Some Analysts Miffed Over E*Trade Account Uncertainty
By Rebecca Buckman
NEW YORK (Dow Jones)--In the on-line brokerage business, customer-account growth is the name of the game. Most upstart cyber-brokers are in a hurry to sign up investors, and Wall Street analysts closely follow the firms' progress, since new customers generate the all-important trading commissions that feed the companies' profits.
But right now, analysts are having a hard time figuring out just how many new accounts one Internet pioneer, E*Trade Group Inc. (EGRP), is racking up each quarter. Although the company plays down the controversy, the uncertainty has led some analysts to wonder whether E*Trade is growing as robustly as it once was.
"They are confusing investors as to what the true economics of their business are," fumed one analyst, E*Trade bull James Marks of Credit Suisse First Boston Corp. "When we as analysts don't know what's happening, we can only assume the worst. And the worst here is that they're not producing true account growth commensurate with their spending."
The brouhaha surfaced publicly last week when E*Trade, of Palo Alto, Calif., released its quarterly earnings report, which contained its latest new-account figures. For the first time, the company didn't specify how many of its new accounts - 80,000 in the company's fiscal second quarter - were regular, "core" accounts and how many came from the company's recent acquisition of OptionsLink, a company that administers employee stock-option programs.
Analysts agree that accounts from OptionsLink generally produce much less revenue, at least initially, than regular E*Trade accounts. Old OptionsLink customers might have used the service to exercise stock options or buy company stock as infrequently as once a year; the average E*Trade customer, by contrast, made 27 trades in fiscal 1997, Marks estimates.
By not breaking out the OptionsLink accounts, as it did in its first fiscal quarter, E*Trade "has made people wonder what the numbers really are," said Bill Burnham, an analyst with Piper Jaffray Inc.
E*Trade's chief financial officer, Stephen C. Richards, said analysts shouldn't be so hung up on the lack of information about OptionsLink accounts. For one thing, E*Trade is aggressively courting those new customers to try to turn them into active, on-line investors, he said.
In addition, as E*Trade's entire business strategy shifts away from a transaction-based brokerage model, pure account numbers become less important. In the future, E*Trade will also derive revenue from banking services and Web site advertising, Richards noted. That's why E*Trade has been trying to focus analysts on new statistics, such as the number of people who visit E*Trade's Web site every month.
He added that E*Trade until now has been "extremely open" with analysts and reporters about its finances, which may have put the company at a competitive disadvantage. Because E*Trade indirectly gave other brokerage firms access to key information, such as its rate-of-return on advertising spending, "in some ways, we'd done ourselves a disservice." As a result, other firms have copied some of E*Trade's innovations, Richards suggested.
Indeed, smaller rival National Discount Brokers Group Inc. (NDB) announced earlier this month that it had struck an agreement with an employee stock-option servicer called AST StockPlan. Like E*Trade, National Discount hopes to turn AST customers into regular Internet traders.
But some analysts remain miffed at E*Trade's new method of reporting its account growth. CS First Boston's Marks, for one, says he may have to revamp his entire analysis model for the company now that he can't calculate important statistics, such as acquisition cost per new account and profitability per account. He uses such numbers to evaluate E*Trade and compare it with competitors such as Ameritrade Holding Corp. (AMTD).
Although he thinks E*Trade's OptionsLink customers eventually could become big revenue producers, Marks complains they have "nothing to do with the sort of cash-flow generation and return capabilities of the company today or in the near future."
Piper Jaffray analyst Burnham agrees. Now "a lot of the traditional metrics will be impossible to calculate" for E*Trade, he said. And while he's interested in the company's new statistics about Web site visits, "visits and page views don't generate revenue. Trades and active accounts do."
Still, Burnham said E*Trade's behavior isn't unlike that of one of its biggest rivals, Charles Schwab Corp. (SCH), which for years refused to divulge the number of customer accounts in its e-Schwab program. E-Schwab customers got big discounts for trading via computers, and therefore generated lower average commissions for the company. In January, Schwab effectively did away with e-Schwab by instituting a new flat fee for Internet trading for all its brokerage customers.
E*Trade Financial Chief Richards declined to provide even a rough estimate of how many core accounts - as opposed to those gleaned from OptionsLink - the company gathered in its most recent quarter. He also wouldn't specifically address analysts' worries that the company's silence means E*Trade's growth - or perhaps its return on advertising spending - has fallen below expectations.
"That's a tough one to answer, because to counter it would be to begin to open (the issue) up," he said.
In January, however, E*Trade disclosed that for its quarter ended Dec. 31, about 65,000 of the company's 100,000 new accounts were converted from OptionsLink. When it reported earnings last week, E*Trade said only that it gathered 80,000 new accounts, bringing its total to more than 400,000.
Although OptionsLink had about 90,000 employee accounts when E*Trade bought it in November, it's unclear how many it holds now. For one thing, some of the original accounts were inactive, according to Richards. In addition, as a new unit of E*Trade, OptionsLink has added some new corporate clients, which has expanded the base number of accounts.
Richards stressed that he's had "lengthy discussions" with each of E*Trade's major analysts about the issue, which he believes will die down when the next quarterly reporting period comes around. "I think we'll have this successfully behind us," he said.
-Rebecca Buckman; 201-938-5294 |
