芝加哥商業交易所 (CME) 2002 Q4 法說會逐字稿

Welcome to the CME fourth quarter earnings results conference call. This conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. John Peschier. Please go ahead, sir.

Thank you for joining us today. Jim McNulty, our President and CEO; and Dave Gomach, our CFO will spend a few minutes of the highlights of the year and the fourth quarter, and then we will open up the call for your questions. Before they begin, I will read the Safe Harbor language.

Statements that are made in this call that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC, including our most recent annual report on form 10-K and our registration statement on form S-1. With that, I would like to turn the call over to Jim.

Thank you very much, John. We are pleased that you're all joining us today in our first earnings call as a publicly traded company. Our IPO in early December helped finish off what has been a very productive year for our exchange. CME today, reported record revenues and earnings for 2002 primarily due to increased trading volume. Net revenues increased 17% to a record $453.2 million for 2002 compared with $387.2 million for 2001. Net income was $94.1 for 2002, an increase of 25% from $75.1 million for the previous year. Diluted earnings per share were $3.13 for 2002 versus $2.57 for 2001. I am going to provide some details on the results for the year, and then I will discuss the factors that contributed to our success in 2002. I would also like to provide an update on several recent initiatives and then Dave Gomach, our CFO, will elaborate on the financial details.

Our average trading volume grew 35% to finish the year at 2.22 million contracts per day. That is up from 1.64 million contracts per day in 2001. During 2002 we grew faster than any other major futures exchange based on futures and options on futures volume. We remain the global leader both in open interest and in notional value traded. We had nearly 19 million open positions at year-end and executed transactions with a notional value of $329 trillion dollars last year. Taking a look at our business by trading venue, volume on our GLOBEX electronic trading platform grew by 141% for the year, from an average of 326,000 per day in 2001 to 786,000 per day in 2002. GLOBEX electronic trading represented 35% of our total volume. That is up from 20% of total volume last year, and 15% of total volume in 2000. In the fourth quarter of 2002 we averaged over 1 million contracts per day on GLOBEX. Our Open Outcry venue remains vibrant. It increased 9% from 2001 and reached an average of almost 1.4 million contracts per day during 2002.

Let me quickly review our major product areas. Our E-mini Equity averaged daily volume surged 137% to 680,000 contracts in 2002 while our Equity standard size contract volume grew by 4%. Interest rate volume increased 12% above the record year of 2001. Foreign exchange grew by 8% and our Smallest Segment commodities making up only one 1% of our total volume declined by 11%. On the financial front we had records in virtually every financial measure during the full year of 2002. Net revenue for the year was $453 million, up 17% from the prior year. Operating income, net income, and diluted earnings per share all climbed more than 20% from our previous record levels in 2001.

Overall, the fourth quarter performance was strong. We achieved the highest fourth quarter volume in revenue totals in our history. Dave will provide some details on that in a moment. The fourth quarter volume was down from the strong third quarter due primarily to lower volatility in world interest rate markets and a very quite holiday set of weeks. The volume decrease was concentrated in our interest rate quadrant. Interest rate average daily volume was approximately 1.3 million in October, 1.1 million in November, and dropped to 700,000 in December. The contributing factors of the slowdown included low expectations of potential threat interest rate changes at the end of the year. A relatively slight yield curve and a holiday season slowdown in our Eurodollar trading that was more extreme than we expected. So far in January, our interest rate volume has increased from December levels to approximately 975,000 per day. I will elaborate on our recent Eurodollar initiatives in a few moments.

External influences benefited our overall 2002 performance. The primary factors were increased volatility in the equity markets and a shift in the post Enron environment to exchange traded central counter party clearing mechanisms, which allow banks and investment banks to bring down their costs and reduce their capital charges. With these positive factors as a backdrop, we continue to execute on our 18-month action plan, enhancing the relevance and the use of our existing products, innovating with new products, improving our technology infrastructure, and expanding our distribution and our user base.

We saw several other positive trends during the quarter. Institutions and individuals are more actively managing their financial risks and interest rates, equities, currencies, and commodities. CME futures and options on futures are designed to hedge against these risks and provide instantaneous 23 hour-a-day investment and asset allocation opportunities. Equity volatility as measured by the VIX index grew from 25.9% in 2000 to 28.4% in 2001 and hit a recent peak in 2002 during the third quarter at 39.1%. We also saw volatility in the yield curve, which bolstered our interest rate volume despite only one Federal Reserve interest rate cut. Keep in mind, this compares to 11 interest rate cuts in 2001.

