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TD Ameritrade Holding Corp. (NYSE:AMTD)

F4Q09 Earnings Call

October 27, 2009 8:00 am ET

Executives

Fred Tomczyk - President and Chief Executive Officer

Bill Gerber - Chief Financial Officer

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

Analysts

Rich Repetto – Sandler O’Neill

Richard Salinger – BMO Capital Markets

Daniel Harris – Goldman Sachs

Roger Freeman – Barclays Capital

Patrick O'Shaughnessy – Raymond James

Howard Chen – Credit Suisse

Michael Hecht – JMP Securities

Matt Fischer – CLSA

Faye Elliott – Bank of America/Merrill Lynch

Joel Jeffrey – KBW

Operator

(Operator Instructions) Welcome to the TD Ameritrade Holding Corporation Fourth Quarter Fiscal Year 2009 Earnings Results Conference Call. With us today from the company is President and Chief Executive Officer Fred Tomczyk and Chief Financial Officer Bill Gerber. At this time, I would like to turn the call over to Bill Murray, Managing Director of Investor Relations, Communications and Public Affairs.

Bill Murray

Welcome to the TD Ameritrade September quarter and full year ’09 earnings call. If you haven’t had a chance yet, our press release and today’s presentation can be found on our website at www.AMTD.com.

Before we begin, I'd like to refer you to our safe harbor statement which is on slide two of the presentation as we will be referring to forward looking statements in today’s presentation. We would also like to advise you to review our description of risk factors contained in our most recent annual and quarterly reports, forms 10-Q and 10-K. The call is intended for investors and analysts and may not be reproduced in the media in whole or in part without prior consent of TD Ameritrade.

Today’s call is coming from the NASDAQ Market site. We’re here because we’ll be ringing the opening bell. I mention that only because we are under some time constraints for this morning’s call which is scheduled through 9:00am. We expect to be able to take all questions there may not be enough time. Please contact our Investor Relations staff with any questions you may have that was not addressed this morning. Because of these time constraints and the number of covering analysts we’d appreciate your cooperation in limiting yourself to two questions.

With that we have Fred Tomczyk, President and CEO and Bill Gerber, our CFO here to review the major events of ’09 along with comments on the outlook for 2010 and beyond. Then we’ll open it up for questions.

Fred Tomczyk

I’m very happy to report that we had a strong fourth quarter with earnings per share of $0.26 to finish out the year with earnings of $1.10 per share. Bill will walk through the details of the quarter a little later but I want to open this morning by putting some perspective on the year. How the company is positioned for the future and our focus for the next year.

As you know, last year was a very difficult one, especially for those of us in financial services. We had a banking crisis that required unprecedented government intervention, a market that was down 30% to 40% at times and short term interest rates plummeting from over 200 basis points to near zero. All in all it looked to be as about a difficult as an environment as one could imagine for our business.

Looking back, I could not be more proud of how TD Ameritrade responded to this environment and our accomplishments over the last year. We made some good decisions, we avoided most of the problems, and were able to take advantage of the situation to grow our business, strengthen our firm, and position ourselves for the future and future growth.

If you turn to slide three I’d like to give you a brief recap of the past year. As I said earlier, we had a great with year with strong results in all aspects of our business that were within our control. We took advantage of our strengths to capitalize on the dislocation in the market in five ways:

We increased our investment in sales and marketing, at the same time that everyone else was pulling back. Our strong organic growth is evidenced that this worked for us.

We were also very thoughtful about examining our cost structure, focusing our efforts on taking costs out of non-client facing areas. We reduced our expenses without impacting service, organic growth, or our strategic initiatives for the future.

We saw an opportunity to advance our trading strategy and took advantage of it by buying thinkorswim. We now have the leading trading technology platform and the leading investor education business in the country. In essence we acquired the fastest growing company in the online brokerage business at an attractive price and advanced our trading strategy by upwards of three years. On a combined basis our options business now represents 10% of all options clearing corporation volume.

In 2009 with our strong financial position we saw an opportunity to buy back 39 million of our shares at an average price of $11.94 which is well below current trading levels. This buyback allowed us to return in excess of $450 million or approximately 70% of our 2009 earnings to our shareholders.

The near zero interest rate environment also brought an opportunity to do something positive for our clients and for the firm. Clients want capital preservation, liquidity, and yield on their cash and in that order. Our new cash strategy moves $10 to $14 billion of our cash suite balances to an insured MMDA product that better meets client needs and positions us well for our rising interest rate environment.

As a result of our strong financial position our client centric business model and these actions, we delivered record organic growth in one of the most challenging market environments you can imagine. The results were tremendous. We brought in nearly $27 billion in net new clients assets or 10% of our beginning assets. We opened more then 730,000 new account, a 14% increase over 2008 and we averaged 372,000 trades per day, up 23% year over year.

Turning to slide four I’d like to spend a few minutes on our financial results for the year. In mid January we were elevated to investment grade, the only upgrade for a financial services firm this year. This is reflective of our strong and resilient business model, our strong balance sheet and financial position, and is remarkable in these unprecedented times.

