Bgc Group Inc (BGC) 2006 Q1 法說會逐字稿

Welcome to the eSpeed first quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] I would like to turn the conference call over now to, Jason McGruder, Vice President of Investor Relations, sir, you may begin.

Good morning. This is Jason McGruder, Vice President of Investor Relations for eSpeed. I would like to remind you all that the information provided on this conference call contains forward-looking statements within the meaning of Section 27A, of the Securities Act of 1993, as amended, and Section 21E of the Securities and Exchange act of 1934, as amended. Such statements are based on current expectations that involve risks and uncertainties. Any statements contained herein, that are not statements of historical fact, may be deemed to be forward-looking statements. Our actual results and a timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, a relationship with Cantor Fitzgerald and its affiliates, the costs and expenses of developing, maintaining, and protecting our intellectual property, including judgments or settlements paid or received, and the related costs, the possibility of future losses and negative cash flow from operations, the effect of market conditions, including trading volume and volatility, our pricing strategy and that of our competitors, our ability to develop new products and services, to enter new markets, to secure and maintain market position, to enter into marketing and strategic alliances, to hire new personnel, to expand the use of our electronic trading system, to induce clients to use our marketplaces and services, and to effectively manage any growth we achieve, [inaudible] the effects of the attacks on the World Trade Center, on the September 11, 2001, and other factors that are discussed in "Risk Factors" in eSpeed's annual report on Form 10-K filed with the Securities and Exchange Commission.

We believe that all forward-looking statements are based upon the reasonable assumptions when made. However, we caution that it is impossible to predict actual results or outcomes or the effects of risks, uncertainties or other factors on anticipated results or outcomes, and that accordingly, you should not place undo reliance on these statements. Forward-looking statements speak only as of the date when made, and we undertake no obligation to update these statements in light of subsequent events or developments. Actual results and outcomes may differ materially from anticipated results or outcomes discussed in forward-looking statements. I would like to turn the call over to our host, Howard Lutnick, Chairman and CEO of eSpeed, Inc.

Good morning, everyone, and I apologize in advance, I have a bit of laryngitis. Thank you all for joining us on the first quarter 2006 earnings call. Joining me today are eSpeed's President, Kevin Foley, our Chief Operating Officer, Paul Saltzman, and our CFO, Jay Ryan. Jay will review our first quarter financial results, then Paul will discuss our fully electronic business, and Kevin will give an overview of our voice-assisted business and new products. I will then complete our comments by obtaining our outlook for 2006, and then we'll be happy to answer your questions. With that, I'll turn it over to Jay.

Thanks, Howard. For the first quarter, we reported GAAP net income of $0.04 per diluted share, and non-GAAP net operating income of $0.03 per diluted share. GAAP net income exceeded operating net income by $0.01 per share, due to gains of approximately, $2.2 million partially offset by expenses of approximately, $1.5 million. Specifically, we reported a gain of $2.1 million, due to September 11 related replacement insurance proceeds, and approximately $100,000 from a tax settlement. GAAP expenses included $700,000 in accelerated amortization of capitalized software, $400,000 in patent-related litigation costs, and $400,000 related to the relocation of our London office. All these differences were net of tax. We reported GAAP revenues for the first quarter of, $42.6 million and non-GAAP operating revenue of $38.7 million. The difference between GAAP and non-GAAP operating revenues was due to a $3.5 million gain from insurance proceeds and $400,000 in interest income related to the resolution of a tax-related matter in the U.K.

First quarter 2006 operating expenses came in at, $36.3 million, which was better than our forecast of approximately $37 million. I will now discuss these results in more detail. First, we saw a $2 million increase in compensation of benefit costs compared to the fourth quarter. As discussed on our last call, we had a one-time reduction in compensation expense in the fourth quarter, as we finalized year-end compensation arrangements. The first quarter compensation expense is more in line with the first three quarters of 2005. Offsetting this increase were cost savings and operating efficiencies in the communications and client networks. We reduced this expense sequentially by about $600,000, and we expect it to remain around this level for the next several quarters. Looking ahead, we expect second quarter 2006 operating expenses to remain consistent with the first quarter, even as we continue to invest in new businesses. I'd like to note that in the second quarter, we expect to see a non-cash, non-operating charge of approximately $2 million net of tax, related to the recently completed relocation of our London office to Bank Street in Canary Wharf.