CME's primary competitive advantage is the diversity and relevance of our product set. We have the world's most actively traded interest rate futures instrument with our Eurodollar contract. CME has approximately 95% of the volume in equity index futures in the U.S., and more than 90% of the world's volume in foreign exchange futures products. Leading the way in 2002 were our three largest products. The Eurodollar futures and options on futures contracts, the Eurodollar, as you may know, is a benchmark 90 day U.S. interest rate instrument that trades quarterly from 90 days out to 10 years. Also the E-mini S&P 500 and NASDAQ 100 contracts, which combined, had a 100% per anum - or greater than a 100% per anum growth rate each year for the past three years.

For several decades, CME has been known as the leading innovator in the futures industry. That history in innovation continued in 2002. In January 2002, we rolled out our fourth E-mini equity contract, the S&P MidCap 400 futures, which just yesterday set an all-time record, trading 6,100 contracts. In June we worked with the New York Mercantile Exchange to introduce an E-mini version of the NYMEX crude oil and natural gas products on our GLOBEX platform, and in July we launched a TRAKRS product line with Merrill Lynch, which is the first futures contract which can be sold by Series 7 securities brokers - Series 7 registered brokers. And in the fourth quarter, our OneChicago joint venture began trading single stock futures.

In terms of technology, we continued to invest resources to enhance our system. We improved both speed and systems performance while handling more than twice the volume when compared to the prior year. Average customer response time declined to just 0.3 seconds at year end compared with approximately 1 second at the end of 2001.

I would also like to highlight last September's launch of our new state-of-the-art remote data center. This is an off-site facility, which allows us to successfully deploy major exchange technology upgrades. In August of 2001 our board approved building the remote data center to provide more systems capacity, another point of redundancy for our trading and clearing technology, and dedicated workspace for our key staff in the event that it's needed in an emergency. Since September 11, we all recognize the importance of a reliable business continuity plan.

We also used this opportunity to create a state-of-the-art facility as our primary site for an upgraded GLOBEX. We built an entirely new network and made significant capital investments in data base and order-routing servers to handle increased GLOBEX usage. As a result, we saw improved performance and a corresponding increase in our trading volume. Also in 2002 we increased our distribution to new customers around the globe. During the year we set up a technology hub in London to improve the speed and ease of use of our products for our European customers. Since July, we have hooked up 22 network connections to some of the largest financial institutions in Europe, enabling a broader range of customers to access our products. We are also actively building our European distribution with a new multilingual marketing team.

Many of you may have seen our recent branding campaign, which began in earnest in mid January. The campaign includes print and television placements in the United States and Europe. Two television spots have been airing on Bloomberg in the U.K. and U.S., and CNBC in Europe and in the U.S. Our intent is to increase the brand awareness of our exchange to potential users of our products, and we are capitalizing on the positive media attention we received during the IPO process.

Now let me discuss some recent initiatives that you may be interested in. First, the Eagle release. We rolled out our Eagle software on Sunday, January 26, and began trading that night. During the first two days of trading we had an unexpected order processing issue that effected trading activity. The solution for this particular issue was put in place on Tuesday. Yesterday, 41,000 electronic interest rate contracts traded on our GLOBEX system. This is above our prior average daily volume of approximately 31,000 contracts in 2002. The launch of this first phase of Eagle brings new electronic functionality to many of the complex strategies now used in trading Eurodollar contracts on our trading floor. Our customers can now execute implied spread trades in the first eight quarterly expirations and 22 corresponding calendar spreads in Eurodollar futures.

Most new products or venue changes experienced a gradual increase in volume. We expect Eagle to lead to a gradual ramp-up of interest rate electronic volume from our current levels. We expect to see a faster initial growth rate from our European customers who are familiar with trading similar products electronically. In the U.S., our primary initial effort will be education as we describe the opportunities and benefits of using this alternative in addition to our highly successful and efficient floor trading operation.

