TD Ameritrade Earnings Preview: Interest-Earning Assets To Drive Revenue Growth

TD Ameritrade (NYSE:AMTD) is scheduled to announce its fiscal fourth quarter earnings on October 28. The brokerage reported a 5% year-on-year (y-o-y) growth in net revenues to $763 million in the fiscal third quarter. Much of the growth came from asset-based business, which grew by 12% y-o-y to $430 million, while low trading volumes during the quarter kept trading commission revenues flat over the year-ago period at $317 million. ^[1]

The brokerage’s employee compensation and benefits expenses rose by over 7% y-o-y to $189 million in the June quarter, which the company attributed to consulting work and certain advertising projects undertaken. These one-time expenses kept the operating margin flat over the prior year quarter. Going forward, the company does not expect to incur these expenses in its fourth fiscal quarter, which is likely to improve margins. Given that most expenses incurred by brokerages are primarily fixed in nature, growth in net revenues is likely to directly impact bottom line growth.

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-Earning And Investment Product Balances Sustain Growth

Ameritrade’s client balances have been 16-20% higher than the year-ago period in every month of the calendar year thus far. As a result, revenues generated by interest on these balances grew by over 24% y-o-y to $149 million in the quarter ending June this year. Ameritrade’s average client balances stood at over $19 billion in the months of July and August – 16% higher than the prior-year period. The average balances in the first half of the year are higher than the company’s projection of $17-18 billion from the end of its previous fiscal year. ^[2] We currently forecast the average balances to grow at a CAGR of nearly 10% in the next few years.

The other fast-growing revenue stream for Ameritrade this year has been investment product fees, or the fees charged for its services on money market mutual funds and other mutual funds. The brokerage successfully added $13.4 billion in net new client assets during the quarter ending June to take its total client asset balance to $140 billion. This was a strong positive for the company, since the June quarter is typically challenging to gather client assets owing to tax season outflows. As a result the revenues generated by investment product fees grew by over 21% y-o-y to $79 million in the third fiscal quarter. The brokerage firm has since added nearly $3 billion in client assets in July and August. Going forward, we expect the company to continue to attract clients at similar rates through the end of this calendar year, leading to a significant growth in investment product fees revenues.

Trading Activity Similar To 2013 Levels

Ameritrade witnessed strong trading activity in January, February and March this year, with an average of about 500,000 trades per day – 30% higher than the prior year period. However, trading activity took a hit in the following months, with average daily trades declining sequentially to under 400,000 trades per day in April, May and June combined. ^[3] Although this was a 20% fall from the previous quarter, the figure was flat over the June quarter in 2013. Ameritrade realized a slightly lower average revenue per trade compared to the prior year quarter, implying a 1% decline in trading revenues to $317 million during the quarter. With no sequential rise in the average trades per day, Ameritrade’s monthly figures for July and August are at 2013 levels. An increasing mix of options traded compared to equities or higher realized revenue per trade could lead to a higher revenues in the September quarter. We currently forecast Ameritrade’s average revenue per trade to be 2% higher on a y-o-y basis at $12.76 for the full year.

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1. TD Ameritrade Q3 2014 Earnings Call Transcript, Seeking Alpha, July 2014 [↩]
2. TD Ameritrade FY 2014 Projections, Ameritrade Investor Relations, October 2013 [↩]
3. Ameritrade Monthly Metrics, Ameritrade Investor Relations, September 2014 [↩]