optionsXpress Holdings Inc. Q2 2009 Earnings Call Transcript

Jul.24.09 | About: optionsXpress Holdings, (OXPS)

optionsXpress Holdings Inc. (NASDAQ:OXPS)

Q2 2009 Earnings Call

July 24, 2009; 9:00 am ET

Executives

David Fisher - Chief Executive Officer

Adam DeWitt - Chief Financial Officer

Analysts

Richard Repetto - Sandler O’Neill

Mike Vinciquerra - BMO Capital Markets

Niamh Alexander - KBW

Patrick O’Shaughnessy - Raymond James

Mark Lane - William Blair & Co.

Michael Hecht - JMP Securities

Operator

Good day and welcome to the optionsXpress Holdings second 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 DeWitt

Thanks, Lorrie. Good morning everyone and thanks for joining us for our second 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 have received the copy of our press release that was faxed or emailed to you. If you haven’t, please call Jim Polson at (312)-553-6730, 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 second quarter. Following David’s remarks, I will walk through the financials and David will wrap-up with our outlook before we finish with your questions. David?

David Fisher

Thanks Adam. Good morning, everyone and thanks for joining our call today. We are pleased to announce solid second quarter results, although the current recessionary environment during the quarter impacted many aspects of our business, our customers and potential customers.

We generated revenue of 61.7 million, net income of 16.1 million and EPS of $0.28, all up from the first quarter of this year. Throughout the quarter, we continued to witness the resiliency of our customer base. Our customer assets increased 13% in the quarter, now up 17% for the year, while the broader indices are up an average of only 4%.

We believe the strong asset growth is evidence that our customers have not abandoned their investing goals or shifted assets to other uses like consumptions or paying down their mortgages. Instead, our customers have continued to do options in futures to successfully navigate these difficult market conditions, while also trading equities more actively and in larger volumes than we have ever seen historically at optionsXpress.

This shift towards equity is driven in large part by trading in low priced stocks like Citicorp and Bank of America, and low priced leverage ETF by FAS and FAZ. Given that much of the equity trading was concentrated in a few names, we believe this mix shift towards equity is temporary.

Nevertheless, the ability of our customers to easily shift between asset classes speaks to the benefit of our diversified platform where customers can trade multiple products in one account, easily adjusting to suit their needs and changing market dynamics. In fact, in July, we’ve already begun seeing a shift back towards a higher percentage of option trades.

One additional note on the higher equity trading; this quarter is that it did not adversely affect average commission, which reached a multi-year high for both stock and options as Adam will discuss in more detail shortly.

It’s clear our customers remain thoughtful and patient in their investing during this volatile investing environment, and over time, we expect to benefit from the resiliency in our customer assets in two primary ways.

First, as customers continue to regain confidence in the market, their trading activities should return to more historic levels. We have the same customers as we did before the financial crisis, and every indication from internal data shows that our new accounts are of the same quality as our older accounts.

Second, we should benefit directly from future increase in interest rates, which remain at historically low levels, and we’ll also give more detail on this and in interest rate sensitivity shortly.

We ended the quarter with over 337,000 accounts, a 16% increase year-over-year, and we added 9,000 new accounts in Q2. While net new accounts are down 7% from Q1. We reduced our marketing expenditures by 14%. As we move into Q3, we continue to see lower new accounts demand across the industry, as you can see in both our recent results and the recent results of our competitors.

Accordingly, we have adjusted our spend down to match the demand. We’re also using this slower time to experiment with different marketing strategies, which could lead to some short-term volatility in our new account number. However, if the market environment changes we’re able to quickly adjust our spend. In addition, we would anticipate ramping the spend back up in Q4 as we move into typically more active time for new account generation.

Longer term, we also expect our new account growth to benefit from our recent acquisition of Optionetics which closed in May. This acquisition is the latest example of the important throughput on customer education. We believe Optionetics will significantly bolster our efforts to both attract new customers, and offer beneficial education to our current customers.

