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TD Ameritrade Holding Corporation (NYSE:AMTD)

F2Q2014 Earnings Conference Call

April 23, 2014 08:30 AM ET

Executives

Fred Tomczyk - President, CEO

Bill Gerber - CFO

Bill Murray - Managing Director, IR

Analysts

Richard Repetto - Sandler O'Neill & Partners

Patrick O'Shaughnessy - Raymond James & Associates Inc.

Joel Jeffrey - Keefe, Bruyette & Woods

Kenneth Hill – Barclays Capital Inc.

Michael Carrier - Bank of America Merrill Lynch

Alex Kramm - UBS Investment Bank

William Katz - Citigroup Global Markets Inc.

Chris Allen - Evercore Partners

Christian Bolu - Credit Suisse

Christopher Shutler - William Blair & Company

Operator

Good day everyone and welcome to the TD Ameritrade Holding Corporation’s March Quarter Earnings Results Conference Call. This call is being recorded. With us today from the Company is President and Chief Executive Officer, Fred Tomczyk, and Chief Financial Officer, Bill Gerber.

At this time, I’d like to turn the call over to Bill Murray, Managing Director of Investor Relations. Please go ahead, sir.

Bill Murray

Thank you, operator, and good morning, everyone and welcome to the March quarter earnings call. If you haven’t already refer to our press release and March quarter earnings presentations, which can be found on amtd.com.

Our Safe Harbor statement and reconciliation of certain non-GAAP financial measures to the most comparable GAAP financial measures are included in the slide presentation. Description of risk factors can be found in our most recent financial reports, Forms 10-Q and 10-K.

As usual, this call is intended for investors and analysts and may not be reproduced in the media in whole or in part without prior consent of TD Ameritrade. This morning Fred and Bill will go through our normal operating review of the quarter results, following that and before Q&A Fred will come back to give his thoughts and perspective on the recent headlines surrounding the recent release of the Flash Boys book. As is our normal custom, please limit your questions to two so that we can get to as many analysts as possible.

With that, let me call -- let me turn the call over to Fred.

Fred Tomczyk

Thank you, Bill and good morning and welcome everyone. The momentum we built in the first quarter has continued through to the second quarter of fiscal 2014. After gathering results remain strong and client trading climb to record levels. The retailer investor is clearly engaged. And we see this in all of our metrics we look at in measuring client engagement.

Let’s take a look at the quarter’s key highlights on Slide 3. We posted our second consecutive record quarter for net revenues with $812 million, up 20% year-over-year and diluted earnings per share of $0.35, up 35% year-over-year. Year-to-date earnings per share were $0.70, up 32% year-over-year.

We cross the $600 billion threshold for total client assets one-year after hitting the $500 billion mark ending the quarter $617 billion, up 19% year-over-year. Net new client assets were $12.2 billion, an 8% annualized growth rate and within our forecasted range.

Our average client trades per day for the quarter were a record 492,000, an activity rate of 8.1%, the best activities rate we’ve seen in a decade. We grew average fee-based balances to $134 billion, up 20% year-over-year. Interest sensitive assets ended the quarter at $96 billion as clients continue to cycle cash back into the markets.

Let’s take a closer look at how each piece of our growth strategy fared, starting with asset gathering on Slide 4. This quarter we brought in $12.2 billion in net new client assets, an 8% annualized growth rate. That brings us to a total of nearly $27 billion or 10% annualized growth for the first six months of fiscal 2014.

Both our retail and institutional channels continue to exhibit strength in asset gathering. Our retail channel had its best quarter for net new client assets in three years continued retail reengagement combined with heavier media spend for the Olympics and retirement season yielded a significant increase in traffic to our Web site. This combined with improvements we made to our online account opening process have resulted in strong new client acquisition.

Technology improvements, like the introduction of a new portfolio analysis tool and the implementation of lean in our branches have led to increased sales production. As a result, retail channel inflows are up and asset retention continues to improve nicely.

On the institutional side, our pipeline remains full as sales efforts continue both with existing RIAs and the breakaway broker market. We also attribute some of this growth to improvements in our client offering that are encouraging more engagement from RIAs.

One of those improvements is our options market center, something we’ve talked about before. This unique offering has increasingly helped us attract a new type of RIA, one that more readily adopts option strategies in its clients’ portfolios. This broader appeal is having a positive impact on our already strong sales funnel.

Let’s move on to trading on Slide 5. Engagement across the board from retail clients to RIAs was up. Our record DARTS of 492,000 were up 30% year-over-year and April is still trending strongly with month-to-date trades averaging 459,000 per day. Our quarterly activity rate of 8.1% is the highest we have seen in a decade as we saw increase in intraday volatility over the quarter.

The S&P 500 moved 1% or more 25 days within the quarter compared to 12 days in the same quarter last year. Nearly every client engagement metric from logins to number of accounts that traded was up for the quarter. More clients were logging in; more clients were logged in were trading, and more of the clients trading where trading more. Engagement was up across all four of our key platforms with mobile leading the way. Retail investor behavior continues to suggest an increasingly bullish sentiment.

Our investor movement index has posted an increase in each of the last six months and is currently at its highest level in the four years that we tracked it. Derivative trades came in at 39% of our daily trades and we saw a record average derivative trades per day of a 192,000 and strength in mobile continues which accounted for a record 13% of our daily trades or 64,000 trades per day on average in the quarter.

On average more than 300,000 clients are using our mobile apps on a weekly basis. That’s up approximately 50% from first time last year. Now as investors continue to reengage with the markets, we’re seeing more client interest in tools and education.

