Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  
TRANSCRIPT SPONSOR
Better Than AdSense

TD Ameritrade Holding Corp. (AMTD)

F2Q07 Earnings Call

April 17, 2007 8:30 am ET

Executives

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

William J. Gerber - Chief Financial Officer, Senior Vice President

Joseph H. Moglia - Chief Executive Officer, Director

Analysts

Michael Vinciquerra - BMO Capital Markets

Patrick Pinschmidt - Merrill Lynch

William Tanona - Goldman Sachs

Richard Herr - Keefe, Bruyette & Woods

Prashant Bhatia - Citigroup Global Markets

Matt Snowling - Friedman, Billings, Ramsey

Howard Chen - Credit Suisse

Richard Repetto - Sandler O'Neill & Partners

Roger Freeman - Lehman Brothers

Michael Goldberg - Desjardins Securities

Matthew Fischer - Deutsche Bank

Michael Carrier - UBS

Scott Appleby - Deutsche Bank

Presentation

Operator

Good day, everyone, and welcome to the TD Ameritrade second quarter fiscal 2007 earnings results conference call. This call is being recorded. With us today are Chief Executive Officer, Mr. Joe Moglia; Chief Financial Officer, Mr. Bill Gerber; and Managing Director of Investor Relations, Communications, and Public Affairs, Mr. Bill Murray. At this time, I would like to turn the call over to Mr. Murray. Please go ahead, sir.

Bill Murray

Thank you. Good morning, everyone. Again, welcome to the TD Ameritrade March earnings call. By now, you have probably seen our press release that was made public this morning. You can also view a copy of the release as well as submit any questions to us via our corporate website at amtd.com.

We will be discussing a number of financial metrics on this call, so in order to more easily follow along with us we strongly encourage you to download and print the presentation now from the homepage at amtd.com. Also, if you want to contact us directly after the conference call, please call investor relations at 800-237-8692.

Before we begin, I would like to note that this call contains forward-looking statements that are made pursuant to the Safe Harbor provisions of the federal securities laws. These statements involve risks, uncertainties and assumptions that may cause actual results to differ materially from those anticipated. Listeners are advised to review the risk factors contained in our most recent annual report on Form 10-K and quarterly report on 10-Q for a description of risks, uncertainties and assumptions related to the forward-looking statements.

On this call, TD Ameritrade management will discuss non-GAAP financial measures, such as operating margins, EBITDA and liquid assets. Listeners to the call can find a reconciliation of these financial measures to the most comparable GAAP financial measures and other required disclosures in the slide presentation and on our website at amtd.com.

Please note 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 call will cover the March ’07 earnings results for TD Ameritrade Holding Corp. At this time, I would like to turn the call over to TD Ameritrade CEO Joe Moglia, followed by our CFO, Bill Gerber. Joe.

TRANSCRIPT SPONSOR

Better Than AdSense

What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price?

This is exactly what Seeking Alpha is offering with transcript sponsorships.

Seven types of companies are sponsoring earnings transcripts on Seeking Alpha:

1. Company sponsors its own earnings call transcript (example).

2. Company sponsors partner's transcript (example).

3. Company sponsors competitor's transcript (example).

4. Issuer-sponsored research firm sponsors client's transcript (example).

5. Investment newsletter sponsors transcripts of successful stock picks (example).

6. IR firm sponsors transcript of micro-cap company (example).

7. Consulting company sponsors company's transcript in sector of interest (example).

Your company's name and promotion could have been on this transcript! Learn more, or email Zack Miller for details.

Joseph H. Moglia

Thanks very much, Bill. Good morning, everybody. This call is going to be the first earnings call that we have had where the two firms have actually been together for four quarters. One of the things that I will point out as we go through some of our numbers is the numbers that we have actually achieved over the span of the last 12 months.

First, for the quarter, we earned $0.23. Now, we had along with the $0.23, we had record client assets and the $0.23 was the second best quarter in our company’s history. It was a little better than the $0.22 that we had a year ago.

However, the $0.23 was at the lower end of our guidance and I believe that the industry is in general now seeing lower activity rates than ideally we would have liked. Certainly that happens to be the case at TD Ameritrade, and I remind you that when you think of the individual investor, recognize that they are lagging indicators in terms of what goes on as far as the market goes. The more the markets demonstrate significant volatility and the more the markets come under pressure, the less enthusiastic they get about getting involved and they tend to back off a little bit and move to the sideline. In effect, I think that that is what we are starting to see. For the last 12 months though we have earned $0.90.

For the quarter, with regard to net revenues, $525 million; 61% of those are based on assets. Over the span of the last 12 months, the number is $2.1 billion.

Pretax income of $230 million -- that is a 44% margin and I remind you that we are still not through the integration or the clearing conversion. For the year, that would be $900 million, or for the last 12 months.

Net income, $141 million. For the last 12 months at 555. EBITDA at 279. For the last 12 months, $1.1 billion, and our annualized ROE for the quarter is 31%. The actual ROE for the last 12 months is 33%.

Now, I am pleased with the actual operating metrics that we have generated so far for the quarter. If you look at the average trades per day, and I want to spend a minute on these relative to my point earlier about volatility, we came in this quarter about 254,000 trades a day. We were able to maintain our overall market share as well as the number one position in the marketplace, but a word about the volatility that we had seen; at the very end of February, we had a day -- remember, this was the day where we had the breakdown in China -- where we did 472,000 trades. We actually experienced a little bit of slowness from outside vendors and market makers. Other than that, our systems were up, incredibly reliable -- it was a great day.

Three weeks later, we did 194,000 trades. That is a pretty big swing over the span of three weeks. The activity rate we had for the March 2006 quarter actual was 4.7. The middle of our outlook for this past quarter was 4.6, and we came in at 4.0. I’m just trying to give you as much color as I can around those numbers. So far in April, we are at, as of last Friday, we are at 234,000 trades a day.

Average investable assets came in at a record $29 billion. Net interest margin was 366 basis points. Client assets were a record $282 billion and client cash and money market funds also with a record $42 billion.

New accounts, we opened up 166,000 accounts. Now, this is more than what TD Waterhouse and Ameritrade would have done when they were operating under separate brands combined, and we are actually 52% ahead of where we were this past December, or last quarter.

Now, in terms of net new accounts, we give you two numbers this time -- the 122,000 and a negative 30,000. What happened was as we move the accounts from TD Waterhouse to the clearing conversion on to the single platform, there are about 152,000 accounts that are dormant at Waterhouse and that have seen no activity whatsoever for quite a while. It does not make sense for us or our shareholders to actually move those over, so we are eliminating those. We are closing those down and consequently, the net new account number will be a negative 30,000.

Qualified accounts, the 3,262,000, continues to come in around the same range that it has been so we are not seeing much change there. But what we are seeing is that the quality of those accounts, the quality of the qualified accounts continues each quarter over the last four quarters to actually improve when you look at average revenues per qualified account and average assets per qualified account. I am just trying to give you a little color around the qualified account numbers because the overall qualified account number has not been moving. The quality of those accounts continues to be good and improve.

