Fool.com: National Discount Brokers Warns (News) September 3, 1999

National Discount Brokers Warns

By Dave Marino-Nachison (TMF Braden)
September 3, 1999

National Discount Brokers (NYSE: NDB) last night said it expected to report fiscal Q1 results somewhere between a $0.02 per share profit and a penny's loss (not counting gains in connection with the June sale of Equitrade Partners), missing First Call's three-analyst consensus $0.21 EPS estimate.

Most of the explanation probably sounded familiar to investors who've watched this sector in recent months. Expenses are seen coming in around $52 million, some 9% higher than analysts' reported estimates, because of ramped-up advertising expenses, write-offs for obsolete equipment, and higher-than-expected charges for clearing transactions at its Sherwood Securities market maker division.

Revenue for the quarter, the company said, will likely be about $52.8 million, or 4% below analysts' estimates. That pretty much wipes out any operating profits, which if the trend continues wouldn't look good when compared to the company's nearly 24% operating margins for the last completed fiscal year.

But for the sector as a whole, this really isn't news. Analysts have for some time been cutting estimates and ratings on the online brokerages they cover, citing the need to rapidly increase promotional spending to pry customers away from competitors. (Click here for a similar story from a different angle.)

Profitability can only suffer, though, as spending increases, particularly if quarters like Q2 -- in which daily Web-based trade volume was about flat with Q1, a comeuppance for investors accustomed to double-digit sequential growth -- increase in frequency.

As written here and elsewhere in early August, some market watchers believe the current quarter may be the first during which transactions fall from the previous period. The indication that National Discount's revenues are apparently certain to fall significantly below fiscal Q4's $66.9 million figure may bear that out.

In better news, account growth at National Discount Brokers' online division increased 13% to 159,000 during the quarter. If account growth keeps up that pace (about 18,000 new accounts per quarter) for the rest of the year, National Discount Brokers stands to report better figures than last year in that department, which would help justify those advertising costs.

If these times are somewhat lean for online brokerages, there's opportunity for investors to pick up some bargains. Perhaps more importantly, investors might get a better picture of which companies have a leg up operationally, now that the surreal rah-rah growth of this spring has started to lose some of its leaves.

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