OptionsXpress Holdings Q1 2008 Earnings Quarterly Conference Call Transcript

OptionsXpress Holdings (OXPS)

Q1 2008 Earnings Call Transcript

April 22, 2008 10:00 am ET

Executives

Adam DeWitt – CFO

David Fisher – CEO

Analysts

Rich Repetto – Sandler O'Neill

William Tanona – Goldman Sachs

Mike Vinciquerra – BMO Capital Markets

Michael Hecht – Banc of America Securities

George Grose – American Capital Partners

Edward Ditmire – Fox-Pitt Kelton

Richard Fetyko – Merriman Curhan Ford

Presentation

Operator

Ladies and gentlemen, please stand by. The conference is about to begin. Good day, everyone, and welcome to the optionsXpress Holdings First Quarter 2008 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Adam DeWitt, Chief Financial Officer. Please go ahead, sir.

Adam DeWitt

Thank you, Cynthia. Good morning, everyone, and thanks for joining us for our first quarter 2008 earnings call. I am Adam DeWitt, the CFO of optionsXpress, and joining me today is our CEO, David Fisher.

By now, you should have received a copy of our press release via fax or e-mail this morning. If you haven't, please call Victoria Paris at 312-553-6715 and we'll make sure you get one. Alternatively, you can view a copy of our release, listen to the call, and submit any questions to us via our web site at optionsXpress.com.

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

Please note that this call is intended for investors and analysts and may not be reproduced in the media in whole or in part without our prior consent.

At this time, I'll turn the call over to our CEO, David Fisher, who'll recap the highlights from the first quarter. Following his remarks, I will walk through the financials and David will wrap up with our outlook before we finish with your questions. David?

David Fisher

Thanks, Adam. Good morning, everyone. Thanks for joining our call today. The first quarter 2008 was a very difficult time for the US financial market and the US economies as a whole. The Dow, S&P 500, NASDAQ, and Russell 2000 were down an average of 10%, inflation is rising, home prices continue to fall and unemployment is on the increase. Each of these factors weighs heavily on the average retail investor, our core customer base.

However, in the phase of these unprecedented forces, we saw great resilience from our customers. DARTs were up 24% year-over-year and assets were up 9%. In addition, we saw a strong growth in our futures business as our customers continue to add these products to their portfolios, increasing diversification at a time when the future markets was very strong in the phase of weak markets on the security side.

The resiliency of our customers is compelling evidence of the benefits of retail customers using derivative products in their portfolios. They are using these products in the way they were intended, hedging, buying insurance, generating income by selling premium in flat and down market, and using bear strategies to take advantage of market weakness.

Our customer's performance this quarter reflects their ability to leverage the tools and resources within our platform to navigate a challenging environment. They have remained engaged and realized better than expected performance. In addition, we saw increased demand for both customer service and education during the quarter and believe this plays right into our strength, as education and customer service are core competencies of optionsXpress.

These are areas where our focus on derivative products stands out and differentiates us from other online brokers. As you can see in our release, the result was that during the quarter we generated double-digit year-over-year revenue and earnings growth. We also realized pre-tax margins of 62% as our low-cost model demonstrated its efficiency even as we saw a market-driven decline in trading volume from last quarter.

Another highlight of the quarter was a continued momentum in our new account growth. Our enhanced marketing initiatives are playing an instrumental role in our robust organic growth, as we added almost 15,000 net new accounts during the quarter. As with the resilient trading results, our new account growth underscores the strength of our product offering and the differentiating features of our platform.

Customers appreciate the advantages of our innovative technology, differentiated education and high-touch customer service, particularly in tough markets like we are currently experiencing. We now have several quarters of reinvigorating new account growth behind us and are seeing continued effectiveness in our marketing efforts. These positive results provide us with the flexibility to now test new channels and platforms for our marketing.

In fact, we began these efforts in the first quarter, which explains a portion of the increase in advertising cost per new account, which Adam will walk you through in a minute. We also remain incredibly focused on driving the development of our educational offerings. We continue to evocate and provide education for our existing customers. These efforts have built loyal and knowledgeable base of account holders that are committed to the optionsXpress platform and realize the many benefits it offers over the competition. This is a principal reason for a low customer turnover.