Although it has only been a couple of months since we closed the acquisition, the integration is going according to plan, and we are pleased with our progress at this point. We had over 4,000 existing customers attending an introductory webinar host by George Fontanills and Tom Gentile from Optionetics. This was by far the most widely attended webinar ever.

We also had a great presence at OASIS, the annual Optionetics’ investor conference. As a result of our early efforts, we are starting to see a steady stream of accounts from Optionetics. Over the next few quarters, we will continue to integrate the benefits of optionsXpress into the Optionetics education experience. It is this deeper integration that we believe will let us achieve our targeted goal of 10,000 new accounts annually from the education channel.

Next, I would like to a minute to recognize the one year anniversary of our acquisition of Open E Cry, now known as OEC. This acquisition has allowed us to further enhance our position as the premier derivatives-focused broker by expanding our reach to institutions and high volume futures and FOREX traders.

We are pleased to say that everything has gone well with the integration of this business as evidenced by the 46% account growth, 38% asset growth, and 38% revenue growth net of payouts since we closed the acquisition.

OEC has benefited from leveraging the balance sheet and the reputation of optionsXpress as part of its sales profit to its sophisticated customers. Later this year, OEC will further leverage the optionsXpress infrastructure when it adds equities and equity options to its offering.

Building on the success of the three acquisitions we have completed so far, we’ll continue to look to take advantage of our strong balance sheet by identifying high quality acquisition as they become available, and as pricing becomes attractive. While we have historically focused on smaller acquisitions that have added additional products at optionsXpress, we are also seeing opportunities for consolidation type of acquisitions.

In addition to acquisitions, we have continued to invest in technology, positioning ourselves as an innovation leader. It’s been one of the greatest periods of innovation in optionsXpress during the second quarter, as we announced several new products and site enhancement that we believe we’ll greatly help our customer identify and execute affective strategies, at additional stickiness to optionsXpress, and attract additional customers.

In response to record customer feedback and interest in the product, we continue to develop our recently unveiled myOX modular portal at a rapid case. Giving customers even more flexibility and control, and customizing their own trading environments. This new offering has really resonated with our customers as approximately 75,000 unique customers have used this technology since its rollout just a few months ago.

Another new feature we recently unveiled is IDEAS. This product scans the customers existing position to help them to find new trading opportunities. It assists customers in uncovering potential ways to modify their trading positions based on their current market perspective by displaying a diverse array of different stock, options and future alternatives, right on their [position page].

We also launched Xtend2, an exciting, new downloadable trading console. Xtend2 is designed for traders who want to be more engaged in the markets by combining the speed and power of existing streaming, trading platforms with the fun and ease of use of innovative and intuitive design.

This next generation platform delivers a truly unique trading experience by building on common features of active trading platforms, such as streaming quotes and one-click trading, while adding innovative new features like drag-and-drop functionality, and ladder trading for options.

Finally, a few weeks ago, we introduced our new mobile application which gives investor an easy and convenient way to monitor their investments and place stocks, options and futures orders via their Blackberry, iPhone and Windows Mobile devices.

Our new mobile application caters to customers on-the- go, by giving them an innovative way to stay abreast of the markets, and make their trades in their optionsXpress accounts from anywhere. We’ve had thousands of dollars of the product already in just the few weeks of availability.

With that, let me turn the call back over to Adam, who will review the second quarter financials with you in greater detail.

Adam DeWitt

Thanks, David. While option trading activity remained below historic levels, a small increase in options activity and record equity trading during the quarter drove a small overall increase in trading activity. This increase in activity combined with the higher than usual retail average commission; and only a small increase in expenses on the brokerage side lead to a 20% sequential increase in earnings in the second quarter.

Before I go into more detail on the financial performance in the quarter, I want to spend a few minutes discussing the impact the Optionetics acquisition had in our financial reporting. The acquisition closed on May 4, so results following that date or approximately two thirds of the quarter, are included in our second quarter results.

We will be breaking up the education segment separately from brokerage services going forward. We’ve included summary revenue and income before taxes for each segment at the end of the financial table in our now release.

