their costs; so they can have a fixed-cost model. And since our -- you know, that works for us as well, we factored that into our overall pricing. But we still continue to have a substantial exposure to variable revenues from volumes. And we think the growth in the treasury business will serve us quite well in that marketplace.

Great. And just one last question, the Software Solutions, that bumped up in the fourth quarter. Is that a good run rate to think about going forward? And can you just touch on what the bump-up was attributed to? Thanks.

It's Jay Ryan. Software Solutions, from the related parties, you're looking at?

Yes.

That's the revenue component of our investment in our voice-assisted businesses; BGC, specifically, would be the most material component of that.

And as that business grows, could we expect that to grow with it? Or was there anything one-time in nature there?

No, we expect it to stay with us and then potentially to grow. But should be certainly staying with us.

Terry O'Connor (ph).

Cedar Creek Management. A couple of questions. Could you break down first quarter and '05 guidance into voice-assisted versus fully electronic?

We haven't done that in the past; I think we break it out on each quarter. You know, we break down the details on each quarter that we operate in. And we also break down the volumes on a monthly basis for you so that you can follow even the quarter past but on a monthly basis. But we do expect the voice component -- because BGC is growing its business -- we do expect the voice component to continue to grow. We have, as we said on this call and previously, we have the new pricing models in our fully electronic business, which should create over time the increase in volume growth. And that will come with both the modification of the pricing model on the short-term. But then because we have the variable component of our revenue associated with volumes, that should drive increased volumes and increased revenues going forward in the treasury business. But we've not broken them out as we guided prospectively between the two. But we do of course break them out for you on a quarter-by-quarter basis so you can see how it's going.

Thank you. Can you give us a rough idea of what you expect your level of investment through the (inaudible) new initiatives in '05, so we can get an idea what this government bond trading business does on a stand-alone basis?

Well, I guess the best way to see that is, through the years '02 and '03, we were delivering a building our government bond business and the fully electronic business. And those expense levels were the levels required to operate that business. And so, the expense growth since then has been really to focus on new initiatives, to focus on better management, more opportunity to extend and scale out into other markets, and to really improve the (inaudible) structure of the Company. But those expenses are discretionary. So if you want to go back to sort of the '02, '03 levels of expenses, you can see what it cost to operate the business on basically the current revenue levels, and you would see that we've made a substantial investment in discretionary hires in order to invest in sales growth, technology-opportunity growth, and new market initiatives. So we are investing aggressively in the Company because we think the opportunities for growth are dramatic for us.

Okay, thank you. Could you give us a general impression of the business model of voice-assisted versus electronic in terms of operating margin potential in each of those businesses?

Sure. In the fully electronic business, it's primarily a fixed cost model, meaning that we build the network and you connect customers to the network, and then your incremental margins are dramatic. And we have in the past, as we grow, guided incremental margins in our fully electronic business of 75 percent. So basically every new dollar of revenue comes with a very strong component for the bottom line.

With respect to the voice-assisted business, we again, we had very strong scale and margins, because we have built already the component parts that will assist the (technical difficulty) in its business, so as they grow, we can scale out and leverage those pieces.

I don't know that the margins are necessarily exactly the same. But they certainly are in excess of 50 percent margins. So you know, we feel both of those businesses are extraordinarily exciting for us. Because remember, in the voice-assisted world, the brokers are the sales force and that's paid by BGC. So we really don't have those kind of sales expenses, and we do have the leverage of our technology. So both of those businesses come with extraordinary scale and margins associated with them. And that's what drives our desire to invest in them. Because we know as we grow in those businesses, we get substantial returns.

Okay. You have a big opportunity in this FX; what else can you tell us about client sign-ups? Is there anything to report on that side, things you're allowed to talk about, who's signed up for it, who's using it; and how you're doing against EDS (ph) and some of your competitors?