In addition, we are developing new educational initiatives, which have an increasing emphasis on customer acquisition. In the first quarter, we took our annual OptionsXpo on the road, holding our first regional expo. Participation at this event was great and the feedback has been universally positive. Both optionsXpress account holders as well as potential customers were able to take advantage of a variety of seminars and discussions to better put them in their investing making decisions.

Given the success of this event, we'll be hosting similar events within the US as well as broadening the reach overseas. In addition, the frequency of our webinars that we hosted during the first quarter of 2008 increased by 200% compared to the first quarter of 2007. These events attracted over 17,000 participants, offering valuable information to help our customers navigate through current market conditions.

Our online events remain a key component of our education platform going forward. Our increasingly intensive efforts around education should make it apparent that education is not just an ancillary business for us, but a vital component of our new account acquisition and customer retention strategy. Focused marketing and education alone will not guaranty our long-term success.

You've heard me say this many times, but at the root of optionsXpress is a culture of persistent innovation. Our innovative efforts were especially apparent in the first quarter with a large number of enhancements that we rolled out to our platform and the new tools that we introduced, over 600 in total. Many of these recent enhancements have been focused on expanding the futures capabilities of our platform.

With XpressTrade being fully integrated at the end of 2007, our futures products are seamlessly integrated into award-winning brokerage platform, enabling our account holders to trade options, futures, and equity side-by-side with cash from the same account.

We believe that opportunities within the futures market are very large and the retail adoption of futures is still in the very early stages. The robust trading platform that we have built, coupled with our increased focus on futures education, have placed us at the front of this growth curve and in a leaning position within the retail futures market.

We also made significant enhancements to our charts, including the introduction of trade from chart functionality, our first from a web-based platform. In addition, we have rolled out a major overhaul to one of our most popular tools, Strategy Scan. Strategy Scan was also and always a terrific tool for novice investors. We have now added a matrix view that allows our customers to tweak the Strategy Scan results to find the optimum trade for their needs.

Enhancement to our charts and the evolution of Strategy Scan symbolize our approach to investing technology, easy to use but powerful. We want investors with all levels of expertise to find value in our technology. This is an incredibly difficult strategy to employ, but we feel that our platform does it better that any other. We're able to help the novice investors be less intimidated as they learn, while providing a platform with great depth that continues to meet the needs of some of the most seasoned investors.

With that, let me turn the call back over to Adam, who is going to review the fourth quarter and full – the first quarter financials with you in greater detail.

Adam DeWitt

Thanks, David. Total net revenues for the quarter was $60.8 million, an 11% increase over first quarter of 2007 and 12% decrease from the fourth quarter. The key drivers of changes in our revenues during this quarter was a decline in trading activities from our customers despite the resiliency in the face of continued challenging equity market conditions and lower short-term interest rates resulting from the Fed's rate cuts.

Commission revenues were $38.9 million for the first quarter of 2008, up 15% from the first quarter of last year as organic account growth and a full quarter of XpressTrade impact drove total trades higher even though trading activity declined slightly in the year-over-year periods. Commission revenues were down 12% from our record results in fourth quarter of 2007 due primarily to the decline in trading activity.

Trades per account per year were 34 in the quarter, down from 41 in the fourth quarter of 2007. As we've discussed in the past, we view the normal range for our customers to be between 30 and 40 trades per year, so that 34 is well within the normal range. That being said, the decline in total trades versus the fourth quarter is a little overstated as the first quarter had two fewer trading days than our fourth quarter.

DARTs or Daily Average Revenue Trades were only down 8% versus the fourth quarter, even though total trades were down 11%. We are particularly encouraged by the 14% increase in futures DARTs during the first quarter as certain commodities markets like gold, grains and oil were strong and our customers were able to take advantage with our fully-integrated futures platform.

Average commissions for the quarter were stable with the fourth quarter, with an average commission of $16.81. Despite the relative increase of futures trades in the first quarter of 2008, average commission remained flat overall as we saw higher futures contracts for trade and a relative increase in brokersXpress trades which have higher average commissions, offset the decline from the change in mix.

First quarter of 2008 net interest income was $13.6 million, an 80% increase over last year's interest income of $12.6 million and 11% decrease from the fourth quarter. The increase in last year was due to asset growth which was partially offset by the decline in short-term rates. The decrease from the prior quarter is due almost entirely to the 250 basis points in Fed rate cuts in the fourth quarter and first quarter of 2008.