Turning to cash, we generated cash flow from operations of $5.1 million during the first quarter of 2006. We also report free-cash flow, which we define as operating cash flow, less net cash use and investing activities, including fixed assets, software development, intellectual property, and investments. The first quarter of 2006 we had free-cash flow of the of negative $1.5 million, primarily due to changes in related party receivables and payables. Excluding related party receivables and payables, free-cash flow for the first quarter of 2006 was a positive $4.9 million. As of March 31, 2006, eSpeed's cash and cash equivalence were approximately, $177.2 million. Our fully diluted weighted average shares of common stock outstanding for the first quarter was 51.1 million shares. Additionally, eSpeed's head count was 376 employees, as of quarter end, down by four employees from the fourth quarter, and 26 from the year ago period. I would like to turn the call over to Paul.

Thank you, Jay. I'm pleased to provide an update on our fully electronic business, including our core U.S. Treasury business. Fully electronic volume on the eSpeed system,, excluding new products was $9 trillion for the first quarter of 2006, up 19.4% sequentially from the fourth quarter, and up 40.3% from the first quarter of 2005. In comparison, over all U.S. Treasury volumes as reported by the federal reserve, we're up 6.1% quarter-over-quarter and up less than 1% year-over-year. Average daily Fed Treasury volume was, $561 billion for the first quarter of 2006. There were 62 trading days in the first quarter of 2006, compared to 61 in the fourth quarter, and first quarters of 2005. We have maintained our competitive market position sequentially, and have clearly improved our market position year-over-year. Moreover, we are pleased with the sequential and year-over-year growth of our volumes as a percent of volumes reported by the Fed. We continue to enjoy a strong, competitive position among technologically sophisticated market participants, some of whom do not report secondary market trading activity to the Fed. ESpeed's proprietary technology, which provides us a distinct competitive advantage, coupled with our increasingly customized approach to trading tools, are showing results.

We continue to be optimistic about our market position for the remainder of 2006. As we have discussed before, most of our largest clients have migrated to our fixed price model and appreciate the decrease in marginal trading costs, such a model provides. We continue to expect Treasury volumes to double from 2005 levels by the end of 2008. And most volume trends support this projection. This will lead to new clients embracing our fixed price model, and more fixed price customers means additional revenue, and continued robust volume growth for eSpeed. These arrangements make our revenue and income stream less volatile and more predictable. With the our competitive position strengthened and volumes increasing, we are well-positioned for U.S. Treasury trading for the coming years.

Finally, in the first quarter of 2006, we extended our offering of fully electronic trading products to include the U.S. Treasury repo market. While this BGC branded hybrid market is still in its fancy, the introduction of this product markets the beginning of what we expect to be a pipeline flow of hybrid products created with BGC's expanding voice brokerage business. Now I'd like to turn the call over to Kevin.

Thank you, Paul. I would like to discuss our overall performance in hybrid voice-assisted businesses and new products. Voice-assisted volume for the first quarter of 2006 was $8.1 trillion, up 6.4% from the fourth quarter, and up 71.2% from the first quarter of 2005. Combined, voice-assisted and screen-assisted revenues were $8.7 million in the first quarter of 2006, versus $7 million in the fourth quarter and $6.9 million in the first quarter of 2005, representing a 26% increase year-over-year. The increases in volume and revenue for our voice-related business reflects BGC's continued strong growth in products with the potential to feed our hybrid pipeline. This hybrid model gives eSpeed a significant long-term opportunity, both in terms of transaction volume, and in terms of increased revenues across our product offerings. As marketplaces mature from telephone-based trading to screen-assisted trading, then to voice-assisted electronic trading, and then eventually with the development of benchmarks to fully electronic trading. Repo is only the first of what we expect to be several asset classes to move toward a hybrid model over the next few years.