Well, EDS is a model of main give up. Meaning, it doesn't provide anonymity. So it is a name-introducing business. And we have a different business model, which is a multiple-buyer/multiple-seller, real-time anonymous system, sort of the way you would think about stocks and bonds trade, foreign exchange does not trade that way. It's just an introducing system. So we have a different kind of model. We are signing up customers and aggressively pursuing signing up customers to come on our platform. But, you know, we are still in the building phase. But you've seen from our new products, we had sequential 32 percent growth sequentially in the new product area. Granted, that -- you know, it comes from the law of small numbers, which is it's easy to grow big percentages when you're growing off of small numbers. But you know, we are focused on that opportunity. It is the largest capital market in the world. And we think we have a unique opportunity. Plus the marginal cost for us to building this global network is comparatively very small to us, because we have that global network already installed for the government bond business. So for us to scale and extend, it really comes with comparatively very low marginal cost, other than as we said we're hiring salespeople to help people understand the products that we have.

Could you just update us through January, February, how you're doing on the FX side in terms of volumes or client adds or whatever metrics you'd like us to focus on?

I think we do that -- that's why we try to do that on a quarterly basis. We don't want to think that any small couple-week period is you know a fundamental or a deciding factor. But, you know, we continue to add salespeople and we continue to invest in that. And I think that's the best indication of what management thinks of our opportunities -- that we continue to invest in the business, continue to hire in the business and continue to view it as a tremendous opportunity for us. And certainly nothing that we've seen lately has dissuaded us from that.

Alan Schein (ph).

With Jay Goldman. I wanted to just flush out the question that was just asked of you by the previous person. As I see it, about $10 million of incremental expenses is ramping from Q4 of '03 through the first-quarter guidance. (multiple speakers)

You mean annualized.

What's that -- no, that's per quarter. $10 million per quarter of operating expenses. That's what the ramp is from Q4 '03 through the first-quarter guidance -- you know, 24 to 34 million.

'03 to '05.

You've got it. Is -- the way you're characterizing it -- is all of that expense, $10 million a quarter, related to new products that are not yet generating meaningful revenue?

It comes in a variety -- no, not specifically. I mean obviously, it comes from additions of management -- you know, a broad spectrum of hires and growth, the acquisition of Ecco, for example. I mean there's --

How much of that $10 million is related to new products, and those initiatives that are not yet generating meaningful revenue?

I don't think we've ever looked at it in that fashion. However, I have said that the U.S. Treasury system that we operated, that brings in our revenue, was able to operate, obviously, in the first quarter -- the fourth quarter of '03 and the first quarter of 03, so with respect to operating our U.S. Treasury business, it could operate without the additional ads. But we've added substantially in our technology group to strengthen the technology of the U.S. Treasury market. So you could say, "Well, couldn't you not have those strength of technology people?" And the answers I guess are always yes and no, which is, we felt that important to have those stronger technology people and add those stronger technology people, to enable us to grow our business, to add new products, to extend our products across to the foreign exchange -- you know, to really leverage the opportunity in front of us.

But a substantial percentage of our expenses are focused on R&D, and are focused on new products and product extensions. So those to that extent the Company could, and it has in the past -- it could earn more money if (multiple speakers) pursue growth.

I'm trying to separate out how much of the $10 million ramp from '03 through the first quarter of '05 is the result of a necessary expense ramp to sustain your business, versus expense ramp to provide for incremental growth that's not yet visible on the revenue line.

I don't think we break it out in that way. But we have said that a substantial amount of our additional expenses have been toward strengthened management, strengthened -- a much bigger sales force, and more and better technology people.

And on top of that, the acquisition of Ecco which would fall into that category, because that is initially a futures-related product that is not significant in terms of revenues.

Have you given some perspective on the revenue expectations from Ecco, or what that's going to add?

No, we haven't broken it out. It's just -- it's going to be part of our product offering, and we are working on its integration to bring it into our product offering. But it's very small and as we have said, it initially was dilutive, and then we expect that over the course of '05 for it to become accretive.

Okay. Just one more follow-up. I guess the first analyst had asked you a question about your buyback -- and I'm trying to understand the rationale, recognizing that the Company's and management's prerogative to buy stock wherever and whenever they choose. But what's the rationale for buying back stock higher and not buying it back lower?