Now let’s turn to investment product fees on Slide 6. Investment product balances continue to rise as sales remain strong. Amerivest sales remain strong and AdvisorDirect sales continue to advance at record levels. Year-over-year investment product fees were up 21% and balances were up 20%. Sequentially, revenues were up 4% and balances were up 2%.We continue to view this growing revenue stream as important to our longer term growth strategy. And we look to further broaden out our offerings in the coming quarters.

Now let’s turn to Slide 7. The macroeconomic environment continues to improve. Inflation remains in check, job numbers have been steady, economic growth while still low by historical standards is steady and trending in the right direction. And we’d expect that to continue as we progress through the year. This has helped fuel continued broad based retail engagement.

Trading for the quarter was at record levels and while down slightly in April is still trending at a strong healthy clip. Margin balances are also at record levels having grown with the markets and the improved investor sentiment. We continue to execute on our asset gathering once again delivering strong results in both our retail and institutional channels.

We’ve just come out of retirement season, our busiest time of the year with strong results as we finish the first half of fiscal 2014 with 27 billion and net new client assets at 10% annualized growth rate. While client activity may moderate, we believe good investor engagement will continue and trading should come in at the high-end of our guidance range.

We believe that as the Fed continues to taper and consider other monetary policy changes, we'll continue to see volatility which will bode well for trading and for our business. We finished the first half of 2014 strong, with $0.70 in earnings per share built upon two consecutive quarters of record net revenues. As we move to the latter half of our fiscal year our focus will remain on executing our growth strategy and building our underlying earnings power while investing in the future.

And with that, I'll turn the call over to Bill.

Bill Gerber

Thanks, Fred, and good morning, everyone. Despite a continuing challenging rate environment, we generated another record quarter for revenues surpassing last quarter's record. This growth was primarily driven by record trading and record margin lending as more investors found opportunities to engage in the markets. In addition, we delivered another strong quarter of asset gathering.

With that, let's begin the financial overview on Slide 8. We’ll start with March to March comparisons on the left side of the page. Note that there was one more trading day this quarter. Overall, year-over-year revenue is up 20%, expenses are up 11% and as a result pre-tax margin was 39% of revenue, while net income and earnings per share increased 35%.

On Line 1, transaction-based revenue is up $87 million or 30%, driven by record trading levels which increased year-over-year by 114,000 trades a day. However, slightly offsetting this, commission rates fell $0.16 due to trade mix.

On Line 2, asset-based revenue is up $47 million driven by margin lending revenue up $60 million due primarily to balance growth. Investment product fees up $13 million also due to balance growth and stock lending revenue up $15 million, primarily caused by a greater pool of available collateral as margin loans grew, plus broad based market performance stoked demand on the short side. As a result, revenue was up $133 million year-over-year and grew to a record $812 million during the quarter.

On Line 5, operating expenses excluding advertising are up $29 million or 8%, primarily due to expenses related to the increased trading volumes, the impact of strategic growth initiatives driving increases in headcount and higher incentive expenses due to our results. We will continue to closely watch our expenses, but will prudently invest where we think it makes sense to do so, primarily in technology. With that said, we expect our operating expenses excluding advertising to stay in the low to mid 390s for the next couple of quarters.

On Line 6, advertising expenses came in at $94 million as expected, up 24% from the prior year, primarily the result of additional spend relating to the winter Olympics sponsorship. Ad spend should return to more normal levels in the June quarter. This all resulted in net income of $194 million and earnings per share of $0.35, up 35% from the same quarter last year. On Line 15 and 16, EBITDA was $369 million or 45% of revenue.

Moving to the sequential quarter comparisons on the right side of the page. Note that there were two less trading days and two fewer interest days this quarter. Revenue was up $60 million primarily on transaction based revenue driving $46 million of the increase due to volumes, increased stock lending balances in the stock lending business -- our margin lending balances and the stock lending business mentioned earlier.

Total operating expenses were up $44 million due to the increased ad spend of $31 million and seasonal tax resets and merit increases beginning January 1st. The result was earnings per share was flat at $0.35. Year-to-date earnings per share is $0.70 versus $0.53 last year, an increase of 32%. This is the second best six months in our history trailing only 2008.

Now let’s turn to spread-based revenue on Slide 9. Spread-based revenue continue to grow despite the rate environment. On a year-over-year basis, this quarter we finished at $348 million in revenue, up 11% from last year. Additionally, balances averaged $91 billion in the quarter, up $8 billion or 10% from last year. The net interest margin came in at 1.52%, flat from last year, but up 11 basis points from a low point in the September quarter.

Of note, margin lending revenue is up $16 million due to $2 billion of higher average balances, partially offset by a slightly lower rate due to the mix of clients. Margin balances ended the quarter at a record $11.2 billion, up 15% from last year. The increase in margin balances in our client base allowed for an increase in stock lending and as a result our net stock lending revenue benefited. Sequentially, revenue increased $13 million or 4% primarily due to the elevated margin balances and stock lending revenue.

Now let's discuss the IDA on the next slide. On a year-over-year basis, average balances are up $6 billion or 9%, but revenue is up $2 million as the balance growth contributed $80 million of higher revenue offset by lower rates driving $60 million less revenue. Sequentially, balance growth is flat, but two fewer interest days and two basis points of rate compression due to slightly higher average floating rate balances resulted in $6 million less revenue.

Client participation in the market is masking the impact of net new asset growth to our IDA balances. Our clients were once again net buyers in the quarter by approximately 13 billion combined with the 12 billion of net buyers in the first fiscal quarter, our clients have been net buyers of 25 billion year-to-date as compared to the 27 billion of net new assets year-to-date.

