Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  
TRANSCRIPT SPONSOR
Wall Street Breakfast

TD Ameritrade Holding Corporation (AMTD)

F3Q07 Earnings Call

July 19, 2007 9:00 am ET

Executives

Bill Murray - MD, IR, Communications and Public Affairs

Bill Gerber - SVP, CFO

Joe Moglia - CEO

Analysts

Mike Vinciquerra - BMO Capital Markets

Rich Repetto - Sandler O'Neill

Prashant Bhatia - Citigroup

Michael Hecht - Banc of America

William Tanona - Goldman Sachs

Matthew Fischer - Deutsche Bank

Roger Freeman - Lehman Brothers

Matt Snowling - Friedman, Billings, Ramsey

Mike Carrier - UBS

Presentation

Operator

Good day everyone and welcome to the TD Ameritrade Third 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, Please go ahead, sir.

Bill Murray

Good morning, everyone. Before we begin, let me just say that we appreciate your patience this morning. We had some unavoidable technical difficulties, we're all squared away and we are ready to go. Certainly by now, you've seen our press release, which was made public this morning. If you have not seen it you can go on to our website www.amtd.com. If you ha e copy of the release, as well as submit questions to us from there. Also on amtd.com is a copy of the presentation that we will be making this morning. So you can print it out to follow-on more easily. If you want to contact us after the conference call please call investor relations at 800-237-8692.

I'd like to note that this call contains forward-looking statements that are made pursuant to Safe Harbor provisions of the Federal Securities Law. 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.

As a part of our presentation, TD management will discuss non-GAAP financial measures, such as operating margins, EBITDA and liquid assets. Listeners 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 again at amtd.com.

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 time, I would like to turn the call over to TD Ameritrade CEO Joe Moglia, who will be followed by our CFO, Bill Gerber. Joe.

Joe Moglia

Thanks very much, Bill and good morning, everybody. It hits me that you know in this day and age whenever anybody in the industry postpones a meeting, postpones a call, postpones a session, whatever it is, the immediate rumors in the marketplace that are hot. There is something going on, there is a story, et cetera, et cetera. So it hit me this morning when we pushed our call back a half an hour, they made very well then an entire group out there that were thinking aha, they have something special to tell us. Don't mean to disappoint you on that, but I apologize about having to push the -- put the call back and as Bill had said, we appreciate your patience as far as that goes.

So on with the actual call itself, we take a look at our first slide, we did have -- we've been around about 32 years now, we did have the best quarter in our history. We came in at $0.26, as far as our earning go and there were couple of reasons why we were ahead of our own midpoint.

First as we're all aware there was greater retail activity over the span of the last couple of months than we had anticipated and then commission rates on average had gone up primarily because of the mix of business and what we've seen in our option business.

Our net revenues came in also, it was a record of $542 million, that's 61% of those revenues are driven by our assets. Pre-tax income, another record at $255 million, our pre-tax margin at 47%, I had said for the last couple of years now, that when we get the integration behind us, going into 2008,we expect to be back above 50% pre-tax margins that continues to be our promise to you in the marketplace.

Our EBITDA is also a record $304 million, 56% of net revenues. And our debt-to-EBITDA ratio today is down to 1.2, it had been 1.8. The amount of debts that we actually have outstanding is at $1.5 billion. It had been $2.2 billion and we bought back almost $50 million of our own stock over the span of the quarter.

Our ROE, annualized ROE for the quarter, comes in at 33% and we are reasonably pleased with that.

Now, before we go on to the next slide, just a comment then about our numbers for the rest of the year. If you look at '07 numbers and you look at the $0.26 for this quarter, it's $0.02 better than our midpoint. That is offset by a penny, by if you recall $100 million in incremental investments that we are making as far as our client segmentation strategy goes. With $10 million further ahead on that, than what we had anticipated, so that would offset by a penny, therefore the midpoint of the range gets raised to $1.01 for the rest of 2007.

If you take a look at some of the operating metrics for the quarter, our average per day came in at about 245,000. By the way, July to-date, so far we had 255,000. Our average investable assets are at a record $31.5 billion, that's up above 13% from a year ago. And the net interest margin we are working for is little over 3.5%. Now, that's down from where we were about a year ago, we were at 3.88%. That's primarily because of our security's lending business, which is a business that we make a little less spread on than we actually do from some of the other elements that make up our net interest margin. So, 3.53% is what we work for on those assets. Client assets, we're at a record of $297 billion that's up 16% from a year ago, cash and money market fund $43 billion that's also a record for us.

New accounts came in at the 152,000. I am pleased with the new account opening. If you look at the rate at which we have been opening accounts, the TD Ameritrade is actually opening up accounts to add at a faster rate than what Ameritrade did and TD Waterhouse did independently add it up to get it. So, we are pleased with that, so with effect one plus one equals something greater than two. Net new accounts for the quarter were 91,000, and qualified accounts came in at 3,276,000. That would be a little bit better than last quarter, but we're still not allowed what the qualified account number.

Now, we want to spend a minute on what's been going on with regards to our market share, but as you look at this slide, the Schwab had announced earnings a little earlier in the week. E*Trade has not yet announced earnings. So, to compare ourselves to a probably trade peers, we are using April and May, we wouldn't have June data yet, and we are preparing that versus where we were a year ago. And over the span of the last 12 months, literally over the span of the last 18 months, we had talked about the intensity and complexity associated with integration. We are very, very pleased with the accomplishment of that integration but it is taken every date of the time that we had told you that it would actually take.

In the midst of all that going on, I have to tell you that I am pleased with where our market share is. In spite of the challenges associated with one of the largest integrations on Wall Street, we have been actually able to not just grow our respective businesses but increase our market share in trades, increase our market share in terms of gross accounts and a market share in terms of client assets is off.

