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TD AMERITRADE Holding Corporation (NYSE:AMTD)

F1Q09 Earnings Call

January 20, 2009 8:30 am ET

Executives

Bill Murray - Managing Director, Investor Relations, Communications and Public Affairs

Fredric J. Tomczyk - President and Chief Executive Officer

William J. Gerber - Chief Financial Officer

Analysts

Howard Chen - Credit Suisse

Richard Repetto - Sandler O'Neill & Partners L.P.

Patrick O'Shaughnessy - Raymond James

Daniel Harris - Goldman Sachs

Roger Freeman - Barclays Capital

Michael Vinciquerra - BMO Capital Markets

Michael Carrier - UBS Investment Research

Brian Bedell - Merrill Lynch

Joel Jeffrey - Keefe, Bruyette & Woods

Operator

Good day, everyone, and welcome to the TD AMERITRADE Holding Corporation first quarter fiscal year 2009 earnings results conference call. Today's call is being recorded.

With us today from the company is President and Chief Executive Officer Fred Tomczyk and Chief Financial Officer Bill Gerber.

At this time, I'll turn the call over to Bill Murray, Managing Director of Investor Relations, Communications and Public Affairs. Please go ahead, sir.

Bill Murray

Thank you, [Gretchen]. Good morning, everyone, and welcome to the TD AMERITRADE December quarter earnings call. Hopefully you've had a chance to read our press release, which can be found on AMTD.com along with today's presentation.

Before we begin, I'd like to familiarize you with the safe harbor disclosure and other disclosures under the federal securities laws. The call contains forward-looking statements involving risks, uncertainties and assumptions that may cause actual results to differ materially from those anticipated. Please review these risk factors, which are disclosed in our most recent annual report on Form 10-K.

Management will be discussing some non-GAAP financial measures as well such as EBITDA and liquid assets. You can find a reconciliation of these financial measures to the most comparable GAAP financial measures in the slide presentation.

This call is intended for investors and analysts and may not be reproduced in the media in whole or in part without prior consent of TD AMERITRADE.

At this point I'd like to turn the call over to TD AMERITRADE President and CEO Fred Tomczyk, you will be followed by our CFO, Bill Gerber.

Fred?

Fredric J. Tomczyk

Thanks, Bill, and good morning, everyone and thank you for joining us on the call today.

I'd like to start this morning by saying that we're pleased with our results for the December quarter, especially in light of the current difficult market environment. These certainly are unprecedented times. We're in a recession and credit crunch - that is at best halfway true  and we're seeing unprecedented government intervention, low market valuations, and near zero interest rate levels.

As you can see on Slide 3, we earned $0.31 per share, one of the better quarters in TD AMERITRADE's history. It's down from $0.40 a share a year ago, which was a record for us and included a $0.03 one-time tax benefit. Excluding the tax benefit, EPS is down 16% from the same time a year ago.

The fundamentals of our business remain strong, as evidenced by our 49% pre-tax margins and $234 billion in client assets, including $52 billion in client cash. Client assets were down 22%, but this is at the same time that the NASDAQ and the S&P 500 were down about 40% from a year ago. The combination of asset gathering and increased levels of client cash helped cushion the impact of the market downturn.

Strong organic growth is evident in our basic operating metrics - net new assets, new accounts and trades per day. Net new assets were just under $8 billion or 11% of beginning assets on an annualized basis. If you'll recall, we gave you a range of 7% to 11% on net new assets, so we're right at the top end of the range. We continue to see good traction on our asset gathering strategy.

In addition, clients remain engaged in the market. Trades per day averaged 357,000 per day for the quarter, up 15% over the same quarter last year. And our strong brand and investments in advertising helped us open 217,000 new accounts in the quarter, our best quarter for new accounts in nine years, all indications that our strategy is working despite the tough economy.

We'll remain focused on asset gathering and on maintaining our number one position in trades, taking advantage of the current dislocation in the market. The acquisition of thinkorswim will help with that, advancing our trading and investor education strategy by several years. Our strong financial position and our acquisition in integration capabilities will allow us advance our strategy in the midst of this difficult market.

Prudent management of the firm's balance sheet and our ability to generate cash has allowed us not only to produce these strong quarterly results, but also to reach $1.3 billion in liquid assets at the end of the quarter. Bill Gerber will give you more details on that in a few moments.

If you turn to Slide 4, I'd like to give you more detail on our asset gathering efforts. Net new assets in the December quarter were $7.8 billion. That's up about $1 billion from a year ago when you exclude the approximately $2.3 billion attributed to E*TRADE's dislocation last December. As I said earlier, net new assets were 11% of total beginning assets on an annualized basis, clearly putting us in the same league with other premier asset gatherers.

