E*Trade Q4 Earnings: Growth In Interest Revenues, Trading Commissions Lead To Improved Margins

E*Trade Financial (NASDAQ:ETFC) announced its Q4 2014 earnings on January 22, reporting a 3% year-on-year (y-o-y) increase in net revenues to $461 million. E*Trade’s asset-based business grew by 10% year-on-year (y-o-y) to $283 million, and a recovery in trading volumes led trading commissions to rise by 5% over the prior year quarter to $105 million. Additionally, the account maintenance fees and services charged by the brokerage also rose by 14% to $48 million during the quarter. ^[1] Similar to Q4, E*Trade’s full year revenues grew by over 5% annually to $1.8 billion with much of the growth coming from asset-based revenues. Net interest revenues rose by over 10% for the full year to $1.1 billion while trading commission revenues grew by 8% y-o-y to $456 million. Additionally, the account maintenance fees and services charged by the brokerage grew by 20% y-o-y to $186 million for the full year. The company exited its market making business in Q1 due to which the company generated insignificant revenues in principal transactions for the full year.

E*Trade’s cash operating expenses in Q4 were nearly flat over the prior year quarter at $258 million. As a result, operating income was up by over 17% y-o-y to $157 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 margins further compressed by 90 basis points to 40.2% in the third quarter. However, the trend reversed in Q4 with adjusted EBITDA margin improving to over 44% – which was almost 2 percentage points higher than the prior year quarter. E*Trade’s margin for the full year was significantly higher than the 2013 levels of about 32-33%. The company expects expenses to rise in the mid single-digits through 2015 owing to the anticipated increase in headcount due to an expected rise in trading activity. However, margins are likely to improve, owing to a higher expected revenue growth in the coming quarters.

See our full analysis for E*Trade Financial

Asset Base Grows With Increase 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 146,000 net new brokerage accounts in 2014 to take its total active brokerage accounts to 3.14 million. ^[2] As a result of consistently adding new accounts, the brokerage’s client assets increased by 5% y-o-y to $41.1 billion by the end of December. Moreover, E*Trade’s total client assets (customer assets in brokerage accounts and banking accounts combined) stood at over $290 billion at the end of Q4, up from $261 billion in 2013. We currently forecast E*Trade’s brokerage related cash to increase to about $60 billion through the end of our forecast period.

Rise In Trade Activity

Trading activity picked up in the fourth quarter after E*Trade witnessed a slowdown in trading during Q2 and Q3. E*Trade’s daily average revenue trades (DARTs) for the quarter rose to 168,000 trades per day up from 159,000 trades per day in Q4 2013. The figure was also a 10% sequential improvement over Q3 levels. Transaction-based revenue generated by the brokerage for the quarter was up by 5% over Q4 2013, with the company realizing a slightly lower revenue per trade during the quarter compared to the year ago period. 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 and further to about $11.05 in Q3. However, revenue realized per trade fell again to $10.84 in Q4, which the company mainly attributed to a lower 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 coming quarters.

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1. E*Trade Q4 2014 Earnings Call Transcript, Seeking Alpha, January 2015 [↩]
2. E*Trade Q4 Press Release, E*Trade Investor Relations, January 2015 [↩]