Now, when you take into consideration the clearing conversion, number or couple of quarters ago we announced that we were closing down the investment centers and the fact that we are just now rolling out our long-term investor offering. I got to tell you that I am actually very, very pleased with where we stand on Wall as far as our market share goes.

Now in terms of where we are right now or where we are going forward and we are literally wrapping up the tail-end to the integration. We said that it will take 18 months, it’s going to take 18 months, but it’s not going to take any longer than that. We said that we will get at a fixed cost run-rate of 333 with regards to synergies, we have improved on that to 321. We said the originally a revenue opportunities are going to be 200. We are now a little time ago that was going to be at least 300. We know it is more than 300 and we said we would maintain at least a 95% retention rate. Those were the four promises we made to the street. We have achieved and surpassed every one of those four promises.

Where we are going through right now, is something similar to what we normally go through, every time we go through a conversion. There was always some sort of integration headache issue problem that needs to be addressed and it usually takes several weeks or couple of months to be able to eliminate those. So, we certainly had our share of those and that has left us with longer wait times in the call centers then ideally we would like.

The two areas where that’s mostly taken place in is the fact that the people have a new fund in, they have questions associated with that, how to navigate, are there educational type of calls that would try to help our clients with, they take longer and then we have some confusion with regards to our statements, that causes a lot of questions etcetera. And there are number of things like that are going on and we are moving -- and we are moving to wrap all those things up. That’s no different, by the way, when we had many of our other conversions.

Now when we go -- as we look forward, the heart of everything that we try to do and has always been is what we are trying to do with regards to our business plan, our client segmentation strategy and our organic growth.

And basically, I think, probably all of you to repeat this back to me, our client segmentation strategy means that we are focused in the areas that we believe we can do well and have a competitive advantage or ultimately have a competitive advantage. So we are going to continue to do everything we can to maintain our leadership role in the active trader spot.

In the long-term investor spot, we are now rolling out our cash management offerings, more long-term products, bond, bond ladders, a bond wizard will be coming out soon. The ability to be able to do bonds online, a formula robust easy to use mutual fund, mutual fund process and offering, our portfolio allocation service.

We have just hired Stephanie [Jeraue] as an investment strategist, and you know about the $100 million that we talked about on our previous call is going to be useful for this, and we are excited about that..

In the RIA space, we have done a reasonable job growing that business up until now moving narrowly just had an active trader offering. Now that we’ve also have a long term investor offering, we think it would be more appealing to the RIAs that are more asset gatherers rather than transaction orient. So that will continue to, would be, and continues to be our focus.

With regards to M&A, I have been asked this a lot. You do M&A or do you try to go for organic growth? And the answer is, you always for go for organic growth, but you try to do both. So, as you will know, a little while ago we announced our ninth acquisition over the span of the last five years.

Of the eight we’ve done. I am comfortable today, that we can say, we are aiming eight now in that regard. And as we look at what’s going on in the industry, it’s indeed something that makes sense for our firm, we will work hard to be able to figure that out. We are not afraid to do a deal.

Now with regard to that, just a couple of comments. First, I know there is a lot of buzz around the last days of consolidation in the online brokerage industry. But as we become asset gatherers, online brokerage will not be the only thing that we will be looking at. We will be looking at entities or strategic alternative that would aid us as well in the asset gathering business or helping to advance our strategy there.

So, things we might we might be looking at are today might be different, than the things we would have looked at a year ago or three years ago. And then, suddenly within our own industry, within our own space, as far as online brokerage goes, we are clearly in the later stages of consolidation as far as the industry goes. I do believe that the risk goes, some room for that.

But at the late stages, the prices, the risks, the rewards, all of those are far greater than what may have been, let’s say, three or four years ago. So consequently, as we look through all these things, we will be, by definition and appropriately so, we would very, very deliberate and thoughtful as we look at all those things. And at the end of the day, there is something that makes sense long-term for our shareholders, it will be something that we will work hard to try to figure out.

And then looking ahead to next year, traditionally, we give you the next fiscal year's numbers at the first earnings calls of that fiscal year. So, we are going to give you detail on our way in October. However, for those of you that need numbers to help with your models, consensus on the street, it is around $1.27. I think it's very reasonable as you look at 2008 numbers, but feel free to use $1.27 at the midpoint of our range for next year, but we will give you specificity and exact numbers on the October call.

With that let me turn it over to Bill.

Bill Gerber

Okay. Thanks Joe. We had a historic quarter by completing the largest conversion ever in our industry and producing record results of $0.26 per share, which is up 13% or $0.03 per share over the same quarter last year. Our pre tax margin and return on equity continues to be a leader and not only in our industry but in the entire United States, finishing the quarter at 47% and 33% respectively. Our EBITDA was a record $304 million or 56% of revenues advancing our cash generation abilities. And our revenue stream remains stable as our asset-based revenues still account for approximately 61% of total revenues.

Let's now turn to the actual June results as they compare to the same quarter last year on slide 8. Our net revenue was a record $542 million, up slightly from last year. Transaction revenue of $198 million decreased $15 million, mostly due to 8,000 lower trades per day, and the pricing change to $9.99 which occurred May 1, 2006.

Trading activity was 245,000 trades per day or 3.9% activity rate versus last year's activity rate of 4.1% or 253,000 trades per day. Our average commission per trade for the quarter came in at $12.82 down $0.57 versus '06. The price change to $9.99 was the largest factor of this decrease, along with the lower priced fixed income products and higher promotional trades we discussed last quarter, also negatively impacted the rate.

However, these were offset by a favorable mix which showed an increase in our options trades in our payment order flow of business. Asset-based revenue of $333 million increased $15 million almost entirely due to $12 billion increase in balances with over $3 billion coming from investable assets and $9 billion in money markets and mutual funds.

