on-line brokerage are still having growing pains, financial results for the latest quarter suggest.

Two prominent companies -- E-Trade Group and DLJdirect Inc. -- reported losses, while National Discount Brokers Group earned $435,000 after losing $650,000 a year earlier. All failed to measure up to the discount brokerage leader, Charles Schwab & Co., whose net income rose 27%, to $125 million.

Meanwhile, two of the banking companies that do all or much of their business on the World Wide Web -- Net.Bank Inc. of Atlanta and Telebanc Financial Corp. of Arlington, Va. -- registered profits of $1.1 million and $2.1 million, respectively.

The mixed bag of results from on-line brokers is expected to continue this week, with a 5-cent-a-share loss from Ameritrade Holding Corp. and next month with a 6-cent-a-share profit from TD Waterhouse Group, according to the consensus estimate from First Call Corp., like American Banker a Thomson Financial company.

Industry experts said a general slowdown in trading because of the summer doldrums and a decline in Internet stocks that are the darlings of on-line investors -- contributed to the sluggish quarters. Some firms, however, were able to offset declining volumes by attracting new customers and more assets.

In early August, Credit Suisse First Boston Corp. analyst Bill Burnham -- now general partner at Softbank Capital Partners -- said it was "probable" that the third quarter would see, for the first time, a decline in trading volume on a sequential-quarter basis.

He based that forecast on a measurable drop in volume between April and July, the first months of the second and third quarters.

"The game has definitely changed for on-line financial services players, said Fiona S. Swerdlow, senior analyst at Jupiter Communications. "Firms that want to increase revenue from individual investors must look beyond transaction fees and become the primary keepers of client assets."

Recent research has led Jupiter to conclude that firms that focus on gathering assets rather than transaction fees "will dominate the space."

The on-line firms had prepared analysts and investors for the effects of lower trading volume.

"Overall, there was not a lot of surprise -- just some reassurance that it wasn't worse than had been predicted," said Richard H. Repetto, research analyst at Lehman Brothers Inc. in New York.

Signs of future growth were evident, though.

San Francisco-based Schwab, for example, saw trading volume decline, but it brought in $25 billion of net new assets during the quarter, an increase of 31% from the year-earlier period.

"Schwab is going after customers who have significant assets," said Greg Smith, a research analyst at Hambrecht & Quist in San Francisco.

These "high-quality accounts" are bringing in an average of $44,000 in net new assets each, an increase of 42% from a year earlier, said chairman and co-chief executive officer Charles R. Schwab.

The company earned $125 million in the quarter that ended Sept. 30, down from $151 million in the previous quarter but up from $98 million in the 1998 third quarter.

Trading volume at E-Trade remained virtually unchanged from the second to the third quarter of calendar 1999. E-Trade's latest quarter was "outstanding ... in that they still added 310,000 net new accounts," Mr. Smith said.

E-Trade reported a loss for the September quarter, the fourth of its fiscal year, of $26.7 million. The results included a charge related to the acquisition of TIR Holdings Ltd., which provides multicurrency securities execution and settlement services. The loss exceeded deficits of $21.2 million in the previous quarter and $15.2 million in the year-earlier quarter.

DLJdirect said the number of trades executed in the September quarter declined by 14% from the preceding three months, to 1.2 million, but that was 67% higher than a year earlier. Customer assets rose in the quarter, to $14.2 billion from $13.3 billion.

DLJdirect's loss was $3.3 million, compared with earnings of $800,000 in the year-earlier period. National Discount Brokers Group said customer assets stood at $7.6 billion on Aug. 31, the end of its most recent reporting period. That was up 3% from the previous quarter. Net income from continuing operations was $435,000, an improvement from a $650,000 loss a year earlier.

During the most recent quarter, NDB sold its stake in Equitrade Partners LLC, a New York Stock Exchange specialist firm, which boosted net income to $20.6 million from a $1.3 million loss a year earlier.

The on-line brokers are being challenged by advertising and marketing demands. The top eight on-line firms have budgeted more than $1.2 billion in fiscal 2000 for marketing, up from $750 million in 1999, Mr. Repetto of Lehman Brothers said. In many cases, he said, this "is absolutely killing earnings.''

E-Trade, for one, said its losses were "in line" with its technology, customer-service infrastructure, and brand-building strategies. The firm, which is in the process of acquiring the profitable, $4 billion-asset Telebanc Financial, spent $77.4 million on "selling and marketing" in the latest quarter.

"They're obviously paying a price" for their account growth, Mr. Smith said.

But E-Trade said its cost to acquire a new customer fell to $198, from $424 a year earlier and $238 in the previous quarter.

Charles Schwab said it spent $58 million on advertising and marketing development in the quarter, bringing the total to $165 million for the year. DLJdirect kicked off a $65 million ad campaign in June and reported an $18 million expenditure on its brand in the latest quarter.

Mr. Repetto said the high customer-acquisition and branding costs could cause some companies to cut back. "Even if the earnings are positively affected in the short term, the long-term result may be negative," he said.

Meanwhile, traditional full-service firms such as Merrill Lynch & Co. and Morgan Stanley Dean Witter & Co. are making on-line plays, and "pure-play" on-line brokerages are expanding their services, blurring the competitive distinctions.

That prompted Glenn Tongue, president of DLJdirect, to say recently that "on-line brokerage is dead. There is no longer the on-line brokerage cocoon. ... Today we are competing with every single brokerage company in America." ?

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