Prospectus Summary
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in the common stock. You should read the entire prospectus carefully, especially the risks of investing in the common stock discussed under "Risk Factors," and the consolidated financial statements and the notes relating to those statements included elsewhere in this prospectus. Unless otherwise noted, references to "optionsXpress," "the company," "we," "us" and "our" refer to optionsXpress Holdings, Inc. and its consolidated subsidiaries on and after June 30, 2004 and to optionsXpress, Inc. and its consolidated subsidiaries prior to June 30, 2004.
optionsXpress Holdings, Inc.
We are the leading online retail brokerage platform for the rapidly expanding listed equity options market and offer a comprehensive suite of brokerage services for stock, mutual fund, option and fixed-income product investors. The quality of our proprietary technology and our unique customer experience is well recognized. We were selected by Forbes as "Best of the Web, Favorite Options Site" in 2002, by Barron's as "Best Online Broker" in 2003 and 2004, and by SmartMoney as "Best Discount Broker" in 2004. For the six-month period ended June 30, 2004, we experienced growth of 175.0% in revenue and 232.2% in pre-tax income compared to the six-month period ended June 30, 2003 and 55.1% in revenue and 59.1% in pre-tax income compared to the six-month period ended December 31, 2003.
Our award-winning brokerage platform results from the combination of our state-of-the-art technology and high-touch customer service. Our innovative browser-based technology delivers a rich array of powerful and differentiating trading tools, allowing both retail and professional investors to identify, analyze and execute a wide range of investment strategies. Many of these internally developed tools, which enhance our customers' experience, are not available from other online or full service brokers. In addition, our real-time customer service approach, featuring "point of contact resolution," allows customer questions to be answered quickly, yielding a high degree of customer satisfaction and loyalty.
We opened our first customer account in December 2000. Since that time, we have grown to over 90,000 customer accounts. Our option trades represented approximately 3.5% of all listed U.S. options volume for the three months ended June 30, 2004. We believe this makes us one of the largest retail online options brokers. Our revenue consists primarily of commissions from customers' trades of options, stocks, mutual funds and fixed-income products. Option trades represent approximately 79% of our customers' trades, with approximately 20% coming from stocks and 1% from mutual funds and fixed-income products.
Our business generates strong cash flows and wide margins compared to many of our competitors. Our expense structure is largely variable based on commissions generated and benefits from our relatively low account acquisition cost and loyal customer base. In addition, all of our tools and services are offered online, eliminating the cost of maintaining retail locations. The option trading portion of our business generates a recurring revenue stream because when options expire, investors need to acquire new positions if they wish to stay invested. We have experienced growth in revenue and market share every year since inception and have been net income and cash flow positive since the first quarter of 2002. We generated $78.6 million of revenue for the twelve months ending June 30, 2004 with $47.7 million of income before income taxes and $28.9 million of net income.
Market Opportunity — Continued Growth in Retail Online Options
The retail online options industry is poised for continued, rapid growth. Approximately 15 million households have online brokerage accounts (13% of all U.S. households). This is forecasted to increase by 11.9% per year to approximately 26 million by 2008 (22% of all U.S. households). The total U.S. listed options market has grown by 22.2% per year over the past 10 years. Despite this growth, it is estimated that only 9% of online accounts are authorized to trade options. We believe that the retail online options trading market will continue to benefit from:
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- investors'
increasing familiarity with options trading;
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- increasing
liquidity and improved pricing in the market created by additional market participation; and
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- beneficial changes in market structure, including the emergence of fully electronic options exchanges in lieu of traditional floor exchanges.
In addition, there is a growing understanding among investors that options can be used not just for speculation, but as an important tool for long term investing and risk management, utilizing strategies such as:
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- Protective —
investors aiming to protect equity portfolios may use options as a hedge, buying puts as protection against unexpected declines in price; and
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- Income generative — investors seeking to gain additional income on their portfolios may sell calls on stock they own, thereby generating income even if the price of the underlying stock does not rise.
