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optionsXpress Holdings Q1 2009 Earnings Call Transcript

April 28, 2009 | about: OXPS

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optionsXpress Holdings, Inc. (OXPS)

Q1 2009 Earnings Call

April 28, 2009 11:00 AM ET

Executives

Adam J. DeWitt - Chief Financial Officer

David A. Fisher - Chief Executive Officer

Analysts

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

Michael Vinciquerra - BMO Capital Markets

Mark Lane - William Blair & Company

Daniel Harris - Goldman Sachs

Edward Ditmire - Fox-Pitt Kelton

Michael Hecht - JMP Securities

Presentation

Operator

Good day and welcome to the optionsXpress Holdings First Quarter 2009 Financial Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Adam DeWitt, Chief Financial Officer. Please go ahead, sir.

Adam J. DeWitt

Thanks, Sam. Good morning everyone and thanks for joining us for our first quarter 2009 earnings call. I am Adam DeWitt, the CFO of optionsXpress, and with me today is our CEO, David Fisher.

By now, you should received a copy of our press release and presentation that was e-mailed to you this morning. If you haven't, please call Victoria Paris at 312-553-6715, and we'll make sure you get one. Alternatively, you can view a copy of our release, listen to the call and submit any questions to us via our website at optionsexpress.com.

Before we begin, I would like to note that this call contains forward-looking statements that are made pursuant to the Safe Harbor provisions of the Federal Securities Laws. These statements involve risks, uncertainties, and assumptions that may cause actual results to differ materially from those anticipated.

Listeners to the call are advised to review the risk factors contained in our prospectus, most recent annual report on Form 10-K, and quarterly report on Form 10-Q for descriptions of risks, uncertainties, and assumptions related to forward-looking statements. Please note that this call is intended for investors and analysts, and may not be reproduced in the media in whole or in part without our prior consent.

At this time, I'll turn the call over to our CEO, David Fisher, who will recap the highlights from the first quarter. And we will walk through the presentation regarding the acquisition of Optionetics, which we announced this morning. You may view the presentation by following the link on our website under Investor Relations.

Following these David's remarks and the presentation, I will walk through the first quarter financials and David will wrap up with our outlook before we finish with questions. David?

David A. Fisher

Great, thanks Adam and thanks everyone for joining our call today. We reported solid results for the first quarter 2009 despite the continued recessionary environment. In the face of the resulted headwinds had affected many aspects of our business.

We're able to generate revenue of 49.3 million and net income of 13.6 million or $0.23 per share. While the economy in the retail trading environment remained under pressure, we saw some improvements throughout our business in March, which have continued into April.

Retail investors may remain resilient and throughout these difficult times of stating gains in their investing and committed to their long-term investing strategies. They have not retreated to the side lines to wait for market volatility to subside and broader economic climate to improve.

Our customers continue to choose options and future as part of their investing strategies, comforted by the stability of our platform, our high quality investor education and the powerful tools we put at their disposal.

As a result, our customer asset balances once again outperformed the overall market increasing 4% during the quarter while the Russell 2000, S&P 500 and DOW were all down 12 to 15%. And while activity rates are near the low end of our historic range, we believe the slower trading levels are evidence that our customers are taking a thoughtful approach of their investing. This should serve them well; and as a result, optionsXpress will benefit when market conditions stabilize and trading levels return to more historic levels.

We had 9,700 new accounts during the quarter, resulting in a total of over 328,000 customer accounts and 18% increase when compared to the end of the first quarter of 2008. After a slow February, we saw a meaningful pick up in new account generation in March, which is continued into April. We are launching two new marketing initiatives in the second quarter, including the use of TV for the first time since the second quarter of last year.

While our advertising costs for net new account in the first quarter was at the high end of what we'd like to be spending right now. We saw some positive signs in our marketing initiatives at the end of the quarter that we think are sustainable. We thought it was important to maintain a meaningful level of advertising spend during the quarter despite the sluggishness as investors outlooks were changing as quickly as the markets. And as the markets improved so did new account growth. And we are in the market to capture those accounts.

Looking forward, our recent efforts combined with our new TV campaign and our new exciting acquisition of Optionetics, which I will discuss shortly, we just believe that we will continue to organically add meaningful number of new accounts at a cost for account that generates an attractive ROI.

