TD Ameritrade Ends 2014 On A High Note As Core Businesses Drive Growth

TD Ameritrade (NYSE:AMTD) announced its fiscal first quarter earnings on January 21, reporting 9% year-on-year (y-o-y) growth in net revenues to $819 million. Top line growth was driven by the asset-based business, which grew by 11 % y-o-y to $451 million, and the transaction-based business, which grew by 9% to $359 million. ^[1] Within combined asset-based revenues, net interest revenues on client assets grew by 27% over the prior year quarter to $161 million, while investment product fee revenues rose by 15% over the prior year quarter to $83 million. On the other hand, revenues from insured money market deposits stayed flat over the prior year period at $207 million for the quarter.

According to our estimates, Ameritrade’s adjusted EBITDA margin improved by almost 50 basis points over the prior year quarter to 47.6% in Q1’15. Adjusted EBITDA margin for the full year expanded by almost 2 percentage points over 2013 to 47.2%. The growth in net revenues was largely responsible for the margin improvement as most expenses remained flat. The only significant rise in the company’s operating expenses was in compensation and benefits costs, which rose by nearly 9% to $199 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  continue to witness an improvement in margins in  the coming quarters, corresponding to growth in net revenues.

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Trading Commission Revenues Grow

Trading activity on Ameritrade’s platform picked up in the quarter ending December after stagnating volumes in the two preceding quarters. The average trades conducted on Ameritrade’s platform through the quarter rose by 10% y-o-y to 457,000 trades per day. ^[2] Management mentioned that the number of trades on Ameritrade’s mobile platform accounted for 14% of total trades – up from 3% in 2010. The number of trades rose by 28% year-over-year to over 3.8 million trades, or over 60,000 trades per day, conducted via the mobile platform as the total number of daily logins grew to almost 200,000 during the quarter. The brokerage intends to focus on the mobile segment and enhance its user experience. With mobile trading 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 that are targeting this particular market segment (see Can Zero-Commission Trading App Robinhood Challenge Large Brokerages?).

Ameritrade realized a slightly lower average revenue per trade of about $12.45  in the quarter. Despite a slight decline in average revenues per trade, net trading revenues rose to $359 million during the quarter. Ameritrade’s revenue per trade for the full year remained flat over 2013 at $12.60 per trade. We currently forecast Ameritrade’s average revenue per trade to gradually rise to about $13.00 through the end of our forecast period.

Asset-Based Revenues Sustain Growth

Ameritrade’s average client balances were 11% higher than the year-ago period at $19.5 billion during the quarter. Average balances for the full year grew by almost 16% y-o-y to just over $19 billion. Moreover, the net yield on these assets increased, due to which revenues generated by interest on these balances grew by 28% y-o-y to $615 million for the calendar year. The implied yield on these assets was almost 30 basis points higher than the previous year at 3.22%. We currently forecast the average yield for the year to rise to over 5% through the end of our forecast period.

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 $150 billion by the end of December – nearly 15% higher than the balance at the end of December last year. As a result, the revenues generated by investment product fees grew by over 15% y-o-y to $83 million in the first fiscal quarter. Investment product fee revenues have witnessed double-digit y-o-y growth in nine successive quarters, with a 20% average growth rate for the full year. Going forward, we expect the company to continue to attract clients at similar rates in the coming quarters, leading to significant growth in investment product fee revenues.

Ameritrade’s revenues generated by insured deposit accounts (IDA) stayed flat over the prior year quarter at $207 million, in keeping with the trend in the last few quarters. Ameritrade’s average IDA balances in the prior year quarter were around $72 billion, which rose to about $75 in the quarter ending December 2014. Moreover, low interest rates meant that revenues were flat the prior year quarter. Similarly, revenues for the full year were only about 2% higher than 2013 at $819 million. The company expects balances to grow by 5-10% in the coming fiscal year, which could result in a corresponding 5-15% increase in revenues even if yield rates stayed nearly flat.

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1. TD Ameritrade Q1 2015 Earnings Call Transcript, Seeking Alpha, January 2015 [↩]
2. Ameritrade Monthly Metrics, Ameritrade Investor Relations, January 2014 [↩]