E*Trade Status report by BancBoston Robertson Stephens
Comments about Etrade in BancBoston Robertson Stephens June 22, 1999 eBrokers report.
eBROKERAGE QUARTERLY Status Report, Electronic Execution Agents and the Democratization of Information
? Agreed to acquire largest Internet bank, Telebanc?a major step to becoming an integrated
eFinance brand
? Market volumes show continued strength in April and June; Q3 estimates look good already
? Opportunity remains huge in growing secular online brokerage market
? Building strong brand in large multi-vendor marketplace
? Positioning itself as a one-stop financial services portal
? Significant technology investment as industry moves toward differentiation based on
functionality, convenience, and serviceCompany
Highlights
Global Financial Franchise Would Get Boost With Acquisition of Telebanc Financial
The table is set in the financial services world of Internet versus Bricks and Mortar. We believe
E*Trade?s proposed acquisition of Telebanc, the largest Internet bank, is a major step for the
company in becoming a top Internet global financial services franchise. Telebanc brings a major asset-gathering suite of online banking products along with a management team that understands the direct-to-consumer model as well as the complex nature of banking regulations, an acumen in short supply, in our view. Telebanc also gives E*Trade a major jump-start on the competition in one of the largest electronic market opportunities, the $4 trillion deposit banking market. In turn, Telebanc receives a major boost in operating leverage, including a leading online brokerage productand a significant move up the marketing budget food chain. Along with its strategic positioning, Telebanc provides financial services product breadth that relieves E*Trade?s transaction dependency. As a FDIC-insured bank, Telebanc generates the majority of its revenues through a conservative asset
portfolio that consists of AAA-rated mortgage-backed securities and A-rated one- to four-family
residential, first-lien mortgage loans.
Market Volumes Show Continued Strength in April and June; Q3 Estimates Look Good Already
For the period between April and May 31, NASDAQ volume was 41.9 billion shares, up 10% versus
the first two months of last quarter. As a result we have become very comfortable with our fiscal Q3
EPS and revenue estimates of $(0.14) and $147.4 million, respectively, and we will be looking
closely at June trading volumes for any reason for further optimism.
eBrokerage Opportunity Remains Huge
Even before E*Trade pursues its online banking strategy, there are significant opportunities in
eBrokerage. Last quarter alone, E*Trade added 232,000 accounts with 67% sequential transaction
growth from 42,000 trades per day in Q1:F99 to 70,000 trades per day in Q2:F99. According to
Business Week, 80% of all adult Internet users seek financial information from the Internet, while Forrester Research indicates 39% of consumers with brokerage accounts are online. In turn, we estimate that there are 25 million portfolios monitored electronically. This suggests, of the 60-70 million total brokerage accounts, 28 million of them have online access. Yet of these, there are as many as 21 million that have yet to open an online brokerage account.
We estimate that by 2002, there will be between 18 and 20 million online brokerage accounts,
representing approximately 40% compound annual growth. In the wake of greater acceptance of the
medium, greater bandwidth, sub-$1000 PCs, and other Internet access devices, we believe our
estimates could be conservative.
Growth in Key Metrics Indicates Brand Strategy Paying Off
Strong Growth Across the Board
In our view, core account growth, transaction growth, and revenue are the critical yardsticks to focus on right now. In all three categories, E*Trade has consistently met or exceeded estimates.
Differentiation Through Broader Product Offerings and Services
Beyond the almost standard real-time quotes, analytics, research, and portfolio monitoring, E*Tradeoffers the following:
? Online banking. Through Telebanc, E*Trade possesses the foundation for an integrated Internet financial services platform.
? Branded mutual funds. The first fund, an S&P 500 Index fund, already has $12 million in assets in less than three months time. Next on the slate is a technology index fund that will track the Goldman Sachs Technology Index.
? Access to $7.1 trillion fixed income market. With access to approximately 400 bond dealers, E*Trade?s Bond Center provides customers with the ability to place online orders for the gamut of fixed income securities, including U.S. Treasuries
(bills, bonds, and strips), corporates (investment and non-investment grades),
munis, government agency, zero-coupon, and CDs.
? Options trading through electronic exchange by 2000. E*Trade has joined a consortium of broker-dealers to start an electronic stock options exchange by early 2000.
