TD Ameritrade Holding Corporation Presents at 2013 Credit Suisse Financial Services Forum, Feb-14-2013 11:45 AM

Feb.14.13 | About: TD Ameritrade (AMTD)

TD Ameritrade Holding Corporation (NASDAQ:AMTD)

February 14, 2013 11:45 am ET


William J. Gerber - Chief Financial Officer, Principal Accounting Officer and Executive Vice President


Howard Chen - Crédit Suisse AG, Research Division

Howard Chen - Crédit Suisse AG, Research Division

Thanks, everyone. We're really excited to close out the conference this morning on our third day for the Credit Suisse Financial Service Forum. I'm pleased to welcome back TD Ameritrade. With the transformational merger of Ameritrade and TD Waterhouse USA now over 7 years ago, I can't believe that. TD Ameritrade embarked on an ambitious plan to expand on its asset gathering capabilities while cementing its position as a leading player in U.S. discount brokerage. The company has been incredibly successful in both, generating $46 billion of net new assets over the past 12 months. That's a 12% organic growth rate in a really challenging environment and well exceeding peers. At the same time, remaining the dominant player in retail trading.

I think one of the hallmarks of the company has always been exceptional and exquisite strong capital management from its position as the acquirer of choice within the industry to repurchasing stock and paying a couple of dividends along the way, negotiating a really unique agreement and partnership alongside their partners, TD Bank.

Spearheading many of those efforts over the years has been TD Ameritrade Chief Financial Officer, Bill Gerber. And before we bring him to the stage, let's do our final round of audience questions, so please pick up your clickers one last time.

First question. Absent higher interest rates, what would make you incrementally more constructive on Ameritrade shares? You have a couple of options.


Howard Chen - Crédit Suisse AG, Research Division

Okay. So a mix of opinion, but more than happy you believe it's an improved retail engagement outlook, while 1/4 of you think that it's increased and continued capital return.

Question number two. What inning of secular growth do you believe we're in for U.S. retail brokerage industry?


Howard Chen - Crédit Suisse AG, Research Division

About 2/3 of the audience thinks we're in the seventh inning and -- but the other 1/3 believes we're in the fourth inning.

Third and final question. I thought this was appropriate since the CFO was here. What would you like to see the company provide more disclosure on? And you have a variety of options.


Howard Chen - Crédit Suisse AG, Research Division

Okay. So a good healthy mix of opinions. So again, I hope that was fun this year, and thanks for participating.

So without further ado, to close this out, TD Ameritrade CFO, Bill Gerber.

William J. Gerber

Thank you, Howard, and thank you to those of you who stayed. I know it's tough to stay in Miami this time of year, but we're happy to be back. As Howard and I we're talking beforehand, I would have been here earlier this week, but it happen -- this conference this year happened to overlap exactly with our Annual Shareholder Meeting, which was Wednesday, and all our committee meetings and board meeting on Tuesday. So I flew out here last night to be here with you. But again, thanks to Howard and Crédit Suisse for having us back.

I do want to introduce, in the front of the room, for those of you who don't know him, Bill Murray. Bill runs our Investor Relations program for us. And certainly if you have any questions, certainly, you can look up either Bill or me.

And it is more fun when it's interactive. I'll try not to bore you. But it is fun when it's more interactive, so I'll try to save lots of time for questions. And last, I should have said it first, Happy Valentine's Day to everybody. In case you forgot, make sure you go get something for your significant others.

But anyway, so those of you who have been with us for some time have seen this before. I'll just briefly touch on our mission statement. The key word here for us is better because it implies that we're never satisfied. We're always going to be looking to doing something different and better for our clients.

Today's investor, of course, is staying relevant to where the client needs are, and these are always evolving and something that we will continue to focus on. And so there are, what we say, 6 things to remember about TD Ameritrade, and we'll touch on each one of these during the brief presentation here.