Finally, our reinvestment strategy is unchanged. Please refer to the slide in the appendix that shows the various trends in the yield curve. Given the current rate environment, it is likely that our IDA net yields will stay at the lower end of our full-year guidance range.

Now let's turn to Slide 11. Interest rate-sensitive balances are up $8 billion or 9% from last year due to organic growth. We finish the quarter with $96 billion in interest rate-sensitive assets, a slight decrease from the prior quarter. We saw more clients deploying their cash into the market.

As a result, client cash as a percentage of total client assets ended at 14.8% in the quarter, slightly below our historical range of 15% to 20% and the lowest we’ve seen since September 2007. Overall consolidated duration was essentially flat at 2.4 years as of March 31st. Finally, as we’ve said many times before and we will continue to emphasize, we remain very well positioned for rising rates. Our sensitivity shown on the slide is unchanged.

Now let’s turn to the final slide. We're pleased with what we saw in the markets over this past quarter as client engagement levels were some of the best we have seen in quite some time. Our investor movement index once again hit an all-time high during the March quarter. Trading and margin lending hit record levels and were the primary drivers to our record revenue. Year-to-date we’ve managed to gather approximately $27 billion in client assets at 10% growth rate.

Amerivest and AdvisorDirect sales continue to fuel strong fee-based balance growth. Also we’ve maintained a strong balance sheet and continue to generate strong cash flows. Finally, we’ve declared a quarterly dividend of $0.12 per share. We are now half way through the fiscal year and we’re at $0.70 of earnings.

Based on the current conditions, we’d expect to be near the high-end of our full-year guidance range of $1.20 to $1.40 and if trading remains strong, we could be over $1.40. We are succeeding in those areas that we can control and we remain confident in our strategy and business model will continue to work well for us.

With that, I’ll turn the call back over to Fred, for some additional comments before we go on to Q&A.

Fred Tomczyk

Thank you, Bill. Before we turn the call over for Q&A, I’d like to address some of the market structure issues that have become a topic of the much discussion in the recent weeks. First of all, with so many participants weighing in on this subject, we’ve seemed to have lost perspective of where we’re in terms of U.S equity market structure. It has become a debate pitting one participant’s opinion against that of another’s opinion. The fact of the matter is that our current market structure is the result of some very thoughtful regulatory changes over the last decade or so, coupled with significant investments and innovations in technology.

The U.S equity market is one of if not the best functioning and most efficient markets in the world. Over the last decade, retail and institutional trading costs have declined and are amongst the lowest in the world. Bid-ask spreads have narrowed significantly. Liquidity as measured by shares and dollar volumes have increased and execution speed, something which is very important to the retail investor has improved considerably.

Speaking as one of the leading retail brokers in the country, if we want to have a discussion on market structure, then let’s do it in a thoughtful, fact-based way focused on the issues that we all agree are problems and should be addressed. This is a very complicated subject and any changes need to be carefully thought through, fully researched, analyzed and tested to ensure that we will benefit the markets and investors rather than move us backwards.

Take for instance high frequency trading. This is a term with no agreed upon definition. That means different things to different people. But based on our analysis, there is no question that the regulatory changes and the electronification of the markets, including most high-frequency trading techniques have been good for retail investors.

With that said, there are some techniques that may be harmful and undermine the credibility of the markets. These are areas that should be addressed, but we encourage a thoughtful fact-based review to get at the heart of the issue and the root causes and if predatory practices exist, they should be addressed.

But to broadly say that all high-frequency trading is bad is like saying that the advancement of technology big data and analytics is bad. The fact is that the retail investor has never had better access to the markets or better execution quality. 10 years ago, 10 second executions were the norm. Now they happen in less than a second.

Before decimalization was introduced in 2001, bid-ask spreads were 1/16 to 1/8 or $0.06 to $0.12 wide. Today the average is approximately $0.02 and penny wide in most of the actively traded names. And in 2003 price improvement occurred on marketable orders for listed stocks on average 14% of the time. Last year it occurred 80% of the time, a fivefold increase.

In fact TD Ameritrade has consistently outperformed the industry average in providing price improvement more than 90% of the time on marketable orders for listed stocks. And this is how our routing strategy works. First we give our clients choice. They can chose to route their orders using a smart router or they can choose from a list of direct routing destinations.

Second, we do not internalize orders. We believe that turning all client orders back to the market is more transparent and better aligned with the needs of our clients. Instead we work with multiple market participants which are selected after an extensive due diligence where best execution is our top priority as well as financial strength and stability.

And third, we evaluate their stability, execution quality and consistency every day. We hold our market centers to a very high standard and on the unlikely event that there is a degradation in best execution we have a discussion or we adjust accordingly. This allows us to do two things. One, create redundancies. We want backup destinations in the event that one of the markets venues has an issue. The client experience should be seamless as possible. And two we encourage competition, which result in faster executions and better pricing for our clients.

Lastly, we make a conscious effort to deal with market participants that are there for our clients in good times and in bad times. After and only after seeking best execution, we turn our focus to how we optimize where our flow is routed in order to maximize revenue opportunities or lower transaction costs.

Some of those opportunities come in the form of payment for order flow. The payments we receive from some market participants do not interfere with our efforts to seek quality execution and optimize the value proposition for our clients. Payment or no payment, best execution is our number one priority. We believe that our approach is the most efficient effective way for us to deliver on our best execution responsibilities and our value proposition for retail investors.