Now, on the next slide, along with the financial results that we have had the last 12 months, I am pleased with some of the things that we were able to do while in the middle of our integration. We continue to hold the number one market share in trades per day. We created $15 billion of MMDA funds, and we were able to stabilize the revenue stream that came off of that through our extension strategy.

We have also seen legitimate organic growth. We have opened up 500,000 accounts in the last 12 months and we see excellent growth out of our RIA business. I have told you before that within the financial services community, the RIA sector is one of the faster growing and certainly we are seeing that ourselves and pleased with the growth that we have seen from our end.

Normally, I don’t make a big deal out of things like this but the fact that this is taking place while in the middle of our integration I think is a big deal -- the Forbes 2007 400 Best Big Companies, this is the first time in the history of our firm that we have made that list and we are by far and away, we lead the broker/broker dealers in that category and we are the only broker dealer listed in that top 100. And in the middle of the integration, with all the things we have going on, we were ranked as the number one online broker in Barron’s. So we are pleased with those things, as we have had other things that we have had to focus on.

Now, our priorities, and we have talked about these every time I have met with an investor, every time I have given a talk, and every time we have had one of our calls, our priorities are to get that integration done, the client segmentation strategy rollout, the movement to a sales organization, and an intense focus on 2008.

Guess what? Those are still our priorities. They have not changed and we want to take those one at a time. So first, the slide on the integration and the clearing conversion, the clearing conversion is still on track for May. Now, it is about time to really start to bring the numbers into focus on that conversion with regard to our costs.

The original goal established when we announced the deal and we closed the deal was a fixed cost run-rate target of $333 million. The actual announcement in terms of dollars saved from an operating basis at that point in time was $328 million in actual expense. A couple of quarters ago, we actually established a stretch goal where we moved those targets from a 333 fixed cost run-rate to 302 and an actual expense reduction to 359.

As of now, we are putting a stick in the sand in terms of where we believe the number is actually going to come out and that is what is now in our current outlook. We are stopping at 321 as far as our run-rate goes and the actual expense reductions is 340.

Now, I think if we were to go further than the 321, I think we potentially start to hurt our client experience and we have no intentions to do that. It might be fair to be asked “Well, why did you go to 302 to begin with?” and that is because we believed that there was still some room there and I am not sure we would have gotten to 320, 321 if we did not establish 302 as a goal. So the 321 is where we are coming in as far as our expense synergies go on the integration. That is a 4% improvement from the original fixed cost target and we are eliminating, other than advertising, 60% of all the costs that the TD Waterhouse had.

Now, what does that leave us with? Ex advertising, that leaves us with a total expense September quarter run-rate of $800 million. That is 100% of every dime in expense we have except for advertising.

Next slide, we are now actually beginning -- we have talked about our client segmentation strategy and going after the long-term investor for a long time. We are actually beginning that rollout now as the conversion comes due.

For the first time, all of our retail clients will be on one website with one sales process and one client experience. I am very excited about that and I think that is a big deal. Legacy Ameritrade clients will have full access to cash management, high LCDs, and especially in a fixed income arena, you can’t be in that together without legitimate access to fixed income. We will be able to do that now online. We will have online trading and clients will actually be able to ladder their own portfolios. They never had that before.

Legacy TD Waterhouse now has regular access to Amerivest and the active trading tools that Ameritrade had. They did not have those before.

And we have expanded functionality across the board with regard to products and service. We will have target date portfolios, lifecycle ETFs, and enhanced mutual funds, ETF screeners. Again, the overall account base never had those before.

Now, the next slide you may have some questions on and we are going to spend a couple of minutes on, and that is this concept, investing in our growth, the ’06 to ’08 philosophy that we have talked about.

So first, we will make investments and decisions and we have made investments and decisions in 2006 and 2008 if we believe that they would help us to 2008 and beyond. That has been the strategy all along.

We often get asked, what are we going to do with our cash? We know what the regular answers are -- we can use it to buy back stock, you can pay down debt, you can use it for M&A, or you can reinvest it in your business. In this case, we are looking at reinvesting some of our cash into our business. Many of you recognize that as we approach 2008, we will also approach 60% pretax margins and we have been asked a number of times, especially in these calls, are we at the point where our margins are too high? I said I am comfortable with our margins where they are but I would not hesitate to reinvest some of that margin into what we believe will generate long-term sustainable earnings. That is where we are right now.

So what we are going to do is invest up to an incremental expense run-rate of $100 million. We are going to start that now and we will continue that through fiscal 2008. I will be the one within TD Ameritrade that will allocate those dollars at my discretion. So we are not just handing out $100 million and saying “do what you want with these”. Different leaders within the organization will come specifically to me and talk about an initiative that they feel will make a difference with regard to the gathering of assets and the generation of greater revenues. For me to approve it, it probably almost always has to be client-facing.

So what we are looking at are things like enhanced sales, whether that is in the branches, in the RIA business, the call center, and even more product specialists, and enhanced functionality across products, services, especially in the long-term investor space.

Now, for a while we will also make this transparent for you, so we will have a separate line item -- now, we are not going to break down the dollars per se but you will be able to see exactly where we got to in our costs with regard to the integration, and then you will see again what we are trying to do with regard to these reinvestments because we will keep a separate line item for that. So you will be able to see exactly what we have and exactly what we are doing.

Now, why are we doing this? First of all, when you look at our client base, and we have had discussions over the past, especially when you wanted to ask about pricing. You know, when you lose clients, do you lose them for price? And I said in some cases so but not all the time, and it would be a mistake to look at it as just only for pricing we would lose some clients.

When you look at our account base, and most of the time we do not give this specificity out, there are a bulk of the clients that we lose, especially the high asset clients, are the ones that fall into the pre-retirement and the retirement demographics. They do not leave us because it is a dollar cheaper someplace else. They leave us because we have not been able to provide them with a comprehensive solution to their retirement needs. We are going to be able to do that now.

We also know that we have, when we look at our -- as big a part of the market as we are with regard to trading, we also know that we have less than 20% of our actual client assets. What we do not have are mostly long-term, more serious investable assets elsewhere. We have a solution for that now. Frankly, over the vast majority of our history as a company, our development spend was focused on helping clients to do a better job of buying or selling a stock.

Therefore, if we are going to do a good job to protect and take care of the assets that we have and do a great job of acquiring that many more assets down the road, the key for us is the successful implementation of the rollout of our client segmentation strategy and in effect, we must be able to enhance our position as an asset gatherer in the marketplace. That is exactly what we are trying to do today.

We still expect, and with all that, in 2008 we would still expect to maintain 50% plus pretax margins. I am actually very excited about this next step in our company’s history.

Now, the next slide talks about our guidance for the rest of the year. I feel good about 2007 as we build to 2008 but based on the fact that what we are seeing, we believe it is industry-wide with regard to lower activity from the retail investor. I think there are -- pragmatically, there are still some questions with regard to what is going on with the real estate market and the sub-prime sector and the impact that that is going to have on sister markets or sister sectors and therefore the overall market in general. Again, keeping in mind that retail is a lagging indicator, if the market comes under more pressure over the span of the next few months, you will see less activity from the retail investor. We are adjusting our outlook.

We now are at $0.92 to $1.08. The dollar versus last year is still up 15% from where we were a year ago and if you look at the numbers from ’03 to 2007, the compounded annual growth rate of 33%. Bottom line is I feel good about everything we have going on. I would rather see more activity.