But it is a unique and differentiated business model. We are low risk, high operating leverage business. We have a very unique insured deposit account agreement with TD that we'll talk about, that currently has $70 billion of assets at TD. We're very client-centric and objective, and we do not have our own product suite that we are selling to clients. So those are very important attributes that we believe make us unique and a little bit differentiated.

We are a market leader in trading and have been for years. We are the leader in options trading, which represent about 30%, 31% of our overall trading, and derivatives in total represented 40% last quarter. We'll touch on that as well.

We are a premier asset gatherer, with double-digit net new asset growth for each of the last 4 years. And we started out -- we're a fiscal September 30. We started out this year with 13% net new asset growth, annualized net new asset growth, in the December quarter. We brought in $16 billion of net new assets in the quarter, which was clearly a record in our history.

We do have the relationship with TD. We'll talk about the insured deposit account agreement, whereby we shift -- or ship clients cash assets off of our balance sheet to TD, and we just revised that agreement. We'll touch on that as well. And we have the ability to touch into the TD branch network, which up and down the Eastern seaboard, TD has about 1,300 branches. We have a referral system with those branches whereby the clients will be referenced to TD Ameritrade. We have received at least one from each of the branches throughout the network, and we'll talk about a little bit more of that as well. But very, very positive for us.

We're well positioned for rising interest rates. They only seem to go in one direction these days, but someday they will go up. We have $90 billion of interest-sensitive assets now. And as I've teasingly said in the past, you multiply virtually any number by $90 billion and it becomes a big number in a hurry, except 0. So we're hopefully going to be -- will be getting into a better overall economic environment. We'll touch on that.

And we have been very good stewards of shareholder capital, and we'll show you some of that as well.

So really, the -- we're trying to match the clients' needs with the delivery channels. We're not going to try to force the clients to interact with us on any particular channel. So they can come in as they like. And on the left side, you can see the web, which has been, of course, the hallmark of the company. Mobile, which has been growing and now represents 8% of our trading activity. So our mobile has grown quite well. And then all the way down through the rest of the way that you can interact with TD Ameritrade, including our registered investment advisors. They are independent, and we are their back office. But that is a very big channel for our business.

We are open architecture, so we're objective and independent. We don't manufacture any product and no one gets an incentive to buy or sell anything. So you're not trying to have people push someone into an interaction where the client may feel as though they're not getting objective advice or objective guidance. And so the clients really love that objectivity and it has been one of the major attributes of TD Ameritrade.

And lastly, on this slide, we are aligned with very strong secular trends. And I would say, looking at one of the questions that Howard had up there about where we're at in retail engagement, what inning are we in, my bias is every kindergarten child that graduates is more computer-literate than the computer -- than the child a year ahead of them. And so I would say, we're closer to the fourth inning than we are to the seventh inning or certainly the ninth inning. This is a trend that is just going to continue. All the young people that are graduating college today, they interact on the web. They do everything virtually on the web. And so this is going to be a trend that is just going to continue, in my view, to be very pronounced for the rest of -- for at least the next decade. So -- and of course, the Internet, self-directed investors and people who are saving, so these are all important secular themes that we are right in the middle of.

Now here, we have what has been going on. Of course, as I've always told people, do you remember when Fed Funds went to 0? It was December 17, 2008, but it's not like I'm paying attention to that. So it's -- we're at unbelievable number of years, over 4 years of having a 0 interest rate environment. But you can see -- so that has put pressure, of course, on our returns, but the -- but it's still very, very strong. And the companies who are here at the conference, as we are kind of looking at the 35% operating margin last year versus the 46% operating margin in 2009 and being a little bit hard on ourselves, a 35% operating margin in any industry is excellent. And so, yes, there is room for us to grow. We will expand that going forward, but that's really a big positive driver.

I think some of -- under the first bullet point on the right side of the slide, really looking at a low capital-intense business in that. And really, we'll talk about the relationship with TD Bank and how that really elevates that for us. A high return on equity and very strong cash generation, which will then allow us to do a lot with the free cash flow.