A few weeks ago we announce an incentive program for large volume traders who trade in Eurodollar contracts from three to 10 years into the future. The Eurodollar contract is traded in quarterly increments out to 10 years, and the product is most liquid in the front months. Our intent is to boost liquidity on the back end of the curve, which can also have a positive effect on the entire 40 quarter complex. In addition, we will increase the physical space on the trading floor of this quarter for the back month area to accommodate an additional 2 dozen traders. We also announced that we are streamlining the volume discount tiers with our Eurodollar contracts for our most active users. This is effective March 1, 2003. As a reminder, we put the original volume discount tiers in place in the beginning of 2001. Starting at that point, we charged our members $0.08 per side for the first 7,500 Eurodollar contracts traded each day, $0.03 for those traded between 7,500 and 1 and 15,000 contracts, and $0.01 per trade above 15,000.

Now, for members, our new rates are $0.08 for trades up to the first 10,000 contracts traded daily, and $0.04 for trading volume above 10,000 contracts. In addition, the new tier level separates futures from options instead of aggregating the totals. These continue to be attractive compared to the rates of similar products traded around the world.

Now let me turn to OneChicago. As many of you know, OneChicago began trading single stock futures, Euro based indices and selected ETFs in November. We are 40% owners of the company. In November, OneChicago averaged 4,100 contracts per day. In December that grew to 5,900 contracts per day, and in January so far, OneChicago has averaged approximately 5,200 contracts. As of January 29, open interest had grown to 60,000 contracts, and while it is still too early to gauge the success of OneChicago, we are encouraged by its early performance.

Let me touch briefly on our strategy for continued growth. First, we will continue to expand in our core business. We will continue to build out our distribution in Europe and Asia with strengthened marketing teams. We will deploy technology solutions to bring down the cost of connecting to CME as we did in 2002 with our London communications hub. We will continue to upgrade technology in order to provide our benchmark products to risk managers 23 hours a day. Second, we intend to further broaden our products range. We will continue to work with our major customers to develop new trading products and new technology information and clearing services. Third, we expect to provide transaction services to third parties. We will continue to look for opportunities to provide services to third parties as we have done in 2002 with the NYMEX E-miNY energy products and in clearing, order routing, and regulatory services that we provide to OneChicago. And fourth, we intend to participate as a consolidator in the industry. We will continue to evaluate opportunities to grow our business in a cash-flow accretive way through alliances or acquisitions.

With that, I'd like to turn the call over to David Gomach, our CFO, who will provide detail on our financial results.

Thank you, Jim. Good morning. I will start by walking you through the key lines on the income statement. Comparisons are made for the fourth quarter of 2001 and the third quarter of 2002, one relevant. At the end I will provide some additional data to assist in modeling future quarters. Before I discuss our results, let me comment on our recent accounting change. We recently adopted the fair value method of accounting per stock option, and retroactively applied the change to 2000, 2001, and 2002 results. Previously, movement in A share and B share values caused the stock-base compensation expense to fluctuate from quarter to quarter. With this change, all existing and future options will be expensed over the life of the option based on the initial value using the fair value method of accounting. This change should reduce volatility in our financial results and make them easier prior periods. Income statements from 2000 through 2002, including the restated periods, are available on our website in the investor relations section. In addition, we intend to consolidate stock-base compensation expense with salaries and benefits for 2003 reporting purposes. And after this quarter, we will no longer provide results excluding stock-based compensation. For the fourth quarter of 2002, we will provide both GAAP figures and some comparisons excluding stock-based compensation and patent litigation expense.

Let me start by providing details on our fourth quarter. Total volume for the fourth quarter averaged 2.26 million contracts per day, which was up 24% compared to the fourth quarter of last year. It is important to point out that our volume in the fourth quarter included our new TRAKRS products, which accounted for 122,000 contracts per day. Excluding TRAKRS, volume was up 18% compared to the same period last year. The main reason to exclude TRAKRS is the fact that we averaged between five- and seven-tenths of a cent per round turn on our TRAKRS product as compared to an average for our other products of approximately $0.65. Compared to the third quarter, volume in the fourth quarter was down 6%, and down 10% excluding TRAKRS. As Jim mentioned, the majority of the volume drop can be attributed to lower December volume in our interest rate product.

