Rise In Trade Volumes Helps TD Ameritrade As Yields Remain Flat Through The First Half Of 2015

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TD Ameritrade (NYSE:AMTD) announced its fiscal third quarter earnings on July 21, reporting a 4% year-on-year (y-o-y) rise in net revenues to $794 million. [1] Unlike the previous quarter, the company reported healthy trade volumes through the June quarter, which were about 8% higher than the comparable prior year period at 434,000 trades per day. Additionally, the company added net new client assets of $11.7 billion through the quarter leading its total client asset base to a record high of $702.3 billion [2]

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

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Trading Revenues Recover Despite Sequential Dip In Volumes

Trading activity on Ameritrade’s platform picked up in early 2014, with an average of over 476,000 trades per day through the March quarter. Although it was a 4% sequential improvement over the December quarter, the average daily volume was about 3% lower than the prior year period. [1] However, the average number of trades fell to about 434,000 trades per day in the June quarter, with a total of 27.3 million trades conducted on Ameritrade’s platforms. Despite the sequential dip, volumes were about 8% higher than the comparable prior year period.

Ameritrade realized $11.59 per trade during the quarter, which was about 10% lower than the average implied revenue per trade in the comparable prior year period. It was also about $1 per trade lower than the 2014 average implied revenue generated per trade. As a result, the revenues generated via trading commissions in the June quarter were only about 3% higher than the year-ago quarter at $328 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 June quarter accounted for 17% 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, the company expects trading activity via mobile devices to surpass desktop trading before the end of the decade. [2]

Asset-Based And Net Interest Revenues Witness Moderate Growth

Ameritrade’s average client balances were 9% higher than the year-ago period at $20.5 billion during the quarter. However, the implied annualized yield on these assets was about 15 basis points lower than previous year levels at at 3.04%. [1] As a result, net-interest revenues generated by Ameritrade were only about 4% higher than the year-ago period at $156 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.

Similarly, Ameritrade witnessed a modest 3% y-o-y rise in revenues to $209 million from insured deposit accounts (IDA) in Q3 FY’15. Ameritrade’s average IDA balances in the prior year quarter  stood at $72.4 billion, which rose to $74.8 billion in the quarter ending June 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.

On the other hand, investment product fees, which was a fast-growing revenue stream for Ameritrade over the last few quarters, kept up the momentum in the June quarter as well. The brokerage’s total fee-based asset balance rose to over $158 billion by the end March, with an average balance of over $161 billion through the quarter. [1] The average balance was over 16% higher compared to the prior year period. However, a slightly lower yield offset some of that growth, and investment product fee revenues increased by about 8% y-o-y to $85 million in the fiscal third quarter. Investment product fee revenues had witnessed double-digit y-o-y growth in nine successive quarters before the June quarter this year.

Impact On Margins

At the end of the March quarter, the company gave guidance for operating expenses (excluding advertising costs) to remain in the $410-$420 million range over the next few quarters. In line with its expectations, Ameritrade’s operating expnses stood at $415 million for the June quarter. [2] According to our estimates, Ameritrade’s adjusted EBITDA margin compressed by over 80 basis points over the prior year quarter to 46.6% in Q3. Despite meaningful top line growth, a more rapid 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 7% higher employee compensation and clearing costs at $202 million. Going forward, if Ameritrade manages to boost top line figures, especially via trading commissions, it could help the company post healthier margins.

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Notes:
  1. TD Ameritrade June Quarter Earnings, Ameritrade Press Release, July 2015 [] [] [] []
  2. TD Ameritrade Q3 FY 2015 Earnings Call Transcript, Seeking Alpha, July 2015 [] [] []