Good news? Uh uh: "Schwab 2nd-Qtr Profit Rises 98%, Warns on Margins Charles Schwab Corp.
said second-quarter profit rose 98 percent, meeting expectations,
and warned margins could shrink as the largest Internet broker
spends more on computers and staff to satisfy demand.
Net income rose to $151 million, or 18 cents a share, from
$76.3 million, or 9 cents, in the second quarter of 1998.
Analysts in a First Call Corp. survey expected 17 cents a share.
Revenue rose 53 percent to a record $982.1 million.
San Francisco-based Schwab said expenses rose 43 percent as
it added 1,000 employees and spent $32 million on computers. It
suffered eight service outages on its Web trading system in the
period as clients opened a record 422,000 accounts, 9 percent
more than in the first quarter.
``They need to build the infrastructure to handle all these
new accounts,' said Amar Mehta, an analyst with CIBC Oppenheimer
who rates Schwab a ``strong buy.' The shares fell 2 1/2, or 4.5
percent, to 52 7/8 in early trading.
Schwab added $23 billion in net new assets in the quarter.
While that's down from $28 billion in the previous period, assets
in the last six months rose $100 million, as much as Schwab added
during its first 20 years in business, while the number of trades
made online daily rose 46 percent.
The company's profit margin was 15 percent of revenue in the
first and second quarters, compared with 10.3 percent for all of
1998. Its founder warned margins may fall closer to historical
levels in coming periods as expenses rise.
Ongoing Investments
``Our ongoing investments in people, technology and our
brand may cause our profit margin for the second half of 1999 to
move back toward the levels we've achieved in recent years,'
said Charles R. Schwab, chairman and co-chief executive.
Schwab has spent $59 million on computers in six months and
can now handle 40,000 to 60,000 simultaneous users and 500,000
separate users in a day. It will add two IBM mainframes later
this year as part of its plan to double or triple the volume it
can now accept.
In the second quarter, daily average commission-producing
trades numbered 160,100, down 2 percent from the first quarter's
162,800. Online trades, which account for two-thirds of all
Schwab customer trades, fell about 1 percent to 136,700 daily
from 137,400.
Daily commission trades fell 17 percent in June to 124,000,
the lowest since December, though they have ``rebounded' to
155,000 in the first weeks of July, Schwab said.
``That June number was kind of surprising, but at least it's
up in July,' Mehta said.
Change in Attitude
Schwab said the decline in daily trades reflected changes in
investors' attitude about the market.
``Following extraordinary trading volumes in the securities
markets during April, investors became increasingly focused on
potential changes in the interest rate environment, and volumes
slowed,' he said.
Internet trades slowed industry-wide in the second quarter.
After doubling in the six months ended March 31, daily average
trades rose 15 percent in the latest quarter, according to Credit
Suisse First Boston.
Last Monday, Ameritrade Holding Corp. said trades rose 14
percent in the latest quarter, down from 56 percent in the
previous period, and it reduced ad spending to focus on adding
people and computers. E*Trade group Inc., the No. 2 online
broker, reports earnings this Monday.
Schwab ended the second quarter with 6.2 million accounts
containing assets of $592 billion. Online accounts totaled 2.8
million containing assets of $251 billion.
``Overall their earnings are not bad,' Mehta said. ``These
guys are going after the investor customer, not the trader.'
Schwab in the second quarter doubled the minimum required account
balance to $5,000 on its basic Schwab Account and $1,000 on its
Schwab Individual Retirement Account. |