We attribute this success to a number of efforts. First, we benefited from the dislocation in the market. We've seen increasing quote flows from smaller banks and thrifts as well as from full-service brokerage organizations. Clients are coming to us, questioning how much they're paying for their advice and looking for a company with a strong balance sheet and a different value proposition.

We've made improvements in client service that have improved our client and asset retention. We've also enhanced our trading programs and added incentives for our call center associates to increase the quality of lead referrals to the branches.

Our increased marketing and share of wallet campaigns have really paid off for us. New accounts were up 46% from 149,000 a year ago to 217,000 for the December quarter. Our marketing efforts have addressed the issues facing investors today, and we believe we are reaching those people who are looking for a strong and stable company, with the right combination of products, price and value-added tools and information, all delivered on an objective basis.

Our cost per new account was down to $215 from $304 for the same quarter last year. The decision to increase our advertising spend in the fall has really paid off for us. And these strong asset gathering results are despite a $2 billion year-over-year decrease in dividends and interest.

I'd like to turn now to the trader side of the business. If you look at Slide 5, you can see that trades per day for the quarter are up 15% year-over-year and up 50% from December 2006 quarter to an average of 357,000 trades per day. Maintaining our leadership position in trades per day is a key focus for us and numbers show our clients remain engaged in the market. As we've said before, active traders will continue to trade in volatile markets.

We've seen an 80% increase in conditional orders from last quarter and we attribute that to a continued focus on and delivery of risk management tools to help clients manage their portfolios.

Education is another important component of our strategy. During the December quarter, we had close to 30,000 clients take advantage of education opportunities and we believe this also plays a role in keeping clients engaged.

January trades per day are 310,000 month-to-date and we believe that a new administration in Washington and the resulting new programs to help stimulate the economy will create continued activity in the market. This should help us to maintain a healthy level of trades per day and the addition of thinkorswim will add further to our trading volumes.

If you turn to Slide 6, I'd like to talk briefly about thinkorswim. There are two kinds of acquisitions and we've said this before - those that add scale and those that add capabilities. Thinkorswim is the fastest-growing online broker in our industry and it leads the industry in option trades per day. This growth, their best-in-class trading platform and their best-inclass investor education programs are what attracted us to them and why we see this as more of a capability type of transaction than a scale transaction. Thinkorswim is a perfect fit for TD AMERITRADE and will advance our trading and education strategy by several years.

It's also a deal that is financially attractive to both sets of shareholders. It will bring us about $68 million in net income excluding synergies which, post the share buyback, will be financed 100% with cash that, to be quite honest, would otherwise earn next to nothing in the current near zero interest rate environment. We expect about $55 million in synergies from the deal, of which about 70% would be revenue synergies as we take 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.

And as we've already said, this deal will not preclude us from looking at other strategic opportunities. If we find another opportunity that we believe is in the best interests of our clients, our associates and our shareholders, we will work hard to take advantage of that opportunity.

Now before I turn the call over to Bill, I'd like to spend a few minutes discussing the current market environment and its impact on TD AMERITRADE. I'm on Slide 7 now.

We had another very strong quarter, but like others in our industry, we are not immune to what's going on in the marketplace. Like other financial services firms, we're facing some strong headwinds, including a near zero interest rate environment. These unprecedented levels of interest rates are impacting our net interest margins as well as the overall yields on money market mutual funds, causing us to waive our fees on some of these funds. We also face an environment of market uncertainty and a depressed stock market. Margin lending has come down significant in line with market valuations.

These headwinds are very real and we see no signs that the overall economic environment will improve over the balance of our fiscal year. As a result, we will be putting in place some mitigating strategies. We will initiate an expense management program this quarter targeting a reduction of our expenses on an annualized basis of $60 million or 6% of expenses excluding advertising.

Our business fundamentals continue to be strong and we're seeing near record levels of organic growth. We have a strong brand, strong platforms, excellent client service, a strong branch network with 900 investment consultants, 4,500 independent registered investment advisors, and the products and services investors need to make smart decisions and navigate through this environment. We have a strong balance sheet and cash position to get us through this cycle, and as I've said before, we will not sacrifice our long-term growth strategy and plans for short-term gains.

Given the current environment, we are updating our guidance to a range of $0.90 to $1.15. While we did expect a difficult market when we gave our guidance last quarter, none of us envisioned the kind of economic and market environment we are now seeing.

