E*Trade Q3 Results Driven By Interest Revenues, Trading Commissions

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ETFC: E*TRADE Financial logo
ETFC
E*TRADE Financial

E*Trade Financial (NASDAQ:ETFC) announced its Q3 2014 earnings on October 21, reporting a 5% year-on-year (y-o-y) increase in net revenues to $440 million. E*Trade’s asset-based business grew by almost 12% year-on-year (y-o-y) to $269 million, and a recovery in trading volumes led trading commissions to rise by 5% over the prior year quarter to $108 million. Additionally, the account maintenance fees and services charged by the brokerage also rose by 12% to $45 million during the quarter. [1]

We have a $21 price estimate for E*Trade’s stock, which is roughly in line with the current market price.

See our full analysis for E*Trade Financial

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Client Assets Grow With Rise In Trading Accounts

E*Trade added about 95,000 net new brokerage accounts in 2013, ending the year with just under 3 million accounts. Comparatively, the brokerage has already added nearly 130,000 net new brokerage accounts from January through September to take its total active brokerage accounts to 3.13 million. [2] As a result of consistently adding new accounts, the brokerage’s client assets increased by 6% y-o-y to $40.4 billion by the end of September. Moreover, E*Trade’s total client assets (customer assets in brokerage accounts and banking accounts combined) stood at over $280 billion at the end of Q2, up from $232 billion in 2013.

Rise In Trade Volumes And Impact on Revenues, Margins

Trading activity remained subdued in the first two months of Q3, with E*Trade’s daily average revenue trades (DARTs) declining by 9% y-o-y to 154,000 trades per day in July. The figure declined sequentially by 5% to 146,000 trades per day in August, though it was nearly flat over August 2013 levels. However, trading activity picked up in September, as DARTs rose by 10% y-o-y to 160,000 trades per day. As a result, transaction-based revenues generated by the brokerage for the full quarter were up by 5% over Q3 2013 owing to a slightly higher revenue per trade realized by E*Trade. The implied revenue per trade – calculated by dividing the net trading commission revenue by the total number of trades  – was $11.13 in 2013. This figure declined to about $10.60 in the first quarter before improving slightly to $10.70 in Q2. According to our estimates, this further rose to about $11.05 in Q3, which the company mainly attributed to a higher mix of options traded compared to equity trades on E*Trade’s platform. An increasing mix of derivatives traded could help improve the average commission per trade for the brokerage in the fourth quarter.

E*Trade’s operating expenses in Q3 were nearly flat both sequentially and annually at $253 million. As a result, operating income was up by over 40% y-o-y to $153 million and net income was up by 83% over the prior year quarter at $86 million. According to our estimates, E*Trade’s adjusted EBITDA margin declined by about 3 percentage points from over 44% in Q1 to 41.1% in Q2. EBITDA Margin further compressed by 90 basis points to 40.2% in the third quarter. However, the EBITDA margin was significantly higher than the prior year levels of about 32-33%. We have a conservative forecast for the company-wide EBITDA margin of around just under 40% in 2014, while we expect it to increase gradually through the end of our forecast period.

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Notes:
  1. E*Trade Q3 2014 Earnings Call Transcript, Seeking Alpha, October 2014 []
  2. E*Trade Monthly Metrics For August, E*Trade Investor Relations, October 2014 []