On the product front, we had another tremendous quarter of innovation at optionsXpress including two major site releases. We believe our advanced, innovative, and secure trading platform helped our customers to be more effective investors during these unprecedented market conditions.

In their annual online and broker review Barron's gave us the highest rating for site usability, which is in a huge focus of ours over the last year highlighted by our new hubs centering on the core feature steps that customers use regularly. In addition, we were the only broker to be named best for long-term investing and best for option traders. This is perfectly aligned with our mission of attracting the masses, educating them about benefits of adding options and other derivatives to their long-term portfolios and giving them the best platform up on which to execute those strategies.

As an example of our continued customer focus innovation, we are also just in the process of rolling out a new feature called Express Savings (ph), which shows customers the amount of money they save from our industry leading price improvements on their trades.

And we are launching a new mobile application in two weeks that will be available to all of our customers on both Blackberry devices, Windows Mobile, and the iPhone.

Finally, we saw no site stability issues during all the market volatility, which gives our customers a great sense of security. The other thing that helped our customers was their increased commitment to investor education. Our new education centers is one of our many efforts to expand our educational content. This content is now organized into specific curricular along customers to quickly access the appropriate level of the material.

This online material is an addition to over 400 live webinars we will run during the year. The 65 recorder webinars that are available to our customers everyday on our site. And over 50 live events, we have planned throughout the year.

On the topic of education, I would like to spend a few minutes discussing the acquisition of Optionetics, which we announced this morning. We are very excited about this addition. Over the last couple of years, you've heard us discuss on increasing focus on the importance of education in both attracting and retaining customers, particularly given our focus on derivative products, which are familiar to all investors.

As I've just mentioned, we've made huge strides, but we believe there is even more opportunity especially with respect to attracting new customers since until recently almost all of our educational efforts being geared towards existing customers.

Optionetics build this opportunity for us perfectly. We prepared a series of slides to walk you through the Optionetics business, why we think it's a good fit in the transaction details. We distributed this morning the email with the press release. It could also be viewed as part of the webcast available at the Investor Relations section of our website, www.optionsxpress.com. A copy of the presentation will be available on the website following the call this morning.

So turning to the presentation, if you put to slide 3, over the last 15 years, Founder, George Fontanills; and Chief Executive Officer, Richard Cawood have built Optionetics into one of the world leading investor education firms.

Optionetics was founded in 1995, and has provided investment education services, portfolio management techniques, market analysis, and online trading tools for investors in more than 50 countries. The quality of their teams, their innovative products and offerings and their dedications to the retail investor had made Optionetics a leader in investor education space and one of the most well respected educational resources both domestically and abroad.

Their offerings include a wide range of investment tools, classes and strategies, top investors learn about the markets, different strategies, risk management and other important investing fundamentals. They have significant worldwide presence, having educated more than 300,000 attendees around the globe with 50% of its subscribers outside of the U.S.

Additionally, they have a master database for more than 2 million past and presence prospect that will be, that we believe could be huge opportunity for us to acquire new accounts. While we talk for (ph) purchasing Optionetics, they actually operate under four primary brands: Optionetics, Safety in the Markets, Profit Strategies, and FXTE. They employ approximately 150 people including 70 in the San Francisco Bay area and a separate Optionetics Australia employing about 80 people.

On slide 4, I want to spend a minute explaining why we believe this deals makes a lot of sense for us. Education is one of the three pillars of our customer centric approach to brokerage and a key component of our marketing efforts. Optionetics will greatly expand our educational offering enhances our account gross strategy.

Relatively, the timing is very good. Quality investor education is highly valued by a wide range of investors including existing customer, who have seen wild swings in their portfolios during the recent market sell off, and customers leaving full service brokerage firms after the poor performances last year. And obviously, we continue to believe in the growth of the options and futures industries, building on a great growth over the last five years.

So, with their focus on derivative products, Optionetics is a natural fit for us with the wealth of education content they developed over the years, complimenting what we already do. The end result will be a truly integrated education experience that benefits our customers through every stage of their investing life cycle. We also feel very comfortable with this transaction, since Optionetics has been a great partner of ours since almost our very beginning.