Most of the $3 billion growth in investable assets is due to the growth in the conduit business, where we borrow shares from one broker dealer and loan the shares to a different broker dealer and we earn a small spread. The increase in the proportionate size of this business is the main reason our net interest margin of 3.53% decreased 35 basis points versus a year ago. The rate earned and the money market and mutual funds was virtually unchanged.

Expenses excluding advertising year-over-year are up slightly to $254 million. Important to note here though is that the $254 million from this quarter includes about $8 million of investments for growth, most of which is increasing our sales force to better serve our clients and promote additional growth. 3 million from severance and 6 million from increased in central accruals, all of which were offset by a 4 million positive settlement with the exchanges regarding a legacy TD quotes communication issue.

We spend $33 million in advertising this quarter, a reduction of $22 million from last year. We had a heavier advertising spend in the June 2006 quarter, as we supported both legacy brands for a month before launching a new brand in the second course of the quarter. That launch required a heavier spend than maintaining an established brand and acquisition effort.

Now that we are over a year into the establishment of our brands, you can see that our marketing spend has dropped back to normal levels. Additionally, our tax expense was about $2 million lower than anticipated this quarter, as we had a catch-up on our state tax rate for the 2006 tax year.

Let's move to slide 9. As Joe mentioned earlier, we are accelerating the pace that which we spend $100 million investments for growth. As you can see right now, we are accelerating that spend with $8 million spend at this quarter up to an increase to $20 million for the September quarter. The majority of this expense is compensation related.

We had anticipated the $10 million spend for the September quarter. When you take into account the $0.02, we beat our outlook buy in this quarter, less the $0.01 effect of the additional $10 million of investments for growth in the September quarter, I just described. That drives the change to the $1.01 from the midpoint or for the outlook midpoint for the 2007 year.

Additionally, with the clearing conversion out of the way and excluding the impact the investments for growth which are in blue, redundant expenses are being eliminated aggregating about $44 million in the September quarter. This would result in about $200 million expenses, ex advertising and ex investments for growth or an $800 million of run-rate.

Now, let's turn to liquid assets. We continue to exhibit strength in the cash generator, which allow us to be flexible and making financial decisions that best impact the firm. Liquid assets are still a little higher than normal, but we are holding at these levels for a $225 million Fiserv acquisition, which we expect to close in the next three to five months.

We started the quarter at $543 million in liquid assets. We earned a $159 million in net income for the June quarter and had $20 million D&A We are using working capital, regulatory capital and capital expenditures of $41 million. We made $206 million in debt payments, $200 million of accelerated payments and $6 million of mandatory payments. And we used $49 million to repurchase 3 million shares of our stock.

As a side note, since the buyback program began through June 30th, we've used $295 million to repurchase 17.3 million shares of our stock at an average cost of 17.08 per share. That leaves us with $426 million in liquid assets. These liquid assets allow for several uses including debt repayments, stock buyback, M&A for additional organic growth.

I should note, over the last nine months we've used 100% of our net income for share repurchases and debt payments.

As always, we will continue to review our capital structure at their board and to determinate optimal uses of our free cash flow. We have great financial flexibility and we’ll ensure that we are best utilizing our cash.

In summary, June was the best quarter in the company’s history with multiple records set. We continue to be an industry in United States leader in free tax margins, and Return on Equity. We have increased our outlook midpoint to a $1 which should be a 16% increase over 2006 levels. Declaring conversion is now complete. We continue to invest in growth for our organization, and as always we continue to be a strong cash generator and utilize the cash to buy back our stock, pay down our debt or grow our company.

I will now turn the call over to the operator and will start the Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will go first to Mike Vinciquerra with BMO Capital Markets.

Mike Vinciquerra - BMO Capital Markets

Thank you. Good morning, guys.

Joe Moglia

Good morning, Mike.

Mike Vinciquerra - BMO Capital Markets

Joe, can we talk about the accelerated stand here, can you give us a sense where -- do you know the first round of spending are you going -- obviously you told us last time that your senior management was going to come to you and give you their proposals for where they want to spend. Where are you seeing the first opportunities, and why the acceleration right now?

Joe Moglia

Yeah, well, Mike when we talked about this you know, we talked about a $100 million spend, and frankly the sooner we implement that spend, we think the sooner that we are going to get results. So, the management team has come to me with individual requests; I have allocated probably 85% or 90% of that so far. You should assume all $100 million dollars is absolutely going to be allocated for 2008. And wherever we had approvals, we began to make those investments right away. The vast majority of those investments early on are in the sales force and greater support in the call centers.

Mike Vinciquerra - BMO Capital Markets

And across the various product areas, RIA is your core business, is there anything specifically being focused on?

Joe Moglia

We know, it would be across the respective client end segments, but I think the greatest emphasis is in the areas where we think we can openly gather assets.

Mike Vinciquerra - BMO Capital Markets

Okay, fair enough. Thank you. And then is there any financial impact you can provide for us on the five serve deal in terms of rough revenue contribution because you are buying most of that organization, but there is a piece that’s going to another buyer, and I don’t know what the pre-tax margins are going to be on the piece that you are buying. Anything you can provide there will be helpful?

Joe Moglia

I think, we are going to close that beyond a million of asset. We are going to close that deal over the span of next 3-5 months and I am glad to give you whatever we can disclose. Geb, what do we have there?

Bill Gerber

Some $60 million of revenues.

Joe Moglia

$60 million of revenues. We have already said that, right?

Bill Gerber

And about a $40 million of expenses.

Joe Moglia

Okay, Mike?

Mike Vinciquerra - BMO Capital Markets

Sure, and I would assume that you have plenty of synergy with your current business that you presume that you are going to increase that pre-tax margin?

Bill Gerber

We certainly ought to.

