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Here’s the entire text of the Q&A from Ameritrade’s (ticker: AMTD) Q3 2005 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Q&A

Operator

Operator Instructions We'll pause for just a moment to compile the Q-and-A roster. Your first question comes from Prashant Bhatia of Citigroup.

Q - Prashant Bhatia

Hi. Just in terms of the margin rates, they moved up about 100 basis points or so this quarter. In your outlook statement you've got them moving up, I think, about 40 basis points more. Is it fair to assume, if the Fed keeps raising, you have more flexibility there to go even higher, number one? And is it also fair to say that you're not seeing a lot of client sensitivity there, because we see the balance essentially higher at the end of the quarter?

A - Joe Moglia

In terms of question one, Prashant, the answer is yes. There will be more flexibility if, indeed, the Fed continues to tighten. And with regard to the -- question two, we do see an inelastic response for the most part from our clients. There are some exceptions to that, but that would be true for the vast majority of the client base.

Q - Prashant Bhatia

Okay. Great. And in terms of the rate paid, I was just wondering if you have any sense of historically -- I guess when you were kind of two separate companies, Ameritrade/Daytech, and rates were a lot higher, what the actual rates -- what the kind of high point was for rates paid to clients versus kind of the outlook statement of 75, 85 bips?

A - Randy McDonald

It is a function of what the market will bear. If the question is really getting to spreads, the interesting thing about our business versus banking is that spreads a bit narrow as interest rates came down. And they are expanding as interest rates are going back up. On the payment side, it really is a function of what the market will bear. So I'm not sure there really is an answer in terms of what we're managing to, in terms of net interest spread. Most of my comments were about how we've been able to expand our spreads by 190, 193 basis points this year.

Q - Prashant Bhatia

Okay. Great. And then just finally, in terms of -- I know one of the big decisions you said had to make was the RIA platform. And while, obviously, you're not going to tell us what you are going to decide on that, could you just walk us through what the thousand or so RIAs on either your platform or the 2000 or so TD's platform would have to do, once a platform is selected? Do they have to move every single client over to the new platform? How does that work?

A - Joe Moglia

Prashant, what is going to happen is both our -- both the Ameritrade platform and the TD Waterhouse platform will operate simultaneously for a period of time, at which point a decision will be made to move everybody to the TD Waterhouse platform. We think that their platform is far more robust than the current one that we have at Ameritrade. And we don't anticipate that being too much of a challenge, to move our people eventually over to their platform.

Q - Prashant Bhatia

Okay. Great. Thank you.

A - Joe Moglia

Thank you, Prashant.

Operator

Your next question comes from Richard Herr of KBW.

Q - Richard Herr

Hi, good morning.

A - Joe Moglia

Hi, Rich.

Q - Richard Herr

Just briefly on the night hedge. It says it -- in the Q it states it matures in various states from fiscal year 2006 to 2007. When -- can you maybe tell us when you expect these to start maturing? Obviously, I guess on your fiscal year, so should we start to expect them to mature in October 2005?

A - Randy McDonald

The first one was a four-year pre-paid forward. And that was the vast majority of it. That was about 5 million shares out of the 7.9 million. So the second two traunches, or roughly around 2.5 million, 2.7 million, I think it was. They were three-year prepaid forwards. So the transactions were entered into back in '03. I think the first traunch was done February 27. And we completed it sometime I think around May. So the first traunch was four years and the second two traunches for 2.7 were three-year.

Q - Richard Herr

Okay. That's helpful. And on the -- maybe just an update on the TD Waterhouse acquisition. Any more clarity from the regulators as to whether you expect to receive positive or negative consent on the sweep account?

A - Randy McDonald

We have -- now, TD is regulated by the New York Stock Exchange. They have three broker dealers. We are regulated by the NASDAQ. TD Waterhouse currently has a sweep program through the NYSE. So we're working with both regulators now on that sweep program. We'll let you know when we get a response from them. But I don't expect any issues.