? Online investment banking through E*Offering provides investors with access to coveted IPOs.
Spurring Trades Through Greater Content
The company recently acquired ClearStation, a Web site focusing on investing tools, including
technical and fundamental analysis, portfolio tracking, and chat functionality. ClearStation provides E*Trade customers with yet another venue to access analysis and opinions prior to making a trade. In addition, E*Trade?s Instant Alerts system enhances customer transaction opportunities by notifying investors through e-mails or pages when their Watch List stocks hit certain trigger points.
International Expansion Is a Key Part of Its Growth Strategy
By partnering with foreign players, E*Trade has established online trading on a global scale. E*Trade branded services can be found in 32 countries, including Australia, Canada, and more recently in France. Adding to its growing international presence, E*Trade will soon open shop in Japan (with Softbank, already a major stakeholder), Israel, Scandinavia, Korea, Germany, and Central Europe. This is consistent with E*Trade?s strategy to become not only the number one financial destination site in the U.S., but globally as well.
Strategic Partnerships/Marketing Arrangements Will Help Bolster Account Growth and
?Stickiness?
In recent months, the company has signed content alliances with Yahoo! (YHOO $158-7/8), CNBC,
Motley Fool, and TheStreet.com. Moreover, E*Trade recently extended its year-old marketing
relationship with America Online. E*Trade gains a significant percentage of its new customers
through America Online. As part of this extension, E*Trade will continue to enjoy its significant brand exposure throughout America Online?s list of properties and benefit from America Online?s mercurial membership growth.
Significant Technology Investment as Industry Moves Toward Differentiation Based on
Functionality, Convenience, and Service
If the past two quarters are any indication, technology is playing a much greater role in the online brokerage industry?s competitive landscape. Given its heavy marketing focus and its growing product line, E*Trade has prudently invested and will continue to invest in technology to keep pace with heightened demand. As part of this effort, the company has recently opened a technology and customer support center near Atlanta, Georgia and will open a similar facility in Virginia as part of the Telebanc acquisition. Both centers will help with system redundancy and improving processing power. In the process, the company is expected to triple its server capacity and aims to have 75% excess capacity over the next twelve to eighteen months.
Losses Per Share for F1999 and F2000 Reflect Aggressive Marketing Campaign
We have established F1999 and F2000 EPS estimates of $(0.30) and $(0.27), respectively. It is
important to note that these losses per share are not reflective of the company?s potential, but rather its growth in accounts through an aggressive marketing campaign. To give some sense of the power in E*Trade?s business model, pre-tax earnings before marketing expense for F2000 would be $220.2 million, or $0.52 per share, a 72% increase over F1999 pre-tax earnings before marketing expense of $128.0 million. With that said, E*Trade?s marketing budget is a discretionary expense that is based on market conditions and competitive positioning; thus, our estimates could change contingent upon shifts in the company?s competitive strategy or the company?s response to significant market
volatility.
We are projecting a loss per share of $0.14 for the quarter versus a consensus forecast of $0.12 loss. EGRP continues to invest heavily in marketing in an attempt to acquire new accounts. We believe EGRP has spent close to $90 million this quarter on marketing, which we estimate will result in approximately 240,000 net new accounts. Given the importance of account acquisition, we continue to believe investors should focus primarily on revenues, transactions, and core accounts. We are looking for net revenues to climb to $147.4 million from $126.7 million, representing a 16.3% sequential increase and transactions to grow 18.6% sequentially to 5.1 million from 4.3 million.
In addition, the growing popularity of E*Trade?s portal, Destination E*Trade, was underscored by
May?s Media Metrix numbers. EGRP?s was ranked the top investing site with 1.8 million unique
visitors, slightly more than double the next two nearest competitors, Fidelity (951,000 unique visitors) and Schwab (839,000 unique visitors). Moreover, NFO Market Research ranked EGRP number one for ?top-of-the-mind? awareness among the eBrokers. More than 24% of the respondents named EGRP as the one they were most familiar with, more than three times greater than the nearest competitor, Schwab with 7.2%. We believe these results show empirically and anecdotally that EGRP?s marketing focus, its expanding product line, and portal strategy are all starting to pay dividends. |
