TD Ameritrade Holding Corporation F1Q08 (Qtr End 12/31/07) Earnings Call Transcript

TD Ameritrade Holding Corporation (AMTD)

F1Q08 Earnings Call

January 17, 200808:30am

Executives

Bill Murray – IR

Joe Moglia - CEO

Bill Gerber - CFO

Analysts

Prashant Bhatia - Citigroup Global Markets

Richard Repetto – Sandler O’Neill & Partners

Howard Chen - Credit Suisse

Michael Vinciquerra - BMO Capital Markets Corp.

Brian Bedell – Merrill Lynch

Michael Carrier – UBS Securities LLC

Presentation

Operator

Good day everyone, and welcome to the TD Ameritrade December quarter 2008 Conference Call. Today’s call is being recorded. With us today is Managing Director of Investor Relations, Communications and Public Affairs, Mr. Bill Murray.  Please ahead, sir.

Bill Murray

Good morning everyone and once again, welcome to the TD Ameritrade December quarter Earnings call.  If you have not seen our press release by now, you can find it in our website at amtd.com along with a copy of today’s presentation.

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 the actual results to differ materially from those anticipated.  You are advised to review the risk factors contained in our most recent Annual Report, Form 10-K with descriptions of risks, uncertainties, and assumptions related to the forward-looking statements.  Management will be discussing some non-GAAP financial measures such as operating margins, EBITDA, and liquid assets. You can find the reconciliation of these financial measures to the most comparable GAAP financial measures in the slide presentation and on our website.

This call is intended for investors and analysts and may not be reproduced in the media in whole or in part without the prior consent of TD Ameritrade.

At this point, I would like to turn the call over to our CEO, Joe Moglia who will be followed by our CFO, Bill Gerber.

Joe Moglia

Good morning everybody.  Thanks very much for joining us.  I recognize there are a lot of people that are announcing earnings today in the marketplace.  I think so much has gone on over the span of the last few months with regards to financial services that I think it is important to be able to take a look at least at what we have done and try to put that in context and I recognize that our business is different from other people’s business, but this has not been an easy time in general for financial services.

Despite what has taken place within the market, from our end, we are really very proud of the quarter that we had.  I think there are three specific reasons for that, the first is, do not underestimate the time and intensity with which we approach our balance sheet.  We are very cognizant of the risks, with what decisions we make there, and we try to be as transparent as possible that will all continue going forward.

Secondly, the markets this quarter have seen some pretty significant volatility.  For us, that has only been an advantage for our transaction business and we will go over those numbers in a minute; and then finally, we do absolutely believe and we think you are going to start to see that we are actually starting to achieve some traction in our asset gathering efforts along the line of our long-term investors as well as the RAAs.

So with that, let me get on to the quarter specifically.  If you recall, in December, the midpoint of our range was around $0.29.  We gave you a press release and took the $0.29 to $0.39.  We came in at $0.40, that is up 67% from what we were a year ago, and up 21% from the September quarter and I only point out that for the September quarter because the September quarter was also a record for us.

Our net revenues was a record also, $642 million, 58% of that was asset based, pre-tax income was a record at $357 million and we had our pre-tax margins at 56%.  Now, if you recall, we said that when we conclude the integration going into 2008, we will expect our pre-tax margins to move above and stay above 50%.  We believe that will be the case as far as 2008 goes.

Net income came in at a record of $241 million.  EBITDA, a record of $404 million and our ROE, we could not be more pleased with this number, it was 42%.

Now, client assets came in at $300 billion.  That is up 8% from where we were a year ago, but it was down 1% from where we were on the September quarter.

I think with all of the things going on specifically within our sector, we are going to need to be able to give you greater color around our assets going forward, in general, than what we normally have, but we think at least, for the sake of greater transparency, so you can do a better job of understanding our numbers, it would be helpful for us to disclose the actual inflows that we have seen from E-Trade.

Now, do not assume that we are going to do that on a regular basis, but for the sake of transparency, so you can understand our numbers, we are going to do that now.

As of the end of the quarter, inflows to us from E-Trade were approximately $2.3 billion.  The average account that we have gotten through that time period was $250,000.00.  Now, if you look at that in the greater context and I realize, you are going to be able to back up net new assets on this.  Before I give you the number, I want you to understand, we have not decided to start to give you net new assets.  We just want you to understand our numbers as far as this quarter goes, but the $2.3 billion of inflows that we have seen from E-Trade for this quarter would be 25% of our net new assets.

So we therefore feel good about the traction that we are starting to achieve in the asset gathering arena.

With that, now let me give you just a little color in terms of what the earnings actually looked like.  We mentioned already that at $0.40, they were up 67% from where we were a year ago, but just some of the facts behind those numbers. On a year-over-year basis, revenues were up 20% and expenses were down 4% and the pre-tax margins a year ago were 45% and today they are 56%.

So that just reinforces, we believe, the power of our operating leverage and if we do a good job of managing both, what we are trying to achieve with regards to our revenue line, as well as our expense lines, operating leverage should kick in and we think it would be a tremendous benefit but not just today, but down the road and over time with our shareholders.

Now, as you all know, our business generates revenues a couple of different ways, and we have already started to break this down for you, we will continue to do that.  Basically, we have got revenues generated from our transactions and revenues that are generated from our assets.  Overall, as I just pointed out, revenues are up 20% to $642 million.  The transaction piece of that is up 29%.  We think frankly that, that is an outstanding number and the asset based number is up 14%, we think that is a very good number.

