E*TRADE Financial's CEO Discusses Q1 2012 Results - Earnings Call Transcript

E*TRADE Financial (ETFC)

Q1 2012 Earnings Call

April 19, 2012 5:00 pm ET

Executives

Steven J. Freiberg - Chief Executive Officer, Director and Member of Finance & Risk Oversight Committee

Matthew J. Audette - Chief Financial Officer, Executive Vice President and Controller

Analysts

Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division

Michael Carrier - Deutsche Bank AG, Research Division

Christopher J. Allen - Evercore Partners Inc., Research Division

Alexander Blostein - Goldman Sachs Group Inc., Research Division

Christopher Harris - Wells Fargo Securities, LLC, Research Division

Howard Chen - Crédit Suisse AG, Research Division

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division

Keith Murray - Nomura Securities Co. Ltd., Research Division

Brian Bedell - ISI Group Inc., Research Division

Presentation

Operator

Good afternoon, and thank you for joining us for E*TRADE Financial's First Quarter 2012 Conference Call. Joining me today are Steven Freiberg, E*TRADE's Chief Executive Officer; Matt Audette, Chief Financial Officer; and other members of E*TRADE's management team.

Before turning the call over to Steve, I'd like to remind everyone that during this conference call, the Company will be sharing with you certain projections or other forward-looking statements regarding future events or its future performance. E*TRADE Financial cautions you that certain factors, including risks and uncertainties referred to in the 10-Ks and 10-Qs and other documents E*TRADE files with the Securities and Exchange Commission could cause the Company's actual results to differ materially from those indicated by its projections or forward-looking statements.

This call will present information as of April 19, 2012.

Please note that E*TRADE Financial disclaims any duty to update any forward-looking statements made in the presentation.

During this call, E*TRADE Financial may also discuss some non-GAAP financial measures in talking about its performance. The Company provide these measures due to its belief that they provide important information about its operating results. These measures will be reconciled to the most directly comparable GAAP financial measures either during the course of this call or in the company's press release, which can be found on its website at investor.etrade.com. These non-GAAP financial measure should be considered in conjunction with the comparable GAAP measure.

This call is recorded, and a replay of this call will be available via phone and webcast beginning this evening at approximately 8:00 p.m. The call is being webcast live at investor.etrade.com. No other recordings or copies of this call are authorized or may be relied upon.

With that, I will now turn the call over to Steve Freiberg.

Steven J. Freiberg

Thank you, operator. Good afternoon, and thank you for joining today's call. I will begin by covering highlights from the quarter and then Matt will take you through the results.

I will follow with additional comments after which we'll open up the call for questions. The first quarter was a solid one on several fronts as we generated some of the strongest customer metrics in the firm's history, made good progress in reducing risk on the legacy loan portfolio and grew revenue sequentially, despite a difficult interest rate environment.

We reported earnings per share of $0.22, which included a $0.09 per share income tax benefit on total net revenue of $489 million, representing a 3% sequential growth. Our Brokerage business was quite robust this quarter. DARTs grew by 12% sequentially while generating new record net new brokerage assets of $4 billion in the quarter, an 11% annualized growth rate and more than double the $1.7 billion in the prior quarter.

Net new brokerage accounts of 46,000 are well above last quarter's 10,000. Our brokerage account attrition rate hit a record low 8.7% annualized marking the second consecutive quarter this metric has tracked below 10%. This is a significant improvement in the previous 3 years, which averaged 12% and is a testament to our ongoing efforts to improve the customer experience. During the quarter, we are recognized by the American Customer Service Index with a first place score among online brokers, the result of a 4% improvement in our score, the largest in our peer group.

Brokerage related cash also ended the quarter at the highest level on record, at $31 billion, enabling us to offset the maturity of net interest spread compression through volume. On the credit front, we make meaningful progress on our review of a loan modification practices and procedures, which we discussed last quarter, and Matt will cover the details later in the call.

I would point out that our legacy loan portfolio ended the quarter at $12.4 billion, down 6% sequentially and down 62% from its peak.

Our overall delinquencies are down 56% from their peak and are at their lowest level in over 4 years. Meanwhile, Special mentioned delinquencies are down 20% sequentially at their lowest level in 5 years. As for our customer offering, we launched several new products and enhancements during the quarter and unveiled 2 important websites redesigns. Rebuilding our storefront through a comprehensive retooling of our public website and completing the rollout of E*TRADE 360, bringing a unique and streamlined experience to our customers.

Both sites have been well received and we continue to make refinements and optimize based on feedback and in-market testing. We will further enhance the prospect experience this year with the incorporation of new planning tools and improvements to the Investor Education section of our site, with the goal of deepening engagement and strengthening E*TRADE's brand position as the place to receive the best investing experience.

We also integrated a retail FOREX offering into our product set with those more sophisticated active traders. In addition to these major launches, we rolled out a number of enhancements and upgrades to our existing platforms. We redesigned our bond resource center to offer streamlined access to news, unbiased education, intuitive screeners to select individual bonds and tools to help our customers quickly and easily build out the fixed income portion of their portfolio. We also made enhancements to E*TRADE Mobile on both iPhone and Android, including mobile check deposit capability, complex options trading and mutual fund trading. Yesterday, we announced voice recognition for the iPhone, allowing users to verbally prompt quotes and order tickets, as well as bar code scanning for iPhone and Android. We believe our mobile strategy is a highly differentiating element of our offering and we have seen a steady increase in customer utilization, with 6% of our trades this quarter executed via mobile applications, up from 3% a year ago.

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