Throughout the lengthy due diligence process will become even more impressed and feel confidence that the quality of the people and the reputation of the firm are great fit for optionsXpress.

Finally, we believe our new partnership will provide both significant opportunity for new account generation as well as essential ongoing education to optionsXpress customers. We will now be at the forefront of creating new options investors and converting them to optionsXpress customers, way to continue to feel our growth.

Turning to slide 5, in terms of the transaction we are acquiring 100% of Optionetics and their various subsidiaries. The purchase price $20 million in cash at closing cost of five year earn out. At the midpoint of the earn out, the total deal consideration will be 37.5 million, which equates to just over 0.6 times of the 2008 revenue. Their key management have all signed long-term employment agreements and none compete and we expect to deal to close in the next two to four weeks.

Turn to slide 6, one of the things that we found so attractive about Optionetics was their breadth of offerings. As I mentioned earlier, we referred to the company generally as Optionetics, but you can see that four primary brands that they run under on slide 6 covering almost every aspect of financial education.

And on slide 7, you can get a sense of how deep elaborate education materials they have developed. In addition, they are an active software developer creating cutting edge products of investors as you can see on slide 8.

On slide 9, you can get a sense of how the business model operates and how we intend to integrate brokerage into that mile to drive high quality low cost accounts. Optionetics is a true direct marketing expert reaching out to investors through many channels including TV, radio, online, et cetera.

They direct the potential customers either the website or through a preview of that. This is at first point, where we can tie and brokerage with an offer to open an account at optionsXpress. As these preview events, as soon as we receive pre-introductory course, which will be further integrated with the OX brokerage experience by integrating our site into the curriculum, for example. We will also have the opportunity to offer the student's discounted products if they sign up for an OX account.

The core of Optionetics education efforts are the workshops and home study courses. And optionsXpress would be completely integrate into these, and we expect a very high conversion rate. And of course, a big piece of Optionetics business is continue education for their students. This has imperfectly transiting education efforts and I believe that better educated investors make better customers with high retention rates.

Slide 10 puts us on to numbers. You can see that Optionetics had about 40,000 attendees in 2008. We estimate that we will achieve a blended 25% conversion rate. We think this conversion rate is conservative based on results we seeing from Investools in thinkorswim.

Flipping to slide 11, the result of additional high quality accounts by also reducing our blended cost per net new accounts.

At this point, I am going to hand the call back over to Adam. He is going to wrap up the Optionetics presentation and then walk you through the highlights of the first quarter, and then I will finish up at the end with the outlook.

Adam J. DeWitt

Thanks David.

On the next slide, we wanted to give you a sense of just how compelling the economics of this transaction can be based on the value that is created by driving new accounts to the brokerage business.

From a revenue standpoint, our average account generated $849 in revenue in 2008. Historically, our Optionetics customers have performed similarly to our average accounts, in terms of annual revenue. Assuming new Optionetics preferred accounts continue to form (ph) just as well. If we use the projections in the prior phase opening 10,000 additional accounts to translate into an additional $8.5 million in revenue each year based on 2008 figures, and as just for that year's accounts.

We believe that Optionetics will be a perpetual source to new accounts. So the incremental revenue is much higher in years two, three and four as the base of new accounts grows. And we expect this revenue to be highly profitable, because our profitability on incremental accounts is higher than our average accounts through the scalability of our brokerage business.

Another way to look at the value created by new accounts is through market cap as brokerage companies are often valued by their accounts. And recent market cash revaluation was approximately $2,500 per account. Based on that metric, those same 10,000 accounts that we talked about in the first example will create $25 million in market value. And again, this will be an incremental $25 million each year as we continue to add new accounts from the relationship.

On the next slide, although we don't give earnings guidance, we wanted to give you an idea of how the acquisition is going to impact our financials. To illustrate, we've used our 2008 financials and combined with Optionetics current run rate to show the impact.

A couple of notes; this obviously does not include any benefit from the new accounts that we will open as result to the relationship. Also this is an annualized view of Optionetics current run rate. It's not necessarily meant to show you what our forecast is for Optionetics for 2009.

