TD Ameritrade Enjoys Sustained Period Of High Trading Activity, August Metrics In Focus

After a relatively slow start to the year, trading activity has picked up according to monthly metrics reported by brokerage firms. The third quarter of the calendar year has been particularly positive for brokerages including TD Ameritrade (NYSE:AMTD), which reported a massive 41% year-over-year growth in average daily trades per day to 537,000 through August. Earlier this year, Ameritrade announced plans to attract more high net worth clients on its trading platform. The company is looking to offer better personalized services and investment consultants to individuals with $1 million or more in their accounts. The brokerage firm has added over a million net new brokerage accounts in the last five years on the back of competitive pricing on brokerage fees and trading commissions, while keeping its minimum account balance requirements at reasonable levels. According to Ameritrade’s management, its “top priority” strategy to offer additional personalized services to high-net worth accounts does not imply that it is moving away from smaller investors. ^[1] The company has reported a sustained rise in trade volumes and total client assets so far in the current quarter. Below we take a look at some of Ameritrade’s key metrics and our full-year forecasts for these metrics.

We have a $34 price estimate for Ameritrade’s stock, which is in line with the current market price.

See our full analysis for TD Ameritrade

High Trading Volumes In The September Quarter

TD Ameritrade averaged 476,000 trades per day in the quarter ended March, which was about 3% lower than prior year levels. Although volumes fell to about 434,000 trades per day in the subsequent quarter, volumes were about 8% higher than the previous year levels. This further rose to about 455,000 trades per day in July – almost 12% higher on a year-over-year basis. Ameritrade’s average trades per day surged to 537,000 in August, which was a 41% y-o-y increase. The total number of funded accounts at the brokerage stood at 6.55 million at the end of the June quarter, a 5% year-over-year increase. ^[2]

Ameritrade realized about $11.59 per trade during the most recent quarter, which was about 10% lower than the average implied revenue per trade in 2014. 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.

Fee-Based Balances Sustain Growth

Investment product fees, or the fees charged for its services on money market mutual funds and other funds, have been a fast-growing revenue stream for Ameritrade. 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 $158 billion through August. However, a slightly lower yield offset some of that growth in revenues in the most recent quarter. Resulting investment product fee revenues increased by about 8% y-o-y to $85 million in the fiscal third quarter ended June. Investment product fee revenues had witnessed double-digit y-o-y growth in nine successive quarters before the June quarter this year.

Interest-Earning Assets, IDA Balances Continue To Grow

Ameritrade’s average client balances were about 10% higher than the year-ago period at $21.4 billion during the month of August. ^[2] However, the implied annualized yield on these assets through the first half of the year was about 15-20 basis points lower than previous year levels at 3.05%. ^[3] As a result, net interest revenues generated by Ameritrade were only about 3% higher than the year-ago period at $305 million, despite the average balances rising by about 10% through the period. We currently forecast the average yield for the year to be around 3.40% for the full year and to grow to over 5% by the end of our forecast period.

TD Ameritrade’s average insured deposit accounts (IDA) balances stood at $77.9 billion through August, which was about 5% higher than August last year. The company witnessed a modest 3% y-o-y rise in revenues to $209 million from insured deposit accounts (IDA) in the most recent 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 environment.

Impact Of Revenue Growth On Margins

According to our estimates, Ameritrade’s adjusted EBITDA margin in fiscal Q2 (quarter ended March) compressed by almost 3 percentage points over the prior year quarter to 42.5%. Although most cash operating expenses remained flat over the comparable prior year period, the brokerage incurred about 8% higher employee compensation and clearing costs. As a result of limited revenue growth and higher expenses, margins compressed during the quarter. 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 expenses stood at $415 million for the June quarter. The company’s adjusted EBITDA margin compressed by over 80 basis points over the prior year quarter to 46.6% in the June quarter. The September quarter has been positive for the company in terms of rise in trading activity. Going forward, if Ameritrade continues to post healthy trade volumes through the latter half of the year, it could boost top line figures and help margins recover. We are currently optimistic in our forecast for the company-wide EBITDA margin. We currently forecast the figure to rise to over 48% in 2015, while we expect it to increase more gradually through the end of our forecast period.

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1. TD Ameritrade moves upmarket to millionaires, Reuters, June 2015 [↩]
2. Ameritrade Monthly Metrics, Ameritrade Investor Relations, September 2015 [↩] [↩]
3. TD Ameritrade June Quarter Earnings, Ameritrade Press Release, July 2015 [↩]