E*Trade

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easily surpassed analysts' fourth-quarter earnings estimates Monday and raised its guidance for 2002 as the online broker cut advertising costs and increased mortgage loan growth.

The company earned 7 cents a share in the fourth quarter, topping analysts' estimate of 4 cents and last year's bottom line of 2 cents a share. Revenue also exceeded expectations, coming in at $345 million, compared with expectations for $329.8 million.

E*Trade also said it was comfortable with first-quarter income estimates of 7 cents a share. For the full year, the company expects earnings of 45 cents to 55 cents a share, which would easily exceed Wall Street's projection of 38 cents. On Dec. 7, E*Trade forecast 2002 earnings of 40 cents to 50 cents a share.

"They exceeded my expectations because of slightly lower marketing costs," said Ken Worthington, an analyst at CIBC World Markets. "They still have good control over their advertising spending."

Fourth-quarter marketing expenses dropped to $54 million from $97 million in the third quarter. The company added that it reduced headcount by 15% last year.

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"It also looks like they're originating more loans and selling more," Worthington said. "The upside has come from the banking side."

E*Trade Mortgage funded $2 billion in mortgages in the quarter, up from $1.3 billion in the third quarter. That produced revenue of $33 million, compared with $28 million in the prior quarter.

Analysts said an uptick in trading volume also helped boost results as the stock market improved. Transaction revenue recovered as stocks rose in the fourth quarter, coming in at $90 million, up from $76 million in the third quarter. "But they are still below levels seen prior to the third quarter," Worthington said. On average, the company recorded 110,000 transactions a day, up 21% from the third quarter but down 27% from the same period last year.

Still, E*Trade isn't as dependent on retail trading as it once was. The U.S. recession and the subsequent decline in trading activity hit brokerages hard last year and forced many companies to cut jobs and other expenses. E*Trade responded to the slumping stock market by diversifying its business model and moving into the mortgage, consumer loan and ATM businesses, while expanding its geographic reach.

"We're taking a very conservative view of the brokerage business," noted CEO Chris Cotsakos said on a conference call. "We think it's going to be very choppy and unpredictable."

Cotsakos said E*Trade is more nimble than the financial giants and better able to take advantage of market trends than pure-play brokerages. Although investors appear poised to plunge into equity markets right now, Cotsakos said they might be equally eager to jump out within the next couple of months. When they do, E*Trade will provide other investment tools, such as bonds and stock baskets, to take advantage of that, he said.

Marketing costs will climb as a percentage of revenue this year, while loan originations are expected to fall, but Cotsakos said a rise in spreads to 2% from 1.21% should offset the increase.

E*Trade's share price has reaped the benefits of the diversification strategy, rising 39% in 2001. Since Sept. 21, the stock has climbed 155%.