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Schwab Struggles to Stanch the Bleeding

The online broker saw more big declines in transaction revenue and commissions last quarter.

Updated from 11:06 a.m. EST

Charles Schwab


saw fourth-quarter earnings plunge 27% from a year ago as the individual investor's yearlong disengagement from stock trading continued to take its toll.

The company posted net income of 8 cents a share, excluding charges, which met estimates but was down from 11 cents a share last year. Revenue for the quarter fell to $1.1 billion from $1.3 billion in the year-ago period. Including items, Schwab lost a penny a share in the fourth quarter.

"The past year was probably the most difficult market environment many of our clients have ever faced," Chairman and Co-CEO Charles R. Schwab said in a statement. "Their investment activity has only recently shown signs of recovery after declining for much of the year and then being further impacted by the terrible events of Sept. 11."

Different Directions

The results are in stark contrast to those of rival


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, which made strides to beef up its banking business in 2001 and on Monday reported a 250% jump in fourth-quarter profits and raised 2002 guidance. Some analysts believe Schwab must do more to diversify its own revenue streams, given the uncertainty in the marketplace.

"When they revolutionized the discount brokerage business, they didn't have a lot of competition. But when you start moving into advisor relationships with high-net worth individuals, there's a whole lot of competition," said Mark Constant, analyst at Lehman Brothers.

Schwab may want to offer other financial services to reduce the volatility in earnings and revenue, "but I'm not optimistic about the company's prospects, especially given that their franchise is known for discount transactions."

Schwab said commissions fell 41% from last year, while principal transaction revenue slid 55% because of a decline in client trading and "challenging" market conditions.

Trading activity did improve from the third quarter, with commissions up 20% to $330 million while transaction revenue rose 50% to $63 million as the stock market saw signs of improvement.

Expense Side

"There are external forces that no one can control," said Joel Gomberg, an analyst at William Blair. "But they've taken significant expense initiatives."

Schwab reduced headcount by 25% in 2001 and said it cut overall operating expenses by 16% in reaction to the plunge in equity markets and subsequent falloff in trading volume.

Schwab said fees from asset management and financial-advice services increased in the fourth quarter to $436 million, from $411 million a year ago. Michael Freudenstein, an analyst at J.P. Morgan, said this is an area where Schwab has an advantage, given that few other brokerages offer pure financial advice without "manufacturing a product."

He expects continued improvement in margins this year but said he is also looking for "modest to no revenue growth." Thomson Financial/First Call is expecting $4.5 billion in revenue in 2002, up from $4.3 billion in 2001. Analysts also expect a 44-cent profit this year although Schwab, as usual, has not offered any forward-looking guidance.

Schwab's stock, which fell 41% last year, was recently up 4 cents, or 0.25%, to $16.06. E*Trade was down 3% to $11.78.