Thinkorswim, the latest acquisition, is reportedly the fastest-growing online broker in the industry and leads the industry in option trades per day.
- The growth, their best-in-class trading platform and their best-inclass investor education programs are what attracted management.
- The management views the acquisition as more of a capability type of transaction than a scale transaction.
- Thinkorswim is a perfect fit for TD AMERITRADE and will advance trading and education strategy by several years.
- The company reported that it is also a deal that is financially attractive to both sets of shareholders.
- The transaction will bring in about $68 million in net income excluding synergies which, post the share buyback, will be financed 100% with cash that would otherwise earn next to nothing in the current near zero interest rate environment.
- The management expects about $55 million in synergies from the deal, of which about 70% would be revenue synergies as the company takes thinkorswim''s products and education programs to TD AMERITRADE''s existing client base.
- The other 30% will be in expense synergies.
- The deal will be accretive at 3% to 7% in 2010 and 10% to 15% within 12 months following the integration and after the buyback.
The company faces an environment of market uncertainty and a depressed stock market.
- Margin lending has come down significant in line with market valuations.
- As part of some mitigating strategies, the company will initiate an expense management program this quarter targeting a reduction of expenses on an annualized basis of $60 million or 6% of expenses excluding advertising.
- Given the current environment, the management is updating guidance to a range of 90 cents to $1.15.
The company earned $611 million in revenue, down $31 million or 5% from the same quarter last year.
- The company had a record quarter for trades per day, which drove a $27 million increase in transaction-based revenues.
- This was partially offset by lower commission rates which were down from $13.27 to $12.76.
- This was primarily due to more free trades as new account growth soared this last quarter and lower options trading volume as a percentage of total trades.
Asset-based revenues were down $56 million, primarily due to the current rate environment and lower margin debt levels.
- Expenses were up $25 million, as expected, due to investments in the business.
- The company spent $47 million in advertising, resulting in 217,000 new accounts with a cost per account of $215.
- The pre-tax margin was nearly 50%.
- The effective tax rate for the quarter was 38.6% versus the lower than usual 32.5% in they year ago quarter.
- The spread-based balances recorded a large drop in revenue of about $57 million.
- The key elements of spread-based revenues are margin loan-related income, the MMDA program, the stock borrow-stock loan business and payments to clients on their cash.
- By far the most significant element in lower spread-based revenues is that margin loan balances and rates are down about $4 billion and 180 basis points respectively year-over-year.
- As a result, margin loan-related income is down almost $100 million from December 2007 to December 2008.
- About 80% of this drop is driven by lower margin loan balances and 20% is due to lower margin loan rates.
- Offsetting the margin drop was an increase in the MMDA revenue of about $7 million as balances grew by about $2.6 billion but were offset by a drop of 43 basis points in yield.
- The lower yield is a result of new investments in the MMDA portfolio at dramatically lower rates than a year ago.
- The stock borrow-stock loan business benefited the quarter by about $30 million versus last year, primarily driven by more than $2 billion lower stock loans at over 200 basis points less cost.
The company commenced the quarter at $788 million in liquid assets and ended the quarter at about $1.3 billion.
- The primary sources of liquid assets were net income of $184 million and regulatory capital of $363 million.
- The management revealed that regulatory capital is an anomaly this quarter.
- Under normal situations, it is a use of liquid assets though this quarter it was a source.
- It was a source due to two items.
- Firstly, required net capital in broker-dealer subsidiaries declined $163 million due to the significant decline in margin lending balances.
- Secondly, the remaining $200 million was primarily due to the timing of the reserve fund issue, which was not included in liquid assets last quarter but was received from reserve fund this quarter.
- The primary uses of liquid assets were a mandatory debt payment of $9 million and $38 million used to buyback approximately 3 million shares of stock.
- The company now remains with $1.3 billion in liquid assets at the end of the quarter.
Key questions and answers from the first quarter fiscal 2009 earnings call conducted by TD AMERITRADE Holding Corp. (AMTD) on January 20, 2009.
Howard Chen (Credit Suisse):
Could you provide an update on where your thoughts are for the breakaway broker opportunities and where RIA assets stand today?
Fredric J. Tomczyk: RIA assets currently stand about 30% of our total assets. We''re happy with how our RIA business is doing. As we said last year, it was one of our more challenging years but we''re quite happy with the start to 2009.
Having said that, on the breakaway broker market there''s two things going on. Number one, we''re seeing sales activity and the number of people we''re talking to at a very high level with all the dislocation going on at the full-service brokerage organizations. However, I would say that the close rate on those sales activities are probably also at the other end of the spectrum at a low end.
There are lots of brokers right now that are getting - if you were a full-service broker today and your revenues were down significantly and your clients were feeling like the way they probably are, you''d be asking yourself, ""Do I take the retention payment where I am or at another full-service broker or is this really the kind of market - do I want to step out and put my own money up?"" A lot of them are hesitating and it wouldn''t surprise me to see that part of the market pull back a bit here for awhile.
That''s not to say that the long-term trends will fundamentally change. I think it will go back to the breakaway broker is very attractive. We could see a bit of a lull here for a period of time because of the current market environment and their views.
Howard Chen (Credit Suisse):
In the revised outlook statement, specifically for the average fee-based rate earned and the step down assumed in the forward outlook, are you now baking in any money market fee waivers and what''s driving that decline?
William J. Gerber: We are baking in money market fee waivers. We''re expecting that the interest rate environment is going to continue and that we would waive to keep our clients at zero, so yes, that''s built in.
Richard Repetto (Sandler O''Neill & Partners L.P.):
Could you give more specifics on the net new assets?
Fredric J. Tomczyk: We do think there are a couple of things going on. If you look at it year-over-year, we have said that we''re quite happy with how our retail business has been doing and that continues. On that side, we continue to see very good asset retention and client retention. You''ve seen the new account numbers. That definitely contributes. Our new accounts are up 49% year-over-year. We''re quite happy on the retail side.
What we''ve seen year-over-year is last year wasn''t our best year in the RIA business in the wake of the Waterhouse conversion. We''ve talked about that before. It took us awhile to earn back our credibility in the market; we think we''ve done that. That''s starting to show up in some of our numbers.
Richard Repetto (Sandler O''Neill & Partners L.P.):
Are you seeing more because of the turmoil at the larger brokers or the smaller brokers?
Fredric J. Tomczyk: Turmoil at the larger brokers is probably the number one contributor. Your comment at the last quarter was it was the first time in our history when we increased advertising in the fourth quarter, and that really did pay off as we hit it just right to take advantage of the dislocation in the market. We were clearly there and very active during October and November.
Richard Repetto (Sandler O''Neill & Partners L.P.):
On the expenses, you''re talking about trying to take out $60 million run rate and if you look at your guidance and the midpoint, it looks like you''re baking in around $ million to $40 million in the year. Can you give detail on the timing of these expenses takeouts?