The graphs set forth below illustrate the historical and forecasted growth in the number of U.S. online investing households as well as the historical growth in U.S. listed equity options volume:
Our Competitive Strengths
optionsXpress is the #1 Online Brokerage Platform
Our online brokerage platform is rated as #1 by Forbes, Barron's and SmartMoney. The core of optionsXpress is our innovative customer-driven technology that forms the basis of our comprehensive brokerage platform. We develop powerful tools that present complex information in a customizable and easy-to-understand manner for all types and levels of investors. We provide the novice investor with interactive educational tools and a user-friendly web-based interface. We empower the expert investor by integrating advanced analytical tools with cutting-edge position management, order execution and routing technology. The intuitive and iterative nature of our software encourages all of our users to understand and develop more sophisticated trading strategies over time.
Our efficient, in-house development capabilities allow us to continuously innovate and improve our platform with frequent enhancements such as:
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- Strategy Scan®. Strategy Scan enables an investor to transform a trading idea into an executable
trade. It accomplishes this by identifying up to three trading opportunities for our customers based upon their bullish, bearish or neutral opinion of a specific stock over a specified time frame. We
clearly identify the range of potential gain or loss for each trading opportunity.
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- Xspreads®. Our Xspreads technology simplifies and expedites the execution of our customers'
combination trades. The Xspreads Order BookSM electronically displays customers' spread orders, thereby creating greater transparency in
the market, resulting in increased liquidity for both our customers and the broader marketplace. In addition, Xspreads enables our customers to execute all legs of a combination trade simultaneously,
thereby eliminating the risk that all legs will not be executed at the desired price.
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- XecuteSM (patent pending). We pioneered online auto-trading for the retail investor.
Our Xecute product allows our customers who subscribe to specified third-party advisory newsletters and other financial publications to automate the trading of the third-party recommendations at
customer-defined commitment levels. This not only benefits our customers who subscribe to these newsletters, but also makes us the logical brokerage platform for other subscribers to such newsletters.
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- Advanced Order Management (patent applied). Our software allows our retail customers to automate professional
trading strategies involving order sequencing without manual intervention. Our customers are able to enter contingent orders which are executed in accordance with specified time, price or other
triggers; for example, "One Triggers Other," "One Cancels Other" and "One Triggers Two." A significant advantage of this functionality is that our customers do not have to constantly monitor the
market in order to execute their orders.
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- Virtual Trading. Virtual trading provides our customers with a mock trading environment where they can practice strategies and educate themselves without risk, utilizing current market information. This provides our customers with a practical method of gaining real market experience without putting money at risk. Our customers can mock trade almost any strategy involving stocks, options and mutual funds, including spreads, straddles, and covered calls. We believe virtual trading provides our customers with a better environment to learn versus simply studying trading strategies.
Exceptional Customer Experience and Service
We have been recognized for our industry-leading customer experience and service. Our website is designed to anticipate the customer's needs. For example, it contains a self-help library of user guides and customer message boards along with well placed definitions and help throughout the platform. Our "point of contact resolution" approach is designed to ensure that customer questions are answered during the initial contact. Customer service is available via live individual web chat, e-mail and telephone. We respond to over 50% of customer inquiries via the Internet, facilitating individualized service in a timely and cost-effective manner. In addition, we continuously use customer feedback to further innovate our website. The result is fewer customer service requests and greater customer satisfaction.
Innovative Targeted Marketing
Our marketing strategy has allowed us to build a powerful, highly respected brand. Our target customer is the long-term investor, both novice and expert, rather than the daytrader. Our marketing strategy, based on a mix of grass roots, online and traditional advertising over the Internet, public relations and other targeted forms of media, has enabled us to attract loyal customers at a significantly lower cost per account than our major competitors. For example, we utilize channel partnerships, such as relationships with securities exchanges, options educators, investment publishers, software vendors and financial portals, to distribute our product to new customers. We believe that the rapid growth in our accounts and industry accolades evidence the powerful brand we have built.
Proprietary Web-Based Account Management Software
To support our trading platform, we have developed highly scalable web-based software for customer relationship management, order management and management information reporting. Unlike a number of our direct competitors, we developed our account management software to operate in real time, free from internal reliance on legacy and third-party mainframe systems common in the brokerage industry. Our software operates without the traditional middleware used by most brokers to connect to third-party back office systems. The resulting automation, combined with the absence of associated licensing fees, results in significant cost savings and flexibility.
Experienced, Complementary Management Team
Led by James A. Gray, our Chairman, David S. Kalt, our Chief Executive Officer, Ned W. Bennett, our Chief Operating Officer, and David A. Fisher, our Chief Financial Officer, we have a strong and dedicated management team with over 65 years of combined experience in the options trading industry, the brokerage industry, the broader financial services industry and the software and Internet technology industry. In addition, we have assembled a knowledgeable and experienced team specializing in all facets of our business, including retail brokerage, institutional sales and trading, risk management, clearing services, back office operations, software development and technology infrastructure.