On this basis, Optionetics would add approximately 45 to $55 million in revenues annually. Since Optionetics collects cash from customers before providing the seminars and also sells subscription that have a... up to 12 month length of time, a portion of their revenue is deferred.

The percent deferred to total revenue is low, because most seminars are fulfilled in a short period of time. The current balance is approximately $9 million and will fluctuate depending on volumes of new sales and recognize sales in a given period. Based on recent history, this balance can fluctuate approximately $2 million plus or minus in a year with the change being recognized into revenue.

On the expense side, the major categories of expenses are compensation, marketing and fulfillment of seminars and other. While marketing and fulfillment of seminars is somewhat on variable based on level of sales, compensation, other expenses are fairly static.

Based on current run rates, we expect Optionetics to generate anywhere from a $2 million pre-tax loss to $2 million in pre-tax income. The important point at these levels the value and impact of the accounts optionsXpress will gain as a result of referrals, but substantially outweigh any income or losses from the Optionetics business.

On the next slide, in terms of integration, our intention is to hit the ground running. We've already identified key players in each side with the senior manager, who led our successful XpressTrade integration leading the efforts from the optionsXpress side.

Clearly our number one priority is to drive conversion of Optionetics customers into brokerage customers. The integration team is focused on this first and foremost. To that end, we have already prepared offers for all Optionetics and optionsXpress customers going out today to introduce the two-to-one and another.

I want to stress that we are committed to all of our channel partners and believe we will be able to continue successful relationships with many of our existing channel partners. Finally, we plan on fully integrating Optionetics software platform to the optionsXpress brokerage platform within four months, making it easy for optionsXpress students to place trades from within their analogical (ph) software, much of this work is already completed.

And now, before I turn the call back over to David for his outlook, I want to spend a few minutes on the results of the first quarter. As David, indicated the first quarter was challenging due to lower interest rate and somewhat muted trading activity in the wake of the market turbulence in the fourth quarter. Despite these challenges, we earned net income of 13.6 million in the quarter or $0.23 per share.

Total net revenues for the quarter were 49.3 million, a 19% decrease versus the first quarter of 2008, and a 14% decrease versus last quarter. Commission revenues of 38.1 million for the first quarter, were down 2% compare to last year, and were down 11% from our results in the last quarter. The small decrease from the prior year was due to large retail trading activity, mostly offset by the addition of institutional trades were Open E Cry. The decrease from the fourth quarter was due to software trading activity particularly in the first two months of the quarter.

Average commission for the quarter was $13.33 compared to $13.14 last quarter. The increase was driven by higher retail average commissions partially offset by lower institutional average commissions. Retail average commission was higher due to higher option contracts per trade and was consequently at the very high end of its typical range.

Institutional average commissions were lower due to more direct business. But these lower commissions come with the corresponding lower payout, which shows up in brokers and clearing costs being lower on a percentage basis.

First quarter of 2009 net interest income was 4.3 million, a 60% decrease compared to last year's net interest income of 13.6 million and a 44% decrease compared to last quarter. Both decreases were primarily related to the series FX funds cuts to a current target level of between zero and 25 basis points. You may recall last quarter's conference call that we are at a run rate of approximately 3 to $3.5 million per quarter an interest income.

Most of our out performance versus this target was related to our ability to secure slightly higher rates on a number of our customer cash related deposits as well as slightly higher cash balances. While interest income will continue to move around due to balance sheet and movements in the Fed funds rate.

Our first quarter interest income is probably a better indicator of our run rate in this interest rate environment. Payments for order flow is $6.3 million for the quarter, which is 16% down from last year and 2% down from fourth quarter. The decreases in both periods were primarily due to a decrease in a number options trades. The impact of the decline in a number of options trades was offset by higher option contracts per trade and a slightly higher payment rate.

On the expense side, total expenses were $28.1 million, up 21% from last year and down slightly from last quarter. Brokerage and clearing costs were 43% higher than the first quarter of 2008, but 10% lower then the fourth quarter of 2008. The primary driver in the year-over-year period was the addition of Open E Cry.

The primary divers in the decline from the fourth quarter were lower payouts to Open E Cry brokers due to more direct business, lower payouts to BX brokers due to lower volume and lower other volume related costs in the retail business. Payouts of brokers during the quarter were approximately $1.9 million for Open E Cry and $1.8 million for BX brokers.