I want to give you more color then on the transaction piece.  Now, it does not take a rocket scientist to understand that our transaction revenues are dominantly driven by trades per day.  So if you look at the December quarter number. For the December quarter, we averaged around 322,000 trades a day.  That is approximately what we are averaging as well so far today in January, and this is more interestingly, these are actually the numbers around which we have seen pretty good consistency on over the span of the last three or four months.

To do over 300,000 trades a day and to sustain that is pretty good over that time period and obviously has a significant impact therefore on our transaction revenues.  There are two reasons for that.  By far, the number one reason is the volatility that we have seen in the market.  We are at 5% activity rates, which is the highest activity rates we have seen since some time in 2005.  But there is another reason, to focus once again on our client segmentation strategy, there are only three client segments that we are aggressively pursuing and one of those is the Active Trader.  We have been number one in that and we continue to be number one in that spot, but because it is important to us and it is one of our main areas of focus, we continue to provide our active traders with enhanced functionality and risk tools.

So what we have also seen over the span of the last quarter, which I think is important to us, that we have seen greater use of some of the risk management tools that we have provided our Active traders and we frankly think that, that makes a difference here as well. So we are seeing take-up in usage in command center skill tools, products like StrategyDesk and overall program trading.  Also, we have said in the past that the reason why our options business is important to us, not because it is the option business, but because options are important to our Active Traders.

So therefore, what we provide them in options is important and over the span of the last year, our options business has doubled in our organization and we are very, very pleased with that.

Now, we take a minute. I want to give greater color with regards to the actual assets.

Away from transactions, we earn money off of our assets.  Now, everybody knows that, but the reason why we have been talking about it so much over the span of the last couple of years is because success in that asset growth, we think, becomes a function over time of our actual asset accumulation story and our ability to be able to provide legitimate value to the long-term investor and the RAAs.

If indeed, we can do that, we do think at some point, the marketplace will start to give us credit for being an asset gatherer and that should enhance our multiple.  We said last year that our objective is that at some time in 2008 we would start to see some traction, we think we are starting to see some traction already in the revenue earning assets and I will break that down for you.  While over all client assets year-over-year we are up about 8%, the revenue earning assets for us in their entirety were up over 23%.  When you ask me and ask us, how do we evaluate whether or not you are actually achieving some traction here, we said, “These are the numbers that we think you are supposed to be focused on, and these are the numbers you are supposed to look at.”  So therefore, we will give you great clarity around these numbers.

The fee-based balances, which include mutual funds, money market funds, Amerivest, TDAX life-cycle funds etcetera are up 30% year-over-year.  We feel very, very good about that.  And the investable assets which include margin, security borrowing MMDA, etcetera are up about 10% year-over-over.  We feel good about that.  Now, to link this with some of the things that we have done in the integration and the conversion and what we were always trying to roll out, I think there is also an important point.  We said that if we are going to be successful as an asset gatherer, our ability to move to more of a sales organization where the client becomes better educated is something that is very, very important to us and we need to get it done.  So we want to give you a little color along those lines.

We have seen success in the guidance campaign that we have promoted where individuals can come in and get free evaluations with regards to their portfolio allocations etcetera.  We are starting to see referrals to our sales force from our call centers that are starting to amount to about 200 referrals a day.  That number traditionally would have been 10.  We are pleased with the first roll out we had with the TDAX Independent Life Cycle Fund.  If you have not had a chance yet to look at what we offer with regards to bonds and ladders and wizards online, I would ask you to do that. We think that will be a competitive advantage for us down the road, and if you have not had a chance to take a look at some of our retirement tools, the wealth-builder, retirement planner etcetera, you should do that as well.  We are starting to see a little traction in those areas.

So in general, we believe, we have started to see legitimate genuine traction in revenue earning assets and that all underpins what we are trying to do with regards to overall asset gathering.

Now, with that I want to spend a minute or two on where we are headed with regards to guidance and give you color on guidance before I turn it over to Bill where he can give you greater specificity around the numbers.

The midpoint of the range had been $1.27, we are taking the midpoint of the range up a nickel to $1.32.  Now, the $1.32 number is 25% ahead of where we were last year, but if that is all we gave you, we would not be giving you enough clarity or information.  So let me give you some color on this.  I have said often, when you have asked me questions, about do you think your pre-tax margins are too high, would you re-allocate some of your pre-tax margins to investments to grow greater earnings down the road, and I have said to that again and again, “Yes, we will not hesitate to re-allocate pre-tax margins to reinvestments where we think we are going to get a greater earnings benefit down the road,” one.  Two, the way we have always done that is while we do not give us credit for the earnings until we start to see the earnings kick in.  That is standard operating procedure for us.  We believe that it has served us well over the span of the last few years.

So approximately, the incremental dime or so above what we feel we might be making as far as the quarter goes, we are taking half of that and we are giving that to our shareholders today and we are taking a nickel of that and we are re-investing that into our future, specifically technology and operations, but the type of technology and operations that will provide us with greater capacity, greater service to our clients, greater security to our clients and we think by doing that, it will not only help us with the retention and the yield part of our overall strategy, but we think, we really believe that will enhance our client experience.  We think that this will generate greater earnings down the road.

Now, the second part of this is, we just finished going through the two revenue streams that so far are holding well at the end of the First quarter for our result for the entire year. So I want to break those down so you understand how we are looking at those.

With regards to the transactions. The transactions, well we think we had an influence on the transactions because of the risk management tools we offered, the key to that is the volatility in the market.  Seventy percent of the US economy is driven by the consumer.  Today, you cannot open up a newspaper or turn on the television without looking at what is going on with the real estate market, the credit market, or what is going on to the value of your home.  The same thing would take place with regards to energy prices and therefore, the corresponding impact; that adds expenses to the average family.

