TD Ameritrade Earnings Preview: Client Assets, Trading Volumes Continue Growth

TD Ameritrade (NYSE:AMTD) is scheduled to announce its fiscal first quarter earnings on Wednesday, January 21. Ameritrade reported a 12% year-on-year (y-o-y) growth in net revenues to $795 million in the fiscal fourth quarter, with growth coming from both its asset-based business, which grew by 16% y-o-y to $450 million, and trading commission revenues, which grew by 8% to $332 million. ^[1] Ameritrade had a positive fiscal year ended September, as evidenced by significant annual growth in all its major revenue streams – commission and transaction fees grew by 15%, interest-based revenue rising by 24% and asset-based revenues rising by 12% – due to an increase in net client assets and a rise in trading activity through the year.

According to our estimates, Ameritrade’s adjusted EBITDA margin through the first three quarters of calendar year 2014 improved by nearly 3 percentage points over the comparable year-ago period to over 48%. The revenue growth was largely responsible for the margin improvement as most expenses remained flat. The only major rise in the company’s operating expenses was in compensation and benefits costs, which rose by nearly 15% to $195 million during the quarter. Employee compensation and benefits expenses grew mainly on account of the brokerage increasing its employee headcount to cater to the rise in trading volumes and investments. Going forward, the brokerage is likely to witness healthy margins for Q1’15 as the increase in trading commissions and asset-based revenues are likely to boost net revenues. We have a $33 price estimate for Ameritrade’s stock, which is about in line with the current market price.

See our full analysis for TD Ameritrade

Rise In Trading Activity Through The Year

Ameritrade’s average trades per day from January through November stood at 437,000 trades per day, about 11% higher than the comparable prior year period. The total number of funded accounts at the brokerage was over 6.3 million accounts at the end of September, which was 5% more than the year-ago period. ^[2] Based on these numbers, the average number of trades per account for the three quarters ended September can be computed to about 13 trades per account in that period. As a result, our forecast for Ameritrade’s annualized trades per account is at 17.6 trades per funded account for the calendar year 2014 – up from 16.6 trades per account in 2013. Subsequently, we expect that figure to rise to just over 20 trades per account through the end of our forecast period.

Ameritrade’s management mentioned that the number of trades on the brokerage’s mobile platform this year accounted for 13% of total trades – up from just 3% of total trades back in 2010. In the most recent quarter, the number of trades rose by 60% year-over-year to over 3 million trades conducted via the mobile platform. The brokerage intends to focus on the mobile segment and enhance its user experience. Since mobile trading is on the rise, it is imperative for established large brokerages to provide mobile trading tools and capabilities to its customers as a safeguard against upcoming apps and mobile platforms that are targeting this particular market segment. The recent launch of the zero-commission trading app Robinhood adds to the competition in the mobile-trading domain. ^[3]

Asset Base Continues To Grow

Ameritrade’s average client balances through the calendar were 15% higher than the year-ago period at $19.0 billion. In the months of October and November, the average client balances stood at over $19.5 billion. Moreover, the net yield on these assets has risen through the year, due to which revenues generated by interest on these balances grew by 34% y-o-y to $159 million in Q4’14. This was the third consecutive quarter of revenue growth of more than 25% in this division. The implied yield on these assets was almost 50 basis points higher than the prior year period at over 3%. We currently forecast the average yield for the year to be around 3.10% and resulting revenues to be 21% higher than the prior calendar year at over $580 million.

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 funds. The brokerage’s total fee-based asset balance rose to $153 billion by the end of November – nearly 17% higher than the balance at the end of November 2013 and 5% higher than the average balance at the end of its fiscal 2014. Investment product fee revenues have witnessed double-digit y-o-y growth in eight successive quarters. Going forward, we expect the company to continue to attract clients at similar rates in 2015 as well, which could lead to significant growth in investment product fee revenues.

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1. TD Ameritrade Q3 2014 Earnings Call Transcript, Seeking Alpha, July 2014 [↩]
2. Ameritrade Monthly Metrics, Ameritrade Investor Relations, December 2014 [↩]
3. Robinhood Launches Zero-Fee Stock Trading App, Tech Crunch, December 2014 [↩]