The headwinds are strong, but we can't spend a lot of time worrying about what we can't control. As a management team, we will continue to focus on doing what we can to mitigate the short-term headwinds while staying focused on growing our business for the longer term. Our focus will remain on managing the business to come out the other side of this cycle even stronger, taking advantage of the current dislocation in the market to improve our competitive position and take share. The thinkorswim acquisition is an example of this.

Now I'll turn the call over to Bill to walk you through the numbers.

William J. Gerber

Thanks, Fred. Good morning.

As we all know, market conditions remain fragile, but TD AMERITRADE has again delivered solid financial results, actually one of the best quarters in our history. Our strong fundamentals indicate that we can weather this storm and come through it in an even better competitive position.

Now let's take a closer look at our quarterly results on Slide 8. As I go through these comparisons, keep in mind that the December quarter last year was the best quarter in our company's history in terms of pre-tax income, net income, EBITDA and EPS.

On Line 4 you will note that we earned $611 million in revenue, down $31 million or 5% from the same quarter last year. As Fred mentioned, we had a record quarter for trades per day, which drove a $27 million increase in transaction-based revenues as seen on Line 1. This was partially offset by lower commission rates - seen on Line 13 - which were down from $13.27 to $12.76. This was primarily due to two items - more free trades as our new account growth soared this last quarter and lower options trading volume as a percentage of total trades.

On Line 2, asset-based revenues were down $56 million, primarily due to the current rate environment and lower margin debt levels, which I will get into on the next slide. Expenses were up $25 million, as expected, due to our investments in the business, which we have discussed each quarter over the last 18 months or so. Additionally, we spent $47 million in advertising, resulting in 217,000 new accounts with a cost per account of $215. The spread said this was the highest quarter of new accounts in almost 9 years and actually the second-best quarter ever.

As you can see on Line 9, our pre-tax margin was nearly 50%, which we are proud of, particularly in the current environment. Our effective tax rate for the quarter was 38.6%. You may recall that last year's rate was lower than usual at 32.5%, which resulted in a $0.03 per share benefit last year.

So our net income was $184 million and our earnings per share was $0.31. And as I mentioned at the beginning, these are very solid results in a very tough market.

Now let's take a closer look at our asset-based revenues on Slide 9. As we've already mentioned and as you can see on Line 4, asset-based revenues were down $56 million versus the same period last year. Essentially all the variance year-over-year is in Line 2, spread-based balances. As you can see, spread-based balances has seen a large drop in revenue of about $57 million. Although overall balances have remained essentially flat, there has been a significant shift in the components of spread-based balances. As a result, the related net interest margin compression from this asset shift has dropped nearly 100 points.

As you recall, 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 this 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 that are 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 over $2 billion lower stock loans at over 200 basis points less cost. We did not need additional funding from the stock loan business as the margin loan balances had fallen so dramatically over the course of the year.

Lastly, payments to clients on their cash fell by about $8 million, principally due to falling rates.

One last comment on this page. Note that the fed funds rate has dropped in excess of 94% over the last 12 months. This is an unprecedented movement that has impacted the company.

Now let's turn to liquid assets for the quarter on Slide 10. We continued to excel as a cash generator. This is especially important in managing a company such as ours through a difficult market environment when new opportunities tend to change and move quickly. We started the quarter at $788 million in liquid assets and ended the quarter at about $1.3 billion. The primary sources of liquid assets were as follows: net income of $184 million and regulatory capital of $363 million.

Regulatory capital is an anomaly this quarter. Usually it is a use of liquid assets; however, this quarter it was a source due primarily to two items. First, required net capital in our broker-dealer subsidiaries declined $163 million due to the significant decline in margin lending balances. And second, 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 that we used to buyback approximately 3 million shares of our stock, which now leaves us with $1.3 billion in liquid assets at the end of the quarter.

So our current liquid assets plus our future earnings provides us with flexibility when we think of future considerations around liquidity. Currently, we are earmarking $225 million for our acquisition of thinkorswim. Our new buyback program will in effect buy up the additional shares being issued in the thinkorswim transaction to reduce the dilutive effect to our shareholders. More details will be provided as they develop.

We are also keeping our powder dry for potential other uses, such as our ongoing discussions with the regulators on the auction rate securities issue. Cash is still king in this environment and we believe our approach is quite prudent.

Now let's take a moment to talk about guidance on Slide 11. This is a portion of the slide we showed you last quarter that we have updated. As you recall, we recast 2008's earnings based on the rate compression in effect as of October 23rd. This resulted in our $1.33 2008 earnings being lowered to approximately $1.21 per share. Since October 23rd, the Fed has lowered rates another 150 basis points. As such, if you recast 2008 using the new rate environment in effect today, the $1.21 drops to $1.05 per share. So these rate changes and the mix of interest-earning assets has now eliminated $0.28 from 2008. All of this change assumes the midpoint net interest margin of our new 2009 outlook.

