10/17/99 - E*Trade Group Inc. (Nasdaq: EGRP)
The Numbers
Recently E*Trade announced results for the quarter ending September 30, 1999, showing what management called, "Profound strength in a flat industry." In the summer quarter that is seasonally bad for the online trading industry, E*Trade announced total revenues of $173.2 million, down slightly from the prior quarter but an increase of 84% from the same period last year. More impressively, E*Trade managed to sign up over 310,000 new active accounts in the quarter, 10% more than industry leader Charles Schwab signed in the quarter, to raise the total active accounts to over 1.55 million (up 185% from last year).
Additionally, the cost paid per new account was reduced to $198 from the prior quarter's figure of $238, and the prior year's figure of $424 (Meanwhile Schwab's cost per new account rose from $129 in the previous quarter to $205 in the most recent quarter). In the call, E*Trade CEO Cristos Cotsakos stated, "If you want to play you got to pay," and that E*Trade has placed a temporary moratorium on profitability. Though the company could show profitability already with reduced marketing efforts, management feels it is currently worthwhile to invest in new customer accounts and brand-building efforts. Cotsakos went on to say profitability should be shown by 2001.
E*Trade now controls a 15% market share and in the last twelve months have managed to cut Schwab's previous 20 basis point lead in half. Total assets at E*Trade rose to over $28 billion, up 154% over last year, and over $50 million in new assets are pouring into E*Trade daily. As combined NYSE/NASDAQ trading volume was down 2% in the quarter, and analysts estimate as much as a 15% reduction in online trading volumes (14% reduction in daily trades reported for the quarter at Schwab), E*Trade managed to remain about flat at 80,350 transactions per day, or 5.1 million total trades for the quarter. Gross margins were 48% for the quarter and guidance was given going forward for that number to remain in the mid 40% to lower 50% area.
Revenue diversification has been a major goal of E*Trade since its IPO in 1996, when transaction fees accounted for 90% of its total revenues. At that time they stated a goal to have transaction fees account for less than 50% of total revenues within five years. In the most recent quarter, E*Trade managed to get this figure below 60% and are on there way to taking it below 50% in the next year, a year ahead of schedule.
Going back a quarter, on 7/19/99 E*Trade announced quarterly revenues of $151.7 million for the period ending June 30, 1999 (evidently raised to $177 million after including TIR Holdings). That represented an increase of 128% from the same period one year earlier and 20% from the prior quarter. E*Trade also announced that over the quarter they had set a new industry record by signing up over 332,000 new active accounts (almost six times more than were added in the same period one year earlier and 43% more than the prior quarter), bringing their total to over 1,240,000 accounts (making E*Trade the largest all-electronic investment services provider). Total transactions in the quarter were 5.1 million, a 177% increase from the same period one year earlier and 19% above the prior quarter's figure. Average daily transactions were up to 80,600 (a 15% increase over the prior quarter), and assets held in customer accounts reached $26 billion (up 130% from the prior year and 22% from the prior quarter). In the web traffic department, E*Trade saw total page views rise 344% over the prior year to 621 million.
Check out this key metric chart from the Q3 earnings announcement-
Key Metric Q3 1999 Q3 1998 Q3 99 vs. Q3 98 Q2 1999 Q3 99 vs. Q2 99
Total active accounts 1,241,000 459,000 170% 909,000 37%
Total Transactions/quarter 5.1 million 1.8 million 177% 4.3 million 19%
Average transactions/day 80,600 29,200 177% 70,000 15%
Total assets in customer accounts $26 billion $11 billion 130% $21 billion 22%
Average daily deposits $63.0 million $19.5 million 223% $56.0 million 13%
Total deposits/quarter $4.0 billion $1.2 billion 231% $3.4 billion 17%
Total page views* 621 million 140 million 344% 510 million 22%
Average daily page views* 6.8 million 1.5 million 348% 5.6 million 20%
*-Q3 1999 Page Views reflect the acquisition of Clearstation.