In addition, in our consolidated results, we’ve added a revenue line item for education activities and expense line item for education marketing and fulfillment. We have kept brokerage advertising separate from education marketing in order to give a more transparent view of advertising costs in the brokerage business.

Please note that while most of Optionetics revenues and expenses are in these two new line items, there are also associated expenses in compensation, depreciation and amortization and G&A. Finally, we have rolled our previously reported quotation in technology expenses into the G&A line, as these expenses have remained fairly consistent over time, and have become less significant in relation to the total.

Now, I turn my attention to the results of the quarter. Total revenues for the quarter were $61.7 million, slightly higher than second quarter 2008 revenues and 25% higher than the first quarter revenues. The education business contributed approximately 7.2 million in revenues for the quarter. Without the education business revenues, total revenue would have been down 12% year-over-year and up 11% sequentially.

Commission revenues of $42 million for the second quarter were up 3% over the second quarter of last year, and up 10% from our results in the first quarter of 2009. The increase year-over-year was due to the inclusion of OEC results, and an increase in retail average commissions. The sequential increase was due to an increase in retail trading activity, and an increase in both the retail and institutional average commissions per trade.

Retail trading activity improved slightly during the quarter, as we experienced record equities trading volume as David discussed earlier. Average commissions for the quarter rose to $14.78 from $13.33 in the first quarter. While the overall increase was in part due to the increase in retail trades, relative to institutional trades, we also saw increases in the average commissions of both retail and institutional trades.

Retail average commission was $18.49 during the quarter, which is a $1.29 higher than the second quarter of last year, and the highest level in almost three years. This high rate is particularly notable given the higher relative percentage of equity trades during the quarter, which have a lower average commission, and was due to a high number of average option contracts per option trade, our highest in several years.

Institution or OEC average commission was $4.31 during the quarter, which is higher than the $3.53 in the first quarter, but as we’ve discussed in the past, higher OEC commissions are typically accompanied by higher average payouts to introducing brokers. So, the net economics were only about $0.30 higher.

Payments for order flow were $7.1 million for the quarter, which is down 13% from last year, and up 13% from the first quarter. Those variances were due primarily to the change in a number of option contracts traded as payment rates have remained stable. Second quarter net interest income was 4.4 million, which represents a 62% decrease compared to last years interest income of 11.5 million, and a slight increase from the first quarter.

As we discussed last quarter, assuming no significant changes to our balances or interest rates, we expect interest income to be somewhat stable at this level. However, if and when the Fed begins raising short-term rates, we expect the impact to be approximately 0.015 per quarter or $0.06 annually for each 25 basis points raise for the first hundred basis points in raises.

Education revenues for this sub-period beginning May 4, was $7.2 million, which included approximately a $100,000 from a decrease in deferred revenues. This level of revenues is consistent with the run rate of Optionetics at the time of the acquisition.

Moving on to expenses. Total expenses for the second quarter were $36.5 million, 48% higher than the second quarter of last year and 30% higher when compared to the first quarter.

Total expenses from the education business for the quarter were approximately $7.6 million. Without the education business, expenses would have been approximately 17% higher than last year, and 3% higher than last quarter.

Brokerage and clearing costs for the second quarter were $8.0 million, 42% higher than the second quarter last year, and 12% higher than the first quarter. The primarily driver in the year-over-year period was the addition of OEC. The primary drivers of the increase in the sequential period were higher brokersXpress payouts, and higher other volume related charges.

Payouts for brokersXpress for the quarter were $2.2 million and payouts for OEC for the quarter were $1.9 million. Compensation costs for the quarter were $10.4 million, 48% higher than the second quarter of 2008 and 25% higher than the first quarter. The most significant driver in both cases is the additional of Optionetics staff. Without the Optionetics staff, compensation would have been down approximately 200,000 in the second quarter sequentially.