Given this context as well as the continued volatility in the markets, we have reevaluated our guidance for 2009. As I mentioned last quarter, there were three areas of earnings pressure  lower margin loan balances and rates, lower reinvestment rates on the MMDA portfolio and not much room to move on the credit rate side.

To that pressure we now add two more elements which are becoming more meaningful. First, fees on money market funds as the total yield on many money market funds are dropping in this rate environment. As such, we are having to evaluate waiving money market fees so that our clients' yield does not turn negative. Second, mutual funds have seen a significant drop in value over the past several months. Our 12(b)(1) trailers are based on asset values in the fund. We are seeing lower mutual fund fees as a result. Collectively, money market fund fees and mutual fund fees represent about 85% of our feebased revenue.

As Fred said, we are looking at several ways to mitigate all of the revenue pressures we are experiencing, plus we have determined to lower our expenses by a minimum of $60 million annually. We will be looking to trim things that aren't working as well as we had hoped, while protecting those things that are working well, like our client-facing initiatives and marketing.

So we are adjusting our range of 2009 to $0.90 to $1.15 per share.

We have always said that we will manage expenses in both good times and in bad, investing more in the business when we are doing well and pulling back on investments when times are tough.

So in summary, despite the difficult market we have leveraged our strong fundamentals to deliver another solid quarter. We are facing some near-term headwinds in this environment, but we will manage through them. We will also continue to focus on generating further traction in our asset gathering efforts, doing what's right to drive client engagement, sales and new assets flowing into our firm, and we will work to maintain our number one market share in trades per day.

Again, all of our results are a credit to our strong conservative balance sheet. We will continue to build cash to provide us with flexibility. We recently announced an agreement to acquire thinkorswim, which we are excited about. Thinkorswim advances our strategy by years and will yield strategic and financial benefits, primarily with respect to our trading business. And we are well positioned to come of the other end of this cycle stronger than where we stand today.

We have a strong business model. It's focused and not over extended. This has not and will not change. At TD AMERITRADE, we continue to show resilience in tough markets. We've been through this before and each time we come out stronger and better positioned to handle the next phase.

With that, Gretchen, I'll open it up for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Howard Chen - Credit Suisse.

Howard Chen - Credit Suisse

Thanks for all the color on the net new asset gathering. Within that $7.8 billion, I guess, could you provide us an update or just for the entire fiscal year could you just 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, right around, I think, it's $80 billion or so. And I think we're happy with how our RIA business is doing. I think 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 I think there's two things going on here. 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. But 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.

And I think 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, I think 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?" And I think a lot of them are hesitating here, 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. But I think 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

And then, Bill, in the revised outlook statement specifically for that average fee-based rate earned and the step down that you assumed in the forward outlook, are you now baking in any money market fee waivers? 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.

Howard Chen - Credit Suisse

Okay. And then could you elaborate on what other options you're potentially thinking other than waiving fees. Is there flexibility to purchase other types of securities in these funds? Are you proactively marketing different types of investment vehicles to the customer base?

Fredric J. Tomczyk

We're not looking at purchasing other types of securities right now. I mean, we're not the asset manager, like some of our peers. TD Asset Management is the asset manager, and I think their view is to stay relatively conservative in this market.

Having said that, we are looking at other alternatives. We do have a view that the FDIC-insured product for the sweep vehicles is actually probably a better product for most investors in today's market. The net yield you're earning on a money market mutual fund versus the FDIC-insured product are roughly comparable if not less, and the second side of that is I don't believe most investors today - and this is a concern of ours and I think we can market off it - that they don't understand the shortcomings of the government or the Treasury guaranteed program on money market mutual funds. So we do think that's a better product.

We're still working through how we might market that and get people more into the FDIC-insured product, which is the better product for them. It gives them the guarantee they think they have and don't have in the money market mutual fund.

Howard Chen - Credit Suisse

Within that spread-based revenue assumption, what's your revised outlook for margin loan balances going forward.

William J. Gerber

We expect margin loan to stay right at around where it is, around $4.2 billion.

Operator

Your next question comes from Richard Repetto - Sandler O'Neill & Partners L.P.

Richard Repetto - Sandler O'Neill & Partners L.P.

I guess the first question's on the net new assets and the strong number you put up, Fred, and could you give more specifics because before you'd talked a lot about sort of stopping the leakage, but it seems like we're at a different level here now. Just some more, I guess, specificity or more specifics.