Q - Richard Herr

Okay. And lastly, Randy, I apologize. You went through this kind of quick, I didn't catch all of it. The unusual items you were talking about. The 5 million of severance to a former executive. Is that one former executive or several?

A - Joe Moglia

That would be several.

Q - Richard Herr

Okay. And the bad debt expense -- I didn't catch all of that. It seems like you said there was 4 million of debt expense related to some employee trading?

A - Randy McDonald

Yes. We had some Ameritrade employees who circumvented some transaction review controls. And they ended up with some unsecured debits.

Q - Richard Herr

Okay. Thank you very much.

Operator

Your next question comes from Matt Snowling with Friedman, Billings, Ramsey.

Q - Matt Snowlling

I'm actually all set. Thanks.

A - Joe Moglia

Thanks, Matt. Good question.

Operator

Your next question comes from Rich Repetto of Sandler O'Neill.

Q - Rich Repetto

Hello.

Operator

Mr. Repetto, your line is open.

Q - Rich Repetto

Can you hear me?

A - Joe Moglia

Can now.

Q - Rich Repetto

I'm not all set though. First, Randy, can you remind us what a Fed rate hike is in EPS? You -- in previous quarters you talked about the sensitivity. A Fed rate hike is equal to X --

A - Randy McDonald

Of $0.02 a quarter.

A - Joe Moglia

$0.02 or $0.03.

A - Randy McDonald

I think it was $0.0025 per quarter.

A - Joe Moglia

For every 25 basis point move.

A - Randy McDonald

Yes, that's right, Joe.

Q - Rich Repetto

Okay. So now on the outlook statement, you've got the margin lending rate going up. And you've got the interest on seg cash going up.

A - Randy McDonald

Right.

Q - Rich Repetto

Looks like you're assuming either 1.5 or 2 fed rate hikes. Is that reasonable?

A - Randy McDonald

No, no, actually, that's a good question, Rich. I probably should have covered that in my comments. But, that rarely reflects what has already transpired. It reflects sort of where we already are. So no, that is not forecasting further rate hikes.

Q - Rich Repetto

Okay. So, like you said in your prepared remarks, you don't forecast fed rate hikes, is what you said.

A - Randy McDonald

That is correct.

Q - Rich Repetto

And so this $0.93 you say -- if just things were status quo in regards to trading and in regards to the margin loan run rates, where they are at, that doesn't include this impact of the EPS from what, at least Bloomberg consensus says, is we're in store for three Fed rate hikes.

A - Randy McDonald

That is a correct statement, Rich.

Q - Rich Repetto

Okay, great. So I would consider $0.93 a pretty conservative number then.

A - Randy McDonald

Well, you have a crystal ball that I don't.

Q - Rich Repetto

No, I certainly don't.

A - Randy McDonald

No, I think we also follow what the futures market is predicting in terms of rate increases. But I think our policy has been pretty consistent over the years to not include those rate hikes unless they materialize.

Q - Rich Repetto

Understood. Understood. The next question is, your month of September was slightly different because your accounting -- you end up on Friday of the last month.

A - Randy McDonald

Yes.

Q - Rich Repetto

Before, you've given us what the -- actually the increase in trades were, if you were on a regular calendar, starting the beginning of September, rather than August 29.

A - Randy McDonald

Yes, we can -- in other words -- I'm looking at my guys -- we want to normalize September trades per day.

Q - Rich Repetto

Exactly. Yes. Normalize September.

A - Randy McDonald

We'll give that to you. I don't have that off the top of my head.

Q - Rich Repettofn

Okay. And then, Joe, E*TRADE closed their acquisition, surprisingly, relatively quickly. And I was just trying to see, what are the differences between how they were allowed or how they got approval to close Harris Direct as quick, and TD Waterhouse, a bigger transaction. But can you explain -- I don't understand the differences here.

A - Joe Moglia

Yes, Rich. Number one, the deal that they did was basically a cash transaction that didn't need shareholders' approval. Ours was a stock transaction that required shareholders' approval. Therefore we've got to go through all of those respective processes and steps with respect to regulatory agencies. That automatically takes that much longer. Had we bought TD Waterhouse for cash, I think there is a decent chance that the deal may have already been closed. But who knows that?