Compensation costs were $8.4 million, 26% higher than the first quarter of last year and 22% higher than the fourth quarter. The increase over the last year is due primarily to severance associated with the previously announced departure Ben Morof, the incorporation of Open E Cry employees from the acquisition and merit increases during 2008.

The increase over the prior quarter was also related to an unusually low bonus accrual in the fourth quarter as a result of a true up for full year performance. Advertising costs for the quarter were 5.8 million, a 19% increase over the first quarter of last year and a 1% decrease from the fourth quarter.

This spend was inline with our expectations as we wanted to maintain a presence in the market despite the general weakness in the marketplace for new brokerage accounts. One last note on expenses; without the additional expenses from Open E Cry, the additional $1 million in advertising expense and $500,000 in severance. Our expenses would have been largely flat year-over-year.

Pre-tax margin was 43% during the fourth quarter, which is down from 51% from the fourth quarter of 2008. With interest rates at 2007 levels, pre-tax would have been in the mid 50s, despite the relatively weak trading environment. Resulting first quarter 2009 net income was 13.6 million and EPS was $0.23 for the quarter, 15% lower than last year and 9% lower than last quarter.

Margin balances were 113 million at the end of the quarter, a 43% decrease versus last year and 13% decrease versus the fourth quarter. As they are stabilizing for several months around 130 level, we saw an incremental decline in balances in March. We believe this decline was consistent with some incremental de-leveraging seen across retail investors, which we could see in retail, other retail online brokers during the period. During the quarter, we repurchased a million shares for approximately $10.4 million at an average price of $10.90.

We have approximately $10 million still available under the original $100 million authorization approved in early 2008 and an additional $20 million that was authorized during the first quarter. We ended the quarter with over $200 million in cash, almost $3.50 per share and no debt. After the Optionetics acquisition closes, we will have approximately $180 million in company cash.

I'll now turn the call back over to David for some final comments.

David A. Fisher

Thanks Adam. While our business like the economy generally and the rest of the online brokerage industry specifically continues to face headwinds, we are pleased with the resiliency of our retail customers and our ability to continue to add new customers and assets during these difficult times.

Our client assets remain relatively stable while the broader indices have recorded double-digit losses. This performance is a testament to our customer's ability to implement complex strategies to mitigate risks and take advantages of unprecedented volatility.

While the headwinds create some short-term challenges, we see strong growth over the medium to long-term as customers continue to add options and future products to their portfolios. We remain committed to delivering the best overall experience to these customers through our platform in customer service. It is more important than ever that our focus must remain on our customers.

The corner stone of our business has always been to built their customer driven product enhancements, world class customer service, and robust tools and education offerings. We believe this foundation as well as the new resources from our acquisition of Optionetics will further provide our customers the basics to become better investors.

Combining Optionetics education leadership with optionsXpress's world class brokerage platform, will result in a truly integrated education experience that benefits our customer through every stages of their investing life cycle.

Financially, we are strong, with the substantial cash position and no debt on the balance sheet as Adam discussed. As a result, we are in a strong position to take advantage of opportunities created by the financial crisis, and to be in a excellent position to benefit once the market conditions improve.

At this time, I will turn the call back over to the operator and we will take some of your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we will take our first question from Rich Repetto with Sandler O'Neill.

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

Hey, good morning David and Adam.

Adam DeWitt

Hi Rich.

David Fisher

Hi, Rich.

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

I guess the first question is, how many accounts right now are you getting from Optionetics on average? And then how much... do they have any referrals to other brokers to try to gauge what actually they... how many brokerage accounts their students are actually opening in any period?

David Fisher

Rich, Optionetics had very different model than say, Investools, for example. But they don't do for the primary business any direct referral deals with brokers. Historically, they've been more broker at NASDAQ and really are only connection them has been advertising on their side. No different, we advertise on 100s of other websites, financial websites that are out there, just in terms of regular banner ads.

Despite that limit engagement, we still are able to capture a couple of thousand accounts every year. And so we think, we obviously with the much tighter integration going forward like Optionetics has never done in the past. We're going to be able to capture a large number of their kind of 40,000 plus attendees per year.