We had an extremely strong volume - we had extremely strong volume in the third quarter, and that continued through mid November. We felt the impact of a volume slowdown beginning just before Thanksgiving. During the first half of the fourth quarter, we averaged over 2.5 million contracts per day, excluding TRAKRS. For mid November through the end of the quarter, we averaged 1.73 million contracts per day, and during the last two weeks of December, we averaged 1.18 million, significantly below our expectations. In terms of product volume, our equity E-mini product volume was about 850,000 contracts per day in the fourth quarter, up 138% compared to last year, and up 4% sequentially despite a decrease in the VIX index from 39.1% in the third quarter to 35.3% in the fourth quarter. Volume in our equity standard size products was 138,000 contracts per day in the fourth quarter, up 3% compared to last year, and down 14% from the third quarter.

Interest rate volume was 1.03 million contracts per day for the quarter, down 20% versus a strong fourth quarter last year, and down 13% compared to the prior quarter. Our volume was 93,000 contracts per day, up 4% compared to last year, and flat compared to the third quarter. Commodity products averaged 29,000 contracts per day, down 11% compared to the fourth quarter of last year, and up 4% sequentially. Looking at volume by venue, GLOBEX was up 156% from the fourth quarter last year to 1.04 million contracts per day. It rose 13% sequentially and represented 46% of total volume during the quarter. GLOBEX was 22% of total volume during the fourth quarter of last year, and 38% of the total volume in the third quarter of 2002. Open Outcry volume was down in the fourth quarter to 1.19 million contracts per day compared to 1.38 million a year ago, and 1.47 million in the third quarter. negotiated transactions, which include block trades and EFPs, were down 1% compared to last year, and up 12% sequentially.

Turning to revenue. The aggregate rate for trade was $0.66 in the fourth quarter and $0.69 excluding TRAKRS. The $0.69 excluding TRAKRS is unchanged from the fourth quarter of last year and was up versus the $0.65 in the third quarter. When looking at our rate for trade, it is important to understand that we provide volume discounts on trades in Eurodollars and equity E-mini contracts. As a result, in higher volume periods we tend to see a reduction in the overall rate per trade because the incremental volume in these two products is assessed a lower rate. Net revenue was up 14% for the quarter to 119.4 million compared to 105 million in the fourth quarter of 2001, and it was down 5% from Q3.

Breaking down the fourth quarter revenue into its component, clearing and transaction fees of 95 million were up 18% compared to last year and represented 80% of total revenue. Compared to the third quarter, clearing and transaction fees were down 4%. Quotation fees totaled 12.2 million, down slightly from last year and up modestly from the third quarter of 2002. GLOBEX access fees totaled 3.2 million for the quarter compared to 3.1 million in the fourth quarter of 2001 and down from 3.4 million in the third quarter. Communication fees were basically flat at 2.4 million compared to last year and the third quarter. Investment income was 1.6 million versus 2.2 million last year, and down from 3.2 in the third quarter of 2002. It is worth noting that we had a one-time gain of 2.7 million in the third quarter related to the sale of marketable securities.

Other operating revenue increased from 3.4 million in the fourth quarter of last year to 4.4 million this year, and was basically flat compared to the prior quarter. The increase from prior year was due primarily to an increase in fees associated with our interest earning facility. With respect to our OneChicago joint venture, we are accounting for our investment using the equity method, and we are booking it as an offset to other revenue. Our share of the loss was approximately 1.2 million during the fourth quarter and 2.9 million during the full year. Those results were offset by 400,000 of fees derived from services that CME provides to OneChicago. Net revenue from securities lending total 600,000 during the fourth quarter, relatively flat compared to the third quarter, and down from 900,000 in the same quarter last year due to lower balances on hand.

Moving to expenses. Total operating expenses during the fourth quarter were 68.9 million including non-cash stock-base compensation of 600,000 and a 7.5 million reduction in patent litigation expense based on our settlement with Euronext, which offset approximately 50% of the expense incurred in the third quarter after we settled our litigation with the eSpeed. Excluding stock-base compensation in the patent litigation expense, total expenses were up a modest 7% from 70.6 million in the fourth quarter of last year. Also, excluding a previously mentioned item, total expenses were up approximately 3 million sequentially to 75.8 million. The increase from Q3 was driven primarily by a 2 million increase in salaries and benefits due to three factors.

