Bgc Group Inc (BGC) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 eSpeed earnings conference call. My name is Shaquanna and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will facilitate a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. If you have any objections, you may disconnect at this time.

I would now like to turn today's meeting over to your host for today's call, Mr. Jason McGruder, Vice President of Investor Relations. Please proceed, sir.

Good morning. Before we begin I want to make sure that you know that our first quarter earnings release was issued last night. If you do not have a copy of this release, you may obtain one by going to the investor info section of espeed.com.

I also need to read our disclaimer. The information in this conference call contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended, also known as The Exchange Act. Such statements are based upon 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. For example, words such as may, will, should, estimates, predicts, potential, continue, strategy, believes, anticipates, plans, expects, intends, and similar expressions are intended to identify forward-looking statements. Our actual results and the outcome and timing of certain events may differ significantly from the expectations discussed in the forward-looking statements.

Factors that might cause or contribute to such discrepancy include, but are not limited to, our relationship with Cantor and its affiliates, the cost 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 overall 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 share, to enter into marketing strategic alliances and other transactions including acquisitions, reorganizations, partnership opportunities and joint ventures, also to hire new personnel, to expand the use of our technology for both integrated hybrid voice-assisted and fully electronic trading, to induce clients to use our marketplace and services, and to effectively manage any growth we achieve and other factors that are discussed under risk factors in eSpeed's annual report on form 10-K filed with the Securities & Exchange Commission.

We believe that all forward-looking statements are based upon 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 undue reliance on these statements. Forward-looking statements may speak only as of the date when made and we undertake no obligation to update these statements in light of subsequent events or developments. I would now like to turn the call over to our host, Howard Lutnick, Chairman, President and CEO of eSpeed Inc.

Good morning, everyone, and thank you for joining us on our first quarter conference call. With me today is our Chief Operating Officer, Paul Saltzman, and our Chief Accounting Officer, Frank Saracino. ESpeed's fundamental strength in the first quarter was underscored by year-over-year gains in our U.S. Treasury business and by increased screen-assisted revenue as additional BGC desks entered our hybrid pipeline. In addition, eSpeed's futures products made solid revenue gains. We remain optimistic about our growth prospects for 2008 and beyond based on positive returns on the investments the Company has made in our portfolio of new products.

Turning to our first quarter performance, Frank will review our financial results and Paul will discuss our fully electronic business and review our quarterly performance in the hybrid business and new products, and I will discuss our outlook for the second quarter and full year 2007 and comment on recent statements that have been made about the Company. After that, we will be glad to answer your questions. Now I would like to turn the call over to Frank.

Thanks, Howard. Good morning. ESpeed reported GAAP net income of $857,000 or $0.02 per diluted share in the first quarter. Our non-GAAP net operating income was $2 million or $0.04 per diluted share for the quarter, at the high-end of our guidance of $0.03 to $0.04. The after tax difference between non-GAAP net operating income and GAAP net income for the quarter reflected $800,000 in patent litigation costs and a $400,000 loss from eSpeed's former Equities Direct Access business, which is set to become part of Aqua in the second quarter. As we previously announced, Aqua will be a new equities trading business in which eSpeed will initially have a 49% ownership stake and Aqua expects to add additional unaffiliated investors.

By comparison, in the first quarter of 2006 we reported GAAP net income of $2 million or $0.04 per diluted share. For that same period we reported non-GAAP net operating income of $1.4 million or $0.03 per diluted share. We reported GAAP revenues of $41.4 million and non-GAAP operating revenues of $41.1 million for the first quarter of 2007.

The difference between GAAP and non-GAAP revenues for the quarter was revenues from eSpeed's Equities Direct Access business of $300,000. Our GAAP revenues for the year ago quarter were $42.6 while our non-GAAP operating revenues were $38.7 million. Fully electronic revenues were $17.9 million in the first quarter of 2007 versus $16.7 million for the first quarter of 2006. Revenues from software solutions were $12.3 million in the quarter compared with $11.3 million in the year ago period. Voice-assisted and screen-assisted revenues totaled $8.7 million in the first quarter of 2007 and in the first quarter of 2006.

The Wagner patent expired on February 20, 2007, and as we have indicated, eSpeed no longer received revenue from this source after that date. For the first quarter of 2007 we recognized approximately $1.3 million in Wagner related revenue in the fully electronic transactions with unrelated parties line item and $1.8 million in Wagner related revenue in the software solutions and licensing fees from unrelated parties line item. We also recognized approximately $600,000 in related amortization expense in the software development costs and other intangibles line.

This resulted in approximately $1.5 million in net income net of tax in the first quarter related to the patent.