Secondly, as I said, we are a market leader in trading. We are a leader in revenue trades per day and have been for a long time. We are over 30%, as I said earlier, of options trades. We're the largest options trader -- retail options trader in the United States. It's a -- this is a very strong business for us. And so as you're looking at the challenging economic environment, et cetera, we're -- our trades have still been very, very strong.

So the important point of that 387,000 trades in January is that in the first half of January, we had our earnings call at about January 22. And then the first half of January, our trades for the month of January were 370,000 a day. And then the last half of the January, the trades were over 400,000 a day, which drove the trading -- the revenue or the activity for the month up to 387,000. So very powerful. We're seeing renewed client engagement. We're still not ready to wave the victory flag yet, but this is a very, very good sign for us.

But you can see in our growth strategies, as far as what derivatives have done for us, the mobile trades I said are now at 8%. We're looking to continue to drive penetration in those areas and believe that we still have a significant opportunity in all of these.

And the Investor Movement Index, you may have heard that. That's something that we just invented and brought out to the market last month. And basically, what it does is it takes what clients are actually doing in their account and measures their buying activity, their selling activity, if they're using margin, how they're -- and there's a complicated formula that goes through to determine are the clients more bullish or are they more bearish? And so it's not an exact indicator, but it is another piece of information that lets you know what the retail investor is thinking.

And the premier asset gatherer, as you can see, over the past few years where we were with the $41 billion last year and the $15.6 billion this year in the first quarter. To put that in perspective, when we went and decided that -- when we knew we had to become an asset gatherer and started asset gathering in 2007, we did $12 billion for the year, the entire year of fiscal 2007. We just did $16 billion in a quarter in 2013. So we have come a long way, and we see the growth opportunity here as being very strong.

It's in both channels of the business in terms of both the RIA channel, as well as the retail channel. And we are looking forward, again, as you can see in the bottom, the annualized growth rate, we've had 4 consecutive years already of double-digit growth. We're starting at 13% for the first quarter this year. So we are very, very positive that this is going to remain what we would consider to be world-class asset gathering. So another important point.

Our market fee-based revenue. This a fairly new disclosure for us, and this is what we call our third revenue stream. So as you can tell, a very strong trend that we're looking at, 15% to 25% growth in this revenue in 2013. We are looking at the end of this first quarter, our December quarter, it was about 8% of our revenues were in this category. We certainly want to get it into double digits.

And so the key products here, Amerivest and AdvisorDirect, are really more retail product, and the mutual funds are really more of an RIA product. And so we are-- we still believe that these 3 areas are going to be integral in driving our market fee-based revenue forward and get it into a level that is much more meaningful versus the overall revenue of the company.

So our relationship with TD Bank. Of course, TD Bank owns 45% of Ameritrade, in case you aren't aware of that. But we have an agreement with TD regarding our insured deposit account agreement, and we're going to touch on this more. But this is a very important area, if you don't know anything about us, that you should focus on. This does represent over 30% of our revenue on an annualized basis. We just revised the agreement, which I'll touch on in a couple of minutes. But really, you get the economics and the rewards of deposit banking without the capital requirements.

So this provides us the opportunity. We have $70 billion at TD Bank. If we had -- if we didn't have this relationship with TD Bank and we had TD Ameritrade Bank and put $70 billion of deposits in it, we would need significant capital to capitalize that bank. So that is the opportunity that we have that it doesn't tie up shareholder equity in the form of capital.

So we do have other areas, as you can see on this slide, with TD Asset Management and the things we're doing there. And then the cross-selling initiative on the bottom right, which is talking about our opportunity to go to -- through the branch network of TD and get clients who are very good clients of TD Bank who don't have a relationship with TD Ameritrade and introduce them to each other. And we do the same thing with referrals of some of our clients who might need banking services that we don't provide, and we would make the reference back to TD.

