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Author: stward One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 10679  
Subject: Quarterly Results Date: 10/25/2000 11:43 PM
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Since it is earnings season, it must be time for another review of the OLBs' quarterly results. We're missing DIR this time, because their complete earnings report is being delayed (due to the merger of DLJ and CSFB). If anybody can suggest other companies that should be tracked, especially as we may not be able to track DIR and NDB in future, I'm open to suggestions. I'm looking for companies with comparable business models, so investment banks and market-makers need not apply.

Growth:

No surprise, it was another tough quarter for this sector. Sequential revenue growth ranged from dismal (NDB: -27%) to so-so (EGRP: 3%, incl. results of a merger). Account and asset growth (i.e. future revenue growth) were still OK, for a summer quarter. EGRP fared better than most; perhaps the diversification into banking is paying off.

Revenue Q3 2000 Q2 2000 Q1 2000 Q4 1999 Q3 1999 Q2 1999 Q1 1999 Q4 1998 Q3 1998 Q2 1998 Q1 1998
AMTD $133,768 $149,086 $170,305 $110,849 $74,478 $78,094 $63,562 $52,117 $39,557 $0 $0
DIR $83,989 $114,213 $76,314 $54,881 $59,674 $47,202 $35,407 $0 $0 $0
EGRP $340,261 $330,341 $407,430 $246,008 $173,178 $151,742 $126,848 $115,920 $68,662 $62,316 $53,309
NDB $20,147 $27,417 $31,408 $18,796 $0 $0 $16,765 $13,162 $0 $0 $0
SCH $1,322,500 $1,404,600 $1,571,900 $1,127,400 $883,700 $982,102 $951,485 $788,600 $0 $0 $0
TWE $345,600 $488,700 $381,600 $253,100 $243,000 $0 $215,000 $169,600 $0 $0

Revenue Growth (Seq) Q3 2000 Q2 2000 Q1 2000 Q4 1999 Q3 1999 Q2 1999 Q1 1999 Q4 1998 Q3 1998 Q2 1998 Q1 1998
AMTD -10% -12% 54% 49% -5% 23% 22% 32%
DIR -26% 50% 39% -8% 26% 33%
EGRP 3% -19% 66% 42% 14% 20% 9% 69% 10% 17%
NDB -27% -13% 67% ERR 27%
SCH -6% -11% 39% 28% -10% 3% 21%
TWE -29% 28% 51% 4%

Accounts (End of Qtr) Q3 2000 Q2 2000 Q1 2000 Q4 1999 Q3 1999 Q2 1999 Q1 1999 Q4 1998 Q3 1998 Q2 1998 Q1 1998
AMTD 1233 1165 992 686 560 505 428 354 306 0 0
DIR 468 429 347 307 277 243 210 190 0 0
EGRP 3315 2945 2614 1881 1551 1241 909 676 544 459 403
NDB 269 246 208 178 160 144 128 116
SCH 7400 7200 6900 6600 6316 6166 5900 5600 5500 5300 5000
TWE 2979 2732 2356 2168 2066

Account Growth (Seq) Q3 2000 Q2 2000 Q1 2000 Q4 1999 Q3 1999 Q2 1999 Q1 1999 Q4 1998 Q3 1998 Q2 1998 Q1 1998
AMTD 5.8% 17.4% 44.6% 22.5% 10.9% 18.0% 20.9% 15.7%
DIR 9.1% 23.6% 13.0% 10.8% 14.0% 15.7% 10.5%
EGRP 12.6% 12.7% 30.0% 21.3% 25.0% 36.5% 34.5% 24.3% 18.5% 13.9%
NDB 9.3% 18.3% 16.9% 11.3% 11.1% 12.5% 10.3% ERR
SCH 2.8% 4.3% 4.5% 4.5% 2.4% 4.5% 5.4% 1.8% 3.8% 6.0%
TWE 9.0% 16.0% 8.7% 4.9%

