NEW YORK - February 28, 2005 - eSpeed, Inc. (NASDAQ: ESPD), a leading developer of electronic marketplaces and related trading technology for the global capital markets, today reported results for the fourth quarter and full year ended December 31, 2004.
eSpeed reported net income of $0.4 million, or $0.01 per diluted share, for the fourth quarter 2004 on a Generally Accepted Accounting Principles (GAAP) basis. To reflect earnings generated from the Company's operations, eSpeed also reports non-GAAP net operating income. For the same period, the Company reported non-GAAP net operating income of $5.0 million, or $0.09 per diluted share. The difference between non-GAAP net operating income and GAAP net income for the fourth quarter 2004 is non-cash charges of $4.6 million (net of tax) for impairment of capitalized software costs and certain patent claims, litigation defense costs and business partner securities. For comparative purposes, eSpeed reported non-GAAP net operating income of $8.8 million, or $0.15 per diluted share, in the fourth quarter of 2003. See "Non-GAAP Financial Measures" below for a detailed description of eSpeed's non-GAAP net operating income.
On a GAAP basis, the Company reported net income of $25.9 million, or $0.46 per diluted share for the full year ended December 31, 2004. For the same period, the Company reported non-GAAP net operating income of $31.1 million, or $0.55 per diluted share. The difference between non-GAAP net operating income and GAAP net income for the full year ended December 31, 2004 is non-cash charges of $5.2 million (net of tax) for impairment of capitalized software costs and certain patent claims, litigation defense costs, business partner securities and a charitable contribution. For comparative purposes, eSpeed reported non-GAAP net operating income of $38.1 million, or $0.66 per diluted share for the full year 2003.
The primary difference between non-GAAP net operating income and GAAP net income for the fourth quarter of 2004 consists of $3.9 million non-cash charges for impairment of capitalized costs related to eSpeed's Price Improvement software and certain claims of its 580 Patent, $0.6 million for litigation defense costs, and $0.1 million for business partner securities. The primary differences between non-GAAP operating results and GAAP results reported for 2004 include non-cash charges of $3.9 million for the impairment of capitalized costs related to eSpeed's Price Improvement software and certain claims of its 580 Patent, $0.6 million related to litigation defense costs, $0.5 million related to business partner securities and a $0.2 million charitable contribution to the Cantor Relief Fund. eSpeed has recorded such impairment charges as a result of the removal of the Price Improvement feature from its trading platform in January 2005 and an adverse jury verdict on February 22, 2005 with respect to certain claims of the 580 Patent, which verdict will be subject to post-trial motions and eSpeed's appeal. Additionally, eSpeed has incurred litigation defense costs related to a patent infringement case brought by Trading Technologies International, Inc. See "Recent Events" below.
eSpeed's total revenues for the fourth quarter 2004 were $39.3 million, compared to total revenues of $39.2 million for the fourth quarter 2003. Fourth quarter 2004 fully electronic revenues were $22.9 million compared to $27.7 million in the fourth quarter 2003. Total revenues from Software Solutions in the fourth quarter 2004 were $9.4 million versus $6.2 million in the fourth quarter 2003.
eSpeed's total revenues for the full year ended December 31, 2004 were $166.5 million, compared to total revenues of $156.6 million for the full year 2003. Fully electronic revenues were $108.0 million compared to $110.0 million in full year 2003. Total revenues from Software Solutions in the full year 2004 were $32.1 million versus $24.2 million in the same period last year.
Fourth quarter 2004 pre-tax operating margins were 20.0 percent. Full year 2004 pre-tax operating margins were 30.5 percent.
Fully electronic volume was $6.2 trillion for the fourth quarter 2004, compared to $7.6 trillion reported by the Company in the fourth quarter 2003. eSpeed's total electronic volume, including fully electronic and voice-assisted transactions, for the fourth quarter 2004 was $9.9 trillion, compared with $10.3 trillion in the fourth quarter 2003. Average daily Federal Reserve US Treasury volume was $501 billion for the fourth quarter 2004.