Mike Vinciquerra - BMO Capital Markets

And then just one last question on, you spend some balance of about the 12B-1 fees and the potential that some people are pushing for a reduction there. Obviously, that would be a wind in your face in terms of growing your asset management business and growing your mutual fund side. Any comments on how that might impact you if something comes through?

Joe Moglia

What I think, you know, right now I don’t think it’s going to be that much of an issue for us. I think the way pricing takes place in the industry can adjust overtime anyway, and today the 12B-1 fees are rather a really small piece of what we do, and as we look at how we want to gather assets, while certainly we need to be able to be in the middle of a mutual fund business with regards to offering products etcetera. We are going to be looking at other things, our own index funds, GPS etcetera, etcetera. So, right now that will not have much of an impact on us. If that indeed happens, you know, I think the path that we are taking anyway may very well be a little bit more away from mutual funds any how.

Mike Vinciquerra - BMO Capital Markets

Okay. Thank you very much

Joe Moglia

Thanks Mike.

Operator

We will take our next question from Rich Repetto with Sandler O'Neill.

Rich Repetto - Sandler O'Neill

Good morning Joe.

Joe Moglia

Hi Rich.

Rich Repetto - Sandler O'Neill

First question, a little bit more on the incremental, the investment spend.

Joe Moglia

Yes.

Rich Repetto - Sandler O'Neill

So the chart or the slide depicts it as -- is it a one time $20 million in the fourth fiscal quarter or is that something that's you know it's just for the sales force, is it safe to say that, you have spent $20 million in fiscal 4Q that's going to be $80 million next year?

Joe Moglia

Yeah, you should assume it's going to be $80 million next year. So the way to approach it that these are not meant to be one-time spend, they are meant to be permanent investment, you know one of our ongoing effort is be able to generate greater revenues, so again if you think in terms of $100 million incremental spent for 2008, you will be covered on that, but that's just not go away in 2009.

Rich Repetto - Sandler O'Neill

Okay. And then Joe I am just trying to get the benefit, any color or info on -- on what the payback on that, now that you've had been a little more time to look at it?

Joe Moglia

Yeah, well the entire objective Rich, is going to be trying to help us become a greater asset gatherer. So by having more people in our sales force, by being able to provide great -- as a transaction oriented firm over the years, one of the things you wanted to do in the call center, somebody will call frankly, you wanted to get off the phone reasonable quickly in order to be able to solve the client's issue or problem, you can't get off the phone reasonably quickly now, if indeed that's exactly what we are trying to do which it is.

So consequently calls themselves, in the call center for example, take more time. So we need more personnel in the call center. You already know that we are in the midst of either or already rolling out or going to be rolling out more of long term oriented products. So is very simply in the bond arena, the ability to do bond online, very, very simple, easy, and the ability to be able to scale that, to be able to do your own bond ladder. We are going create a bond wizard, et cetera. Those are all some of things in effect that we are trying to do to kind of enhance our capability in the long-term investors' space.

Rich Repetto - Sandler O'Neill

I guess, my question regards to then, on the $20 million that turns into $80 million, when you spread it out over year, is it just a sort of sustain the revenue outlook that's current right now or does it, for example bring in at the margin 50%, does it bring in $160 million in additional revenue next year or does…?

Joe Moglia

Yeah, I think, we are hopeful, certainly that's it going to bring in additional revenue next year. We're going to give you more detail on that in October. But it is also meant to protect the assets we have. So if indeed we lose a client, because we haven't had a long-term offering, but this does a better job of protecting what we already have, as well as helps us to attract new assets. It does both of those.

Rich Repetto - Sandler O'Neill

Okay. And then, I guess, the last thing. This wouldn't be myself, if I didn't asked about, so you've restructured the independent or you have the independent committee to evaluation the strategic alternatives. I guess, the question is, can you give me any insight on what they're doing now, are they meeting with other companies, are they being contacted, are they reaching out to investors or what exactly , because, I hear your deliberate comments, I'm just trying to see, what going on behind the scenes here?

Joe Moglia

So you're interested in kind of, like the less than deliberate comments. Inside of the secret, inside info. You know Rich, as you know, and as you all know, M&A is something that literally we work at all the time. So to have M&A committee that can assist us in that, help monitor that, help have provide us with ideas as far as that goes. I do believe is a smart and a valuable thing. With all the things going on in the industry we have already said that, you should assume that we are talking to and we'll continue to talk to any player that exist in the industry.

Now anything specific with regards to the M&A committee, as far as the discussions with anybody et cetera, et cetera, I wouldn't be able to disclose that anyhow. But again, as part of standard operating procedure, you should assume that the management and the M&A committee is involved with stuff that we've got going on.

Rich Repetto - Sandler O'Neill

Okay. I'll leave it that, that's very helpful Joe. Thanks.

Joe Moglia

Okay Rich.

Operator

We go next to Prashant Bhatia with Citigroup.

Prashant Bhatia - Citigroup

Hello.

Joe Moglia

Hi Prashant.

Prashant Bhatia - Citigroup

Now that the integration is done, can you give us a feel for how much attrition you had -- rough numbers in terms of the assets or may be in terms of qualified accounts?

Joe Moglia

Yeah, I think in terms of the goal-specific -- what's our -- what was that specific, I want to double check on this specific attrition rate for the quarter?

Bill Gerber

It was under 4 for the attrition rate for the quarter.

Joe Moglia

Okay that was under 4% for the quarter, and if you recall, when we regionally set this up, we had said that, we assume to 5% attrition rate for our loan accounts. I think we assumed to 7.5% or was it 10%? The 7.5% attrition rate for the TD Waterhouse accounts. So 4% for the quarter that's probably a little higher than what it was and you would expect that to be a little higher, as you are going through the actual conversion and the period subsequent to the conversion. So, if attrition is going to kick up, I would expect that to -- we have already started to see that probably a little bit and I would expect that probably it will continue for a little while until it is early down.

