THREAD ----Charles Schwab Corp.
Dow Jones Newswires -- April 8, 1999
Web-Trade Fever Continued To Boost Online Broker Revs
In 1Q
By Caroline Humer
NEW YORK (Dow Jones)--The online brokerage boom accelerated in the first quarter of 1999 as
investors logged on and made about one-third more trades than they did in the previous quarter,
analysts say.
Companies like Charles Schwab & Corp. (SCH), E*Trade Group Inc. (EGRP) and Ameritrade
Holdings Corp. (AMTD) satisfied people's growing appetites for Internet stock trading in the Macrhg
quarter, registering more customer accounts, higher revenues and, in some cases, improved earnings,
the analysts say.
Gains in the stock market have been one of the key drivers to the retail interest, analysts say.
"During the past four months, it's been relatively easy for the individual investor to pick stocks him or
herself and do very, very well," explained Greg Smith, a San Francisco-based analyst for Putnam
Lovell de Guardiola & Thornton Inc.
Knight-Trimark Group Inc. (NITE), a large Nasdaq market maker that executes customer trades for
many online brokerages, also reaped the benefits of the quarter's surge in trading, analysts say.
Online and discount brokerages aren't the only securities firms that experienced strong equity trading
volume in the most recent quarter. But unlike full-service brokerages or buy-side firms which have
many business lines, about two-thirds of Internet brokerage revenue comes directly from trading and,
thus, will have a large impact on the bottom line.
Analysts estimate that online trading volume rose at least 30% to 35% from the previous quarter at
brokerages like Schwab, E*Trade and Ameritrade. While this translated into sequential and
year-on-year growth for Schwab, Knight/Trimark, and Ameritrade, advertising spending at E*Trade
held back the potential for earnings. E*Trade is expected to post its third straight quarterly loss
because of its $100 million advertising budget.
Schwab Figures Boost Sector Expectations
Analysts' confidence that the online brokerage sector continued to grow in the most recent quarter is
based, in part, on Schwab's recent preview.
In mid-March, Schwab disclosed that its earnings had about doubled from a year ago. Schwab
indicated that first-quarter earnings would range from 31 cents to 34 cents a share, compared with a
year-ago's split-adjusted 16 cents a share and last quarter's 26 cents a share.
According to a First Call consensus forecast of seven analysts, Schwab will announce earnings of 33
cents a share. Some so-called "whisper numbers" posted on Web sites and Internet message boards
put Schwab's first-quarter results as high as 37 cents a share. Analysts agreed that there is a likely
upside to Schwab's outlook given the market gains during last two weeks of March, when the Dow
Jones Industrial Average closed above 10,000 points several times.
Schwab has said it expects to report revenues of $910 million to $940 million in the latest quarter, up
from $604 million a year ago. Schwab's monthly trade reports in January and February put average
daily revenue trades at 153,000 and 150,900 respectively. Putnam Lovell's Smith said that March
daily trades are likely to slightly outpace February's level.
Heavy trading volume was one reason why Credit Suisse First Boston analyst Bill Burnham said
earlier this week that online brokerages could surpass Wall Street estimates. That news was enough
to breathe new life into the firms' already vibrant stocks, pushing Schwab and E*Trade to new highs
this week.
Analysts said they believe E*Trade added 120,000 to 171,000 new accounts in the quarter, on top
of the 676,000 it already had. CS First Boston estimates put the firm's number of new core accounts,
or those which aren't related to stock options plans, at 127,000. That would have brought to
572,000 the total number of core accounts as of March 31.
Ameritrade is believed to have added 55,000 to 77,000 in the first calendar quarter of 1999; it had
354,000 accounts at the end of 1998.
Trading volume and customer account numbers remain the key factors for growth in the online
brokerage business, U.S. Bancorp Piper Jaffray analyst Stephen Franco said. More and more, he
added, he is keeping tabs on the level of assets per account. After several quarters of decline, he
said, the per-account asset figure rose for most of the online brokerages in the last quarter of 1998.
Franco will be looking to see whether or not that continued in 1999's first quarter, creating a new
trend.
"They are all trying to get less dependent on commission revenue and increase their percentage of
asset-based revenue," he said. About 65% to 70% of online brokerage's revenues are from
commissions, he explained.
At E*Trade, advertising spending of about $50 million offset revenue gains and contributed to what
First Call estimates will be a 17 cents a share loss based. A year ago this time, the company earned a
split-adjusted 5 cents a share; in the previous quarter, it posted a loss of 23 cents a share.
Advertising spending of $13 million to $14 million also weighed on Ameritrade's income statement.
Ameritrade is expected to report earnings of 7 cents a share in the March period, which is the
company's second fiscal quarter, according to First Call. The company broke even last year on a
split-adjusted basis. Ameritrade earned a split-adjusted 6 cents a share in its first fiscal quarter.
Knight/Trimark To Reflect Online Broker Growth
Knight/Trimark, which executes trades for many online firms including Ameritrade and E*Trade, also
experienced strong growth, analysts said. The firm, whose primary business is trading Nasdaq
stocks, is expected to post earnings of 39 cents a share, compared with pro-forma earnings of 16
cents a share a year ago and 33 cents a share last quarter. Knight/Trimark went public in July of
1998 and has grown rapidly as orders from online brokerage customers have increased.
Charlotte Chamberlain, an analyst for Jefferies & Co., said she expects Knight/Trimark to report 38
cents a share in quarterly earnings. But given that analysts are expecting some upside to the online
brokerages' earnings, she said, "We wouldn't be surprised at all if Knight came in higher."
Knight/Trimark is the only publicly-held Nasdaq market maker and competes with Charles Schwab
unit Mayer & Schweitzer, another large market maker, as well as electronic communications
networks, or ECNs, like Reuters PLC's (RTRSY) Instinet unit or Datek Holdings Corp.'s Island.
Darren Lewis, an analyst at Southwest Securities Inc., said that another figure he would be looking
for from Knight is Nasdaq market share. The company traded about 16% of total Nasdaq stock
trades at the end of last quarter.
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