TradeStation Group, Inc. Q4 2007 Earnings Call Transcript

TradeStation Group, Inc. (TRAD)

Q4 2007 Earnings Call

February 19, 2008, 11:00 am ET

Executives

Salomon Sredni – CEO

David Fleischman – CFO

Analysts

William Tanona – Goldman Sachs

Tripti Prasad – Sidoti & Co.

Richard Repetto – Sandler O’Neill & Partners LP

Matt Snowling – FBR Capital Markets

Joe Spinelli – Citigroup

Edward Ditmire – Fox-Pitt Kelton

Presentation

Operator

Good day, everyone, and welcome to today’s TradeStation Group 2007 Q4 Earnings Results Conference Call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to TradeStation Group Chief Financial Officer Mr. David Fleischman. Please go ahead.

David Fleischman

Thank you. Good morning and welcome to the TradeStation Group Fourth Quarter 2007 Conference Call. Today’s conference call is being broadcast live over the Internet and will be archived for the next 90 days at www.tradestation.com. We would like to thank all of our listeners, including shareholders, customers and analysts for joining us this morning. My name is David Fleischman, Chief Financial Officer of TradeStation Group. Here with me today is Salomon Sredni, our Chief Executive Officer.

By now, you should’ve seen our financial results released this morning. If you have not, they are available at our Company website, www.tradestation.com, in the Investor Relations section. Also, if you are accessing this call through our website, please note that some of the prepared comments you are about to hear are accompanied by graphs and charts, and we invite you to view them as you listen.

Before we start, I would like to emphasize that this conference call will include statements that are forward-looking and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act. All forward-looking statements are based on current expectations and beliefs and actual results may differ materially from the results suggested in this conference call. Factors that may cause or contribute to such differences include those set forth in today’s earnings release and the Company’s filings with the Securities and Exchange Commission. Please note that the Company undertakes no obligation to update any information presented in this conference call.

With that said, it’s my pleasure to hand over the call to Solomon Sredni, Chief Executive Officer of TradeStation Group.

Salomon Sredni

Thank you, David. Good morning, everyone.

2007 was another great year for our Company with good news record revenues, record net income, record earnings per share, record DARTs and record total accounts. If you look at our revenues, year-over-year they increased about 18%, while our EPS was up 16%. If we look at DARTs for the year, they’re approximately $80,000, a 30% increase from the 2006 DARTs.

The fourth quarter was also a great quarter. Revenues increased 16%, while EPS grew by 11% when compared to the prior year quarter, this despite the negative impact of lower interest rates which begun effecting us late third quarter of last year. With a VIX at elevated levels during the fourth quarter, and when I talk about the VIX, I’m talking about CBOE Volatility Index, our DARTs and our per account trading activity remained at high levels that we saw in the summer of ’07 confirming that we continue to attract and build a customer base of very active and valuable trading accounts.

Before I get into the metrics for the fourth quarter, I hope that you all saw this morning the release we had about the Readers’ Choice Awards. I’m delighted to report that TradeStation, once again, dominated the results of the Readers’ Choice Awards which are given by Technical Analysis of Stocks and Commodities magazine, is a very respected magazine and this award, in particular, given by the readers of that magazine. The results were announced this weekend and TradeStation won Best Futures Brokerage for the fourth year in a row, and in getting that award we beat competitors like Interactive Brokers and MF Global, which is formerly known as Man Financial. TradeStation was also rated high as a Stock Brokerage and it was rated higher than Charles Schwab, E*Trade, Fidelity Brokerage, OptionsXpress and Scotttrade, as well TD Ameritrade and thinkorswim. We also won this year for the sixth consecutive year the Readers’ Choice Awards for Best Institutional Platform and Best Professional Platform, and in that category we beat (inaudible) Bloomberg and Rueters. For the fourth year in a row, we won in four categories: Best Trading Systems – Futures, Best Trading Systems – Stocks, Best Trading Systems – Options, and Best Options Analysis Software. Last but not least, we also won for the fifth consecutive year for Best Subscription Internet Analytical Platform. Having the readers of Stocks and Commodities magazine rate us number one in eight different categories across a variety of so many different categories is a testament to the hard working commitment of our team. I’m very, very proud of this achievement as are all of our employees.

