Ameritrade Holding Corp

views updated

AMERITRADE HOLDING CORP.

Ameritrade Holding Corp. offers online discount brokerage services through five subsidiaries, each of which has its own strategy and target market. Ameritrade Inc. (www.ameritrade.com) is the company's principal retail broker-dealer. It combines discount brokerage fees with trading over the Internet and only charges an $8 brokerage fee for each Internet equity market order. Ameritrade also provides a relatively high level of service and offers a number of investment tools, including free real-time quotes, customizable charts, market summaries, and research tools like company profiles and earnings estimates. It also makes current financial information from Reuters, PR Newswire, and Business Wire available to its customers. Another service of Ameritrade provides free market reports and individual stock alerts that can be delivered via e-mail, alphanumeric pager, and e-mail enabled mobile phone. Ameritrade customers also can request assistance from a customer service representative or technical support person via e-mail or phone.

Another subsidiary, Accutrade Inc. (www. accutrade.com), provides a higher level of service for customers who are willing to pay for it, including personal service from a discount broker. Freetrade.com (www.freetrade.com) was introduced in May 2000 for experienced investors who require little in the way of personalized service. Freetrade charges no commission on Internet market orders and only $5 for stop-and-limit orders and odd lots. Freetrade's limited service includes buying and selling equities, as well as short sells and buys and option orders. However, it does not trade in mutual funds or over-the-counter, pink sheet, or bulletin board orders. All communication with Freetrade must be done by e-mail, and funding of accounts must be done by wire. Freetrade does not accept account transfers, and there are no personnel assigned to open mail or answer the telephone. To qualify for a Freetrade account an investor must have at least two years of experience as a customer of a discount broker and two years of experience as an Internet user. A deposit of $5,000 is required to activate an account at Freetrade. Freetrade expected to generate revenue through interest income, from payments by market makers and specialists based on order flow, and from advertising on its Web site.

Two other subsidiaries, AmeriVest Inc. and Ameritrade Institutional Services Inc. (AIS), enable the company to provide discount online brokerage services to customers of other financial institutions or service providers. AmeriVest provides wholesale brokerage services to financial institutions such as banks, savings and loans, credit unions, and their customers. AIS was introduced in late 2000 to provide brokerage services to financial planners and investment advisors and their customers. Another subsidiary, Advanced Clearing, provides clearing services to Ameritrade Holdings' subsidiaries, as well as to independent broker-dealers and others.

Ameritrade Holding also operates a financial portal, OnMoney.com, which was launched in late 1999. OnMoney.com offers personal financial management services that enable customers to view and manage their various personal financial accounts, including checking and savings accounts, credit cards, reward programs, and investments—all on one statement and without having to transfer any account balances. When Ameritrade Holding acquired Financial Passport Inc. in July 2000, OnMoney.com was able to expand the services it offered to include financial planning and a wide range of other financial products and services. At the OnMoney.com Web site visitors can link to deals on mortgages, discount brokers, banks, auto insurance, life insurance, bill payment services, auto loans, financial planners, and more. The site also features links to up-to-date financial news.

ONE OF THE FIRST DISCOUNT BROKERAGE FIRMS

Ameritrade Holding Corp. has a long history as a discount brokerage firm that goes back to May 1975, when the Securities and Exchange Commission (SEC) deregulated the brokerage industry and made negotiated commissions available to individual investors. Around this time J. Joe Ricketts and his partners became associated with the company, then known as First Omaha Securities, which had been established in 1971 as a local investment-banking firm in Omaha, Nebraska. First Omaha Securities became one of the first firms to offer negotiated commissions, later known as discount brokerage, in 1975.

First Omaha Securities later became First National Brokerage Services Inc., and then Accutrade Inc. In 1987 TransTerra Co. was established as the holding company for AmeriTrade Clearing (later known as Advanced Clearing), a clearing broker established by the company in 1983, and the company's discount brokerages. During the 1980s and 1990s Accutrade developed its customer-oriented business strategy by offering multiple means of access to trading. In 1988 the company was the first to offer trading by touch-tone phone. In 1995 customers were able to trade over a portable communications device. In 1996 the company launched Accutrade for Windows, the first online investing system that allowed individuals to engage in program and basket trading.

In 1994 the company launched Ceres Securities Inc., a deep discount brokerage. In 1995 it acquired K. Aufhauser & Co. Inc., which had the first Internet trading site launched in August 1994. In 1995 it also acquired All American Brokers Inc., and in 1996 launched eBroker, an Internet-only broker, as a division of All American Brokers. In November 1996 the parent company TransTerra was renamed Ameritrade Holding Corp.

AMERITRADE INC. LAUNCHED IN 1997

Ameritrade Holding Corp. had its initial public offering (IPO) on March 3, 1997, with shares opening at $15 per share. During the year the company established marketing alliances with America Online, The Microsoft Network, The Motley Fool, Yahoo!, the Quicken.com Channel, and Infoseek's Personal Finance Channel. In October 1997 Ameritrade Inc. was launched, incorporating the most popular features of Aufhauser, Ceres, and eBroker into one firm and offering breakthrough pricing of $8 per Internet trade. It also was during 1997 that Ameritrade Holding began developing OnMoney, its Internet-based financial services mall.

