TD Ameritrade Earnings Preview: Healthy Trading Activity To Complement Rise In Average Client Balances

38.38
Trefis
AMTD: AMTD IDEA Group logo
AMTD
AMTD IDEA Group

TD Ameritrade (NYSE:AMTD) is scheduled to announce its fiscal third quarter earnings on Tuesday, July 21. [1] The brokerage firm reported a 1% year-on-year (y-o-y) decline in net revenues to $803 million in the March quarter as trading commission revenues fell by 6% to $350 million. [2] A moderate rise in asset-based revenues due to flattish yields was not enough to offset the decline in transaction-based revenues.

According to our estimates, Ameritrade’s adjusted EBITDA margin compressed by almost 3 percentage points over the prior year quarter to 42.5% in Q2’15. 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.

We have a $34 price estimate for Ameritrade’s stock, which is over 10% lower than the current market price. Ameritrade’s stock price has risen by 7-8% since the beginning of the year.

Relevant Articles
  1. Coronavirus Recovery Watch: Capital Market Portfolio: 15% 5D Return vs. (-25%) YTD Return – [BlackRock, E*TRADE, Schwab & TD Ameritrade]
  2. Why Isn’t Charles Schwab’s Stock Benefiting From The Spike In Trading Volumes?
  3. How Would Zero Trading Commissions Impact TD Ameritrade Revenues In 2020?
  4. What Would The Combined Charles Schwab-TD Ameritrade Look Like?
  5. Is TD Ameritrade’s Fiscal 2020 Revenue Guidance Too Optimistic?
  6. Did Interest Income Gains Offset Lower Trading Commissions For TD Ameritrade In Fiscal Q3?

See our full analysis for TD Ameritrade

Healthy Trading Activity Through The Quarter

After a sustained period of high trading activity, especially in January and February, volumes seemingly subsided in the June quarter. The company averaged 476,000 trades per day through the March quarter, which fell to about 457,000 trades per day in April. This further declined to about 427,000 trades per day in May. Despite a sequential decline, volumes were about 11% higher than the comparable year-ago period. [3]

The total number of funded accounts at the brokerage was over 6.37 million accounts at the end of 2014, which increased to about 6.46 million accounts at the end of March. Based on these numbers, the average implied number of trades per account stood at about 17.7 trades per account for the full year. Trading activity has picked up in 2015 thus far, due to which we forecast Ameritrade’s annualized trades per account rise to about 18.5 trades per funded account for the calendar year 2015. 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 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. [4] More recently, the company introduced a trading app for the Apple Watch, which will be available in the fall.

Asset Based-Revenues Could Grow With Improved Yields

Ameritrade’s average client balances at end of May were 8% higher than the year-ago period and 7% higher than December levels at $20.4 billion.  [3] In the most recent quarter, the net yield on these assets fell by about 20 basis points over the prior year period to 3.07%. However, high average balances meant that net revenues were up by about 2% y-o-y to $149 million. We currently forecast the average yield for the current calendar year to be around 3.40% and the average balance to be about 8% higher than the prior calendar year at about $20.5 billion.

The company’s average insured deposit accounts (IDA) balances stood at $74.7 billion through May, which was about 3% higher than May last year. Ameritrade witnessed a modest 1% y-o-y rise in revenues to $205 million from IDA balances in the March quarter. 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. If rates pick up significantly in late-2015, then it could push yields higher than our current forecasts.

Ameritrade’s investment product fees, or the fees charged for its services on money market mutual funds and other funds, has also witnessed robust growth over the last few quarters. The brokerage’s average fee-based asset balance for 2014 stood at $142 billion — nearly 18% higher than the average balance in 2013. The average balance has further improved to almost $162 billion through May.  Investment product fee revenues have witnessed double-digit year-over-year growth in nine successive quarters. Going forward, we expect the company to continue to attract clients at similar rates through the end of this calendar year, which could lead to significant growth in investment product fee revenues.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. TD Ameritrade to Host Earnings Conference Call, Ameritrade Press Release, July 2015 []
  2. TD Ameritrade Q2 FY 2015 Earnings Call Transcript, Seeking Alpha, April 2015 []
  3. Ameritrade Monthly Metrics, Ameritrade Investor Relations, June 2015 [] []
  4. The iPhone app Robinhood lets you trade stocks for free, Bloomberg, March 2015 []