First, deferred compensation expense increased approximately 1.1 million from Q3 to Q4. This portion of the expense increases or decreases according to the market performance of the investment in our deferred compensation plan. During the fourth quarter we saw an increase in expense due to improved performance of the investment. There is a corresponding offset in investment income, so there is no effect on net income. The second reason was an increase in our head count of 36 during the fourth quarter to bring our headcount to 1,152. Lastly, capitalized technology salary expense was lower in Q4 than Q3. It is worth noting that our salaries and benefits expense as a percent of revenue has come down from 42% in 2000 to 27% in 2001 and 25% in 2002.

Public relations and promotions expense increased about 600,000 sequentially as we incurred the initial costs of our post IPO branding campaign. The other expense category increased by approximately 1 million as we had increases in bank fees, board related fees, interest expense due to the litigation settlement, and insurance expense where we are seeing significant premium increases in D&O and property & casualty insurance. GAAP operating income was 50.4 million in the fourth quarter compared to 32.6 million for the same quarter last year. The GAAP operating margin was 42.3% versus 31.1% in the fourth quarter last year. Excluding stock-base compensation and patent litigation expense, operating income would have been 43.6 million, up from 34.4 million in the same period last year. Operating margin would have been 36.5% compared to 32.8% in the fourth quarter of 2001 and 42% in the third quarter of 2002.

In the fourth quarter our overall tax rate was 37.5%. The primary reason for the reduction was the favorable resolution of an income tax item with the IRS. Going forward, it is reasonable to expect our tax rate to be approximately 40%. GAAP net income for the quarter was 31.5 million versus 19.3 million in the fourth quarter of 2001. GAAP diluted EPS was $1.02 compared to $0.66 last year. Excluding stock-base compensation in the patent settlement, net income for the quarter would have been 27.2 million, or $0.88 per share compared to 20.4 million, or $0.69 per share in the fourth quarter of last year.

Briefly commenting on the full year results, our average daily volume was up 35% for the full year and up 33% excluding TRAKRS. Our E-mini growth was the primary driver as it was up 137% for the year. Net revenue for the year was 453 million, an increase of 17%, and excluding stock-base compensation and patent litigation expense, operating income was 164 million, an increase of 24%. Net income exceeded 100 million, up 27% from last year, and diluted EPS totalled $3.33, up 24% from $2.70 in 2001. Note; as I mentioned earlier, going forward we will no longer exclude stock-base compensation when reporting our results.

Now let me shift to the balance sheet. Cash and investments totaled 339 million at year end compared to 161 million at the beginning of the year. During the fourth quarter, we received approximately 118 million from the IPO. Capital expenditures and capitalized software development costs were approximately 57 million in 2002 compared to 37 million in 2001. To summarize, despite the slowdown we saw during the holiday, we had another strong quarter. This was the second highest volume in revenue quarter in our history. Our operating margins remain high and our diluted earnings per share excluding stock-base compensation and patent litigation expense was the second highest in our history. Our balance sheet remains strong and we continue to invest and grow.

I would like to now spend a few moments discussing our guidance policy. CME does not intend to provide specific earnings guidance on an ongoing basis primarily due to the difficulty of projecting trading volume. The board and management team are committed to creating long-term shareholder value and we will continue to make decisions with that as our guiding principle. While we will not be providing specific guidance, it is worth pointing out that our volume is available on a daily basis. In our quarterly conference calls we will intend to provide additional information on revenue and expense items, which will be helpful for modeling perfectly.

Now to give you a framework for the first quarter of 2003. First, we will have 61 trading days, which is three fewer than we had in the fourth quarter of 2002. On the revenue front, in March we will modify our tiered pricing schedule for our interest rate products as Jim described earlier. We also have announced an incentive plan to promote liquidity in the back months of our Eurodollar complex by offering incentives for high volume traders and will cap that amount at 4 million in total over two five month periods beginning in March. Based on current volume, we believe our tier will more than offset the cost of our incentive plan. Both items will be reflected in clearing and transaction revenue. We will be altering the fee structure for users of our quote data affective April 1, 2003. The current pricing schedule is $60 per month for the first screen at each location, and $12 per month for each additional screen.