Above and beyond that, there are numerous economists that are predicting recessions.  The employment data in the last couple of weeks has not come in strong.  The recession discussion talks about job loss.  We believe that there is not going to be a recession, but we believe that with all this going on, the impact to the actual behavior of the consumer has to take place in some sort of way where it is a pullback. That pullback will have a negative impact in the economy. We believe that pullback will then have a negative impact on the overall market.

We recognize, it is our job to run our company in good times and bad times; we recognize that. But we just finished our First quarter.  There are still three quarters to go.  And we think it is very prudent on our part, at least as far as the transactions go, and at least at this particular point in time, to not increase the transaction forecast for the subsequent three quarters.

When you look at the second part of the equation, the revenue earning assets, the revenue earning assets for us, for this year, at the end of October when we were discussing 2008 results, we said, our target for the year would come in at 16% growth on revenue earning assets.  When we gave you that number, we said we thought that was an aggressive number, but we felt we had a shot to be able to get there.  We are on track to get there, but we think that is an aggressive number and it is still the First quarter.  So we are not making any changes there. So at least at this time, with three full quarters to go, we are not making any changes to forecast with regards to the March, the June, or the September quarters.  We will however, reevaluate that, of course, and give you greater color at the end of each of those quarters, but that is where we believe we should be today.

Now, for all of you that have your own models, one of the things that Bill will give you today and we have always given you is a sensitivity analysis across the respective drivers that impact our revenues and our profitability. So in effect, if those drivers change, this will be the bottom line impact that TD Ameritrade will actually have.  You can certainly make your own judgments as to what our numbers may or may not be and fit those into your models and come up with your numbers.

But for us now, the mid point of guidance for the rest of 2008 is going to be $1.32 that is up 25% and we will re-evaluate that and discuss that with you at the end of each quarter. With that let me turn it over to Bill.

Bill Gerber

As Joe mentioned, we once again shattered all of our old earnings record starting off Fiscal 2008 with yet another record quarter.  In fact, I would like to point out that our net income for this quarter is approaching the total revenue for the year that I started with the firm, which was 1999.  The last eight-plus years have been quite remarkable.

As you can see on slide nine, we continue to exhibit tremendous strength in cash generation with our EBITDA coming in at a record of $404 million or 63% of our net revenues.  This is an increase of 39% over the $291 million or 54% of net revenues in the same quarter last year.

Note that over the last four quarters, we have generated over $1.3 billion in EBITDA.  We also have a record Return on Equity this quarter, 42%; up from 34% in the December quarter last year.  42% Returns on Equity are excellent results and are a testament to our profitability and to how well we are managing our shareholder’s equity.

Let us turn now to the actual December results as they compare to the same quarter last year in slide ten.  We are proud of the organic growth we have achieved over the course of the quarter.  Asset-based revenues continue to climb and account for roughly 60% of our net revenues.  As we have said before, these asset-based revenues reinforce the stability of our overall revenue stream.

Our net revenue was a record $642 million up $107 million or 20% from last year.  Our transaction-based revenue of $260 million increased $66 million year-over-year, as our clients continue to engage themselves in the market.  We realized the boost in training activity of 84,000 trades per day, a 35% increase.  Trading activity was 322,000 trades per day or a 5% activity rate versus last year’s activity rate of 3.8% or 238,000 trades per day.

Our average commission rate was down $0.20 to $12.84 due to more promotional trades and lower fixed income commissions and was offset by the higher mix of option trades that Joe discussed.  This commission rate was within our guidance.

Asset-based revenue, which is a combination of fee-based and investable asset revenue was $373 million, an increase of $46 million year-over-year.  We saw a $15 million increase in fee-based revenue almost entirely due to a $14 billion increase in balances with virtually no change in the rate earned on those balances.  Recall that these balances include mutual funds, money market funds, Amerivest and other products.

And investable asset revenues were up $31 million or 11% to $305 million.  Half of this change was due to increased balances of $2.9 billion and half due to 8 basis points of higher net interest margin.  The revenues are up primarily in margin lending, which reached historic highs during the quarter.

The net interest margin is up 8 basis points, primarily due to earning a wider spread on the MMDA balances.  Other revenue is down, $6 million, due to higher re-org fees in the prior year, which we noted in last year’s call.

Expenses excluding advertising are down $17 million year-over-year primarily due to the benefits of our post conversion business model.  Now that we are past that particular milestone, we have seen expense reductions particularly in clearing and execution, professional services, and communication.

Interest and borrowing is also down by approximately $5 million as the result of debt payments and lower interest rates in the last 12 months.  These cost-savings were partially offset by higher compensation expenses, primarily from our previously mentioned investments for growth and higher incentive accruals as a result from our record financial results.  We also spent $45 million in advertising this quarter, an increase of $6 million year-over-year, resulting in 149,000 new accounts with a cost per account of $305.00.

Additionally, the $45 million was $7 million over our outlook midpoint.  The increase in ad spending versus outlook was principally related to market opportunities as there was significant money in motion this quarter.

Lastly, as you can see, our effective tax rate for the quarter was 32.5% versus last year’s rate of 39%.  This $0.03 EPS benefit was primarily due to two items.  First, we reached a favorable resolution on a state income tax issue and second, our 2006 actual state tax rate from our filed tax returns was lower than what we had booked on our financial statements.  Thus, we adjusted our 2007 estimated state tax rates lower to reflect the actual taxes expected to be owed.

