By Stephen Phillips
E-Trade Group Inc, the number-three online brokerage firm, reported narrower-than-expected losses for its fourth-quarter on reduced revenue as it cut prices and overheads in the face of what it called soft market conditions. Menlo Park, California-based E-Trade said that, excluding an acquisition cost, it lost $26.7m or 11 cents-a-share in the three months to September 30 compared to a forecast 13 cents-a-share loss – the average of a poll of Wall Street analysts conducted by First Call. The loss is greater than that reported by the firm for the same period last year of $15.2m or 8 cents-a-share.
Including earnings from newly-acquired TIR Holdings Ltd an international financial services house, revenue rose 84% on the year-ago to $173.2m. But this was down from $177m for the third- quarter due to a new pricing strategy introduced in August offering much-reduced commission charges on customer trades, as low as $4.95. E-Trade posted a net loss of $54.44m for the fiscal year down from a modest $1.93m profit in 1998 on revenue up 120% at $355.83m, including acquisitions.
The firm trumpeted 310,000 new trading accounts for the latest quarter, to bring its total number of active accounts to 1.55 million – up 185% on 544,000 at the same time last year. E-Trade said that it had captured 20% to 25% of new accounts and halved a 20-point gap between itself and number-one online investment house, Charles Schwab over the fiscal year to claim a 15% market share. The firm spent about $77.44m on advertising during the quarter. Chief financial officer, Leonard Purkis said the firm had demonstrated agility in the face of soft market conditions and that the results were solid.
However the value of the new business E-Trade is adding was called into question by reduced quarterly growth in cash deposited in trading accounts with the firm. Total assets in customer accounts, from which E-Trade also earns interest, stood at $28bn at the end of the September, an increase of only 7.69% on the previous quarter on 310,000 new customers, compared to a 22% increase between the second and third quarters on 332,000 new customers. Average assets per account declined almost 14% from $20,950 to $18,052. The firm admitted that many new customers belong to the small investor class, which has been spurned by online brokerages such as Merrill Lynch. But president and chief operating officer, Kathy Levinson shrugged off fears that the firm faces shrinking revenue opportunities from its customer base. She said that many of the new customers are middle Americans … just starting to accumulate wealth from stock options and rising wages.
The firm reported that it had driven down the cost of adding new accounts by 17% on the previous quarter to $198 from $238. But total transactions on the accounts, from which E-Trade draws 60% of its revenue, were flat to the previous quarter at 5.1 million, though up 163% from 2 million a year ago. The firm flagged the steady trading figures as an achievement citing a 2% fall in share turnover on the Nasdaq and New York Stock Exchanges, plus a 12%-15% decline in online trading activity.
However the volatility of trading volume underscores the importance of E-Trade’s avowed strategy to reduce its reliance on transaction fees within its revenue model to below 50%. The firm said it is pursuing what it calls an asset aggregation strategy to diversify into a personal finance one-stop shop. A key component of this strategy is the pending merger with Telebanc an internet bank claiming 100,000 customers. The firm is also looking to increase revenue from online advertising, investment banking and services marketed to businesses.
E-Trade’s share price closed up 0.86% at $25.62 yesterday after the result announcement.
