TD Ameritrade Earnings: Subdued Volumes, Yields Weigh On Results

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TD Ameritrade (NASDAQ:AMTD) reported mixed fiscal first quarter earnings on Wednesday, January 20. Net revenues reported by the brokerage were down marginally to $812 million. Going forward, the company expects to see a boost in its transaction revenues and maintain the growth momentum it has observed in asset balances.

The main factor contributing to the lackluster revenues was deterioration in transaction-based revenues, which were down 9% year on year (y-o-y) to $328 million. However, in line with our expectations, asset based revenues rose by 5% y-o-y to $473 million, even as net interest revenues fell by approximately 4% y-o-y to $154 million. [1] Meanwhile, operating expenses were curtailed, falling slightly to $469 million. However, net income failed to show growth, stagnating at $212 million in the first quarter of fiscal 2016.

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We have a $34 price estimate for TD Ameritrade’s stock, which is 20% above  the current market price.

See our full analysis for TD Ameritrade

Subdued Trade Volumes

Trade volumes in the December quarter were just 438,000 trades per day, down 4% y-o-y. The company reported that a record 18% of total client trades in the quarter were conducted via mobile devices. In addition to falling trade volumes, the average commission and transaction fee per trade decreased by over 4% y-o-y, to $11.90. ((TD Ameritrade Reports Continued Strong Asset Gathering, Ameritrade Press Release, January 2016)) The aforementioned factors led to a 9% decline in transaction revenues to $328 million. As the company continues to focus on its mobile segment, while updating its platforms with cutting-edge features, daily trade volumes will likely pick up in the coming quarters. However, we expect the average revenue per trade to remain flat owing to the intensifying competition in the industry. ((TD Ameritrade Future Outlook, Ameritrade Press Release, January 2016))

Low Yields Suppress Spread Based Revenues

Spread based assets, which consist of interest earning assets and insured money-market deposit account (IDA) balances, saw strong growth in 2015, rising over 9% y-o-y to $102.8 billion in December. [2] However, sequentially, the balances have stagnated for the past few months. Nevertheless, we expect the brokerage to boost its spread based assets in 2016 on the back of the Fed’s decision to hike interest rates.

While the average yield on IDA balances rose in the December quarter to 1.1%, the yield on interest earning assets fell by 50 basis points to 2.71%. Consequently, IDA revenues ($227; 10% y-o-y) drove spread based revenues higher to $381 million, whereas net interest revenues ($154; -4% y-o-y) were a drag. The company expects the interest rate hike to boost spread based revenues by $50 million to $80 million in 2016. ((TD Ameritrade Q1 FY 2016 Earnings Call Transcript, Seeking Alpha, January 2016))

Fee Based Balances Remain Strong

TD Ameritrade is gradually shifting its attention to its investment product segment, as can be seen from the stream’s growing contribution to net revenues. In the December quarter, fee based balances rose to $158.6 billion, up 5% y-o-y. [2] Furthermore, average yield on these balances also grew to 0.23%. As a result, investment product fee revenues surged by 10% y-o-y to a record $92 million. We forecast investment product balances to sustain growth as the company works on strengthening its portfolio advisory offerings, which in turn should boost fee based revenues.

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Notes:
  1. TD Ameritrade Q1 FY 2016 Earnings Call Transcript, Seeking Alpha, January 2016 []
  2. TD Ameritrade Reports Continued Strong Asset Gathering, Ameritrade Press Release, January 2016 [] []