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E*Trade shares higher on earnings news

E*Trade posts a narrower-than-expected second-quarter loss backed by strong revenue growth.

E*Trade shares bounced back today after the company reported a narrower-than-expected second-quarter loss backed by strong revenue growth.

For the quarter, online broker E*Trade said its pro forma loss was $14.3 million, or 12 cents a share, vs. net income of $4.5 million, or 5 cents in the year-ago period. Analysts surveyed by First Call expected the company to post a loss of 17 cents a share.

Revenue for the quarter was $126.7 million, up 126 percent from $56.1 million in the same period a year earlier.

After losing 18.75 yesterday to close at 73.81, E*Trade shares rebounded after the earnings report, trading up 15.3125 to 89.125 in afternoon trading. The stock traded as high as 93 today. Donaldson Lufkin & Jenrette Securities raised its recommendation to "buy." The stock had fallen more than 41 percent in four trading days through yesterday.

"This was a fantastic quarter, and the big surprise came in transaction revenues," Scott Appleby, analyst with ABN Amro, told Bloomberg News. "Not only was their account base extremely active, but they also added more accounts than we expected."

E*Trade was the last of the three publicly traded, standalone online brokers to release quarterly earnings, after a three-month period when industrywide trading volume rose more than one-third. Charles Schwab and Ameritrade reported results last week.

In afternoon trading, Ameritrade rose 21.625 or 24.6 percent to 109.50. Schwab rose 6 to 108.

The Palo Alto, California-based company said it added 233,000 new accounts in the quarter, an increase of 77 percent from the previous quarter, by spending $60 million on advertising. The company also said its average transaction per day reached 70,000, up 63 percent from the previous quarter.

E*Trade reduced its cost of adding new accounts from $300 each in the previous quarter to about $250 in the most recent period, ad president Kathy Levinson credited the company's "financial portal" strategy

"That allowed us to create a whole new strategy for consumer education and account acquisition," she said, "That's made our account acquisition more efficient and made our advertising strategy work. I think it's a big piece of our lower custom acquisitions."

When it launched Destination E*Trade, visitors to the site were given access to a broader range of information without signing on as a customer. When the quarter ended, half a million people had signed on as members, turning more than a half-billion pages of financial data--and spurring ad banner revenues.

But the company said it anticipates more red ink as it spends big on sales and marketing to add new customers.

"It's never going to be cheaper. The momentum is there," chief executive Christos Cotsakos said during an interview on CNBC.

"At $250 per account they can justify being more aggressive'' in ad spending, said Genni Combes, analyst with Hambrecht & Quist. The average account now generates more than 20 trades a year, or about $200 in gross profit, almost paying for any ad spending within 12 months, she said.

E*Trade ended the quarter with 909,000 accounts and customer assets of $21.1 billion. Its customer trading volume may surpass Toronto-Dominion Bank's Waterhouse brokerage, allowing E*Trade to regain the No. 2 industry ranking it held until last quarter.

"It's going to be close," said Steve Franco, analyst with US Bancorp Piper Jaffray. "Either way, they really proved a lot this quarter."

CEO Cotsakos also scotched any takeover talk. "We certainly would like to stay independent."

During the second quarter, the company said it realized an after-tax gain of $20 million, or 16 cents a share related to the sale of a portion of its investment in Knight/Trimark Securities. Including the gain, the company said net income was $5.8 million, or 5 cents diluted share.

Bloomberg News contributed to this report..