Let me turn back now to our financial performance and talk a little bit about the fourth quarter. In the fourth quarter, our DARTs increased by about 44% up to $90,000 when you compare them to the fourth quarter of 2006. We also released this morning our DARTs for January and DARTs in January increased to $115,000 and to date, this past Thursday, our DARTs in February were at about $105,000. It’s important for me to remind you once again that these DARTs were produced by roughly 36 to 37 accounts. That’s obviously a small fraction of the number of accounts that our competitors have to produce their DARTs. We attribute this DART growth obviously to the diversity of our product offering and the robustness of our business model, particularly when volatility increases. We believe that the diversity of the offering and the increased presence in the futures and forex markets positions us well for growth in the industry. I’ll give you a little bit more about our forex performance later in the call, so we’ll come back to that.

As I mentioned in our last call, we expected that the increased marketing and the increased sales resources would start paying off in the fourth quarter of last year. I’d also talked about the fact that we felt to putting a lot of time and attention into attrition and that we wanted to see attrition go down in the fourth quarter of 2007, fourth quarter, and I’m proud to say that we succeeded in both counts. We have higher gross aves [sic]. As a mater of fact, fourth quarter aves were a record and that’s the result of the marketing spend and the sales force additions that we made earlier in the year. Obviously we also saw attrition come down in the 2007 quarter when compared to the 2007 third quarter. When I talked about the net accounts, we added 1,665, almost 1,700. I will choose the best growth for the year and about 70% better than the account adds, net account adds in the 2007 third quarter. As I mentioned earlier, we’re very, very proud that we both were able to get record gross accounts and reduce attrition to deliver this 70% growth compared to the third quarter, and it’s about 35% better than the 2006 fourth quarter net account growth .

Our other client account metrics also continue to be among the very best in the industry. In the 2007 fourth quarter on an annualized basis, our average account rated 632 times and produced about $4,100 in revenue. Both numbers are we see substantially higher than those produced by Ameritrade and E*Trade, and what’s led to this is really the volatility in the marketplace and the diversity and robustness of our offering.

The account balance on the average (inaudible) brokerage account continues to be substantially higher than we would normally see in the online brokerage industry. The average balance of our TradeStation Equities Client Account was approximately $79,000 in the 2007 fourth quarter, considerably higher than the average balance in the mid $40,000 range you see at Ameritrade and E*Trade. The $19,000 average balance over TradeStation’s Futures Account is we believe considerably higher than the industry average.

Before I turn my attention to our growth initiatives and our performance, David will review our fourth quarter 2007 performance from a financial perspective. David.

David Fleischman

Thank you, Sal. For those of you listening through our TradeStation website, we again invite you to view the graphs and charts accompanying my comments.

For the quarter ended December 31, 2007, TradeStation Group had record brokerage commissions and fees and record daily average revenue trades. Net income was $9.3 million or $0.21 per share. These results were achieved despite reduced net interest income as a result of interest rate cuts that unfavorably impacted our 2007 fourth quarter net revenues. For the quarter ended December 31, 2007, TradeStation Group had net income of $9.3 million as compared to 2006 fourth quarter net income of $8.6 million and 2007 third quarter net income of $9.7 million. The increased market volatility that began in the 2007 third quarter and continued into the fourth quarter was an important factor helping us achieve record brokerage commissions and fees as our active trade of customers tend to trade more when there is increased market volatility. This increase in brokerage commissions and fees was the result of increased account growth and increased volatility.

Fourth quarter 2007 net revenues of $40.2 million, approximately the same as the 2007 third quarter, increased 16% when compared to fourth quarter 2006 net revenues of $34.5 million due primarily to increased brokerage commissions and fees partially offset by reduced net interest income. Brokerage commissions and fees of $27.6 million increased 32% from fourth quarter 2006 brokerage commissions and fees of $21 million. We believe this is due primarily to increased trading due to increased market volatility and our growing account base.