Finally, many of you are aware that there were some personnel changes this year, over the span of the quarter. Randy has chosen to retire. That will coincide with the end of the clearing conversion, and [Ossef] wants to raise his family on the West Coast, specifically San Francisco, and he will be doing that. In fact, he is in the process of moving as we speak and he will be working for a private equity firm there. We want to wish both Randy and [Ossef] all the very, very best and thank them for the commitment that they have made to us and the contribution that they have made to TD Ameritrade.

Now, the Office of the Chief Executive will be going away and it will be replaced by our new senior operating committee. It is the leadership on the senior operating committee that has driven the vast majority of the integration, as well as the client segmentation business plan, and it is the senior operating committee that will be the exact same group and the exact same group leadership that will be responsible for the execution of all that plan. I have every confidence that the group will do a great job and I am excited to work with them.

With that, let me turn it over to Bill.

William J. Gerber

Thanks, Joe. Our March 2007 quarter was solid, with 44% pretax margins and $0.23 per share. That represents a 5% or a $0.01 increase in EPS over the same quarter last year. Please remember that we discuss all quarterly activity excluding investment gains. Our revenue stream continues to shift and become more stable as our asset-based revenues are 61% of total revenues and are much higher than last year. Now, let me give you a little more color on the quarter and on our updated outlook statement.

First, let’s look at the actual March quarter results versus our outlook midpoint on slide 12. In general, our net revenue of $525 million was lower than anticipated, almost entirely due to trading volumes. Transaction revenue of $193 million was $41 million lower then expected. Lower trades per day accounted for 75% of the variance as trading activity for the quarter was 254,000 trades per day, or a 4.0% activity rate, versus forecasted activity rate of 4.6%, or 292,000 trades per day.

We do not believe we lost any market share but rather that the retail investor was less engaged this quarter than what we had anticipated based on historical averages. I would like to note that these trading volumes are an improvement of 7% from the December quarter levels.

Commission per trade was also lower at $12.49 and was below the outlook range. There were two primary causes of this decline; our WIC related results, which I will discuss in more detail, and significantly higher promotional trades due to higher new accounts.

As you recall, the WICs were closed in December and were legacy TD Waterhouse entities that housed commission-based sales people. They sold high-end products, including load mutual funds, structured products, fixed income, et cetera, which had a very high per ticket revenue. That commission-based model was not conducive to our model at TD Ameritrade. We do not want to incent our sales people in a way that could potentially put them at odds with our clients and that model was not scalable. So we formed the guidance solutions team in Fort Worth, which is a salary and bonus-based group.

The impact on commission rates comes from the mix of products sold during the quarter, mostly fixed income. With the current inverted yield curve, we are seeing many clients opt for more traditional short-term products, like CDs and treasuries. These are two of our lowest commission per trade fixed income products, and as we continue to become more proficient in the guidance team sales, and as the shape of the yield curve changes, we expect our revenue from this group to increase, thus moving our commission rate higher.

However, in order to reflect the current environment, we are lowering the rate per trade for the remainder of the fiscal year in our outlook statement. As you know, we will discuss any rate variability on all future calls.

For our asset-based revenues this quarter, most components are relatively close to the midpoint with revenue from our investable assets coming in $2 million ahead of expectations, offset by revenue from money market and other mutual fund fees coming in $1 million behind expectation.

A few points of note in our asset-based revenues; you will notice that we had both higher balances in the investable assets, as well as a lower NIM rate. The vast majority of this effect was the stock borrow/stock loan business, which is our lowest spread business in this line item and actually very difficult to project. This quarter, we had significantly higher stock borrow/stock loan activity than we had anticipated. As such, this activity drove both the average balances higher and the NIM rate lower than we had anticipated.

Regarding expenses, the $257 million was different than outlook primarily due to a few one-time items: compensation costs impacted by $4 million and one-time costs associated with legacy Waterhouse associates moving to our benefits program on January 1, and a $3 million catch-up of quote expenses with market centers on legacy Waterhouse side included in communication cost. These were offset by a $4 million benefit in occupancy and equipment from settling a Waterhouse matter lower than what we had originally expected. Finally, we spent $43 million in advertising to bring in 166,000 accounts at a cost per account of $258.

Based on our best knowledge of the current industry environment and to some decisions we have made, we have changed our fiscal outlook, which is on the next slide. We begin with the January outlook midpoint of $1.10 and make the following adjustments: $0.03 for the March quarter actuals of $0.23, which were below our $0.26 midpoint; $0.02 for an assumed lower commission rate for the rest of the fiscal year, as I cited earlier; $0.03 for lower trading activity due to the current market environment; and $0.02 for the additional investments in the business to spur growth Joe discussed earlier.

To illustrate this in the outlook statement, we have created a separate line item called investments for growth. However, we will record these expenses to their natural line items when they occur. We anticipate the vast majority of the costs to be compensation related, and that brings you to the new midpoint of $1.00.

Our new range for ’07 is $0.92 to $1.08. We have increased the range for the last two quarters to account for the significant market volatility we have seen.

Let’s go to slide 14. As Joe already told you, we are still on track for our clearing conversion next month. To illustrate the quarterly expense trends, this slide shows our September ’07 run-rate expenses in green once we have achieved our synergy targets. This is the $800 million of run-rate expenses we have referenced. The amounts we plan to invest for growth in the business are in blue. This is part of the $100 million run-rate investments for growth. The redundant expenses are in orange, which we expect to eliminate through our synergy efforts.

Cost reductions will begin immediately after the conversion in May with some of the impact in the June quarter, but the majority of the impact won’t be seen until the September quarter. As we have mentioned before, expense reductions come primarily through compensation as we reduce headcount, clearing expense as we eliminate the ADP outsourcing service, and professional services as we eliminate extra technology contractors who are assisting in the integration and build-out efforts.

A quick comment about the new investments; we are anticipating investing up to $25 million per quarter, or $100 million run-rate to drive the growth. As you can see in this chart, we anticipate investing $10 million, which is a $40 million run-rate, in the September quarter. The exact timing and amounts of these investments will be controlled by Joe and monitored by my team. We will give you more color on our expected revenues and expenses for 2008 when we release our 2008 outlook statement later this year.

Now let’s turn to liquid assets. We continue to exhibit strength as a cash generator which allows us to be flexible in making financial decisions that best impact the firm. We ended the December quarter at $499 million in liquid assets. We earned $141 million in net income in the March quarter and had $20 million in depreciation and amortization. We are using working capital, regulatory capital and capital expenditures of $61 million. We made $6 million in mandatory debt payments and used $50 million to repurchase 3 million shares of stock.

We did not spend as much as we did in the past quarter on repurchases due to capital planning needs for the May clearing conversion, but it is worth noting that we have spent approximately two-thirds of our net income in this fiscal year on stock buy-backs.

Since the buy-back program began through March 31st, we have used $247 million to repurchase 14.5 million shares. So that leaves us with $543 million in discretionary cash. I do not anticipate having this much discretionary cash at the end of the June quarter. This free cash allows for several uses, including debt repayment, stock buy-back, M&A, or additional organic growth. As always, we will continue to review our capital structure with our Board of Directors to determine the optimal uses of our free cash flow. We have great financial flexibility and will ensure that we are best utilizing our cash.

