Broker Charles Schwab reported that its revenues and net income for the first half of 1998 were the highest in the company's history, and projected that its third-quarter earnings report also will beat Wall Street expectations.
The company expects to report third-quarter 1998 net income of between $90 and $97 million, or between 33 cents and 35 cents per share, on revenues of about $700 million. Analysts had forecast that Schwab would earn 31 cents per share for the third quarter.
"These estimated results reflect heavy trading volumes, the strength of our core domestic business, the absence of any international proprietary trading, and a continued focus on staffing levels, expenses, and risk management," said Schwab president and co-CEO David Pottruck.
Schwab's net income for the third quarter of 1997 was $77 million, or 28 cents per share, on revenues of $612 million.
Shares of Schwab jumped higher today on the company's positive earnings news, rising 2.69 points or 7.23 percent to reach 39.88. The stock has traded as high as 46 and as low as 27.75 during the past 52 weeks.
For its second quarter ended June 30, Schwab earned $144.3 million or 53 cents per share, on revenues of $1.24 million. The company earned $130.7 million or 48 cents per share on revenues of $1.06 million during the same period a year ago.
Schwab reported second-quarter net income of $76.3 million or 28 cents per share on record revenues of $638 million--a 20 percent increase from the year-ago quarter. The company met Wall Street's earnings estimates of 28 cents per share, according to First Call. For the same quarter a year ago, the company earned $64 million or 23 cents per share, on revenues $530.7 million.
"By staying focused on meeting the needs of investors, we experienced continued strength in our fundamentals," said Schwab chairman and co-CEO Charles Schwab. "Record levels of customer trading activity during April helped us to achieve a 15 percent increase in commission revenues, even as lower-priced Internet trading activity continued to grow."
Schwab also reported today that, as of the end of June, it had an online customer base of 1.8 million active accounts, with $128 billion in assets.
"Online trades made up 52 percent of our total trading volume during the quarter, up from 36 percent in the second quarter of 1997," said Pottruck. "Our customers now buy and sell more than $2 billion worth of securities through our Web site every week."
Noted Bill Burnham, an online trading analyst at investment banking firm Credit Suisse First Boston: "These firms have to live with the fact that their volumes are going to vary because of the market's volatility. In general, the more trading, the better it will be for these firms--especially for those that can handle it.
"We're seeing this with Schwab and I think we'll see this with E*Trade and Ameritrade," Burnham added. "I think we'll see [other online traders] have higher revenues than expected because of all this market activity."
Schwab is in an unusual position in the overall brokerage marketplace in that it is not considered a full-service brokerage such as PaineWebber, for example. But its level of service and its price per trade ($29.95 for up to 1,000 shares) sets it apart from the crop of "discount brokers" that have proliferated on the Web.
These online trading firms have been bombarded with record traffic as investors reacted to recent market volatility by stepping up their trading. Just last week, equipment failures at Ameritrade and Waterhouse briefly stymied online traders--on a day when the market dropped more than 3 percent or nearly 250 points.
The worst example of online trading problems to date was in October 1997, when the Dow registered one of the biggest single-day drops in its history and investors repeatedly encountered difficulty when logging on to their online brokerage accounts. Even the alternative option of placing orders over the telephone became troublesome as panicked investors jammed all the available phone lines.
The incident prompted the Securities and Exchange Commission and the National Association of Securities Dealers to follow up on complaints by investors in order to determine if the brokerages were taking sufficient measures to handle increased volume. Firms such as E*Trade and Schwab were among those visited by regulators.
"Unlike October 1997, where essentially every firm had trouble handling the volume, what we are seeing is isolated firms having problems, not the industry as a whole," Burnham said. "In general, most firms are operating without a hitch through the market turmoil."
But as a result of the regulatory attention, and with online trading surging, Web brokerages including Schwab have been trying to boost the capacity of their systems.
"Customers increasingly want accessibility, information, and guidance from Schwab," Pottruck said, "and we continue to invest in the new and expanded services and technology that enable us to meet those needs."