Brand Name & Industry Recognition
A survey conducted in May, 1999 by NFO Market Research showed that E*Trade ranked number one in top-of-mind customer awareness among online trading companies. When asked which one online trading service stood out in their mind, over 33% of respondents named E*Trade as the company with which they are most familiar, more than four times more than the nearest competitor Charles Schwab and Schwab Online, and more than eleven times more than Ameritrade. Additionally, Opinion Research says that E*Trade is one of the top four most recognized e-commerce brands along with Amazon, E-Bay, and Priceline. These four brands are recognized twenty times more often than the next nine largest e-commerce brand names.
E*TRADE also has received important industry recognition in recent months. Gomez Advisors and Lafferty Information and Research Group, two leading, independent industry analysts, both ranked E*Trade as the number one online investing site in their most recent industry-wide evaluations.
Destination E*Trade
The Media Metrix "Key Measures Report" for May of 1999 showed that E*Trade maintained the number one position in Internet reach to unique visitors for the fifth consecutive month this year, with over 1.8 million. Additionally, the report showed that E*Trade had more visitors than the most prominent financial information sites on the net, including CBS Marketwatch, CNNfn, Bloomberg.com, Silicon Investor, TheStreet.com, and Motley Fool. E*Trade also had a greater reach than Charles Schwab, Ameritrade, Discover Brokerage and Datek all combined.
Specific results of the report are:
Investing Site Unique Visitors
E*TRADE 1,810,000
CBS MarketWatch 1,609,000
CNNfn 1,346,000
Fidelity 951,000
Bloomberg.com 924,000
Motley Fool 851,000
Charles Schwab 839,000
TheStreet.com 783,000
Ameritrade 403,000
DLJ Direct 401,000
Silicon Investor 333,000
Discover Brokerage 327,000
Datek 222,000
To compliment that, the E*Trade Website also leads online investing sites in "stickiness." A June, 1999 Media Metrix report showed that E*trade recently ranked number two worldwide in average minutes per user per month. Visitors to Destination E*Trade spent an average of 66.5 minutes per month on the site, second only to eBay and 50% more than the closest online investing site, Charles Shwab.
Top 10 Internet Sites/Networks Ranked by Average Minutes**/User/Month-
eBay
125.5
E*Trade.com
66.5
Microsoft Sites
66.0
Yahoo Sites
64.6
Pointcast
57.2
USA.NET Services
53.8
Uproar
47.3
Mpath Interactive
46.2
Schwab.com
43.9
Excite Network
33.7
**Based upon Home/Work unduplicated reach.
Additionally, internal analysis at E*Trade shows that Website reach has remained steady (it attracted over 16 million unique users in the most recent quarter) while other financial information portals have seen a major decline in reach over the slower summer months.
To add another e-commerce revenue stream to Destination E*Trade, the company recently announced a co-branded bookstore with Amazon.com to offer consumers the top selling books in personal finance and online investing at Amazon's reduced prices. The new bookstore is part of the E*Trade Marketplace which also includes a Shopping Center that is being developed.
Destination E*Trade has been a great success for the company so far, in fact when the site was introduced on 9/10/98 the company announced a goal to sign up 1 million new accounts in the following 12-18 months, and that goal was reached in less than 12 months.
Industry Growth
A recent report from Jupiter Communications predicts that online brokerage accounts may swell to $3 trillion in 2003, up from $415 billion in 1998. Within 5 years around 41% of U.S. households with stock investors are expected to have online trading accounts, and 30% are estimated to manage heir bank accounts online. The report goes on to say that online brokers are seen leading the growth in the financial services sector, with the number of online investors growing to 20.3 million in 2003 compared to 4.3 million last year and 11 million currently. Another report mentioned in the conference call suggested growth to hit over 32 million retail accounts by 2003. As revealed in the call, even in the midst of a huge advertising blitz and 140 competitors, E*Trade is currently attracting 20-25% of all new online trading accounts, so future account growth looks quite positive going forward.