The new pricing schedule reduces the charge for the first screen at each location to $50 per month, but increases the screen charge from $12 to $20 per month. As of December 21, 2002, CME had approximately 33,000 first locations and 126,000 additional devises. We expect an increase in total quote fees beginning in the second quarter of 2003; however, we cannot predict the impact of a pricing change on our current number of subscribers. In terms of our expenses, we recently began a branding advertising campaign. The expense related to this branding campaign is expected to be 5.5 million in the first quarter, which is incremental to our typical public relations and promotions account. In terms of diluted share count, we would expect between 33.8 million and 33.9 million shares for the first quarter of 2003.

Now, let me provide an update on January volume. Through January 28, we are averaging 2.13 million contracts per day, and 2.1 million excluding TRAKRS. By product group, interest rates are averaging 975,000 contracts per day, E-mini equities are at 877,000, equity standard contracts are averaging 112,000, foreign exchange is averaging 99,000, and commodity products are at 36,000. As I stated before, volume is available on our website on a daily and monthly basis. With that, we would like to open up the call for your questions.

Thank you. Today's question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the '*' key followed by the digit '1' on your touchtone telephone. Again, that is '*' '1' for questions. We will be pausing for just a moment to give everyone a chance to respond.

We will take today's first question from Henry McVey at Morgan Stanley.

Good morning. Can you hear me?

Yes, Henry.

OK. Couple things. One is just on the - when you look at the interest rates, the fall off, you said 975 and you just go back a couple quarters. What area are you seeing that it - is there any specific buyers that is doing less business or what is the trend line there?

Henry, we don't see any change at this point in terms of the participants in the market, except that we saw a slowdown at the end of December, which we think was holiday related, and now it feels like the market is coming back.

Henry, in November we were at 1.1 million, December was the drop to 700,000 as we felt the real impact of the holiday season. But through the first - to date in January, we are up to 975, so again, the biggest part of the slowdown in December was the expectation that there would be no Fed action, the flattening of the yield curve, and that was very much exacerbated by the holiday season.

I guess, two other on the expenses. One was communications came in about 800,000 higher than what we thought, and then second was the compensation was just higher and, you know, is fourth quarter run rate compensation, is that what you want us to take away from here? And the same thing on the communications?

On the communications, you know, we do expect that to grow slightly, continue going forward. There was about 400,000 of one-time expenses in GLOBEX communications in the fourth quarter, but that expense line will continue to grow as we go forward. In terms of salaries and benefits, yes, the expense is - there was no real surprises there other than in the fourth quarter. We had 800,000 related to the third comp. But going forward into the first quarter we will definitely see an increase as a result of FICA expense, salary increases which occur in the first quarter, and we have also added - we added 25 headcounts in the fourth quarter on average, so we expect the effect of those employees.

And just so I understand. I wasn't familiar - with the deferred comp, you are saying there that that gets offset in the revenue - in the other revenue line item?

Right. In interest income. So what happens is if the market goes up, the assets in that plan increase - that's an increase in salaries expense but it is offset exactly because we will get a similar - an exact increase in investment income. So net to operating income is zero.

OK. And this final question. Do you see any change in pattern in the migration between the different venues, the pit versus the electronic verses the ex-pit, just as we think about trying to come up with an average price?

Well, we've certainly seen a change as the Eurodollar volume has dropped. I know in the last few days our percentage of volume on the GLOBEX platform has been over 50%. So again, you know, Eurodollars are the driver of the pit volume, and then the increase we saw in Eurodollars electronically, one night doesn't mean that much, but it did increase to 41,000. And so far in the first quarter, or in January, we have seen an uptick in our privately negotiated volume.

Henry, one other point, as you may remember, I mentioned that electronic volume for the year was at 35%; however in December it was at 49%. So the trend continues to move toward the electronic venue.

OK.

I mean, the E-mini volume, in December was 693. Q4 it averaged 848. It is back up to 877,000 in January. The very beginning of January was a little slow, but we are seeing - as you can see every day, the mini volume has been slow.

OK, thanks, guys.

Thank you.

And we will be taking our next question from at Jefferies and Company.

Good morning. Two questions. First of all, could you give us an estimate of free cash-flow for both the quarter and the year? And I was wondering, for the nuance of this on the call, is there seasonality to your volumes? The way, for example, there is seasonality to equity flows. The fourth quarter and the first quarter are seasonally the strongest with the second and the third the weakest. You know, mortgage volume's the second and the third quarter are the strongest, and the fourth and the first are the weakest. Is there any kind of seasonality to your volume? Thanks again.

