Tuesday, July 18, 2006

TD Ameritrade Q3 2006 Earnings

BMO Capital Markets, 18 July 2006

TD Ameritrade (40% owned by TD Bank) reported strong EPS and raised guidance for 2007. EPS in the quarter were US$0.23 up 28% from a year ago and marginally ahead of forecasts. Solid fee revenues and better cost control offset somewhat weaker commission revenues. In addition, AMTD increased guidance for 2007 to reflect higher expected margins on balances and tight cost control. Overall, these were positive results and suggest that the benefits of the integration of Waterhouse and Ameritrade are larger than initially expected. This is despite the fact that trades per day in June and the start of July are 25% less than in April and May. We estimate that, when translated into TD’s cash earnings, AMTD will contribute about $60 million this quarter, ahead of the $39 million reported in TD’s second quarter (and $53 million if the second quarter was adjusted to include a full quarter of AMTD). It is noteworthy that TD’s share of AMTD and BNK now each contribute about $60 million to TD’s quarterly cash earnings, which are roughly $850 million. We believe that TD shares are very good value at current levels. Canadian operations are performing well and the balance sheet is strong. In the U.S., BNK is underachieving but AMTD is ahead of plan.
Bloomberg, 18 July 2006

TD Ameritrade Holding Corp. was raised to outperform from market perform by analyst Matt Snowling at Friedman, Billings, Ramsey & Co. The price target is $21.00 per share.
AP, Josh Funk, 18 July 2006

Online brokerage TD Ameritrade Holding Corp. said Tuesday its third-quarter profit soared 67 percent on higher fee-based revenue and its acquisition of TD Waterhouse. The company's shares zoomed more than 6 percent in response.

The company also tightened its guidance for fiscal 2006 and raised its forecast for the following year. Ameritrade shares rose 87 cents to $14.51 in late morning trading, but the stock remains near the low end of a 52-week range of $13.30 to $26.37.

Ameritrade reported earnings grew to $139.8 million, or 23 cents per share, during the quarter that ended June 30, from $83.6 million, or 20 cents per share, a year ago.

Total revenue more than doubled, to $540.3 million from $234.4 million a year earlier. At the same time, expenses ballooned to $307.3 million from $97.5 million. The company said revenue from managing accounts for clients was nearly 60 percent of total revenue.

"Despite a decline in investor activity in June, we realized a record quarter, thanks in part to an increase in asset-based revenues," said Joe Moglia, Ameritrade's chief executive.

The Omaha-based company's net earnings per share of about 23 cents also exceeded what Wall Street had forecast. Analysts surveyed by Thomson Financial on average expected earnings per share of 22 cents on $544 million of revenue.

Ameritrade's results this year have been helped by its acquisition of TD Waterhouse's U.S. retail securities business. The deal closed in January.

Last month, some TD Waterhouse customers had trouble accessing Ameritrade's online trading platform for several days after new security measures were added, but Moglia said those problems did not significantly affect earnings.

Moglia says the company continues to work on completing the integration of TD Waterhouse to help the company grow in the long-term investor segment.

Previously, the company said it planned to close two of its five call centers as part of the merger and keep centers in Omaha and in Fort Worth, Texas.

Moglia said Tuesday that Ameritrade has now decided to keep its Yorkview, Canada, call center open for at least the next two years to help ensure good customer service. But even with the additional call center, Moglia said, the company still expects to save about $378 million in annual expenses once the integration is completed.

"We're investing in (fiscal) '06 and '07 to make sure we are stronger in '08," Moglia said.

Lauren Bender, an analyst with Boston-based Celent, said this quarter's results show that Ameritrade is becoming more than an online brokerage.

"The April-June results show that the merger of TD Waterhouse and Ameritrade has created a brokerage firm that is well-positioned to compete head-on for retail investors' trading and investment activity," Bender said.

Analyst Howard Chen, with Credit Suisse First Boston, said in a research note that he believes Ameritrade will have significant earning power once the Waterhouse integration is completed even though the short-term market outlook "remains choppy." Chen's one-year price target for the stock is $23.

Moglia said it's too soon to tell how the company's new $9.99-per-trade pricing, announced in April, will affect the business long term, but the initial response has been positive.