By mid-1997 Internet trading had grown to about 25 percent of the firm's brokerage activity, or about 25,000 trades per month. Following the consolidation of Aufhauser, Ceres, and eBroker into Ameritrade Inc., the company launched a $20 million national advertising campaign focusing on the Ameritrade's online trading fee of $8. For fiscal 1997, ending September 26, Ameritrade Holding reported net income of $13.8 million on net revenue of $77.2 million (subsequently restated to $95.7 million).

Heavy advertising expenditures helped to increase the number of new accounts at Ameritrade and boost revenue, but they also resulted in much higher quarterly losses. For the first quarter of fiscal 1998 the company reported a loss of $11.2 million on revenue of $25.7 million, while customer accounts increased by 50 percent to 147,000. The company handled an average of 10,600 trades a day during the quarter. Ameritrade justified its strategy of pursuing market share by noting that online accounts were relatively cheap to acquire through advertising and marketing. In mid-1998 Ameritrade expanded its relationship with America Online by committing to pay $25 million over two years for a prominent spot on America Online's finance page. After reporting losses for the first two quarters of fiscal 1998, Ameritrade had a profitable third quarter as it began earning revenue from newly acquired customer accounts.

Ameritrade's average number of online trades was 21,400 by mid-1998. Market turbulence later in the year resulted in a one-day record of 35,000 trades for the company. In some cases the high volume of trading resulted in temporary shutdowns of Ameritrade's service, something Chairman and CEO J. Joe Ricketts termed "a multi-million dollar fiasco." Installing new software was one of the problems facing the company. The other was the possibility of declining stock prices and the lower trading volumes that might result. For fiscal 1998 Ameritrade reported revenue of $134.9 million (later restated to $164.2 million). The company barely broke even, with net income of $210,438. For the year it spent $40 million on advertising, and the number of accounts more than tripled to 306,000. Other developments during the year included the introduction of electronic trade confirmations by e-mail and Internet-delivered stock quotes.

GROWTH AND EXPANSION, 1999

Ameritrade Holding grew and expanded during fiscal 1999 as revenue increased to $315.2 million. The profitable company had net income of $11.5 million, and the number of accounts rose to 560,000. During the year the company expanded its facilities by opening a customer service center in Fort Worth, Texas, and a technology development center in Maryland. It acquired the online brokerage firm, The R.J. Forbes Group Inc. The company also partnered with banks in Germany and France to offer customers the ability to buy and sell the stocks of major French, German, and European companies. In September Ameritrade began offering extended hours trading.

Ameritrade continued to spend heavily to attract new customers. It launched OnMoney.com, its financial portal, with a $50 million advertising campaign in 1999. The company said it planned to spend $200 million on advertising in fiscal 2000, up from about $60 million in fiscal 1999. Business Week, which ranked Ameritrade Holding Corp. 30th on its list of best performing information technology companies, noted that Ameritrade was facing increased competition. There were some 140 companies offering Internet trading in mid-1999, up from only 24 two years before. By the end of calendar year 1999 Ameritrade averaged 81,000 trades a day, an increase of 142 percent over the previous year's levels. The number of accounts rose from 354,000 at the end of calendar 1998 to 686,000 at the end of calendar 1999.

REVENUE MORE THAN DOUBLED IN FISCAL 2000

Ameritrade's revenue more than doubled in fiscal 2000, reaching $654.4 million. However, heavy advertising and marketing expenses resulted in a net loss of $13.6 million for the year. In the first quarter alone the company spent nearly $60 million on advertising in an effort to build market share. Trading volume averaged a record 173,000 trades a day in March 2000, but then declined throughout the rest of the year. Also contributing to Ameritrade's losses was its financial services portal, OnMoney.com. After spending $90 million on the portal, Ameritrade only realized revenue of $602,000 from OnMoney.com during fiscal 2000.

New products and services introduced during 2000 included the Ameritrade Online Investor Index, a daily index that reported the top 10 stocks traded that day by Ameritrade's customers. The index also reported whether customers were net buyers or sellers. Through separate marketing agreements with Sprint PCS, AT&T Wireless Services, and Nextel Communications, Ameritrade began offering wireless access to customer account information and allowed customers to place trades and get real-time quotes over their wireless devices. Through a strategic alliance with NetB@nk, Ameritrade applicants were able to apply for a NetB@nk account without having to enter any additional information. In addition, NetB@ nk customers gained access to Ameritrade's brokerage services. Another strategic alliance between Ameritrade and MBNA America Bank, N.A., resulted in MBNA's credit card services being provided to Ameritrade's customers, with Ameritrade offering its brokerage services to MBNA customers. Finally, a partnership with 1stUp.com Corp. of San Francisco gave Ameritrade's customers free unlimited Internet access.

BEAR MARKET DAMPENED REVENUE OUTLOOK, 2000-2001

A slumping stock market and lower trading volume by its customers caused Ameritrade to report a $23 million loss for the quarter ending December 31,2000. Unfavorable market conditions held through the next quarter, causing Ameritrade to cut its revenue outlook for fiscal 2001 to between $470 million and $600 million, down from earlier projections of $570 million to $650 million. Trading volume for Ameritrade's customers averaged 131,000 a day in January and 114,000 in February. In March 2001 the company hired Joseph Moglia as its new CEO. Moglia was formerly a senior vice president at Merrill Lynch & Co. Ricketts would remain as Ameritrade's chairman. With the company projecting a fiscal 2001 loss of $43.7 million, Ameritrade was taking steps to cut costs and remain financially healthy. In January the company laid off 9 percent of its workforce, and a debt-repurchase program was expected to cut interest expenses.