Fully electronic, new product volume on the eSpeed system was $524 billion in the first quarter of 2006, compared to $540 billion in the fourth quarter of 2005, and $436 billion in the year ago quarter. We're seeing improvements from these levels so far in the current quarter, and we're optimistic that we are on the right track in our new product strategy. For example, in our FX business, we're seeing increased liquidity, a more diversified base of participants, and tighter bid offer spreads. We continue to believe that the FX market offers great opportunity, and we remain confident that we can achieve meaningful scale over the next few quarters. We also expect improvement in our future's business as our strategy begins to take hold in that sector. Volume for the eSpeed equities direct access product was 203 million shares in the first quarter 2006, compared with 147 million shares in the fourth quarter, and 168 million shares in the first quarter of 2005. Now I'd like to turn the call back to Howard who will update our outlook for 2006.

Thanks, Kevin. The second quarter of 2006, we expect to generate non-GAAP operating revenues in excess of $38 million, and we expect our non-GAAP net operating income to be in the range of $0.02 to $0.03 per diluted share. We expect the average daily Federal Reserve U.S. Treasury volume to be between 550 and 565 billion for the quarter. For the full year, 2006, we expect to generate non-GAAP operating revenues in excess of $152 million, and we now expect to reduce our operating expenses to be between $144 and $147 million, which is an improvement over the 147 to 150 million we guided last quarter. We are raising our full-year non-GAAP net operating income guidance to $0.07 to $0.10 per diluted share, which is up from our previous guidance of $0.02 to $0.06 per share. Before we take questions, as you may know, this is Jay's last earnings call with us, and we appreciate the contributions he has made over the last two years and we wish him success. We are currently searching for a new CFO, and we will announce that successor when the search process is completed. Operator, we are now available to answer questions.

Thank you. [OPERATOR INSTRUCTIONS] One moment for your first question. Our first question comes from, Rich Repetto from Sandler O'Neil. Your line is open. Mr. Repetto, your line is open.

Hi, Howard. I don't want to ask too many questions, it sounds like your voice is under the weather here, but anyway, the first thing was, on these new customers that Paul talks about, and the outlook of volumes doubling, and the fixed pricing, is there anyway you can give us a clue on when a new customer comes in, how much revenue that they do bring? Any sort of of a metric that gives us an idea of how much it would make per new customer, ballpark?

Rich, this is Paul. I think as we've said in the past, we don't embrace a standard pricing model. We view each customer as having a unique set of interests and goals, and we customize our pricing. Some customers prefer to protect their downside, some have bullish perspectives on volume, some are more passive,in that they provide liquidity to our systems, some are more active, in that they take liquidity from the system. Is it's extraordinarily difficult to predict with any degree of certainty exactly what the contribution will be of any particular customer. But I think in the aggregate, it's certainly well into the seven figures. And I think from our perspective, the key is to migrate these variable rate customers that come in, and start to enjoy and appreciate the benefits of the fixed price model as they start to get comfortable with the eSpeed trading system, the trading tools that we have, and the comfort level with the volumes.

Okay. Okay, next question was on the reduced -- or the reduction in the operating expenses, I may have missed this, but I don't see it in the release. Just sort of the driver behind the reduction in the expense guidance?

Yes, hi, it's Jay. You'll see when we updated our first quarter results, there was one item in particular that provided some cost savings in terms of communications and client networks. That savings we had in the quarter was about $600,000. We think that will continue going forward. That's the single biggest item. There were some other more minor savings on the line items. We just, in general continued to focus on expense initiatives. And want to try to hold that line as much as possible.

The last question, and, again, I don't want to force Howard to speak if anybody else can speak on it, but with the FX and the new products, maybe Kevin is the best guy, but with the new products, FX, you've heard, I'm sure you've heard about the [C&E and Roiters] new platform. They're boasting about the clearing being a key advantage of their new combined offering. When it launches in '07 or so, but I just trying to see, I thought I understood that your platform had a clearing mechanism as well. And then secondly, just color that you, your comments on just the launch of this platform versus yours.

Yes, Rich, let me draw one distinction about what we're doing in foreign exchange. We're using the CLS mechanism to have settlement with an interpositioning broker, which means that you're not required to have an XCM, like you would in a future's model, or a prime broker and so forth. Your banks would come in directly and for the first time trade in a central marketplace with full anonymity because CLS really just takes out the kind of credit risk that exists in direct bank to bank settlement mechanism. But I would say that we're bullish on the category, and it's not surprising just that other people would view it as an opportunity as well. But we think we have the right model, and as I said, we're beginning to see some positives in the area of liquidity formation, [inaudible]spreads, and the diversification of the base of participants that encourages us going forward.

