TSC 21: E*Trade Sees the Good Times Lasting

The online brokerage raises second-half guidance after posting a 41% increase in quarterly trading volume.
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Updated from July 16

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E*Trade

(ET) - Get Report

announced second-quarter results Wednesday that matched Wall Street expectations, and raised guidance for the remainder of 2003.

The online financial company announced second-quarter earnings of $50 million, or 14 cents a share, in line with analyst estimates, and better than the year-ago profit of $39 million, or 11 cents a share. Revenue was stronger than expected, coming in at $381 million, better than the $356 million expected by analysts and up more than 20% from year-ago levels.

Despite the bullish outlook, E*Trade's shares were down 56 cents, or 5.7%, to $9.20 Thursday morning. Fellow online brokerage

Ameritrade

(AMTD) - Get Report

was down 52 cents, or 6%, to $8.08, while

Schwab

(SCH)

was off 35 cents, or 3%, to $11.25.

As expected, huge increases in the online broker-banker's mortgage lending business and trading operation contributed to the strong quarter. In a sign of how a powerful stock market rally can entice customers to trade, E*Trade reported that average daily trading volumes were up 41% over the first quarter, resulting in $222.7 million in revenue, up from $215.1 million a year ago.

"The high-margin incremental revenue from increased trading activity we experienced this quarter, along with our cost discipline and product innovation, demonstrate our ability to deliver value to customers and shareholders," said CEO Mitch Caplan, in a release. "Further, this quarter's solid operating results reinforce the strength, flexibility and operating leverage of our diversified model."

E*Trade also said that business would be strong going forward and boosted estimates for 2003, raising earnings guidance to a range between 52 cents and 57 cents a share, better than the 49-cent profit currently expected by analysts.

The banking operation brought in $158.4 million, up from the year-ago $100.9 million, thanks to the explosion in mortgage lending and the addition of new accounts as the company's diversification plan takes hold. In the second quarter, E*Trade said it had 673,000 active banking accounts, up 34% from the year-ago 503,000. Assets in banking accounts totaled $9.1 billion, up 10%, from the year-ago $8.3 million.

"E*Trade Mortgage generated $2.9 billion in direct retail mortgage originations, with another $1.7 billion in the pipeline at quarter's end, an increase of 42% over the pipeline at the end of the first quarter," said the company.

The gain in banking accounts helped offset a 21% slide in retail brokerage accounts, which dropped to 2.87 million from the year-ago 3.65 million. But while the net number of accounts fell significantly, the assets in the accounts E*Trade's brokerage kept continued to rise, hitting $56.7 billion, up 29% from last year due in part to the market rally.

One low point for the company was its continued failure to raise net interest margins, or the amount it makes on each loan. Net interest margins for the second quarter came in at 144 basis points, off from the 152 basis points it had in the first quarter and well short of the 200 basis points that E*Trade had earlier targeted.

"The results of its spread-widening initiatives were dampened by the effect of continued prepayments, which helped drive mortgage volume," the company said.

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