Fiscal year 2009 produced solid financial results with earnings per share of $1.10 and return on equity of 21%. Our balance sheet remained strong. We ended the year where we began with more than $1 billion in liquid assets even after the acquisition of thinkorswim and the share buyback. At the end of it all we were able to deliver total shareholder return of 18% versus a 9% decline in the S&P 500.

Turning to the next side, I’d like to spend a few minutes on two important financial metrics; our industry leading return on client assets, and pre-tax margins. As you can see from the chart on slide five we entered the year with pre-tax margins of 44% and our return on client assets was 42 basis points. Interest rates drove margins down last year but strong trading and asset gathering results helped offset the impact. We’re proud of our 44% margins in light of the environment we’ve been in and attribute these strong results to several things.

First, as you’re aware, we’re a leader in the active trader segment, a business that is about scale and technology. We also generated record net new assets that were deployed by our clients in various investment alternatives. Our cash management strategy also helped mitigate the impact of near zero interest rates. As a result, we have fewer client assets in money market mutual funds and more with higher yielding insured MMDA balances, a product that offers advantages for both the client and for us. Finally, we continue to focus on leveraging technology in everything we do. We made tremendous strides in improving our technology infrastructure and processing capabilities through 2009.

I’d like to turn now to our two core focuses; net new assets and trades per day. As most of you know we started our asset gathering journey three years ago with the TD Waterhouse acquisition and subsequent integration. On slide six you can see that we ended fiscal 2009 with a record $26.6 billion in net new assets more than double what we gathered back in 2007 when we started this journey.

Even more remarkable is that we achieved these results despite a 31% decline in the S&P 500 during the same time period. With the results we’ve achieved over the past three years our asset gathering rate is now on par with today’s premier asset gatherers. We attribute these strong results to a combination of efforts; our client centric multi-channel business model is clearly working. Clients choose how they want to do business with us whether it’s via the phone, the web, and person at one of our branches or with one of our independent registered investment advisors.

We’ve successfully moved from a service oriented culture focused on the active trader segment to a sales and service culture focused on trading and asset gathering. We made significant improvements in client service in both our retail and institutional businesses which is reflected in record CSI and net promoter scores and in significantly improved retention rates.

We also implemented a number of share of wallet initiatives targeting additional assets from existing clients and broadened our product suite to better meet client needs and be in a better position to consolidate assets. We continue to see strong trends in our retail business. The referral programs from the call centers to the branches are a year older, have been refined and generated close to $3 billion in net new assets during the year, up from zero in 2007.

Finally, asset gathering in our advisor business has now returned to pre-conversion levels. While still early in our asset gathering journey we feel very good about what we’ve accomplished and will stay focused on continuing to build on our momentum in 2010 and beyond.

Moving on to slide seven you can see that we continued to lead the industry in trades ending the year with an average 372,000 trades per day. This is up 23% from last year when trades averaged 301,000 trades per day. The retail trader was resilient in 2009 taking advantage of volatility and the significant intraday market movements that seemed to happen regularly throughout the year. We attribute this increased engagement to enhanced education programs, risk management tools, new product alternatives for traders, and quality execution that helped give clients a confidence to trade in a difficult market.

Option trades are running at 18% of total trading volumes and we continue to have quality order execution with price improvement on seven out of every 10 trades. We have grown legacy TD Ameritrade funded accounts by 557,000 in the past two years and thinkorswim grew funded account by 76,000 during the same timeframe. About 50% of our legacy TD Ameritrade clients have been with us for more than five years. This experience combined with the enhance risk management tools and investor education programs are the primary drivers of our activity rate increase from 5.7% in 2007 to 7.3% in 2009.

If you turn to slide eight I’d like to talk about our outlook for the future. 2009 was a great year for organic growth and we see momentum continuing to build. We are pleased with our competitive position as we entered fiscal 2010 and we plan to use our strong financial position to take advantage of new opportunities to deliver additional growth and enhanced shareholder value.

In a research study by Powers Group the trader segment is projected to grow at double digit rate over the next five years. We are the clear leader in this space and plan to capitalize on that market growth by combining the best of TD Ameritrade and thinkorswim’s trading platforms.

We are entering the third year of our asset gathering strategy. We’ve learned what works well for us and we are in the process of refining and improving on these efforts. We are seeing a lot of traction on both the retail and institutional sides of our business and we expect this growth to continue in fiscal 2010. The thinkorswim integration is going well. We’ve rolled out the thinkorswim trading platform to about 100,000 clients and early signs are very encouraging. We will continue to work on the integration through 2010 with complex options, futures, and Forex capabilities being rolling out throughout the year. We expect to begin capturing synergies in the second half of next year.

We believe that investor education is key to getting great engagement from our clients in both trading and investing as well as acquiring new clients. Organizationally our retail distribution channels are combined under one leadership team that is focused on leveraging all of our channels to the benefit of our clients. Our distribution model was designed and incented to deliver great service and to just do what’s right for the client and gather assets.

We will continue to enhance our technology capabilities to obtain process efficiencies across the entire firm. We began our data center upgrade in 2009 adding a new data center with the potential to increase our trading capacity to handle more than one million trades per day, as well as strengthening the resiliency of our technology infrastructure.