Fourth quarter 2007 net interest income of $10.3 million was a 7% decrease from fourth quarter 2006 net interest income of $11.1 million and a 4% decrease from third quarter 2007 net interest income of $10.8 million. This decrease was the result of lower interest rates. On September 18, 2007, the Federal Funds Target Rate of Interest was reduced by 50 basis points; and on each of October 31^st and December 11^th, it was reduced by another 25 basis points. In 2008, the Federal Funds Target Rate of Interest was further reduced by 75 basis points; and on January 22^nd, by 75 basis points on January 22^nd and by 50 basis points on January 30^th to its current rate of 3%. Most of our interest income is tied to the Federal Funds Target and Vary Rates of Interest. We estimate based on the size and nature of our customer assets as of December 31, 2007, that each basis point increase or decrease in the Federal Funds Target Rate of Interest impacts our annual net income by approximately $66,000. Increases or decreases in our aggregate customer balances over 2008 will also affect our net interest income. In preparing our 2008 first quarter and total year business outlook, we assume there will be an additional 25 basis point reduction in March 2008 and then another 25 basis point reduction in June, bringing the assumed Federal Funds Target Rate of Interest to 2.5% in mid June 2008. Of course, no one can predict what the rate will be throughout 2008.

During the 2007 fourth quarter, total expenses were $25.4 million, 63% of net revenues as compared to $20.9 million, 61% of net revenues in the 2006 fourth quarter. This increase of total expenses was primarily the result of increased execution costs due to a higher number of customer trades and, as we continue to grow our accounts in revenues, our increased investment in people, infrastructure and advertising.

For the 2007 fourth quarter, employee compensation and benefits was $8.3 million as compared to $7.6 million in the 2006 fourth quarter. At December 31, 2007, the Company had 318 employees as compared to 302 employees at December 31, 2006. As Sal as mentioned in previous statements, in 2008 we plan to increase our employee headcount primarily in product development.

For the 2007 fourth quarter, clearing and execution of $8.5 million, 31% of brokerage commissions and fees, compared to 2006 fourth quarter clearing and execution of $7 million, 33% of brokerage commissions and fees, increased trading volume and mix of business accounted for the lower percentage in the 2007 fourth quarter. Data Centers and communication costs in the 2007 fourth quarter was $2.8 million as compared to $1.7 million in the 2006 fourth quarter. Beginning in the 2007 third quarter, the Company began reclassifying a portion of its recovery of exchange fees within brokerage commissions and fees. Together with the effect of that reclassification, higher costs to circuits and exchange fees primarily accounted for the increase. Advertising costs in the 2007 forth quarter were $1.4 million as compared to $1.1 million in the 2006 fourth quarter. We believe that this planned increase in advertising costs will continue into 2008.

Fourth quarter 2007 depreciation and amortization was $1 million as compared to $785,000 in the 2006 fourth quarter. The increase was primarily the result of increased capital expenditures in December 2006, in the December 2006 fourth quarter. Fourth quarter 2007 other costs were $1.5 million as compared to $873,000 in the 2006 fourth quarter. The variance was primarily the result of increased regulatory fees and expenses, software maintenance costs and an increase in reserve pertaining to a regulatory matter that dates back to 2004 which has now been fully resolved. In the 2007 fourth quarter, the Company pursuant to its stock buyback plan, spent approximately $3.7 million to purchase 303,000 shares of its common stock. Since buying under the plan began November 13, 2006, through December 31, 2007, the Company has spent approximately $17 million to purchase approximately 1.4 million shares.

In this morning’s earnings release, we issued our Business Outlook for the 2008 first quarter and full year. We are estimating for the 2008 first quarter that net revenues will range from $39 million to $42 million and earnings per share will range from $0.16 to $0.19. We are estimating that for the 2008 year, net revenues will range from $158 million to $177 million and earnings per share will range from $0.69 to $0.86. Included in the 2008 first quarter Business Outlook is $900,000 of estimated legal fee expense pertaining to a lawsuit against the Company and certain of its directors and officers brought by the founders and former offices of Onlinetrading.com, a brokerage we acquired in late 2000. This case went to trial in late January and I am pleased to report that the Company and its directors and officers prevailed on all claims. As a result of this victory, the Company plans to now seek recovery of its legal fees from the plaintiffs. When preparing our 2008 Business Outlook, we assumed among other things that accounts will average daily revenue per account for each asset class at approximately the same level they averaged during the four-month period ending January 31, 2008, after reducing January 2008 equities and option revenue per account by 10%, a period of higher volatility and that the Federal Funds Target Rate of Interest will decline to 2.5% by mid June in 2008 and not change thereafter in 2008. Variations in these and other assumptions will likely result in material differences to the estimated results in the Business Outlook.