For the full year 2004, fully electronic volume was $29.4 trillion, compared to $31.7 trillion for the full year 2003. eSpeed's total electronic volume for 2004 was $43.2 trillion, compared to $42.6 trillion in 2003.
Fully electronic notional volume for new products, which eSpeed defines as mortgage-backed securities, foreign exchange, interest rate swaps, futures and repos, was $497 billion in the fourth quarter 2004, compared to $376 billion in the third quarter 2004. Volume for the eSpeed Equities direct access product was 123 million shares in the fourth quarter 2004, compared with 105 million shares in the third quarter 2004.
The Company generated free cash flow (cash from operations less capital expenditures) of $2.0 million for the fourth quarter 2004 and $23.8 million for the full year 2004. Excluding related party receivables and payables, free cash flow for the fourth quarter 2004 was ($1.3) million and $23.1 million for the full year 2004. Fourth quarter cash flow included the payment of annual year-end bonuses. As of December 31, 2004, eSpeed's cash and cash equivalents was approximately $209.7 million.
During the fourth quarter 2004, the Company utilized approximately $13.6 million of cash with respect to the acquisition of ITSEcco Holdings Limited. Additionally, eSpeed repurchased approximately 230,000 shares of the Company's stock for a total of $2.1 million in cash, at an average price of $9.24. For the full year 2004, eSpeed repurchased approximately 2.9 million shares of the Company's stock for a total of $31.9 million in cash, at an average price of $11.00. The Company has $87.6 million remaining from its $100 million buyback authorization.
For the first quarter 2005, eSpeed expects to generate revenues in excess of $37 million and expects non-GAAP net operating income to be in the range of $0.03 to $0.04 per diluted share. This is based on the Company's expectations that the average daily Federal Reserve US Treasury volume will be between $540 and $550 billion for the first quarter 2005. The Company anticipates recording litigation expenses in excess of $0.02 per diluted share which will be excluded from its non-GAAP net operating income for the first quarter 2005.
For the full year 2005, the Company expects to generate revenues in excess of $150 million. This includes the expectation that average daily Federal Reserve U.S. Treasury volume will be between $540 and $550 billion for the full year 2005.
Howard W. Lutnick, Chairman and CEO of eSpeed, Inc. commented, "We expect that in 2005 we will begin to see positive effects of the changes put in place in 2004. Our core US Treasury business is positioned for solid cash generation and growth, and we are optimistic that our foreign exchange business will expand and add value to the Company throughout the year. We are confident that we have the best team in place to execute our strategy of improving client service, tailoring pricing solutions, offering innovative technology and successfully entering new markets."
In January 2005, eSpeed announced that after extensive customer collaboration, the Company decided to remove the Price Improvement (PI) feature from its trading platform. With the removal of PI, eSpeed offers its customers faster execution and a simpler trading system. In the near term, the Company expects the removal of PI will reduce its revenue per transaction and overall revenue. In the longer term, however, eSpeed expects this change will lead to increased volume traded on eSpeed's system and will improve the Company's revenue and profitability.
