TD Ameritrade Earnings Preview: Robust Trading Activity To Drive Q4 Results

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Brokerage firm TD Ameritrade (NYSE:AMTD) is scheduled to announce its fiscal fourth quarter earnings on Tuesday, October 27. [1] Ameritrade reported healthy trade volume metrics for July and August, with a similar trend reported by competing brokerages such as E*Trade Financial (NASDAQ:ETFC) and Charles Schwab (NYSE:SCHW). Additionally, Ameritrade continued to add to its interest-earning and insured deposit account (IDA) average balances through the September quarter. Although Ameritrade’s fee-based balances fell sequentially in August, the average balance through Q4’15 remained higher than the comparable prior year period.

In the most recent quarter, the brokerage reported a 4% year-on-year (y-o-y) rise in net revenues to $794 million. [2] Growth was attributable to both trading commissions as well as an increase in net client assets. With even healthier trade volumes and a strong increase in client assets, Ameritrade could witness a solid set of Q4’15 results.

We have a $34 price estimate for Ameritrade’s stock, which is in line with the current market price. Ameritrade’s stock price fluctuated between $31 and $38 through the September quarter.

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See our full analysis for TD Ameritrade

Impressive Trade Volumes Through Fiscal Q4

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. [3]

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.

Asset Based-Revenues Could Grow With Improved Yields

Ameritrade’s  average client balances were about 10% higher than the year-ago period at $21.4 billion during the month of August. [3] 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%. [2] 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 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 IDA in the most recent quarter. We currently forecast Ameritrade’s IDA balances to increase by 4-5% for the full year. However, yields are likely to remain flattish for the full year owing to the current interest rate environment. Since interest rates are likely to pick up next year, it could push yields higher from fiscal year 2016.

Ameritrade’s investment product fees, or the fees charged for its services on money market mutual funds and other funds, have 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 improved to over $158 billion through the first half of the year. As a result, investment product fee revenues witnessed double-digit year-over-year growth in nine straight quarters from early 2013 through mid 2015. Ameritrade’s average fee-based assets stood at just over $159 billion for July and August combined, roughly 11% higher on a y-o-y basis. [3]

Impact On Margins

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 (quarter ended March). Limited revenue growth complemented by a rise in operating expenses led margins to fall through the quarter. At the end of the March quarter, the company gave guidance for operating expenses (excluding advertising costs) to remain in the $410 million-$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. If Ameritrade’s cash operating expenses stay within the guided range, high revenues could translate directly to healthier margins. 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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Notes:
  1. TD Ameritrade to Host Earnings Conference Call, Ameritrade Press Release, October 2015 []
  2. TD Ameritrade June Quarter Earnings, Ameritrade Press Release, July 2015 [] []
  3. Ameritrade Monthly Metrics, Ameritrade Investor Relations, September 2015 [] [] []