TD Bank has been very good for us. As you know, we have a banking relationship with them through TD Bank, America’s most convenient bank as well as money management relationship through TD asset management and these have worked well. We continue to examine other areas of opportunity in 2010 including cross selling with TD Bank and providing our trading technology to clients of TD Waterhouse in Canada and in the UK.

As you can see, we have been actively working on efforts to grow our business organically and its working. The management team is committed to a continued focus on increasing our momentum on both the trading and asset gathering sides of our business in 2010 and beyond.

If you turn to slide nine I’d like to change gears and talk about shareholder value. Beyond our focus on organic growth we have and will continue to position the firm to deliver value to our shareholders. We see considerable upside for our business in a rising interest rate environment. I can’t predict interest rates or the slope of the yield curve but I would say that given where we are in the interest rate cycle the odds of an interest rate increase are higher then the odds of an interest rate decrease at this point. The upside potential of an increase in interest rates is significant, $0.07 in earnings per share for every increase of 25 basis points up to the first hundred basis points of increase in the Federal Funds rate.

In light of the current interest rate environment our ratings upgrade to investment grade combined with our strong balance sheet and cash position we are reviewing our capital plan in order to better position the company to take advantage of opportunities to add value regardless of the environment. We will continue to study our options whether they are in another acquisition, a share buyback, or a dividend to deliver increased value to our shareholders.

As I’ve said many times before if we see an acquisition opportunity that we feel is in the best interest of our clients, shareholders, and associates we will do our best to take advantage of that opportunity. It has to make strategic and financial sense and have the right risk reward. We are focused on growth with or without an acquisition. Our organic growth metrics over the last couple of years demonstrate that we can be successful with our without an acquisition.

Lastly, one of the things I’ve learned over my 25 plus years in financial services is always position yourself for optionality. Work hard to create options and always protect options. We will stay focused on creating optionality and executing on the right opportunities in 2010 and beyond.

Before turning it over to Bill I think what’s most important is that we have again demonstrated that we can grow this business organically. Our results speak for themselves. Record trades, record net new assets, and record gross new accounts all during on the most difficult environments in financial services in decades.

We couldn’t control the markets and we couldn’t control interest rates so we focused on the things we could control. We took advantage of the dislocation in the market; we refined our business model and improved our technology platform and processing efficiency. We’re in a very good position from both the financial point of view and from the point of view of momentum as we enter 2010. This positions us well to continue to deliver on our commitment to our clients, our associates, and our shareholders.

Thank you and now I’d like to turn the call over to Bill Gerber to talk you through the fourth quarter results and our guidance for next year.

Bill Gerber

To echo Fred’s remarks we truly couldn’t be more pleased with our accomplishments this year. Fred has already shown you many of our year end numbers and we believe that they alone tell a very strong growth story. When you take a look at what we’ve been able to accomplish consistently on a quarter by quarter basis you’ll see that what we’ve been doing at TD Ameritrade has truly positioned our firm for continued strong financials and long term earnings potential.

Let’s take a look at that starting with the September quarter on slide 10. Our EPS came in at $0.26 per share or $0.28 per share if you exclude the impact of the accounting charge on our auction rate securities buyback. This $0.28 per share would be comparable to $0.27 per share on a street estimate. Our results were principally driven by strong trading of 411,000 trades per day, our highest quarter in history. Our October trading through last Friday is 406,000 trades per day.

We ended the quarter at over $31 billion in MMDA balances and margin debt has rebounded ending at $5.8 billion which is up from $5 billion at the beginning of the quarter. Net new assets were seasonally slow at $5.4 billion but still almost double the amount from the same quarter last year. New accounts of 151,000 were very solid again.

Assets and cash continued to grow as well ending at $302 billion and $58 billion respectively. As we’ve been saying for the last four quarters we continue to exhibit strong business fundamentals with yet another record quarter for trading backed by strong quarterly asset and account growth.

Just a quick comment on the $0.02 auction rate securities charge. The charge that we booked is lower then the $0.05 to $0.10 per share we estimated in our July conference call. The primary difference in the accounting charge was three things; significant redemptions by the issuer over the last 90 days, much stronger estimated fair market values, and lower uptake rates by our client. The combination of these three is what caused the lower auction rate securities effect.

Now let’s take a look at our financials in greater detail on slide 11. Here you can see the quarterly and the annual results but I’ll start with the September quarter first. Transaction based revenues as seen on line one exceeded last year’s results primarily as a result of the record trading activity discussed earlier. This transaction growth offsets the decline we realized in asset based revenues on line two which of course is driven by the near zero interest rate environment. Other revenues on line three are up as a result of the education business we acquired from thinkorswim. All in, revenues were flat year over year.

On the expense side are expenses before advertising on line five are up approximately $20 million from a year ago, however, keep in mind that we had the reserve fund charge of $36 million in last year’s numbers while we had $14 million in auction rate securities charges and $55 million related to thinkorswim this year. Net of those expenses before advertising is down $13 million.