Okay. And just to clarify, that's CLS, now is that an organization that basically clears and does the credit support for the people that trade, but I'm not -- I'm not aware, I don't know much about CLS, per se, I guess.

Well, suffice it to say, it provides for bank settlement with no margin. What CLS does is guarantee the settlement. And it's a bank thing, encouraged by the central banks in order to take out systemic settlement risks that existed in the foreign exchange area and we have taken advantage of it to provide for an anonymous multiple seller marketplace.

Okay. We can follow-up more post call. Thank you.

Thank you, our next question comes from, Richard Herr from KBW. Your line is open.

Hi, good morning. Just a question on the growth and the voice-assisted and the screen-based obviously, that's a number that's a little harder for us to track intra-quarter. On your growth, 25, 26%. Are the trends such that at BGC we could expect that growth rate to maintain throughout the rest of this year and next year?

I think BGC is, as you well know, has grown substantially through acquisition and through the hiring of brokers to staff, new desks, and new products. The key thing for us is the opportunity that that provides so that line is necessarily going to grow is BGC grows, but we also look, most significantly, to your products moving through the pipeline from products where we earn 2.5% of revenue, to products where we are in 7% of revenue, and ultimately the products where there are benchmarks where we earn the lion's share of the gross revenue. That's the key driver for us. I would say BGC is in a strong position. It's growing, it's not something that we're in a position to quantify with any kind of precision.

Okay. That's helpful. And on the expenses, was it the accelerated amortization that's bringing down some of the communications expenses going forward?

No, no. It was just a thorough review of communications and client network expenses really unrelated to the acceleration.

Okay, okay. Just on acceleration, what, if you could share with us, what software in particular did you change the useful life of? Related to any of your new products, or is it an older technology?

We brought on some new software, replacing older software products that provide some cost savings.

This is Paul. I just want to make sure that everyone appreciates that when we're talking about our customer and client networks that we're talking about operating efficiencies in terms of the cost savings, as Jay indicated, we've undergone thorough review of our technologies, so this isn't in any way a diminishing investment in our service to our customer, but rather a way of just operating our network and operating our interfacing with customers in a more efficient manner.

Okay, okay. That's all I had. Thank you very much.

Thank you. The next question comes from, [Alon Shane form Jay Goldman] Your line is open.

Hi. I just wanted to get a perspective, in the past you've laid out some benchmarks for success in the new business initiatives, and I wanted to see if you had any updated expectations on what those benchmarks and timing were with respect to those new businesses?

No, we're not updating anything with respect to the timing. We have, as I said, we have positive indications thus far in this quarter, that's not a tremendous amount of data, but significant of enough for us to feel good about it. And we look forward to the increased formation and liquidity in our new products. One of the key indicators is the [bid operate]spreads, and narrowing of the [bid operate] spreads is something that's necessarily has to happen to lead to volume increases further on down the line.

Sir, his line disconnected. Sir, if you're still on line, please press star one and I can replace your line in conference. Please press star one. Let me see -- there he is, just one moment. [Alon], your line is back open.

Sorry about that. So just the follow up was, in the past you talked about $0.01 a share being an incremental $0.01 a share as being the success benchmark. Is that something that you guys still focus on with this new business.

It's obviously something we're focused on, it's just not something we're putting a time frame on. We're focusing on the kind of benchmarks, as we manage business and measure our progress, we're focusing on the kind of benchmark that is lead to success in the future. Such as,[bid as] spreads. We've seen from the first quarter to the second quarter [bid as] spreads narrowing in key time segments of FX markets, by as much as 1 or 2 basis points. We have spreads that are inside of two [pips], as they say in foreign exchange, for significant times during the day in bench mark euro.

Okay. Final question. Have you set aside the buyback, what's the status of the stock buyback?