Brokerage advertising cost for the quarter were $5.0 million, 1.1% lower then the second quarter of last year, and a 14% decrease when compared to the first quarter of 2009. G&A cost for the quarter were $5.9 million, which is 16% higher than a year ago, and 24% higher than the last quarter. Both increases were primarily due to the inclusion of Optionetics, and $400,000 in transaction cost associated with the acquisition of Optionetics.

Depreciation and amortization was $2.3 million during the quarter, which is up from $2.0 million in the first quarter. The increase is due to both Optionetics run rate depreciation, amortization and intangibles arising from the acquisition. Pre-tax margin was 41% for the company overall during the second quarter. For the brokerage business, pre-tax margin was 47%, which is up from 43% in the first quarter of 2009 as revenues grew almost 11%, and expenses only 3%.

As we discussed in our first quarter conference call, our expectations were for Optionetics to operate at close to a breakeven level. For the first two months, they did just add. They continue to get good traffic at their events, and as David mentioned, we are beginning to see some momentum in our account generation efforts. But it will take a better part of a year to ramp up to the full 10,000 per year.

Resulting second quarter 2009 net income was $16.1 million, a 31% increase compared to the second quarter of last year and a 19% increase compared to last quarter. Total client assets were $5.7 billion, 1% higher than last year, and 13% higher than last quarter. Margin balances were $123 million at the end of the quarter, a 48% decrease compared to last year, but rebounded 9% from the end of the first quarter of 2009.

Total company cash and short-term investments at the quarter were approximately $200 million. We remain committed to deploying our cash to create the most value for our shareholders. To that end, since the beginning of 2008, we’ve completed two acquisitions for over $30 million cash consideration, bought back approximately $100 million in stocks, and paid $19 million in dividends.

I will now turn the call back over to David Fisher for some final comments.

David Fisher

Thanks Adam. Despite the current headwind facing the financial services industry, we remain confident in the resiliency of our customer base and our ability to continue to add new customers and assets during these difficult times. We are also committed to investing in our business to provide our customers with the most innovative tools to help them navigate the current economic environment, as customer engagement and satisfaction are important factors in optionsXpress’ long-term growth and profitability.

Financially and operationally, we are strong, which gives us the flexibility to act quickly to unpredictable market conditions and opportunities. We have a substantial cash position, no debt on the balance sheet, and continue to generate excellent cash flow. As a result, we are in a position to take advantage of opportunities created by the financial crisis, and to be in an excellent position to benefit significantly once the market conditions improve.

With that, at this time I’ll turn the call back over to the operator and we’ll take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Richard Repetto - Sandler O’Neill.

Richard Repetto - Sandler O’Neill

Good morning, Dave and Adam. The first question is on the equity trading, and you said the mix shift to the low priced stocks in the ETF. The ones that you mentioned in particular did some pretty big reverse splits. So how much did the FAS and FAZ make up? Did the reverse splits really have any impact here, 5 for 1, 1 for 5 and 1 for 10?

David Fisher

Yes, they were a significant part of trading during the quarter. You can see the volume industry wide and our customers traded them as well. With the reverse splits in those stocks, and with [Bway] moving up back into double digits, current customers have clearly shifted their focus more towards options than they had in the second quarter.

We’ve already seen that in July and I think that’s a combination of that change in those stock prices as well as the reduction in volatility. Seeing the VIX back in the 20s, I think customers are more comfortable engaging their option strategies than they were during the first and second quarter. I think the combination of those two has led at least in the initial stages of the third quarter of seeing a mixed shift back towards options.

Richard Repetto - Sandler O’Neill

Got it, thank you. The next question on Optionetics. You have talked about the better part every year to ramp up and I’m sure this has to do with the model and the channel partnership, but if you looked at thinkorswim, you might say that accounts growth there picked up even before the acquisition closed, if that’s legal and possible. I guess the timeframe of the ramp the account acquisition model. Then out of the early accounts, are they more profitable, less profitable than say your traditional optionsXpress account.