Fredric J. Tomczyk

We do think there's a couple of things going on, Rich. I think 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. And on that side, it definitely is - 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. And so 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. And that's starting to show up in some of our numbers.

Richard Repetto - Sandler O'Neill & Partners L.P.

And there isn't - how do I put this - you talked about from smaller brokers and the larger traditional investment banks, but is it weighted one towards the other? Are you seeing more because of the turmoil we're seeing, I guess, at the larger brokers?

Fredric J. Tomczyk

Well, I think turmoil at the larger brokers is probably the number one contributor.

I mean, as you recall, I think 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. And we were clearly there and very active during October and November.

Richard Repetto - Sandler O'Neill & Partners L.P.

On the expenses, Bill, so 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 about, as best I can, around 30 or 40 in the year. Can you just give us a little color on the timing of these expenses takeouts because I know you've got a lot less floating rate debt to pay, that that's coming out of the expenses, too.

William J. Gerber

Right. Right. You're right, Rich. I mean, about two-thirds of it will hit in 2009 and then the run rate would be in full effect by 2010. So I agree.

Richard Repetto - Sandler O'Neill & Partners L.P.

So if two-thirds, you know, we're already a quarter, that means most of it comes out this quarter, then, the $60 million on a run rate basis?

William J. Gerber

A lot of it and, you know - yes. That's the easiest way of saying it, yes, without getting into too much detail.

Richard Repetto - Sandler O'Neill & Partners L.P.

And then lastly, on this waiver issue, can you tell us the exposure you have, like how much in client money is in - like we know, for example, Schwab's got $30 plus billion in the Treasury money market. Can you tell us how much is in the funds and what's the yield? I guess it'd be in sort of a Treasury fund that's probably in the most danger right now.

William J. Gerber

A lot of the funds are very low. We have about $30 billion in total money market funds and the vast majority of those, their yield is right now in the single digits.

Richard Repetto - Sandler O'Neill & Partners L.P.

And then the average - I'm trying to see how much room - you split that fee with TD Assessment Management. Can you tell me how the fee split is on that $30 billion?

William J. Gerber

Right. TD only takes about 10 basis points and we take the rest, so -

Richard Repetto - Sandler O'Neill & Partners L.P.

Which is 60?

William J. Gerber

No, about 80.

Operator

Your next question comes from Patrick O'Shaughnessy - Raymond James.

Patrick O'Shaughnessy - Raymond James

I was wondering if you could provide some updates on some of your asset gathering plans that you've talked about in the past, specifically maybe some of the things that you're trying to do at TD Bank to try to better work the relationship that you have?

Fredric J. Tomczyk

Well, we talked about three areas that we're working with TD Bank. Number one was us originating more accounts and assets out of their customer base and branch network. Number two is increasing the breadth and depth of our banking-type products to our customer base. And three was working with TD Waterhouse in the U.K.

The reality is that all those are at very early stages. They're really not impacting our asset gathering numbers as of yet. I'd say the last one, the one with TD Waterhouse U.K. is probably moving along the quickest because that clearly is a win-win for both organizations. The other two, because our partners at TD Bank USA are in the midst of a significant conversion I think that is their top priority and ought to be their top priority. And so on that one, until they get through that, which will be September, we will continue to pilot different programs but not really get at it, I would call, in real earnest and have any impact on us until probably 2010 fiscal.

Operator

Your next question comes from Daniel Harris - Goldman Sachs.

Daniel Harris - Goldman Sachs

Could you guys just talk a little bit about the change in the commission rate that you guys have in the new outlook versus the old one? You talked a little bit about what we saw in 1Q, but do you expect the level of free trades and sort of a lower percentage of option trades to continue over the next few quarters?

William J. Gerber

No, not really. We're expecting that to kind of revert back to the mean. We think that the options trading, particularly the volatility, was so high this last quarter that options became fairly expensive and so as that volatility kind of moves back we would expect to see more options trades. And certainly the free trades, as we mentioned, the 217,000, was the second-best quarter in our history, only exceeded by one back in March of 2000, and so we would expect to see free trades probably abate as well.

So right now we're expecting a range of right around $13.25 for the midpoint for the commission for the year or for the next nine months.

Daniel Harris - Goldman Sachs

And then just with regards to something in the outlook statement and expenses, you've got revenues down roughly 12% or so on average and advertising down 3%. Is the thought here continue to spend at a similar level and hopefully take more market share or is that just not something that you had anticipated lowering at all anyway?

Fredric J. Tomczyk

Our view on marketing, at $215 per account to $300 an account, if we can continue to do that and get the kind of new account flows and share of wallet lifts that we are seeing, we'll continue to make those investments through this cycle.