A recent survey by Internet research firm Gomez Advisors supports the Jupiter Communications conclusions, stating that there will be phenomenal growth ahead for the online trading industry. The Gomez report said that there are now 5.1 million online investors with 11.2 million accounts. More importantly, that number could rise nearly 66% over the next six months as around 3.5 million more people (of whom 2.85 million now have a full-service broker) plan to open an online trading account in that period. The survey also suggests that the online investing community could add an additional 12.8 million people over time. This number includes individuals who have used online quotes and research.
The report also concluded that online trading is becoming a mainstream investing activity that is now attracting long term investors. According to Gomez' brokerage analyst Dan Burke, "The main beneficiaries of this trend are online brokers who offer comprehensive package of financial services. The brokers that are going to benefit the most are those that offer the wealth of services that appeal to more mainstream investors -- like research and stock screen tools, financial planning tools."
Expanding Product Line & Strategic Investments
E*Trade offers more services than any company in the industry, and is expanding those offerings quickly. On6/1/99 E*Trade announced they will acquire Telebanc (TBFC) and would become the first pure-play e-commerce financial network to unite banking, brokerage services, and other related financial products and services, eliminating the need for multiple financial relationships and significantly differentiating the company's product line from others in the industry. Telebanc operates telebank.com, which saw a quarter/quarter increase of 189% in total Website visits according to a recent earnings report, and currently has nearly 100,000 customer accounts in America and over 20 foreign countries, as well as over $3.2 billion in assets and more than $2 billion in deposits. That figure makes Telebank the only pure-play Internet bank to advance into the top 40 U.S. federally chartered savings banks, and also is currently four times larger than all other pure-play Internet banks combined. Significant industry growth for online banking is expected in the years to come. A report by CyberDialogue in May of 1999 predicted that 24.4 million Internet users in the U.S alone are expected to bank online by 2002, a large increase from the 6.9 million online bank customers at the end of 1998. A recent report from Piper Jaffray supports that conclusion, suggesting online bank accounts will reach over 25 million households by 2003.
Telebank created a branchless banking model in 1989, replacing traditional brick-and-mortar banks with services offered through electronic delivery channels including the Internet, telephone, ATM, and fax. This model reduces operating costs and allows Telebank to pass the savings back to consumers as premium rates, which rank in the top 1% nationally, and more free services. Telebank offers internet checking accounts with premium interest rates, free printed checks, free unlimited online bill payments, free Internet account access, and a free ATM/Debit card with no monthly fees.
Telebank recently announced a deal with Yahoo that will give Telebanc account holders access to a single secure, password-protected site on Yahoo Finance to consolidate and access all their personal finances. The more than 2 million registered Yahoo Finance users will also be introduced to what Telebanc has to offer. For the first time, consumers will have access to an Internet-based, FDIC-insured cash management account, enabling them to complete a full range of transactions online (such as paying bills, purchasing mutual funds, CDs and fixed-income securities, and trading equities).
The Telebanc merger is expected to close this Fall, and E*Trade is already promoting Telebank services in the Banking Center area of the E*Trade Website.
To enhance the online banking aspect of the business, E*Trade recently purchased a minority interest in LoanCity.com, a technology-driven mortgage bank that currently does business with with country's top lenders, who collectively service approximately 75% of all U.S. mortgages, and provides mortgage brokers and their customers online access to more than 50,000 loan products. The Web site also lets consumers check mortgage rates, track their mortgage applications online, and educate themselves about how mortgages work. "By investing in LoanCity.com, E*Trade is supporting its broad mission of empowering consumers to achieve their financial goals," said Tom Bevilacqua, executive vice president of corporate development and strategic investments for E*Trade. "There are great synergies between our companies and we intend to explore a variety of avenues for enhancing our relationship and leveraging our investment in LoanCity.com."