David Fisher

Yes, in terms of the time of the integration, especially kind of compared to what you saw with INVESTools or thinkorswim, there is a couple of factor there. First of all, Optionetics had never worked closely with a broker before. They always view themselves as kind of broker neutral, Switzerland, as they like to call it. So they don’t have a lot of ways in their system. So very quickly tie into a broker and the benefits of broker into their product offerings, their seminars, how they teach and even in their website.

So, it’s taking time to redo many of those things to really inject optionsXpress and the benefit of optionsXpress into each one of those different touch point. INVESTools had a long history of working very closely with brokers in particular working with us. So they were able to more quickly plug in, thinkorswim. In addition because they were acquiring a broker dealer, there was like about a six-month period between when that deal was announced and when it was closed. And so they had the entire six-month period to work, thinkorswim.

Starting to work thinkorswim into their platform, into their education that we haven’t had with Optionetics because we basically sign and close that deal simultaneously. With respect to the accounts we are seeing, they are very good accounts, they are very similar to our average accounts at optionsXpress. The customers tend to be a little bit newer and so the ramp can be a little bit slower, but there are also people who are investing very heavily in their education and their investing to take it very seriously and so they tend to be very good long-term customers.

Richard Repetto - Sandler O’Neill

My ears pricked up when you said a consolidation type of acquisition. I think I know what it means, but I just want you to explain it just a little bit more.

David Fisher

There’s been a lot of consolidation in our industry really over the last eight to nine years ever since the dot-com bust. The deals have been shown to make sense. These are highly scalable businesses where there is a lot of leverage and you can get a tremendous amount of synergies through consolidation. There are also businesses where scale has been shown to help, both on the operational side, but also on the marketing and customer acquisition side.

When we look at the industry, there’s only handful of brokers larger then us. There is a dozen smaller than us. So, we think we are in an excellent position in [firm ways] high margins has the lowest cost per trade in the entire industry. To be looking at those dozens of smaller brokers as consolidation opportunities moving forward.

Operator

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

Mike Vinciquerra - BMO Capital Markets

I just want to ask a follow-up on Optionetics. You guys mentioned that you had about 10,000 attendees I think during the quarter in the events. Are those paying customers or are those people who are going to both, paid and free events?

Adam DeWitt

That’s a combination, Mike. It includes both the folks to go to the unpaid and then folks that go to the paid.

Mike Vinciquerra - BMO Capital Markets

Do you consider the customers that they have had historically as your bigger pool potential optionsXpress’ customers or is it the new flow that’s probably going to be more important?

Adam DeWitt

When you give the numbers, they are really talking about the new flow. They do have a very expensive historic database that we think we could tap into, but it hasn’t really been incorporated in any of our numbers or assumptions going forward. We don’t think that’s an opportunity for us.

Mike Vinciquerra - BMO Capital Markets

Are the majority of those 10,000 international rather then domestic?

Adam DeWitt

No, while there are quite a few international in there, the majority are domestic.

Mike Vinciquerra - BMO Capital Markets

Back on the commission rate, obviously you’re seeing a little bit of a mix shift back toward margins, investment options which have higher rates. Do you think we are going to see a retrenchment from the level you saw this quarter was obviously very strong and very helpful to the top line?

Adam DeWitt

Like I said in my remarks, it’s the highest level that we’ve seen in several years, and it was due to higher option contracts per trade, and I believe due to some of the things that David talked about in terms of more low dollar stocks being traded. So, you have people trading more contracts to get the same type of exposure. We would expect that to retrench over time, and certainly would not expect it to go higher but more likely to go down.

Mike Vinciquerra - BMO Capital Markets

One thing on the institutional side. David, you gave us some stats on the growth you’ve seen since you owned that over the last year? Can you reset us in terms of roughly where the account base is on that, and can you also talk a bit about what product those folks are trading in the futures arena, because we’ve seen the volume kind of come down in the institutional over the last several months. So, I’m just curious if that’s more in line, if we just look at the broader futures market or those specific product categories that they trade more frequently?

David Fisher

Sure. Mike, in term of the accounts, there are little over 4000 now. I believe when we first purchased OEC, there were around 2,800, and in terms of the products that they are trading, it really is across the spectrum. There is a lot of the interest rate futures, a lot of index futures, but also some of the commodities that are more popular like oil, some of the other energy product as well. So, I think it’s a broad representation of the futures markets.

