Friday, July 20, 2007

TD Ameritrade Q3 2007 Earnings

The Globe and Mail, Tara Perkins, 20 July 2007

Nearly two months after hedge funds began pressuring TD Ameritrade Holding Corp. to merge with a rival, the online brokerage firm shows no signs of acquiescing. And the hedge funds show no sign of backing down.

As TD Ameritrade reported record profit yesterday, its chief executive officer, Joe Moglia, told investors that the company has "an absolute focus on organic growth."

And a spokesman for Jana Partners LLC - one of the two hedge funds putting heat on TD Ameritrade to pursue a merger - said its financial results continue to show the need to pursue a strategic combination, given the challenges in growing organically.

"They just want to run their business for six or nine months and see if they can actually start generating some organic growth in client assets, better growth in client accounts, and see if they can actually take the tools that they combined from the two entities and add some value for their customers," BMO Nesbitt Burns Inc. analyst Michael Vinciquerra said yesterday.

While a merger with a rival could add value for shareholders, the company does not want to do anything in the near term, he added.

TD Ameritrade has just finished moving the customers it obtained from last year's acquisition of TD Waterhouse USA over to its own online trading platform. Causing more disruption for customers at this point could prompt some of them to leave, Mr. Vinciquerra said.

The company's profit was $159-million (U.S.), up from $140-million a year ago. But that didn't come from new revenue, with the top line remaining virtually flat.

A lower tax rate helped a bit, as did lower expenses.

"A mediocre earnings report increases pressure on management to find a merger partner," said Patrick O'Shaughnessy, an analyst at Morningstar who gives TD Ameritrade one star, the lowest rating on a scale of five. "At least they can put the merger with TD Waterhouse behind them, and they have done a pretty good job of managing their expenses."

TD Ameritrade had total client assets of $298.2-billion at the end of the quarter, up 5.7 per cent from three months earlier, Mr. Vinciquerra pointed out in a note to clients. It had 6.321 million total accounts, having gained 152,000 new customers but losing 61,000 during the quarter. Average client trades per day fell 3.5 per cent to 244,800.

Despite Ameritrade's higher profit, Toronto-Dominion Bank is expected to see a lower contribution from its 40-per-cent stake in the brokerage because of the stronger Canadian dollar, said Blackmont Capital analyst Brad Smith. While TD Ameritrade's profit was up 13 per cent from a year ago, the portion that hits TD's bottom line will actually fall 13 per cent to $59-million (Canadian). TD Bank is scheduled to release its earnings on Aug. 23.

The hedge funds have accused TD Bank of using its seats on Ameritrade's board of directors to block any possible mergers.

Mr. Moglia reiterated yesterday that the online brokerage industry is delving further into the business of asset gathering, and so the types of takeovers or mergers it might look to do now would be different from a year ago.
Financial Post, Jonathan Ratner, 19 July 2007

Among the news out with online brokerage TD Ameritrade Holding Corp.’s third quarter earnings, which showed net income rose to US$159-million – its best quarter ever, was Toronto-Dominion Bank’s piece of the action.

TD said it expects the earnings will contribute $59-million to its own third quarter net income.

This was up from $55-million a year earlier, but down from $63-million in the second quarter, Desjardins Securities analyst Michael Goldberg said in a note.

He says TD’s internal allocation of more debt against its Ameritrade investment and a weaker U.S. dollar are to blame. As a result, he thinks Ameritrade’s overall performance was positive.

“AMTD now moves on to the third leg of benefits from its acquisition and integration of Waterhouse, development of the longer term investor business,” Mr. Goldberg said.

He has a “top pick” rating and $79 price target on TD, which reports third quarter results on Aug. 23.

Brad Smith at Blackmont Capital maintained his $73 price target and "hold" rating on TD, while agreeing that the results were solid.

However, he considers news that more investment spending will likely be required to retain Ameritrade's existing client asset base a signal that margin pressures remain a concern.
Bloomberg, Bradley Keoun, 19 July 2007

TD Ameritrade Holding Corp., the online broker facing shareholder pressure to merge with a rival, boosted profit 14 percent last quarter by reducing costs as customers traded less.

Net income rose to $158.7 million, or 26 cents a share, in the quarter ended June 30, from $139.8 million, or 23 cents, a year earlier, TD Ameritrade said today in a statement. The Omaha, Nebraska-based company was expected to earn 25 cents, the average of 13 analyst estimates compiled by Bloomberg. Revenue climbed less than 1 percent, the slowest in more than two years.