But our ultimate goal was to be or have better than 95% retention. We are certainly at 96% plus and we are pleased with that. But now would be the time, into the last couple of months or the next couple of months, we would see it kicked up in the attrition.

Prashant Bhatia - Citigroup

Okay, great. And then, you have got a model that doesn't have a lot of credit risk, doesn't have a lot of rate risk. It is not that capital intensive. I guess, if you focus more on the asset gathering side of it, do you see an opportunity there to may be better service the customers that you have by taking more of rate or credit risk?

Joe Moglia

Yeah, I don't think we would be overly aggressive trying to take too much interest rate risk or too much credit risk. Having said that, we are very conservative and if we think that something on a risk reward basis winds up making sense, we don't have a problem taking a look at that ourselves Prashant. So, we are in the process, we are just evaluating that now.

Prashant Bhatia - Citigroup

Okay great. And then finally, on the client cash you have been growing, it looks like roughly about a $1 billion a quarter. Looking at kind of the outlook going forward, I think, just more flat on that. Is there something that you are seeing in terms of customer behavior or is that just may be being a little conservative on your part?

Bill Gerber

That's being a little more conservative, Prashant.

Prashant Bhatia - Citigroup

Okay. Great. Thank you.

Joe Moglia

Thanks Prashant.

Operator

We'll go next to Michael Hecht from the Banc of America.

Michael Hecht - Banc of America

Guys, I am on the phone. I am here. Hi guys.

Bill Gerber

Okay. Alright.

Michael Hecht - Banc of America

How are you doing?

Bill Gerber

Great. How are you doing?

Michael Hecht - Banc of America

Good. So, just a couple of questions on the incremental investments stand, I mean, can you give us on how in terms of how we should be thinking about measuring the progress, you are showing in about the gathering kind of penetrating the long-term investment stationing, do you have any data that show as form kind of overall flows and things you give us more kind of data and help on going forward?

Joe Moglia

Yeah, I think Michael in terms of, I think, which you need to be able to look at our assets, I mean, that's what we are trying to do, we are trying to grow our assets. And then as you might breakdown the assets, you look, I would look at assets per take per client or per count. I mean that would probably be the most simple measurement, as far as that goes.

Now, I know a lot of times, I get a lot of request with regards to, well, can you breakdown the $100 million and you know what kind of role, why do you expect on a $100 million. We think that all the $100 million are smart well thought out of investments and things that frankly may be we should have already been doing or certainly should be doing now.

You know and at the end of the day, I don't know, if we've got to, I don't want to create too many assumptions, but when you look at what we are trying to do, we are trying to gather assets and I think you just keep continue to keep an eye on how we are doing as far as the asset side of our revenue base goes and what that looks like on a per capita basis and you are probably having a good indication as we, well, in terms of we do not have to work. And I am hoping that sometime in 2008, we start to feel in you will start to see that we are actually getting a little bit of a foothold in this arena. But I think what we start to gain some attraction I think the upside becomes pretty significant.

Michael Hecht - Banc of America

Okay. That's helpful. And then just give me a little more color on the investment spent in the comp, I am looking if you give me color on, it sounds like you are looking to add more people but any commentary on what you are looking to do it in terms of looking at higher or increase in the quality of person or training of person and are you looking at potentially tweaking compensation model and may be make it more variable that actually motivate your sales people or actually sell for some sort of incentive comp?

Joe Moglia

The majority of our compensation today might for our sales people tends to be variable and the reality is we kind of look at compensation all the time. So, since compensation is probably the one number factor in helping determine the behavior of our associates. Frankly, the analysis of how we do that is something that it is discussed and looked at on pretty regular basis. So, we are doing that, we will continue to do. We will continue to invest money in training and we feel pretty good about the quality of the sales force that we have today.

We don't think we have enough. So that's the approach. As far as the individual branches, if you recall, when we did the Waterhouse deal, we inherited about 145 or so. We eliminated assets that we thought we are not particularly productive. So, we don't necessarily feel we've to add branches, although we won't hesitate to do that if we think it makes sense. But to add sales, both on a national basis, or again our Call Centers as well as in branches we'll be, what we will be doing.

Michael Hecht - Banc of America

Okay. So, really just adding more people, no changes to model or anything like that?

Joe Moglia

I don't think you need to change the models, but you asked about are we looking at changes in comp, and yeah, we do.

Michael Hecht - Banc of America

Okay. I got you. And then, just I wanted to come back on the Fiserv. Just want to trying to give a sense, I mean, is this the something which you think about is strengthening your position in the RIA business? And then, just as a housekeeping item, where did you RIA assets end in the quarter and how is that compared to the last quarter? I think the last data point ad was 55 billion?

Joe Moglia

Yeah. We don't disclose that throughout the span of the year, is that? I am looking at my team, is that correct? We don't disclose at the span of the year, we usually give you an update where that stands on annual basis. So, we'll do that more in October. I think though, we did disclose with regards the Fiserv, that what was our buying as, $28 billion in assets.

Michael Hecht - Banc of America

Okay. And then…I am sorry.

Bill Gerber

Michael I will add there a point, you said, $57 billion, it was $70 billion. It was a lot better than the point we gave so.

Michael Hecht - Banc of America

Now is that one?

Bill Gerber

That was in the end of the fiscal year.

Michael Hecht - Banc of America

Okay. Thanks for your time.

Joe Moglia

And you should assume we should be at $100 billion or so. Let me give you a little bit more color on that year end.

Michael Hecht - Banc of America

Okay, one other question, any updates on Amerivest and any traction you are seeing there?

