Great Titchfield Street, London -- Egg (LSE: EGG), the internet bank that launched 1,000 headline puns, issued a profit warning this morning. It may actually make one! Egg says it was profitable in November, according to its management accounts, achieving the target it set when it floated last summer of breaking even in the final quarter of 2001.
Egg has been helped by the fact that it is more of a traditional business than other Internet-based firms. It is not exposed to falling advertising rates -- in fact it has probably benefited from them. Its main drivers of credit cards and savings accounts have also been good playgrounds in the last two years. The former has enjoyed buoyant consumer spending, while offering competitive rates has helped the latter snatch good market share.
2001 was the year that Egg focussed on profitability. As a result, its offers are less competitive than they were in 2000, when building a critical mass of customers was number one on the agenda. Interestingly, despite the fact its products are now relatively less attractive, absolute customer growth in 2001 has exceeded the year before. Egg added 569,000 customers this year, as opposed to 559,000 last year. In total, it now has 1.92m users, highly impressive for a business that is just over three years old.
2002 is likely to be the year of the cross-sell. At the end of September, well over half of its customers held just the Egg credit card and none of its other financial products. With Virgin launching a card next year and even Barclaycard realising that maybe 2% interest a month is a little excessive, then this market is going to get a lot more competitive. For Egg, getting to profitability is stage one; stage two is staying there.
At 160p per share, Egg has a market value of £1.3b. Profit forecasts vary widely at the moment. For 2002, they are congregating around £10m to £15m; for the year after, they are nearing £50m. Whilst Egg has done well operationally, the share price may have run ahead a little too far. It's probably worth waiting until Egg has proved it has the ability to stay in profitability before considering any purchase.
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