I don't -- I can't answer that question because of the way you asked it! I think the answer is that the management and aboard have authorized the stock buyback and we will buyback from time to time. Sometimes we will end up buying it higher than it is and sometimes we will buy lower than it is, simply because we buy in the marketplace (multiple speakers) that's not really my expertise. I think we haven't authorized stock buyback and we are comfortable saying that we do plan to buy back stock over the course of the (multiple speakers) (multiple speakers)

Higher prices is greater, than in the most recent quarter, when you still had the authorization to place it and you hardly used it, and I'm trying to understand what the rationale is for buying back to stock significantly higher and then choosing not to buy it back when the stock is lower (inaudible).

I don't think I can really add anything to what I said last time.

Was the Company excluded from buying back stock over the course of the quarter?

Say that again?

Was the Company excluded -- were you not allowed to buy back stock does quarter? Because -- you know, you were involved in things that precluded you from buying back stock?

I think I'm just going to stay with what I've said already, and I don't think I can go beyond what I said with respect to stock buybacks.

Jason Street.

Yes, good morning. I'm from UBS. A simple question, really -- are your prices now lower than BrokerTec?

Well, I think we have a pricing model that we are very comfortable with, and it's not really a simple answer, because we have -- once a client -- for example, let's say a client signs a fixed-price deal with us, then their marginal costs of trading with us is zero, because they have a fixed component for example, and they would have no marginal costs of trading.

And the other example would be, if someone has a variable component, it would depend on what pricing model and how much volume they do with the other guy. So I think it depends on a variety of situations, but I think the best way we would say is, we're well-positioned, we think, from a price perspective to compete out there, and that's sort of how we feel.

Do you think that would you expect BrokerTec to respond and change that and change their pricing levels and models to respond to your initiative?

Look, it's a dynamic world. And you know, there's a duopoly -- there's only two of us, and we are -- as I said, we've been out with a new set of customized initiatives to -- that we think will improve our pricing and improve our volumes. And to the extend you want to ask about their pricing, you should give them a call!

I will do that. Let me try one other question, which is, you said that you expect treasury volumes to double over the next four years. What would you guess would be the increase in revenues between the two of you, over that period? Over that doubling of volume? I mean, would they grow 20 percent, 50 percent, 80 percent?

Well, I think because of the fixed component, it would be less than 100 percent, and -- but I haven't really worked it out in that fashion. Probably more than 20 and less than 100. But, you know, somewhere in there. It would depend on volumes, and revenue, and mix of business, and how it works and how many new clients come on, for example versus how much volume is driven by the current client base. It will depend in large part to the mix. So I don't think it's possible for anyone to actually come up with an accurate description of what it is. Other than to say that because of the fixed component, it wouldn't be a doubling of the market would not double the revenues. But it also wouldn't only increase to 20 percent. I think it's somewhere in between those two. You know, and that would all depend on the mix and how things changed over time.

I think 20 to 100 is quite a large spread. I don't think you're going to do much business on that!

I think you're right! I'm just -- the problem is, I can't really put a finer pen on it, because then you'd be acting as if I had some level of precision to it, which I don't. Because for example, if the volumes came from only the same clients, the level of growth would be different from, for example, if a substantial new of number of clients added in. So I think it just comes from a wide variety of things.

Raj Sharma.

Merriman Curhan Ford. Good morning. Howard, I just want to understand -- the guidance for '05, does it build any growth from market share gains, or computer-to-computer trading? Or is there any foreign X trading platform revenue number in there?

I think what we've done is we've guided the first quarter with some level of detail. With respect to the full year, we said that we see our revenues in excess of $150 million. So from where we sit today, we do not see our revenues declining any further on average for the course of the year. And that's what we are willing to guide for. We are going to work throughout the course of this year on delivering growth in the U.S. government securities business, and delivering -- and that could be from volume growth, new customer growth, from a variety of sources -- new product growth, as well as from foreign exchange, and as well as from futures. So you know, that's what we're going to work hard on. But, you know, as we've said, it's for us to deliver on that before we start adding it to our guidance.