We spent approximately $56 million in advertising for the quarter which is up a bit from what we spent in the same quarter last year. This is primarily due to marketing support for thinkorswim. Our effective tax rate for the quarter was virtually flat with last year and in line with our expectations which brings us to net income for the quarter on line 11 of $157 million or $0.26 per share.

For the year you can see we are at $1.10 per share versus $1.33 last year. Notice the trading revenues on line one were up over $200 million but that that was more than offset by an almost $400 million decline in asset based revenues caused principally by the rate environment.

Although pro-forma year over year numbers are never exact a very interesting point on the change in asset based revenues is that the balance driven change year over year actually increased revenues by about $80 million. Our asset gathering efforts continue to payoff. However, lower rates decreased revenues by about $470 million. The rate drop alone is $0.47 per share this year. In a moment I’ll give you the same information for the quarter since the rate effect accelerated during the year.

On the expense side, expenses were up $75 million due entirely to thinkorswim. Finally, as you can see on lines 13 and 14 our EBITDA for the year was $1.2 billion or 51% of revenues. This is quite strong cash flow in one of the most difficult 12 months in US history. All in all we continue to do well in what we can control; excellent organic growth and continued expense management efforts.

Now let’s turn to the current status for net interest margin on slide 12. Just as we did last quarter we are looking at both the rates and the balances in the top graph. Again, net interest margin is a calculation of the aggregate rate earned on all spread based balances. Until we get to an interest rate environment where the rate on new investments exceeds the rate on maturing investments, all else being equal, the NIM rate will continue to contract. However, if you can grow balances you can minimize and sometimes reverse the impact of the NIM contraction on spread based revenue. Since it’s the revenue that we care about let’s take a closer look at the graphs.

As you can see, while the NIM continues to drop our ability to increase our spread based balances has helped the increase in spread based revenue. The primary driver of our NIM rate contracting was a $6 billion increase in our MMDA portfolio from the end of June. This is a 25% increase in the portfolio size primarily as a result of our cash management strategy. As we invested these proceeds the rate we received was lower then our prevailing NIM so the rate contracted on the whole MMDA portfolio. This is actually a very good problem to have as our portfolio is set up very nicely for a rising rate environment.

The other driver of the drop in NIM from last quarter is that stock lending yields have returned to historical levels. As you can also see on the bottom chart our spread based revenue dropped from September 2008 to September 2009 by about $50 million. However, underlying this change are two important items.

First, our balance increases year over year actually increased revenue by about $122 million but this was offset by about a $172 million decrease in revenues. Said another way, if we had the same rates as the September 2008 quarter on our September 2009 balances our interest revenues would have been up approximately $172 million in the quarter. This $172 million combined with the rate driven impact on our fee based balances makes the total impact for the quarter about $200 million or $0.20 per share.

One more comment on the MMDA. In December we are going to begin using the term “Insured Deposit Account” or IDA instead of MMDA as this is the name under which we market the product to our clients.

Now let’s take a look at our cash management strategy on slide 13. The graph shows you the transition of our MMDA and money market fund balances over the last three quarters. As you can see, the increase in MMDA balances corresponds with the decrease in money market fund balances. This was our stated goal and we have achieved it.

Since we announced the program, MMDA has grown $10.6 billion. We are progressing nicely through our current process of ongoing marketing efforts, explaining the benefits of the MMDA program to clients in an attempt to drive more assets there. We expect to complete the next phase in January 2010 when we move the $4.6 billion now on our balance sheet to the MMDA program. We still expect continued growth in our MMDA balances as client assets grow and marketing efforts continue.

Finally, as you can see on the bottom of the slide, total client cash is up about $5 billion as well since March. To be clear, total cash on the bottom of the slide is inclusive of the numbers in the chart. As we said last quarter, our cash management strategy would be earnings neutral for 2009 but it positions us well for the future.

Now let’s turn to liquid assets on slide 14. We increased liquid assets by about $100 million over the quarter primarily due to net income. Over the next six months we expect to use more of our cash to fund the auction rate securities buyback. Yesterday was the end of phase one of the auction rate securities buyback. Based on tenders that have come in through yesterday clients have asked us to redeem about $260 million. Some clients can tender through March 2010 and this can be extended as far as June 2010 under certain circumstances. However, we believe that we have seen the vast majority of the tender activity.

As we mentioned last quarter, the interest income paid on the auction rate securities continues to be very close to the rate being earned on our cash today. We do not expect any real impact to earnings on that front going forward. We will continue to adjust this unrealized loss in future quarters as conditions in the auction rate market change and we will update you on our progress quarterly. Even with this cash usage we are still quite comfortable with our cash position.

Now let’s take a couple minutes and talk about our 2010 guidance. On slide 15 we’re providing you with the key components of our annual guidance for the next fiscal year. As we did for 2009 we have posted more detail on our website AMTD.com. Like 2009 we are only offering annual guidance which means that we will not update our forecast on a quarterly basis.

Regarding 2010 we took a different approach to establishing our annual ranges this year given the incredible market volatility that we experienced last year. We have created assumptions for low and relatively high market growth environments. As you can see, we are modeling net new asset growth of $21 billion on the low end and $33 billion on the high end or a range of 7% to 11% of beginning client assets.