To add some clarity around the impact of interest rates, our run rate for interest revenue at the end of the quarter, following the 75 basis points in cuts in March, was between $12 million and $12.5 million per quarter. Each quarter point cut from here will impact interest revenue a little more than $0.005 per quarter.

Payments for order flow was $7.5 million for the quarter, down 8% from last quarter and down 15% from last quarter. The decline from the prior year was due to the drop in payment rates, we discussed last quarter, as a result of the second phase of the Penny Pilot. The decline from the fourth quarter is due almost entirely to lower volume and option trades, which were down 16% as the per contract payment rates we received were flat to the fourth quarter. In fact, payment for option trade was up slightly.

We did make some additional progress in terms of the initiatives we talked about last quarter to capture more value from our order flow and we remain optimistic about our ability to extract significant value from our order flow regardless of changes in market structure. The third phase of the Penny Pilot was rolled out at the end of the first quarter. This phase contains a much smaller percentage of our overall volume than prior phases and we expect only a small impact to payment, even if we don't receive any benefit from the initiatives we're working on.

Moving on to expenses, while we faced headwinds on the revenue side of the business, we manage to keep expenses flat to the fourth quarter despite an increased investment in advertising. Total expenses for the first quarter were $23.3 million, 17% higher than the first quarter of last year. Advertising cost for the quarter were $4.9 million, 15% higher than the fourth quarter. We have planned on higher advertising spend coming into 2008 and we are reasonably pleased with the results, as we had our best new account quarter since the second quarter of 2006.

We opened 14,700 new accounts and that likely would have been higher if it weren't for the fewer business days in the first quarter. Total other expenses were $2.2 million, a 21% decrease versus the fourth quarter. This is mainly due to fewer one-time expenses that typically make up this category.

From last quarter, notably last time was effected some of our optionsXpo and lower outside recruiting cost. Pre-tax margins remained about 60% – at 62% during the first quarter despite the difficult environment on the revenue front, demonstrating our platform's ability to generate great returns despite the (inaudible) flows in the market cycles.

Net income rose 12% for the quarter versus last year, most of the gain was due to organic growth and a full fourth quarter of XpressTrade results. We also had a small benefit from a lower tax rate due to a change in Illinois State Tax Law. This benefit is ongoing and we should see it in future quarters as well. Total client assets were $5.4 billion, a 6% decrease versus last quarter, which compares favorably to the 10 plus percent decline in the market averages due in large part to new assets brought to the platform by new and existing customers.

Margin balances were $198 million at the end of the quarter, a 10% decrease versus the end of 2007, were in line with the decline in customer engagement. During the quarter, we announced that our Board authorized $100 million buyback. The Board supported the buyback because it's an efficient way to return value to shareholders when opportunities present themselves due to market volatility.

We felt that the market did present some opportunities for us to purchase shares in the quarter and as a result, purchased a total of 2.9 million shares for $63 million for an average price of $21.64. In the future, as we see opportunities arise, we will continue to consider buying back shares as we evaluate all potential uses of our cash, including acquisitions.

I will now turn the call back over to David Fisher for some final comments.

David Fisher

Thanks, Adam. Our business is not immune from economic forces and we certainly cannot predict what the future holds for the market. We remain committed to controlling the areas of our business that we can. We are committed to expanding on our marketing efforts in new account growth, which means expanding our education offerings, and we are committed to expanding our technology efforts, all while keeping expenses low and all with the goal of driving growth.

We continue to see opportunities within our core options and futures business. We see accelerated growth in our ancillary businesses. brokersXpress, our wholesale business serving registered reps and RIAs, is generating solid results. And international markets continue to present us with significant opportunities as we have mentioned in the past.

Market volatility will come and go, but our growth efforts have proven effective. We are focused on maintaining our leadership position in retail derivatives and staying ahead of our customers' expectations and delivering easy to use, but powerful, investing technology. We believe our position in the market remains strong and we can continue to deliver solid results.

At this time, I will turn it back over to the operator and we will take some of your questions.

Question-and-Answer Session

Operator

(Operator instructions) We will take our first question from Rich Repetto with Sandler O'Neill. Please go ahead.

Rich Repetto – Sandler O'Neill

Good morning, guys.

Adam DeWitt

Good morning, Rich.