Raj Sharma Okay. So you're saying the first-quarter number of 37 million -- you know, you can get the 150 pretty much by annualizing the 37. So are you saying that if there was any market share gain, you will at least do 150 million and you could do more if you executed and delivered on your growth objectives?

Right. In looking at our business as a whole, if we were able for example to have market-share gain without doing so by cutting our price, then the answer would be yes. So I think from where we are now, we have lots of opportunity. But our objective is to deliver on that opportunity. We have a tremendous set of opportunities for growth, but we need to execute them, and that's what we're going to work on. So the opportunities are there but we need to deliver on them from where we are today.

So I just want to understand, Howard, the revenue number seems to be a -- we'll do at least a minimum of 150. But the expense line seems to be loaded, or seems to have increased sequentially. So are you including all the expenses that you foresee right now and for the rest of the year? Because you're saying that the same level of expenses here (ph)?

I think the point that we were trying to make was that we are comfortable with the level of expenses that Jay described. And that to the extent those expenses do grow, they will come with a commensurate growth in revenues. So the object for us of saying that our expenses are not going to grow while our revenue stays at 150 million. But if our revenues grow beyond 150 million, we are not going to be constrained to just hold our expenses there if we feel those opportunities are available to us.

Charlotte Chamberlain.

Good morning, yes. Charlotte Chamberlain at Jefferies. Following up on Rich Repetto's question, Howard, is there any price of your stock at which you would actually privatize eSpeed?

I don't think I can comment on that one way or the other. I just can't.

Okay. Then getting onto more mundane issues, in respect to Colin's question you said that these -- and I never get these letters here -- BGCB (ph) -- is the primary reason that you got the bump-up in software. But could you tell us what proportion of the 32 percent increase in new products that you have for the quarter -- how much BGCB contributed to that? In other words, was it half, was a tenth? How much did they contribute to that?

Well, I will help you with the initials, which is -- the initials were named after the founder of Cantor Fitzgerald, named Bernie Cantor. So you know it always starts with a B and ends with a C, and you can just continue (ph) the middle. So it's BGC. And with respect to your second question, which is BGC did not have anything -- any material impact in the fully electronic growth of our new product initiative.

Okay, but there are voice. And so the -- I guess my question would be, why is it that the contribution of BGC -- and thank you for that -- is only in Software Solutions and not part of your voice brokerage line?

It would be in both. So it would be --

Oh, it is in both?

It would be in both. So the voice-assisted revenue line is clearly the revenue we get as our percentage of the voice business that we do. So that's clear; we get a percentage of that, and that's primarily in Europe now and expanding in Asia. But we also provide them other software work, which is geared to the Software Solutions line as well.

Okay. You've been asked this question a million times -- the overall treasury trading volumes were up, but your share volume was down absolutely. On the other hand, your revenue capture or your average revenue per bond, pretty much stayed flat. Was that a conscious decision on your part, or was that basically what the customers wanted?

Well, if you look forward -- and I think looking forward is the best way to think about this, which is, if some of our customers have a fixed component and some of our customers have a fixed and a variable component, and as our volumes grow going forward, our revenues will grow, but our average revenue per million will decline as opposed to if our volumes were to decline, our average revenue capture per million would grow, but our revenues would decline. So I think the point is that if our volumes declined, our average revenue capture per million will grow, but that's not a good thing. We want our volumes to grow and our revenues to grow. And if that means our average revenue per million declines, that's called volume discounts and that's a good thing. I mean, that's why we have those volume discounts; that's why we have those pricing arrangements; and we think that's a good thing. It's really revenue growth is the key to these pricing models, and that's why we've put them in place. And we expect to significantly finish them at the end of the first quarter so that we will have those in place to try to drive more volumes across our platform.

Okay. So the absolute volume decline that we saw, even though the market was up, was a customer choice rather than something that you were engineering through pricing or whatever?

Well, I think we clearly changed our pricing by taking out the Price Improvement feature while --

Just a minute (ph), we're talking about the December quarter. Price Improvement was still there.