In the low growth scenario we are assuming a flat rate environment. While on the high end we could see a rising interest rate environment which include the 25 basis point increase at the end of the March, June, and September quarters of 2010. In creating our trading forecasts we took our lowest activity rate over the last three years for the low end of the range and used the highest activity rate over the same time period for the high end of the range.

We expect that our expenses will move with top line growth as well as the timing of our thinkorswim integration efforts. The result is $1.10 to $1.40 annual EPS range. Please note that this range is not intended for you to think that we are indicating the midpoint is the most likely case. Instead we are giving you this range as just that, a range of potential outcomes for the upcoming year. As you know, our sensitivities in the appendix can be used for additional information in developing your models.

In conclusion, when we were giving this same call a year ago we were talking to you a lot about uncertainty. Nobody was really quite sure how the year would go. However, we did tell you that we were confident that our financial strength and stability coupled with a sound long term growth strategy would get us through the cycle and position us for success on the other side of this cycle. Now here we are, 2009 is complete, and we have something that many other organizations this year will not have, growth in key business metrics that set up the future.

We’ve delivered strong growth in what has been a very difficult year. Our business fundamentals have remained healthy throughout this cycle. We used that health and stability to take advantage of growth opportunities like the acquisition of thinkorswim and today we remain on track for completing this combination by this time next year.

We focused on the things we could control and now we’re in an excellent position to benefit from the turnaround in market conditions that has been a long time in coming. We couldn’t be more pleased with the role organic growth has played in our success this year and we’ve done many things like implementing our new cash management strategy that would help strengthen that growth potential as conditions continue to improve.

We are looking forward to 2010. Given the year we’ve had we can’t accurately predict what will happen. We are confident that our growth strategy, our financial strength, and our current position in the marketplace will help us build upon our successes in 2009 and create more value for our shareholders, clients, and associates in the next year.

With that I’ll turn the call over to you for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Rich Repetto – Sandler O’Neill

Rich Repetto – Sandler O’Neill

Could you go over the contribution from thinkorswim on revenues and expenses? I think you got around it but the general numbers.

Bill Gerber

Basically thinkorswim was a push this year, as we said when we bought thinkorswim so revenues and expenses are basically equal. We still expect the 3% to 7% accretion in 2010 and the double digit accretion we talked about in 2011.

Rich Repetto – Sandler O’Neill

Was it generally around $70 million then revenue and expenses?

Bill Gerber

Yes.

Rich Repetto – Sandler O’Neill

To look at the expenses, if you look quarter to quarter they went up $332 million last quarter ex the auction rate securities $389 million then that’s an incremental $57 million and I know you had thinkorswim for $13 million of last quarter so that would make sense. I’m trying to see you also had some one timers about $18 million last quarter, were there any one timers in this quarter and on the expense side?

Bill Gerber

Yes, there were a couple. We had some integration costs, some profession service project about $6 million; we had some arbitration for about $4 million. There were probably a couple more after that. ARS, you already had the ARS in there.

Rich Repetto – Sandler O’Neill

The sensitivities changed as far as on the balance type sensitivities, color on how that was calculated compared to what the sensitivities were prior quarter?

Bill Gerber

We look at it each quarter we reset it based upon the new balances that are out there and the rates that are prevailing at the time and trying to assess if that happened what would be the change so that’s the main driver.

Rich Repetto – Sandler O’Neill

We’ve seen volatility drop literally eight or nine months in a row and your feeling on the activity rates going into at least the beginning of this year, fiscal ’10 for you.

Fred Tomczyk

The fix has definitely come in here and is at a low point in terms of the last 52 weeks. As Bill said, we’ve seen trading so far in October average around 406,000 trades per day which last year was the highest activity rate over the last three years so very, very healthy. I do expect the activity rate to come off somewhat but I would say so far this year is still at a decent rate and the trades have continued to be at a very good rate. Some of that is the activity rate coming off, I think some of it is the adding of thinkorswim and the capabilities, and some of that is just the fact that we’ve grown our funded account base quite strongly the last two years and that does show up on the trades per day.

Operator

Your next question comes from Richard Salinger – BMO Capital Markets

Richard Salinger – BMO Capital Markets

In the past you’ve expressed some interest in Forex market as another area for growth. Would you detail how you plan to approach that market and how you view its appropriateness for the retail investors and traders?

Fred Tomczyk

What we’ve expressed, I’m not sure where that comment comes from other then to say we wanted to increase the range and the breadth of our products available to our active trader client base. That means adding complex options, that means adding futures, and that means adding Forex to make sure that we have all the various products on our shelf that active traders look for. I think that’s really what we’re trying to say.

Operator

Your next question comes from Daniel Harris – Goldman Sachs

Daniel Harris – Goldman Sachs

I want to focus on the MMDA or the IDA as you’re calling it now. I think this quarter you said that the reinvestment rate was 150 to 200 bps and I think last quarter was about 25 bps lower. Is that anything to do with strategy or just what the market is giving you on yields these days?