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

Okay. And then just one more question on Optionetics; I was able to browse through the frequently asked questions on their website, and it talks about... and again this is not a full picture they're offerings, because there is no rates. But it does talk about in the refund policy, where they guarantee if you don't make a 300% return on tuition paid, you can get a refund of your tuition. Is that something you're aware of or is that a common practice there?

Adam DeWitt

Edward, it's a common practice among most of the ideas. It's a 300% is... I think it's a way making customers believe it. It's no different than saying untraditional money-back guarantee, which essentially as the customer wants their money back, they're in general going to be able to get their money back. And that's pretty typical throughout the industry.

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

Okay, understood. And I guess, now switching over to optionsXpress, Adam you said, you are able to secure better rates. Could you... for some I think is for the deposits, could you get me more detail like what... how you are able to do that? Like you invested in different securities or what better, how we're able to get the better rates I guess in the quarter?

Adam DeWitt

It's a combination of things. I mean obviously, we are not taking any more risk. It's just the matter of figuring out where we can put our customer cash in the safest place and maybe squeeze out a few extra basis points. I mean the reality was in December, January, we were making zero or close to zero on everything. And so if we're able to get... let's say move the needle from zero to 15 basis points, zero to 20 basis points, it makes a big difference. And it's just working different financial institutions at different demand appetites for deposits as well as reworking our arrangement on our FDIC sweep program to get a little higher yields at nearly lower rates.

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

Okay, understood. And very last question is the activity rate you see, your darts... equity darts were up a little bit higher than the options darts. Any big difference you see in... because of the trading, the equity guys seems like they're triggering a lot more ETFs and low price stock. Are you seeing anything with your customers sort of movement move towards stock trading than say options were making buy stock at 2, $3 or whatever.

David Fisher

Yeah, Rich, I think you pointed out that a couple of times during the end of the quarter that with a lot of the volume in the FAB (ph) markets was driven by a small number, a very low price stocks, specifically some of the financial stocks like TD, AIG, Banc of America. And that applies to our customer basis well. And with those stocks so low at times to just to being these trade the underlying equity as opposed to Chinese, kind of hard to trade options on a $1 stock. So we certainly saw some of the volumes switch to those low price equity stocks just, because it were the underlying equity was placed.

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

Got it okay. Thanks guys and congrats on the transaction.

David Fisher

Thanks Richard.

Operator

And our next question comes from Mike Vinciquerra with BMO Capital Market.

Michael Vinciquerra - BMO Capital Markets

Hi, good morning.

David Fisher

Hi Mike.

Michael Vinciquerra - BMO Capital Markets

A follow-up on a couple of questions on Optionetics as well. It looks like... you have always kind of run your education business as a, I don't want to call, not for profit, but essentially in breakeven type of business. And this company as a standalone had to be for profit. But going forward, it sounds to me like you are counting on the brokerage size is going to be the driver here. And Optionetics itself you may continue to see a close to breakeven is that the right way to think about it?

David Fisher

Yeah. I think that's exactly the way we are thinking about it. But there is clearly value in education, but with the brokerage is providing so much of it. It was hard for these education firms to extract as much value if they have historically stopping able to profit on the backend from January and when you count.

So what this transaction does is marry their wealth of content that they developed over the years plus their expertise and going out and finding customers and educating them through these seminars and workshops. But then capturing that backend value and the way they haven't been able to do historically.

Michael Vinciquerra - BMO Capital Markets

Okay. And if I heard your answer to Rich correctly, these guys have really never captured any other back end value other than maybe a quick through payment from someone like yourselves or one of the guys, who advertised on this site?

David Fisher

It's always been just pure advertising revenue on this side, which is a... varies about numbers; that's not even material number to the revenue. They really try to succeed just through the education business.

Michael Vinciquerra - BMO Capital Markets

Got it. And then I haven't been through all of the different seminar pricing, but Investools, being say their biggest competitor, I would presume. It looks like the Optionetics two days seminar is something like $4,500 to attendant in person plus get the CDs and DVDs and so forth whereas Investools is now 299 or something like that.

Are these completely different programs or is there something about Optionetics that you can kind of extract the premium particularly in this type of economic environment?