To further support the goal of becoming the ultimate one-stop financial services destination, E*Trade also launched a fully integrated Bond Center on its web site this year. The Bond Center provides easy access to commentary, market data, research and analytical tools, including a sophisticated screening capability. This easy-to-use tool enables investors to quickly search through a wide range of fixed income securities, including U.S. Treasury, corporate, municipal, government agency and zero coupon bonds, based on price, yield, maturity, issuer, credit rating and other criteria.
Additionally, E*Trade has added 350 funds to its Mutual Fund Center over the past several months, giving it a total of over 4,700. E*Trade has opened four E*Trade-branded funds that seek to follow the returns of market indexes, and has four new funds currently in registration. Mutual fund assets at E*Trade have topped the $1 billion mark and E*Trade is coming out with a new advertising campaign to more aggressively attack this lucrative market segment.
On the investment-banking side, E*Trade currently holds 28% ownership of E*Offering, and is planning on taking advantage of its option to increase its share in the company to 51% according to Cotsakos in the recent E*Trade earnings conference call. Founded in January of 1999, E*Offering provides full-service investment research, greater access and insight into the public offerings marketplace, and distribution of IPOs. The partnership with E*Trade allows for an unprecedented portion (up to 50%) of their public offerings to be distributed through E*Trade to individual investors. Additionally, E*Offering offers easier, cheaper, and faster access to the equity underwriting market for companies. According to E*Offering CEO Walter Cruttenden in his Letter from the CEO, this year approximately 50% of all companies going public will distribute some shares online, compared to almost none just two years ago. Cruttenden goes on to suggest that within three years the majority of all shares sold in 80% of all IPOs will be distributed online. The Letter from the CEO is an interesting discussion of things to come here, including the E-Book, which is an IPO book open to all investors to help assess how much demand really exists for a certain company at a certain price, as well as possible tiered auctions and international exposure for future IPO offerings.
Speaking about the investment-banking subject in the recent earnings conference call, Cotsakos said, "We are also providing individual investors new opportunities to achieve their financial goals at E*Trade by reinventing the investment-banking business. We have already offered our customers shares in over 100 public offerings, 1/3 of which occurred in the last quarter, and through our strategic investment in E*Offering we plan to further democratize the financial service industries by giving individuals access that previously was available only to the big institutions."
E*Offering can be reached from the E*Trade IPO Center, an area of the E*Trade Website that keeps customers informed about past and upcoming IPO offerings.
To compliment E*Offering, E*Trade recently invested $4 million in Garage.com, a company whose main business is to help find venture capital for high-tech startups. Only in operation since October of 1998, Garage.com has already raised more than $60 million since the start of this year for 20 different clients. Michael Rolnick, VP of New Ventures at E*Trade, said his company is looking to Garage.com to provide more early-stage investment opportunities for its retail customers, and adds that the company is exploring ways of making such investments available to the public.
E*Trade is committed to providing the most comprehensive global financial services experience on the Internet, as demonstrated by its acquisition of ClearStation, a community-based financial analysis site that recently announced it reached one million unique visitors since its launch in July of 1998. Since its inception, ClearStation has built up a following of actively engaged, high net worth investors. According to a July 1999 Millward Brown Interactive ClearStation Audit, the average portfolio size of the ClearStation audience is $235,506, significantly above the industry average.
On 8/17/99 E*Trade announced an agreement with Instinet Corporation that will allow E*Trade customers to trade online after-hours starting in October of 1999 at standard E*Trade commission rates. The deal will give E*Trade customers an after-hours trading window from 4 - 6:30 p.m. ET and will allow access to NYSE and NASDAQ equities. Additionally the deal now provides E*Trade customers with access to after-hours quotes (which are actual orders from Instinet clients). This service has traditionally been available only to large institutional investors, fund managers, and broker/dealers. As part of the agreement Instinet has joined E*Trade (14% ownership) and other investors including Goldman Sachs, Merrill Lynch, CNBC, and J.P. Morgan by making a strategic investment in Archipelago, one of the nation's leading Electronic Communications Networks (ECNs). Archipelago is currently seeking SEC approval to establish itself as a registered, self-regulating stock exchange and is involved with a consortium of global financial firms that in June acquired a majority stake in Tradepoint, a U.K. screen-based for-profit exchange. Archipelago's daily volume of 25 million shares in NASDAQ stocks (approximately 2% of total Nasdaq volume, up from 1% in December, 1998) and 10 million shares in NYSE-listed shares will probably pick up as E*Trade and others hook into the trading system (E*Trade will be hooked up sometime in early 2000).