Bill Gerber

It’s probably a little bit of both to be honest. The duration has drifted down a little bit closer to two years. We’re certainly not getting paid for going out very far. Generally the market continues to contract. I’d say it’s maybe 50/50.

Daniel Harris – Goldman Sachs

On the advertising spend, most of your peers look like they dropped that number this quarter and I know that you guys have swim for the full quarter but was the core Ameritrade advertising up or how should we think about that? If it is up or flat versus your peers which seem like they were down what are you guys seeing in the market in terms of advertising that gives you the confidence to keep spending there to attract assets in what I think has been a pretty tough quarter for getting that new accounts?

Bill Gerber

We were flat from quarter over quarter from June to September. We talk about advertising I think almost daily but its something that we believe that if you are consistently in the market you get the type of accounts you’re looking for and we measure this metric every month. That’s really a determinant as to where we’re going to go. One of Fred’s points he made is last year when everybody was pulling back and re-trenching we accelerated and it worked out quite well in terms of our core metrics. We measure this on a month by month basis, we’ll see how it goes but that’s what happened in the September quarter.

Fred Tomczyk

We didn’t spend much in July and August. We definitely pulled back in those two months but we do pick it back up in September.

Operator

Your next question comes from Roger Freeman – Barclays Capital

Roger Freeman – Barclays Capital

I wanted to come back to the first question Rich had on activity rates, etc. You look at your activity rates remained very strong up healthily year over year and I’m trying to tie that back to what we’re seeing in the community asset management space. Funds flows into equity mutual funds have been extremely weak and actually been negative again and we’re hearing sort of a retail disengagement. I’m trying to figure out what the difference is between what you’re seeing and what we’re seeing in the fund space, are you driven more by the professional volume now then ever before?

Fred Tomczyk

We’ve always been driven to a significant extent by the, how we define the active trader and that continues to be the case. I do think you’re seeing some differences between the firms that are leading in the active trader space versus the casual trader. The active trader stayed very engaged through this market.

Roger Freeman – Barclays Capital

On the ARS can you give us a couple extra details, you said the uptake rates were lower then you expected what were those? What is the total balance at this point that you would be expecting to redeem? You’re showing the $260 to $320 million in your cash flow outlook is that the number? What’s the pricing implied on that now is it $0.98, $0.99?

Bill Gerber

About $0.98. We’ve had $260 million that’s been asked for and we’re looking at $260 to $320 million, it’s a little bit lower then that actually.

Roger Freeman – Barclays Capital

Investment products, how much of the sequential decline there is money market fee waiver, what were those this quarter versus last quarter?

Bill Gerber

Money market fee waivers were $20 million this quarter, identical to last quarter. That’s the bid delta. Of course as the total amount comes down you’re seeing an absolute reduction with out fee waivers then the fee waivers were $20 million this quarter and $20 million last quarter out of the money market funds into the MMDA obviously.

Operator

Your next question comes from Patrick O'Shaughnessy – Raymond James

Patrick O'Shaughnessy – Raymond James

I’m looking at your commissions per trade and given that you had a full quarter of thinkorswim and they had a lower commission per trade then legacy to the Ameritrade I would have expected that number to have come down a little bit more. It was actually surprisingly stable quarter over quarter. Can you talk about what were some of the drivers in that commission per trade this quarter and then looking forward to your outlook statement for next year it does look like you’re expecting that to come down? If you can elaborate just a little bit on your thoughts as far as pricing.

Bill Gerber

On our pricing the biggest delta this quarter was the strength of the payment for order flows so that’s what has been very resilient. Next year we’re looking at the order flow decreasing a little bit just basically on how we’re tiering and where we think the order flow is going to come from. Time will tell. That’s the difference between actually quarter September and 2010.

Patrick O'Shaughnessy – Raymond James

The number of funded accounts that you guys had this quarter was down a little bit sequentially from last quarter, down I think 2%. Obviously your total accounts number was up, funded being down, can you talk about maybe what’s going on there?

Bill Gerber

Actually this quarter we started to try to encourage to use electronic statements, we started charging $2.00 for paper statements and so there were some clients that were getting a paper statement that had under $2.00 in their account essentially that became unfunded so that’s what caused that.

Operator

Your next question comes from Howard Chen – Credit Suisse

Howard Chen – Credit Suisse

On the asset gathering front the franchise has a lot of momentum within organic growth; you both touched on it in your prepared remarks. Could you provide a little bit more color on asset gathering by segment, maybe where institutional assets reside today? As you think about your outlook for the franchise for the next fiscal year do you see any potential shift in where those incremental assets come from, is it more weighted towards one side of the franchise or the other?

Fred Tomczyk

As you know, we don’t disclose the split between those two. Roughly assets continue to be 30% institutional and 70% retail. The reality is the year over year growth in 2009 was in 2008 we got our retail franchise really moving quite well on the asset gathering side. The institutional side was still coming out of the conversion and had Fiserv to deal with which was the second conversion.