At TD Ameritrade we will always advocate for the retail investor. We believe that our current market structure while greatly improved in recent years particularly for retail investors does have some areas that should be reviewed and studied. Areas we think deserve attention include equal and timely access the information, the number of order types in the market, order to trade or quote to trade ratios, and technology resilience -- resiliency in an effort to address a number of the glitches that have occurred.

We encourage a fact-based effort to get those issues on the table and deal with them in a disciplined, thoughtful way by people who understand their complexity and the impact they have on the greater market structure in retail investors. But let's not throw the baby out with the bath water. The U.S equities market is one of if not the best functioning and most efficient markets in the world and retail investors are getting better and faster execution at lower cost today than at any time in the history.

Solutions that address the underlying problems while retaining the benefits of our current market structure will ensure that we do not set backwards. Let's continue to level the playing field for retail and institutional investors by enhancing transparency, access, and value in a very competitive market structure.

And with that, I'll turn the call over for Q&A.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question is from Rich Repetto with Sandler O'Neill. Please go ahead.

Richard Repetto - Sandler O'Neill & Partners

Yes. Good morning, Fred. Good morning, Bill.

Fred Tomczyk

Hi Rich.

Richard Repetto - Sandler O'Neill & Partners

I guess the first question is -- was on the strong NII and the securities lending and margin loan balances. And I’m just trying to -- try to gauge like the sustainability of the securities lending because Bill -- I hear you said greater pool of available collateral and you said something about market-based stocking demand or demand stocking. So I just -- should we just look at how margin balances are trending to sort of model out the securities lending and the outperformance you’ve seen and how well margin loan balances, we know they ended the quarter higher than the average, but how are they in April as trading has come off a little bit?

Bill Gerber

Yes, so -- I mean margin lending has increased again. So it’s higher now than it was at the end of the quarter. And we do see a few things. I think what the best way to think about it, one of course is look at margin lending because as I said that does provide the approval that it's available for us to loan. And two, I think generally speaking, look at the overall short interest would probably be a decent gauge to determine is there more short activity, because those are the two drivers. So as I said, so one, the balances were up which drove more collateral available. And two, the market did have a lot more shorting going on in the quarter and those two elements is what drove the revenue. So, I am cautiously optimistic that that’s going to continue into each quarter. But as to your point, this is a difficult one to model.

Richard Repetto - Sandler O'Neill & Partners

Got it, okay. Thank you. And then my follow-up Fred, so thanks for the balance comments here on market structure. And I guess my question is just a bit more specific to Ameritrade, but payment for order flow; do you suspect that’s going to be any changes in the payment for order flow regulations and if so what are some -- what's important to Ameritrade and what alternatives might, if there was any changes if you see that?

Fred Tomczyk

Payment for order flow has been around for a long time, it's been looked at before. So this isn't the first time this has come up for a discussion. So, we don’t have any particular inside knowledge, but we’re not anticipating because of books been written, but all of a sudden payment for order flow is going away. I would also add that, and it's a hypothetical question of it going away. We normally don’t answer those, but in any situation where something changes and almost we would look at it and say, after we’ve looked at to our best execution responsibilities, we would look to extract value from our order flow. And we believe that in any competitive market structure, and we believe we will continue to have a competitive market structure. Our flow has value, that’s been proven out, and we’re going to look to whatever variety of ways and alternatives are available to us to make sure that we extract some of that value, but after we’ve looked after our best execution responsibilities.

Richard Repetto - Sandler O'Neill & Partners

Got it. Thanks and congrats on the strong quarter.

Fred Tomczyk

Thanks.

Operator

Our next question is from Patrick O'Shaughnessy of Raymond James. Please go ahead.

Patrick O'Shaughnessy - Raymond James & Associates Inc.

Hi, good morning guys.

Bill Gerber

Hi, Patrick.

Patrick O'Shaughnessy - Raymond James & Associates Inc.

So I was hoping if you could talk about your trading volumes after Michael Lewis’s book came out. Did you see any impact on your customers all of a sudden thinking, hey maybe the market is not there for me and maybe I should take a step back or do you think that your customers kind of shrugged it off?

Bill Gerber

Well, I’ll give you some statistics. First off, trading did not change after Michael Lewis’s book. And just to give you some statistics we don’t pay attention to what certain media people say as much and we don’t pay attention to what some our peers say as much. We pay attention to what our clients say. And we have had, I think it's -- let me get them here for you, 70 phone calls and 112 emails on this. So, this is from our perspective not a hot issue with our customers, that’s not to say we don’t take it seriously, but it's not a hot issue with our customers. And our perspective on this is, this is a Wall Street issue, not a Main Street issue and we’re on Main Street front.

Patrick O'Shaughnessy - Raymond James & Associates Inc.

Got you. I appreciate that. And then for my follow-up, Fred if I caught your comments correctly you talked about broadening your investment product offering in a couple of quarters, is there any additional detail you can provide on that right now?

Fred Tomczyk

The team is working through that right now, but I think what we’ve learned with Amerivest is, it's important to have the right types of products for different market environments and whenever it happens to be in demand not unlike any large asset manager and so we continue to look at that, and the team is looking at launching another version or two of Amerivest probably before the fall.

Patrick O'Shaughnessy - Raymond James & Associates Inc.

All right, great. Thank you.

Operator

Our next question is from Joel Jeffrey of KBW. Please go ahead.

Joel Jeffrey - Keefe, Bruyette & Woods

Hi, good morning guys.

Bill Gerber

Hi, Joel.

Joel Jeffrey - Keefe, Bruyette & Woods

Over the past year you guys haven't been terribly active in terms of share repurchases. I’m just wondering if you’re kind of rethinking that activity level given its stocks just kind of maintain this above 30 price level since the beginning of the year. Kind of any updated thoughts on how you’re thinking about share repurchases?

