Ameritrade Earnings Preview: Interest-Earning Assets, Fees To Drive Q3 Results

TD Ameritrade (NYSE:AMTD) is scheduled to report its third fiscal quarter earnings on July 22. The brokerage’s revenues grew by 20% year-on-year (y-o-y) in the previous quarter to $812 million. The top-line growth was driven by a 28% y-o-y increase in net interest revenues from client assets and a 30% increase in trading commissions during the March quarter. ^[1] Given that expenses incurred by brokerages are largely fixed in nature, the revenue growth contributed significantly to Ameritrade’s bottom-line growth, due to which the company posted healthier margins in the previous quarter.

According to our analysis, the company’s adjusted EBITDA margin improved by over 150 basis points in Q2 FY 2014, compared to the prior year quarter. However, the slight decline in trading volumes during the current quarter could weigh on profitability relative to the previous quarter. A similar trend was witnessed in competing brokerage Charles Schwab’s (NYSE:SCHW) recent earnings report. We expect Ameritrade to deliver strong quarterly results despite lower trading volumes due to continued growth in its client asset base and improving EBITDA margins. We have a $33 price estimate for Ameritrade’s stock, which is slightly higher than the current market price.

See our full analysis for TD Ameritrade

Interest On Client Balances, Investment Product Fees To Continue To Grow

Revenues generated by interest on client balances grew by 28% y-o-y to $146 million in the previous quarter. Average client balances rose by almost 20% to $18.5 billion in the previous quarter. The company has continued to attract more customers, with average client balances touching $19 billion at the end of May, which is higher than its projection of $17-18 billion at the end of its previous fiscal year. ^[2] We currently forecast an 18% increase in net interest revenues for the full year.

In a similar fashion, the revenues generated by Ameritrade on the fees charged for its services on money market mutual funds and other mutual funds through programs such as AdvisorDirect and Amerivest TM grew by over 20% to $75 million in the March quarter. The fees are charged as a percentage of the client asset balances. Total client asset balances rose by over 15% in the first two months of the June quarter.

IDA Balances Flat

In the last few quarters, the company’s insured deposit account (IDA) assets have been somewhat flat since the beginning of the year at about $72-73 billion. After growing at a CAGR of over 30% from  $16 billion in 2008 to $70 billion in 2013, the growth in average IDA balance has somewhat slowed down in 2014. ^[3] We expect the growth to to continue, albeit at a slower rate. The massive growth in IDA assets was offset by a declining yield on these assets. We expect the yield on these assets to bottom out this year and gradually increase thereafter since the Fed has initiated its QE tapering program. Looking ahead, we expect the low yield on IDAs to continue for remainder of the year.

Low Trading Activity During The Quarter

Ameritrade’s daily average revenue trades (DARTs) sequentially increased in each of the three quarters beginning July 2013 – from about 380,000 in Q4 FY 2013 to 492,000 in the second fiscal quarter of 2014. Although the company’s average trades per day rose by over 15% in April to 448,000 trades per day, they declined both sequentially and annually to 383,000 trades a day in May. ^[3] In its recent earnings report, Charles Schwab reported that its trading volumes declined in the June quarter, particularly during the months of May (-14%) and June (-6%). Despite a slight dip in trading volumes, we forecast the average trades per account to grow by over 5% to 17.5 trades through 2014.

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1. TD Ameritrade Q2 2014 Earnings Call Transcript, Seeking Alpha, April 2014 [↩]
2. TD Ameritrade FY 2014 Projections, Ameritrade Investor Relations, October 2013 [↩]
3. Ameritrade Monthly Metrics for May, TD Ameritrade Investor Relations, June 2014 [↩] [↩]