That concludes my prepared comments for today pertaining to our financial statements. I will now turn the call back over to Sal.

Salomon Sredni

Thank you, David. I said earlier, I would give you some visibility on our forex product and let me do that. As you guys all know in July of ’07, we launched a powerful integrated trading platform for forex traders. We enhanced this platform in October of 2007 by adding many (inaudible) forex trading capabilities to the platform, which appeals to a different segment of the retail forex trader market. This new seamless offering gave our forex trading customers the ability to execute forex trading strategies on an automated or manual basis the same way that we’d given it to equity options and electronic futures customers in the past. Concurrent with the launches, everybody probably remembers, we introduced attractive, an attractiver [sic] pricing plan with tighter currency (inaudible) spreads so our customers could benefit from better execution. We believe that the combination of this new pricing plan and the power and quality of the forex trading platform is an offer that is hard to match. Although it’s early, early indications acceleration in both new forex accounts and forex trading activity, let me share a little bit of information with you. From June 30^th to December 31^st of 2007, we added about 800, on a net basis by the way, we added 800 new forex accounts, a 46% increase to that segment of our customer base and forex DARTs over that same period tripled. When you compare the fourth quarter of ’07 to the second quarter of ’07, the average trades per day made by forex accounts also increased by 178%, demonstrating the powerful platform once in the hand of forex traders. I want to target all this information by saying that obviously forex is still a very small percentage of our total business and all those numbers I just gave you should be viewed in that context. We obviously continue to be excited about the prospects of the retail forex market and we believe that our product is vastly superior and we feel that we’ll continue to grow that segment of our business.

Last year, I shared with you the percentage of our business that came from derivatives and I said would update it from time-to-time, so here’s my update: Just to refresh everybody’s memory, in 2005 about 55% of our total brokerage revenues, by which I mean total commissions fees and interest income directly generated by brokerage accounts, came from cash equity. So 55% came from cash equities back in 2005, while 45% came from derivatives which include equity, index options, futures and forex. For the 2007 year, which is two years later, 47% of those revenues came from cash equities and about 53% of the revenue in 2007 came from equity and index options, futures and forex, so that flipped. To look at it another way, today more than half of our brokerage revenues come from derivatives trading. This increase reflects a growing presence and the success in the trading markets that are generally considered to be areas of highest potential market size and growth in our industry. We believe that these trends, which cast as a force to reckon with in the derivatives market is an important and exciting factor for our potential growth. Much to our disappointment, we believe that the market fails to recognize this and the value and (inaudible) of our franchise when bearing a company on its stocks.

We also continue to focus the value of the TradeStation platform can offer to both institutional and individual traders outside the United States. First and foremost, the launch of forex gives us access to a growing (inaudible) international market online, community of online traders. We believe that their individual (inaudible) in places like Germany, Italy and the Pacific Rim that would expand the TradeStation platform to be the best solution to help meet their trading objectives, mainly the derivatives markets such as futures and will continue to work on this cause.

During 2007, we continue to build a network of independent agents in Europe and Asia to help us execute on those opportunities as reasonably as possible. I believe we’re up to 17 independent agents. The view is also favorable. We have seen a substantial growth as a percentage compared to prior quarters in the non-US accounts during the 2007 quarters. Our international business is growing and we are very focused on strategies to expedite that growth. Although it’s a little bit too early to share the details, we’re very excited about our potential outside the US and look forward to future penetration growth in those markets.