In summary, the clearing conversion is on track for May and the synergy goals are set. We continue to be an industry leader in pretax margins. The midpoint of our 2007 outlook has been adjusted to $1.00, which is up 15% from 2006 results. We expect to invest in growth opportunities for 2008 and beyond and we continue to be a very strong cash flow generator.

As Joe said, March 31st marks the end of the first full year of TD Ameritrade and it has been quite an eventful year. In the last 12 months, we have generated $1.1 billion of EBITDA, which represents 53% of revenues over that same time period. We are proud of that achievement which occurred during the integration of Waterhouse. We are now looking forward to the clearing conversion and the rest of 2007 and beyond with great anticipation.

With that, I will turn the call over to the operator for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions)

We will go to Michael Vinciquerra of BMO Capital Markets.

Michael Vinciquerra - BMO Capital Markets

Just wanted to ask on the qualified accounts, Joe, you mentioned that the qualify of your qualified accounts is rising. At what point do we start to see the aggregate statistics rising as well in terms of assets and revenue per account? You mentioned within that group it is rising, but obviously there must be an offset somewhere else because the assets look to be relatively stable overall.

Joseph H. Moglia

I think the assets that we have seen in general -- remember, the qualified accounts is what generates 90% of our overall profitability, so if indeed the assets per qualified account and revenue per qualified account are doing well, that translates into 90% of our overall numbers. So as long as the quality of those accounts continue to be good, I think we are okay an we are looking at aggregate growth anyway.

Michael Vinciquerra - BMO Capital Markets

I guess I am just looking at overall assets for the -- I know you are at a record this quarter but when you kind of strip out market gains over the last couple of quarters, there really has not been much what looks like organic growth. Am I looking at the statistics wrong or do you expect that to hopefully accelerate the next couple of quarters?

Joseph H. Moglia

I think you are looking at those accurately. The issue is I would go back to what our issue has been over the span of the last couple of years. We have never really had a legitimate solution for our long-term investors, so again as the demographics of our population improves and we have more people in the retirement and the pre-retirement phases, their interest in more full comprehensive solutions to what their needs might be with regard to retirement suggests that they wind up taking some of those assets elsewhere. They do not necessarily close their account but they wind up shifting those assets somewhere else.

I believe with the conversion coming to an end and the legitimate rollout of the client segmentation strategy, clients that have done that will look at bringing some of those back in and then new prospects, that our long-term investors would look at that as well.

So every one of those answers literally the last couple of years that address the issue of market share, I think our answer has been the client segmentation strategy. Now we are actually ready to execute on it.

Michael Vinciquerra - BMO Capital Markets

Thank you. Just one question for Bill, just on the commission rates. I am not that familiar with the Fort Worth operation you have there, but I guess the question is was it not clear that you would see a commission degradation when this whole process started, or was is simply a change in the types of products that those clients were actually trading in that drove the change versus your projections?

William J. Gerber

Well, I think it is both. We did not expect to see a degradation and the guidance solution team was up and running at the time that we did close the WICs. Secondly, we certainly are seeing a shift due to we think the yield curve, where clients are opting for more short-term products right now as opposed to moving on in the curve.

Operator

We will go to Patrick Pinschmidt of Merrill Lynch.

Patrick Pinschmidt - Merrill Lynch

Thanks. Good morning, guys. Joe, a question for you on the incremental expense investment for 2008. Can you talk about your philosophy there in terms of the market backdrop? For example, if the market fails to rebound and you do not see the customer engagement levels, are there other levers you can pull to maybe dial back the incremental expense levels you might be talking about for ’08?

Joseph H. Moglia

Why don’t we talk about a couple of different categories then, Patrick? First, if for example the markets are not doing well and we are not seeing reasonable activity rate, that also suggests that we may not be seeing as many account openings, so therefore in our marketing department, we would reevaluate whether or not marketing spend would be something we want to be more aggressive or less aggressive on. So we could dial that back depending on what we see going on. There may also be other variable type like expenses that we could also dial back.

On the incremental expenses though that I am talking about, they are literally meant to be more truly client-facing, a real emphasis on sales and a real emphasis for people’s longer term money. Now, I believe long-term, that is something that we need to do so I think we would be moving ahead even in the face of poor activity rates with trying to make this reinvestment in the long-term investor space, in the RIA space, because we think that is part of our future and we need it.

Having said that, if while we are making those initiatives and it is not working, there is an initiative not working, we will kill it. But even if activity rates start to fall off and then we will watch costs someplace else, the last thing that I would want to do is start to pull back on the incremental expense because that is so much a part of our future, I think it is necessary.

Patrick Pinschmidt - Merrill Lynch

How quickly would you expect to see a return on these investments?

Joseph H. Moglia

I think a good rule of thumb, and you hopefully do better than this, is 12 months. So you start to make investment in your sales efforts today. By the time you get them in place, train them, et cetera, et cetera, they become comfortable with what is going on, that takes a few months. So certainly by the end of 12 months I think would be fair.

Patrick Pinschmidt - Merrill Lynch

Any incremental advertising spend versus ’07, is that included in that $100 million or not?

Joseph H. Moglia

No, advertising spend would be separate from that.

Patrick Pinschmidt - Merrill Lynch

Okay, and then in terms of the RIA business, I know this is an area for growth. Are there specific investments for this business? I know Schwab made a point of announcing in December that they are targeting new investment spending for this business. What are you guys doing here?

Joseph H. Moglia

Well, we have already made a couple of investments there. We bought iRebal and we bought the ICTC, which allows us to do a better job of custodying 401K type of assets for the RIA, and the iRebal allows them to rebalance multiple large portfolios at a simultaneous time. I think the ICTC is something that we needed to do. I think the iRebal will be a differentiating product for us, but those things have already been done.

Now, in terms of the $100 million spend, Tom Bradley and his team will be coming to me with some of the things that they think that they need to do that will do a better job of bringing in more assets, more RIAs, and more sales. They are in the process of putting that list together now.

Operator

We will go to William Tanona of Goldman Sachs.

William Tanona - Goldman Sachs

Good morning, guys. I am sitting here looking at old outlook statements and I see when the merger first was announced back first quarter of last year. I am looking at the midpoint of the guidance at about a 4% activity rate being somewhere around $1.13. Now at a 4% activity rate, you are talking about $1.00. As you are moving your business more and more towards these asset- and fee-based businesses, help me understand why we are so far off 12 months after the merger has occurred?

Joseph H. Moglia

Well, I think the one big thing that happened is that we rolled out the new value proposition. I remember right there we took a $100 million hit, so the value proposition was $100 million. The clearing conversion, it was originally thought we would get that done -- in the very, very beginning we felt we might get that done in December. Shortly after that, we pushed that to February. February was the date for a while. Last time we said February was not going to work, we are going to move that out to May. We feel good about where it is in May, but you are looking at five months there of incremental costs.