Q - Rich Repetto

Got you. Got you. And I guess lastly, if the Fed did raise even one Fed rate hike, I know you've got concerns -- well, I mean it's probably clear how it impacts Ameritrade standalone. But you've talked about -- I know it probably -- I guess the biggest positive impact to the acquisition as far as yield curve would be if the curve steepened. Is that correct as well?

A - Randy McDonald

That would help us.

Q - Rich Repetto

Okay.

A - Randy McDonald

Now, don't forget that what we're trying to do is go out on the yield curve, so you're correct. Our strategy is to take advantage of two-year money rather than overnight money. So you're absolutely correct. To the extent that the yield curve steepens, that would make the opportunity a bigger opportunity for us.

Q - Rich Repetto

And Randy, I guess my questions are, the benefits that you're seeing of the Fed rate hikes, you can't get much more -- unless the curve went inverted, which is a possibility. But if you assume that it doesn't go inverted, the benefits that you're seeing now from the front end Fed increases, Ameritrade standalone will benefit. And then potentially you could even get a double dip and you could see the sweep benefit, if the curve ever steepened from higher rates, which we expect them to do, to raise.

A - Randy McDonald

I can't disagree with anything you just said.

Q - Rich Repetto

Okay. Thanks, guys. That's all I had.

Operator

Your next question comes from Steven Chamberlain with Pemco.

Q - Dave Chamberlain

Hi, this is actually Dave Chamberlain. I'm curious, just on the outlook with regards to the commission rate, is there any reason why you're coming to 12.5 or $13 versus -- it seems like it's kind of been able to stay stable in the 13th change level. Just curious --

A - Randy McDonald

What happens over time -- actually, if you look, David, at the history of Ameritrade, that number comes down every year. And it's mix of business. Our base rate for an equity trade is 1099. There are also option trades, have contracts with them. So as the business gets bigger and the options become a smaller percentage, the other thing that is an element in there is the payment per order flow. And that's come down over time. Recently, the last year or two, it did not. It has maintained some stability. But that would account for the slight decrease that you're seeing. Those two things.

Q - Dave Chamberlain

Thanks.

Operator

Your next question comes from Howard Chen with CSFB.

Q - Howard Chen

Good morning, Joe. Good morning, Randy.

A - Joe Moglia

Good morning, Howard.

Q - Howard Chen

Joe, you started off by giving your thoughts on growth for the next three years and prospects for the long-term investor space. I know your team, in the past, has been a big proponent of this, the product demand poll rather than pushing product on customers. But do you have any updated thoughts on penetrating that marketplace, with or without incorporating banking products into the suite?

A - Joe Moglia

Yes. Offhand, Howard, one of the things that we are planning to do -- I am not announcing this now. But one of the things we are planning to do is, post-close, is probably have a session with the entire analyst community where we roll out exactly what that client segmentation strategy is, what kind of products -- suite of products and services we are providing for each individual in each of the respective segments, how we're going to handle the advisory business, et cetera. So we are going to roll that out as it becomes more clear, post-close, and we will give everybody an update on that. The bottom line though, is you can't have a good long-term investor value proposition if you don't have the appropriate products that an individual cares about. A great portfolio allocation tool, which we think we will have, a competitive edge on, with regards to Amerivest, and then the other array of products, whether that be fixed-income, mutual funds, what have you. ETS, etcetera.

Q - Howard Chen

Great. That's helpful. I'm looking forward to coming out to Omaha for that.

A - Joe Moglia

I didn't say it would be in Omaha, necessarily. Laughter.

Q - Howard Chen

And, second question: if I look out at the time between deal announcement and today -- in my mind, Fed has raised rates a few more times than you've baked in at deal announcement. And you generated more free cash than I had anticipated. So you have a bit more extra cash than expected. Mechanically, shouldn't that just simply suggest that baseline deal synergies have gone up?