Operator

Your next question comes from Niamh Alexander - KBW.

Niamh Alexander - KBW

If I could stick with the institutional business, is this futures commission merchant’s as well?

Adam DeWitt

They are non-clearing FCM.

Niamh Alexander - KBW

They are non-clearing FCM. So, they are non-clearing, we don’t need to keep customers segment assets. I guess a lot of their business comes through introducing brokers, and it looks like regulators are maybe proposing increasing capital requirements for introducing brokers. Is that something that you guys are concerned about or you are kind of looking into?

David Fisher

I think increasing capital requirements in introducing brokers would actually help us, because both optionsXpress and Open E Cry is non-clearing FCMs actually compete a little bit against introducing brokers. They are also customers of ours. They are also competitors of ours; and direct business, almost all of those more profitable businesses we get through those IBs.

So, if there is a shake out where a number of IBs are leaving the business, and we can get more direct customer business, that would actually be somewhat better for us. Both we and Open E Cry have plenty of capital to support any capital requirements that have been proposed. So, that’s not something that we think would have a negative implication upon us at all.

Niamh Alexander - KBW

That’s interesting. About how much of the business comes from IBs right now versus direct?

David Fisher

It’s about 50-50.

Niamh Alexander - KBW

About 50-50 right now. Thanks for explaining that. Then, I just wanted to talk about margin balances a little bit. We’ve seen the active kind of brokers that have reported so far, margin balances have started to pick up again as the volatility has normalized. Maybe there is not as much opportunity to participate with volatility so extreme.

We haven’t really seen your June margin balance come up all that much yet. What’s your sense there, because there is a nice little bit of leverage there in the model as that starts to pick up, and it has been low for a while?

David Fisher

As we’ve mentioned, at the end of June and end of July, we have seen a mix shift back towards options, and with options, except for the small percentage of our customer base, its non-portfolio margin. You are not using margin with option trades. So, a part of that is our customers are now getting more leverage by shifting back to option strategies away from some of the equity trading.

That said; we are still up our lows a few months ago on margin, because we are a more option focused broker there’s never been nearly as much of a profit driver for our business. It’s a very small percentage of our profits and our interest revenue. So, it’s something we are less focused on in terms of pushing from our customer base.

Niamh Alexander - KBW

Then lastly, in terms of payment for order flow and the profitability of the trading, are you seeing kind of that market improve a little bit? We are hearing some market makers are getting a little more aggressive and paying a little bit more out. Do you think they’ve kind of bottomed out in terms of folks pulling back from paying for order flow?

David Fisher

As I mentioned in my remarks, the payment rates have been very stable for us. We are starting to see a little bit more activity in terms of market makers getting a little more aggressive. It hasn’t impacted the rates yet, but it may going forward.

Niamh Alexander - KBW

So, nothing major, just modestly incrementally positive for you?

David Fisher

That’s right.

Operator

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

Patrick O’Shaughnessy - Raymond James

Some of the other online brokers that have reported so far this quarter have mentioned that July trading volumes have been down a little bit from June. I was wondering if you could kind of give any inside into what you’ve been seeing at optionsXpress?

David Fisher

There has been descent option volumes; especially over the last week. So, we are beneficiaries of that. Our competitor reported some pretty sharp drops in July, which we haven’t necessarily seen anything as bad as they were reporting, but we still has over a week left in the month. It’s hard to say where it’s going to go given the summer slowness. However, I think the pickup in some of the option trading over the last week has helped us may be more than some of the larger online brokers that are more equity focused.

Patrick O’Shaughnessy - Raymond James

Got it. That’s helpful. When you are talking about the mix shift, is that primarily from the Open E Cry customers than customers, because as we look through your monthly DARTs, and we can kind of breakdown what’s equity versus options. It seems like options as a percentage of retail DARTs been a relatively consistent over the past few months. So, when you are talking about the mix shift, has that primarily been on the institutional side of things?