Fred Tomczyk

It's something that we sit down and look at and talk about after each quarter and reevaluate our priority list in terms of where we want to -- what we want to do with our free cash flow and strong capital levels. I think that the truth of the matter is I think we did think about it, certainly when it went down below 30 we thought hard, but we’re unable to make any moves because we’re in a blackout period. But I think right now Bill and I talked about this yesterday, and I think our buyers would continue to lean towards dividends in the current environment.

Joel Jeffrey - Keefe, Bruyette & Woods

Okay, great. And then just, thinking about the trading activity being up and as strong as it's been, and the net new asset flow is coming in. Should we think about a lower percentage of client assets coming in as cash and having that in kind of negative impact on the growth rate of the IDA balances?

Fred Tomczyk

No, we haven't seen that indication at all, no accounts continue to have a good cash level, in fact a higher cash level than you’re seeing on average. And we haven't seen any changes in that. I think what we’ve seen here is just we’ve seen for the first 6 months, $27 billion in net buying activity in both our retail and institutional clients, and it's just, we got it -- we’re going into a market environment where people are very -- happen to be very bullish and to be looking to invest. So I think all you’re seeing of the cash level’s is that that bullish settlement come out in the cash allocations which are at the low end of the ranges we have seen over the last 10 years.

Joel Jeffrey - Keefe, Bruyette & Woods

Great. Thanks for taking my questions.

Operator

Our next question is from Kenneth Hill of Barclays. Please go ahead.

Kenneth Hill – Barclays Capital Inc.

Good morning, Fred and Bill. How are you guys doing?

Bill Gerber

Hi, Kenneth.

Kenneth Hill - Barclays Capital Inc.

So we’ve seen your partner TD Bank talk about growing its wealth business more dramatically. You guys seem to be a key piece of that expansion here in the U.S. I know that relationship has been good for you guys, good for them as well, but I was hoping you could speak a little bit more to the intention to grow that wealth business in U.S. and what that could mean to you guys over time?

Fred Tomczyk

Well we believe that in our discussions with them, where they’ve been a good strategic partner over the years and we anticipate that continuing. In our discussions on this one, they’re more interested in the high end of the wealth business what you would typically call our A-type of market, and more of a private banking type high end that’s part of the market. We are much more on our retail side, a mass -- mass affluent type marketing firm obviously we bump into each other a bit, but that’s common of all wealth models. But really we’re trying to grow both sides of the equation in a partnership oriented way through their customer base and brand system. As I have said before, I think they had a certain strategy in the best of intentions. We have a strategy in the best of intentions, but getting two organizations to get this working together well will take time. But (technical difficulty) management intentions and strategy we’re pretty much aligned.

Kenneth Hill - Barclays Capital Inc.

Okay. And then, I think Fred in our comments you mentioned the RIA trend seem to be good, and you see innovative offerings like the options market center helping to drive new types of RIAs to your platform. I was wondering kind of how that’s translated to customer base and any shifts you’ve seen in the customer base with the goal there being to garner maybe a more useful component to it over time?

Fred Tomczyk

Well the RIAs client base will definitely lean towards older and wealthier by -- that’s the market they’re after. We’re seeing in the RIA channel, there’s about 1000 RIAs that are now using options in their business in one way shape or form. And approximately the 50% of RIAs that use options have over $100 million of client assets. So it's tends to skew to the higher asset intensive and that’s what we were trying to hand out, it basically is taking us up. It's not that we haven't been in that market it's increasingly attracting the larger RIAs to our offering. And then on the retail side, it is -- we’re just seeing options continue to have appeal, mobile continue to have appeal. So, we’re seeing a lot of changes in technology and the way people are investing particularly the, what you might call the millennials today.

Kenneth Hill - Barclays Capital Inc.

Okay. Thanks for taking my questions.

Operator

Our next question is from Mike Carrier of Bank of America. Please go ahead.

Michael Carrier - Bank of America Merrill Lynch

Thanks guys. Bill, maybe a question just on the expenses and then I think tax rate. So, just on the expanses, I think this quarter is always seasonality and you guys guided on the advertising side. So, I guess when we get the moderation I think you mentioned sort of that $390 million range ex-advertising. Within there, is that like predicated on this higher activity run rate, so meaning like clearing an execution, cost being a little bit higher, comp being a little bit higher. And then, I just wanted to get some color on the seasonality particularly on comp and advertising, and then the tax rate’s simply was a little higher this quarter, so I didn’t know if there was anything unusual there.

Bill Gerber

Okay. So, yes on the expenses you’re exactly right. Certainly more trading activity will drive more in clearing the execution et cetera. Obviously our results being towards the high end would therefore as I said in the remarks tend to increase the incentive as well. So those two things for the last half of the year if the results continue and the trading continues strong then yes those will be elements that we’ll see a -- it will be a little bit hotter than what we had envisioned particularly at the midpoint of our range. On the taxes of course, well first two things; one is the seasonal resets that you have in FICA and all that other jazz and the other merits in January 1, I mean those are all elements too. We obviously know those are coming and have those factored in, but they are a change sequentially. On the tax rate, the tax rate actually was pretty normal this quarter. It was last quarter that we had the state tax benefit that lowered the December quarter rate, and so I would say that in, this may come as a surprise to you pal, but the states continued to increase their tax rate. And so we’re fighting through all the states that are increasing taxes et cetera. So, right now I would say the quarter that we had was pretty clean and would be a reasonable rate to use going forward for a while.

