E*Trade Earnings Mixed, Could Hurt Stock In Early Trading
By REBECCA BUCKMAN
Dow Jones Newswires
NEW YORK -- Shares of on-line brokerage E*Trade Group Inc. (EGRP) could open slightly lower Wednesday on a mixed quarterly earnings report.
Tuesday night, the Palo Alto, Calif. reported fiscal second-quarter profits that met analysts' expectations. But underlying the 15-cent-a-share number were what at least one analyst called some troubling statistics, including lower-than-expected growth in transactions and commission revenue.
"The quarter looks fair," wrote analyst James Marks, of Credit Suisse First Boston Corp., in a research report issued late Tuesday. "The company hit its botton-line target, but only with some unexpected revenues."
Those revenues came from E*Trade's international operations, Marks said. Revenue from stock commissions, the firm's bread-and-butter, came in about $2 million below Marks' estimates. Overall, transaction volume was up just 1.4% from the level of the previous quarter, far short of Marks's published prediction of 7.5%.
Last week, Marks and some other analysts said that E*Trade could report profits of as much as 16 cents or 17 cents a share. Instead, net income came in at $6.1 million, or 15 cents a share. That figure is up substantially from profits of less than $3.1 million, or 9 cents a share, in the year-earlier quarter, but down a cent from the company's first-quarter earnings.
Counting a one-time acquisition charge, however, profits in the first quarter were 12 cents a share.
Analysts noted that transactions and commissions in E*Trade's fiscal second quarter were hurt by one factor beyond the company's control: There were 5% fewer trading days than in the first quarter.
Still, investors seemed worried about E*Trade's profit report. Recently, shares of the company were down 2 9/16, or 9.5%, to 24 3/8, on Nasdaq volume of 1.7 million shares, already exceeding the daily average of 1.08 million. They were earlier down as much as 15.1%, at 22 7/8.
Analyst Mark Wolfenberger of Deutsche Morgan Grenfell lowered his rating on the stock Wednesday to accumulate from buy. Before E*Trade's earnings report, he had warned that account growth at the company could be hurt by increased competition from other, lower-priced competitors, such as Ameritrade Holdings Corp. (AMTD).
E*Trade said it added 80,000 new accounts in the quarter, bringing its total to slightly over 400,000. But that number may be less than it seems: Analysts suspect many of the new accounts came from E*Trade's acquisition late last year of OptionsLink, a California firm that administers corporate stock-option plans.
The OptionsLink accounts are much less active and generate less revenue than regular E*Trade accounts, and some analysts appeared miffed that E*Trade didn't break out those numbers. In the first quarter, E*Trade told analysts it added 35,000 new, core accounts and about 65,000 accounts from OptionsLink.
In his report, CS First Boston analyst Marks said account growth looked strong, "but is it meaningful?"
He called transaction growth "tepid," although he noted that the average daily number of trades was 6.4% greater than in the first quarter. Overall revenue, which was $53.3 million, fell short of Marks's estimate of $54.23 million.
But E*Trade Chief Executive and President Christos Cotsakos said he's not worried about the slower quarter-to-quarter growth in transactions at his company.
"We're very pleased with our results. We think they were excellent given the market conditions," he told Dow Jones.
Cotsakos said E*Trade was hurt by the wider stock-market slowdown in January, which followed the somewhat lethargic months of November and December. In addition, he acknowledged that with the on-line trading industry now "punctuated with a lot more competitors," some of E*Trade's customers are migrating to lower-priced brokers.
But over the long-term, E*Trade's business plan - which includes providing other financial services such as home mortgages and on-line bill payment - will make it a leader on the Internet, Cotsakos maintained.
"We're not building the company quarter over quarter," he said. "There's going to be a correction at some point, and when that correction hits, all these companies with cheap trades and no infrastructure and no cash are going to have a very, very difficult time in the marketplace."
E*Trade should start realizing revenue from some of the new, banking-type services on its soon-to-be unveiled "Destination E*Trade" Web site sometime early in the next fiscal year, Cotsakos said. Destination E*Trade, which also contains more services and information for public Web surfers who don't hold accounts with the company, will be rolled out later this month.
When it announced its earnings late Tuesday, E*Trade also unveiled big plans for international expansion. "That's another area where we're far ahead of the pack," the CEO said.
The company said it signed licensing agreements with four foreign companies - in Asia, France, Germany and Israel - that will allow E*Trade to offer its services in 25 more countries. E*Trade now operates in Canada and soon will launch services in Australia through a firm there, Nova Pacific Capital.
Cotsakos said E*Trade will take a minority stake in each of its four new partner companies - which E*Trade declined to name - and may pursue joint ventures with other firms with which the four partners sign sub-licensing deals. It is through those sub-deals that E*Trade will eventually move into 25 new nations, Cotsakos said.
-Rebecca Buckman; 201-938-5294 |