Absent these adjustments, our effective state tax rate would have been approximately 38% for the quarter.  As you know, taxes are a complex area and estimating state tax rates is a key element in our tax expense each quarter.

One final point on this slide, all of these results are driven by a conservative balance sheet, which takes prudent risk for our business model.  We do not take undue risks to reach for yield.

Now let us turn to liquid assets for the quarter on slide 11.  We continue as a strong cash generator which allows us to be flexible in making financial decisions that best impact the firm.  We continue to hold liquid assets at a higher level than normal in preparation for our $225 million Fiserv acquisition, which we expect to close soon.  We started the quarter at $622 million in liquid assets.  We earned $241 million in net income and had $21 million of depreciation and amortization.

This quarter, we left additional capital in the broker dealer of $195 million.  This capital supported the higher margin loans as mentioned earlier and also supported certain timing issues at December 31, most of which are reversing in January.  This is not a use of cash per se, this is capital left in the broker dealer to support our core business.

We also used $49 million this quarter for capital expenditures and other.  We made $6 million in mandatory debt payments. Then we used $20 million to buyback a million shares of our stocks.  That leaves us with $614 million in liquid assets.

As we said before, there are only five ways in which you can use your cash.  Debt repayment, stock buyback acquisitions, funding additional organic growth, or pay a dividends and that is it.  As you know, we have done all five in the past two years including the $6.00 per share cash dividend almost two years ago, today; to the continuing stock buyback program, our growth initiatives, etcetera.

We are currently evaluating the amount of liquid assets to be held at the company in this economic environment.  We will continue to update you every quarter on this topic.  Additionally, we will continue to review our capital structure and the opportunities available to us with our Board of Directors to determine the optimal uses of our free cash flow.  We continue to have great financial flexibility and will ensure utilizing our cash.

Let us move on to the 2008 outlook on slide 12.

We started Fiscal 2008 with a midpoint of $1.27, a 20% increase over 2007’s result.  We have adjusted that guidance to include the additional $0.10 that we realized in the December quarter over our midpoint result.  However, as Joe mentioned, we are now planning on putting half of that $0.10 increase back into the business to continue to enhance the client experience and support future growth.

We are completely dedicated the organic growth of this firm and feel that reinvestment is an important part of fueling that growth.  We will continue to consider such reinvestment opportunities if conditions remain favorable.  So this leaves us with a new outlook midpoint of $1.32 or a 25% increase over Fiscal 2007.  An updated copy of our outlook can be found under the investor tab on amtd.com.

On slide 13, is our sensitivity slide Joe mentioned earlier, and this is here to provide you with the ability to assess how changes in market conditions might impact our financial results.  And I think you have all seen all these before.

Of note today, is the impact on our Fiscal 2008 if the Fed moves 25 or 50 basis points.  As you know, we control the credit rate paid and as such, based on our models we would expect a nominal impact from a 25 or 50 Basis Point cut.

In summary, the retail investor was very engaged this quarter.  Volatility continued in the market and our results again showed the strength of our operating leverage and scalability and the financial advantages they bring to such an environment.  We have once again delivered the best quarter in our history with record asset based revenues, and growth in revenue earning assets.  We finished the quarter with 56% pre-tax margins and 42% Returns on Equity, both of which are excellent numbers.  These results have allowed us to increase our guidance for the year with a new midpoint of $1.32, which represents a 25% increase over 2007.

We have seen positive traction on our asset gathering strategy.  Our balance sheet remains conservative, clean, and strong.  And finally, we have once again demonstrated our ability to generate cash.  We are in a tremendous financial position and will be working with our Board to determine how to best utilize the cash.

2008 is off to a great start.  Our goals for the company remain constant.  We will continue adding tools, services, and functionality so as to help our clients make smart informed investment decisions thereby re-affirming their decision to make TD Ameritrade, the investment firm of choice.  And with that Melissa, we will start the questions.

Question and Answer Session

Operator

Thank you, the question an answer session will be conducted electronically. [Operator instructions].We will go first to Prashant Bhatia with Citigroup.

Prashant Bhatia - Citigroup Global Markets

I guess you are reinvesting some money here to grow.  In your view, can you give us a feel for what the two or three areas are that you could really invest that would drive a fairly big improvement in client experience?  What gives you the biggest kind of bank for the buck there, and is it potentially a relationship for certain customers a part of that spend?

Joe Moglia

The relationship for certain customers is a part of that spend, and I think if you want to look at it more from a holistic perspective relative to what we were doing prior.  At the end of the day, clients come to us because they expect a certain level of service from us.  There is a commitment associated with our brand. So our ability to be able to do certain things for them, they are kind of automatic I think in financial services.  Being able to provide simple wire transfers, to be able to provide simple accuracy, and more sophistication with regards to a statement, I mean, a better understanding in terms of what your actual investment performance return is, because we are emphasizing asset gathering more, we are seeing more business in the mutual fund arena.

So what we are trying to do now is spend more time making sure that our operations and our technology a) can provide greater overall scale, as well as greater overall productivity to provide greater, more efficient service to our client.  We think that at the end of the day, it genuinely enhances the client experience.  If you then couple that with what we are trying to do on the front end with greater functionality across the long-term investment, the RIA as well as the Active Trader and link that to what we are trying to do throughout the sales organization. We think that becomes a pretty powerful brand commitment, so to speak, and experience that our clients will achieve.

So, as you know, Prashant, we talk in terms of not just the growth we bring in, but when the clients come in the door, making sure that, that experience is the type of experience that they are hoping to have and then surprise them on the upside.  We think that would provide them with impetuous to bring greater share of their wallet.