Daniel Harris - Goldman Sachs

Given your net liquid assets, two things - one, does some of the change in regulatory capital, is that likely to change back in the next few quarters, I'm sorry, on the reserve fund, and then the second thing is is there any reason why you couldn't repurchase debt other than the fact that you'd like to hold more cash right now?

William J. Gerber

On the reserve fund, the reserve fund monies that remain are still in our liquid assets right now. It's about $100 million, a little over $100 million that's still there. We do expect to receive that during 2009, but we're not exactly sure on the timing of that. That's obviously up to the reserve fund.

On what are we going to do with the cash and whether we're going to pay down the debt, our debt right now is at 1.77% interest rate pre-tax, so we really don't think that that would be a good use of our cash, to pay down the debt. We think we can do other things with it and look for opportunities that would make more money than that.

But, as always, we will continue to look at that and if we feel as though paying down the debt is appropriate, we'll do so.

Operator

Your next question comes from Roger Freeman - Barclays Capital.

Roger Freeman - Barclays Capital

I just wanted to come back to money markets again for a second. When did you cut fees on the money market funds, because there's obviously been a downtick in yield, but it's not been that significant yet so just wondering when we sort see the full quarter effect of that.

William J. Gerber

Right. And it's on several different funds. It's not just one fund. We started waiving - I think the first time I actually waived was in early December, so now we are looking at the timing as really going through the rest of the next probably four to six months, assuming that the rate environment doesn't change, assuming, as one of the other questions said, that the funds don't start purchasing assets that are higher yielding to maintain a greater than zero percent interest rate for the clients. We just think it's the right thing to do to look at waiving our fee. It's a fluid situation, but that's essentially what's happening right now.

Roger Freeman - Barclays Capital

And a follow up to one of your answers before, so it sounds like most of the money market funds are in government-backed securities and that you have little in the way of prime money markets. Is that right?

William J. Gerber

It's not quite that explicit, but I think your basic premise is right. I think the majority is in government backed, but I don't think it's a 90-10 split or anything like that.

Roger Freeman - Barclays Capital

Do you have a good prime offering? Because we're seeing certainly shifts market wide from Treasury to prime.

William J. Gerber

There is a prime offering at TDAM and so people are certainly looking at that as well. That's another area. As one of the mitigating strategies, as Fred mentioned, we are looking at all of these potentials for shifting.

Roger Freeman - Barclays Capital

Then in terms of the margin rate, it was pretty strong; it was actually down very slightly, I think 5 basis points. How come that didn't go down more in the quarter? Margin lending yield.

William J. Gerber

Okay, the margin on the yield, sorry. It's more probably the mix in the tiers. What we're seeing is that, although the rate is down, the people who are deleveraging are at the lower rate levels.

Roger Freeman - Barclays Capital

And in terms of the options, you made an interesting comment about the volume and the impact of volatility. Do you not see customers shifting into selling volatility, i.e., selling covered calls, that sort of thing? I would have thought that might have been somewhat of an offset.

Fredric J. Tomczyk

There is some of that definitely going on, Roger, and that is one of the education opportunities, to help people understand the benefits of selling covered calls, particularly in this market.

Having said that, I think it's just the reality is that premiums paid for the volatility on the options has taken some of the traders to look more seriously at the leverage ETFs then they might otherwise would have in other markets.

Roger Freeman - Barclays Capital

And just lastly, margin utilization, can you comment on that? Margin balances I think were down 42% sequentially, S&P down 22%. How are people actually using available margin right now?

William J. Gerber

Margin utilization had been holding in pretty much at the same rate that we had seen until probably the beginning of October, and now we are seeing more deleveraging, so to speak, of the client relative to their total portfolio.

Operator

Your next question comes from Michael Vinciquerra - BMO Capital Markets.

Michael Vinciquerra - BMO Capital Markets

On the net new assets, I just wanted to ask, where are you seeing the majority of flows from? Obviously your biggest opportunity is with your current client base, but I'm just curious, with all the new accounts you're adding, is that having a meaningful impact on the NNA or is it mostly from your own clients already?

Fredric J. Tomczyk

Well, it's not one thing; it's a whole lot of things. If it was just one thing, we'd tell you that, but that is not what we're seeing. It's a combination of things. We continue to see our retention rates be quite good. We're still early in the share of wallet, but we're seeing some nice lift there. The new accounts are definitely contributing, and year-over-year you're seeing the RIA business come back to where it was pre-conversion and get back to being a decent and a healthy asset gatherer for us which you wouldn't have seen last year to the same degree.