David Fisher

Similar to Investools, Optionetics has a whole range of different offerings and a whole rang of different pricing. So, they have plenty of products charge kind of 195, 295, but then they do go all the way up to the more expensive products, which in addition two day class gives you materials and CDs, books, ongoing coaching and the number of other benefits. So they really try to do is have a number of products at a number of different price points to capture as many different students as possible.

Michael Vinciquerra - BMO Capital Markets

Okay. Has there been any pricing pressure at all in this space just given again the economy and so forth?

David Fisher

Yeah, I think there has been some, which was why it's been hard for these guys to really extract enough value on a standalone basis to a lot of profits. But Optionetics had a solid first quarter in a difficult market environment charging the prices that you are saying. And going forward, we think we just have even more flexibility and pricing of that business given the value we extract on the back end.

Michael Vinciquerra - BMO Capital Markets

Got it, Okay. And then one thing for Adam just on the compensation side, even if I take out the $0.5 dollars pretty significant increase in terms of your compensation ratio. I know you said there was a little bonus accrual in Q4, but what is it... is there something about Q1 that enables you to increase the bonus accrual even with kind of commissions and general profitability coming down?

Adam DeWitt

It's actually in the opposite. The fourth quarter was unusually low, because we trued up for the full year. So let's say the right run rate in the fourth quarter was probably closer to 7.5 to 8. And then we talked about the severance, to back up the severance and now you are at high severance and then the other pieces in the first quarter. There is extra FICO, so some people having maxed out and then if you max out in the first quarter.

Michael Vinciquerra - BMO Capital Markets

Okay. So this 7.5 to 8 might be at least a reasonable starting point going forward?

Adam DeWitt

Yes, the first quarter is better if you back out the severance.

Michael Vinciquerra - BMO Capital Markets

Got it. Okay, thanks very much.

Operator

And our next question comes from Mark Lane with William Blair and company.

Mark Lane - William Blair & Company

Hi, good morning. I just have a couple of follow ups on Optionetics. So what is the total percentage of revenue that comes from business partners or other brokers including your advertising revenue those sort of things?

Adam DeWitt

Of Optionetics revenue?

Mark Lane - William Blair & Company

Yeah.

Adam DeWitt

It's virtually immaterial.

Mark Lane - William Blair & Company

Okay.

Adam DeWitt

We were the biggest piece, but the total pullover is immaterial.

Mark Lane - William Blair & Company

Okay. And so how was their first quarter revenue versus last year? How was it?

Adam DeWitt

Our first quarter revenue is very much inline with the kind of target that we gave in terms of the run-rates. So I'd say they're on a run rate for 45 to $55 million of revenue for the year, and the first quarter was the inline with that.

Mark Lane - William Blair & Company

Okay. So that's down from 60 million-ish run rate last year. I mean it's pretty I think even throughout the year.

Adam DeWitt

Yeah. It's down a little bit and obviously the environment is pretty tough, average is down a little bit.

Mark Lane - William Blair & Company

So, your intention is not to change the business model at all just to run an exactly how it's been a runner, what are something that you think that you can do to make the business more profitable or run it more effectively?

Adam DeWitt

Well, I think there is a couple of things. If profitability is defined in a whole new way, now you have this back end profitability from generating accounts, not just the profitability from the education. And so the big focus in terms of running the biggest business differently, really integrating the optionsXpress brokerage experience into their education, so we get a very high conversion rate from their customer average. In terms of other changes going forward, they have a great platform with the tremendous amount content that allows us to experiment doing a lot of different things, that we haven't done historically, we don't know what all those will be today. But between the wealth of product, they are great team, they're great technology; we're having a lot of fun over the next couple of years experimenting with different ideas.

Mark Lane - William Blair & Company

And maybe, I missed it on the prepared remarks, but brokersXpress assets at the end of the first quarter were...

David Fisher

We didn't disclose it, but it's been fluctuating pretty much inline with our optionsXpress retail balances, so around that billion dollar, Mark.

Mark Lane - William Blair & Company

Okay, thank you.

Operator

And our next question comes from Daniel Harris with Goldman Sachs.

Daniel Harris - Goldman Sachs

Hi, good morning guys.

David Fisher

Good morning.