Operating expenses for the quarter came in at $37.9 million compared to $36.3 million in the year ago quarter. We anticipate quarterly expenses being below this quarter's level over the course of 2007, although we continue to invest in technology to support our foundation treasury business and the growth of our affiliated voice brokers, as well as to support expected growth in our new products. We generated cash flow from operations of $13.7 million during the first quarter of 2007 compared with $5.1 million in the first quarter of 2006. We also report free cash flow defined as cash from operations less net cash used in investing activities including capital expenditures. Our free cash flow was $5 million in the first quarter of 2007 versus negative $1.5 million in the year ago quarter. Free cash flow for the first quarter of 2007, excluding related party receivables and payables, was $2.6 million compared with $4.9 million in the first quarter of 2006.

As of March 31, 2007, our cash and cash equivalents were approximately $192.6 million. Finally, eSpeed's headcount was 422 employees as of the end of the quarter. I would now like to turn the call ever over to Paul.

Thank you, Frank. I would like to give you an overview of our fully electronic business including our U.S. Treasury's business, as well as discuss the hybrid voice-assisted businesses and our new products.

Fully electronic volume traded on the eSpeed system, excluding new products, was $11.8 trillion for the first quarter of 2007, up 31.8% from the $9 trillion reported in the first quarter of 2006. There were 62 trading days in both the first quarter of 2007 and the first quarter of 2006. We improved our competitive market position in the first quarter of 2007 compared to the first quarter of 2006 and saw strong trading volumes from U.S. Treasury customers.

Revenue in the first quarter from fully electronic transactions, excluding Wagner related payments, was $16.7 million compared with $15.8 million in the first quarter of 2006. Moreover, our commitment to investing in our technology and network has provided the scale, reliability, and capacity to easily handle the record, notional and transactional, fully electronic volumes we saw in the first quarter of 2007.

The quarter included two record high volume days, in which we seamlessly processed almost twice the number of transactions compared to the average day in the first quarter of 2006 and about three times the average daily -- average notional daily volume for the New York Stock Exchange and Nasdaq combined. The ease with which eSpeed handled this volume in transactions, each taking only milliseconds, underscores the value of our proprietary network in technology and why it is such a valuable asset. We're confident that we have the capacity to handle significantly more volume, as our new products such as futures and spot foreign exchange ramp up and as asset classes continue to move along the hybrid pipeline from our affiliate BGC Partners.

Our hybrid screen and voice-assisted volume was a combined $16.4 trillion in the quarter, up 22.3% from $13.4 trillion in the first quarter of 2006.

We continue to expect additional volume and revenue growth as more of BGC's products move from voice-only to screen-assisted and voice-assisted trading. For example, we are rolling out a new platform which will enable BGC's currently voice-only structured product desks that trade credit default swap tranches to use the eSpeed system.

We are also introducing a new foreign exchange options platform for BGC, which should increase volume for the product and facilitate the migration of this asset class towards fully electronic trading over the next few years.

Fully electronic volume traded on the eSpeed system for new products, which we define as foreign exchange, interest rate swaps, futures, repos, and beginning in the first quarter of this year credit default swaps, was up 169.9% to $1.4 trillion in the first quarter compared to $524 billion in the first quarter of 2006.

I would like to now turn the call over to Howard, who will update on our revenue and earnings outlook.

Thank you, Paul. For the second quarter of 2007 we expect to generate non-GAAP operating revenues in excess of $36 million and non-GAAP net operating income approximately $0.00 per diluted share. For the full year 2007 we now expect to generate non-GAAP operating revenues approximately $153 million, up from our previous guidance of $152 million. We expect to incur operating expenses in the range of $148 million to $149 million compared to our previous guidance of $146 million to $148 million. We expect non-GAAP net operating income to be in the range of $0.05 to $0.06 per diluted share, and this is compared to our previous outlook of $0.05 to $0.07 per diluted share.

Before we begin the Q&A, I would like to address some of the recent filings and press releases regarding eSpeed that have been issued by others over the past few weeks.

As you know, we have a longstanding policy of not commenting on potential strategic matters such as stock buybacks, dividends, or corporate transactions, including potential acquisitions or dispositions, whether with a Cantor company, a competitor or some other marketplace participant. This remains our policy, and we are not going to comment on any of these topics or possibilities nor will we answer any questions about them. However, to the extent to which certain stockholders or competitors have acted in a public manner that we view as improper or disingenuous, I think it is appropriate to make a few observations to supplement or correct the public record.

Let's start with Chapman Capital. I do not know if Chapman's actions fit into the category of pump and dump, but I have serious concerns about their trading behavior. During the very period Chapman was calling for the immediate auction of eSpeed, it sold a huge amount of deep in-the-money call options.