This year what we’ve really done is the retail side continues to be very healthy and is in fact up a bit further but our institutional side had come all the way back so we’re quite happy with both of them where they are. I think as we look forward next year to take it up another notch will require us to come up with some new initiatives. We have some ideas there but it’s still pretty early on some of those, education business that we think we can drive some extra lift here.

Howard Chen – Credit Suisse

You added a Chief Risk Officer to the management bench this quarter. How should we think about David’s addition signaling any willingness to evolve the risk profile of the company, maybe take on more balance sheet or credit risk potentially in an M&A transaction?

Fred Tomczyk

I don’t think you should read that into it at all. I still have a very low appetite for balance sheet risk. We run a very aggressive organic growth and acquisition oriented company. We know we have high operating leverage so we think it’s important to have a prudent financial leverage and to keep the balance sheet pretty conservative.

Why we hired David was clear our point of view is that given all we’ve gone through, through this cycle and when I look back at it and when the management team looks back at it and when the Board looks back at it we would say we ought to have somebody who spends all of their time on risk including the various aspects of risk whether its operational risk and making sure as the regulatory environment starts, there’s potential changes here that we have somebody who is on the compliance side, on the risk side and is spending all of their time on that.

We thought that was important so that it’s not a part-time job like Bill. Having said that all of our business heads and people have to have a strong orientation to manage risk property. I think David will be much more of the oversight that and make sure that we have the appropriate focus on it.

Howard Chen – Credit Suisse

You noted the stock lending yields have dropped back to historical levels, contribution from the business continues to be well above average though, and short interest levels were low. Just curious if you could give a little bit more color on stock lending in general?

Bill Gerber

There was one particular trade that was very powerful in the June quarter and it continued over into the month of July before it evaporated and that was really the driving force behind the lift that we saw in stock lending. Today again the stock lending levels are back to normal but that’s really the delta that you see between the June and the September quarter.

Something a little unrelated but I want to clarify something I said earlier. The discount on the auction rate securities is just under 5%. I think is misquoted that when I was asked previously. I want to squeeze that in too.

Operator

Your next question comes from Michael Hecht – JMP Securities

Michael Hecht – JMP Securities

On the 2010 guidance I’m looking at the ad spend specifically and it looks kind of like a mid 20% growth rate for next year versus what you spent this year. I get that some of that’s thinkorswim but it seems kind of aggressive almost 9% of revenues which is twice the levels of Schwab and what historically had been 7% to 8% for you guys. I hear you guys are pleased with the organic growth but with the big ramp in ad spend the mid point of net new assets is $27 billion so the same as last year which seems pretty conservative. How do we think about that?

Bill Gerber

The vast majority of the change in the advertising comes from advertising for the education part of the business. That is the biggest delta between the two years. It’s a success metric so if the clients don’t sign up for education the fee obviously becomes much less. At any rate that singularly is the biggest difference year over year.

Michael Hecht – JMP Securities

Following up on the guidance, how do we think about tax rate guidance within the 2010 numbers and share count, is it flat versus this year, as part of what you guys, assuming there’s a baseline? A little bit more on the outlook for capital management and more color on how you’re thinking about the potential cash dividend. Is that mutually exclusive to making acquisitions and what types of assets are you looking at, at this point, key product areas, what’s the appetite for a deal like eTrade?

Bill Gerber

There’s about 22 parts to that question. 39% is the tax rate; 595 million is our assumed number of shares.

Fred Tomczyk

On the capital plan if you think back to 2009 we said very similar things throughout the year. The reality is we deployed basically 100% of the cash that we earned in 2009 through the combination if you actually put it in the cash portion of the thinkorswim acquisition and the share buyback we effectively deployed all of the cash we generated, to the benefit of our shareholders.

Obviously we continue to look at that, different alternatives. We are thinking it through; we have not landed at this point. We are significant cash generator; we have a conservative balance sheet. We’re weighing all of our options and when we have something further to say on that I’m sure we’ll come out like we always do and be quite transparent of our thinking and why we’re doing what we’re doing. Whatever has value to our shareholders is what we’ll do.

Operator

Your next question comes from Matt Fischer – CLSA

Matt Fischer – CLSA

On the sensitivity when I look at the 25 basis point shift in fed fund does that $0.07 include anything from the fee waivers?

Bill Gerber

Yes it does.

Matt Fischer – CLSA

How do we think about this first 25 basis points and the impact from fee waivers? Then the second 25 basis points?

Bill Gerber

The fee waivers, we earned 16 basis points and in a normal period we earn about lets say 86 make it nice easy round numbers so we’ve been waiving about 70 bps right now. The first 70 bps of increase we’re not sure, we’ll have to look at the market to determine what we share with the client etc. we would probably give the vast majority of that back to get our fee waivers back. If that’s what you’re driving at that’s what our initial thinking is right now.

Matt Fischer – CLSA

Back to the net new assets, new versus existing customer any color there?

Fred Tomczyk

It is a combination of both. Anytime you’re an asset gatherer you have to; you look at your ins and you look at your outs. If you look at our ins there’s a good chunk that comes from new clients and there’s also a good chunk that comes from existing clients. In fact I think it’s roughly equal in the past year. You work very hard at retention and that’s really the retention of assets on your existing clients which we’ve significantly improved the last couple of years.