In an effort to attract more active trading accounts, E*Trade now offers more active traders (with 30 or more trades per quarter) Power E*Trade service. The free service offers users discounted trades to as low as $4.95 per trade, more real-time information including unlimited quotes, charts, and streaming watchlists, a free subscription to TheStreet.com, investment ideas from Clearstation, a priority customer service hotline, exclusive discussion groups, after-hours trading, and even free high-speed DSL access, NASDAQ level II quotes and preferred IPO allocation for the most active traders (75 or more trades per quarter). Positive impact from the Power E*Trade program are expected to be seen in next quarter's results.
E*Trade also recently announced a co-branded real estate service with Owners.com that can be accessed from the E*Trade Mortgage Center. E*Trade users will have access to Owner.com's by-owner marketing services, including its national database of homes for sale by-owner, online classifieds, and several features that enable homeowners to evaluate and manage the transaction process. Through the co-branded service, consumers can review every major step of the home buying and selling process, and are provided with tools and services ranging from customized yard signs and mortgage services to home pricing reports (comps) and insurance. The Owners.com "My Desktop' feature enables users to manage the transaction process from their own personalized home page on the Owners.com web site.
The Mortgage Center also allows users to investigate, compare, and apply for loans with E-Loan, and even offers a Rate Alert that will notify a customer when their desired loan becomes available. The site also offers more in-depth education and explanation on loans and loan services.
Bevilacqua said, "You come into us through digital financial media and from there you are going to go into different areas like online investing where you are going to have stock trading, mutual funds, bond trading, online banking with Telebanc, online insurance, mortgage loans." In addition to online trading, the Bond Center, the Mutual Fund Center, and the Mortgage Center, and the Banking Center, the E*Trade Website also offers a Retirement Center that sheds light on IRAs and retirement planning, a Tax Center which offers, "Tools and resources to make your life less taxing," an Insurance Center that offers information on home, life, and auto insurance and has over 200,000 community members in their insurance discussion groups, and a Knowledge Center that discusses everything from the basics of investing to more advanced investing strategies.
On the horizon as an exciting new product offering for early 2000 is the Personal Financial Information Manager, an innovative new online product that will enable investors to develop a personal "command center" for managing and tracking important financial events. Customers will be able to be notified of important events such as splits, earnings, and news that may effect issues in their portfolio through e-mails and other communications methods. The new service will be powered by the Abrio calendar engine of Confluent Inc., a company E*Trade recently purchased.
In the future, E*Trade CEO Christos Cotsakos envisions a site that includes streaming video with news, live analyst reports and road shows, and real-time updates to portfolios as users move through banking, credit cards and investments.
Some of E*Trade's other non-financial investments so far include stakes in e-mail company Critical Path and Web-hosting company Digital Island, companies it said it took stakes in to build reliability and service.
Finally, E*Trade recently became a partner in the Silicon Valley incubator fund S Cubed Ventures. E*Trade joined three other partners; Crescendo Ventures, Crystal Internet Venture Fund, and Red Rock Ventures, in the fund started in 1998 by venture consultant Stephan Saperstein, a former executive with Sun Microsystems.