A - Joe Moglia

I think the answer, mechanically, you would say yes to that. But without the deal actually closing and us have a really exact handle in terms of what the base numbers are in every one of the product areas, every one of the distribution areas, every one of the business areas, we would rather wait until after the close to give you a good solid update on that rather than speculate on individual numbers now.

Q - Howard Chen

Right. Great. And last question, Randy, it's a small number, but I noticed you're no longer providing the stock lending bar revenues in the outlook statement. It had been running at I think about like 5 million a quarter. The first question, what was it this quarter, and is it fair to assume that number is about 5 million still, a quarter, going forward?

A - Randy McDonald

Actually, we do break it out on the outlook statement. So in my comments, I mentioned that the -- quarter-over-quarter, that increased by 2 million.

Q - Howard Chen

Oh, okay. Great.

A - Randy McDonald

But if you go to the outlook statement, we do break out -- it's the securities lending interest and the securities lending expense are gross. So you can follow that. And so take the net of those two and that's the number that we use to provide net.

Q - Howard Chen

Oh, I see. You've just grossed it out. That's helpful. Okay. Great.

A - Randy McDonald

No problem.

Q - Howard Chen

Thanks. Great quarter.

A - Randy McDonald

Thank you.

Operator

Your next question comes from Mike Vinciquerra of Raymond James.

Q - Mike Vinciquerra

Thanks. Good morning, guys.

A - Joe Moglia

Good morning, Mike.

Q - Mike Vinciquerra

I'm always afraid to get behind line with Rich, because I start out with ten questions, by the time he's done I'm down to two. But at any rate, I wanted to follow up on something he did hit on, though, which is talking about the benefits you guys have gotten so far with the rate increases versus your outlook for the TD transaction. Now, if I look back at your original presentation, you're looking for $200 million in benefit. It would seem to me that you've already gotten an portion of that 200 million simply by the rise of the short-term rates. And I'm just curious: if the yield curve stayed as it is, Randy, today, would that $200 million incremental, once the transaction closed, actually be a little bit lower because you've already gotten some of the benefits? Does that make sense?

A - Randy McDonald

I understand the question. The way you said it -- let me restate your question. I think the way you said it at the end was a little confusing. Yes, the purpose of getting to 200 million is to take advantage of moving out to two-year money. The fact that overnight money is now approaching two-year money, yes, a lot of the -- some of the 200 million, and we're not quantifying that yet. We're going to come out with, at close, a very robust call on this. We have to be very careful about what we're telling you now because we have our proxy out there. And so, yes, the answer to your question is absolutely yes. And as the yield curve, as Rich mentioned, as the yield curve does become more inclined, there is obviously more opportunity if that yield curve becomes more inclined. So the first question, have we realized some of the 200 million? Yes. Is there opportunity for more than 200 million if the yield curve becomes more inclined? Yes.

Q - Mike Vinciquerra

Makes sense. Thank you very much for that. Second of all, Joe, you mentioned -- you talked a little bit about, in your prepared remarks, the branch strategy and what you're planning on doing with increasing the sales effort. Can you talk to us about what TD's branch personnel do today, what are they there for, what service are they providing, are they bringing in sales today, and how you expect that to change once you guys are combined.

A - Joe Moglia

Today their emphasis is to provide both service and be an asset gatherer in the branches. Going forward, we will handle the vast majority of the service in our call center. And the investment consultants in the branches will be expected to go out, in effect, and sell PD/Ameritrade, sell Amerivest, sell the long-term investment -- platform and bring in as many assets and business as they possibly can. Again, Mike, we will give you much more color on the specificity behind that after we close in our next follow-up meetings.

Q - Mike Vinciquerra

Okay. So there will be some changes in their responsibilities. There will be some retraining and everything like that that probably has to go on.

A - Joe Moglia

That's correct.

Q - Mike Vinciquerra

Finally, on the impressive increase in your client assets during the quarter, I guess it was up about 10%, can you give us an estimate of the mix between appreciation in client assets versus actually new money brought into the account?

