E*Trade’s CFO Keeps Lid on Costs

Ignore the Super Bowl ad blitz, E*Trade is determined to cut costs, even if it means a smaller ad budget.
Joseph RadiganJanuary 26, 2001

Maybe you can’t have your cake and eat it, too, but you can’t blame E*Trade CFO Leonard Purkis for trying.

On Friday, Purkis is headed for Tampa, Fla., the site of this year’s Super Bowl, where E*Trade is joining a host of other advertisers who are shelling out an average of $2.4 million for each 30-second spot.

At the same time, the company is slashing its ad budget as it focuses on profit growth and expanding its gross margins. Purkis says E*Trade will probably spend $350 million to $400 million on advertising in 2001 compared to $500 million last year.

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“Last year, in the March quarter, we said we’ve built the business, now it’s time for us to go into the profitability mode,” Purkis says.

The drive to profitability was evident in the quarterly results E*Trade reported Wednesday afternoon. Net revenue rose 22 percent to $333.8 million from the Dec. 99 quarter, while the company earned $5.8 million from operations compared to a $38.1 million loss in the year earlier period.

E*Trade improved its bottom line at a time when its rivals like Charles Schwab & Co. and Knight Trading Group both reported shrinking earnings. In addition, Ameritrade Holding reported that its loss for the December fiscal first quarter widened to $23 million compared to $22 million a year earlier.

How exactly is E*Trade bucking the trend? Purkis says the company did much of its technology investment in 1998 and 1999. By the time 2000 arrived, it had already built its technology infrastructure and brand name to a self-sustaining level, and the time had arrived to rein in costs.

In the December quarter, the cost-of-service line on the income statement rose 16 percent – – less than the 22 percent rate of growth in the top line – – to $133.3 million.

Meanwhile, as the advertising budget shrank, selling and marketing expenses were cut to $97.9 million compared to $131.8 million a year earlier. Technology development costs were reduced to $29.2 million from $37.3 million in the prior year quarter.

Purkis says the company considers roughly $30 million per quarter, or 8 percent to 10 percent of net sales, as an ideal target for its technology budget.

“We’re very focused on where we’re getting returns on our investment,” Purkis says. “What we’ve designed is not just a trading system, but it is a technology platform for a financial services business. It allows us to integrate platforms that are basically plug and play. If there’s a question of [server] capacity, it just means plugging in another Sun [Microsystems] box.”

The investment in technology also helped keep a lid on operating costs. Purkis says 80 percent of all new accounts are opened on line, and that degree of automation, plus the reduced ad expenses, have kept the cost of opening each new account at $300. Purkis says the company’s business model is built upon keeping this figure below $350.

The focus on cost control helped drive the gross margin to 60 percent compared to 58 percent in the year-ago quarter. Purkis says E*Trade wants to see the gross margin ultimately climb to 70 percent, which would put it more in line with the financial performance of the software companies near its Silicon Valley headquarters.

But while E*Trade wants to hang out with the other tech firms in terms of its financial performance, it prefers to keep company with other financial firms when it comes to identity. That explains two decisions it announced earlier in the week, a decision to move its stock to the New York Stock Exchange and a shift to a calendar fiscal year from a September 30 fiscal year.

Without the change to the fiscal year, the December 31 quarter just reported would have been the first period for fiscal 2001. But E*Trade didn’t specify which year the December quarter was part of when it reported its earnings.

“This is just part of E*Trade’s evolution and part of our growing up,” Purkis says. “It’s part of the transition to a blue-chip financial services firm.”

While E*Trade, as on-line broker, was at least indirectly part of the day-trading phenomenon that lifted tech stocks and the rest of the Nasdaq Composite index into the stratosphere during the frenzied bull market of 1999, Purkis says, “We’re not a day-trading operation. E*Trade has progressed from a pure brokerage business to an online financial services firm.”