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E*Trade Says Big Changes in Works

Major changes are in the works at online bank/brokerage E*Trade , including its corporate governance structure, technology, and new financial products, company officials said.

During an analyst presentation Thursday, E*Trade's new CEO, Mitchell Caplan, joined other senior management executives to discuss how the company is changing its board of directors and cross-selling new brokerage products to its online banking customers.

It was a presentation that sought to put recent controversies about its founder's pay package behind it and plans in motion for new growth arenas amid stagnant financial markets and cutthroat competition from other online brokerages.

"For a whole host of reasons, we haven't done as clear and transparent a job we can at describing" the company's business model, said Caplan. "What empowered customers two years ago at the height of the Internet craze is the same thing (now): creating value, how you deliver it, and products you offer based on market conditions," he said.

Pointing to E*Trade's recent purchase of 4,000 ATM machines, Caplan said "the whole point of adding an ATM network is to give customers another point of access, and to help the company move its banking operations from purely savings-driven to a bank that has more transaction accounts."

Earlier this month, E*Trade purchased from XtraCash ATM a portfolio of 4,000 ATM machines, bringing its ATM network to 15,000 and placing it as the second-largest network of ATMs in the country.

Now, the plan is to cross-sell its banking customers on brokerage products, such as E*Trade's "power of 9" promotion that charges $9.99 per-trade and a guarantee the trades go through in 9 seconds or less, company officials said.

Caplan also detailed a new push to sell brokerage customers more banking products, such as mortgage origination and car loans, a move helped by its recent $101 million purchase of consumer finance business Ganis Credit Corporation.

"We're going to get into credit cards, entirely by focusing on our customer base," Caplan said, heralding a new push into an asset class of banking products that up until now E*Trade has avoided.

The cross-sell approach appears to be working. The company's active account tally of 4.9 million is up by close to 5 percent compared to the same time in 2001. E*Trade said it has managed to sell loan products to about 10 percent of its household brokerage base, or about 260,000 customers, and would like to see that increase to 20 percent.

Given the three-year-slide in the financial markets, and the disappearance of a large swath of day-traders who jumped into online trading before the 2000 market correction, E*Trade's moves reflect its need to find new transactions to fill the gap.

Although it declared a profit of about $30 million on revenues of about $349 million during the fourth quarter of 2002 (higher on both numbers compared to the same, year-ago period), the Menlo Park, Calif.-based company has warned that the first quarter will be much slower, perhaps by as much as 20 percent.

Early on Linux, late on Pay Changes

Company officials said its lower internal technology costs were due in part to its early embrace of the open source movement, along with its quest to build speedier trading applications.

Joshua Levine, the company's chief technology officer, said by moving to adopt Intel-based computers and architecture, the company has seen its server-management costs go from between $160,000 and $240,000 per machine to about $3,910. "We have a chance to manage vendors as opposed to letting vendors manage us," Levine said of the company's embrace of open source standards, while at the same time leading to a dramatic improvement in the performance of the company's browser-based trading and banking products for customers, he said.

Next up for E*Trade, Levine said, is to embrace the burgeoning Web Services movement by adopting key programming protocols that would help the company roll out tools such as real-time Excel spreadsheets to assist customers' decision-making with their brokerage accounts. "It's very important that Web services be part of an E*Trade offering," Levine said. "As we move from the browser to really empowered computing, we want to be a part of it."

But while investors responded positively to the company's aggressive embrace of emerging technology, E*Trade's Caplan found himself responding to investors' criticisms about corporate governance and compensation issues, less than a month after he was named to replace CEO Christos Cotsakos after he abruptly resigned in January.

Cotsakos' departure followed news that his pay package for 2001 was $60 million, at a time when the company's stock price was plummeting and its revenues sliding. He agreed to give back $21 million the following May.

But despite Cotsakos' unusual payback of millions in his salary for 2001, his compensation package for 2002 was close to $45 million, also as the company lost millions and saw its stock price slide. E*Trade shares were trading around $70 in April 1999, but have fallen to less than $5 in 2003.

"We are transforming the board," Caplan told investors. "We're actively looking for two to three new board members, one that would chair the audit committee, another a compensation committee," he said. "What you will see is rational compensation from the top, bottom and side to side. It will be market-driven and rational in the marketplace."

During a Q&A portion of the presentation, one investor called the statement about the corporate governance changes music to his ears. But another investor suggested the company needed to replace the entire board of directors over the compensation issue.

"There's no trying to defend it," Caplan replied. "In the board's mind there was justification for each of those components (of pay packages) over many years. And so they all came together at once, and in a way that was completely unacceptable in the marketplace."

Caplan also told the investor: "I suspect you will see the compensation committee go away."