The bottom line is I think we have done a pretty good job with trying to be as transparent as we possibly could be with showing you our numbers on a monthly basis as well as a quarterly basis. So numbers that we talked about a year ago versus numbers where we are today, this is obviously a more accurate indication in terms of what we are trying to do and we are looking at $100 million incremental spend that we were not talking about before.

William Tanona - Goldman Sachs

I guess I just look at some of these expenses, even for this quarter, and something like comp being so high relative to where you were on the guidance side and looking at you guys raising the comp numbers there in terms of your projection and then talking about investments for growth and largely that coming from the comp side. I guess I am just wondering; was there something inherent that you guys did not see 12 months ago that today you have a clearer picture as to why these expenses are higher?

Joseph H. Moglia

I think when you talk about the comp bill, remember a lot of what we are talking about with regard to the incremental investment is meant to be people, so comp by definition then will significantly start to go up. It is not that individuals are getting paid more. It is that we are going to have more people, mostly sales-oriented or product-oriented or service-oriented people that indeed would be part of that.

When we looked at this a while ago, it would not have made sense for us to ramp up our sales effort when we did not have the conversion done and we had people on separate platforms and we did not have the products ready to go to roll out. So while certainly that was part of our business plan and it was something that we knew we would eventually get to, we weren’t just ready to do it then.

So now that we see the clearing conversion coming to an end, we are ready to literally end the numbers or put a stake in the ground with regard to the numbers on the expenses, and now we recognize we think is about as perfect a time as you can have to start to reinvest the incremental money to be able to have greater functionality, greater service, more products, but a real emphasis on the sales efforts.

I think it is more a matter of timing. At one point, we knew we would be doing this. We did not know when.

William Tanona - Goldman Sachs

Okay, that’s helpful. Then, Bill, in terms of you mentioned that you do not expect to have this much free cash flow at the June quarter end. Could you give us a sense as to what your preference would be for using that, whether it is going to be some of these investments or the share repurchases?

William J. Gerber

It is probably going to be all of the above, Bill. We look at this all the time, as you know. We have a 32 million share buy-back program that we are executing on. We have $1.7 billion in debt that we continue to look at and the organics. So I think we fortunately have great enough cash flow that we can service all these things at one time.

Operator

We will go to Richard Herr of KBW.

Richard Herr - Keefe, Bruyette & Woods

Good morning, guys. Just maybe start off briefly on those dormant accounts. Was Ameritrade aware of these when you acquired TD Waterhouse?

Joseph H. Moglia

I am not aware that we were aware of them when we acquired TD Waterhouse, but we announced the deal in June 2005 and now it is almost May -- it will be May of 2007 where we are getting ready to make the conversion, so as we get -- that is two years -- so as we get near conversion time, we look at every one of those accounts and make a decision as to whether it is smart for us to move them over. In the last few weeks, we have looked at those and came up with that 152,000 that we thought did not make sense.

Richard Herr - Keefe, Bruyette & Woods

Okay, that’s fair. That’s helpful. Just on the commission rate and maybe going forward here, I think one of the industry trends that we have been looking at and maybe it impacts yourself a little bit less, but the move to pennies in the options market, how much of the average rate per trade going lower this quarter was a result of the SEC penny pilot? What are your thoughts going forward here? How much has lower payment for order flow been incorporated into this lower guidance?

Joseph H. Moglia

I think for the pilot program that they currently have, spreads have come in. They have not come in considerably but they have certainly come in, but we have also seen the actual volume, the number of contracts with each transaction go up. They have virtually offset each other.

Now, as we look at our business and they expand the penny concept across the option base: A, it will take a while; B, there’s still going to be plenty of options or plenty of stocks where there is not going to be great liquidity and they will still have reasonable spreads, therefore the payment for order flow will still be reasonable. But based on what we have seen so far, if it is offset by increased volume, it could be a net net neutral.

I would not assume it is net net neutral down the road, but I would not assume anything devastating here. I probably would build in a small minus as you think about 2008, 2009, but we have not had to do that yet.

Richard Herr - Keefe, Bruyette & Woods

That’s very helpful. Just one last question; I think really what could be a significant positive for the industry is portfolio margin and what is Ameritrade’s thoughts on what they are going to offer customers on the portfolio margin front? Thanks.

Joseph H. Moglia

Right now, Rich, from our end, we are literally pulling together everything that we are trying to do with regard to disciplined portfolio strategies, portfolio products, the cycle funds, the term funds, et cetera, et cetera. What we want to do is get those out, structure them properly, price them appropriately, and then sit down and literally we will have an all day offsite and talk about how can we maximize what are potential revenues with regard to value to the client and revenues for our shareholders as far as those things go.

We do not have that ready to go yet but we do have it on the drawing board to think about how we want to play it.

Operator

We will go to Prashant Bhatia of Citigroup.

Prashant Bhatia - Citigroup Global Markets

Just real quick on the $100 million, what was the process in setting that number? What got you comfortable it should not be $150 million or $200 million?

Joseph H. Moglia

Because I thought before we -- I think if we spend $100 million effectively and we are bringing in greater assets and greater revenues, and then the team comes back and says “You know what? We should be doing more of this” I would be very supportive of that and I would bring that to the Board, and I have to believe that the Board would be very supportive of that.

Frankly, Prashant, before we get to $100 million, we are going to get to $50 million and we are going to make the same decision as we look at those things. If indeed we are coming in with initiatives that are not delivering what we want, we would kill those initiatives as well.

I think at least if you look at the margins going forward, we were still able to keep our margins significantly high and readjust the $100 million as far as the reinvestment goes. But it will not be easy for any of our teammates within TD Ameritrade to get this money unless they really truly believe they have a good solid plan, one that will be more than made up for what we expected it to be, the protection of the current client base, or the acquisition of greater assets from the client base with new prospects.

Prashant Bhatia - Citigroup Global Markets

Okay, so we should think of this as more of a willingness on the management team’s part to give up margin above the 50% range and trade it off for revenue or asset growth?

Joseph H. Moglia

Yes.

Prashant Bhatia - Citigroup Global Markets

Okay, and then, out of the $100 million, it sounds like none of it has been allocated yet and now people will come to you to request investment spend. Is that the way it is going to work?

Joseph H. Moglia

We have started to allocate but we are in the process. The people that are really ready to go have already been talking to me and in my office and the phone does not stop ringing. Those that are not quite ready to go have not gotten in yet, but you should assume that the process has already started.

Prashant Bhatia - Citigroup Global Markets

Okay, and then in the past, you have also talked about increasing the sales effort at the branch and call center level. Are you seeing any early signs that the legacy Ameritrade customers are bringing more assets to the firm as a result of some of that, some of the sales initiatives that you have in place?

Joseph H. Moglia

Yes, Prashant. All the interaction that we have seen by the current client base, especially those clients that did not have access to the branches prior, that now have access to the branches, their next trade almost always brings in greater assets, so that is one of the areas where we will be filling out the footprint that we already have in the branches. We will be adding sales people to the branches and where we think new branches make sense, we will look at that as well.

Prashant Bhatia - Citigroup Global Markets

Okay, great, so Ameritrade customers are definitely using the branches and bringing in I guess more money in a meaningful way?

Joseph H. Moglia

So far, that is still a small amount. Remember, we have not had everything on one platform yet and I would expect more of that to take place post clearing conversion.