Jana Partners LLC and SAC Capital Advisors LLC, hedge funds with an 8 percent stake in TD Ameritrade, have called for the company to merge with Charles Schwab Corp. or E*Trade Financial Corp. TD Ameritrade Chief Executive Officer Joseph Moglia, who slashed more than $300 million in costs following the company's 2006 purchase of TD Waterhouse USA, has vowed to spend $100 million in the next 15 months to spur growth.

``A mediocre earnings report increases pressure on management to find a merger partner,'' said Patrick O'Shaughnessy, an analyst at Morningstar who gives TD Ameritrade one star, the lowest rating on a scale of five. ``At least they can put the merger with TD Waterhouse behind them, and they have done a pretty good job of managing their expenses.''

Until yesterday, the shares climbed 22 percent this year, the second-best performer in the 12-member Amex Securities Broker-Dealer Index after A.G. Edwards Inc., which is up 34 percent. St. Louis-based A.G. Edwards agreed in May to sell itself to Wachovia Corp.

Revenue growth flagged in part because the 25 percent rise in the Standard & Poor's 500 Index in the past year failed to spark a surge in trading by the company's clients. Commissions and other transaction fees are the company's biggest source of income, followed by interest on loans to customers.

Trading revenue in the quarter fell by 7.2 percent to $197.8 million, TD Ameritrade said. Net interest revenue fell by 30 percent to $138.9 million, while fees on money-market bank accounts almost doubled to $134.6 million.

Clients averaged about 245,000 trades per day, compared with 254,000 last quarter and 253,000 in the third quarter of last year.

Moglia, 58, said today on a conference call with analysts that retail investors ``are not wildly bullish'' in part because they're concerned about rising costs for heating, gasoline and groceries. ``That does have a psychological impact.''

At the end of June, TD Ameritrade held about $297.2 billion of client assets, up 16 percent from a year earlier.

Schwab, the biggest online broker, said earlier this week that second-quarter profit increased 16 percent as $52 million of advertising helped drive the fastest customer-account growth in five years. The San Francisco-based company also said customers traded less, leading to a 6 percent drop in transaction fees. Schwab, which has a mutual-fund arm and bank, relies on trading commissions less than TD Ameritrade does.

Moglia offset slowing revenue by shaving expenses. He shifted TD Waterhouse's 2.2 million customers to TD Ameritrade's trade-processing system in May, completing a step he promised when the merger was announced in mid-2005. TD Ameritrade had been routing TD Waterhouse trades through a clearing system maintained by Automatic Data Processing Inc., under a legacy contract inherited in the merger.

The ``clearing conversion'' aimed to eliminate about $200 million in annual costs, the company said in April.

The $1.6 billion purchase of TD Waterhouse fueled four straight quarters of 60 percent-plus revenue growth for TD Ameritrade. In June, the company said it received a letter from Jana and SAC urging another merger, with Schwab or New York- based E*Trade, the No. 4 broker.

The funds said in the letter that a merger with either of the rivals may lead to as much as $800 million in new revenue and cost savings.

Today's results ``continue to show the need to pursue a strategic combination, given the challenges in growing organically,'' Charles Penner, a New York-based spokesman for Jana, said today in an interview.

Jana and SAC have accused TD Ameritrade of letting its largest shareholder, Toronto-Dominion Bank, wield too much influence over merger discussions. Toronto-Dominion, Canada's third-biggest lender, controls five of TD Ameritrade's 12 board seats. Jana and SAC say a merger might interfere with the Toronto-based bank's U.S. expansion plans.

In July, TD Ameritrade responded to the criticisms by removing Toronto-Dominion's representatives from a committee established to review merger prospects.

Toronto-Dominion has said its representatives on the TD Ameritrade board are acting in the best interest of all shareholders.

On the conference call, Moglia said the company made $8 million of the $100 million new investment in the last quarter, and has budgeted $20 million for the current quarter and each of the following three quarters. Uses include providing training for call-center staffers, who are being asked to promote a broader range of products and services.

``The management team has come to me with individual requests'' for uses of the $100 million, and ``I've allocated probably 85 or 90 percent of that so far,'' Moglia said. ``Frankly the sooner we implement that spend, we think the sooner we're going to get results.''