So you can see, we've had more than $2 billion of net new assets through this channel with TD, and we're very positive. We're going to expect that to the grow. We recently announced in our December quarter that we were going to hire another 100 salespeople over the year. Part of those salespeople will be put up against the TD Bank initiative. So very, very positive relationship for the company. It's very important for you to understand, if you have not followed us, this relationship because it is integral to our business plan.

We are well positioned for rising interest rates. Someday, please, but -- and you can see the sensitivities down on the bottom right part of the page. We have said what would happen to our earnings per share in a no-growth environment, with a 100 basis point increase across the curve? And in year one, that would be $0.32; year 2, that becomes $0.43; and year 3, it becomes $0.54. So this is obviously a very powerful move.

And just for your reference, again, think of the LIBOR swap curve. That is what we operate on with our relationship with TD, and think in the 0 to 8-year range, so any movements outside of -- or 10 or above are really not relevant to our investment strategy in the IDA. But again, this is a very powerful number, up 50% since 2009. And we continue to do our part to outrun rate compression by getting more assets in the door. So our teams are doing great on that. We continue to focus on it. This is a key area for us to continue to drive for and the management team is all over it.

So the IDA, again, it's hard to outrun the rate compression, as I said. But we have taken the dollars, as you can see, from the December quarter 2009 of $155 million of revenue up to $205 million of revenue, even though we doubled the assets under management there. So if you look in that, the bottom numbers if you can see them right underneath the chart, they're a little small, sorry, but let me give you a couple.

So last year, the 5-year swap rate, December quarter of '11, the 5-year swap rate was at 1.32%. This year, the 5-year swap rate is at 83 basis points. So it's been cut by almost half, and that has a significant effect on our revenue stream. But we've been able to offset most of that through the growth. We will continue to do that as best we can. But what we're doing is we are building the core earnings power of the company, and we can't -- we don't control interest rates. We can only control what hopefully we can bring in the door with our clients and be ready for when times are better.

So briefly on the revised IDA agreement with TD, there were 2 things that were happening: One is that we had -- we were having pressure on any dollars that were sitting in float. And we're actually having a negative yield on any of the dollars that we're sitting in float with the arrangement. And so we wanted to try to change that. And TD wanted to, say, well, when times are good, we want to share in some of the upside because we are providing significant value to Ameritrade, and we want to be a participant in that.

So thus began long negotiations. But ultimately, what happened is that we picked up on the short end about $30 million annually. And so that -- we can go through the detail. There are more details in the back of -- if you have our presentation with you, you can see the examples in the back. But if not, if you don't have it, we'll get it to you. But the -- we'll pick up about $30 million annually if rates stay where they are right now or they can move up slightly.

But with the share with TD will trigger when Fed Funds is at 75 basis points and the 5-year swap is at 150 basis points. Then, on any new extension after those 2 times are hit, any new extension that is greater than 150, we will pay TD 20% of the differential between the investment yield, gross yield and the 150. So time comes and those 2 triggers are hit, we make a $1 billion investment at 160. Obviously, the differential 10 basis points, 20% of that, we would pay TD an additional 2 basis points on that $1 billion investment.

So then, as the portfolio rolls, they would get -- and all those conditions are still met, that's how the calculation would be done on each individual investment. It also has a cap of 10 basis points. So think of it, right at 200 -- if we have a 200 basis point investment, 200 less 150, 50 basis points, 20%, 10, that's it. So if the next one is 210, 220, 230, 240, we're still paying TD an extra 10 basis points.

So we believe that this is good for both companies. It's certainly good for our clients to have this relationship and have the ability to have FDIC insurance. So we do believe that this is going to be a continuing, very powerful component of our revenue stream and certainly makes us quite unique. This provides us with the free cash flow.

Leading into shareholder -- good stewards of shareholder capital. So we've been upgraded by S&P in fiscal '12 to an A. We're hopefully getting -- going to have hopefully similar results from their peer.

In fiscal 13, we did pay down $250 million of debt in the December quarter. It was kind of an odd lot for us as part of our debt that we took out years ago. We increased the dividend by $0.50 (sic) [50%] to $0.09 per quarter, and we paid out a $0.50 special dividend in December, which we funded with our revolver, which we're gradually paying back right now.