Prashant Bhatia - Citigroup Global Markets

Post conversion, what do you think are the two or three most meaningful things an Ameritrade customer will see or experience that might encourage them to do more business with the firm?

Joseph H. Moglia

I think if you look back on the slide that we talked about, the typical TD Waterhouse client has never really had access to Amerivest. I truly believe that Amerivest is a differentiating service for anyone that wants or would like to have or needs, which I think is everybody, a customized asset allocation portfolio. That would be one.

Many of them also like to buy and sell stocks. The trading tools in effect that we have and the risk management tools that we have on the Ameritrade platform will be something I think that they will be positively pleased with.

The Ameritrade client, or the legacy Ameritrade client, has never legitimately had access to true cash management. They are going to have that now. While they have been able to buy a bond in the past, they have had to do it through a telephone and it has been cumbersome. Now they are going to be able to do that themselves online and they could even very simply ladder their own fixed income portfolios. Those are things they have never had before.

Remember, we are only going to focus on these three client segments; the trader, the investor, and the RIA, and if we devote all of our energy to being effective in that particular space, I cannot see how we are not going to be effective.

Operator

We will go to Matt Snowling of FBR.

Matt Snowling - Friedman, Billings, Ramsey

Good morning, Joe. My question is the jury is probably still out in terms of the value proposition in incentive gathering assets. I am wondering, with the $100 million investment now that you are making, have you ever thought about maybe moving away from a flat pricing structure to more of a segmented pricing?

Joseph H. Moglia

We have thought about every different kind of pricing structure imaginable. I assume you are just talking about our advertised $9.99?

Matt Snowling - Friedman, Billings, Ramsey

Right.

Joseph H. Moglia

We have thought about every one imaginable. Last April, when we rolled out the new pricing, if you recall we said we worked so hard on this to, at the end of the day listen to the clients and keep it simple, and this simplicity was something they really all asked for.

Now, based on the results that we have seen so far with regard to the active trader and the shift of the extension of the brand into the long-term investor, and the original objective, which was to balance your market share with profitability, right now we feel really, really good about our $9.99 value proposition.

Having said all that, Matt, we are not wed to that. We will always be happy to look at it, but for the time being I think we feel pretty good where that is.

Now, the area that I think we might have some room in is how, as we become proficient in the rollout of the longer term products over the span of the next month, three months, six months, nine months, 12 months, how do we price those?

We will be constantly reevaluating that, but the $9.99 price for now is a good solid price but it is never going to be sacrosanct.

Matt Snowling - Friedman, Billings, Ramsey

A quick question for Bill; in terms of the liquid asset of $543 million, can you give us a sense of how comfortable or what level you are comfortable taking that down too?

William J. Gerber

I think 250 is probably a decent level to have. At that level, could I go to 200? Sure. Could I go to 175? Sure, but I think for opportunities that we see coming along, we should probably have a little more cash sitting around.

Operator

We will go to Howard Chen of Credit Suisse.

Howard Chen - Credit Suisse

Good morning, Bill. Good morning, Joe. A couple of questions; the last data point we had on the RIA business is that you had about $60 billion of assets under in-house. Can you update us there? Are there any meaningful changes?

Joseph H. Moglia

I am looking around the room and I have a number, Howard, and I am just looking around the room -- I am actually asking the question internally. I am going to get people to nod heads. Normally we have not disclosed that number until the end -- every year we give an update. Are we supposed to give a number now or is that going to create -- do I go to jail if I do this, or what happens?

William J. Gerber

We said it.

Joseph H. Moglia

We said it? Okay, so the number is a little over 70.

Howard Chen - Credit Suisse

Okay, and really, what is driving that growth? Is there already incremental investment spending that has been in that business that has been driving that recently? What has been the primary -- is it from existing RIAs? Is it signing on the incremental RIA?

Joseph H. Moglia

I think it is a combination of all of those things, Howard. First of all, I mentioned earlier that there are more and more RIAs that are leaving the full commission firms than we have ever seen before. In fact, I do not have the statistic in front of me but a statistic you may want to look up, look at total assets for full commission firms versus total assets for the RIAs over the span of the last four or five years. You will see significant growth in the RIA assets on a percentage basis and you might even see a negative number on the full commission shops. Real growth there, a lot of SCs moving away from the full commission firms. I think that trend is not over with. That trend is just getting start, as far as I am concerned. So that is an area that continues to grow.

As you know, there are three significant players in it, ourselves and two of our competitors. For us, it is an absolute priority and focus. We are only focused on three client groups; the trader, the investor, and the RIA. So we are working hard to make sure that something that we can provide our clients is something that an RIA might be able to lever and something the RIA might be able to lever might be something good for our clients.

Earlier I also pointed out that we have been making investments in the RIA business. I mentioned ICTC and I mentioned iRebal and I am sure a part of this $100 million that we are talking about will be used for the RIAs as well.

Howard Chen - Credit Suisse

That’s helpful. Again, not to beat this investment spending to death, but on that point within that $100 million, are you budgeting for fill-in acquisitions, for maybe a technology that is more of a buy versus build? Or is this really just like organic deployment of capital?

Joseph H. Moglia

We look at this as organic deployment of capital. If we saw an M&A opportunity, we would treat that separately.

Howard Chen - Credit Suisse

Okay, and then finally, and you sort of touched on this in some of your comments, Joe, but how are we going to gauge the success of all the investment spending? Are we going to look at client asset growth, assets per qualified account, revenue growth in the franchise? How are you going to gauge your success, whether something is worth it or a kill, et cetera?

Joseph H. Moglia

Asset growth, asset per qualified account, revenues across the board -- I mean, I think as we move to an asset gathering platform, I think the key is going to be to keep an eye on the movement of our revenues and the movement of our assets. Then I think you may want to look at that also since the bulk of our profitability comes from our qualified account, look at that on an average per qualified account as well.

When you look at our numbers, Howard, there are only four or five metrics. As transparent as we are, there is really only four or five metrics that we can really look at. We are looking at DARTs, but that does not necessarily reinforce the fact that we are doing a good job becoming an asset gatherer, but revenues, assets, new accounts, new qualified accounts, averages per accounts -- those are things that will be the types of things we will look at.

Operator

We will go to Richard Repetto of Sandler O'Neill.

Richard Repetto - Sandler O'Neill & Partners

I am going to fire a fastball here -- it seems like what everybody is saying on this investment --

Joseph H. Moglia

Hold it, hold it, hold it.

Richard Repetto - Sandler O'Neill & Partners

What?

Joseph H. Moglia

I’m getting my cleats firm in the ground. Go ahead.

Richard Repetto - Sandler O'Neill & Partners

Since I’m so far back in the queue, I have to fire some fastballs. In regards to all the questions about the investment spending, it seems like a very big focus here. I have to ask, is this a realization that the model when you merge with TD Waterhouse, TD Ameritrade, that as you transition to an asset gatherer, that you do not have all the components, all the infrastructure to transition to an asset gathering model?

Joseph H. Moglia

I think all along we said -- let’s go back to the fall of 2001. We said we are going to be a leader in the active trader space. We are going to do a great job of helping clients buy and sell stocks. We are going to try to be number one in that space and if we are effective, we are going to try and lead the effort in terms of consolidation. Period.

