TD Ameritrade (NYSE:AMTD) reported on April 16 that its net revenue for the second quarter (quarter ended March 31) was $679 million, up 1% from the same period last year. The growth came primarily from investment products fees, which were up 34% y-o-y due to strong asset gathering activity during the quarter. The net interest revenue earned by the firm on client balances was also up by almost 7% on the back of an improvement in the average annualized yield earned on these balances. However, the company’s transaction based revenues continued to be a drag on the firm’s overall performance and experienced a 2% y-o-y decline as the total trades executed on Ameritrade’s platform decreased by over 5% y-o-y.
The firm’s results are almost in line with our expectations and our current price estimate for the company is around $19.50. We will soon update our model to reflect all the information released in this earnings call.
Asset Gathering Remains Strong
Ameritrade continues to gather assets at an impressive pace. However, as predicted by us in our pre-earnings article, the net new asset performance for this quarter remained lower than the previous quarter’s figures. The company attracted a total of $13 billion in net new assets over this quarter, compared to the previous quarter’s tally of $16 billion.
Nevertheless, the pace of Ameritrade’s asset growth is praiseworthy as the firm’s total client assets reached an important milestone in March when they crossed the $500 billion mark for the first time in the company’s history. 
Specifically, a large portion of this quarter’s asset growth came from increases in Ameritrade’s fee-based investment balances, which were up by over 32% y-o-y and reached $105.7 billion at the end of 2Q13. We noticed the same thing in Charles Schwab’s (NYSE:SCHW) case and highlighted in our earnings review article on Schwab that the average balances in Schwab’s mutual funds and advice solutions (both are fee based products) increased y-o-y by 9% and 17%, respectively, in the first quarter of this year. This reaffirms our belief that the growth in advice led solutions is an industry wide phenomenon and will continue to drive the investment product fees higher at all brokerages that provide such services to their customers. Ameritrade’s revenue from investment product fees was up by almost 35% y-o-y in this quarter and reached $62 million.
Trading Volumes Continue To Be A Drag
As mentioned in our pre-earnings article, commission based revenues make up for around 40% of Ameritrade’s total revenues and account for nearly 30% of the value in the company’s stock. From that angle, it is important that this division performs well.
However, the recent results suggest that Ameritrade’s trading based revenues continue to languish in the absence of a meaningful uptick in trade volumes, even though the average revenue per trade was up by $0.48 due to positive changes in trade mix.  Ameritrade’s transaction based revenues were down by almost 2% y-o-y to $287 million as the total trades executed on Ameritrade’s platform declined by over 5% y-o-y to 22.7 million.
Going forward, we expect the firm’s transaction based revenues to remain depressed as “many investors hesitate to reenter the markets.” 
Lower Expenses Are A Positive
On the expense side, the company seems to have cut its expenses. The company’s total operating expenses are down by nearly 3% y-o-y, to $442 million in 2Q13 from $454 million in the same quarter last year. The expense cuts come primarily from lower professional services as the company continues to tightly manage its consulting and contractor spend as well as lower advertising costs.
While lower expenses are generally a good thing, we will be closely watching the company’s earnings over the next few quarters to access if reduced advertisement spending has any impact on the rate of new account openings at the firm.
The silver lining in the firm’s transaction based business’ performance was the impressive growth of mobile trading, albeit from a small base. In the word of Fredric Tomczyk, CEO of Ameritrade, “clients continue to embrace mobile as we average more than 2,500 new users per day in the quarter. Mobile trades at a record 31,000 per day, were up 25% year-over-year.” 
We believe that this could be an important differentiator for the firm going forward and could lift the company’s trade based revenues disproportionately when trading volumes eventually recover.Notes:
- TD Ameritrade Client Assets Surpass $500 Billion, TD Ameritrade, March 11, 2013 [↩]
- TD Ameritrade Holding Management Discusses Q2 2013 Results – Earnings Call Transcript, SeekingAlpha, April 16, 2013 [↩] [↩] [↩]