Correct. So the repricing of our business would have the result of reducing our average price but hopefully increasing our revenue,. And I think that's very much why we chose to do that. And the results will be what they are. But that certainly was our thinking in making that move.

Okay. One last question. Have you abandoned all hope for electronic trading of off-the-runs and warrant (ph) issues? I haven't heard you talk about that probably in four quarters. And that would seem to be the obvious add-on product, and in my view anyway, probably why ICAP is continually gaining market share on you.

No, we are very much still consider off-the-runs extension part of our business. But we are just not talking on these kinds of calls for things that we don't have traction and something to express in our guidance. But we continue to work on it, and we feel we will be successful in that space. But that's just one of the initiatives. But we, on these calls, we just can't cover all of them. But that is certainly one of our initiatives that we are continuing to work on.

Okay well just -- originally, they were supposed to get traction probably about a year ago. Is there some particular impediment that has prevented them from getting traction?

I don't know if there's a particular impediment, but for us, we've added to our sales force; we are modifying our systems. We are continuing to make moves that we think will create the right set of incentives and the right business model for us to become successful in the off-the-run business. BGC's growth in that space may assist as well by adding voice brokers to that space. A variety of factors will hopefully lead us to be successful in that space. But it clearly is taking us time, more time than we had certainly anticipated a year ago. But we continue to work on it and we are not stopping. We just can't highlight all of the things we're working on at the same time. It would just make the calls too long.

Okay. But BGC has had meaningful contributions in off-the-runs and warrant issues?

We do expect them to, yes.

Oh, they haven't yet but you do expect them?

Well, they are beginning to. And as they grow, we think it will get better and better.

Excellent. Thanks so much!

Richard Herr.

KBW. Good morning, how are you? A couple of quick questions for you. One, looking at the guidance for this year, it looks like you are making if my math is correct, something about 16 cents in earnings this year. I was curious -- obviously, you are reinvesting tremendously back in your business -- do you think these are trough earnings? Could we see something better for 2006? And secondly, if you could comment at all, to the extent that you can, on whether you're going to appeal the BrokerTec ruling and the patent invalidation, given it was thrown out on technical grounds? Thank you very much.

On the latter question, yes! On the former question, I don't think we can sit here today and forecast 2006. But your thinking, that we are aggressively investing in our business to find -- to make sure that we are focused on our growth and we drive business ahead in the places that we have the best opportunities, is spot-on, which is why we are doing it. We feel well-positioned; we feel that we have a great platform beneath us, and we need to go after those opportunities and not try to shrink back. And so we are aggressively pursuing those opportunities, and we think they will build us growth. But again, I'm not going to guide growth and unless we see it. And so as we sit here right now, you know, we are comfortable saying we think our revenues will exceed 150 million. But as and when we can deliver on this growth we will be updating you and telling you what we see at that time. But I just can't -- as I sit here in the first quarter of 2005, I really can't speak to 2006, because we've got to deliver on 2005 first.

Okay, that's helpful. And just, what do you think of the timing in terms of the appeal process? For the BrokerTec?

It's likely to be a 2006 event. So there, you got something in 2006!

(OPERATOR INSTRUCTIONS). Raj Sharma.

Yes. So Howard, I just wanted to clarify -- on the revenue for '05, you were saying a minimum of 150 but the expense structure says operating expenses of 128. So -- you can't put a minimum EPS or an earnings number for '05? Because you were able to say that you could do at least 150 million in revenues. Or should we just do the math and come up with -- (multiple speakers) net income.

Hi, Raj. It's Jay. We guided 34, 34.5 for the first quarter. So you know even at the high range of that, we would be at 138 for the year. I thought you said 128. (multiple speakers). 138 would be -- just be extrapolated out versus the 150 that was referenced on the revenue line.

Okay, thank you.

At this time, I will now turn the conference back over to Mr. Howard Lutnick. Sir, --

Well, thank you all for joining me and our team this quarter. You know, we are focused on growth and we are going to focus on executing on our business plan, and we look forward to talking to you again in the future. So thanks for joining us this morning and have a good day today. Bye bye.