David Fisher

Good morning, Rich.

Rich Repetto – Sandler O'Neill

My question first is on the payment for order flow, we've talked about the growth initiatives. Could you give us an update, is this some – we would start to see the impact of in the second quarter, and can we be a little bit more specific on what – the rumor has – I won't say what the rumors are but can you be more specific on what they are?

David Fisher

Sure. For competitive reasons, we are just not going to disclose right now what we are doing on that front. But, we have seen increasingly positive results throughout the first quarter. We saw the beginning impact –beginning positive results in the fourth quarter and that that just increased in the first quarter. And as Adam mentioned, we feel good that payment rates are going to remain fairly stable and we expect very little impact from the third phase of the Penny Pilot, even if we get no additional benefit from any of those efforts, although we certainly expect that we could in the second quarter and beyond.

Rich Repetto – Sandler O'Neill

And David, is there anyway you could sort of even just generally quantify by digit divertis [Ph] 10% of the flow to sort of continue to test out these initiatives or whether 20%, 25% or --?

David Fisher

Sure, I won't give exact percentage, but it is a meaning for percent. It's not like we are taking a few contracts here or there and doing some different things with them, especially if you got later in the quarter, through – when we were doing more than one thing, so through the couple of different things we are doing, we certainly did divert a meaningful percentage of our flow. But just, it is still but a small test portion and that's why if we can continue to have success of these and ramp them up, we do think there is opportunity for benefit going forward.

Rich Repetto – Sandler O'Neill

Okay. And then next question is on the tax rate. I didn't catch, I know you talked a bit about it, but is this the tax rate going – good for going forward, the 36.6%? That's the lowest I have in your history actually.

David Fisher

Yes, the lower tax rate is due to a change in Illinois State Tax Law. I think it is been a factor in a number of companies that have reported this quarter. The rate that we had in the first quarter, it should be an ongoing rate and it is a good gauge for where are going to be in the future.

Rich Repetto – Sandler O'Neill

Okay. Okay, and I guess the last question would be on the marketing ethics, David, the overall level was up to very good levels, did the – what your spent (inaudible) has always increased. I'm just trying to see what kind of advertising expense, are you happy with these levels? I know you generate a lot more from each account than what you still – what you spent but could it be 5 million plus going forward or we sort of peaked out at the 4.9 and sort of headed back down seasonally?

David Fisher

Sure, let me a couple different, now, parts to your question. I think in terms of cost per account, that 250 to 350 range in cost per account is a level we are very comfortable, given that our accounts are generating over $600 of pre-tax profit per year and we have very low turnover. So at this level, we still have a very, very strong ROI on our marketing spend. In terms of kind dollar level of spend, I think you will see, some flattening out in that, given that we are heading into the summer time where we thing advertising historically has been less effective. Although going forward, if you look out into future years, '09 and beyond, we do think there continues to be opportunity to get better at our advertising, explore new channels as we discussed today and over time spend more money while keeping that cost per account steady with a goal of bringing in more accounts.

Richard Repetto – Sandler O'Neill

Okay. Thanks, guys.

Operator

We will take our next question from William Tanona with Goldman Sachs. Please go ahead.

William Tanona – Goldman Sachs

Hi, good morning guys.

David Fisher

Hey, Bill.

William Tanona – Goldman Sachs

I know you guys talk about seeing progress and being happy with the results on the market making program. But I guess for us that, sit on the outside, it's pretty tough for us to gauge that level of success just given some of the metrics that we are seeing particularly if you look at kind of the capture rate of that order flow that we are seeing. So, can you give us a little bit more granularity as to why you feel positive and why we should be thinking about that in a positive way?

David Fisher

I will take the worst-case scenario and say, you don't believe us that we are having any good success with those initiatives. Our payment rate was flat and our actually our capture rate in terms of payment per option trade was up. So, even if we weren't making any progress, quarterly that payment rate has stabilized. We had that one-time impact from the second phase of the Penny Pilot and there was no future deterioration and in fact a slight pickup in payment. Beyond that, the third phase of the Penny Pilot, which was at the end of the quarter, is a very, very small percentage of our overall order flow. And it is at names with much wider (inaudible) spreads, we still think – so we think that the impact of the Penny Pilot, it can be very, very small on overall payment. So, even in the – if you don't believe that we can generate any positive results from some these initiatives, if we just added that flow back into our mix, combined with the fact that everything had been stabilized in the fourth quarter and actually up a little bit, we think it is a pretty positive story with the upside coming from, if we can continue to generate positive results for these initiates which we have seen in our small-scale testing and can roll those out on a bigger scale going forward.