Daniel Harris - Goldman Sachs

On the Optionetics, can you explain to me the reason why they have four different brands and what they do differently in each one?

David Fisher

Sure. Part of it is they have acquired some of these brands overtime. So they are not all... they are out grown. But I think the reason they have left them is because they really attract different niches of the market whether internationally versus domestic versus products focused. Safety in the Markets being a kind of more futurist related products; Optionetics will be an option related markets; Profit Strategies, a more stock based product; and FXTE being a ForEx-based product. And they have corresponding software to go along with the different products whether it's more fundamental analysis versus more technical analysis or charting.

So it really allows them to segment different customer basis and attract each one of them more specifically. But going forward obviously, we are going to figure out that now connect its brokerage whether it continues to make sense having the different brands and the different products or may have said that's more of a combined offering, no different than the optionsXpress platform is combined offering of all the different products. But again that the wealth of content gives us a lot of opportunities to experiment and for make sense to bring it to... bring them together certainly the deal.

Daniel Harris - Goldman Sachs

And is it the Optionetics brand that the largest driver of revenues and margin?

David Fisher

No, it's actually... each of the... Optionetics brand, the Safety in the Markets brand, the Profit Strategies brand are all pretty big brand. The Optionetics brand is by far the biggest brand the U.S. And that's why it's more well known and what would talk about. But Safety in the Markets is a very big brand in Australia and Asia, and some of the biggest software products are developed over in Australia. But Optionetics is clearly the biggest brand domestically and brand we work with the longest as an options-focused brand.

Daniel Harris - Goldman Sachs

So as you look at this acquisition and the whole that it may have filled in for you guys that you've been addressing, and clearly there are dozens of other small companies maybe known as many on the education side both in the U.S. and internationally. What are their areas do you look at to round out your portfolio of capabilities and would you say that that's more U.S. or international focused and more focused on other trading or education going forward?

David Fisher

So, in terms of acquisitions, we certainly break them into two buckets; one is kind of more profit and capability focused, and I would say there, the biggest opportunities for us are in the brokersXpress business and order kind of better software for their platform... different types of products for their advisors. And then second is internationally, where expanding have presence in some foreign markets and especially offering local products in those foreign markets is something we don't do at all today and could be a nice acquisition opportunity for us. The other area we look at acquisitions, especially in this market environment is more consolidation role up type of opportunities. There is lot of amount there; we've been looking at a lot of them. We haven't found the exactly right one. But if we think it clearly makes sense in our space to do those... for consolidation that happened, we've seen it over the years. We think we are likely to see more of it during this difficult market environment. There's only a few brokers larger than us and there is whole lot of brokers smaller than us. So we could see us playing a pretty meaningful role in consolidating over the next year.

Daniel Harris - Goldman Sachs

And did you have a capability set in Australia prior to this Optionetics acquisition?

David Fisher

Yeah. We own business called optionsXpress Australia Pty. It's Australia-based broker dealer that we actually partnered with some of the principals of Optionetics. And putting together about four or five years ago.

Daniel Harris - Goldman Sachs

Okay. And then just shifting to the expense side, you know advertising... you guys have been much more active... it's costing a little bit more per net new account. Is the trend that we are seeing now with the cost per net new account on a quarterly basis the last few quarters. The way we should think about that over the next four to eight quarters or do you anticipate that being offset by an emergence or a higher number of net new accounts to sort of bring that back into that 200 to $300 level per account.

Daniel Harris - Goldman Sachs

I believe is only type of... but our belief is that first quarter was a little bit of an outlier. January and February were extremely difficult times in the markets. With the markets starting out the year down 20%, we tell that's extremely skittish, and it was certainly reflected in the new account group. And we saw an improvement in March when the market improved.

We also continued to rollout new market initiatives that we think yielded some benefit and combined with the Optionetics additions. We think that we can definitely increase the level of new accounts throughout the last three quarters of the year, thereby hopefully lowering our costs renewal account. Because while we still... it's still a very attractive ROI even what we spent in the first quarter, we certainly would like to see that number come down.

Daniel Harris - Goldman Sachs

Okay, guys. Thank you.

Operator

(Operator Instructions). And we'll take our next question from Edward Ditmire with Fox-Pitt Kelton.