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MAY 10, 2002 NEWSMAKER Q&A Why Ameritrade Is "Very Comfortable" CEO Joe Moglia talks about waiting out the downturn, the Datek acquisition, and why, come what may, "we won't lose money"
The stocks of tech outfits have lost much of their appeal as well. But don't write off online brokers just yet, says Moglia. Ameritrade, with $437 million in annual sales and 1.8 million customer accounts, recently purchased rival Datek for $1.3 billion in stock. The acquisition, set to be complete in July, will give Ameritrade 2.7 million accounts and make it No. 2 in the business, after E*Trade. Moglia says Ameritrade (AMTD ) will ride out 2002 unscathed and will make a splash when the markets come back. He recently spoke with BusinessWeek Online correspondent Olga Kharif about Ameritrade's prospects. Here are edited excerpts of their conversation: Q: Do you see any signs of people resuming online trading? A: Online trading will come back when you see a comfort level on the part of the investor that the economy is O.K. and that the markets are going to go into the recovery mode. That hasn't happened yet, but we've gone through a period where there were 11 successive easings by the Federal Reserve. There's no threat of inflation. I certainly know that we're in a cyclical business, and there will be a rebound, and there will be a turnaround. My guess is we'll start to see that in two or three quarters. Q: What's your strategy for riding out the rough times? A: With the Datek acquisition, the synergies will [save us millions in expenses], which will help us, even if the slump is prolonged. And, eventually, there will be a rebound. The operating margins that we enjoy and the account base that we're building will give us that much more upside potential. Q: In the first quarter of this year, Ameritrade recorded net income of $1.9 million (1 cent a share), as compared with a loss of $54.2 million, (30 cents a share) in the year-ago quarter. Will you be able to keep your business profitable? A: Right now, [the number of trades] is down 30% from where it was a year ago. And, so far this fiscal year [as of the second quarter ended Mar. 29], we've made 5 cents in earnings per share. This time last year, we lost 9 cents a share. That's a 14-cent positive turnaround with business down 30%. If things don't go well, we won't lose money. We'll continue to work hard, grow our market share, and we'll hang in there. But when the market rebounds, our profits will go up faster than anybody else's [because Ameritrade is one of few pure-play online brokerages]. Q: You just acquired Datek. Analysts expect a lot more consolidation in this industry. How do you plan to participate in this consolidation? A: We are going to do what's in the best interests of our shareholders and in the best interests of our clients. Right now, we absolutely believe it's in the best interests of our shareholders and clients to continue to grow the business. If, three years from now, it makes sense for us to do something different [such as merge with another company or get acquired], we'll do what we believe is in the best interests of our shareholders. Q: Your main competitor, E*Trade, has been running ads inviting current Datek customers to switch sides (see BW Online, 5/10/02, "How Valuable Is E*Trade's Crown?"). Are you concerned about losing a lot of Datek customers to E*Trade before the acquisition closes in early July? A: When we did the National Discount Broker acquisition last summer, some of our competitors aggressively tried to go after those accounts. When we completed the actual integration of NDB, our attrition was only 2%. A client doesn't leave because of an ad in the paper. Clients leave because they're dissatisfied with the service that they receive. And, in our case, our client satisfaction rates, for both the Datek client and Ameritrade clients, are really very high. So we don't expect that to be an issue. Q: Price competition in this business is becoming more severe. Some companies offer $4 trades, while you charge $8 a trade. Do you plan to lower your prices? A: There are two things that you can never lose sight of in business. One is, you've got to do a great job taking care of your clients. Second thing is, you've got to do a great job taking care of the shareholders. If you can continue to do that, you will be in business for a long time, and you'll make a lot of people happy. Anybody can lower their price for a while, but then something else has to give. Either they're lowering the returns they're providing to shareholders, or they're lowering the experience they're providing the client. We're very comfortable where we are. Q: E*Trade chose to diversify into financial services such as banking. Do you plan to diversify? A: With all the advantages we have in our industry as an online broker, it would be foolish for us to give those up. The way we're currently set up, we have low costs, we have high operating margins, we have a single technology platform. And that's an advantage that we've got that other people don't have. If we became more diversified, it would increase our expenses because we'd have to have more complex technology, and we'd have greater regulatory issues. If we start to branch out and become too diversified, we start to move into the realm where other competitors have the advantages, not us.  Edited by Patricia O'Connell Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | MAY |
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