William Tanona – Goldman Sachs

Okay. That is helpful. And then I guess, as I think about the margins, you guys last quarter obviously talked about probably hitting a peak in terms of those margins and we did see those come down pretty substantially here in the first quarter. Where do you think that those margins shake out, is it still in that kind of low-60s range for the rest of the quarter or should we will be thinking about some other type of level?

David Fisher

Yes, we have historically said – with normal trading activity, we are kind of in the low to mid-60s. And I remember last quarter, it was a little bit reflective of the heightened trading that we had in the fourth quarter, being over 40 trades per account per year is kind of an anomaly for us. And so, we feel comfortable where we are here. We are obviously – trading was down this quarter. We still have pre-tax margins over 60 and we feel good about the performance. We talked a little bit about headwinds, but we feel good about where we are now.

William Tanona – Goldman Sachs

Great, thanks. And then finally, you mentioned that you bought back 2.9 million shares in the quarter. Obviously if we look at the share count, looks like the share count only went down by above 400,000, just wanted know was that just timing within the quarter or was that also because of the issuance of restricted stocks? I am just trying to get a better sense as to why the share count may not have gone down as much as we would have thought?

David Fisher

The dynamic that you are talking about is almost entirely due to the timing of the buyback. It wasn't authorized until mid-April and most of the --

Adam DeWitt

February.

David Fisher

I'm sorry mid-February and we did most of the buying in March. So, you saw only a small impact in the first quarter from the buyback.

William Tanona – Goldman Sachs

Thanks.

David Fisher

Thanks, Bill.

Operator

We will take our next question from Mike Vinciquerra with BMO Capital Markets. Please go ahead.

Mike Vinciquerra – BMO Capital Markets

Thank you. Good morning, guys.

David Fisher

Good morning.

Mike Vinciquerra – BMO Capital Markets

I wanted to ask, digging more into this, the growth in your futures business because it does seem to be having some impact on some of the metrics. So first of all, can you give us a sense for what the mix of futures trading among your clients is, where is the adoption in terms of types of products that they are trading?

David Fisher

Sure, the types of products that they are trading are I think what you would expect and they are heavily weighted towards kind of the industries in the financial futures. But, during the last – depending on which market and that is the way futures markets kind of go, depending on where the action is, is sometimes where the trading goes. So last quarter, we saw a little bit of a uplift in some of the other commodities like gold, oil, and some of the grains. We certainly saw a shift. We obviously have a lot of customers in our platform from the XpressTrade acquisition last year, who are still heavy futures but we also saw some adoption from some optionsXpress customers as well.

Mike Vinciquerra – BMO Capital Markets

So, the optionsXpress customers adding to their trading with futures or they substituting what they use to do and moving more but into the futures space?

David Fisher

What we've seen is a little bit of both, so it's a little bit of substitution. I think net-net, you are seeing a little bit more activity. I think people that trade futures, if you are trading futures, you are generally – the turnover is a little bit more, so you see a little bit more, to the folks that are coming over from the optionsXpress side and trading futures, you are seeing the activity rate a little bit, but you are not going to see – it's not enough that it's going to impact our overall trading activity levels.

Mike Vinciquerra – BMO Capital Markets

Okay. And then just finally, the economics on futures trading, is it roughly the same as the rest of your core business or is that having an impact on the numbers that Bill was just talking about?

Adam DeWitt

In terms – what you mean by economics? Is it top line or bottom-line?

Mike Vinciquerra – BMO Capital Markets

Pre-tax margins, are those tradings just as profitable because I don't believe you get any payment on those, I guess that would affect the economics to some degree.

Adam DeWitt

That's right. The average commission is a little bit lower. So what you see is a little bit lower on the revenue side. As you pointed out, there is not a lot of payment – there is no payment for order flow. But, overall, net net, the margins are very similar to our overall business. So, our incremental – so incremental futures trade is very similar to an incremental options trade or an incremental stock trade.