A - Randy McDonald

We haven't typically done that. Why don't we consider whether we will do that. We do have the information. We've never disclosed that. And so that would be a big change in how we present data. Let me take that under advisement.

Q - Mike Vinciquerra

Fair enough. Thanks again, guys.

A - Joe Moglia

Thanks, Mike.

A - Randy McDonald

It is positive. I mean, it is absolutely -- new money is coming in the term.

Operator

Operator Instructions Your next question comes from Rich Repetto of Sandler O'Neill.

Q - Rich Repetto

I love this space so much, I've got more questions. The point I was trying to get here on this net interest income, Randy, if you take a look at -- I'm looking at next year, what you're forecasting. It looks like -- I know this quarter had 98 days. It was a big quarter. But you reported 125, 128 -- excuse me, 126 million. But next year, with the run rate, it looks like 125 is a pretty good run rate as well for a 91-day interest day quarter. So I guess my question is, when you annualize that, you get 500 million. 125 time 4. That's up 100 million from what you reported this year, the 398 or so. To me -- what is the incremental margin? If that's all profit, to me that's an incremental $0.15, if you tax it and take it on the shares, because you're saying $0.93 in flat conditions, that would tell me it's got to be 96 or so, plus upside with the Fed rate hikes.

A - Randy McDonald

Right. But then the other side is what we're paying out. Now, that's why I went to great pains to talk about spreads. And I think Prashant asked a good question at the beginning of the call, which is, we've seen expanding spreads for the business. The difference between paying out 69 on cash, client cash, and receiving in a little below 7% on the margin loans, and I think it was 335 on said cash. So the spreads that we've seen increase have been about 190 and 193 basis points. Remember that as rates came down, those spreads compressed. Now they are expanding back out. I think Prashant's question was, how much can they continue to expand? Isn't there a point where your net interest margin -- it's not infinite. Market will say, gee, you're charging us too much in terms of margin loans or you're not paying us enough on client cash. So what is the net interest margin that you're managing to?

Q - Rich Repetto

I fully am aware and sensitive to that fact. But the 125 million run rate factors in that spread. It factors in the cost that you're paying on to clients. So I hear what you're saying, Randy, but it just seems conservative. Because that 125 is net of what you pay -- of what you're paying the clients.

A - Randy McDonald

Go ahead, Bill.

A - Bill Gerber

Rich, if you're -- you're exactly right. The additional 100 million or so, that -- it was roughly $0.14 a share. So I don't disagree with your concept.

A - Randy McDonald

I don't think we're disagreeing, Rich.

Q - Rich Repetto

No, it is actually a good thing. I hear you. I think it is conservative.

A - Joe Moglia

Rich, I think that's fair. I think especially since -- the key to what is going to happen in '06 and '07 is going to be the success with which we run and deliver on the integration. Today if we're just talking about Ameritrade by ourselves as a standalone, if anything, I think it would be prudent to air on the side of being more conservative than not.

A - Randy McDonald

But again, I want to emphasize that what has happened in the past 12 months with the number of increases we've had, I wouldn't assume that if you have another four increases that we could increase the spread like we've done this year.

Q - Rich Repetto

I fully agree. And that's why I'm just saying, in a static, if you just took the run rate, it would be $0.14 or $0.15. And anything above that --

A - Randy McDonald

Yes, we're agreeing. Absolutely. If you remember, at the announcement, we even did that. We took and showed you -- or actually, it was the last earnings call -- we showed you on a bar chart, we built that slide. Had we not done projections here for purposes of not having too many projections out there while the proxy is out there.

Q - Rich Repetto

Understood. Thanks, guys.

A - Joe Moglia

Thanks, Rich.

Operator

Your final question is from Michael Hecht with Banc of America.

Q - Michael Hecht

Hey, good morning, guys.

A - Joe Moglia

Good morning, Mike.