Michael Vinciquerra - BMO Capital Markets

So at this point, the new accounts coming in, we've seen a lift at many of the discount brokers; there's not a lot of people just coming in and testing and kind of testing out the tools before bringing assets in. Are you seeing just kind of the same funding percentages you've seen historically?

Fredric J. Tomczyk

We're seeing decent funding percentages, but obviously the assets per new account are down with the market a bit.

Michael Vinciquerra - BMO Capital Markets

And then, Bill, you mentioned the 1.77% rate on the debt. Do you guys not have any swaps in place at all? I mean, it's all floating rate at this point, so that's going to just, if rates stay low, you're going to benefit?

William J. Gerber

Right. We have not swapped. That's certainly something that we have looked at in the past and obviously are looking at now, but correct, it's a floating rate and we reset it. Right now we're resetting it every month based off of LIBOR.

Michael Vinciquerra - BMO Capital Markets

And then finally just one follow up on the TOS deal. The main benefits come, you said, within 12 months after integration. How long do you think the integration's actually going to take once you close that deal?

Fredric J. Tomczyk

As we said on our call, we said it would take upwards of 18 months to get the full integration, but we are looking at ways right now to get some of the benefits earlier, particularly on the revenue side. But I think it's premature for us to get there. We have ideas, but until we get into integration planning in earnest with the other side, which is not right now, I think it'd be premature for us to try to refine those numbers.

Operator

Your next question comes from Michael Carrier - UBS Investment Research.

Michael Carrier - UBS Investment Research

When I'm looking at the net new assets and the account growth, obviously in this environment, despite, I guess the environment headwinds, you want to continue to spend on the advertising. I guess when you're looking through 2009, the pull back on advertising isn't that great.

But if you look at, whether it's net new assets or account growth, if you went back to let's just call it 1% account growth and net new assets on an annualized basis only coming in at maybe 3% to 5%, is that an environment that you'd probably take another look at the advertising and say the incremental benefit that we're getting from spending just isn't there, so we're going to be pulling back on the amount that we're spending?

Fredric J. Tomczyk

Absolutely. And as I said, if we're getting new accounts at these levels and net new assets at these levels, we'll continue to invest in advertising. But if the business fundamentals pull off because of the market environment and our cost per account starts to rise and it's just not working because of the environment, we would definitely consider pulling back on the advertising.

Michael Carrier - UBS Investment Research

And then just on the outlook statement, when I look at the DARTs it looks like the average level for the year is in line with sort of the January level, like 310,000. And it seems, you know, relatively high just given the environment, but you're also generating a lot of new account growth. So I'm just trying to figure out like what makes you feel that the 310,000 is a good average rate? Is it something to do with the new account growth?

William J. Gerber

We actually have kept the same midpoint for the last nine months as we had in the initial, so I think we're averaging about 290 as our expectation; we will definitely keep watching that. And the outlook does have a range in there for the last nine months of about 270 to 320. That's what's baked into the high and low end of the range. So we do think that if there is a tapering off, we've built some of that into the outlook statement.

Right now, again, we are seeing, as Fred said, 310 so far in January. Each month has been  we watch it very closely, as you can tell.

Michael Carrier - UBS Investment Research

And then finally just on the spread-based revenues, you gave a lot of color on like the margin balances in the outlook. When you're looking at the MMDA product, and I know you guys have gone into it in the past in terms of the laddered approach to investing the assets, but I'm just trying to figure out like what are in your assumptions for the rest of the year given where rates are, meaning where does the MMDA kind of yield, baseline or bottom? And then if we were in their environment for an extended period of time, because the assets continue to re-rate, would there be ongoing pressure and then, same way, meaning if rates started to go up, would you see the benefit?

William J. Gerber

Right. Today what we are looking at in the MMDA program is the risk reward of extending very much, so our tendency is to stay a little bit shorter. We're just not getting paid for much in the way of the extension. The midpoint is just a little over 3% is what we're seeing in the last nine months. And certainly if the rates continue this low we would have to see, again, the asset mix. It just depends. If they stayed this way indefinitely what the rate could ultimately go to. But it's a tough interest rate environment on the investment side.

Operator

Your next question comes from Brian Bedell - Merrill Lynch.

Brian Bedell - Merrill Lynch

Just to follow up quickly on the money market fund balances, are you assuming the $30 billion stays for 2009 and it does not - and your outlook statement does not include any mitigation strategies to shift those over to higher-yielding assets?

William J. Gerber

Correct. We have not put any of the mitigating strategies into the outlook statement yet, correct.

Brian Bedell - Merrill Lynch

Okay. So there could only be really an upside to that if you're successful in shifting some clients over?

