By Tara Seals

Posted: 1/2002

Trading Desk

Going for Brokerage: RateXchange Regroups

By Tara Seals

RateXchange Corp. plans to be cash-flow positive early this year. After establishing a core competency of general brokerage, cutting away a subsidiary, expanding its information services and changing around management, the company sees nothing but smooth sailing ahead, despite a difficult financial environment,

“We diversified our revenue base so we don’t end up being a one-trick pony,” says Russ Matulich, RateXchange senior vice president.

RateXchange, a former neutral online trading system for the exchange of telecom bandwidth capacity, spent 2001 in evolution. The company added information and consulting services, then new services to be traded, such as IP transit, and, finally, an OTC component.

The company’s latest change comes with the announcement that it will begin brokering products outside the telecom realm, such as stocks and bonds.

RateXchange CEO Jon Merriman comes from a Wall Street background, and Matulich says he’s driving the initiative.

“We’ll broker wherever the opportunity is, whether it’s minutes or IP or bandwidth or stocks and bonds,” says Matiluch. “But we’re not jumping into opportunities where we don’t have expertise.”

The company’s brokers have a book of business that they bring with them from company to company, he explains. Customers are loyal to the broker rather than the firm, and RateXchange has been attracting brokers by offering larger commission percentages than established firms.

In the stocks and bonds business RateXchange’s is a boutique clientele. Rather than focus on the market share dominated by huge companies such as Merrill Lynch and Morgan Stanley, which cater to individuals with large personal net worth and billion-dollar corporations, RateXchange brings on $50 million to $150 million portfolios.

“We’ve got a lot of relationships,” says Matiluch. “We want to broker based on bringing people in that can pay for themselves.”

And while the company has been moving in a general brokerage direction for six to nine months, it is actively picking up volumes for brokering other things besides bandwidth.

“It’s brokerage in its purist form, stocks, bonds and other commodities,” Matiluch explains. “It’s a diversification of a product line. Brokering will be the primary focus.”

In order to solidify that focus on the brokerage business, RateXchange sold its Xpit Corp. subsidiary to the privately-held CQG Inc. Xpit ran an Internet-based futures trading system.

“Xpit was a front-end trading system for regulated commodities, and you could buy gummy bear futures if you wanted to on it,” says Matiluch. “It got out of our core competency of brokering.”

The sale strengthens RateXchange’s balance sheet and brought in cash for expansion. CQG paid $1.5 million in cash and invested an undisclosed amount in RateXchange’s $3.25 million financing round.

“We had a solid quarter, given the extremely difficult environment,” said Merriman. “For the third consecutive quarter, we have decreased our cash operating expenses significantly, continued to deliver solutions to our customers and moved forward on our brokerage operations, which we expect to deliver near-term revenue.”

RateXchange’s financial results for the third quarter showed revenue growth of 11 percent from the previous quarter. Its cash operating loss of $1.6 million improved 24 percent quarter-over-quarter from $2.1 million and 75 percent year-over-year from $6.3 million. The company expects EBITDA break-even in the second quarter of 2002.

Despite the diversification, the company still is involved in bandwidth trading, online and OTC via a partnership with Amerex Ltd.

The delivery and physical exchange of bandwidth it will leave to others, however. “We just don’t want to be held back by big capital-intensive businesses like a telecom network,” says Matiluch.

In RateXchange’s bandwidth brokerage partnership with Amerex, total equivalent DS-O miles traded in the third quarter of 2001 grew 157 percent, to approximately 1.5 billion miles. That’s up from 583 million miles in the second quarter of 2001, while total bandwidth gross merchandise value traded grew 3.3 percent quarter-over-quarter, to $3.36 million from $3.25 million.

RateXchange also continues to beef up its consulting and information services divisions. After terminating a relationship with Dow Jones Inc. for bandwidth market indexing, RateXchange signed a deal for indexing last fall with Reuters News Service Inc.

“Dow Jones wanted carriers to deliver numbers in financial transactions to them and carriers just won’t do that,” explains Matiluch.

Reuters publishes RateXchange bandwidth prices and a bandwidth index.

“We have the most data and we’re neutral and we have no vested interest as a principle,” says Matiluch. “Reuters has 700,000 terminals, and we feed pricing and a snapshot of what’s happening in bandwidth trading.”

RateXchange also has had changes in management, with two key executives doing double duty. After the Xpit sale, Merriman was appointed chairman of the board of directors, while remaining CEO. Rob Ford will stay as COO, but also took Merriman’s former title

of president.

Some of the management changes were in the wake of a wave of resignations. Michael Cairns, senior vice president of finance, and Nick Cioll, chief strategy officer left

the company.

Jack Blunt, formerly vice-president of finance and business development, will become senior vice president of finance while Rick Robinson, formerly vice president of sales, was named chief strategy officer.

RateXchange also an-nounced resignations from its Board of Directors. Michael Boren and David Boren, the two founders of Xpit.com, have given up their seats, but remain RateXchange shareholders and will transition to the company’s advisory board.

“These new positions and promotions complete our management transition to focus on our brokerage, information and consulting businesses. I am pleased to work with this cohesive group as we head into 2002, which promises to be an exciting year,” said Merriman in a statement.