In fact, in the 32-hour period beginning the morning of April 18th, the same day that Tullett announced its approach to us and Chapman demanded the removal of all of eSpeed's independent directors and again demanded the immediate auction of eSpeed, Chapman sold approximately 15,000 deep in-the-money calls representing about 1.5 million shares. These are not the actions of a serious long-term holder of eSpeed and we simply are not going to engage in any way with the Chapman firm.

As for Tullett, its actions exposed its long-term vulnerability, which is its lack of competitive technology. We believe eSpeed's superior technology will be the leader in the marketplace as asset classes continue their momentum towards fully electronic trading. Let's be clear, Tullett is both our and BGC's competitor.

It seems to me that Tullett made a public spectacle of itself trying to buy our Company to fill its missing technology hole by adding a condition that any rational person would know is a total nonstarter, namely that BGC should surrender to its competitor its perpetual joint services technology agreement with eSpeed, which has been in place and publicly disclosed since eSpeed's IPO in 1999.

And then, in a bizarre twist, Tullett, a large -- which is itself a large broker of collateralized financing arrangements known as repurchase obligations or repos, leveled a strange accusation regarding the recoverability of eSpeed's cash, implying that money invested with Cantor in a tri-party repo is something other than an interest-earning cash equivalent.

In case this laughable analysis confused anyone, let me assure you that not only is eSpeed's financing collateralized at 102% of value, but that collateral is held in safe custody at the Bank of New York and our cash is available to us daily. These are the reasons why we chose not to reward this behavior with a serious dialog. As I said earlier, I am not going to take questions on any of these topics, but felt some observations were appropriate. Operator, we are now ready to take questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Rich Repetto with Sandler O'Neill. Please proceed.

Good morning, Howard.

Good morning.

Just the first question is you excluded some of the expenses related to the equity -- what you're developing for the equity trading platform. Can you tell us what that was like in prior quarters or so we -- is this spending being ramped up I guess is the point, is the question.

I don't have the exact numbers, but it is -- it wasn't -- it is kind of flat to previous quarters. There was no ramping in the first quarter of those expenses.

I think it was $300,000, which was in -- it is just in the nonoperating line because it is being spun out of eSpeed and we will own a 49% stake in Aqua, which we expect to be completed in the second quarter. So that's why it is not going to be a continuing part of our business, but it is in our GAAP numbers, of course, until such time as it is separated and then we will obviously have our equity stake in that business.

Understood. And then I took your comments to heart. I am not going to ask about any, whatever, potential transaction or anything like that, but I guess could you just refresh us, though, on the relationship on how BGC and Cantor interact and work with the eSpeed platform. Like what are the -- the benefits to both of having the companies work so closely and integrated so closely?

Sure. At the inception of eSpeed, so upon its birth, its founding and its creation and as part of its IPO, it was a perpetual joint services agreement that linked Cantor then, which is now that part of the business which is being separated now called BGC, linked it to its technology of eSpeed. And basically the relationship goes as follows, which is that as the voice business progresses from a voice-only business to a screen assisting the voice broker to then the voice assisting the computer and finally to the clients typing themselves, that evolution towards electronic trading has different -- while it has different economics between the two parties, they are joined at the hip. In the beginning, the brokers are doing all the work and eSpeed is providing the technology to support those brokers and it gets 2.5% at one level and then 7% at the next level. So it receives a revenue share and it provides that technology.

Now, the key next step is once it goes electronic, and if it ever goes electronic and that's the point which is when and if ever BGC's business goes electronic, eSpeed will receive 65% of the revenues over time for new products. There is an arrangement where it is a 50/50 split for a certain period of time and after awhile then it reverts back to the 65% split to eSpeed. But what that does is it incents that eSpeed, which has built this technology and as primarily a fixed cost model would then get huge operating leverage and scale for that investment from BGC's perspective. So eventually some day, when BGC has gotten a business onto eSpeed's electronic trading platform, like it did with U.S. Treasuries as an example, people might say, gee, paying 35% to BGC seems like a lot. But if you think about it today, when all that volume is going through the voice brokers, getting 65% of all that revenues, which seemed like a lot. So it all depends on when you look at it on the continuum.

There are always going to be days and businesses where it seems that the 65% paid to eSpeed would be way too high for eSpeed because, for instance, if BGC does $100 million of revenue in a particular product and took it electronic, eSpeed would get 65% of the money and that's an enormous amount of money. However, once it is electronic and eSpeed is doing all the work, paying the other guy who brought you all the business 35% would seem like a lot.

So the point is that's why it is perpetual and that's why it is exclusive, because that way they both know that this is going to happen, come hell or high water, that's the deal. And it is always been the deal and it was the deal since the day eSpeed was born out of that business. It is always been in our public filings. It has always been part of the business and it allows eSpeed operating leverage that says eSpeed can build the technology, can manage the technology, and when these businesses go electronic, because in our view it is all about when, not if, but when, eSpeed will be in the perfect position to leverage its current infrastructure and make that money.