So that is sort of the approach on that and that is sort of the way we have been looking at it.

Prashant Bhatia - Citigroup Global Markets

Okay, and then, you brought in about $7 billion in net new money by buyout of E-Trade which is a pretty strong number; can you give us a feel for what some of the drivers were there, was it existing, was it new? Anything that you could kind of give us a little bit more detail on there?

Joe Moglia

We do not break those specific numbers out, but you should assume it was part of both.  And when we talked about some of the things that we have done in the past, you know that we have grown our sales force.  We have said again and again, if you are going to be an asset gatherer, we have to be able to provide a greater sales effort and that sales effort is not, “Hey, I have got something to sell you.”  It is an educational oriented one.  So, I could kid at some time about that adage, but you give somebody a fish.  You feed him for a day, you teach him how to fish.  You feed him for a lifetime.  Everything we do deals more along the lines of, if we can better educate our client base, they a) will become more independent; b) they will be able to make, we believe, better decisions, and we will do whatever we can from our end to be able to help them do that.

So if they want to make those decisions totally on their own, they can.  If they need some validation, they can have that, and if they want somebody to actually manage their money for them, we can refer that as well.

So that is basically what we are trying to do there.

Prashant Bhatia - Citigroup Global Markets

Okay, and then, just finally, so far in January, the asset intake from E-Trade, is that still running at elevated levels versus historical trends and can you share any TFA data there versus history.

Joe Moglia

I think, again, for you to have clarity, I think it is appropriate for me to share that, we are not going to give specific numbers, but the numbers that we continue to see with regards to inflow from them is significantly higher than anything we have ever seen historically.

Prashant Bhatia - Citigroup Global Markets

Okay, great.  Thanks!  That is very helpful.

Operator

We will go next to Richard Repetto with Sandler O’Neill.

Richard Repetto – Sandler O’Neill & Partners

I have got some questions for Bill actually.  If I had to summarize Joe’s comments about the outlook going forward.  It would be to say that we are just keeping it the same because we really do not know what things are going to look like, would that be correct?

Bill Gerber

I think that is very fair.

Richard Repetto – Sandler O’Neill & Partners

Okay, I looked at this outlook statement and you have taken that nickel of investment spending. So if every penny is $10 million, you would expect expenses to be up $50 million; but if I look at this outlook statement, it is telling me that the expenses are going to be up for the next three quarters, more like $88 million or close to $90 million.

Bill Gerber

Yes, the other part of that of Fiserv.

Richard Repetto – Sandler O’Neill & Partners

Okay, and then well that answers the question.  So in the revenue side, that is up $37 million as well from your prior guidance.

Bill Gerber

Also Fiserv.

Richard Repetto – Sandler O’Neill & Partners

So you are basically making Fiserv as break even?

Bill Gerber

Correct.

Richard Repetto – Sandler O’Neill & Partners

You hit the fast ball!  Next question, the debt repayment.  Prior you had modeled some debt being paid down over the last three quarters; it does not show any debt re-pay over the next two quarters, could you explain what the change in the outlook here is?

Bill Gerber

Yes, as I mentioned real briefly in my remarks, we are currently evaluating how much cash to keep on the books in this economic environment and our debt is at a very attractive after tax rate of 4% and probably, we will go lower if the Fed cuts.  And so, we are evaluating whether or not to keep more liquidity at the company level and look at the other opportunities we have available to us or pay down the debt. So right now we have not made a decision whichever we are going to go yet.

Joe Moglia

Rich, do you mind if I interrupt and jump in here?

Richard Repetto – Sandler O’Neill & Partners

Not at all.

Joe Moglia

The one thought to that, at least we are being sensitive of and we are happy to get your comments on this and we do expect a pullback.  We do not believe there is going to be a recession, but if indeed we go through a difficult period.  I talked about the economy and therefore, correspondingly lagging impact on the market. For us to have a reasonable amount of cash available in a difficult time and in effect keep our power dry, may not be a bad strategic thing at all, at least for a little while because we have seen historically when the markets go through difficult time periods, assets tend to come up cheap.

So that is also in the back of our mind.  Having said all that, we recognize, we have got a lot of cash on our balance sheet and we want to be sensitive to making sure that we take the most advantage of that, but those are some of the things that are going through our heads now and then.

Richard Repetto – Sandler O’Neill & Partners

That makes sense.  The last question, Bill, back to sales, you said that there would be no impact to EPS at 25 to 50 Basis Point cut, can you give any sensitivity beyond that if things get wild and crazy?

Bill Gerber

For me to say that we have modeled the 25 to 50 and up to 75, it would certainly have an impact probably a penny-ish for a year, but it really is going to depend upon the slope of the curves and then what our re-investment opportunities are; but we think that it is because we control half the equation on the credit side, and we are do a lot of flexibility here, but it would probably go up a penny-ish.

Richard Repetto – Sandler O’Neill & Partners

The Fiserv thing, we did not model Fiserv into the outlook, you did not model it into the outlook the last quarter, is that what you are telling me?

Bill Gerber

Right and what we anticipate is because it is supposed to close here very shortly, it did not make any sense. We tended to ignore it for what could be under a week.

Richard Repetto – Sandler O’Neill & Partners

Understood, very last question.  What spreads do you want to give the Patriots on winning the Super Bowl Joe? Or what odds?

