eTrade 2006 Annual Report Download - page 35

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Expense Excluding Interest
The components of expense excluding interest and the year-over-year variances are as follows (dollars in
thousands):
Variance
Year Ended December 31, 2006 vs. 2005
2006 2005 Amount %
Compensation and benefits $ 469,202 $ 380,803 $ 88,399 23 %
Clearing and servicing 253,040 189,736 63,304 33 %
Advertising and marketing development 119,782 105,935 13,847 13 %
Communications 110,346 82,485 27,861 34 %
Professional services 96,947 77,416 19,531 25 %
Depreciation and amortization 73,845 74,981 (1,136) (2)%
Occupancy and equipment 85,568 69,089 16,479 24 %
Amortization of other intangibles 46,220 43,765 2,455 6 %
Facility restructuring and other exit activities 28,537 (30,017) 58,554 *
Other 136,042 59,860 76,182 127 %
Total expense excluding interest $1,419,529 $1,054,053 $365,476 35 %
* Percentage not meaningful.
Expense excluding interest increased 35% to $1,419.5 million for 2006 compared to 2005. The increase in
expense excluding interest was driven primarily by an increase in the number of employees in our service
organization, higher trading volumes and loan balances, facility restructuring activities and an increase in fraud
related losses.
Compensation and Benefits
Compensation and benefits increased 23% to $469.2 million for 2006 compared to 2005. This resulted
primarily from a higher number of employees in our service organization, a full year impact of expensing stock
options(1) and increased variable and incentive compensation expense. These increases in compensation are in
line with the growth and performance of our business and our focus on enhancing customer service with
additional representatives. We believe compensation and benefits as a percentage of revenue is a measure of our
efficiency and the most relevant metric to assess this increase. This ratio declined to 19% for 2006 from 22% for
2005.
Clearing and Servicing
Clearing and servicing expense increased 33% to $253.0 million for 2006 compared to 2005. This increase
was a result of higher trading volumes and higher loan balances during the period.
Communications
Communications expense increased 34% to $110.3 million for 2006 compared to 2005. The increase was
due primarily to expenses associated with our newly acquired customers from Harrisdirect and BrownCo. In
addition, we experienced higher variable expenses, such as quote services and trade confirmations, related to our
increase in trading volume.
Professional Services
Professional services increased 25% to $96.9 million for 2006 compared to 2005. The increase was due
primarily to third party support services, including technology and transitional service agreements, associated
with our acquisitions of Harrisdirect and BrownCo.
(1) In July 2005 we adopted SFAS No. 123 (R), Share-Based Payment, which requires the expensing of stock options. Stock option expense
was $22.1 million for 2006 and $13.7 for 2005.
32