William J. Gerber

That's right.

Brian Bedell - Merrill Lynch

On the NIM compression outlook, a couple of things. First of all, do you think you can hold margin rates relatively steady over the next 12 months or so?

William J. Gerber

Well, we're fairly confident they're not going to go much lower; we think zero's as far as they can go. But we think so. Brian, we think that the opportunity as far as price improvement is not really that great, but the rates have come down to a point where we feel that we're very competitive and we don't see really very much pressure in reducing those further.

Brian Bedell - Merrill Lynch

And then on the MMDA, I guess the run up, just what is the average maturity of that portfolio right now?

William J. Gerber

The duration is slightly over two years. I think we're getting about $2 to $3 billion in run off every year.

Brian Bedell - Merrill Lynch

Okay. And they're still being primarily invested in Canadian mortgage-backed securities on the short term?

William J. Gerber

They have been. As you recall, we switched to the notional basis last July 1st, but the vast majority of the funds are currently invested in the Canadian mortgage-backs, yes.

Brian Bedell - Merrill Lynch

And then just the reason for the average commission drop in the outlook statement just from when you did it this last October versus now, is it really just a different assumption on the level of options in the mix or are there more assumptions of free trades baked in the new numbers?

William J. Gerber

It's actually the impact of what happened in the December quarter. When you blend it into the original outlook is what drives it down. So the last nine months we are continuing at the same commission rate that we had in the October outlook to this outlook. The last nine months is identical. It's just the effect that this quarter had $12.76 and when you blend that in for the entire year, that's what gets you to the $12.92 to $13.30.

Brian Bedell - Merrill Lynch

So no structural change in what you're thinking about for free trades going forward?

William J. Gerber

No.

Brian Bedell - Merrill Lynch

And then just on the momentum of the DARTs of the 310, January to date is that improving as we're getting into January or was that stronger in the beginning part of January?

Fredric J. Tomczyk

As with any January, it's a little bumpy as you start the year, so it's very hard to draw many conclusions. Obviously, the first couple of days of the year were slow, but since then we've seen some decent trading levels.

Brian Bedell - Merrill Lynch

And that was new account funding from the very good organic growth that you had in December to be kicking in over the next 30 to 60 days. Is that a fair statement?

Fredric J. Tomczyk

That's a fair statement.

Brian Bedell - Merrill Lynch

And just one last question just on the auction rate securities. Can you just update us on sort of the conversations that you're having with the regulators on that and what level of auction rate securities your clients have been holding?

William J. Gerber

Okay. Currently our clients have about $700 million in auction rate securities. This is an area where we are seeing some liquidity come to the market. There has been redemptions, almost $400 million, since really post-Christmas, and so we're pleased to see about that. We are cooperating with regulators in the discussions, although there's no finalization yet as to ultimately what the result will be.

Brian Bedell - Merrill Lynch

And so kind of worst-case scenario you'd have to sort of buyback the $700 million? You'd hold it on your balance sheet until it matured, I guess, but you'd have that use of cash, I guess, temporarily?

William J. Gerber

That would be the worst case, I agree.

Operator

Your last question comes from Joel Jeffrey - Keefe, Bruyette & Woods.

Joel Jeffrey - Keefe, Bruyette & Woods

Can you just give the percentage of the DARTs that came from options trades in the quarter?

William J. Gerber

It was 9.5%.

Joel Jeffrey - Keefe, Bruyette & Woods

And then just lastly, in terms of the MMDA program, what was the rate that the Canadian MBS portfolio was paying?

William J. Gerber

I'm going to have to give you an estimate here, but I believe it's about 4.5%-ish. We can clarify that with you after the call, but that's about 4.5%.

Joel Jeffrey - Keefe, Bruyette & Woods

And has that come down or has that been relatively constant?

William J. Gerber

Well, that piece of it has stayed flat because we bought it and we're just clipping coupons there.

Operator

And this concludes the question-and-answer session today. At this time I'll turn the conference back over to Fred Tomczyk.

Fredric J. Tomczyk

Okay. Thank you, everyone, for joining us on the call today. We're obviously very happy with our start to the year. We were right on consensus. We're quite happy with our organic growth in the market, but, as we've said, we've got some headwinds here that we're facing. We're certainly not immune to them, like all of our peers and competitors, but management is putting in place a number of mitigating strategies. We'll continue to stay focused on growing our business and getting to the other side of the cycle.

Thank you.

Operator

This concludes today's conference. I'd like to thank you for your participation. You may now disconnect your line.

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Source: TD AMERITRADE Holding Corporation F1Q09 (Qtr End 12/31/08) Earnings Call Transcript
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