Joe Moglia

Thirteen.  Oh, by the way, I do not want to go on record for this.  I was actually asked this question in October publicly, what would happen as far as the Super Bowl goes and in October, I said that the Patriots will run the table.  They will go undefeated.  They will finish 19:0, and they will win the Super Bowl.  I am not saying that now, I said that in October and the spread is 13.

Richard Repetto – Sandler O’Neill & Partners

A visionary in many ways.  Thanks.

Operator

We will go next to Howard Chen with Credit Suisse.

Howard Chen - Credit Suisse

Congratulations on the strong quarter.  Joe, we are six months post the announcement of the initial round of the incremental investment spending and how much of that initial $100 million have you deployed and have you seen any break even or pay back for that initial round of the investment there?

Joe Moglia

All of it has been deployed and I think based on the numbers that we just went over this morning, we believe we are starting to see traction and we do not think that, that was an accident.  We think that the $100 million helped contribute to some of the success that we have seen this quarter and hopefully the type of success that you will see this year, so we feel pretty good about that.

Howard Chen - Credit Suisse

Okay, and then Bill, I wanted to follow up on a couple of questions; one, just with regards to the sensitivity to Fed actions, just a penny-ish for a 75 Basis Point cut, are you in that kind of round numbers?  Are you assuming some steepening of the short end of the your curves, say like three months to three years?

Bill Gerber

No, actually, we modeled parallel shifts.

Howard Chen - Credit Suisse

Okay, so if we saw, let us just say, like 50 basis points of steepening on the short end of the your curve, 25 Basis Point steepening, you are saying.  Would you think that would have a negative or positive impact overall?

Bill Gerber

Probably, more of a positive impact.

Howard Chen - Credit Suisse

Okay, and then on the re-investments in TD Bank USA arrangement, are you still primarily invested in Canadian MBS and if so, what is your current outlook for that portfolio?  Do you still see that as a solid place to be right now in this environment?

Bill Gerber

Yes, and yes.  We are still primarily invested in Canadian Mortgage Backed Securities.  We still see that as being a great place to have our investments right now.  The dollars that are not invested in the Canadian are invested primarily in US agency paper. So we believe very low risk and as I think I have mentioned to you in the past, I wish I would have taken the currency risk with the Canadian mortgages, but we do not do that.  And so therefore, we are paid in US dollars, but right now, the portfolio is very strong.

Howard Chen - Credit Suisse

Yes, the money is very strong here.  With regards to just deposit pricing and on the commission for trade, Bill, are you seeing any sort of competitive pressure from those in the industry that might be much more wounded that you are, on both the deposit pricing as well as commission for trade?

Bill Gerber

I do not think we are wounded, so that is okay.

Howard Chen - Credit Suisse

So there are others that are wounded.

Bill Gerber

No, we are not seeing a significant amount of price pressure.  There is always price a pressure in everything.  Probably less so in commission, of course, but in deposit rates, we continue to try different offers as well, and to have a higher yielding offer and see what traction that gets, but right now, I think, I would say the competitive environment really has not changed dramatically from what it was six months ago.

Howard Chen - Credit Suisse

Okay, and then final question on capital management, knowing that you have very attractive terms on your current debt, I just want to kind of flip up the question, and what do you think the outlook would be if you wanted to raise additional debt right now in the market to do with strategic position, do you think you would have the flexibility to do that?

Joe Moglia

I think if the market place liked the strategic opportunity, I think it is difficult as the environment is now, I think you have got to frame this in the environment that we are currently in. So it would not be as easy as may be under normal circumstances, but I would think that the market like the strategic acquisition that we were looking at it, I think we will comfortably be able to raise a reasonable amount of more debt.

Howard Chen - Credit Suisse

Right, I guess, with 50% margins, 40% ROEs, I mean, I would think the market understands that your business model generates a lot of compassion [ph].

Joe Moglia

I would think that too, Howard.  We would need to explain that to the marketplace, which is what we did last time.  This is what we will do again.

Howard Chen - Credit Suisse

Okay.  Thanks so much you guys.

Operator

We will go next to Mike Vinciquerra with BMO Capital Markets Corp.

Michael Vinciquerra - BMO Capital Markets Corp.

One question, I do not want to beat this up, Joe, but the E-Trade, the $2.3 billion, I just want to make sure I understand; does that include only assets ACAP added over to you, does that include subsequent transfers into the same account that opened through the ACAP?

Bill Gerber

It is only the ACAP that have transferred over to us.

Michael Vinciquerra - BMO Capital Markets Corp.

Okay, so those clients brought additional assets to you; subsequent that, that would be included in the other $7 billion or $8 billion in net new assets?

Bill Gerber

Quite possible.

Michael Vinciquerra - BMO Capital Markets Corp.

Okay, and question for you Bill then, looking at the money market deposit account, the average fee rate looks like it jumped 50 basis points net yield to you guys during the quarter, what is the dynamic there?

Bill Gerber

Say that again, Mike; I am not sure I followed that.

Michael Vinciquerra - BMO Capital Markets Corp.

On the page you have selected operating data, you show your money market deposit account fees, the average balance is about flat quarter-over-quarter, but the average annualized yield went to 3.5% to 4.0% and that actually drove that number higher than we could model, what was the driver of that 50 Basis Point improvement?

Bill Gerber

It was the lowering of the rate paid to the client which was the main driver of that.

Michael Vinciquerra - BMO Capital Markets Corp.

And it reflects the fact that you guys have extended all part of your portfolio and so it is locked in it, of longer term money?

Bill Gerber

That is right.  Exactly.

Michael Vinciquerra - BMO Capital Markets Corp.

