Key Takeaways From Ameritrade’s Q3 Earnings

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TD Ameritrade‘s (NASDAQ: AMTD) stock price jumped nearly 5% as the company reported better than expected Q3 fiscal 2017 earnings. The company’s focus on client engagement and advisory services has helped it expand its customer and asset base and consequently, quarterly revenues grew by over 11% year-over-year. Additionally, the acquisition of Scottrade, which is set to close by the end of the fiscal year, has kept investor attention and should lead to a massive increase in customers and assets and ensure growth in future.

Aided by the Fed’s two interest rate hikes in the last 4 months, revenues from interest earning assets continue to be the primary growth driver. Additionally, the price cut in equity trading commissions marginally impacted Ameritrade’s overall trading revenue, as the company managed to increase its daily trading volumes by over 10% due to a larger customer base. Despite the growth in expenses due to investments in technology, and sales and marketing capabilities, the company’s operating margin grew by around 260 basis points to 42.3%. The costs incurred due to the Scottrade acquisition, which is due to close later in the year, will keep operating expenses around the same level through the year. However, this should not compress margins as the company will be able to grow its asset base and trading volumes following the completion of the deal.

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Rate Hikes Drove Growth In Interest Revenue  

Interest earning assets continued to be a big part of Ameritrade’s business, generating around 50% of the brokerage’s revenue in the June quarter. The rate hikes in March and June helped drive nearly 22% growth in the segment’s revenue. This trend is likely to continue in the near term as we expect another hikes in the next 6 months.

Additionally, the net yield on these assets for the company, at 1.6%, remains lower than that of other players such as E-Trade (2.7%) and Charles Schwab (1.8%). We expect it to increase in the future with growth in assets and the Scottrade acquisition.

Trading Revenue Remained Unaffected Despite Cut In Commissions  

Transaction-based revenue accounts for 36% of Ameritrade’s overall revenue. The third quarter saw around a 4% decline in trading commissions due to the company’s decision to slash its commissions from $9.99 to $6.95 per trade in February. The 10% growth in trading volumes managed to partially offset the decline in trading revenue due to price cut.

Increased Demand For Tech-Enabled Products Helped Investment Product Fees

TD Ameritrade’s investment product fees saw nearly 9% growth for the quarter, primarily due to an increase in the number of customers seeking financial advice supported by technologically-driven insights. The company focused on addressing the demand for innovative financial products.

With more customers seeking financial advice supported by technology, we expect a significant rise in the brokerage’s assets under management. The digital advisory business, and the company’s focus on newer investment products to meet customer demand, are likely to drive these asset volumes and higher investment product fees in future.

See our complete analysis for Ameritrade.

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