I'll go - to answer the free cash-flow question first. There is always information is available either through our press release or the documents that will be released. For the year, our net income was 94.1 million. We backed out of that - or add to it tax adjusted stock base comp which was just a little over 2 million. Depreciation gets added back. That's 48.5 million, and then our CapEx for the year - you subtract that away -well, 56.9 or 57 million. So we're basically at 88 million for free cash-flow for the year. And I think for the quarter that was approximately - you could go through the same calculation - around 30 million. Not too far from what our net income was.

OK, great. And seasonality?

Yes. In seasonality, Charlotte, normally we see a slowdown during the holiday season, at year end, and prior to 2001 you could typically see a slowdown in the end of July and into August, again, the vacation season. However, since that really was mostly prior to 2001, and as you may remember, we had eight consecutive quarters of record volume starting at the end 2000, and it really took out that correlation to holiday seasons from the end of 2000 until, really, the present. This is the first holiday season in several years where we actually saw a holiday effect.

OK, great. Thanks.

And our next question comes form Joel Gomberg at William Blair.

Thanks. Jim, maybe you can elaborate a little bit more on the problems you experienced with the Eagle rollout, and where do you stand on 41,000, a run rate going forward?

Sure, Joel. As you may know, we rolled out the Eagle software on Sunday night, and that was after having several full production tests in the previous month, and then several months, actually, of mock trading by some of our biggest users. One of the things that we found was a glitch that had to do with some of the automated trading systems hooked up. Our software team went to work on it right away. They found the way to fix it and they implemented the fix to it on Tuesday, and it has been running smoothly ever since. In terms of the growth, we hit 40,000 yesterday, which was higher than the amount that we usually trade in Eurodollars on the GLOBEX platform. And what we would expect to see is as the users begin to learn how to use this functionality on GLOBEX that we will begin to see a pickup in electronic trading volume. We would expect that pickup to occur in Europe primarily, where interest rate contract are already traded in a similar fashion where they can do spreads and where they trade electronically. One of the great benefits, of course to this, is that it gives us a market in Eurodollars, which is a benchmark product globally, 23 hours a day.

You have a backlog of overseas participants that will be signing up over the next year, or - I mean...?

Yes we do. In fact, that was all part of the plan, Joel, that we executed last year, where we hooked up 22 networks of major financial institutions in Europe to our new telecom hub in London. And we also put in place a marketing team - multilingual marketing team that is based out of London, and they have backgrounds in interest rates and foreign exchange. And so this team is now meeting with the major players all over Europe to hook them up and get them starting using Eagle.

OK. Second item was on the change in the pricing on the Eurodollars. Should we expect much impact on the volumes, given the prices go up? And then, I guess I am trying to get a handle on coming up with an average price for the Eurodollar. You know, you have been averaging in the $0.46 to $0.51 area this year. But what can we expect on the mix shift there?

Yes, Joel. First here, there are two numbers. You have a $0.46 to the $0.51. That is in the third or the fourth quarter, does reflect the - you know what happens as volumes dropped in Eurodollars, you did see an increase in the rate portrayed. What with respect to the change in the tiered pricing, if I can just give you some data. On some 275 hundred contracts there was no change for a large liquidity provider trading from 75 to 10,000. Their rate is going to go from $0.03 to $0.08 a side. So that is an increase of $0.05. You know, an individual trading from 10,000 to 15,000 is going to see their rate go from $0.03 to $0.04, and that is up a penny. And then anybody trading over 15,000 is going to see their rate go up $0.03, from $0.01 to $0.04. We look at that and we feel conservatively as you just- well, I mean, we think we can get approximately an incremental $0.02 a side, which round term would be $0.04.

That helps. Thanks a lot.

We will be taking your next question from Colin Clarke at Salomon Smith Barney.

Good morning.

Hi, Colin.

Hi. First, can you provide the dividend amount you expect to pay for 2003?

We will have the next board meeting on the 5th. The board will review that. I think I mentioned the calculation of free cash-flow. Our policy is to pay out 20% of prior year's cash earnings, and we do use a free cash-flow calculation. The board does have some discretion around that. So that decision will be made on the 5th with the press release following immediately.

OK. Is there any way to quantify the potential opportunity in terms of expanding the pit in the back month Eurodollar contracts?