And then just one question, when you were going through your capital management, you mentioned CapEx and other at $49 million, typically CapEx is much, much lower; can you provide any detail on that line?

Bill Gerber

Certainly, as part of the investments or growth and other things, we are spending some of that money in the CapEx.  We continue to go through and renovate branches etcetera. So it is a combination of those things.  I think that is a little bit high, probably a little higher than what we normally run, and of course the other part in there would just be kind of paying down accounts payable and just no use cash. So if it becomes real material and certainly we will split it out for you, but I do not have it right at the tip of my fingers here.

Michael Vinciquerra - BMO Capital Markets Corp.

Can you kind of book-in the CapEx spend, maybe just a wide range, just give us a sense of where it might be as we look at cash flow projection.

Bill Gerber

I think it is probably, I would say on the high side, it would be $25 million a quarter.

Michael Vinciquerra - BMO Capital Markets Corp.

Okay, alright, very good.  Thank you, guys.

Operator

We will go next to Brian Bedell with Merrill Lynch.

Brian Bedell – Merrill Lynch

If we talk about client organic growth, do I understand this correctly, if we do the math on the $2.3 billion and that is 25% of net new client assets, we are looking at about 12% organic growth rate annualized with client assets?

Joe Moglia

That is right!

Brian Bedell – Merrill Lynch

Okay, and do you feel that in the current market environment both with E-Trade and your expanded asset gathering capabilities perhaps and to emphasize the additional expenses you have invested that this 12% is relatively sustainable in the near term?

Joe Moglia

Well, the answer is we do not know.  We think so.  We would like to believe that.  At the beginning of the year, we looked out at our ability to be able to take out revenue earning assets and our target was 16%.  So far, we are at track with regards to the 16%.  That is an aggressive number, but we feel good with what we have seen so far.  We continue to reinvest back in the business and we will see, and as part of the reason why with regards to the assets earnings part of the picture when we look at guidance, that we were not at the point now where we wanted to change that. We were all directed to increase it or what have you, so we will give more color on that, Brian, as time goes on, but we feel good about our progress so far.

Brian Bedell – Merrill Lynch

Okay, great and then, just doing the math on the sensitivity to the charts, if we replicate the fourth quarter, the December quarter and this March quarter, the way I calculate that is about a nickel upside to your First quarter EPS from the mid-range guidance, does that sound about right?

Joe Moglia

Sounds about right.

Brian Bedell – Merrill Lynch

Okay, and then would you spend some of that or would you let that fall to the bottom line?

Joe Moglia

We would evaluate that then.

Brian Bedell – Merrill Lynch

Okay, and then just going back to the question on the money markets funds, it has made your 350-400 basis points came from lowering your deposit cost. If the Fed was going to continue to cut wouldn’t that dynamic somewhat stay in place in the near term?

Bill Gerber

It just depends because we have different tiers and there is only so much you can cut.  You cannot go below zero, and so it depends upon the tiers that it affects and so there usually is a little bit of slippage when you get down to these lower rates, it gets repressed a little bit.

Brian Bedell – Merrill Lynch

We are still at relatively decent rates, we are not near the floor as just yet. So I would think that as the Fed is aggressively cutting here over the next few months potentially there would at least be some more liability sensitivity to your balance sheet and you would get a near term expansion on that.

Bill Gerber

And again according to our models and when you look at the tiers, it is very important to look at that tier structure and that is really the control or element that we have and there are certain amounts and for competitive reasons etcetera, etcetera that we would look at how much can we cut, but all in a 25 or 50 Basis Point cut, we think is nominal.

Brian Bedell – Merrill Lynch

So do you think you, sort of, over cut during the fourth quarter and then there will be some, sort of, catch up in the First quarter? In other words, maybe you cut more relative to the Fed cut than you normally would have in the fourth quarter for whatever reason and then in this quarter, you may not use your deposit rate as much?

Bill Gerber

No I think, when the rates went down in the fourth quarter we looked across the board and cut it but certain tiers within our MMDA structure, we pay a very low rate and certain tiers are below 50 basis points, below 25 basis points.

Brian Bedell – Merrill Lynch

Okay, so you are already hitting the floor then or getting close to the floor.  And then, if you could just talk quickly about the Fiserv acquisition, are you still bringing on $28 billion of client assets, is that correct?

Joe Moglia

Yes, the numbers are right, the numbers are not $28 billion, and it is supposed to close some time this month and we are waiting for approval from the FDIC.

Brian Bedell – Merrill Lynch

And then, you are modeling that to be neutral to earnings for the balance of the year, when does that turn accretive, do you think?

Joe Moglia

Probably 2009.

Brian Bedell – Merrill Lynch

Fiscal 2009?

Joe Moglia

Yes, what we will do on that is subsequent to the closing of that deal, we will give you more color on that at that later earning’s call.  So, right now, while we have included it in our numbers because of the timings, it does not make sense to give a whole lot of color on it.  In fact, may be, there is a mistake to actually put the numbers in right now before the close, but we thought it was just wise to do that and we will give you greater color around that at the next earning’s call after the close.

Brian Bedell – Merrill Lynch

That definitely helps to put it in there.  It gives us a sense of where the revenues and expenses are going at least.

Just one last question if you want to just talk about your E-Trade strategy both in terms of the acquisition of their clients through your marketing campaign and what you are saying, and then may be contrast that with any kind of outlook of whether you would still be interested in acquiring them.  What would give you a favorable, sort of, scenario for making an acquisition of E-Trade?

Joe Moglia

Why don’t I just break this data to a number of components, Brian, and if I have missed on something, you can just ask me that specifically.