Q - Michael Hecht

Hey, I just wanted to touch on how your market share number of trades. It seems to me you've been pretty consistently losing share the last few quarters. This most recent quarter it looks like your trades are up about 5%. Most of your major competitors seem like they're up between 10 and many closer to 20%. I mean, I understand there are some timing differences, in terms of when you closed the quarter and that kind of stuff. But can you talk about why you think your customers seem to be trading a little bit less than others? And how you guys plan to address some of the market share slippage.

A - Joe Moglia

Yes, Mike. One, I agree with you. We see those numbers as well. Secondly, there are two basic reasons why a client -- when we do our analysis, we have two reasons why a client leaves. The first one, for those that have greater assets, is because they are choosing to consolidate their accounts at one place. That means, for them, today we don't have an adequate enough long-term investor solution to satisfy their long-term needs. For the clients that we have that don't have much in terms of assets, they may leave primarily because of price. That's one-two in order, as far as why somebody would leave. The real focus for us is again to roll out a client segmentation strategy where we have different value propositions for different types of clients. Different price points for different levels of service and different product suites. Frankly, we probably would have rolled that out by now, had it not been for the TD Waterhouse acquisition. It didn't make sense to do that when we were trying to integrate both firms. That's the reason why I say, going forward, when you look the our market share and growth, a big part of us being able to achieve greater numbers in that arena will be the rollout of the client segmentation strategy as well as a movement from a marketing organization to both a marketing and a sales organization.

Q - Michael Hecht

Okay. That's helpful. Thanks.

Is it possible to get any color on just the mix of your trade? I know you guys have a couple of offers out there. The iZone kind of $5.00 trade offer versus the kind of core pricing. Any difference in mix, in terms of where you're seeing activity, stronger or weaker?

A - Joe Moglia

We don't disclose the specificity behind that. But suffice it to say that the vast majority of that comes in on the basic Ameritrade offering at $10.99.

Q - Michael Hecht

Okay. On the payment for Ameritrade, I think you mentioned that it's been kind of stable the last year or two. It is still a number less than 5% of overall kind of commissions, just to give us a ballpark of where that is running?

A - Randy McDonald

Yes, we've never -- not in recent years. We've not disclosed a specific number. But it is definitely below 10%. It is not very significant to us anymore.

Q - Michael Hecht

Okay. And then just the last question, I was wondering if you could give us any color on where some of your margin rates and client credit balance rates and saved cash rates kind of ended the quarter or maybe where they are averaging around today, just to give us a sense of how that compares to the average for the quarter.

A - Randy McDonald

Actually, have you gone to the outlook statement? Because we are painfully clear with going through the -- both the average balances as well the ending balances. So rather than taking up everybody's time on the call to do that now, why don't you take a look at that outlook statement. If you still have a question, Bill, myself, Tim, somehow we'll all take your call. But that's all very, very detailed at amtd.com, at the outlook statement.

Q - Michael Hecht

Got it.

A - Bill Gerber

For '05. If you look at -- this is Bill. If you look at '05, those rates are static in all categories throughout the year. That's essentially where we're at right now.

Q - Michael Hecht

Okay. That's helpful. Thanks.

Operator

At this time, there are no further questions. I'll now turn it back over for closing remarks.

Joe Moglia, Chief Executive Officer

A comment, and that is, I mean a good third of the questions and many of the questions that we got between quarters from different investors and the analysts dealt with, really, what is going to happen with the TD Waterhouse acquisition and what are things really going to look like post-close. We do recognize that. And I think we have always erred on the side of giving the marketplace as much transparency in as many arenas as possible. Our job is to continue to do that. But we thought it would be much more practical and the information would be far more succinct and accurate, just to make sure that we give everybody a really good solid update shortly after we close. So please, bear with us as far as that goes. Remember, we will give you guidance thereafter on a regular basis as well.

Having said that, again, we are incredibly proud of the last three years. We're proud of the record year that we had this year. But as proud as we are of the last two years, I can't tell you how excited we are as far as our future goes.

Thanks, everybody, for joining our call. Have a happy Halloween and a happy Thanksgiving.

Operator

This does conclude today's Ameritrade September quarter and fiscal year 2005 earnings call. Thank you

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