Fast-Growing Ameritrade Beefs Up Its Technology

Ameritrade's (AMTD) relationship with the Internet has been more Bill and Hillary than Ronnie and Nancy.

Ameritrade remains one of the fastest-growing online brokers. It was the No. 6 online broker in the fourth quarter with 7.6% of online trades, according to Piper Jaffray. Its stock took off in December, along with E*Trade's (EGRP) and Charles Schwab's (SCH), and just keeps going up. Shareholders have been rewarded with 228% return in 1999 alone. The stock closed up 4.4%, or 2 3/16, at 51 11/16 Monday.

But the Omaha, Neb.-based company has suffered technology problems for about a year as its tremendous growth has outpaced its technological abilities. Attendees at a conference last March heard from Ameritrade execs about how the company couldn't keep up with demand.

Other aspects of its service have lagged behind some competitors. Its Web site looks essentially the same as it ever has, while other top brokers such as E*Trade and Datek have redesigned. And its products and services pale beside those offered by Schwab and Donaldson Lufkin & Jenrette's (DLJ) DLJdirect.

"All of us [online brokers] have been caught off guard by the movement to the Internet," says Joe Ricketts, co-chief executive of Ameritrade Holding, the online broker's parent. In a presentation Monday at PaineWebber's Mass Market Internet conference in New York, he said the broker went so far as to quit developing new products and services as it focuses on ensuring its technology can handle current customers.

But recent moves by Ameritrade show it may be ready to stake out a chunk of technology respect commensurate with its share of the growing industry. As other brokers endure some high-profile technology glitches of their own, the changes couldn't come at a better time.

Ameritrade hired Thomas Lewis as its tech-focused co-chief executive. Lewis' experience includes being chief information officer at USF&G Insurance and co-founding Seer Technologies, a technology consulting firm. He also helped create a new technology plan for American Express (AXP) and led the effort to rebuild Credit Suisse First Boston's trading systems in the mid-'80s.

"We plan to spend $100 million in technology over the next two years," says Lewis. "We believe we can significantly leapfrog the competition." In the fiscal year ended September 1998, the company spent $10.6 million on equipment and occupancy costs.

Ameritrade is building a customer service and communications center in Fort Worth, Texas, that will more than double the space of its Omaha operations. It is also building a technology site in the Baltimore area that will mirror the Omaha site's communications, processing and data operations.

The company also hired a new chief information officer, a former vice president of systems development at Bell Atlantic (BEL), and will add 100 to 150 people to the technology team to double its size. (Ameritrade's full-time workforce almost doubled in 1998 to more than 1,100.) The goal, says Lewis, is to have enough capacity to stay 30% ahead of peak traffic and trade volume and to eliminate trading interruptions.

"By bringing in the new CEO and laying the foundation for the new customer service center, they're laying the foundation for a much bigger company," says analyst Bill Burnham at Credit Suisse First Boston. Burnham, whose firm has performed underwriting for Ameritrade, rates the broker a buy.

Already, some customers have noticed an improvement in the online and phone service, although some continue to complain of having to try several times to find an available server. The technology improvements should ease some concern among certain money managers.

"They've attracted attention to the point where it's caused problems," says Rob Cummisford, co-manager of the (KNEMX)Kent Small Company Growth fund. "I think they are taking steps and taking a goodwill effort to correct the problems that have happened in the past." The diversified fund, which held 70,000 presplit shares at the end of June, is down 19.5% in the past year and shows an annualized three-year return of 8.4%. (Ameritrade shares split 2 for 1 last August and again last month.)

As it has pulled its technology under control, Ameritrade has begun rolling out a new advertising campaign, several months later than expected. The campaign has been scaled back from original expectations because of the rapid growth, although Ricketts would like to be spending more. Burnham had expected $25 million to $30 million in ad spending for the current quarter, but now expects only $12 million to $13 million.

The reduced ad spending has boosted earnings estimates for the quarter ending in March. Burnham revised his forecast to a profit of 8 cents a share from a loss of 5 cents. The First Call consensus estimate calls for a loss of 2 cents a share, compared with a loss of 8 cents a share a month ago.

Despite the recent flurry of activity, Ameritrade isn't likely to stray too far from its discount brokerage business. It aims to only flesh out its services in a way that directly relates to do-it-yourself investing. And it will continue to stand out for its cheap $8 trades. While other brokers rush to offer a wide array of services, Burnham thinks there is room for a basic approach.

"Ameritrade has had a more focused strategy than E*Trade," says Burnham. "The real focus for [Ameritrade] is expanding their core discount brokerage franchise."

That will include more international partnerships. Monday the company announced an agreement with Cortal, a European discount broker and a unit of Paribas, to offer online trading of French stocks to Ameritrade customers. In November, Ameritrade announced an agreement with Deutsche Bank enabling it to offer Ameritrade customers the ability to trade German stocks online.

Ameritrade also plans to add more tools and research, although they might be offered for an additional fee. Ricketts says 24-hour trading is going to arrive soon, but underwriting won't soon follow. And the upcoming online financial services mall, dubbed OnMoney, is a separate unit from Ameritrade.

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