We are also optimistic about the potential for growth and further penetration in the US active trader market both in cash equities and derivatives. We recently conducted market research that confirmed unequivocally the strength of our franchise. In this market research TradeStation received a very high net promoter score. For those of you that don’t know, a net promoter score measures the likelihood that our customers will enthusiastically or positively refer our firm to someone else and is generally regarded as a very (inaudible) factor by those who are seeking to value the strength and depth of our products, service or franchise. We believe these results reflect the strength of our core selling proposition and a good indicator of our potential for further growth, including mainly (inaudible) technology for our trading platform. To help insure we remain ahead of the competitors, we have several enhancements and new features in the works, which we will share with you at or about the time of their release. One major enhancement that we plan to release in about two weeks is a trading simulator that will now allow brokerage clients to use all of the powerful automation or execution (inaudible) TradeStation on the TradeStation platform on a simulator or paper trading basis so the customers can explore and get more comfortable with the power stones powerful tools before risking any money on their trades. We view that the simulator will serve as a powerful trading tool that will build our customer bases comfort and confidence in trading actively using TradeStation. These are features that has been frequently requested by both our customers and our prospects. I then mention, we look forward to sharing additional enhances with you as they get closer to the release date. I truly believe that electronic rule-based trading, the core of our service offering and of our unique selling proposition has a (inaudible). It is (inaudible) to all serious traders and as time goes on we think that more and more institutional and individual traders both domestically and abroad will be primarily rule-based traders.

I want to once again thank all of our employees for their achievements and their continued dedication and focus. I continue to be extremely excited about our team and the potential we have to grow the Company to a new level.

That concludes my prepared remarks for today’s presentation. We’ll now ask the operator to open the floor for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll go first to William Tanona with Goldman Sachs.

William Tanona – Goldman Sachs

Good morning, guys. Just a quick question in terms of the guidance and just how we should be thinking about this. As I look at either the first quarter or the full year 2008 guidance and looking at the revenue guidance and then the corresponding EPS guidance, it looks like you guys are forecasting in either scenario pretty significant declines in margins. You guys had been running at 23%, 24%, but if I look at kind of the full year from worse case to best case, it’s somewhere between 19% and 22% and then in the first quarter it’s 18% to 20%. Just want to get your thoughts as to why the compensation or non-comp expenses seem to be increasing so dramatically here.

David Fleischman

Bill, basically the increases, the decrease is really all in the interest side. Our interest revenue we are projecting to go down. As I said in my remarks, we are prepared, in the outlook, we used the 2.5% rate by mid June as far as interest. Just to put it in perspective, pre tax, that’s about $13 million effect in 2008. So I think that’s really the main cause of that decrease. Now also, as we said, we also will be increasing our staff with the product development people that we talked about earlier.

William Tanona – Goldman Sachs

But just to kind of go back, push back on that a little bit, if I look at kind of the high end of the guidance in the 42 million that you guys are projecting and then take the $0.19 and multiply that out by 44 million shares, it basically is telling you have an after tax margin of about 20% and so you still have revenues increasing regardless of the impact from net interest income so I’m still kind of looking as to why there’s such a big ramp-up on the expense side of the equation.

David Fleischman

It’s also because as our commissions and fees increase, our clearing expenses increase, I mean execution.

Salomon Sredni

Bill, it’s Sal. I think what’s happening is that we’re losing basically revenue that’s 100% margin. It’s being offset somewhat by what we believe will be an increase in commissions and fees, but again there’s a margin that there’s a cost to those revenues where the revenues were losing had no cost attached to them. So that’s what’s driving in effect our margin percentage down. There’s nothing the cost increases outside of what’s valuable related to execution don’t change dramatically year-over-year in our work.

William Tanona – Goldman Sachs

Then in terms of just looking at the added disclosure you gave for the net new accounts on the forex, is it right to kind of interpret that as the 800 million forex accounts that you got in the last six months is about a third of net new account openings or are we looking at that the wrong way? I guess asked differently, if somebody has a stock or an option account and then gets into forex, does that count as a new account opening for the overall franchise as well if they open up a different account in forex?

David Fleischman

Yes, it does. It’s a separate account.

Salomon Sredni

Just a quick correction, you said 800 million, I only wish it was 800 million accounts, it’s just 800 accounts and that was in the six-month period. So off the top of my head, we probably added, I don’t know, somewhere around 2,600 accounts in the third and fourth quarter, so 800 of them were forex, some of them could’ve been current customers, some of them, I would say a majority is probably new customers.

