| 22 April 2010

E*TRADE Corporation lost $48 million in the first quarter. We all know that now. But to put that loss in perspective we must remember that the firm recorded $1.3 billion in losses in 2009. So a $48 million loss? Shareholders rejoice!

In fact, they did do a tick better than the $67 million they lost in the fourth quarter. And they're safely sitting on $418 million in cash, of which $765 million was rasied in a common stock offering last year. But more important to us is their performance on the core brokerage metrics. If the firm is attempting to refocus efforts on domestic brokerage operations then it's time to ask, how are they doing?

Let's take them in turn, shall we? First a look at trading activity; and to be honest there's not much to report here. DARTs have been choppy for most firms in the first quarter, and E*TRADE is no exception. We're beginning to wonder whether DARTs, once the gold-standard metric, are even worth following any more. Trades are cheap and the broker price war has plucked all the potental margin out of the pot.

But, while most firms have been channeling for a year we must take notice of E*TRADE's fall from significantly higher trading activity during this time last year. We think this is due, in part, to the new account activity, which has significantly waned.




While all brokers have struggled here and there on new accounts, E*TRADE is the one firm to actually turn in negative numbers. In other words, customers are leaving. Take note that the chart below dips into the negative several times and, in fact, while the firm reported a net additon of 2,000 brokerage accounts for the quarter in their press release, the truth is they actually lost accounts last month.

In fact, the bump up in new accounts in February we would directly attribute to their massive new year advertising push, including an ad in the SuperBowl. Was it worth it? Let's take a look!



The chart below shows you just how much E*TRADE spent on marketing each quarter. (All firms report their marketing expenses on a quarterly basis.) We reported that The Charles Schwab Corporation (SCHW) ramped up their marketing expense in Q1. TD Ameritrade (AMTD) did the same thing in Q4, as we also noted. E*TRADE, for its part, clearly ramped up marketing efforts as well. They even introduced a new baby with great fanfare at the Superbowl in February.

The cost of those efforts? Roughly $38 million in Q1. And the results? Just UNDER 2,000 net new accounts. Actually it was 1,898 net new accounts to be exact. And it was $38,135,000 in marketing expense, to be exact. We want to be exact here because that means -- wait, let us break out the calculator -- yes, we have it here: $20,092.22 per new account.

That's what E*TRADE paid for each new account. Even if you compared this with a very liberal (expensive) industry average of $1000 per new account it's still out of the ballpark. Actually, we can make some direct comparsions. Schwab spent $62 million in Q1 to net 230,000 new accounts ($230 per new account). TD Ameritrade spent $65 million in Q4 (Q1 isn't out yet) to net 180,000 new accounts ($361 per account).

Our conclusion: that is one expensive baby. We're just sayin'.




If there's any "good" news it's that assets continued to grow for the firm. (The numbers below are in millions.) But that is faint praise considering we made the point over and over again that much of the asset gain is due to a whoppingly good two months in the markets. In fact, the S&P 500 gained about 3% in February and another 6% in March for a total of 9% during those two months.

E*TRADE, meanwhile, gained 3.7% and 5.3% respectively or, coincidentally, exactly 9%, despite adding accounts. This means that some accounts must have lost money. To be fair, Schwab did slightly worse than this and TD Ameritrade did slightly better.

Our conclusion: E*TRADE's asset "growth" is not alarmingly off base compared with other brokers, but it isn't due to much more than a solid two months of performance in the markets, that's all.



Suffering is not a new experience for E*TRADE. They're a company that's been suffering for a while. But they've been working hard to get their mojo back. In doing so, former CEO Donald Layton was brought in to clean up the balance sheet and keep the firm from going under. He left in December, was replaced by an interim CEO, and then they finally hired Steven Freiberg one month ago to get the firm moving forward and to, once again, focus on the core business.

This was Mr. Freiberg's first earnings go-round, so we were curious to see what he would say (or what his handlers would have him say) about the shift in focus and the performance of the core brokerage business in Q1. Given our analysis above, his statement tells us one thing. Mr Freiberg: you have some work to do. 

"Our online brokerage business performed well," he said, "during a period of decreased market volatility delivering growth in customer assets, accounts, and margin receivables."