TD Ameritrade Q2 FY’15 Earnings: Sluggish Trading Volumes, Flattish Yields Restrict Growth

TD Ameritrade (NYSE:AMTD) announced its fiscal second quarter earnings on April 21, reporting a 1% year-on-year (y-o-y) decline in net revenues to $803 million. The company reported high trade volumes through January and February, which fell in March leading to only a mild sequential improvement in trade volumes for the quarter. However, trade volumes were lower than the comparable prior year period. As a result, trading commission revenues for the March quarter were about 6% lower than the year-ago quarter at $350 million. ^[1]

We have a $34 price estimate for Ameritrade’s stock, which is slightly lower than the current market price.

See our full analysis for TD Ameritrade

Trading Commissions Fall

Trading activity on Ameritrade’s platform picked up in early 2014, with an average of over 490,000 trades per day through January and February. However, the average trades per day fell to 456,000 trades per day, bringing down the quarterly average to 476,000 trades per day. Although it was a 4% sequential improvement over the December quarter, the average daily volume was about 3% lower than the prior year period. ^[2] Ameritrade realized about $12.04 per trade during the quarter, which was about 4% lower than the average implied revenue per trade in 2014. As a result, the revenues generated via trading commissions in the March quarter were about 6% lower than the year-ago quarter at $350 million. We currently forecast Ameritrade’s average revenue per trade through 2015 to be about 2% lower on a y-o-y basis at $12.35 for the full calendar year.

Ameritrade’s management mentioned that the number of trades on the brokerage’s mobile platform in the March quarter accounted for 15% of total trades — up from just 3% of total trades back in 2010. 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 companies and zero-brokerage apps that are targeting this particular market segment. ^[3]

Low Interest Rates, Flat Yields And Impact On Margins

Ameritrade’s average client balances were 5% higher than the year-ago period at $19.4 billion during the quarter. The implied annualized yield on these assets was about 20 basis points lower than previous year levels at at 3.07%. As a result, net-interest revenues generated by Ameritrade were only about 2% higher than the year-ago period at $149 million. We currently forecast the average yield for the year to be around 3.40% and to grow to over 5% by the end of our forecast period.

On the other hand, investment product fees, which was a fast-growing revenue stream for Ameritrade through 2014, kept up the momentum in the March quarter. The brokerage’s total fee-based asset balance rose to over $158 billion by the end March, with an average balance of $155 billion through the quarter. The average balance was over 16% higher compared to the prior year period. Consequently, the revenues generated by investment product fees grew by over 13% y-o-y to $85 million in the fiscal second quarter. Investment product fee revenues have witnessed double-digit y-o-y growth in nine successive quarters now. Going forward, we expect the company to continue to attract clients at similar rates through the end of this calendar year, leading to significant growth in investment product fee revenues.

Ameritrade witnessed a modest 1% y-o-y rise in revenues to $205 million from insured deposit accounts (IDA) in Q2 FY’15. Ameritrade’s average IDA balances in the prior year quarter were around $73 billion, which rose to almost $75 billion in the quarter ending March this year. We currently forecast Ameritrade’s IDA balances to increase by 4-5% for the full year. However, Ameritrade’s management expects yields to remain flattish for the full year owing to the current interest rate scenario.

According to our estimates, Ameritrade’s adjusted EBITDA margin compressed by almost 3 percentage points over the prior year quarter to 42.5% in Q2. Limited revenue growth complemented by a rise in operating expenses led margins to fall through the quarter. Although most cash operating expenses remained flat over the comparable prior year period, the brokerage incurred about 8% higher employee compensation and clearing costs. Going forward, the brokerage expects operating expenses to remain in the $410-$420 range over the next few quarters. If the company manages to boost top line figures, it could directly impact margins.

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1. TD Ameritrade Q2 FY 2015 Earnings Call Transcript, Seeking Alpha, April 2015 [↩]
2. Ameritrade Monthly Metrics, Ameritrade Investor Relations, April 2015 [↩]
3. The iPhone app Robinhood lets you trade stocks for free, Bloomberg, March 2015 [↩]