David Fleischman

Yes, actually the number’s 3,400 accounts.

Salomon Sredni

Thank you.

William Tanona – Goldman Sachs

Thanks for the clarification. So just in terms of understanding it maybe a little bit better, then if I look at your overall new accounts or your overall account base, how much of those are, how many of those are just relationships? So of the accounts that you have, what’s the actual number of relationships that you guys have outstanding?

David Fleischman

It’s really a very small number, a very small percentage of our accounts have more than one account, usually their unique.

William Tanona – Goldman Sachs

Thanks.

Salomon Sredni

Mostly relationships, Bill.

Operator

We’ll take the next question from Tripti Prasad at Sidoti.

Tripti Prasad – Sidoti & Co.

Good morning. I have a question on the, again, just going back to the guidance really quickly, looking at the low end here just trying to understand for each basis point is where I guess in the last Q it was $55,000 was the quoted number per basis point. So seeing that you’re predicting I guess an additional 50 basis points, but one starts in March and one starts in June that for each, if we were to use say like a round number, it really would end up being closer to $2 million for the year as an impact meaning, I can’t see why the guidance is any lower than like $0.74/$0.75.

David Fleischman

Tripti, I’m sorry but I’m not sure I understand the question.

Tripti Prasad – Sidoti & Co.

So of the 25 basis points, is that still, is it a fair benchmark still $55,000 per basis point?

David Fleischman

I see, yeah. If you recall at December 31^st, the Fed Funds Target Rate of Interest was 4.25. Over the course of the year, we’re brining it down to 2.5%. You have to look at the entire year and the entire delter [sic] of the interest rate change.

Tripti Prasad – Sidoti & Co.

Right, but by the time it goes down to 2.5%, that impact in June would, $55,000 was an annual number so…

David Fleischman

Now that annual number is $60,000 because our account base has grown.

Tripti Prasad – Sidoti & Co.

But if you’re already expecting a 10% decline in the equities per account, then wouldn’t that already be taken if not 50% of I guess of all of your accounts, right, like wouldn’t that already be taken into account?

Salomon Sredni

Tripti, the low end of the range and the high end of the range, the only difference in that range is really fluctuation in our trades per account. It doesn’t have to do with interest in particular. When you’re looking at interest rates, how we build in both the low end and the high end model the range, what we’ve assumed, as David said, is this decrease that’s pretty substantial in interest rate at a pretty accelerated time period from start in September and we expecting, obviously you saw what happened in January where there was 125 basis point decrease. So when you’re looking at the range, it has nothing to do, the range is not driven by the interest rate, the range is driven by potential fluctuations because obviously we don’t know of trading per account, so it’s not driven by interest rates. The impact of interest rate is, as David mentioned, for the year, I think he said it’s $13 million on a pre-tax basis. That’s what’s flowing through. It has nothing to do with the low end or the high end of the range.

Tripti Prasad – Sidoti & Co.

Then looking at the account adds, you have healthy growth here, but really still around the 5% sequential increase so what are some of your new, like new initiatives that are really going to drive something a little bit more than that in the upcoming quarters?

Salomon Sredni

Well I mentioned the simulator, which is in our release of our current version of the product, but also as additional functionality as it relates to features that our customers have been asking for. We believe that the simulator is going to have an impact on net account openings. But the bottom line is that we have several initiatives in our product development pipeline and the decision I’ve made is really to talk about those as they become closer to the release date. So the bottom line is that we have a lot of exciting stuff in the pipeline but nothing that I’m prepared to talk about except for Release II which includes additional futures execution type functionality and also includes the simulator. As we continue to also build, I mean we have the impact of a bigger sales force; we have the impact of our increased spending on marketing, new marketing campaign, so it’s (inaudible) that that continues to build the momentum that we have, that we had in the fourth quarter.

Tripti Prasad – Sidoti & Co.

Thanks a lot.

Salomon Sredni

No problem.

Operator

(Operator Instructions) We’ll go next to Rich Repetto with Sandler O’Neill & Partners.

Richard Repetto – Sandler O’Neill & Partners LP

Good morning, guys. I guess I may have misheard you, but I heard 50,000 and I also heard 60,000 on the sensitivity to the additional basis point.