Michael Carrier - Bank of America Merrill Lynch

Okay. And then Fred, just on activity levels, so when you look at the activity this quarter, was there anything you would characterize as unusual. I mean it seems like based on your guys index it's been kind of a consistent improvement in kind of the outlook from the retail investor for some time. And then I guess on that front we all sort of come up with some growth rate for DART activity over time and it tends not to be that strong. But are areas like increasing use of derivatives or the mobile technology, are those structural growth driver’s that can take that growth rate a bit higher than maybe what some of us would think would be more normal?

Fred Tomczyk

The way we look at it is it's hard to point to any one thing that’s going to move the activity rate over like about a 12 month period significantly other than settlement and volatility. Those are the two things. I think in the long-term we look at things like there’s no question when you have more derivatives, people tend to trade more and they tend to be more resilient in their trading, because options in futures expire. So you have to re-put your position on, on a regular basis. There’s also no question that options in futures traders know how to trade in almost any type of market versus where if you’re an equity trader in a down market you’re not sure what to do, and we have seen those play out. But mobile, we would definitely say is a long-term secular shift. I think derivative is a secular shift. But mobile we know for example that people that trade with us with mobile trade on average one time more per month than people that don’t. And so we do see some long-term shifts, but it's hard for me to say that that’s going to dramatically change in any material way the trajectory of growth in trading over the next 12 months as an example. It may over time, but I think what's catching our attention is when you see the number of people using mobile with us every week up 50% year-over-year, there’s no question this is a definite trend and you’re seeing that in the technology industry and you’re seeing it in our industry. But I think what -- as we look at it from here there’s no question. I think we had a bit of a correction in some certain biotech and social media, and so our newer tech stocks here, so we’ll see how that fairs on the IMX in April. But anytime you have the kind of increasingly bullish settlement that we’ve had over the last 6 to 9 months, and you have increase in volatility, our trading is going to be strong than it was this past quarter.

Michael Carrier - Bank of America Merrill Lynch

Okay. Thanks guys.

Bill Gerber

Okay, Mike.

Operator

Our next question is from Alex Kramm of UBS. Please go ahead.

Alex Kramm - UBS Investment Bank

Hi, good morning.

Bill Gerber

Good morning.

Alex Kramm - UBS Investment Bank

Just wanted to come back and sorry to beat the dead horse on the whole market structure or payment for order flow discussion, I think you laid it out very well. I think the one thing I’d be curious about is that, I mean this is, payment for order flow in particular it's been something that’s been reviewed several times. I think it was mentioned briefly in the concept release in 2010. So, maybe if you can just give us, I don’t want to say a history lesson but maybe just how you’ve been involved with regulators in the past like, how engaged you are in these discussions, like where you’ve been asked in the past and how you’ve argued the case. And then maybe, if there’s been any increase in engagement with the staff or commissioners from your person level in the last few weeks after this has obviously been a much bigger issue here?

Fred Tomczyk

We normally do not comment on interactions with the regulators, but I can say, I have had no discussions with anyone at the SEC in the last two or three weeks. Historically I mean, the last time this whole -- what I find interesting here is, just give you a bit of a lesson here, it's interesting, I think there was been two books written on the whole market structure here in the last year, one was called Dark Pools by Scott Patterson. I thought it was a very good book, very soundly written. It was interesting back then 6 months ago Dark Pools were the evil enemy of the empire here. And here we go into the Michael Lewis’s book called Flash Boys, and we have a new evil enemy. And what’s interesting to me and the hero of that book is the IEX and no disrespect to the IEX, but they want to become an exchange but they’re actually in fact a Dark Pool today. And so, as you look through all this, this does move around. But the history here if you go back through time has been the SEC has always done this in a very thoughtful way, a very fact based way from our perspective, that’s all you can ask for. They weigh every participant’s views which I think they should -- we can all also ask for, but it's not like lobbying the government, the Federal politics. They’re a very different organization with a very different mandate. And that’s all you can ask for, but it's always been consistently to encourage a competitor of market because they believe that’s the best way to encourage competition and make the markets efficient. And all the way through they have been consistent in applying that in a very thoughtful way, a competitive market and making sure that the markets is efficient and robust as possible.

Alex Kramm - UBS Investment Bank

That’s great, thank you. And then just secondly, maybe just a little bit more about April. I mean obviously you have given us the DARTs number and some of the other metrics here. But I think you just mentioned to an earlier question that there has been a big, there was a mini correction here, so can you just talk about anything you’ve seen in terms of behavior that we should be aware of and also we have the tax paid and that sometimes that drives a little bit of cash outflows. I think more so for your competitor but, anything we should be aware of as we think about April here with almost the month done here.

Fred Tomczyk

I think where we are right now in April it's hard to read. We just had a mini correction but we have also had a series of vacations, anybody that lives in New York knows that. New York hasn’t been the normal New York the last week or two. But a lot of people are way on vacations and I think it's continued till this week. I have never got to work so fast, and it's kind of slow right now, number one. Number two is, on tax payments I think almost anybody in this business is going to have tax outflows for taxes right now for a bit, probably through that now I would guess given that April 15th has come and gone although there’ll still be some checks, cash. But when the market was up 30% last year people had capital gains and a lot of people did harvest them and if they did basically they’re going to have tax liabilities.

Alex Kramm - UBS Investment Bank

Okay. Very good. Thank you.

Operator

Our next question is from Bill Katz of Citi. Please go ahead.

William Katz - Citigroup Global Markets Inc.

Hi, thanks very much for taking the questions. I apologize for also asking question on payment for order flow. But when you define -- a little bit of a technical question I apologize, but when you define best execution can you give me a definition of how you define that please?

