TD Waterhouse Stopped Short of Goal (News) August 20, 1999

TD Waterhouse Stopped Short of Goal

By Bill Mann (TMF Otter)
August 20, 1999

Discount broker TD Waterhouse Group (NYSE: TWE) announced its fiscal Q3 earnings yesterday, beating estimates but showing a reduction in earnings from operations. Waterhouse achieved earnings per diluted share of $0.08, $0.02 higher than expected, but lower than last quarter's earnings by one penny. Waterhouse also announced today that it would offer its customers the ability to trade stocks after hours through electronic communication network (ECN) Island. In doing so, the company joins rival online brokerages E*Trade (Nasdaq: EGRP) and Datek in moving to after hours trading.

This earnings report is Waterhouse's first since its IPO in June. Toronto-Dominion Bank (NYSE: TD), which spun off Waterhouse, maintains an 88% stake in the company. Waterhouse sold 43 million shares to the public, netting $750 million and allowing it to repay certain loans to Toronto-Dominion. At the time of the IPO, Waterhouse announced that it intended to invest the proceeds into company growth. Waterhouse touts itself as the world's second largest discount brokerage, trailing only Charles Schwab (NYSE: SCH), but it maintains a low profile without the glitzy ad campaigns of several competitors.

Waterhouse's results are a mixed bag. On the one hand, in year-over-year comparisons, the company grew net income by 104%, trades per day by 86%, and revenues by 49%. However, these results fail to meet those of the preceding quarter, as trades per day slipped 8%, gross net income fell 12% and gross revenues fell 2%. Further, the gross revenues number for this quarter includes net interest income, which rose by 31% bolstered in part by the proceeds from the IPO.

Waterhouse's high-profile IPO in June was priced at $24. Since that time the company's shares have declined amidst weakness throughout the online brokerage industry, with its price having declined by 43% from its high on July 15. In this same time frame, E*Trade dropped 34%, National Discount Brokers (NYSE: NDB) fell 38%, and Schwab was knocked down 24%, pointing to a general disfavor toward the sector. Comparing the company's results with its peers is a bit deceptive, since April is counted as Q2 for Waterhouse but Q3 for the other companies. This past April saw the highest number of online trades per day in history.

To date, Waterhouse has rested upon its reputation for service (ranked #1 by Mutual Fund Magazine and #2 in SmartMoney among discount brokerages), and has not followed other brokerages in flooding the market with advertising.


The company expects to dramatically increase its customer attraction campaign and estimates that its account acquisition costs will rise by more than 12% to $100 per new account. This increase will manifest itself in a new print, online, and television campaign, which the company will initiate in the fall.

Waterhouse's announcement that it will offer after-hours trading signifies that it intends to extend its market reach. Its agreement with Island, which is majority owned by Datek, will allow customers to trade up until 5:15 p.m. Eastern time. In the agreement, Waterhouse will contribute $25 million to Island, which should be finalized this week.

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