A number of our things like the sales to service initiative and some of our campaigns to generate increased share of wallet have clearly worked for us. Our attrition is down and our ins are up both as a result of new accounts and from existing clients through share of wallet programs and our sales and service initiatives.

Matt Fischer – CLSA

I just missed what you said on the share count.

Bill Gerber

595 million.

Operator

Your next question comes from Faye Elliott – Bank of America/Merrill Lynch

Faye Elliott – Bank of America/Merrill Lynch

Can you go over one more time the ARS cost? In the quarter were we looking for $57 million or $0.05 to $0.10 in the quarter?

Bill Gerber

What we had said last quarter when this was fairly fresh and there was certainly a lot more uncertainty is that we thought it could be a $0.05 to $0.10 affect on our auction rate securities. During the quarter there were significant redemptions by the issuer. There were less clients that we thought were actually going to take the offer then what we had anticipated. The estimated market values of those assets strengthened pretty dramatically. The combination of those three cause all in about a $14.5 million charge. You’ll see the $13 million plus on the face of the income statement and the other piece is up in the revenue section because that was the effect on Ameritrade owned auction rate securities from when we bought back some auction rate securities form other clients in the past. That’s the total effect.

Faye Elliott – Bank of America/Merrill Lynch

There were numbers, I’m not sure I caught necessarily the significant, sorry to make you repeat it. There was a $260 to $320 million is the delta what you expect you could have to pay going forward?

Bill Gerber

What we have said we have received tender requests from clients for about $260 million. The program for certain clients can continue through March 2010. Yesterday was the cutoff for certain clients, other clients continue on through March 2010. It might still continue to trickle in here for a while. Our estimate of that range is $260 to $320 million based upon what we’re seeing right now.

Faye Elliott – Bank of America/Merrill Lynch

Back to the MMDA I know that you are moving balances from the money market funds. In the quarter what were the dynamics there with the MMDA balance? Was most of the growth in the balance from the planned shift or was the growth in the balance from just net new assets?

Bill Gerber

$6 billion of it was the shift from clients who were in the money market funds to the MMDA. The rest would have been organic.

Faye Elliott – Bank of America/Merrill Lynch

The rest of the shift comes through in the first quarter?

Bill Gerber

Yes, January 2010 we have about $4.5 billion that’s sitting on our balance sheet and we will be moving that off of our balance sheet into the MMDA program in January 2010.

Faye Elliott – Bank of America/Merrill Lynch

For the investment products is that mostly, sorry I’m somewhat new to the story, MMS or is there?

Bill Gerber

Its mutual funds and the money market funds.

Faye Elliott – Bank of America/Merrill Lynch

Is there a percentage breakdown?

Bill Gerber

I’m not sure we have that out there. Why don’t you call Bill Murray after and you can go through that.

Faye Elliott – Bank of America/Merrill Lynch

Compensation expense probably sustainable based on thinkorswim at this level and same with we’ve already gone over advertising then the higher amortization levels sustainable?

Bill Gerber

The amortization is principally due to the thinkorswim purchase price and I’m writing down the client list on thinkorswim.

Faye Elliott – Bank of America/Merrill Lynch

Would that be a one time increase over your more normal level or will it stay at this level?

Bill Gerber

That will stay at that level for several years.

Operator

Your last question comes from Joel Jeffrey – KBW

Joel Jeffrey – KBW

How much of your dark volume is comprised of your top ten percent of your clients?

Fred Tomczyk

We don’t disclose at that level of detail. Any player in financial services is going to get a good chunk of their revenue or their profits from 20% of their clients. I think that’s very common in financial services.

Joel Jeffrey – KBW

Excluding saying that, have you seen that percentage increase or decrease recently? Just trying to figure out again how much of the active trader business is really driving your results.

Fred Tomczyk

The reality is there’s no standard definition of active trader so it’s all in how you personally define it. We haven’t really seen a change over the course of the year. You can see changes in very short period of times but over any 12 month period it tends to be pretty constant.

Joel Jeffrey – KBW

You commented that your options volume account for 10% of the options clearing volume. Is that a number you expect to see growing or is that something we should look at in terms of thinking about the business going forward?

Fred Tomczyk

It’d be nice to see it grow but traders do move around to different products depending on certain dynamics in the market at any given time. The only thing that can happen is when the Fix is very high people will move out of options into other products and visa versa when the fix comes in sometimes they go back to options. We certainly hope to grow it and we like the options business we’re big at it and we just hope to grow it. If we can increase our percentage of OCC volume that would be great.

Thank you everybody for joining us this morning. As we said, we finished the year with a strong quarter. We’re very happy with our organic growth. We set records pretty much in all of our core metrics and that combined with our balance sheet and cash position. I continue to believe that the company is very well positioned strategically for continued growth and to take advantage of opportunities to deliver increased shareholder value. Thank you and we look forward to seeing you next quarter.

Operator

That concludes our conference for today. Thank you for your participation.

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Source: TD Ameritrade Holding Corp. F4Q09 (Qtr End 09/30/09) Earnings Call Transcript
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