eTrade 1999 Annual Report Download - page 33

1999 implementation of the new Power E*TRADE program, which provides reduced commissions for active traders.
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Payments for order flow increased to $39.1 million in fiscal 1999, up 52% from $25.8 million in fiscal 1998, which was down 4%
from $26.8 million in fiscal 1997. As a percentage of transaction revenue, payments for order flow have decreased to 11% in fiscal
1999, down from 16% in fiscal 1998, which was down from 24% in fiscal 1997. The decrease in payments for order flow is reflective
of a trend that the Company expects to continue as a result of the implementation by the SEC of new order handling rules in January
1997, the outcome of which was that the bid/ask spread was reduced, thereby reducing market maker margins and limiting their ability
to pay for order flow. Also contributing to the decline was the loss of Roundtable earnings, which ended when Roundtable was
reorganized as Knight/Trimark, Inc. and went public in July 1998. Until its initial public offering, Knight/Trimark would allocate a
portion of its earnings to its owners, including the Company, based on the percentage its owners contributed to Knight/Trimark's total
order flow. The Company previously recorded the amounts it received under this allocation as payment for order flow revenue.
Global and institutional revenues increased to $111.0 million in fiscal 1999, up 16% from $95.8 million in fiscal 1998, which was up
20% from $80.1 million in fiscal 1997. Global and institutional revenues are comprised of revenues from TIR's operations, as well as
licensing fees and royalties from E*TRADE International's affiliates. TIR's revenues increased to $106.9 million in fiscal 1999, up
20% from $88.8 million in fiscal 1998, which was up 17% from $76.1 million in fiscal 1997. These increases are primarily attributable
to strong market conditions in the U.S. and Europe, as well as an increase in futures commissions. TIR revenues are largely comprised
of commissions from institutional trade executions; for fiscal 1999 approximately 60% of their transactions were from outside the
U.S., and approximately 60% were cross- border transactions. International licensing fees and royalties decreased to $4.1 million in
fiscal 1999, down 41% from $7.0 million in fiscal 1998, which was up 75% from $4.0 million in fiscal 1997.
Net interest revenues primarily represent interest earned by the Company on credit extended to its customers to finance their purchases
of securities on margin, fees on its customer assets invested in money market accounts and interest earned on investment securities,
offset by interest paid to customers on certain credit balances, interest paid to banks and interest paid to other broker-dealers through
the Company's stock loan program. Net interest revenues increased to $122.3 million in fiscal 1999, up 116% from $56.7 million in
fiscal 1998, which was up 120% from $25.7 million in fiscal 1997. These increases were reflective of the overall increases in: average
customer margin balances which have increased 100% to $1.9 billion in fiscal 1999, from $0.9 billion in fiscal 1998, which was an
increase of 164% from $0.4 billion in fiscal 1997; average customer money market fund balances which have increased 130% to $3.2
billion in fiscal 1999, from $1.4 billion in fiscal 1998, which was an increase of 76% from $0.8 billion in fiscal 1997; average
customer credit balances which have increased 102% to $0.5 billion in fiscal 1999, from $0.2 billion in fiscal 1998, which was a 12%
increase from $0.2 billion in fiscal 1997; and average stock loan balances which have increased 61% to $1.1 billion in fiscal 1999,
from $0.7 billion in fiscal 1998, which was up 277% from $0.2 billion in fiscal 1997. In addition to net interest revenue generated on
the balances above, the Company earned interest revenue on the investment security balances held for corporate purposes.
Other revenues increased to $32.3 million in fiscal 1999, up 53% from $21.1 million in fiscal 1998, which was up 13% from $18.6
million in fiscal 1997. Other revenues increased primarily due to growth in mutual funds revenue, revenues from advertising on the
Company's Web site, investment banking revenue, E*TRADE Business Solutions revenue, and broker-related fees for services.
Cost of Services
Total cost of services increased to $283.9 million in fiscal 1999, up 104% from $138.9 million in fiscal 1998, which was up 45% from
$95.9 million in fiscal 1997. Cost of services includes expenses related to the Company's clearing operations, customer service
activities, Web site content costs, and system maintenance and communication expenses. These increases reflect the overall increase in
customer transactions processed by the Company, a related increase in customer service inquiries, and operations and maintenance
costs associated with the Company's technology centers in Rancho Cordova, California and Alpharetta, Georgia. Included in total cost
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of services for fiscal 1997 was a charge of $4.3 million, which resulted from a clerical oversight connected with the Company's failure
to timely renew its registration as a broker-dealer in the state of Ohio. Cost of services as a percentage of total transaction revenues
was 45.7% in fiscal 1999 compared to 41.4% in fiscal 1998 and 41.0% in fiscal 1997. The increase in fiscal 1999, is primarily related
to the introduction of 24x7x366 live agent customer service, the build-out of the technology operation infrastructure to support the
growth of the global business, added content to the Web site, and the promotional and pricing programs introduced in fiscal 1999.
Operating Expenses
Selling and marketing expenses increased to $301.7 million in fiscal 1999, up 157% from $117.3 million in fiscal 1998, which was up
74% from $67.3 million in fiscal 1997. The increases reflect expenditures for advertising placements, creative development and
collateral materials resulting from a variety of advertising campaigns directed at building brand name recognition, growing the
2002. EDGAR Online, Inc.