Assets (End of Qtr) Q3 2000 Q2 2000 Q1 2000 Q4 1999 Q3 1999 Q2 1999 Q1 1999 Q4 1998 Q3 1998 Q2 1998 Q1 1998
AMTD $36,000 $34,800 $38,900 $31,600 $22,900 $22,600 $19,500 $14,900 $11,400 $0
DIR $27,500 $29,400 $20,300 $14,200 $13,300 $11,200 $8,900 $0 $0
EGRP $65,900 $60,700 $65,200 $44,100 $28,400 $26,000 $21,000 $15,200 $11,200 $11,200
NDB $11,200 $9,900 $12,200 $8,900 $8,000 $7,000 $6,500 $5,600 $0 $0
SCH $961,000 $931,000 $823,000 $725,000 $595,000 $591,700 $542,000 $491,100 $408,200 $0
TWE $165,300 $175,000 $150,200 $121,700 $112,700 $0 $95,700 $0 $0

Asset Growth (Seq) Q3 2000 Q2 2000 Q1 2000 Q4 1999 Q3 1999 Q2 1999 Q1 1999 Q4 1998 Q3 1998 Q2 1998 Q1 1998
AMTD 3.4% -10.5% 23.1% 38.0% 1.3% 15.9% 30.9% 30.7%
DIR -6.5% 44.8% 43.0% 6.8% 18.8% 25.8%
EGRP 8.6% -6.9% 47.8% 55.3% 9.2% 23.8% 38.2% 35.7% 0.0%
NDB 13.1% -18.9% 37.1% 11.3% 14.3% 7.7% 16.1%
SCH 3.2% 13.1% 13.5% 21.8% 0.6% 9.2% 10.4% 20.3%
TWE -5.5% 16.5% 23.4% 8.0%

Operating Efficiency:

For the second quarter in a row, SCH's operating margin has slipped into the low 20's, 8-10% below its historic average. This is hardly disastrous, but it isn't good news for SCH investors either. By contrast, the larger pure-play OLBs (AMTD and EGRP) have maintained higher margins - and they're much steadier than they were in 1999 (when they briefly dropped into the teens). The upstarts are growing up, and the efficiencies of their business model are starting to pay off.

AMTD's 25.3% operating margin would have been much higher (42.5%!) if it weren't for the costs associated with their OnMoney subsidiary ($23M). Plans to secure outside backing for this subsidiary have been put on hold for at least 6 months, so this will be a continued drag on AMTD earnings for at least two more quarters. Whether it will someday repay AMTD shareholders with IPO cash (or additional revenue for AMTD itself) remains to be seen; this is creating a lot of uncertainty in AMTD earnings forecasts, so take the "official" analyst estimates with a grain of salt.

On the good side, this shows that AMTD's core brokerage business is extremely efficient, and has the potential to be a major cash producer. AMTD claims to have the lowest trade-execution costs of any OLB.

Net income (before the distortions of taxes and ad spending, which have very uneven effects from one company to the next), shows SCH maintaining about a 3X lead over EGRP - compared to a 10X lead a year ago. AMTD is 3X smaller than EGRP (or 2X, if you ignore OnMoney), by this metric. NDB is actually operating in the red; obviously Deutsche Bank didn't buy them for the retail brokerage (unless they think they can run it better).

Advertising was scaled back across the board this quarter, as the OLBs waited for a more favorable investing climate (when ads are more likely to pay off). Ad budgets are still substantial though - and the spending still pays off fairly well in terms of new accounts. The exception was AMTD; for some reason, they weren't able to gather many new accounts this quarter, and their cost/account shot up to nearly $500 as a result. Anybody have any idea why? Has their ad strategy changed?

Operating Income Q3 2000 Q2 2000 Q1 2000 Q4 1999 Q3 1999 Q2 1999 Q1 1999 Q4 1998 Q3 1998 Q2 1998 Q1 1998
AMTD $286 $4,598 $3,201 ($21,711) ($9,197) $8,918 $7,979 $3,742 $5,791 $0 $0
DIR ($4,564) $14,819 ($820) ($2,238) $6,032 $7,173 $1,785 $0 $0 $0
EGRP $7,246 ($7,671) ($13,715) ($58,200) ($32,653) ($27,668) ($26,489) ($11,550) ($15,747) $6,560 $6,118
NDB ($8,725) ($6,855) $1,362 ($3,219) $0 $0 $714 ($1,141) $0 $0 $0
SCH $142,300 $137,100 $296,900 $170,500 $124,500 $150,991 $142,767 $106,400 $0 $0 $0
TWE $34,500 $76,600 $57,000 $20,900 $26,400 $0 $20,100 $14,500 $0 $0

