Guys, let's get back to talking about EGRP and not about each other. Thanks.
Here's an article doubting E*Trade. (Note the ad on the upper left side is for Ameritrade. Gee, at least try not to be so obvious about it.)
E*Trade: Less Than Meets the Eye?
smartmoney.com
July 20, 2000
E*Trade: Less Than Meets the Eye?
By Matthew Goldstein
THE FOLKS WHO run E*Trade Group (EGRP), the nation's third-biggest online brokerage, love to count heads.
When E*Trade announced its fiscal third-quarter profits this week, the company crowed that it has nearly three million online accounts. That's more than double the customer count this time last year. Pretty good, no? Well, let's take a closer look at the numbers.
To be precise, the Menlo Park, Calif., firm has 2,944,741 customers. But those aren't all online trading accounts. It turns out that 222,582 accounts are with E*Trade Bank, the newly minted online bank that the firm rolled out a few months ago, following its acquisition of Telebanc.
And of E*Trade's remaining 2,722,159 online stock accounts, one Wall Street analyst estimates that as many as 25% may not be active trading accounts in the truest sense of the word. Why's that? E*Trade includes in its tally online accounts it administers for some 3,500 companies with employee stock-option programs. E*Trade's been doing this for about two years and it views all those employees as future long-term customers.
The problem is that until those employees exercise their stock options, those accounts at E*Trade are more or less dormant. Moreover, there's no guarantee that the stock options in those accounts will ever be exercised. Many of the companies in E*Trade's Business Solutions Group are young technology firms with uncertain futures and underwater options - especially after the big April sell-off.
E*Trade's never broken out separate numbers for the stock-options program, and company officials won't say for certain how many online trading accounts are of the stock-option variety. In fact, the firm won't even confirm that those accounts are included in its overall tally.
If E*Trade does count them in its total, it would by no means be alone in fudging its number of customers. Nancy Salk, director of financial-services research for the consulting firm J.D. Power and Associates, says the two biggest online brokerages in terms of customers -Fidelity and Charles Schwab (SCH) - also include dormant or relatively inactive trading accounts in the numbers they publicly report. She says the online-brokerage industry needs an agreed-upon standard for what constitutes an active trading account.
But what's troubling about E*Trade's math is that its soaring new-customer count has been one of the firm's few real bright spots. Yes, it's true that E*Trade surprised everyone this week when it reported a break-even quarter - on a 77% revenue increase over the same time last year - after most Wall Street analysts expected the firm to post a loss of a penny a share. But E*Trade probably would've lost money last quarter if it hadn't slashed its massive advertising and marketing budget by 35% following April's big market correction.
And while all online brokers have felt the pain from a sharp 25% falloff in online trading activity since April, E*Trade seems to have fared worse than archrival Schwab. Of particular concern to E*Trade shareholders should be a 6% dip in the value of customer assets under the firm's management. At the end of the June quarter, E*Trade customers had $60.7 billion in investment and banking assets - roughly $5 billion less than at the end of March.
E*Trade officials won't comment on the asset decline. Instead, they note that the firm's customers deposited a gross $7.6 billion in new money and assets with the firm during the most recent quarter. But it's obvious that a good number of E*Trade customers lost money in the April correction and the newly deposited money didn't make up the difference. Indeed, the average E*Trade brokerage customer now has $20,000 in his or her account, down from $25,000 in March, analysts say.
Schwab's online-brokerage division, by contrast, suffered only a minimal decline in customer assets. Schwab's online customers ended the quarter with $413.5 billion in assets, a 1% drop from March's $418 billion figure. And when you factor in Schwab's traditional brokerage business and its recent acquisition of the money-management firm U.S. Trust, Schwab simply swamped E*Trade in the asset-gathering race - taking in $37 billion in new-customer assets last quarter. The average Schwab customer now has $129,000 in his or her account, up from $112,000 in the prior quarter.
Those are important statistics because the key to growth in the brokerage business these days is gaining control over a greater share of a customer's assets. Investors with deeper pockets generate more revenues for a brokerage firm because they're more likely to deposit their money in a wider range of financial products - such as IRAs, mutual funds and bonds. That's one reason E*Trade in the past year moved into the banking business with its acquisition of the online-banking company Telebanc and a national chain of automated teller machines. The online firm believes that if it has more financial products to offer, it will be able to entice customers to deposit more of their money with the firm.
In fact, E*Trade officials point to all those employee stock-option accounts as their little-known ace-in-the-hole in the competition for securing more customer assets. Amy Errett, E*Trade's chief asset gathering officer, says that if all the stock options in the plans the firm manages were immediately exercised, they would add some $150 billion in customer assets.
And most analysts agree that E*Trade's strategy of trying to manage as many employee stock-option plans as possible gives the firm a leg up over rivals like Ameritrade Holding (AMTD) in forging long-term customer relations. But for now, most of those assets and accounts are unrealized potential, no matter how they're counted. |