Joe Moglia

Yeah we are actually, it's still -- it's not big enough to break out or talk about from that prospective, but the key to Amerivest in the past, if you recall, was while we would try to market it, there were too many questions associated with it. For example, what does diversification mean? What does it means to rebalance? So it does require a little bit of an educational sales call. So, now that the sales force is on one platform we have actually seen a very nice pick up in interest and business associated with Amerivest, and in our product area with Dave Kelley and his team, we continue to try to frankly expand and improve the whole of Amerivest content. So, the ability to provide portfolio allocation services, not just through EPS, but of course a number of investment products has also stopped that they were playing and working within. I still think that Amerivest could very well be a differentiator product, and we are starting to feel good about the traction that we are seeing.

Bill Murray

And Michael, this is Bill, one last to add a there a point it was that $70 billion was as of March, starting out as of September, so the March '07.

Michael Hecht - Banc of America

Okay, okay that great. Bill, I am sorry, this is really the last question. Just on tax rate, you mentioned the State tax that has just lowered a little bit this quarter, and any thoughts on the Q4 rate which we will be using, should be using may be the 37.5 you had this quarter or the year-to-date rate, 38.5 any thoughts?

Bill Gerber

We are still looking at 38% to 39%. I think there is going to be of a lot of these things coming through unfortunately on a regular basis, and I think what's spent for you are going to see a lot of more of this going forward, but right now we’ll still say 38% to 39%.

Michael Hecht - Banc of America

Okay. Cool. Thanks guys.

Operator

We will go next to William Tanona with Goldman Sachs

William Tanona - Goldman Sachs

Hey, good morning, guys.

Joe Moglia

Good morning, Bill.

William Tanona - Goldman Sachs

Just a couple of quick ones here. You know, going back to your investment spends, it was a pretty big jump and if you think about it, you get to about 80% of what you thought you are going to spend. Any thoughts about possibly even pushing that higher or is that kind of a hard and set rule of what you are willing to invest near term?

Joe Moglia

Bill, no I wouldn’t say it’s a hard and set rule, but I would like to see the results for the $100 million first. So our management team, we would have got problems figuring out a way to get that higher, but I think we have been very thoughtful about where we are going to allocate the $100 million, and I think we got to see some results from the $100 million. If that $100 million really started to pay off and we have found certain areas we would be really getting a tremendous return from, we would not hesitate increasing those areas. By the same token, we found that there were some areas of spend that weren’t doing as well.

We would look at being able to shut that down or reallocate some place else. So bottom line is, don’t assume an increase in the $100 million, but we would do that if we thought that made cash. But, right now, I think we have got to see the results of the $100 million first.

William Tanona - Goldman Sachs

Okay. And then how much timeframe do you think you would give before you kind of make those types of decisions?

Joe Moglia

Over the span of next 12 months.

William Tanona - Goldman Sachs

Right. And then, as you guys talked about guidance for next year, did that kind of guidance include the FISERV acquisition or was that excluding the FISERV acquisition?

Joe Moglia

It should include the FISERV acquisition.

William Tanona - Goldman Sachs

Okay. And then again --

Joe Moglia

But again, more details on October.

William Tanona - Goldman Sachs

Sure. Okay. And then last question on attrition. We talked a little bit about overall attrition, but could you kind of talk about what you are seeing specifically in the RIA business. And particularly what the attrition rate might have been since doing the deal with Waterhouse?

Joe Moglia

The attrition in RIA, we don’t break that out specifically, but the attrition in the RIA business has always been, I mean, very, very retention in the RIA business has always been very good. Now, when I talk about some of the -- so when the question was asked thoroughly about what’s going as far as the attrition rate now goes, and I said at the time you are going to see most of the attrition is literally when you first close the deal, and then its through the entire clearing conversion.

So, while that has just taken place, the impact that is going to have hangs around for another quarter or so. The impact of that has upon our clients on a direct basis, our long-terms investors and our active traders that also then would have the same type of impact as seen on our RIAs. So any of the headaches that pop up from post-clearing conversion issues will be something that everybody in affect will have to go through. But the retention that we have seen in general across the board has been very good, and it’s been very good in the RIA space. But I think, if we see a spike or we see another issue, it’s going to be like over the span in the next quarter or so.

William Tanona - Goldman Sachs

Okay. Great. Thanks.

Joe Moglia

Thank you, Bill.

Operator

We will go to Matthew Fischer with Deutsche Bank.

Matthew Fischer - Deutsche Bank

Good morning.

Joe Moglia

Hi, Matt.

Matthew Fischer - Deutsche Bank

First question also just to get back on the expense investment for growth. The 20 million, the increase in 10 million, is that, is the increase compensation related or is the full $20 million compensation related?

Joe Moglia

No I think a piece of that, the bulk of that is compensation related.

Matthew Fischer - Deutsche Bank

Okay.

Bill Gerber

Another portion of that would be for personal services, as we are hiring technology people to help with product development; but the vast majority of it is comp.

Matthew Fischer - Deutsche Bank

Okay, that’s the vast majority of the 20 million?

Bill Gerber

Yes.

Matthew Fischer - Deutsche Bank

Okay. So, then I guess about going forward about 80 million or in that range is of the $100 million is compensation, these are, I guess, so the other 20 million is for products and those type of things?

Joe Moglia

You know Matt I think, you're probably trying to fine tune into a little bit too much. Right now, the initial part of the spend tends to be for bringing more people on board to help us in our assets gathering effort.

Matthew Fischer - Deutsche Bank

Right.

Joe Moglia

There are, I mean, $100 million gets broken down a lot of the ways and I would say, a big piece of that is related to compensation adding people, adding professionals, et cetera. But now, we're not going to fine tune or breakout. We want you to always know where that $100 million stands, but we are not going to breakout the details behind the $100 million. But suffice it to say that those are the areas that we're using in it.

