Charles Schwab Corp. will keep reducing expenses this year by cuts in ad spending and, potentially, in jobs, its chief financial officer, Christopher V. Dodds, said Tuesday in the wake of a fourth-quarter earnings report that showed a 64% profit slump.
Ameritrade Holding Corp., a Schwab competitor that has been locked in a fee-cutting war with the big San Francisco company, reported profits up 29% in its fiscal first quarter. And Joseph Moglia, its chief executive officer, said his company will raise ad spending this year as part of a bid for market share.
Mr. Dodds said each of his brokerage company's four business lines - individual investor, Schwab Institutional, U.S. Trust, and retirement services - has been given specific expense targets for 2005 that are a few percentage points lower than last year.
"How they achieve these goals [is] up to them," he said. "It could be job reductions, it be could be cutting consultants, it could be fewer analysts. We don't have a drawing board here with a set order to cut our head count. This is all at the discretion of our four business lines."
He expects Schwab's head count to be down or flat this year, Mr. Dodds said, but the San Francisco company is planning no significant companywide layoffs. It began aggressively cutting costs during the third quarter, he said, and in the second half reduced expenses by $275 million. He said he expects to maintain this momentum in 2005.
At the end of the third quarter, Schwab announced plans to cut about 3% of its work force - 400 to 500 jobs - to bring expenses in line with lower revenue. During the second quarter, the company cut 1,500 jobs.
Schwab said profits fell 64% in the fourth quarter as the company booked $111 million of after-tax charges related to cost-cutting and the sale of its capital markets business. Net income declined to $53 million, or 4 cents per share, from $148 million in the fourth quarter of 2003.
Excluding the charges, the company earned $164 million, or 12 cents per share, to beat estimates by a penny.
For the year, Schwab's net income was $286 million, down 39%. Adjusted operating income for the year was $538 million, up 10%.
Daniel Goldberg, an analyst at Bear, Stearns & Co., said this quarter was the first in which Schwab beat estimates since the third quarter of 2003.
Michael Vinciquerra, an analyst at Raymond James & Associates, said the cost cuts had allowed Schwab to beat estimates. The company's revenue was $20 million lower than analysts expected, he said, but expenses were $60 million below expectations. Revenue was flat for the full year, at $1.06 billion, but expenses grew 8.5%, to $900 million.
The most significant fourth-quarter expense savings came in compensation and advertising, Mr. Vinciquerra said. Compensation fell to a 42% share of the company's overall expenses, from 48% in the second quarter, and ad spending fell 18.2%, to $33 million.
"A firm has more discretion when it comes to advertising spending, but less advertising leads to less growth in future periods," Mr. Vinciquerra said.
Richard H. Repetto, an analyst at Sandler O'Neill & Partners in New York, said this was Schwab's lowest quarter for ad spending since the second and third quarters in 2003 when it spent $22 million and $31 million, respectively. This way of saving costs could backfire, he said.
"Given the competition that is going on among the online brokers when it comes to pricing, you have to market," Mr. Repetto said. "Schwab is focused on an overall cost-reduction program, and this leads to cuts in the ad budget, but long-term that could be a problem."
In midday trading after the earnings announcement, Schwab stock was up 3.06%, to $11.06 a share.
Mr. Moglia, the Ameritrade CEO, said his company plans to increase ad spending this year. It had already increased its ad budget by 15%, to $23 million, in its fourth quarter.
Mr. Dodds said ad spending would rise in the first quarter but fall for the full year. Reduced ad spending "is a function of our business units' desire to invest more in their sales force or their branch network," he said. "They want to invest in people, and that is their choice. We think that we have a great opportunity to increase our asset base and clients by investing in branches and people."
Schwab has reduced its fees in an effort to compete with lower-cost discount brokerages such as Ameritrade and E-Trade Financial Corp.
In November Schwab cut its base commission rate for online stock trades to $19.95 from $29.95. And this month it waived service fees on brokerage, individual retirement, education savings, custodial, and college savings accounts for customers with at least $25,000 of household assets. Previously, the minimum to avoid fees was $50,000.
Ameritrade said Tuesday that its first-quarter net income rose 29% despite a decline in average client trades per day. It earned 22 cents per share, or $92.6 million, on $262 million of revenue. Analysts had expected, on average, that the company would earn 19 cents per share.
The Omaha company reported holding record client assets, about $80 billion, up 24% from the year earlier. It said it processed an average of about 171,000 customer trades per day in the quarter, down from 175,000 a year earlier.
At midday, Ameritrade stock was up 3.94%, to $12.92 a share.
Schwab processed an average of about 178,000 commission trades per day in its fourth quarter, up from about 162,000 a year earlier.
Mr. Moglia said trading volume is a lagging indicator of what is going on in the markets. If markets continue to improve, he said, retail investors will begin trading again.
Schwab increased total client assets by 12%, to $1.081 trillion. In December, it said, it opened 56,000 accounts, 37% more than in November and the most for a month since April.
Raymond James' Mr. Vinciquerra said more competitive pricing would lead to more new accounts. "Schwab is not going to lag the industry in new accounts as they did the last several years," he said. "Price cuts have that impact."
Mr. Dodds said Schwab is encouraged by the performance of its two-year-old bank. It had a "nicely profitable quarter," he said, as it increased assets by 8%, to $4.4 billion. Mr. Dodds said the bank continues to see growth in mortgages and home equity loans.
In October, the bank introduced a Visa credit card by e-mail to about 400,000 brokerage clients. The bank's revenue is not broken out but is less than 5% of the company's overall revenue, he said. It will continue to increase its menu of products and services.
Analysts expect more cost-cutting at Schwab. Mr. Vinciquerra said it planned to cut 20% of expenses when it began cost-saving measures eight to 10 months ago. As of a November analysts meeting, savings amounted to 8%.
Mr. Dodds said Schwab plans to increase revenue 3% to 5% this year, which will require further cost cuts. "Cost discipline and cost focus is a part of Schwab's story in 2005," he said.