So as you can see, our net income versus what we've returned and deployed on the chart is very strong. We have said publicly that we are looking to return 40% to 60% of our net income to our shareholders on an annual basis. We do include debt repayment in that calculation. So certainly with the special dividend, with the recurring dividend and the debt payment pay down of $250 million, we think we'll be in good shape to get that done.

Just a couple more slides, and I'll open it up for questions. So where are we focusing on in 2013? It's still a challenging environment. And, yes, I would love to say that we're completely optimistic about the U.S. economy, but we're cautiously optimistic. There are certainly a lot of favorable numbers that are coming out in employment and housing, and so all these things are boding well. But we can't ignore the fact that there are international concerns that can affect that quite quickly and severely, so we remain cautiously optimistic.

We are looking to maintain our momentum in trading and asset gathering, and we think that we are well on our way to doing that for our fifth consecutive year.

We want to grow that third revenue stream that I talked about, the market fee-based revenue, and get that into double-digit percentage as a part of our business. And we think that, that will be very good for us.

We're going to obviously focus on expenses and then keep our strong return of capital strategy.

So in our fiscal 2013 outlook range, it was $1 to $1.20. As you may have seen, so we made $0.27 in the December quarter. So we're on our way there.

Again, this is a repeat of the earlier slide, but we have that unique and differentiated business model. I think one of the keys in there is our relationship with TD and how that provides us with significant free cash flow that we do not have to tie up in capital within our own bank. I think that is a very significant differentiator for us. We are going to go and keep our leadership in trading and asset gathering, as I just mentioned. Someday, interest rates will rise again, and we're well positioned for that. But we will be a good steward of your capital if you choose to invest in us.

So with that, thank you for your time, and I will open it up for questions.

Question-and-Answer Session

Howard Chen - Crédit Suisse AG, Research Division

Let's take some questions. Maybe I'll kick it off, Bill. You recently reported your January stats, and we spoke a bit about it here today. But aside from just the improvement in DARTs and the increased asset levels, what are some of the other measures that you look at telling you, whether that would be something like call centers, conversations or buy-sell breadth? Is there anything that you see in the other stats that you look at that could give us confidence that this is the beginning of a sustained improvement?

William J. Gerber

Yes, it's not a head fake. I think what we have noticed and even during the slower times, we do see like how many times the clients actually open and look at their account. And they're still doing that quite regularly. And so the same level of -- so people are engaged. They're not just setting their account aside and not looking at it, not thinking about it. So they're still very engaged. Our call centers are still very active, particularly now at this time of the year with tax reporting, of course. That will get them more activity here in the near term. But I think the new clients that we're getting, net new accounts that we're getting every quarter, thanks certainly to the efforts of our marketing group, is really beneficial. And we're still seeing a lot of retail engagement and RIA engagement. Our breakaway brokers are very significant who -- we brought in 110 breakaway brokers in the December quarter, over 400 last year, and we are still doing quite well in that part of our business, too. So in both channels, we're seeing a lot of anecdotal activity that would lead one to believe that there is a lot more punch in the recovery.

Yes, sir? Steve?

Unknown Analyst

Yes, Schwab announced that they're going to get trailer fees on their new ETF One, first thing. And I just -- can you refresh my memory on like what sort of fees you derive from the ETFs that you put either into Amerivest or any other sort of fees you're getting? And is there any way to extract more value from the ETF manufacturer for you?

William J. Gerber

Yes, we don't -- there is no fee per se, and we're actively watching what Schwab is doing relative to their program that they just announced. It's -- if it's successful, then certainly we would be able to follow along in that. I think it will be a challenge for them, but it will be of interest, and we will watch it. So ETF still represents about 10% of our total client assets. They are certainly part of our packaged product in Amerivest, but there's no pay-to-play type scenario for us.