Matthew Fischer - Deutsche Bank

Okay. It sounds like you down through, I mean, it does seems like you would maybe need to get dig a lot deeper if and when you start to develop these new products?

Joe Moglia

Well, that is what we are doing.

Matthew Fischer - Deutsche Bank

Right. The other thing, I guess, you've mentioned some of the metrics that you used in kind of measuring your progress within the long-term investor state, if you could go, maybe run through with that a bit more, if possible?

Joe Moglia

Okay. If you look at how we generate our revenues, okay, you look at the first part of this transaction, what we are getting with regards to commissions et cetera, et cetera. And then, the second part of that is what's generator of the asset piece. When you look at the assets, we kind of break it down, I think you should still look into kind of two components you've got your net interest margin.

We are just part of the way, we have always made money. That's also how we handle our relation with TD as far as our overall banking strategy with how we manage our risk on the yield curve and how we help manage to balance sheet with our client assets. And then you've got the other piece, how do you generate these, mutual funds, and money markets funds, what happens, what else then happens with things like our portfolio services, new products that we come up with.

So, you've got fees that are generated, because of your assets away from net interest margin and how you have broken down that way that sort of the way we broken it down. But at the end of the day it comes down to what extent, are you doing a better job of not just growing assets but to growing more assets under management that are generating internal fees for us.

Matthew Fischer - Deutsche Bank

Okay. And then, I guess to tough on the asset growth, your 5% sequential in total client assets, how much of that, could you break that how much is net new assets? And how much is market appreciation?

Joe Moglia

Okay. We don't break that number out, now we've had people to ask us, they consider whether I would come up with the net new asset number and we have committed to that yet. But it is something that's on the table.

Matthew Fischer - Deutsche Bank

As they had accelerated since you began this first towards the long-term investor?

Joe Moglia

As our asset growth accelerated?

Matthew Fischer - Deutsche Bank

Well, the net new asset, the organic growth.

Joe Moglia

The answer is yes.

Matthew Fischer - Deutsche Bank

Okay. I guess, we not yet willing to kind of quantify?

Joe Moglia

That's what I just said.

Matthew Fischer - Deutsche Bank

Right. Okay. Thank you very much.

Joe Moglia

Alright. Thanks Matt.

Operator

We will go next to Roger Freeman with Lehman Brothers.

Roger Freeman - Lehman Brothers

Hi, good morning.

Joe Moglia

Hi Roger.

Roger Freeman - Lehman Brothers

I wanted to ask you just may be some commentary on what you are seeing in the retail environment in general? There been a few months including June that have been somewhat disappointing from DARTs perspective , and I am wondering if there is any possibility that consumers in -- as they are getting stress with the housing down turn have the less available cash put into the market. Do you have any sense what there might be going on?

Joe Moglia

Yeah, we have not seen that yet. I think it's important to remember Roger that the retail investor is a lagging indicator in terms of what's going on.

Roger Freeman - Lehman Brothers

Right.

Joe Moglia

But the fact that we are seeing the market it is directed highs. In fact that we've seen really good market performance on an international basis. All those things tend to bring the retail investor into the equation. Now, the fact that they are involved, and I would suggest that they are bullish, does not mean that they are irrationally exuberant. So, when you look at something like co-inflation while that might be in check, actual inflation is up over 5% year-to-date. Now for an individual, that each of an individual that drives a car they feel that, and that would be part of I think of what happens to the retail sentiment across the United Sates. So, the markets are doing well, they have a comfortable level on that, but they are not wildly bullish and they are not totally involved.

Roger Freeman - Lehman Brothers

Okay. So you think some of the inflationary head wins are offsetting the way they are looking at their market entities setting new levels and maybe not just rushing for the money?

Joe Moglia

The answer is yes. But for the reason I am giving you, its not just because they say, oh, inflation is up over 5%, if that’s up over 5% number it does translate into what they are paying for heating, what they are paying for fuel, what they are paying for the gas, what they are paying for the daily groceries, and I think that does have a psychological impact.

Roger Freeman - Lehman Brothers

Okay. That’s helpful. I wanted to ask you just to follow up on the Amerivest comment, can you say how much of planned assets are in this product yet, or will you be able to disclose that for us at some point, so that we can sort of track how it is?

Joe Moglia

Yeah, I don't know if we are going to disclose it at some point, but we are not going to disclose it now.

Roger Freeman - Lehman Brothers

Okay. That’s easy. And then there is a last question just around the pricing, some of the moving parts there. Two questions, one is, has payment for auto flow been increasing from the market makers that you spent flow to, and secondly how much has, have options being growing inside the mix. Can you maybe quantify what option versus equities is in your credit mix?

Joe Moglia

Yes. First, as far as, payment for the flow has been remarkably stable I think over the span of probably the last couple of years. And sometimes it want to kind of goes up and you will see it kind of go down another time but for the most products it's been relatively stable. The payment for the flow with regards to the options continues to be a reasonable piece of that and that continues to be reasonably substantial.

Now with a movement toward penny pricing with regards to options we would probably see a tightening of payment for the flow there, but then you would also probably see a corresponding increase in volume. So for the time being payment for the flow is not material enough for us to break it out. But it has been remarkably consistent let's say over the span of the last couple of years, although the mix has shifted a little bit away from equities to options over the span of last couple of years.

Roger Freeman - Lehman Brothers

Okay and then just in terms of overall options trading because that has a positive mix -- a positive impact on the pricing mix of the rates are higher. How has that been trending and what percentage is the option of trading volume?

Bill Gerber

Yeah. Options are now about 10% of our trading volume and represents about the lower 20% of our commission.

Roger Freeman - Lehman Brothers

Alright. Has that changed much since say the end of last year?

Bill Gerber

It's been creeping up, you know it's been 8 to 20, but it's been trending more toward 10.

