While other online brokerages are showing signs of weakness, E-Trade Group Inc. is flexing its muscles with new initiatives and demonstrating the success of its coupling of an online bank with an Internet stock-trading service.
Indeed, it was the prosperity of E-Trade Bank - which picked up $1 billion of deposits in the fourth quarter - that helped offset flat results in the company's brokerage arm in the last quarter. While E-Trade has not been immune to the trading volume declines that have afflicted all brokerages, it seems to have shielded itself by emphasizing a "financial supermarket" strategy. After the market's close on Wednesday the company reported a small fourth-quarter profit, of $5.8 million, or 2 cents per share, compared with a loss of $38.1 million, or 13 cents per share, a year earlier. Revenues rose 22%, to $334 million.
The numbers may not reflect what many observers say is a pivotal moment for E-Trade, which has distinguished itself from its rivals by following a diversification strategy that seems to be shielding it from the fickleness of online investors.
This week E-Trade announced that it will move next month from the Nasdaq stock exchange to Wall Street's big league, the New York Stock Exchange, where it will trade under the new ticker symbol ET. It also announced plans to open 20 new E-Trade offices in Target retail stores by yearend. Last fall the company opened a branch in a Target store in Roswell, Ga.
This Sunday millions of Americans will watch E-Trade flaunt its prosperity. For the second year in a row the company is sponsoring the halftime show at the Super Bowl.
"The progress of E-Trade Bank is the cornerstone of our diversification strategy and a very steady revenue stream," said Christos M. Cotsakos, chairman and chief executive officer of E-Trade Group, in a conference call Thursday about quarterly earnings. Many of the new deposits came from E-Trade's brokerage account customers who decided to shift their money into insured accounts, he said.
E-Trade Bank has fueled the company's growth, Mr. Cotsakos said. Fourth-quarter assets at the bank, which was known as Telebanc when E-Trade acquired it last January, more than doubled from a year earlier, to $11.1 billion, and the bank contributed 61% of the holding company's total interest income for the quarter.
This month E-Trade disclosed plans to buy an online mortgage broker, LoansDirect, to expand its bank products.
By contrast, many of E-Trade's rivals are suffering. JB Oxford Holdings Inc. said Thursday that its JB Oxford & Co. unit had laid off 32 employees in administrative and support positions, or 12% of its work force. Ameritrade Holding Corp., which laid off 200 part-time employees in December, said this month it will lay off about 230 full-time and 100 part-time employees.
Officials at Morgan OnLine, J.P. Morgan Chase & Co.'s private banking Web site, said this month it would lay off about 150 employees, and Charles Schwab Corp. put a hiring freeze in place last month. Prudential Securities, Merrill Lynch & Co., and other brokerages have also announced austerity measures.
E-Trade, of Menlo Park, Calif., has tried to cushion itself through diversity in its business lines. Its acquisition last January of Telebanc has clearly been a saving grace: In the most recent earnings announcement, the company reported a 178% growth in banking accounts, to 362,617, and a 116% jump in total banking deposits, to $5.7 billion.
"The diversification business model has grown and proved itself under the most challenging circumstances," Mr. Cotsakos said. "Adding mortgage origination to our business will improve the bank asset portfolio by cross-selling high-value mortgages to our customers base." The acquisition of LoansDirect is expected to close imminently.
Tim Butler, a senior research analyst at Pacific Crest Securities in Portland, Ore., said the "timing of the acquisition couldn't be better, given that it appears we are on the cusp of the Fed easing" interest rates, "which will lead to a mortgage refinancing boom.".
E-Trade Group is also forging into non-Internet avenues. The second E-Trade Zone kiosk will be in a Boulder, Colo., SuperTarget store. Mr. Cotsakos said 25% of the foot traffic in the Roswell, Ga., store opened an E-Trade account.
The Roswell kiosk, "was successful on day one for the brokerage business, and after we made adjustments on the banking side it is just humming now," said Mitchell H. Caplan, chief banking officer of E-Trade Group. "It is fascinating to build something so successful that brings in the right kind of balances and the right kind of activity and to be able to do it so cost-effectively."
E-Trade also plans to open a financial center in Midtown Manhattan, on prime real estate on Madison Avenue.
"The Manhattan Center is an extension of our brand, a marketing flagship store that solidifies the E-Trade brand in the New York area," Mr. Caplan said.
Eric Wasserstrom, an analyst at UBS Warburg, said E-Trade's brokerage predecessors have had great success with a combination of Internet and brick-and-mortar entities. Somewhere between 50% and 70% of TD Waterhouse's new accounts come in through its branches, he said.
"A physical presence is critical as a customer-acquisition tool, and accounts that come in through the physical door are higher-asset accounts with a greater propensity to cross-sell," Mr. Wasserstrom said.
To continue its growth, E-Trade says it is shifting gears this year to concentrate again on profitability.
"We have placed E-Trade in a place of stability to produce ongoing future growth," Mr. Cotsakos said. "We will maintain a steady focus for growth and profitability."
E-Trade plans to trim its marketing budget and increase the number of transactions per account, Mr. Cotsakos said. E-Trade spent $97.9 million on marketing in the fourth quarter, down 25.7% from a year earlier.
"We have a 3.6 million-customer base, and we are going to refocus and trim marketing to concentrate on enhancing the value of our current base to more efficiently drive profits," he said.
Mr. Caplan said in a telephone interview, "We have grown and matured as a company, and we are now a profitable company, and it is our goal to move over and be in the company of our competitors and colleagues."
The renewed focus on profitability has heartened some industry observers.
"The most encouraging aspect from management is a new focus on profitability," Mr. Butler said. "In the past they have focused too much on making aggressive investment and marketing.