Ameritrade reported handling 252,784 trades a day on average during the third quarter, which is down from the 254,382 trades a day it handled during the second quarter.

And average client margin balances grew from roughly $6.8 billion in the second quarter to $7.9 billion in the third quarter.

The company narrowed its guidance for fiscal 2006 earnings to a range of 94 cents to $1, or between 87 cents and 93 cents when a one-time gain from the sale of its investment in Knight Capital Group Inc. is excluded. Previously, the company had forecast earnings in a range of 85 cents to $1.03.

Ameritrade raised its earnings projections for fiscal 2007 to a range of 99 cents to $1.21 per share, up from an earlier estimate of 94 cents to $1.18.

Analysts are expecting a profit of 90 cents in fiscal 2006 and $1.20 in fiscal 2007.
Bloomberg, 18 July 2006

TD Ameritrade Holding Corp., the third-biggest online brokerage, said profit jumped 67 percent in the first full quarter since its $1.3 billion purchase of TD Waterhouse USA.

Net income in the fiscal third quarter ended June 30 rose to $139.8 million, or 23 cents a share, from $83.6 million, or 20 cents, a year earlier, the Omaha, Nebraska-based company said today in a statement. Revenue more than doubled to a record $540.3 million.

Chief Executive Officer Joseph Moglia is relying on the 2.25 million customer accounts acquired with TD Waterhouse USA to help maintain profit growth after the stock market declined for the first time in five quarters. Average client trades per day jumped 82 percent from a year earlier.

"We continue to believe post-integration TD Ameritrade earnings power is significant," said Howard Chen, a New York- based analyst at Credit Suisse Group, in a note to investors today.

Ameritrade shares rose after the company raised its earnings forecast for next year to between 99 cents and $1.21 from an earlier target of 95 cents to $1.17. It lowered the top end of this year's forecast to $1 from $1.06. Shares of the company jumped 75 cents, or 5.5 percent, to $14.39 at 11:18 a.m. in composite trading on the Nasdaq Stock Market.

Market Drop

On a per-share basis, the results matched the 23-cent estimate of Sandler O'Neill & Partners analyst Richard Repetto, ranked the most-accurate forecaster of the company's earnings by StarMine Inc. Based on the average of 12 analysts' estimates, the company was expected to earn 22 cents, according to Thomson Financial.

Before today, concern that a prolonged drop in U.S. stocks would slow trading had pushed TD Ameritrade's stock price down 30 percent since Jan. 25, when the merger closed. The stock is the worst performer this year in the 12-member Amex Securities Broker/Dealer index. Competition with rivals including Charles Schwab Corp. and E*Trade Financial Corp. has forced the company, which now has about 6 million accounts, to slash commission rates to keep customers from defecting.

Ameritrade clients averaged 253,000 trades per day during the quarter, which while down from the second-quarter average of 254,000 was higher than the 139,000 average of the third quarter of 2005.

Computer Glitch

The company had computer problems that kept its clients from using its Web-based trading site for almost a week in June. The problems arose from the merging of login procedures for TD Waterhouse and Ameritrade customers.

Revenue from commissions and transaction fees almost doubled in the quarter to $213.2 million. Net interest revenue, or what the company earns from loaning cash and securities to clients to trade with, more than doubled to $199.4 million.

Earnings per share last quarter grew slower than total net income because the company, previously called Ameritrade Holding Corp., paid for the acquisition of TD Waterhouse USA by issuing 196.3 million of its own shares to the seller, Toronto-Dominion Bank.

The purchase, which helped diversify the company beyond its roots as a Web site for day-traders, increased a cost base that previously consisted mostly of computers and customer-service call centers. TD Waterhouse had a network of 143 brokerage branches, compared with Ameritrade's four, and 2,600 investment advisers, compared with 1,400.


Total operating expenses last quarter more than tripled to $307.3 million. Employee compensation and benefits almost doubled to $213 million, a smaller increase than Sandler O'Neill's Repetto had expected.

Moglia has vowed to reduce fixed costs by an annual rate of $328 million, or more than 30 percent, by mid-2007. The company already has closed 44 branches and a call center in Jersey City, New Jersey. It chopped the number of employees to 4,100 as of March 31 from 4,500 when the acquisition closed.

TD Ameritrade has said it wants to reduce the workforce to 3,500.