How to Save Your Company: eSpeed's Turnaround

No public company was hit harder by the Sept. 11 terrorist attacks than

eSpeed

(ESPD)

.

The electronic trading arm of Cantor Fitzgerald, eSpeed lost 180 of its 486 employees including its president when the World Trade Center towers fell, leading many to wonder if the company itself would survive. Its privately held parent was also devastated, losing close to 700 employees.

But since the tragedy, eSpeed has worked through its grief to stage one of the great comebacks in the history of corporate America, doubling its stock price and posting its first profit ever in the fourth quarter.

Tough Guys

While rivals encroached on its market in the weeks following the terrorist attacks, eSpeed has maintained its dominant position in its core online bond trading business, brokering over one-third of all trades between dealers in benchmark Treasury securities daily. And it's slowly rebuilding business in many other areas of brokerage where it operates on a smaller scale, like interest rate swaps and derivatives.

"We do believe in many ways it is a business miracle," said Amy Nauiokas, director of marketing for Cantor Fitzgerald and eSpeed. The company attributes its recovery in part to the backup systems it installed after the World Trade Center bombing in 1993, the round-the-clock dedication of employees who survived the disaster, and to the loyalty of its customers.

"The first few weeks were very touch and go, but after we crossed the first milestones, and as we continued to see people coming back and supporting the platform, it became clear that the business was stabilizing and we had to move forward," said Nauiokas.

Cantor hatched eSpeed in March of 1999 in a bid to recreate itself as a dot-com and prevent budding online rivals from robbing its business. It sold 20% of eSpeed in an initial public offering in December of that year, and spent over $300 million during the next two years outfitting the operation with new technology.

eSpeed quickly took advantage of Cantor's leading position in Treasury trading, siphoning off the parent company's business and attracting its own. The startup also expanded its offerings to include 48 fixed-income securities and commodities products, including energy, foreign currency and foreign government bonds. In addition, the company also licenses its software to third parties. Revenue soared 142% in the year after its IPO to $82.7 million, and rose another 41% in 2001 to $116.6 million. After nine quarters of losses, eSpeed was expected to record its first profit in the third quarter of 2001.

Sept. 11 set that goal back. Beyond the horrible loss of life, eSpeed saw $18 million in computer and office equipment destroyed. Two separate backup systems allowed the company to begin brokering some orders again once the bond market reopened Sept. 13, but connections to its customers' private networks, which ran through optical lines in the World Trade Center, couldn't be rerouted for weeks.

And the company wasn't running a full-fledged data center until February of this year, when it moved its technology operations into offices in Rochelle Park, N.J.

"Connectivity with private networks was lost across the board," said Nauiokas. "We had to come up with alternative trading solutions for some of our clients last minute."

Darkness Visible

Some feared that without sufficient equipment or personnel, eSpeed and Cantor would lose their business to competitors. One of eSpeed's biggest rivals in the Treasury brokerage business, BrokerTec, won some market share during the third quarter, according to J.P. Morgan analyst Greg Smith, and eSpeed's transaction revenue fell to $21.4 billion in the third quarter from $27 billion in the second quarter. Rather than a profit, eSpeed posted a loss.

But the online exchange turned things around in the final months of last year. With some employees working two to four different jobs and sleeping on cots or under their desks, eSpeed reestablished connections with most of its own clients, wooed Cantor's remaining U.S. voice-based Treasury customers online, and began brokering trades of some of the other instruments which it had temporarily halted.

"After Sept. 11, a lot of people couldn't get back to their desks, and many of the banks were setting up in hotel rooms and putting laptops in hotel rooms, and we were able to give them access to trading because we had that Internet flexibility. That really helped quite a bit," said Nauiokas. "And a lot of people have realized since they went back to their offices that the Internet not only can work, but sometimes works better."

eSpeed's online energy trading unit TradeSpark also pursued Enron's former online energy trading business, hiked its commissions for energy trades, and saw fourth-quarter transaction revenue jump 81% vs. the previous year. eSpeed's total transaction revenue rose to $23.03 billion in the fourth quarter, and the company turned a profit of 5 cents a share, including noncash charges and assuming a pro forma 40% tax rate.

eSpeed only recently found a new home. Currently housed in three separate locations in New York and New Jersey, eSpeed will move into new offices at 57th Street and Lexington Avenue in the late spring.

Postmen Like Doctors

"In terms of rebuilding the culture of the company and creating that cohesiveness that we had before, it's been very difficult to do because we haven't been in the same place," said Nauiokas. "So I think the move this spring will be tremendously helpful. That's a light at the end of the tunnel."

More tunnel remains to be navigated. Before Sept. 11, Cantor was in the process of moving all of its business online to eSpeed. Some 80% of the Treasury business was already fully online, but the transfer was in its early stages outside of government bonds. While the Sept. 11 attacks sped the company's absorption of Cantor's Treasury business, they also cut off eSpeed's access to Cantor customers in other areas of its brokerage business. Cantor has not yet determined which financial product marketplaces it will re-enter.

eSpeed says it sees new business opportunities with former Cantor U.S. voice brokerage competitors. "We are not re-entering the voice brokerage business in certain products," says Nauiokas. "That allows us to partner with or license software to people we otherwise wouldn't have." On Tuesday, eSpeed announced it had agreed to license its electronic trading software to TradeSpark rival IntercontinentalExchange. In the fourth quarter, software sales accounted for 15% of the company's revenue.

But analysts say Cantor was the online arm's primary engine of growth.

"What you could view as low-hanging fruit for them is gone," says Greg Smith of J.P. Morgan. "I'm not ever expecting them to return to pre-Sept. 11 growth expectations." At least half of eSpeed's revenues still came from its U.S. Treasury brokerage as of the second quarter of last year, while close to 20% came from energy trading.

Getting Crowded

And eSpeed isn't lacking competition. In the past few years, more than 70 companies have created electronic exchanges for fixed-income securities. London-based Garban-Intercaptial, for example, is the primary broker in foreign government bonds, an area eSpeed is pursuing. Atlanta-based online energy trader IntercontinentalExchange, also known as ICE, has emerged as a major player in the online energy trading business following Enron's fall.

Meanwhile, in its core Treasuries business, eSpeed has to contend with privately held rivals BrokerTec and TradeWeb. Reliable market share data is not available, but analysts say eSpeed's rivals are catching up. Meanwhile, with the prospect of rate cuts disappearing, Treasury trading volume is expected to be flat or down in 2002, compared with a 44% increase during 2001.

Analysts estimate the company will earn 38 cents for the full year vs. a loss of 5 cents for all of 2001. Espeed's own forecasts call for revenue to grow $7 million in 2002 to $124 million.

Despite the challenges, eSpeed is standing on solid financial ground, with $160 million in cash on its balance sheet at the end of last year, and very little debt. Since hitting a low of $5.10 on Oct. 18, eSpeed has jumped to $11.54, putting its valuation at 33 times 2002 earnings.

"It's a tough company to value," says Richard Repetto, an analyst with Putnam Lovell, who has a $10 price target on the stock. "It's like a company with just one quarter, because it's a company without all the parts it used to have."