David Fisher

No. I think we are talking about a longer term trend. If you look back to last year, options typically were 60% plus of the retail trades, and at the beginning of this year, the beginning six months, it’s been the kind of in the mid to high 50s. So, when we are talking about a mix shift, and when you are talking about a four, five or even six point mix shift, it actually ends up being fairly substantial. As David mentioned, we are starting to see it go back, or at least in July so far, we’ve seen it go back towards that more historic 60 plus range.

Patrick O’Shaughnessy - Raymond James

Got it. So with that mix shift is back to your 60% plus range, with market volatility becoming a little bit lower, sub 30 at this point on the VIX, do you feel comfort that maybe you are getting back more towards some of the more, normal historical trading behaviors of your clients, that they are getting more comfortable with how things are and maybe you’ll kind of see return to some of the trading patterns that we saw early 2008, in that sort of timeframe?

David Fisher

I think we are starting to. I think it’s little too early to be too confident about it. I think we can get through the rest of the summer without too many shocks to the economy or the markets in general, and if we keep the VIX kind of sub 30, it will be a very position sign as we head into the fall, which is usually a very active time for our customer. So, that’s what we are kind of keeping out for. Steady market, no major economic shocks we think would be a very, very positive sign as we get through the rest of the summer.

Patrick O’Shaughnessy - Raymond James

Got it. Then one last question about the Xtend2 platform. I know it’s pretty early since its launch, and it’s still pretty much in beta mode. But I was wondering if you had any initial takes on what sort of progress you are seeing from that. Have you seen a lot of customer pick up? Do customers who use that platform tend to trade a little bit more frequently, kind of what are you seeing initially?

David Fisher

So we’ve had thousands of downloads of both that and our OX mobile platform since we launched them in June. On the [expense] side, the customers who are trading on it, trade very actively. So it’s still too new to kind of talk about numbers and how much engagement we expect and whether it’s going to attract new customers.

It’s only been out a few weeks and we’ve haven’t done any marketing for really at all. We haven’t even really e-mailed our entire customer base. We haven’t done any third-party marketing whatsoever. So it’s too early to talk about numbers, but we have had thousands of downloads and the customers who are using it trade very actively.

Operator

Your next question comes from Mark Lane - William Blair & Co.

Mark Lane - William Blair & Co.

David, you mentioned about experimenting, but in terms of your marketing, making some changes that might increase the volatility of new account generation. Can you talk about what you mean by that and when in fact we might even see that?

David Fisher

Its mostly different online strategy, kind of experimenting with spiking spend, with dramatic cutbacks in spend, trying some new channels. As long as we are cutting back at our marketing and we are not seeing as much demand from normal channels. It’s a good opportunity to experiment.

I don’t think they are going to be huge in impact, but you never know. That’s why you do these tests. We are already doing them in July. So you could see some results in July and then certainly through August and September. We intend to continue to do some pretty meaningful shifts in kind of how we are allocating our spend and kind of how we think about spend.

Mark Lane - William Blair & Co.

Disregarding the segmentation of the education revenues, for the brokerage advertising my understanding was there was some education-related spending in there. So is this education marketing fulfillment only Optionetics or are you moving all of your sort of education-related expense in there?

David Fisher

There was education expenses in the legacy optionsXpress business, but there was very little in the brokerage advertising line. Yes, we have some trainers on staff, so there is a compensation expense. So it’s a pretty clean comparison in terms of apples-to-apples on the brokerage advertising fee in the current quarter and the current view versus the old view.

Mark Lane - William Blair & Co.

If we were looking at sort of like a pro-forma margin for the quarter, and we were just looking at the two-month results for the impact from the education segment, if we just normalize that for the whole quarter, would that be a pretty good run rate to look at the pro-forma number? Would there be anything unusual to note that would make that not a good analysis?

