E*Trade 2nd-Qtr Loss Narrows, CEO Says Profit Nearer
4/12/00 2:22:00 PM
Source: Bloomberg News
cnetinvestor.com
Menlo Park, California, April 12 (Bloomberg) -- E*Trade Group Inc. narrowed its operating loss in the fiscal second quarter to $22.6 million as trading volume surged and the No. 2 online broker added a record 603,000 net new accounts.
The Menlo Park, California-based company reported revenue more than doubled to $407.4 million, from $161.8 million a year ago, as transaction revenue and net interest income both tripled.
Chief Executive Christos Cotsakos said in an interview that the brokerage could 'absolutely' record a profitable quarter by the end of 2000, about six months earlier than expected, as it reduces ad spending more than 40 percent from current levels.
'Clearly we can take it down,' he said. 'Our message has taken root and we've found that a lot of the spending out there directs people to E*Trade.'
E*Trade ended the quarter with 2.6 million total accounts, likely moving it closer to industry leaders Charles Schwab Corp. and Fidelity Investments, which each had more than 3.3 million online accounts on Dec. 31.
'I think there will probably be some juggling but we can probably overtake Schwab within the next year,' Cotsakos said in the interview.
The 603,000 new accounts added in the three months ended March 31 were 83 percent more than the 330,000 E*Trade added the previous quarter.
'This has got to open up some people's eyes -- Merrill Lynch and Schwab have ceded the low end to E*Trade and Ameritrade and these guys are just scooping up new accounts,' said Greg Smith, analyst with Chase Hambrecht & Quist. Ameritrade Holding Corp., the No. 6 Web broker, is due to report results tomorrow.
Trades Surge
At E*Trade, daily average trades rose 73 percent to 229,000 from 133,000 in the previous quarter. Schwab clients made an average of 320,000 commission trades in March.
'We had several days where we were above 300,000 trades, pushing us ever closer to gaining the top spot,' Cotsakos said during a conference call with investors and analysts. In 1998 E*Trade had one-third Schwab's market share of trades; on March 31 it had two-thirds.
Still, E*Trade executives cautioned analysts that trades are likely to fall in future quarters from last quarter's record. 'There's probably going to be a sequential decline, although this month has been good so far,' said Steve Franco, analyst with U.S. Bancorp Piper Jaffray.
Client margin debt rose 63 percent during the quarter to $6.2 billion, rising to 9 percent of assets from 8 percent the previous quarter, said Len Purkis, chief financial officer. Fully 350 stocks now can't be bought on margin, up from 60 a year ago.
E*Trade will open an 'investment learning center' on New York's Madison Avenue by October, featuring live Webcasts, demonstrations and equipment from computer, software and media companies, Cotsakos said. The company will open several more such centers over the next few years, he said.
Banking-Brokerage Kiosks
By October, E*Trade will also put combination banking- brokerage kiosks in the offices of some of the 3,000 companies that use it to manage their employee stock option plans. E*Trade will also add Germany and Hong Kong to its nine-country international business this year, and boost online advice offerings from DirectAdvice.com and Financial Engines Inc. this quarter, executives said.
The average cost of a new E*Trade account fell 11 percent during the quarter ended March 31, to $256 from $289, as the Menlo Park, California-based company spent $177.5 million on advertising and marketing in the quarter, up 49 percent.
The company should spend $100 million to $120 million a quarter on advertising over the next six months, meaning ads will account for a declining percentage of revenue, said Cotsakos. Commissions accounted for 46 percent of gross revenue in the latest quarter, a figure that should drop to near 30 percent in three years, he said.
The company ended the quarter with $65 billion in assets, up 39 percent from last quarter, including banking assets of $6.5 billion. E*Trade completed its purchase of Telebanc Financial Corp. during the quarter, and now has 170,584 online bank accounts.
Schwab's Assets
Schwab, which reports earnings Friday or Monday, had assets of $725 billion at Dec. 31.
E*Trade's second-quarter operating loss of 8 cents a share was narrower than the 16 cents analysts surveyed by First Call/Thomson Financial expected. A year earlier E*Trade lost $23.5 million, or 9 cents, on operations.
'The thing that jumped out at me was expense control, the gross margin was 68 percent and I expected 51 percent,' said Franco, who now projects a 30-cent profit for the fiscal year ending Sept. 30, 2001, up from break-even. 'It shows you that there is a profitable model underlying the hyper growth they've been going through.'
Gross margins should remain between 50 percent and 60 percent in coming quarters, said Purkis.
Not counting merger-related costs and gains and losses on venture capital and other corporate investments, what the company called 'net after-tax income from ongoing operations,' E*Trade had a profit of $1.3 million in the quarter, or less than a penny a share. A year earlier the comparable figure was a loss of $13.3 million, or 5 cents a share.
Merger Costs
In the latest quarter, E*Trade had after-tax merger costs of $21.8 million, or 7 cents a share; after-tax gains on the sale of investments of $7.8 million, or 3 cents a share, and unrealized losses on venture capital investments of $10.5 million, or 4 cents, after taxes.
Including all gains, losses, and taxes, E*Trade had a net loss of $23.2 million, or 8 cents a share, in the quarter, compared with a year-earlier profit of $8.5 million, or 3 cents a share.
The company has more than $1 billion of cash and short-term investments, enough to last two years even in a stock market slump, Cotsakos said.
'There are a lot of companies out there that are in a one- horse race with a one-horse team,' he said. 'We have institutional, international, business solutions, banking, the huge retail piece, and the portal. That's very difficult for people to copy-cat.'
E*Trade fell 11/16, or 2.9 percent, to 22 3/4 in New York trading as the Nasdaq Composite fell 7.1 percent. That gave E*Trade a market value of $6.6 billion, compared to Schwab's $42.4 billion. |