David Fleischman

60,000 at December 31^st.

Salomon Sredni

Per basis point.

David Fleischman

Per basis point (inaudible) income.

Richard Repetto – Sandler O’Neill & Partners LP

Then the next, this 10% assumption on what the revenue of the equity accounts generate down, now is that just trying to be conservative or is that something more purposeful, like a price decrease or something.

David Fleischman

First of all, and let me just say, that it was very specifically for our equities and options account, the trades per account for the month of January and it was just to try to be a little more conservative and bring it in line.

Salomon Sredni

Equity and (inaudible) were sky high in January and we felt that as we built an outlook, we ought to be a little more conservative than assuming that that continue at those levels. If they do that, that would be gravy, but that’s what we did in outlook.

Richard Repetto – Sandler O’Neill & Partners LP

I understand that now. This legal fees, I didn’t catch that that there was expense and now that will be reversed over the year or will be expensed in the first quarter and then reversed over in the year.

Salomon Sredni

No, Rich. As David mentioned, there was a lawsuit that was filed a years ago by partnerships that were affiliated with former executives of onlinetrading, which as you probably recall, we acquired back in 2000. Last week a jury down in (inaudible) determined there was no wrong doing and we prevailed on all the claims. We are entitled to receive those fees back from the plaintiffs. We’ve expensed them and we have not… When we recover them, we will record again contingency but we can’t record that until we get the money in house. So one day those fees will come back, but we certainly haven’t built it into the outlook we showed you today.

David Fleischman

But first quarter does include $900,000 expense.

Richard Repetto – Sandler O’Neill & Partners LP

The first quarter guidance includes a $900,000…

David Fleischman

That is correct. That is correct.

Salomon Sredni

It will be there. Those are fees we incurred.

Richard Repetto – Sandler O’Neill & Partners LP

That’s the number that will be eventually be reversed when the cash comes in.

David Fleischman

If and when it comes in, yes.

Richard Repetto – Sandler O’Neill & Partners LP

Gotcha. I guess the last question is the DARTs on the futures DARTs, now you account for them on a round turn basis, is that correct? Like one DART is equal to two contracts traded?

David Fleischman

Yes.

Richard Repetto – Sandler O’Neill & Partners LP

That was it. That’s all I have.

Operator

We’ll go next to Matt Snowling with FBR Capital Market.

Matt Snowling – FBR Capital Markets

Hi guys. Just wondering, with $104 million of cash, I have to ask this question, and your outlook for short rates coming down even further, why wouldn’t you be a little bit more aggressive in buying back the stock, especially down to $10? Is this all accretive to put that to a buyback?

Salomon Sredni

We looked at it; it would be accretive. We’re currently evaluating internally what the options are with cash. Ideally we’d like to find better ways to work that cash then do a buyback. As you know, we currently have a buyback in place, $60 million buyback. So as I said earlier, it’s something that we look at from time-to-time, but to be quite frank, we continue to look at acquisitions and see if there’s an opportunity to continue to leverage the business and expedite some of these initiatives that we’re excited about that we think we can expedite if we do the right deal.

Matt Snowling – FBR Capital Markets

Just a follow-up question: How much cash do you think you need just from an operational standpoint?

Salomon Sredni

It’s a difficult question, but the number I’ve quoted in the past is somewhere in the $30 or $40 million range.

Matt Snowling – FBR Capital Markets

Great. Thanks.

Salomon Sredni

No problem.

Operator

We’ll go next to Joe Spinelli with Citi.

Joe Spinelli – Citigroup

But again, congratulations on another good quarter. I was wondering if we could talk a little bit just about the forward guidance because I want to make sure I’ve got this modeled out correctly. If I look at, and the part of this I’m struggling with is on the interest rate front. I use the Fed Funds Futures as kind of a benchmark for where rates are going in the future. They’re showing four cuts by August, essentially one at the March, April, June and August meetings; and you guy are going with, you’re saying 50 basis points and then nothing additional.

David Fleischman

Basically when we prepared the outlook, I looked at the consensus; and the consensus that I saw was these 2 basis points out of 25 basis point cuts. But the reason we’re giving you the $60,000 per basis points, so if you want to use something different, feel free for your model.

