In a game where transactions worth millions of dollars earn you pennies of profit, you can't afford to have too many miscues. Electronic bond-trading firm eSpeed (NASDAQ:ESPD) reported yesterday that while it has earned more pennies than it anticipated, it's still losing the overall game -- the result of a series of problems that have plagued it for a while.

The operator of global capital marketplaces announced revenues of $38.9 million and earnings of $0.02 per share, both of which beat analyst expectations and its own guidance. But its performance was still off sharply from last year, when the company reported $44.6 million in revenue and earnings of $0.18 per share. The loss of its patent lawsuits, combined with an unpopular trading platform feature, cut into revenues.

eSpeed had transformed the way government bonds were bought and sold, scraping off a few pennies of commission on the millions of dollars in transactions it conducted. Trillions of dollars, really. For the first quarter of 2005, fully electronic volume was $6.4 trillion, a 12.6% increase over the $5.7 trillion reported in the first quarter of last year. Yet the revenues realized by eSpeed for handling those transactions fell by 33%, from $30.5 million to $20.4 million. Part of the reason for the fall-off was the eSpeed's decision to discontinue its "price improvement" platform feature.

"Price improvement" gave traders a better price, but slowed down a transaction, while eSpeed reaped greater profits. For traders, though, speed and reliability were more important than price and, with the price differences as narrow as they are on U.S. Treasuries and the higher commissions traders had to pay to get better prices, it simply was not worth it. eSpeed had touted the "price improvement" feature as an innovation that separated the company from the competition, but ultimately it allowed rival Broker-Tec to continue to gain ground on it. eSpeed's capitulation recognized this and led to diminished revenues. Some 40% of eSpeed's customers had used the feature, and more than 20% of the volume had contained some price improvement.

The next hit eSpeed took was losing the patent infringement lawsuits it had filed against Broker-Tec. Had eSpeed prevailed, the competition would either have had to pay huge royalties to eSpeed or shut down. However, the court ruled that there was no infringement. Moreover, in a separate lawsuit filed against another rival, Trading Technologies, the court found a defect in eSpeed's patent application that will probably result in the patent being voided.

This one-time promising selection of Motley Fool Hidden Gems (before being sold this year) seems stuck in the slow lane, unable to gain traction. It is attempting to expand its business by buying the Eurozone bond trading platform MTS Group, but it faces an uphill battle against a European consortium also trying to acquire it. (Eurozone refers to the 12 European Union countries that use the euro instead of their former distinct currencies.)

Yet as mentioned previously, eSpeed did beat its guidance and, as a matter of fact, upped guidance for the full year. It now expects to earn $155 million in revenues with net income of $0.15 to $0.18 a share. Still, that's some 7% below the $166 million it recognized last year. With cash and equivalents totaling around $3.50 per share, it is trading at less than two-and-a-half times cash on hand and a tempting 4.8 EV/FCF ratio. But the company has flashed such signs before, and there are simply too many uncertainties swirling around eSpeed to make it a safe investment. Competition continues to gnaw away at it, litigation costs continue to grow, and lost revenues are in the picture for the immediate future. eSpeed is just not on the fast track to anywhere.

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Motley Fool contributor Rich Duprey does not own any of the stocks mentioned in the article.