Bill Gerber

That is a defined term under the SEC we report. Well, I am sorry about that, let me back up. The best execution is to make sure that you have, you execute in the NBBO that’s published in the market.

William Katz - Citigroup Global Markets Inc.

So, that would be based off of the [ph] [swift] as it stands right now?

Fred Tomczyk

Well that’s how we report on our 605 or 606 reports. That’s the convention.

William Katz - Citigroup Global Markets Inc.

Okay, that’s helpful. And then just sort of stepping back for a second, when you look at -- you mentioned the pipeline is still pretty good in terms of RIAs and FAs. Can you just sort of go into a little bit more in terms of where you’re seeing that demand coming from and then from, in terms of acquisition cost any change in pricing to gather those assets so to speak?

Fred Tomczyk

Well I haven't seen anything particularly in the last quarter. I think it's been a competitive market, heavy use of promotions and incentives. I think that happens in almost any direct response marketing organization or type of business or e-marketing. You’re going to see a heavy use of promotions and incentives and/or teaser rates. And I can’t say I have seen any material change in the last 12 months. It's just very competitive.

William Katz - Citigroup Global Markets Inc.

Okay. Thank you.

Operator

Our next question is from Chris Allen of Evercore. Please go ahead.

Chris Allen - Evercore Partners

Good morning, guys.

Bill Gerber

Hi, Chris.

Chris Allen - Evercore Partners

I think most of everything has been kind of covered. I guess just one question; you mentioned a higher FTE count because of strategic initiatives. Can you give us any color there, does that relate to the ongoing build out of sales or in some other areas?

Bill Gerber

There’s several areas, but yes it's increasing sales people. Obviously this time of the year you have an increase in the call centers to handle the volumes et cetera. But in technology we have added some people, so it's in selected areas but -- and we’re obviously willing to continue to look at that to continue to drive our innovation and the mobiles Fred talked about et cetera so we are making some conscious decisions here.

Chris Allen - Evercore Partners

And the investment in technology that you guys referred to, this is ongoing built out of the platform or is there any kind of specific areas?

Bill Gerber

I mean it's ongoing built out of the platform. You’re doing a few things, always looking for more efficiencies and speed. And you’re looking for new innovation and building new products and so both of those areas I would say are the key drivers.

Chris Allen - Evercore Partners

Got it. Thanks a lot guys.

Bill Gerber

Okay, Chris.

Operator

Our next question is from Christian Bolu of Credit Suisse. Please go ahead.

Christian Bolu - Credit Suisse

Good morning, guys and thanks for taking my questions. I hate to ask another one on payment for order flow, but just would be helpful if you could expand on kind of what alternatives you have to monetize your order flow should payments for order flow go away?

Fred Tomczyk

Well, I am not going to get too specific because I think that’s a hypothetical question. But under current law -- I mean under current rules, you have I think its three options you can internalize which some players do. You just basically set up a market maker responsible --- market maker and do it yourself. So two, you can log to different market venues, or you can (indiscernible) to an exchange whenever. So you have a variety of alternatives. All I’m trying to say is basically, it's clear in any competitive market structure our flow has value and economic value that’s been proven out. People that want to start a venue or start an exchange or whatever are interested in our flow. They need volume. They need liquidity. And we’re a good stable source of volume and liquidity. And so there is a value in that. And in any competitive market structure people will figure out ways to basically, to make the next best adjustment, that’s how we’ve gotten where we are. We have had innovation in the market and we would expect after any other changes that you would look to the next best alternative, and almost any player in the market is looking to lower their transaction cost and/or do revenue share type opportunities for their business when that has economic value and we would do the same thing again. It’ll just be in a different way.

Christian Bolu - Credit Suisse

That’s helpful. Just a follow-up question, on derivatives as a percentage to total trade it stepped down a little bit I think to 39% from 41% last quarter. I realize it's difficult to comment on quarter-over-quarter moves and the absolute number was very strong, but just given that trend has been up basically for a while now, I appreciate any color you have on the decline in the percentage.

Fred Tomczyk

Yes, well I think this one’s actually rather simply because derivatives are used by maybe I don’t know 10% to 11% of your client base. And what you’ve got here is that, the reengagement of the retail investor is very broad based. And so when you get to the other 85% lets call it, the client that’s reengaging and they’re more likely to go into equities, the numbers just overwhelm the derivative trade volume. And so it's just a mad thing about a broad based reengagement by the customer base.

Christian Bolu - Credit Suisse

Great. It's very clear. Thank you very much.

Operator

The next question is from Chris Shutler of William Blair. Please go ahead.

Christopher Shutler - William Blair & Company

Hi, guys good morning.

Fred Tomczyk

Good morning.

Bill Gerber

Hi, Chris.

Christopher Shutler - William Blair & Company

Fred you mentioned Dark Pools, and I’m just curious, I mean if there were regulatory actions taken to move more trading back to the exchanges, how do you think that would ultimately impact your payment for order flow revenue?

Fred Tomczyk

Well it would be, I mean what you’re asking, first off it's a hypothetical question, but I understand the exchanges are looking to move more to their venues, which I don’t blame them for. I mean from an economic perspective it's attracted to them. It would definitely put a dent in it, but it would not eliminate it.

Christopher Shutler - William Blair & Company

Okay. And then just one other totally unrelated the, your advertising spend has been very consistent now for what, I think what's going on about 5 years, so just thinking ahead once rates do begin to rise, do you have plans to ramp up your ad spending and essentially I am trying to figure out if you think you’re leaving any growth on the table as it stands today?

