E-Trade Group Inc. is looking less like a pure-play online brokerage and more like a diversified financial services company as it seeks to mitigate the effects that a dip in trading volumes has had on its revenue growth.
Just a day after the Menlo Park, Calif., company announced that economic doldrums had contributed to a 21% decline in its first-quarter revenue, it said that it had agreed with Target Stores to greatly expand the reach of its network of automated teller machines and staffed E-Trade stores throughout Target's footprint.
The bulking up is not confined to kiosks; the company last week opened a glitzy, four-story trading bazaar in one of Manhattan's priciest real estate sites, and it has plans for 20 more megastores in cities worldwide.
E-Trade hopes its new stores and branches will give it an even stronger brand presence. At the same time, it is paring back its marketing budget, much of which had been lavished on zany prime-time television advertisements.
The company said during its earnings call that it will slash the marketing budget by as much as 50% over the next few quarters. E-Trade spent about $93.7 million marketing in the first quarter, compared to more than $180.6 million in the same quarter last year. Last year, E-Trade spent $487.6 million, or 34% of its revenue, on marketing.
On Wednesday E-Trade said it will expand its network of ATMs in Target stores to more than 1,000 over two years, up from 110. It also plans to install 20 E-Trade "centers," 400-square-foot facilities staffed with sales and service representatives within SuperTarget stores.
James Marks, an analyst at Credit Suisse First Boston in New York, said that the branches in Target stores and elsewhere would not blow E-Trade's budget. "An ATM and a few computers and maybe one person is not costly. I don't think such an endeavor will add to their expenses dramatically."
At the same time, the company is continuing its strategy of trying to insulate revenue streams from the turbulent online stock-trading market by offering more financial products.
The onetime online trading specialist has been offering basic banking services since its January 2000 acquisition of Telebank, and during the latest quarter it added access to mortgage and home equity loans by buying LoansDirect. E-Trade plans to introduce credit cards and insurance products in 2002, according to a spokeswoman.
Richard H. Repetto, a senior vice president and analyst with Putnam Lovell Securities in New York, said, "There has been change in their strategy from external spending in marketing dollars to acquire customers and doing acquisitions to an internal focus on getting more revenue per customer."
Revenues from the E-Trade Bank subsidiary have so far provided the most significant prop to the broker's flagging fortunes. In the latest quarter, banking assets rose 7% to $12.1 billion from the previous quarter, while brokerage assets fell 12%, to $41.1 billion. E-Trade Bank contributed 21% of the company's net revenues in the first quarter, up from 16% in the fourth quarter of 2000.
Revenue from processing customer trades fell 48%, to $131.4 million, in the first quarter, from $254.6 million in the same period last year, and E-Trade processed an average of 136,000 trades per day during the first quarter, down from 232,000 a year ago.
But Mr. Marks said he was unconvinced that E-Trade Bank was a wise hedge to a weakened trading environment.
"We are completely unimpressed by any kind of growth numbers in deposits or accounts," he said. "All the evidence so far is that there is not much value being created in Internet banking from a shareholder perspective. It is possible to grow deposits and accounts, but that is not a very impressive accomplishment - all you've got to do is put out one of the highest rates and hot money flows in."
Gregory W. Smith, a senior research analyst at J.P. Morgan Securities in San Francisco, said that E-Trade Bank "clearly is becoming more meaningful part of E-Trade's revenues but in the grand scheme of things, it is still relatively small. The brokerage is still going to dictate the majority of E-Trade's revenues."
Nonetheless, he called the banking business a "great purchase" that will diversify revenues.
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