Net (pre-tax,pre-ad) Q3 2000 Q2 2000 Q1 2000 Q4 1999 Q3 1999 Q2 1999 Q1 1999 Q4 1998 Q3 1998 Q2 1998 Q1 1998
AMTD $33,904 $48,815 $60,326 $24,967 $10,512 $25,995 $25,684 $15,535 $12,941 $0 $0
DIR $12,073 $43,539 $24,718 $14,400 $24,473 $17,362 $8,244 $0 $0 $0
EGRP $101,019 $115,298 $154,846 $59,264 $27,896 $39,670 $36,926 $34,236 $10,294 $21,789 $6,118
NDB ($2,436) $4,148 $7,217 $2,034 $0 $0 $3,049 $28 $0 $0 $0
SCH $303,000 $330,600 $511,800 $358,800 $261,500 $304,062 $288,583 $229,100 $0 $0 $0
TWE $90,200 $166,500 $137,400 $64,600 $63,600 $0 $49,600 $39,100 $0 $0

Operating Margin Q3 2000 Q2 2000 Q1 2000 Q4 1999 Q3 1999 Q2 1999 Q1 1999 Q4 1998 Q3 1998 Q2 1998 Q1 1998
AMTD 25.3% 32.7% 35.4% 22.5% 14.1% 33.3% 40.4% 29.8% 32.7% ERR ERR
DIR 14.4% 38.1% 32.4% 26.2% 41.0% 36.8% 23.3% ERR ERR ERR
EGRP 29.7% 34.9% 38.0% 24.1% 16.1% 26.1% 29.1% 29.5% 15.0% 35.0% 11.5%
NDB -12.1% 15.1% 23.0% 10.8% ERR ERR 18.2% 0.2% ERR ERR ERR
SCH 22.9% 23.5% 32.6% 31.8% 29.6% 31.0% 30.3% 29.1% ERR ERR ERR
TWE 26.1% 34.1% 36.0% 25.5% 26.2% ERR 23.1% 23.1% ERR ERR

Ad Spending Q3 2000 Q2 2000 Q1 2000 Q4 1999 Q3 1999 Q2 1999 Q1 1999 Q4 1998 Q3 1998 Q2 1998 Q1 1998
AMTD $33,619 $41,222 $54,774 $58,662 $24,815 $12,105 $13,154 $9,643 $3,857 $0 $0
DIR $19,990 $18,070 $25,452 $18,128 $13,232 $6,101 $5,228 $0 $0 $0
EGRP $91,773 $115,081 $177,484 $119,492 $77,443 $82,369 $60,006 $55,001 $37,171 $11,588 $0
NDB $6,289 $11,003 $4,724 $5,253 $0 $0 $1,715 $1,169 $0 $0 $0
SCH $62,600 $77,100 $103,700 $77,100 $57,700 $54,483 $52,591 $53,300 $0 $0 $0
TWE $23,400 $29,200 $36,100 $24,100 $14,600 $0 $11,500 $9,000 $0 $0

Ad Cost/ New Account Q3 2000 Q2 2000 Q1 2000 Q4 1999 Q3 1999 Q2 1999 Q1 1999 Q4 1998 Q3 1998 Q2 1998 Q1 1998
AMTD $494.40 $238.28 $179.00 $465.57 $451.18 $157.21 $177.76 $200.90
DIR $512.56 $220.37 $636.30 $604.27 $389.18 $184.88 $261.40
EGRP $248.04 $347.68 $294.33 $362.10 $249.82 $248.10 $257.54 $416.67
NDB $273.43 $289.55 $157.47 $291.83 $0.00 $0.00 $142.92
SCH $313.00 $257.00 $345.67 $271.48 $384.67 $204.82 $175.30 $533.00
TWE $94.74 $77.66 $192.02 $236.27

Summary:

Are the online brokers the best business model on the Internet, or just another dot-bomb with no sustainable advantage? I think the numbers show that the best of these businesses can thrive, even in a difficult market. Despite intense competition, prices have remained fairly steady (or, in AXP's case, risen), and operating margins remain healthy. This is no passing fad.

-- stward
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