Our Growth Strategy
Growing Share of Growing Market — Retail Online Options
We have generated rapid growth since inception by appealing to the growing retail options market. We aim to continue to expand our customer base by both gaining market share in this market and by accelerating the growth of retail options trading generally. Our strategy for gaining market share includes leveraging our customer-driven online brokerage platform and implementing our targeted marketing strategy. To accelerate the growth of options trading, we will continue to cultivate new retail options investors by making options trading more intuitive and accessible and through our missionary educational initiatives.
Increased Penetration in Larger Markets — Retail Online Stocks, Mutual Funds and Fixed-Income Products
We plan to continue penetrating the much larger stock, mutual fund and fixed-income markets. The key components of our platform that have made us successful in the options markets are applicable to these other markets. Furthermore, since customers who trade options often trade the underlying securities, we have ample opportunity to cross-sell stocks, mutual funds and fixed-income products. In addition, there are significant opportunities for us to expand into the futures, foreign exchange and other derivative markets where our technology can be easily adapted.
brokersXpress — Expansion into Professional Advisor and Institutional Markets
Launched in March 2004, our brokersXpress subsidiary has allowed us to expand beyond the self-directed investor market. brokersXpress is an extension of our optionsXpress platform geared towards independent registered representatives and registered investment advisors. We offer these professionals a turnkey account and execution management platform including all of the functionality of our retail platform. The combination of our web-based platform and low cost has made brokersXpress appealing to such professionals. Industry-wide, total assets under management by these professionals have grown at a rate of approximately 19% per year in the last six years to the current level of over $800 billion. We also aim to expand the distribution of our platform to institutional investors such as hedge funds and money managers.
International Expansion
We intend to continue expanding our international customer base through cost-effective targeting of online customers in economically and legally compatible foreign jurisdictions where there is an interest in accessing U.S. markets. We also plan to continue partnering with foreign-registered brokers who want to offer their customers access to U.S. markets.
General
Our principal executive offices are located at 39 S. LaSalle Street, Suite 220, Chicago, Illinois 60603. The telephone number for our principal executive offices is (312) 630-3300 or (888) 280-8020. Our Internet address is www.optionsxpress.com. This Internet address is provided for informational purposes only. The information at this Internet address is not a part of this prospectus.
Risk Factors
We face risks in operating our business, including risks that may prevent us from achieving our growth strategy. You should consider these risks before investing in our company. For a discussion of the significant risks associated with operating our business or with investing in our common stock, you should read the section entitled "Risk Factors" beginning on page 9 of this prospectus.
THIS IS THE END OF A COMPOSITION COMPONENTThe Offering
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- Does
not include shares of common stock that may be sold by us and the selling stockholders if the underwriters choose to exercise in full
their option to
purchase additional shares. See "Underwriting." Unless otherwise indicated, the information contained in this prospectus assumes that the underwriters' option to purchase additional shares is not
exercised.
- (2)
- Does not include shares reserved for issuance under our 2004 Equity Incentive Plan and shares reserved for issuance under our 2004 Employee Stock Purchase Plan.
Summary Historical Consolidated Financial and Operating Information
The following summary consolidated financial and operating data should be read together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations." The financial information as of and for the years ended December 31, 2001, 2002 and 2003 set forth below was derived from our audited consolidated financial statements and related notes included elsewhere in this prospectus. The financial information for the six months ended June 30, 2003 and as of and for the six months ended June 30, 2004 set forth below was derived from our unaudited condensed consolidated financial statements and related notes included elsewhere in this prospectus. In management's opinion, these unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the condensed consolidated financial information for the periods presented. The historical financial and operating information may not be indicative of our future performance.
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- Gives
retroactive effect to a : stock split to be effected prior to the completion of this offering.
- (2)
- Customer
accounts are open, numbered accounts.
- (3)
- DARTs
are total revenue-generating trades for a period divided by the number of trading days in that period.
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- Customer
trades per account are total trades divided by the average number of total customer accounts during the period. Customer trades are annualized for the periods ending
June 30 based on the number of trading days in each such period.
- (5)
- Reflects the application of net proceeds to cash.