David Fisher

On the education side, there are going to have some seasonality in it. So they are going to be probably a little bit slower in the May to June timeframe and maybe even in July. So they are going to have some seasonality to their business. But in terms of run rate, where they work for the second quarter, it’s a good pro forma, but it’s going to fluctuate so close to breakeven that just a little move either way can really change that quite a bit.

Operator

Your final question comes from Michael Hecht - JMP Securities.

Michael Hecht - JMP Securities

Just a follow-up on Optionetics, did you guys say how much in terms of accounts that contributed in the quarter, it may sound small but I know it’s going to ramp over the next 12 months. Was there any contribution in the quarter to account growth?

Adam DeWitt

Help from Optionetics?

Michael Hecht - JMP Securities

Yes.

Adam DeWitt

It was small. We did start seeing a steady stream of accounts. So, from almost non to starting to see those accounts coming on a daily basis, were they measurable, we are doing accounts almost everyday. Throughout the quarter that I was ramping, it’s very small in total.

Michael Hecht - JMP Securities

Then just going back to the average ticket. On the OEC side, you guys said you are rolling out equities and options I think you said later in the year. So, the average ticket there at 431 for the quarter which seem like it ticked up a bit you said. What impact do you think that’s going to have on the average commission for ticket there, the other products?

Adam DeWitt

Yes, not exactly sure. In the beginning, we are not going to have a lot of volume there right. So, it’s going to be dominated by the futures. I think pricing is not going to be tuned to similar.

So that you are going to see a big impact either way, but a lot of it depends at the end of the day whether the IB is reintroducing brokers or trading equities in which case it will increase the average commission or if it’s more direct business in which case it would lower the average commission, but our initial view is that the pricing is not going to have a big impact on that average commission.

Michael Hecht - JMP Securities

On the balance sheet, you guys have over $200 million of cash in the investment securities or like more than $350 a share. What’s the near-term plan, even a longer-term plan, how much cash do you need to hold the round and what’s the uptick for capital deployment between, even more aggressive buybacks, I know you’ve been more aggressive in dividends with acquisitions.

David Fisher

In terms of how much cash we need, it’s kind of $60 million to $80 million plus or minus to run our self-clearing business and give us a little cushion that we are not feeling stretched on the daily basis. We could always borrow, if we need some additional cash or beyond that. So with respect to kind of using our additional cash, and additional of 200 million right now, we generate cash over quarter.

Our preferred use has always been acquisitions. We think we’ve gotten great value from the acquisitions we made in the past. We think there’s other good opportunities out there. So that’s where we are look to invest our cash first.

That desire has only increased, given what’s going in the market and kind of valuations going down, kind of across the board. If we can’t though find good acquisition opportunities for one reason or other, we’ve shown that we are certainly willing to return cash to our shareholders, kind of right now, it’s got a valuations.

We’ve chosen to focus more buybacks, then on dividend. Over the next six months, few quarters we were not able to find good acquisition opportunities. It will certainly pick up the pace of our buyback, all things equal.

Michael Hecht - JMP Securities

With the other invested securities an any update on the ARS that you guys have left there and then you guys, do you have anything on the client side in ARS?

Adam DeWitt

We have no exposure on the client side whatsoever in auction rates. In terms of ours, as we’ve disclosed and accused, the vast majority of them are at UBS and though we have -- we are participating in their settlement. They will be refunded in full at par by June of next year. They have also in the interim offered to provide no-cost loans against those auction rates. So, we feel pretty good about the liquidity situation there.

Michael Hecht - JMP Securities

Okay. Got you. Then you had nice growth in client assets in the quarter; you guys talked about 13%. What the mix of cash there. I mean, is it safe to say it’s still elevated versus your normal 32%, 33%, although maybe it’s down a percentage in terms of this quarter just given the move in the equity market; deposit move.

David Fisher

It’s definitely still elevated. It’s off a little bit from the fourth and first quarters, but it’s still at the high end of the range. So, it is quite a bit higher than that 32%, 33%.

Operator

Due to time constraints, this does conclude our question-and-answer session. We would like to thank everyone for participating on today’s call. This concludes our conference.

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 www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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