Roger Freeman - Lehman Brothers

Got it. Okay, thanks a lot.

Joe Moglia

Thanks Roger.

Operator

We go next to Matt Snowling with Friedman, Billings and Ramsey.

Matt Snowling - Friedman, Billings, Ramsey

Yeah, good morning.

Joe Moglia

Hi Matt.

Matt Snowling - Friedman, Billings, Ramsey

I hate to beat dead horse on this investment spend, but you mentioned that building of your call center support and that, and whether it's 100 million or something south of that seems like a pretty high number. call center, I am wondering if it's more about hiring more seasoned brokers on the branch level?

Joe Moglia

Yeah I'd say Matt, it's a combination -- I think, and I obviously do a lot of questions on the $100 million spend and I recognize it, look everybody likes to get much more specificity with regards to granularity on that. But we are not spending a $100 million on the call center. A piece of the $100 million goes for greater call center support and greater education for the call center. Remember, one other thing we said that we want to able to do is, our call centers have predominantly only been service centers. And part of what we want to transition is the sales element within the call center.

So, in the past, whatever I could do to kind of help you and solve your problem, today, we might very well start asking the question, were you comfortable with your retirement or have you had a chance to take a took at ABC. That doesn’t happen overnight, that requires probably a pilot program and some education. That requires some cost to it. Away from that, you’ve got sales taking place in the branches. Away from that, you’ve kind of a virtual sales effect that takes place on a national basis, within our own call center and within our core call center.

Then you have got, we know what kind of products we want to get out of the door. We want a little bit more help trying to get those products out the door. And as you start to add up all of these things and you can get to the $100 million reasonably quickly. But as I said, there was discipline associated with that, where every individual that we made the request for is on the hook for delivering on that and had to be specifically approved by me.

So, and that’s basically, wherein how we’re using the $100 million. So, when we say the bulk of it is kind of more of people,. It’s more people for those reasons. It’s not like, its all in the call center.

Matt Snowling - Friedman, Billings, Ramsey

One of my questions I guess is, you were going out looking for seasoned brokers, with existing books.

Joe Moglia

Yeah. The answer is we are not going as far as looking for seasoned brokers with existing books, because our sales model is going to be different than what a lot of those others are. We handle that through our RIA business. So, the seasoned brokers with existing books are frankly more of candidates for our RIA sector, than they are for our normal sales forces. So the sales force we have, we feel pretty good with, we want be able add to that, those seasoned brokers are candidates for our RIA business.

Matt Snowling - Friedman, Billings, Ramsey

Thanks.

Operator

And we will take our last question from Mike Carrier with UBS.

Mike Carrier - UBS

Thanks, guys. Good morning. Just one more question on -- just on the investment spend, and not on the investment spend but more on the return, just wanted to know where are these -- one of your line managers comes to you, and you ask her some of this money, is the focus more on increasing the assets in the current accounts, meaning on the MMVA side or the mutual funds side? Or is it more on the side of brining in some of those qualified accounts, or is it -- can you kind of break that down, so we kind of get a sense of how the model should be working as we kind of increase the investment spent?

Joe Moglia

You know, I think we would literally try to do both of those. We have talked in the past that the three objectives here are growth, retention and yield. So as we roll out cash management products, we become, as we do a better job and manage our own client asset as far as the balance sheet goes from a banking strategy prospective, we should be able generate far greater yield from the clients that we currently have then we have had up until now. I think everybody knows while we do the best majority of our clients trades, we don't have the majority of their assets.

So that gives us an opportunity to gain greater share of wealth which is very, very important for us. Well just being able to do that also makes us I think more attractive from an acquisition perspective to bring more clients in the door. So as we look at this, it is literally a matter, it's this simple, and it gets complex a little bit behind us, but you are either asking for incremental funds because you were trying to figure out a way to bring more assets in the door, or you want to do a better job of retaining the assets we currently have, or you want to do better job of generating greater yield on the assets that we already have.

And all that would exist throughout the entire organization, so as people come in they'll say, I think I want to use this amount of money and I think this is going to be the benefit etcetera, etcetera. But we need to cover both of those. Now breaking that down or fine tuning it with regards to percentage we are not going to disclose that, but that would be how we look at that.

Bill Gerber

And Michael, this is Bill, and you were the last questioner today because unfortunately with the time -- the late time start we have to end it but, so do you have anything else to answer?

Mike Carrier - UBS

Yeah and just on the qualify accounts, do have any kind of -- any more color in terms of what the revenues are for those accounts versus the total accounts, if we assume that some of that money is going to bring in the higher revenue generating account and we can follow that?

Joe Moglia

You know, when we first started to talk about qualified accounts we said that this is about 50% of our client base, and they account for about 90% of whatever ultimate revenues and profitability are. I think it’s fair to say that, that is all probably the same. So, well we haven't seen a significant increase in the qualified account numbers themselves the quality of the business generated as our world business has grown from the qualified account has been good.

Mike Carrier - UBS

Okay. And then just finally on the expenses, could you just go over some of the noise that was in the quarter?

Bill Gerber

Sure. The, it’s a noise but 8 million of expenses were for the investment, for growth, and most of that was in the sales force to better serve the clients, $3 million was for severance, $6 million was from increased incentive accruals. So, all of those were in compensation. And then there was a positive $4 million settlement with the exchanges regarding a communication “issue: on the Legacy TD side?

Mike Carrier - UBS

Okay. Thanks a lot.

Bill Gerber

Okay. And thanks again everybody today and if you have any further questions, please feel free to call the Investors Relations Group, and we will get back to you as soon as we can. Thanks everyone.

Thanks folks.

Operator

That does conclude today's conference. You may disconnect at this time.

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 Holding F3Q07 (Qtr End 6/30/07) Earnings Call Transcript
This Transcript
All Transcripts