Capital One Financial Corp. of Falls Church yesterday reported a more than 30 percent improvement in second-quarter earnings, but the company's stock fell sharply because the firm also disclosed that its cellular phone division is falling far short of expectations.
Capital One, the nation's sixth-largest issuer of credit cards, said its profit for the quarter ended June 30 grew to $87.5 million (41 cents a share) from $66.9 million (32 cents) in the same period a year ago.
The company said it added 1.2 million new cards during the quarter and the balances on its customers' accounts grew by $416 million, to $17.9 billion. Capital One's net interest margin -- the difference between the interest rate customers pay and what it costs the company to borrow money -- increased by a full percentage point over last year to 10.89 percent. Six-month earnings rose 42 percent, to $189 million (80 cents), compared with $132.5 million (64 cents) for the same period a year ago.
But the gains in the Capital One credit card business were undercut by losses of the company's America One cellular phone business. Saying that cell phones were like "a credit card with an antenna," Capital One three years ago began using its successful credit card marketing system to sell portable phone service. By using computers to sort through lists of potential customers and identify likely prospects, Capital One says it gets better results than other card companies.
But the cellular phone division lost $57 million on revenue of $67 million in the first half of the year, and Capital One said it is rethinking its approach to the business. The company said it is "significantly slowing its investment" in cellular phones but "over time will increase its investment in market segments that are generally not being served by major wireless competitors."
Analysts interpreted the announcement to mean that Capital One probably will not be able to develop its cellular phone division into a high-growth business that will make up for an expected decline in growth of the saturated credit card market.
Capital One stock dropped by more than $8 a share after the announcement reached the market, but recovered about half the losses to close at $48.93 3/4, down $3.87 1/2 a share, on the New York Stock Exchange.
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