This is Howard, we still have over 50 million available for the stock buyback, and we don't really comment about timing. That's available to the board and we make that decision as a company from time to time. But, that authorization is still outstanding, and there is no setting aside of it. It's just still outstanding. We just -- we didn't purchase any stock last quarter.

I noticed that you didn't purchase any stock, that's why I was curious if there was a specific change of how you viewed the excess capital on the balance sheet?

We know that the cash on our balance sheet is opportunistic for acquisition. You may remember we looked at acquiring MTS. Certainly, that cash puts us in a strong position to look at strategic acquisitions. We also have, of course, the opportunity to buyback our stock and make other investments. So, it is a key topic we address here and the best uses to try to produce value for our shareholders and the Company. That continues to be a topic. We have bought stock back over a long period of time and that remains one of the opportunities that we have authorized to us to go forward. But, I don't really comment on that.

Fair enough. Were there open windows to buy back stock and you did not take advantage of those?

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

Okay. Thank you.

I am showing no further questions. To remind the participants if they do have a question to please press star followed by one on their touch-tone phone. That is star one on their touch-tone phone. Sir --

Thank you, operator.

I do have a question from, Brad Evans with Heartland, sir, your line is open.

Good morning, just as an adjunct to that prior question, when you look at the valuation that was placed upon MTS and their recent transactions with Hotspot FX, as well as, the recent deal with ICAP and EBS, how do those valuations reflect your view of the current valuation of eSpeed?

Well, I think EBS had technology that needs replacing. It had excellent market position, but again, did not bring with it proprietary technology that was valuable for the future. The same was true for MTS. They had outsourced their technology and were really market position companies. One of the key values of eSpeed is its technology base. It's proprietary technology that we own, that we can extend to other market position companies and really get the economic value of that kind of acquisition. That's nothing -- that's not a usual event in this market. As a matter of fact, if you look in all the exchanges, you'll see that they don't own their proprietary technology, so it makes it more difficult for them to really get these kind of advantages that eSpeed can get. So, I think that's something we consider all the time part of why we keep our cash, part of the things we consider where can we best extend our technology and get those benefits.

I appreciate that comment, but that's more of my point. If indeed the IP position of eSpeed further strengthens your competitive advantage longer term and you're seeing higher valuations placed on inferior assets, doesn't that argue for a greater activity on the buyback, even in addition to allowing for you to look at strategic opportunities on the M&A side for yourself. It seems like there could be a dual course with the liquidity and the balance sheet could be pursued, is the argument I guess.

I hear you, I just as a policy do not comment on the buyback one way or the other. But I do hear you, but we don't comment, so I can't really give you any further color, unfortunately.

Would you agree with my statement in that the valuation placed on those assets reflects favorably for eSpeed?

I don't think that I'm supposed to comment one way or the other on that. So I will -- I just can't comment, sorry.

Okay, thank you.

and I do have a question from, Rich Repetto again, from Sandler O'Neil Your line is open.

Two follow ups. First, the Wagner patent, I believe it expires or you'll seeing the rolling off of the revenues next year. Could you give us a ballpark amount what it is? And I guess there's some costs associated with it that your amortizing against the patent, like a legal cost. Just trying to get a feel for the margin on that as well.

A couple of million dollars a quarter.

And would that be a feel for the margin of that couple million?

That's the margin. It will net us a couple million dollars a quarter.

Okay. And then lastly, there's been some talk in the market about potentially spitting out BGC. I guess, is that one of the consideration, and would that impact, at all,the voice electronic volume and revenue, or revenue?

I'm not going to comment on the first part, but we don't expect any actions that BGC takes to have a negative impact on eSpeed. BGC's growth and its success in the markets, which you've seen clearly in the numbers, and is having clearly well known in the business now, is only working to grow our business and help us. So, however, I don't think there's anything in their actions that we understand that will negatively impact us. In fact, all their growth is positive for us going forward.

Okay. Thank you very much

And at this time, I am showing no further questions.

Well, thank you all for joining us today. And of course, now my voice sounds better. That's the way things work. Thank you for putting up with up with laryngitis, for the moment. We finished our quarter ahead of our estimates, we raised our operating income outlook for the year and we look forward to updating you on our progress next quarter.Thank you for join us and and have a great day for the quarter. Thanks.