I don't think we can quantify it explicitly at all, but what we would expect is with 25 new participants able to trade in the back months, there tends to be a cascading affect. As back months trade, it creates hedging opportunities in the front months, and so one of the things that's attractive to us is to make room for more people and to have a more diverse group of market makers in the back months where we get that cascading affect.

OK. But besides greater volatility levels in the equity E-mini contracts, what other opportunities are there that you are seeing in terms of new customer sign-ons in the U.S. and Europe?

One of the things that we are seeing is that there are more privately held companies which you call trading companies that have set up operations where they trade actively, particularly they are trading in the E-mini products just because of the liquidity and the narrow bid-out spread and the low cost compared to other equity alternatives. There was a study done in April that, for example, compared our E-mini S&P products to the spider product, which is risk management equivalent, or putting together a basket of spider look-a-like stocks, and what they determined was the E-mini S&P cost 60% less than the spider product, and it was - and the baskets were 100% more expensive than doing the E-mini S&P. And so I think this will continue to attract institutional players, but also those active trading companies that have been - we've been seeing set up in places like London, New York, Chicago, Los Angeles, Houston, Dallas; and it is becoming a more and more important as time goes on.

Great. Thank you.

And we will next to Bill Tanona at JP Morgan.

Hi, guys. With respect to your new pricing structure for the quotation data fees. Just doing a quick calculation. I am coming up with about $700,000 in incremental revenues per month, or 8.4 million. Does that sound about right to you guys? Assuming nobody leaves?

It is close. I mean, if you just do the math assuming nobody leaves, yes, it is $10 times - you do the math.

Yes. OK. Have you guys done any type of sensitivity as to the pricing structure and what type of clients you might think would leave as a result?

No. I mean, it is too soon to really tell.

OK. Can you guys give us an idea as to what level of trading volumes are going to be needed at OneChicago for you guys to break even? I think you guys said you had $2.9 million loss and made about $400,000 in clearing fees. Is that right?

Not clearing fees. The $400,000 was based on services we provide to OneChicago for regulatory that we built an interface to OneChicago for trading and clearing purposes, so that is a fee that OneChicago pays us. We really have nothing for clearing fees. But those were .

OK. And what type of level do you think is going to be needed for that to become profitable?

In terms of the breakeven for OneChicago, we don't want to speak for OneChicago at this point. But one thing we can say is that it is a highly leveragable business model, so that's why I mentioned earlier that we find it attractive and we are encouraged by the early performance.

OK.

It is a very small staff.

OK. As far as your additional expensed for promotion. I know you guys said 5.5 million in the first quarter. Is that a run rate we should use going forward for the second, third, and fourth quarters, or is that going to be coming down to a more normalized level?

It is basically that the entire campaign will be in the first quarter. There was some funds in the last third and fourth quarter originally, but the agency felt we would get a much better bang, or impact, by claiming more of it in the first quarter. There may be a little bit in the second quarter, but you know, that would be certainly less than a million.

OK.

It was meant to be a front loaded high impact program, Bill.

OK, so it is going to be a one-time event the first quarter.

Basically.

OK, and are you guys going to have to incur any type of additional costs to expand the back end of the contracts in the Eurodollars?

It's small. A couple hundred thousand of capitalized items.

OK. That's it. Thanks.

And we will go next to at .

Good morning. It's a great job, gentlemen. I had a question about the dividend, but you answered it. I have a question with respect to the insurance that you mentioned, costs being increased. Could you give us some color on what you're experiencing with respect to insurance costs this year versus last year?

Yes. We were running at about 250,000 a quarter previously. We did have to get public D&O insurance. Also our property & casualty - I mean, I think everybody in the insurance market is feeling the effect of premium increases. So we went to about 500,000 in the fourth quarter and we are looking at our insurance costing almost a million dollars a quarter going forward.

Compared with last year?

Two-fifty a quarter.

OK. That is quite an increase. And are there any gaps in coverage or have you been able to fill all the needs?

We have filled them all.

Great. OK, again, great quarter.

Thanks very much, Henry.

And having no further questions at this time, I would like turn the call back over for any additional or closing remarks.

Thank you very much.

Thank you for joining us today, and Dave Gomach and John Peschier will be available following the call to answer any additional questions that you might have.

And thank you for your participation in today's conference, and you may disconnect at this time.

Thank you.