Hambrecht & Quist update on EGRP
Company: E*TRADE Group
Price: 25.75
Recommendation: Buy - Focus List
Notes: a, b
Date: 3/14/00
E*Trade Changes the Rules of Engagement for Pure-Play Online Banking
* E*Trade announced the acquisition of Card Capture Services (CCS), the
largest independent network of ATM machines, consisting of 8,500 terminals in
48 states.
* Through this acquisition, E*Trade should solve one of the great deficiencies
of pure-play online banking - the frustrating need to mail deposits. Soon
customers will be able to make deposits (and withdraw cash without fees)
directly through this expansive ATM network. We believe this should help
stimulate faster growth in E*Trade's banking operations.
* This acquisition gives E*Trade a vast physical presence and greatly enhances
customer convenience and functionality with very little bricks-and-mortar.
The ATM machines will become branded under the E*Trade name, leveraging the
company's marketing efforts.
* This is another example of E*Trade pushing the envelope and throwing
competitors on the defensive. We view this acquisition as a savvy way to
narrow the gap between the e-world and the real-world. Banking deposits and
withdrawals are only the beginning - the ATMs should evolve into multi-
function financial kiosks.
* Terms of the deal were not announced. It will be accounted for as a
purchase using stock. CCS is a fast growing and profitable company on a
standalone basis with revenues of $72 million during calendar 1999.
*
1999 A 2000 A 2001 E
Q1 EPS $(0.04) $(0.14)A $(0.04)
Q2 EPS 0.03 (0.18) 0.01
Q3 EPS (0.09) (0.13) 0.09
Q4 EPS (0.10) (0.06) 0.17
FY EPS (0.20) (0.51) 0.23
FY REVS (M) 677 1,220 1,640
CY EPS (0.30) (0.41) 0.49
CY P/E NM NM 53
FY Ends Sep Current Price $25.75
52-Week Range $6-72 Market Cap (M) $7,287.3
Shares Out (M) 283.0 Book Value NA
Net Cash/Share NA 3-Year EPS Growth NM
CY01 P/E-to-Growth NM
Leaping the Big Online Banking Hurdle. E*Trade announced that it has
signed a definitive agreement to acquire privately-held Card Capture Services
(CCS), the nation's largest independent network of centrally-managed automated
teller machines (ATMs). Through an all-stock purchase transaction, E*Trade
gains CCS's existing network of 8,500 ATMs operating in 48 states and three
countries. The machines are predominately located in hotels, shopping malls,
grocery and convenience stores, gas stations, and a number of other public
domains. Through this acquisition, we believe that E*Trade is initially
removing one of the impediments to pure-play online banking, the frustrating
need to mail deposits. This should help stimulate adoption of online banking
and drive new accounts to E*Trade Bank. Additionally, the ATM machines could
eventually become financial kiosks, with greatly expanded functionality.
Not considering any of the strategic implications of this deal, E*Trade is
gaining a fast-growing, profitable company with 1999 revenues of $72 million
and an experienced management team. Although the financial terms of the
acquisition have not yet been released, it should be accretive to earnings,
even after goodwill charges. The deal is expected to close during the
calendar second quarter.
Founded in 1993, CCS is a full-service provider of transaction processing and
ATM systems management that sells and distributes standalone ATM units through
a network of dealers around the country. In most cases, merchants purchase
the machines from CCS and enter into an ongoing revenue share agreement. Why
would a merchant want to purchase an ATM terminal for their store? By
providing a means for customers to obtain cash within the store, merchants
benefit by minimizing their exposure to bad checks and lowering their credit
card processing expenses, not to mention the incremental foot traffic
(especially if there are no competing ATMs within a reasonable distance).
By now owning this network, E*Trade should benefit by strategically leveraging
the visibility of these machines to enhance brand awareness and add a
significant degree of convenience for its customers, all of which we believe
will further differentiate E*Trade from its competitors. Ultimately, E*Trade
should be able to use these machines as cross-selling tools and to provide
services to its existing customers while reaching potentially new customers
who access the machines independently.
One of the primary hurdles that has faced the Internet banking industry since
its inception has been the lack of physical touch points with its customers.
In other words, Internet banking customers have enjoyed the functionality of
processing transactions such as bill payments and account transfers on-line,
but could only access cash through ATMs that imposed surcharges and make
deposits through the mail. Although CCS's existing network of ATMs does not
currently offer deposit capabilities, the implementation of such functionality
can be added to the machines very easily and the collection of deposits will
be administered through a third party vendor. Through this increased
functionality, E*Trade can bridge the gap between the e-world and the real-
world.
The value of this ATM network to E*Trade should extend well beyond the current
capabilities. E*Trade has plans to convert each ATM unit into a financial
services kiosk. Imagine being able to walk up to a machine in a local
convenience store, deposit a check, withdrawal cash, trade a high-flying
Internet stock, buy concert tickets, check the weather forecast, and talk to a
live customer service agent via streaming video - all in one stop. ATM
terminals are already gaining increased complexity, enabling an extension of e-
commerce. In fact, many of CCS's new machines are already dispensing postage
stamps, prepaid phone cards, and coupons today. |