Understood, Howard. One of the few -- I was there before or back in 2000 when you had the original agreements with the voice broker. I guess this very last question is I got a lot of respect with you having rebuilt BGC, period. The question is is BGC , I know the documents in the public domain and the intention to file, I guess is BGC where you want it right now, that's number one. And are they subject to the same sort of caps on commissions, the monthly or the fixed sort of commissions at a certain, after hitting a certain volume that eSpeed

So from eSpeed's perspective, BGC's growth is excellent, because it is adding to our hybrid pipeline. We provide the technology for them, all of the technology for them, and we receive either, for the technology we provide, either our costs paid, 2.5% or 7% all under the contracts, appropriately under the contracts that we have with BGC that we just discussed. So their growth is our pipeline and is our growth.

And obviously, as you can see from our numbers and their document, their S-1 is public which can be read by any of you, we are very satisfied with their position and how they're doing and very excited by it, because those revenues are our pipeline and we think it is very helpful for your ability to understand our Company that all of the revenues are now made publicly available.

It means if you take their S-1, it is the inverse revenue numbers of our numbers. So you can see the full size of the pipeline and read about it. And I think that was very helpful for our shareholders to be able to read that and to see how our pipeline is growing. So it is available and we're very excited at how BGC is doing from our perspective.

And just the last part of that question is BGC -- do they have the same sort of commission arrangements with the, say the larger investment banks? Are they capped as well?

Generally speaking, no.

Okay. We can get in more detail afterwards. That at least points us in the right direction. Thanks, Howard.

(OPERATOR INSTRUCTIONS) We now have time for one more question. That question comes from the line of Justin Hughes with Philadelphia Financial. Please proceed.

Good morning, Howard. Thanks for taking my question.

Sure.

The main -- my biggest question you dove into a little bit on the joint services agreement but I think a lot -- the numbers confuse people. Isn't it just simply put this is an agreement for Cantor or BGC to put liquidity on the system, in return they receive a payment for it? So to look in hindsight and say we don't want to pay it now is just silly?

Generally speaking, that's right. It encourages, by the perpetual nature of the agreement, it encourages the voice broker to take its entire business line and put it on an electronic system and it will get a share of the revenues prospectively. So it must clear, settle and process everything, but basically if you want to think about it in general terms, the brokers pay -- if you look at the global -- into dealer/broker space, on average they compensate their brokers around 60% of the revenues in compensation.

So the concept of paying a fully electronic broker for you, i.e., your technology company, 65% is not materially different from the voice brokers saying that's how much it is paying its brokers or its producers. If its computer is going to become its producer, that's where this concept came from, which is eSpeed then becomes responsible for the relationship with the customer, the electronics and the connectivity, and it gets roughly a similar amount of money, because if you consider that those inter-dealer brokers pay 60% to their staff, they also have rent, they also have telecommunications, they also have all of the ancillary costs of employing all of their brokers.

So you can imagine if they could actually have a 65% deal, that would actually be a good deal. It wouldn't take any money away from the inter-dealer broker to have that arrangement with someone like eSpeed. That's why we have that relationship. Now, if you turn that on its head and look at it from eSpeed's perspective, you have the inter-dealer broker who pretty much is no better off and no worse off by having this relationship with eSpeed. And then you look at eSpeed which gets 65% of that money and, while we only have really one gigantic product line fully electronic now, which is U.S. Treasury, any additional product line of large size that goes fully electronic on our platform will produce enormous scale for us and profits. So -- and if you look at the IDB space and BGC, who is our perpetual partner in this, their revenue opportunity is ours and so we look forward to it. And that's why that is -- that's why it works effectively so well in our opinion.

You've got what we announced just this quarter and last, that FX options, which are global gigantic product, has started to move in the first solid steps towards electronics. Credit default swap tranches that Paul mentioned, another gigantic global product taking solid steps towards going electronic. BGC is solidly in those businesses and pursuing those businesses for us. And I think that is the beauty of our relationship.

Okay. And then the second question, I hope you can comment on this, but literally at the exact same time that you pointed out the questionable option activity several weeks ago, many investors, including myself, we received calls from your active shareholder that both Nasdaq and GFI were preparing to make bids for your Company imminently. Have you received any interest from either one of those companies?

Unfortunately I cannot comment and I have been instructed not to comment one way or the other.

Okay. That's all I had. Thank you.

I would now like to turn the call over to eSpeed for closing remarks.

Well, thank you, everybody, for joining us. I appreciate you taking the time this morning and I look forward to updating you next quarter. Thank you and have a good day, everyone.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a good day.