optionsXpress Slips as Trades Fall

Updated

optionsXpress (NAS: OXPS) , which is in the process of being acquired by Charles Schwab (NYS: SCHW) , saw its second-quarter earnings plunge 43%, to $8.8 million, due to a sudden drop in trading activity.

Although declining trading volumes have been a general trend this earnings season, Schwab managed to overcome falling trading volumes to post a 16% rise in quarterly earnings. On the other hand, peer TD AMERITRADE (NAS: AMTD) saw its profits slip by 12% as trading volumes fell. Is Schwab inheriting a dying business, or is optionsXpress doing just fine?

A look at the numbers
Revenue at optionsXpress for the quarter fell to $59.2 million, down 10% on a year-on-year basis. However, the number of customer accounts grew 8%, with optionsXpress ending the quarter with 397,400 customers.

Retail daily average revenue trades (DARTs), an important metric in the brokerage industry, in the quarter stood at 32,200, down 12% on a sequential-quarter basis and 2% on a year-on-year basis. This explained much of the drop in overall revenues.

Competitor E*TRADE (NAS: ETFC) saw its DARTs cool off by 17% sequentially and 13% from a year ago. Average trades fell by 13% at Schwab and by 11% at TD AMERITRADE on a year-on-year basis during the same period.

In addition, a $1.6 million expense related to the Charles Schwab merger weighed on the second-quarter earnings as well. The merger should come into effect from the third quarter, so this is probably the last time optionsXpress will be reporting its income as a single entity.

What Chuck should look at
Not everything was sloppy this quarter. optionsXpress saw some positives, too: Not only did customer accounts jump, but customer assets increased to $8.4 billion, up 20% from a year ago. This will come as good news to Schwab.

Moreover, Schwab investors should not be disheartened by one bad quarter. Schwab is acquiring a company with strong fundamentals, and one which has been delivering strong DARTs in recent times. This quarter appears to be a minor blip as the entire industry has had to face a decline in trade volumes.

The Foolish bottom line
This wasn't the best quarter for optionsXpress in terms of revenue growth and earnings. However, there were a few positives in the quarter. Add Schwab to your free stock watchlist to keep an eye on how things go as the merger progresses.

At the time thisarticle was published Shubh Datta doesn't own any shares in the companies mentioned above. Motley Fool newsletter services have recommended buying shares of Charles Schwab and optionsXpress. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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