Phase two, if we are successful at that, we will then start to move into the long-term investor space and the RIA space, so we will be always working and tinkering with that in effect on the side.

Now, for the last several years, as you know, we have been working on things like Amerivest and a couple of other things as well, but one of the absolute reasons why we did the TD Waterhouse deal was not just because the numbers were compelling, not because of frankly the strategic relationship with the bank that we were able to have with Ameritrade and TD as well, but because they were already in the asset gathering business. Remember, we had about $80 billion in assets. They had about $160 billion or so in assets.

For us, for me at least, it took our long term investor strategy and advanced it by probably four or five years. So it has been our business plan and our vision all along. We were going to get there but we were not going to be able to get there as quickly had we not done the deal.

So absolutely there are plenty of things from a long-term investors perspective that we were able to get by doing the Waterhouse deal that we did not have prior. I thought we did a great job as an active trader moving into the long-term investor space. Now, we will continue to do a great job with the active traders but we are going to be in the long-term investor space and there is no reason why we cannot do as good a job in that space as we did in the active trader space.

William J. Gerber

We are still going to have 50%-plus pretax margins.

Richard Repetto - Sandler O'Neill & Partners

I guess that is the exact point, is that the promise of TD Ameritrade in my view was an asset gathering model not with old TD Waterhouse margins and not with Schwab margins, but with margins at 50% to 60%. I guess that is the difference here incrementally is as you make the transition, do you have all the necessary infrastructure to do that at 50%, 60% margins to go to the asset gathering model? I guess that is the question and that is what is different today versus the last quarter.

Joseph H. Moglia

The answer is we believe we do. We have recommitted a couple of times today to the fact that we will be a 50%-plus pretax margins in 2008. But Rich, I don’t want to play with this. If we are effective at this and we have 54% pretax margins, we will be very thoughtful about taking 54% pretax margins to 50% pretax margins if we feel we could have greater overall sustainable growth in our earnings. So it is a balance.

I have always in the absence of really believing you can grow sustainable quality earnings long-term, I will always err on the side of higher margins because it is a better discipline for your management team to in effect function through and to go through respective processes.

But we really believe we have something special in terms of quality growth, good asset generation, et cetera, I do not mind giving up some margin to be able to do that. Right now, I am very comfortable for 2008 you are going to have 50%-plus pretax margins, but that is not inviolate. When we hit 40% pretax margins, I said it wasn’t inviolate.

Richard Repetto - Sandler O'Neill & Partners

Understood. The very last point is now we are definitely in sight of the conversion. We are definitely in sight of a much more focused model on asset gathering with the investment, et cetera. How does your outlook on consolidation space, because all of the things you have been talking about -- sustainable profitability, sustainable model that provides you value in that particular segment of the market going forward -- might possibly be better done with partners. Are we at a point now where we are taking a more serious look, given that you are almost through the consolidation?

Joseph H. Moglia

No, we are not taking a more serious look. We are taking the same type of look I think that we have always taken. If Rich, you mean because the consolidation is coming to an end and you do not need to worry about that as much, can you be more open to doing something else, I think that that comment is fair.

But if we thought that something made sense up until now, we certainly would have looked at it. As we become an “asset gatherer”, we might be looking at certain things a little longer than we might not have looked at so long in the past. But we still believe that consolidation or in general, M&A type of activity across the board, if that is going to enhance our platform and our ability to generate longer term sustainable profits and it is good for our clients, it is good for our shareholders, again as always, we will be looking at those things hard.

Operator

We will go to Roger Freeman of Lehman Brothers.

Roger Freeman - Lehman Brothers

Good morning. Just a couple of questions -- I guess one more on the investment initiatives. How much of this is that some of the cost savings related to the integration are that you can’t achieve some of those stretch goals? You have brought -- you did bring that down by $20 million. Is that part of the $100 million?

Joseph H. Moglia

No, the stretch goals, our first goal was 333. I thought there was more room in the 333, otherwise we would have gotten to 333, probably gotten a little past it and we would have called ourselves heroes. Because I thought there was more room in 333, we established the 302. As we started to approach frankly 310, 312, it started to become evident to us and our leadership that maybe we were starting to bite into the client experience. That was a no-no.

What we agreed on internally was that 321 was a good solid number. We are stopping. 321 is the number. Period. Away from 321, we are looking at the $100 million at investments the way we have been speaking to that currently over the span of the last half hour or so. As I said, what Bill will do is he will provide you with a separate line item where you can see what the 321 has become, and separate from that, what the actual reinvestment numbers are.

Roger Freeman - Lehman Brothers

Okay, so the 302 was not in your outlook statement, is that correct?

Joseph H. Moglia

No, 302 was in our outlook statement. 333 was first in our outlook statement. I improved that to 302 because I thought we could get more than 333, and then I stopped it at 321 because I thought going past that could potentially hurt our client experience. I said from the very beginning we were not going to do that.

Roger Freeman - Lehman Brothers

Got it. I guess the second question is you had talked about better revenue metrics coming out of the qualified account base. Could you just talk a little bit more about where you have seen penetration of products or services? Is it things like Amerivest and the trading tool and cash management? Are those generically the things, or is there anything in particular that has dominated the improvements?

Joseph H. Moglia

We would choose not to break that out now but again, if you assume a year or so ago we really had nothing along the lines of cash management, Amerivest we were still just trying to roll out, still a little bit -- great idea but still a little clunky, all those things are just starting to appear now. Post conversion we start to become more aggressive with it.

I would not say that we have seen good growth in the RIA business but I would not say that there is any one thing that has helped us gather more assets. I think it is everything across the board. The key is getting this clearing conversion behind us and moving everything to one platform.

Roger Freeman - Lehman Brothers

On Amerivest, because that has been something you have talked about a lot, how has that initial re-rollout been going?

Joseph H. Moglia

The re-rollout that has taken place since our sales force has started to sell it has been very good, but they have been hampered by the lack of not being able to work on one simple platform. So it would be much easier -- in June, it is going to be a lot easier for our sales people to in effect talk and sell Amerivest than it is today, and it is easier today than it was six months ago.

Operator

We will go to Michael Goldberg of Desjardins Securities.

Michael Goldberg - Desjardins Securities

Good morning. One thing I am confused about, when you characterized the $100 million of spending as investment spending, it sounds temporary. But when you include it in your run-rate, or add it to the $800 million run-rate, it sounds permanent. Which is it?

Joseph H. Moglia

Permanent.

Michael Goldberg - Desjardins Securities

Thanks.

Operator

We will go to Matthew Fischer of Deutsche Bank.

Matthew Fischer - Deutsche Bank

Most of my questions have been answered, so I guess just a little clarification; you are going to have all of the -- you are going to be up on one platform when the conversion is done. Are all the products you mentioned ready to be marketed just as soon as this is finished?

Joseph H. Moglia

The products we had on the sheets, on the slide, are ready to be marketed and the rest of the products would be getting rolled out over the span of the rest of 2007 and the first quarter, maybe second quarter of fiscal ’08. They are ready to go.