In June 2003, eSpeed filed a lawsuit for infringement of eSpeed's exclusively licensed Automated Auction Protocol Processor Patent, also known as the 580 Patent. The 580 Patent covers a system and methods for auction based trading of specialized items, such as fixed income instruments. In a pre-trial ruling on February 7, 2005, the U.S. District Court in Delaware ruled that BrokerTec Global did not infringe on eSpeed's 580 Patent. On February 22, 2005, a jury found that Garban GTN and BrokerTec USA did infringe on eSpeed's 580 Patent but that there was a deficiency in the application which led to the 580 Patent. eSpeed is currently awaiting entry of final judgment on the jury findings by the court following expected post-trial motions, as well as a judgment on an inequitable conduct claim against eSpeed. The court's rulings could lead to a judgment of invalidity on a portion of the claims set forth in the patent and, in the event of an adverse judgment on inequitable conduct, a judgment of unenforceability with respect to some or all claims. eSpeed expects to appeal certain rulings to the U.S. Court of Appeals for the Federal Circuit. The Company is also a defendant in a patent infringement case brought by Trading Technologies International, Inc. ("TT"). If the plaintiffs ultimately prevail in the claims brought by TT, eSpeed may be required to pay damages and/or costs and expenses, or may be forced to modify or withdraw certain products from the market. In both cases, eSpeed, on the one hand, and BrokerTec USA and TT, on the other hand, requested attorneys fees from the other party, which may be awarded by the courts in exceptional cases. The Company has been named as a defendant in a number of purported class action complaints alleging violations of the U.S. securities laws from August 12, 2003 to July 1, 2004. The Company believes such class action cases are without merit. Guidance for the first quarter and full year of 2005 does not take into account any charge to earnings or losses related to payments, lost revenue or legal and other costs, if any, which may be necessary as a result of any of these cases or in any other matter. While such amounts, if any, cannot be predicted at this time, management believes any such payment or product modification or withdrawal will not have a material impact on the financial condition or prospects of the Company, but may have a material adverse impact in any given quarter on the Company's financial results or cash flows.
To supplement eSpeed's consolidated financial statements presented in accordance with GAAP and to better reflect the Company's quarter-over-quarter and comparative year-over-year operating performance, eSpeed uses non-GAAP financial measures of revenues, net income and earnings per share, which are adjusted to exclude certain expenses and gains. In addition, the Company provides a computation of free cash flows. These non-GAAP financial measurements do not replace the presentation of eSpeed's GAAP financial results but are provided to improve overall understanding of the Company's current financial performance and its prospects for the future. Specifically, eSpeed believes the non-GAAP financial results provide useful information to both management and investors regarding certain additional financial and business trends relating to the Company's financial condition and results from operations. In addition, eSpeed's management uses these measures for reviewing the Company's financial results and evaluating eSpeed's financial performance. In the fourth quarter of 2004, the difference between GAAP net income and non-GAAP net operating income was $4.6 million. For the full year 2004, the difference between GAAP net income and non-GAAP net operating income was $5.2 million. eSpeed considers "non-GAAP net operating income" as after tax income generated from the Company's continuing operations excluding certain non-recurring or non-core items such as, but not limited to, asset impairments, litigation judgments, costs or settlements, restructuring charges, charitable contributions, insurance proceeds, business partner securities and similar events. The amortization of patent costs and associated licensing fees (including those made in settlement of litigation) from such patents are generally treated as operating items. Material judgments or settlement amounts paid or received and impairments to all or a portion of such assets are generally treated as non-operating items. Management does not provide guidance of GAAP net income because certain items identified as excluded from non-GAAP net operating income are difficult to forecast.
About eSpeed, Inc.
eSpeed, Inc. (NASDAQ: ESPD) is a leader in developing and deploying electronic marketplaces and related trading technology that offers traders access to the most liquid, efficient and neutral financial markets in the world. eSpeed operates multiple buyer, multiple seller real-time electronic marketplaces for the global capital markets, including the world's largest government bond markets and other fixed income and equities marketplaces. eSpeed's suite of marketplace tools provides end-to-end transaction solutions for the purchase and sale of financial and non-financial products over eSpeed's global private network or via the Internet. eSpeed's neutral platform, reliable network, straight-through processing and superior products make it the trusted source for electronic trading at the world's largest fixed income and foreign exchange trading firms and major exchanges. To learn more, please visit www.espeed.com.
Statements contained in this Press Release, which are not historical facts, are forward-looking statements, as the term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors, which include, but are not limited to: the effects of the attacks on the World Trade Center, market volatility, the limited operating history of eSpeed, Inc., and its ability to enter into marketing and strategic alliances, to effectively manage its growth, to expand the use of its electronic systems and to induce clients to use its marketplaces and services, and other factors that are discussed in eSpeed's Annual Report on Form 10-K, filed with the Securities and Exchange Commission.
Contacts:
Investors:
Kim Henneforth
212-610-2433
Media:
Michael Geller
212-610-2430