One, as far as the E-Trade numbers, I think at least, we have added on the side to giving you as much information there as we possibly can.  So, you have greater clarity around our numbers.

Two, we do not have an E-Trade strategy per se as far as our business plan goes.  In fact, I think that oftentimes is a mistake in the business when you spend too much time wondering or worrying about what somebody else is doing, while you always need to be aware what it going on in the competitive market.

We have got our strategy.  The client segmentation strategy, the asset gathered strategy.  We talk about it all the time.  We are totally, absolutely focused on that. We do not need to do a deal to be able to have legitimate sustainable long-term growth for our shareholders.  With regards to the E-Trade situation strategically now, we have said in the past that we would always have an interest in their accounts, but this is a very, very complex situation.  There is tremendous risk-reward involved and we would like to do something in effect that works long term for our respective shareholders.  And if it does not, we are not going to worry about it.

So, we still have an interest in doing that.  I just reinforced the fact that it is complex.  Away from E-Trade, there has been no change at all with regards to what our strategy is.  If we think there is something that works for ourselves and our clients, we will work hard to try to figure it out.  But while all that is going on, our number one objective is to be able to deliver on our business strategy.

Brian Bedell – Merrill Lynch

Regarding E-Trade or any other acquisitions, you were interested immensely in the brokerage account.  Can you just reiterate your view on taking on any credit risk?

Joe Moglia

Well, I think actions speaks louder than words and you could have easily taken on credit risk over the span of the last couple of years on our own balance sheet and I think when we look at those things, I mean the risk reward tradeoff of making a few more dollars with regards to your earnings and potentially having a credit problem that actually can jeopardize your firm and put it at risk that is not worth doing for us.

So we will continue to look on a risk reward basis and be very, very sensitive to what the benefits might be by extending more on  the curve, taking a little credit risk, etcetera, etcetera.  The bottom line that you have got to err on the side of being conservative there and we will be transparent about it as far as you and the marketplace goes.

Operator

We will take our next question from Michael Carrier with UBS.

Michael Carrier – UBS Securities LLC

This is a question on the outlook.  I think the current activity rates have been strong and the asset growth has been stronger than expected; but obviously, they all share that same uncertain outlook and I think if you look at the outlook statement and you try to balance, you have to continue to invest because you are making progress on the asset side and you want to continue to invest for the long term in that area of the business.  But on the trading side, we could easily see the moderation.

So by two questions, one is, what percentage of your expenses can you rein in if you do get in to that environment?

Two, if I look at the outlook statement and if I adjust for like Fiserv, meaning the payment and some of the excess capital that you are keeping in the broker, you still have like a billion in EBITDA this year, which would be somewhere in the range of $50 million and buy that to use it all.  And in the outlook, it looks like maybe around $10 million and obviously that is just more conservative in this environment.  But just your outlook on, can you increase that given the strong cash flow and then again on the expenses, like what portion can you rein in if you get into that, kind of, sluggish environment?

Joe Moglia

If I take the difficult environment question first; part of the reason why we are leaving the transaction number alone for the rest of the quarter, in effect, if we are 320,000 trades a day and let us say our average trades for the rest of the year are in the 260,000 area, you are looking at a 60,000 trade push. We could still deliver the numbers that we promised you.  So as trades get eroded and the profitability from those trades gets eroded, we are still comfortable we are going to be able to hit our numbers.

Now as we start to see that, we manage our business dynamically.  So therefore, when we talk about reinvestment back into the business, if the numbers are coming off, we are going to be much tougher on ourselves.  And then, if we get to the point where we start to approach, let us say, 258,000 trades per day threshold, then we will have to start to look more aggressively with regards to actually cutting expenses.

But we look at that every week and we will do that on a dynamic basis.  Just as we might take part of our profitability and reinvest it back in the business.  If the profitability is dropping off, we will be doing less reinvestment and if it starts to aggressively drop off, we will start to cut our cost.  In all cases, we still feel pretty comfortable about the $1.32 that we promised.  That is question number one.

Question number two, I mean you are 100% right, we are a cash flow generation machine.  We feel great about where the EBITDA was.  I did say that I do not think it is a bad idea and usually we are pretty aggressive with how we put our cash to use, but I think, with the environment that we are in right now; it is not that we are trying to save for a rainy day.  In a tough environment, there maybe an incredible opportunity that maybe a phenomenal use of our cash relative to where we are today, down the road.  We do buy our stock back everyday; we have got our revenues that work on the marketplace.  We are more aggressive, the stock price is lower, but we are buying back everyday and with regards to the debt, we will not hesitate to pay down the debt, we just think on after tax basis that it is cheap, and there may be an opportunity out there we do not necessarily want to lose.

Remember though, this is dynamic; we do not lock this in and forget about it.  These are things that we look at all the time as a finance and a management team and it is a regular discussion as far as the Board goes.  So I think you make a great point.  We are sensitive to that, but that is the reason why we are looking at it the way we are looking at it.

Operator

At this time, we have no further questions.  I would like to turn the call back over to Mr. Joe Moglia for any additional or closing remarks.

Joe Moglia

Once again, I recognize there is a lot of stuff going on at financial services today and they recognize you all have many responsibilities away from what you might have as far as TD Ameritrade goes.  I thank you for joining us today.  And I really am proud of the quarter we have had, especially in light of everything that has taken place in the marketplace.  So thank you very, very much for joining us and we look forward to talking to you and seeing you at our Annual Shareholder’s meeting in February.

Operator

Once again that does conclude today’s call.  We do appreciate your participation.  You may disconnect at this time.

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