Matthew Fischer - Deutsche Bank

So I guess your marketing strategy, at least in the near-term, is it more geared toward the existing customers of legacy TD Waterhouse and Ameritrade to introduce them to these products? Or is it a combination of both new customers and existing?

Joseph H. Moglia

Frankly, it is a combination of both but I think one of the things that Chris Armstrong and Laurine Garrity and the team is looking at is we do need, if indeed we already have relationships with 6 million clients. We know they have their assets away. If we just did nothing but focus on those clients, we should be able to make a difference. So we are thinking about that pretty hard internally as well. Do we do that by just normal spend with our advertising dollars or is there something different that we have to get after there? There are a lot of things I think that we can play with or have an opportunity.

I think right now we have a lot of things on the drawing board. My guess is there is going to be a small handful of things that might really work that I really would love to see us get our total support behind.

Matthew Fischer - Deutsche Bank

Okay, so I guess the impact is more a 2008 event?

Joseph H. Moglia

The impact on the expenses begins now but certainly continues through 2008. The impact on the results I think pragmatically starts in 2008.

Matthew Fischer - Deutsche Bank

And that is the 12 month lag you mentioned?

Joseph H. Moglia

Yes.

Matthew Fischer - Deutsche Bank

The last thing, the guidance that the retail investor is less active, is it -- we have seen the markets rebound and we have seen them come back considerably. At what point do you get a bit more comfortable with the investor activity?

Joseph H. Moglia

I think right now there is still a lot of -- every time I watch, I pick up the news or I watch one of our business shows, literally I almost never get through a half-an-hour or a page where they do not talk about something to do with the real estate market and what is going on with sub-prime and the impact that is going to have elsewhere, number one.

Now, I think that the retail client was nicely getting back -- not as aggressively as you like, but slowly but surely they were getting back into the market. The week where we had the international blow-up, that was the first time in three years where we had multiple days where they were in the hundreds of down days. I think that was a joke.

So while we saw a lot of activity then during that week, the natural fallout from that was well “Hold it, I’m a little nervous now and I just got burned and give me a chance to see if the markets indeed stabilize here and settle down for a while.” If you see stabilization and less downside big volatility days, the client starts to come back. That was just a month ago where they felt this, and their numbers will demonstrate they are not as active as they were. One week after this debacle in the market, they became less active.

Operator

We will go next to Michael Carrier of UBS.

Michael Carrier - UBS

Just a question on the cash level. The cash build in the quarter, stock price is a bit lower and then fewer buy-backs -- just trying to get a sense of you guys mentioned you need a sum for capital planning fees for the conversion. Can you explain that? Out of the 543, what percentage of that do you view as kind of you need for working capital or you use versus what you use for buy-back?

William J. Gerber

The cash needs that we have, or the capital needs that we have for the clearing conversion is probably well into the $100 million plus range. What happens is that you move your assets over from one broker dealer to another but you cannot move the staff along until after that is completed, so in essence you need capital in both places. So that is essentially the reason for the build-up in the quarter. We would expect that to come down, as I mentioned earlier, post clearing conversion.

Your second question is regarding how much cash do you think we need to have laying around?

Michael Carrier - UBS

Right.

William J. Gerber

That one is -- some elements of the business, our stock borrow/stock loan business, et cetera, the amount of net capital you keep in the broker dealer, there are some business lines that we look at that require more capital. As I mentioned earlier, if I took it down to $250 million, I am still going to be pretty comfortable there but it is kind of a judgment call. We go through this discussion very frequently, weekly within the finance group to see how much capital we should have in the PDs.

Michael Carrier - UBS

Okay, and just a follow-up; I may have missed this when you guys were talking, but it looks like the mutual fund balances were restated. I just wondered what drove that or what was the reasoning behind that, but the revenues did not really change.

William J. Gerber

We had two things in the mutual fund balances; one was those that had 12B-1 fees and those that did not. So what happened, you will notice the rate between last quarter and this quarter was much higher this quarter than it was last quarter because we took out those that had no 12B-1 fees and no load funds and moved that out.

Operator

We will go next to Scott Appleby of Deutsche Bank.

Scott Appleby - Deutsche Bank

One of the things that seems to be working for Schwab is a targeted in-house advisor network. I am just curious if that is what you are talking about here or if those are thoughts, and then if the belief is that it may be in conflict with your RIA, which network, which although Schwab does not believe it is in conflict either.

Joseph H. Moglia

Within our RIA business, we have an advisor direct initiative, which I think is comparable to what they have. We do not look at that as a conflict at all. The bottom line, there are clients that are very comfortable doing this themselves. They have the ability to do that. There is also the shade-of-gray type of client that might need their hand held and someone to just walk them through this. It is kind of that old parable, if you give somebody a fish, they can eat but if you teach them how to fish -- well, we are going to try to do that with that part of our client base. Help them to understand how to create their own ladder online and fixed income -- help them, walk them through how they can actually handle their own portfolios with regard to Amerivest.

But for those clients that legitimately need real customized advice along the lines of what is suitable, unsuitable, et cetera, we have advisors for them to be able to direct them. I don’t look at that as a conflict at all. That would be the way we handle that.

Scott Appleby - Deutsche Bank

Have they made any outgoing calls yet, or is it all inbound?

Joseph H. Moglia

The RIAs?

Scott Appleby - Deutsche Bank

Or your in-house group.

Joseph H. Moglia

Our in-house group would make outgoing calls, yes.

Operator

That concludes today’s question-and-answer session. I will turn the conference back to Mr. Murray for any additional remarks.

Joseph H. Moglia

Okay, folks, I think we had a good session. You had a lot of good questions. Hopefully everybody understands what we are trying to do. Again, the exciting thing for us is not so much what is happening right now but it is getting the clearing conversion behind us and truly being able to not only take care of the active trader but to finally go after the long-term investor and really go after the RIA business is something that we have been dreaming about and has been part of our strategy for a long time. Now that we can actually start to execute that, I think will take us to a whole different level as far as the markets. I realize we have not done that yet and I realize we have to earn that, but that is going to be our absolute, absolute focus. Over time, if indeed we earn our stripes and the marketplace starts to consider us more of an add together, I think that will also be great for our stock and enhance our multiple as well.

Thanks for much -- hope you get a little bit better weather in the Northeast and the Midwest, and everybody have a good spring.

Operator

That concludes today’s conference. We thank you for your participation. You may disconnect at this time.

TRANSCRIPT SPONSOR

Better Than AdSense

What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price?

This is exactly what Seeking Alpha is offering with transcript sponsorships.

Six types of companies are sponsoring earnings transcripts on Seeking Alpha:

1. Company sponsors its own earnings call transcript (example).

2. Company sponsors partner's transcript (example).

3. Company sponsors competitor's transcript (example).

4. Issuer-sponsored research firm sponsors client's transcript (example).

5. Investment newsletter sponsors transcripts of successful stock picks (example).

6. IR firm sponsors transcript of micro-cap company (example).

7. Consulting company sponsors company's transcript in sector of interest (example).

Your company's name and promotion could have been on this transcript! Learn more, or email Zack Miller for details.

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

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

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

Source: TD Ameritrade F2Q07 (Qtr End 3/31/07) Earnings Call Transcript
This Transcript
All Transcripts