E*Trade's loss meets expectations

The online brokerage reports a net loss of $15.8 million but shows strong growth in transactions.

4 min read
Online brokerage E*Trade today reported a fourth-quarter loss roughly in line with expectations and showed strong account and transaction growth.

E*Trade reported a net loss of $15.8 million, or 33 cents per share, compared to profits of $5.9 million or 15 cents per share for the like quarter a year ago. Excluding several nonrecurring charges totaling $9.5 million or 20 cents per share, E*Trade would have lost 13 cents per share.

Analysts expected E*Trade to post a loss of 14 cents per share, according to First Call.

Quarterly revenue rose to $68.7 million from $52 million a year ago.

The company posted a fiscal 1998 net loss of $1.3 million or 3 cents per share on revenue of $245.3 million, compared to net income of $15 million or 42 cents per share on revenue of $156.4 million in fiscal 1997.

During the quarter, E*Trade received a $400 million investment from Softbank and completed its acquisition of financial software maker ShareData.

E*Trade said it added 85,000 new accounts during the quarter ended September 30, bringing its total to 544,000. The company said its site had 171 million page views, up 22 percent sequentially, and a daily average of 53,000 unique visitors compared to 51,000 in the third quarter.

Wall Street was watching E*Trade's earnings for signs of how the downturn in global stock markets has affected the bottom line for electronic brokerages.

The increased volume in trading, brought on by investor concerns about the health of the stock markets, is expected overall to be a mixed blessing for e-brokerages.

The volatility in the stock markets during the past three months may have hurt stock prices--the Dow Jones Industrial Average and Nasdaq composite index are hovering near late-1997 levels--but electronic brokerages, which tout their low per-trade prices, stand to profit from the increased trading volume.

"These guys live off transaction volume," said Jim Marks, managing director at Deutsche Bank Securities.

However, analysts said, increased volume immediately after a stock market slump usually slows dramatically, which could cut into profits. Some firms offer Internet-based trades for as low as $8 per transaction.

Wall Street is expecting profits of 33 cents per share for Charles Schwab, according to First Call. Schwab is slated to report its third-quarter earnings tomorrow or Friday, a spokeswoman said.

Ameritrade Holding, which runs the Ameritrade electronic brokerage, will report its fourth-quarter earnings October 27.

The recent heavy trading volume appears to have contributed to the continued growth of online brokerages.

"The electronic brokerages are gaining market share as a whole relative to traditional retail and full-service brokerages," said ABN AMRO analyst Scott Appleby. "It is reflected in their earnings power, their growth, and acceleration."

Schwab, which expects to meet or beat Wall Street's expectations this week, has said online transactions are up from year-ago periods and will represent about 52 percent of its total volume this quarter.

Yesterday, investment bank Donaldson Lufkin & Jenrette, which owns the DLJ Direct e-brokerage, reported better-than-expected third-quarter earnings. The company did not break out revenue figures for its electronic brokerage, but DLJ Direct senior vice president for marketing Denise Benou Stires said account executions were up 60 percent over the like year-ago period.

But the major e-brokerages are also in a transition period, analysts said.

Having hurdled some of the capacity and outage problems that plagued the market in its infancy, online trading firms have established themselves as a viable alternative to traditional full-service and discount retail brokerages. But like many of the most established Internet companies, they are beginning to invest heavily in new services and brand awareness.

E*Trade is spending millions in an offline promotional campaign including high-visibility television commercials. Both Schwab and E*Trade have undergone major Web site redesigns in recent months, offering new services and information to customers.

The key to the future for e-brokerages, analysts said, is to become more than a place to buy and sell stock on the cheap, but rather to be a financial hub for all of their customers' banking needs, from their stock portfolios to online banking and car loans.

"E*Trade is taking very tentative steps in that direction," noted Deutsche Bank Securities' Marks.

The company relaunched its site as Destination E*Trade last month in an attempt to become a financial portal to the Net for investors the same way that Net directories such as Yahoo and Excite aim to be the gateway of choice for the average Web surfer.

Schwab online executives have spoken out recently about the company's strategy for redefining the term "full-service brokerage" to include a number of online services that are unavailable to investors through traditional investment banks.

"It's no longer just about trading, it's about investing, and those are two different things," said Schwab spokesman Tom Taggart. "Our benchmarks are the assets we attract, not how many people trade."

In another example of an e-brokerage going beyond stock trades, DLJ Direct last week signed a deal with E-Loan to provide online mortgage comparison services.

"While we've all [electronic brokerages] gotten pretty good at making transactions, we're seeking to add value for our investors," Stires said.

Like most business markets that go through periods of consolidation, the first signs of an Internet industry shakedown are beginning to occur as bigger Net firms swallow smaller competitors and brick-and-mortar companies buy into Web companies to have an e-commerce presence online.

Some observers think the independent e-brokerages also will become takeover targets.

"I think ultimately the E*Trades, the Ameritrades, the Dateks of the world will be owned by banks or foreign financial institutions," Deutsche Bank's Marks said.

With the high stock valuations of many Internet firms, analysts don't expect large banks to buy out the e-brokerages any time soon, but Marks said, "Once you see one transaction, I think you'll see them all fall pretty quickly."