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E*Trade 4th-Qtr Loss Less Than Forecast at 11c-Shr
10/13/99 1:33:00 PM
Source: Bloomberg News
Menlo Park, California, Oct. 13 (Bloomberg) -- E*Trade Group Inc. reported a smaller-than-expected loss in its fiscal fourth quarter as it added customers for an average of 17 percent less per account than in the previous quarter.
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The No. 2 Internet brokerage also said it plans to scrap one- size-fits-all pricing to hold off competitors.
Menlo Park, California-based E*Trade added 310,000 accounts in the quarter ended Sept. 30 at an average cost of $198 per account, compared with $238 in the third quarter, said Len Purkis, chief financial officer. E*Trade spent $424 per account in last year's fourth quarter, he said.
``Account growth looked spectacular,' said Greg Smith, an analyst with Hambrecht & Quist Group. ``Relative to the industry, it looks like they're bucking the higher acquisition cost trend.' Since August, three E*Trade rivals have reported increased costs for adding new accounts.
Internet brokers have increased spending on advertising as they face increased competition from Merrill Lynch & Co., American Express Co. and others, which are offering online trading and other services to keep existing customers from straying.
American Express recently offered free trades for accounts containing more than $100,000, while Merrill has an account offering unlimited trades for a minimum of $1,500 a year, or 1 percent of assets.
In response, E*Trade will by early next year introduce flexible pricing, with commissions based on account balances and trading behavior, Chairman and Chief Executive Christos Cotsakos said in an interview.
``With modeling of customer behavior, we can do this on a granular basis, almost down to a market of one,' he said. It's ``too early to tell' whether such a move would affect revenue, he said.
Beating Estimates
E*Trade lost $26.7 million, or 11 cents a share, in the fourth quarter, compared with $15.2 million, or 8 cents, in the year-earlier period. It was expected to lose 13 cents, according to the average estimate of 10 analysts surveyed by First Call Corp.
The company's revenue fell 2 percent from the previous quarter to $173.2 million. In August, the company cut prices on some active traders' transactions to $4.95 from the previous minimum of $14.95. In part because of price cuts, commissions per trade fell 8 percent from the previous quarter to $17.25, Purkis said. The figure was $19.66 a year earlier.
The firm will lose money until the fiscal year beginning in October 2000 as it spends at least $350 million in the current fiscal year on advertising and marketing, Purkis said.
``There will be some pressure on margins as they have to adjust pricing to counteract people like American Express and Merrill Lynch,' said Steve Franco, an analyst at U.S. Bancorp Piper Jaffray. ``And until assets per account uptick, they can't make up for that with higher customer interest revenue.'
E*Trade ended the quarter with 1.55 million accounts and customer assets of $28 billion, up from 1.24 million and $26 billion, the previous quarter. Assets per account fell to about $18,000 from $20,000 last quarter, below the industry average of about $30,000.
``That's because almost 25 percent of our accounts are new in the last quarter and because we're attracting middle America,' said Kathy Levinson, E*Trade's president.
New Alliances
E*Trade may soon announce an alliance with a firm that markets financial services through physical locations, Cotsakos said. ``We have an alliance with BancBoston Robertson Stephens, and we may do more in that area of blended channels.'
Ventures with firms such as Yahoo! Inc., the biggest Internet directory, or traditional media companies are also possible, he said. Softbank Corp. is the biggest investor in both Yahoo and E*Trade. Peter Chernin, president of broadcast and film company News Corp., recently joined E*Trade's board.
``Great brains tend to think alike,' Cotsakos said. ``We're the only (online broker) that's moving with the right people.'
The company has no plans to sell itself, though its stock is down more than 60 percent from a record 72 1/4 on April 14, Cotsakos said. The company may still use its stock to make acquisitions.
``We are a very attractive company for people to be a part of, but we've never wanted to be a part of someone else,' he said. ``At 72, we had a terrific currency, at 25 it's still good.'
Marketing Payoff
The company spent $301 million in the past fiscal year on sales and marketing, the most in the industry, and that effort is now paying dividends in the form of lower acquisition costs, Smith said. ``The brand is really resonating with the consumer and they're seeing the benefits of all the spending they did months ago,' he said.
Customer trades were little changed at about 80,350 a day. Industrywide, trades fell more than 5 percent in the quarter, the first such decline, as shares of Internet stocks favored by online traders slumped.
Subtracting the results of TIR Holdings, a global electronic trading network E*Trade acquired last month, revenue fell 3.6 percent to $146.3 million, said Rich Repetto, an analyst with Lehman Brothers. The cost of adding each net new account -- new accounts less closed accounts -- was steady at about $248, he said.
``These numbers look OK, but I have a little concern about the revenue figure,' he said. ``Trading actually was good because others were down.'
E*Trade is the second publicly traded standalone online broker to release quarterly earnings. DLJdirect Inc. yesterday reported results that matched analysts' expectations, while trades fell 14 percent. Charles Schwab Corp., the No. 1 Internet broker is expected to report tomorrow or Friday.
Knight/Trimark
Knight/Trimark Group Inc., the biggest Nasdaq market maker which counts E*Trade among its top customers, today said customer trades and revenue per trade fell in the third quarter as investors shunned the Internet and Over-the-counter Bulletin Board stocks that provide its most profitable executions.
For the full year, E*Trade revenue rose 85 percent to $621.4 million. The company lost $54.4 million, or 23 cents a share, in the fiscal year compared with a profit of $1.9 million, or a penny a share, in 1998.
Also today, E*Trade named Joshua Levine, formerly in charge of technology for Deutsche Bank's global equities business, as chief information officer, succeeding Debra Chrapaty, who was named chief media officer.
E*Trade shares rose 7/32 to 25 5/8.
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