Fred Tomczyk

Well, I think to say there has been a level for the last 5 years is probably not accurate. So I’ll talk in 6 years because I have been -- I’m 5.5 years in now. And so when I first came down we were spending about $140 million a year in advertising in my memory, and now we’re spending about $250 million. So we definitely upped it, because we saw the opportunity in the market and we wanted to broaden out our offer and we made the shift from being just a trading shop -- equity trading shop to an equity and option trading shop, but also to an asset gatherer. So we’ve invested a lot in marketing. It's been constant in probably the last two to three years, I think that’s fair. And I think right now when rates do rise we’ll look at that in terms of where we invest. I think marketing is a little bit more dynamic and a bit of a call on the market environment that you’re in. There is certain market environments where it works really well and other ones where it doesn’t work so well. We have been -- the hard part is predicting those. But if I had to say, where would we invest right now if we wanted to invest, marketing would be on the list. We have always had sales people on the list, but if I had to pick one right now it would be technology because I do think we’re going through a fair bit of change in technology whether it's mobile, the trend to mobile to social media, data analytics all those types of techniques that which are pervasive in almost any business and so I have seen quite a shift and we’re investing in each of those areas rather significantly. And the question we keep asking ourselves, are we investing enough in those areas. Because we do see it shifting and normally these shifts start, they pick up momentum and then they get stronger. We have been at the front edge of that but just got to make sure you can stay at the front edge and keep up with the volumes as it continues to grow.

Christopher Shutler - William Blair & Company

All right. Thanks a lot.

Operator

Our next question is from Alex Blostein of Goldman Sachs. Please go ahead.

Alexander Blostein - Goldman Sachs

Hi, good morning, guys. So, hopefully the last one on payment for order flow, but taking the step back it feels like there’s a couple of hot topics that are at the heart of the issue here and I appreciate the fact that a lot of it is ultimately hypothetical. But when we think about some of the debates whether it's potential change to maker, taker or some of the volumes going back to the lid venues. Do you see anything out there right now that I guess would make the retail flow less valuable to the wholesalers overall, and again I appreciate that it's fairly hypothetical just trying to figure out the different scenarios what kind of a change in economics that could mean for your business?

Fred Tomczyk

Yes, those are hard to get out, because it is a hypothetical question and when you say a change to maker, taker well it depends what the change is. And whether there is a change, number one. Trade out is probably a little easier because there is a definitive proposal on the table by the exchanges, we’re not in favor of trade out for -- we just understand that to us that’s kind of like picking winners and losers. If there is an issue with not enough trades on the let market, then we should have a discussion about how to like the markets and this was the discussion around [ph] [DART pools] or you can like the markets without forcing or picking winners and losers from our perspective. And -- but trade at definitely would have a dense because basically its going to force trades into unless it has a certain improvement level on to a venue where its going to be a cost to us versus our revenue share. And so trade at puts a dent, but it doesn’t eliminate payment for order flow from our perspective.

Alexander Blostein - Goldman Sachs

Okay. Thanks for that. And then, shifting gears a little bit, just want to spend a second on kind of addressing against the breadth of the retail reengagement and where we’re really in the cycle. And I guess the two ways to think about it is obviously you guys are near record or at record as far as activity per account goes. There are two drivers there that’s obviously the cyclical recovery and then there are some meaningful structural talents whether it's the derivatives or the mobile usage, where are we in the cyclical piece I guess? I mean, I don't know if you guys can look at that as a percentage of cash or is percentage of stock ownership between your client base, but just trying to get a sense of is there enough left in the actual cyclical piece of the retail reengagement cycle?

Fred Tomczyk

The -- oh geez, good question actually. I would say to you that in terms of the cyclical change I think we are at the high-end here or the trailing end of the cycle, unless the economy, if we do come out the economy turn stronger here and I’d say April, May, June or even in the fall and the market starts to -- the economy starts to grow faster. I think you'll see it go again, then we would be -- tend to be bullish. But that’s very much a function of the economy and I’m optimistic, but I have been optimistic for a bit and this has been a long tough slog. But I think that where we are in the cycle is largely a function of the economy. And right now I think we paused. We had a good run last year, we’ve had a positive quarter, we’ve been sideways, we had the weather, we’ve had a few events here and there we’ve got events in Russia and Ukraine. So a lot of it is going to depend on the economy and macroeconomic geopolitical events here I think where we go in terms of the cycle. What was the second one? Was that your question or …?

Alexander Blostein - Goldman Sachs

Yes, I know. That was my question -- just I guess trying to better understand where we’re in the cycle, but -- and the structural tailwind that you addressed, seems like it’s more of a steady-eddie progression both on the derivative and the mobile side?

Fred Tomczyk

Yes. The other thing I think with respect to trades, which is on slightly different than sentiment, but a component of sentiment, trades will depend more on volatility from here.

Alexander Blostein - Goldman Sachs

Right. Great. Thanks so much for taking the questions.

Bill Gerber

Thanks, Alex.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Fred Tomczyk for any closing remarks.

Fred Tomczyk

Okay. Well, thank you for your time today everyone. We are obviously -- we had a strong march quarter. We’ve had a strong first half. We are very happy with where we are in terms of our earnings for the year. We are certainly trending very, very well. We have had record net revenues for the second quarter in a row, earnings per share up 35% year-over-year. Asset gathering remained strong and as you can see in our volumes we have got record trading volumes in the quarter, record margin loans and as Rich pointed out strong securities lending which goes out in hand with margin loans. So we’re very happy. I think the management team is going to stay very focused on what it’s to control. Keep our heads down and keep doing our job to execute our strategy. With that, I will talk to you again in July. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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