Joe Spinelli – Citigroup

Understood. But I mean it’s… I’m just trying to understand what your expectation was based on. So you’re just saying it’s based on just consensus you’ve seen from strategists and the like?

David Fleischman

That’s correct.

Joe Spinelli – Citigroup

Totally fair. Great. Obviously none of us know exactly where it’s going. Then the second thing, guys, if we could talk just a minute about the rate per trade or commission per trade. Was the decrease that we saw this past quarter, was that the result of increased effect or forex trading or more futures versus options? I mean exactly how do we clarify that?

David Fleischman

Sure. It was really… It is the mix of business. Equities business was much stronger this quarter. But what you have to remember about the margin and so on is the fact that we earn less revenue per trade on an equities trade, but our margin is higher on equities trade than it is on a futures trade. To put in perspective, we aren’t the highest gross margin is on forex but as a percent but, and as a percentage such a low part of our mix of business today. But the revenue per trade is lower on equities, but we have a higher percentage of margin.

Joe Spinelli – Citigroup

Understood. Then in terms of modeling out the forex business going forward, when do you anticipate that starting to have some material impact on the operating results? Is that an ’08 story or should we focus more on that as being out in kind of ’09?

Salomon Sredni

We’ll continue to pound as our market will continue to really promote our product and hopefully will continue to grow. Obviously I always said that there’s a little rock up period and you’ll see, obviously we saw that third into fourth quarter, but we obviously continue to hope that that will continue to increase and we’ll spend some marketing dollars there to try to bring new forex traders in the fall.

Joe Spinelli – Citigroup

Understood. Understood. Great. Thanks again, guys.

Operator

We’ll go next to Edward Ditmire with Fox-Pitt Kelton

Edward Ditmire – Fox-Pitt Kelton

Good morning, guys. I was trying to back into what kind of expense projections you’re looking at from the revenue and earnings per share guidance you gave. Is it far off to say that you expect operating expenses to increase about 20% in ’08 versus ’07?

David Fleischman

Are you including an execution cost in that analysis?

Edward Ditmire – Fox-Pitt Kelton

Yes.

David Fleischman

I actually think the number is probably a little less but it’s somewhere between 15% and 20% including clearing and execution. Remember that’s a variable cost so you always have to keep that in mind.

Salomon Sredni

More so that comes… If I recall I the outlook, and I’m going off the top of my head, there’s a 40% increase in brokerage commissions and fees. So if you have a 40% there, a majority of the increase is really coming off of both clearing and execution costs.

Edward Ditmire – Fox-Pitt Kelton

Can you guys kind of, I know you’ve talked about this in the past, but kind of give your latest thoughts for how to think about clearing and execution costs as, what component is fixed and which component is variable?

David Fleischman

Sure. Basically the clearing part is fixed and the execution is the variable. As we’ve talked about before, we use SunGard Phase III system for our equities and options; we use RJO for our futures and Bear Stearns clears our institutional equities and options. The SunGard portion and the RJO portion are fixed and so then the only variable you really have in there are your execution costs and, again, that’s going to also move around depending on mix of business.

Edward Ditmire – Fox-Pitt Kelton

I guess what I was trying to get a sense of is what portion of that line item do you think is fixed and which portion is variable?

David Fleischman

I guess the easiest way for me to say it is that the small, it’s a very, very small part. The fixed portion is a very small part of that total line.

Salomon Sredni

As we’ve grown our revenue line, obviously in that (inaudible) is a valuable piece and the fixed piece has remained pretty small so only the valuable piece is growing.

David Fleischman

In other words, if I were thinking of it, I probably think probably close to 100% as being variable.

Salomon Sredni

To be frank, one of the things we’re looking at is: Hey, what can we do to bring the valuable piece down? But that’s going to way down the line and we’ll see what we can do there.

Edward Ditmire – Fox-Pitt Kelton

Thanks, guys.

Operator

That does conclude the question-and-answer session for today. I’d like to turn the conference back over to the presenters for any additional or closing remarks.

David Fleischman

Thank you. There being no further questions, we would like to thank all of you for joining us this morning. We appreciate your support and look forward to our next conference call. Thank you.

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