Howard Chen - Crédit Suisse AG, Research Division

The sensitivity analysis, what do you factor in as a potential reduction in IDA balances as people remix towards either equities or other assets out of cash? Is there some sort of assumed sort of attrition or not?

William J. Gerber

No. What we do, we try to keep that static. We'd have too many moving variables. We'd keep it static and say -- and the real -- I think the real key -- because, as we all know, we're coming out of historically unprecedented low rates and one of the things that we need to look at is how we tier our rating -- our rates for our clients to give them a competitive rate. And it's something that we obviously look at every day, even without real movements in the market. But to your point, that will be something that we're -- we've already talked about it a lot internally with the management team. It's something that we're going to obviously focus on when rates do start moving.

Howard Chen - Crédit Suisse AG, Research Division

So you made this simple statement of young people and increasing adoption of the web. I mean, when I think about the younger generation of investors or financial services consumers, it's led with a checking account or a savings account. How critical is it for you to be able to kind of win that initial account and how do you do that?

William J. Gerber

Some of the things that we're trying to do is we have a program right now to -- at 60 colleges throughout the country, that we have our thinkorswim platform at. As a matter of fact, one of my peers, Steve Quirk is up at, I think, in Madison, Wisconsin, today at the business school up there. So that's one way. What we really are seeing in all the statistics, in all the surveys that have been done is that as the generational wealth transfer goes between the older generation down to mine and ultimately to my children, that the level of activity that will be on the web increases dramatically. So my parent's generation, very low penetration on the web. My generation, much higher. My kids' level is off the charts. I'm not even sure they know what a human broker is but -- or what a human is a lot of times. They're just online all the time. But it's a -- we really think secularly that it's important to engage, but I think our brand and how we've been able to get into the market, keep our advertising strong, I think we are certainly a known commodity to the younger generation. So I'm not certain that their -- a checking or savings account is going to be really a make or break.

Howard Chen - Crédit Suisse AG, Research Division

And mobile representing 8% of your trades today, how do you -- is that additive or substitute of today?

William J. Gerber

We think it's additive, almost to the tune of a trade a month and based upon the information that we have seen. But certainly, there's going to be some trades you are going to get either way. But the fact that you have it at your fingertips and if you're on your account, sitting in a nice room like this, you can still trade it. And we're finding that it is, we believe, additive at least one trade per month.

Howard Chen - Crédit Suisse AG, Research Division

Final question, Bill. I can't leave you -- get you off the stage without asking you this: The company, under your stewardship, has been the acquirer of choice within the industry. You've returned a significant amount of capital to your shareholders organically over the last couple of years. We talked a lot about organic growth today. But what's the M&A landscape look like today and what's your appetite to do something?

William J. Gerber

Well, our appetite is unchanged. We certainly would love to have an opportunity to make an acquisition that makes sense. We do think that there are going to -- opportunities will present themselves, and we will continue to be very active in that. We agree that an acquisition would be one of the highest, if not the highest, uses of our shareholder equity. And because we have proven over the course of the years how powerful a combination of peers in the industry can be, we would definitely be an active participant in any transaction that may come down the road.

Howard Chen - Crédit Suisse AG, Research Division

And what's the landscape look like today, Bill?

William J. Gerber

The landscape is certainly smaller. And as one of my peers told me, "Well, that's because you guys bought them all." But it is a lot smaller. There's only a handful of players of size that really matter. And so the 2 different types of acquisitions that you'd make, one is for pure scale and one is for product diversity. I would say of those 2 in our world, the acquisition of thinkorswim was for the product. We really -- they had a better platform and, certainly, the talents to run that platform that we did not have. And so that would be more of a product acquisition. Most of the other acquisitions were scale acquisitions, so we would have to look at each. Depending upon the company that we may want to merge with, we would have to look at each one of those and assess where that would fit on the continuum.

Howard Chen - Crédit Suisse AG, Research Division

Great. With that, let's end it there. And please join me again in thanking Bill and the TD Ameritrade team for closing out the conference this year.

William J. Gerber

Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!