Going Global
While around ten million Americans have opened online accounts over the last three years, worldwide growth may just be beginning. United Kingdom (UK) internet trading is just catching on, with a mere 100,000 users currently registered. According to Forrester Research, expectations are for that number to more than triple to over 350,000 by year end, and perhaps increase as much as 1000% from there to over 3 million accounts by 2002. A recent report showed that the number of online trades in the UK surged 73% in the second quarter alone. To tap into this growing market, on 7/28/99 E*Trade announced the launch of E*Trade UK. In an interview with CBS Marketwatch, Julian Costley, chief executive of E-Trade UK, said "We think the U.K. potential is exactly the same as the U.S. In the U.S. there are something like 35 percent of retail trades conducted online. In the U.K., we foresee that 10 percent will be on line by next summer." Costley went on to say he expects to see 80,000 new accounts by Christmas, and 150,000 new accounts over the next 12 months.
Elsewhere overseas, E*Trade just announced a new joint venture with Berliner Effekenbank that will expand its services into Germany. According to a J.P. Morgan Securities study, Germany has Europe's most advanced discount brokerage industry, with over 200,000 online accounts, a number that is expected to grow to nearly 3 million by 2002 as Germany gets online. At the end of 1998, there were 7.5 million Internet users in Germany, representing about 9% of the population, a number that is expected to grow to more than 27 million by the end of 2002. According to Judy Balint, President of E*Trade International, "The combination of E*Trade's global brand, products, and services with the significant local presence Berliner Effekenbank should make for a formidable new entrant to the German online investing market."
Japanese consumers, increasingly frustrated by low returns on bank deposits and eager to find ways to maximize their massive personal savings, may also be ready for this new investing style according to experts. According to estimates from Nikko Securities, online trading could account for as much as 20% of the Japan's total stock transactions in 3-5 years. To tap into the potential market, E*Trade recently launched its Japanese site in a joint venture with Japanese powerhouse Softbank. E*Trade already had as many as 30,000 Japanese accounts using its call center that was opened in April of 1999, and the goal is to sign up over 100,000 online accounts within the first year of online operations.
These recent site launches are part of the master plan to launch sites in the top twenty financial markets worldwide. E*Trade and its international affiliates have also already launched E*Trade-branded sites in Canada, Australia (also serving New Zealand), Sweden, and France. Together with the newer site openings, E*Trade is coming closer to their goal of offering worldwide 24-hour trading. Major progress is being made in overseas revenues, which now account for 18% of E*Trade's total revenues.
Additionally, E*Trade is planning the first cross-border trading network which will ultimately enable investors to trade foreign securities as easily as domestic issues. To accelerate this network, E*Trade has acquired and integrated TIR Holdings Limited, an international financial services company offering global multi-currency securities execution and settlement services, and a leading provider of independent research to institutional investors with over 600 clients, for $122 million in E*Trade stock. TIR is already doing business in over 35 countries around the world. E*Trade is rapidly overlaying its technology architecture on the TIR network to deliver a new level of automation and performance to international retail, corporate, and institutional investors with a new web-based, electronic platform for international trading.
Summary:
E*Trade was early into the online investing industry and has a strong footing in a large and quickly growing business. E*Trade has over 1.55 million active trading accounts and is currently signing up 20-25% of all new online trading accounts while offering more diverse services to an increasingly global customer base. The Website is showing tremendous growth in many categories including reach and "stickiness", and is developing a quickly growing community of high-net-worth users that are very likely to consolidate more of their assets at E*Trade in the future as service offerings are expanded. According to Cotsakos, the next 12-18 months will be the defining period in the industry, and E*Trade has momentum heading into that period.
The 21st century, according to Cotsakos, is about the power of the individual. E*Trade was built with that in mind. Perhaps Cotsakos sums it up best himself, "E*Trade continues to hit on all cylinders. Our roadmap is clear and we continue to execute successfully. We are building a global franchise capable of forging a unique relationship with the new self-directed online investor. E*Trade will continue to move aggressively against each quadrant of our strategy in the coming months in order to further establish our company as the Global Leader and Recognized Authority in Electronic Personal Financial Services." At the conference call he stated, "We are building a blue-chip internet company for the 21st century." Looks like they are off to a good start.
By Mike Goldstein |