Mike Vinciquerra – BMO Capital Markets

Okay. And then just one more thing. David Fisher, you mentioned in your comments about the $600 per account in profit. I mean we did just a quick math and it is something like a $135,000 per account this quarter and it was 174 last quarter. It has been running near 150 to 175 I guess the last five quarters. This quarter, it is down. I am just wanting to trying to make sure that the incremental account that you are adding is still as profitable as the accounts that you've had before and I wanted to know if there is [ph] something just seasonal this quarter and we would expect it to pop back above 150 next quarter and get above that $600 annualized range. But, right now, it looks like things are – it definitely dropped off in Q1.

David Fisher

Yes, so the $600 in annualized number and over the last 12 months, we're still well above that $600 number. The reason it was down in this quarter is just a combination of the lower trading volume because of the market conditions as well as the drop in interest income because of the Fed rate cuts. And so, certainly, if we take a more normalized environment as rates we think are below kind of where they will be, if you look at a five-year average, they are certainly well below almost any five-year period in US history. Plus you got a little bit, another trade or two per customer per year, we'll be right back above that 600 number and it has nothing to do with the quality of the new accounts. First of all, we certainly had strong new account growth in the last couple of quarters, but hardly enough to impact those overall averages. And in fact, you've heard us talk about in the past, we routinely look at what we call as vintage analysis where we look at the performance of our customer bases by the quarter that they came to optionsXpress and we continue to see very consistent performance across vintages.

Mike Vinciquerra – BMO Capital Markets

Okay, those are helpful points. And then just one thing for Adam, just the brokerage and clearing cost at the DART [ph], compared to the commissions. In the quarter, net commissions were down 11, brokerage and clearing were only down about 1.5, is it related to the mix in term of business?

Adam DeWitt

Actually, it is a little bit. One thing you got to remember, a couple of years ago before we were self clearing, that line item was a lot more variable than it is today, so there is a lot more fixed cost in there. There are still some variable costs and the lower volume that we saw overall was offset by a change in mix, some things like – some futures contracts that we pay a little bit more on execution for and some option trades that we pay a little bit more in execution for us, so that's exactly right.

Mike Vinciquerra – BMO Capital Markets

Okay. Thank you very much.

David Fisher

Thanks, Mike.

Operator

We will take our next question from Michael Hecht with Banc of America Securities. Please go ahead.

Michael Hecht – Banc of America Securities

Hey guys, good morning, how is it going?

Adam DeWitt

Good morning, Mike.

David Fisher

Good morning, Mike.

Michael Hecht – Banc of America Securities

Couple of questions on the balance sheet and I guess tie into [ph] net interest income pressures. You had a decent drop-off in payables to brokerage accounts on the balance sheet about 16% to $718 million. So, that was a bit surprising to me. That's kind of cash, client cash, (inaudible) folks withdrawing cash or just using cash to do trades? And then I guess, what were total cash balances including money funds and did you actually see a tick up in money funds during the quarter?

David Fisher

Yes, that just – don't forget that's spot balance. So that number moves around quite a bit, and it's just an indication of where customers are and level of investment. If there are customer cash, let's say for example, is sitting there and for option requirements, some assured options, it has a lot of option requirements, more people are sure, you will see that number higher and money that you won't see will be in the money fund, which is off the balance sheet. I think overall our cash balances as a percentage total balances are very similar to where they are historically, kind around that 30% to 35% of total assets in cash between money market, credit balances, and so on and so forth.

Michael Hecht – Banc of America Securities

Okay. But the money fund balance is probably being a little bit higher this quarter?

David Fisher

Right. At that point in time, that could vary throughout the months and throughout the quarter, and being that our primary business is options and we have an expiration cycle that we go through, at different times of the month, those numbers move around quite a bit.

Michael Hecht – Banc of America Securities

Okay. That is fair enough. And then, just following upon the spread compression, can you repeat for me the guidance you gave on NII, just in terms of how we should think about increment cuts? And then, can you give us a little more clarity on I guess what your average margin rates were in the first quarter, and how those changed during the quarter, and then also kind of your average crediting rates and– or in other words, what you are paying on free credit balances at the broker/dealer and how those have changed? I am just trying to get a sense of have we reach the floor on the crediting rates and how much flexibility you have there?

David Fisher

Yes, let me – I am left with [ph] the guidance again on the interest income first, so we had $13.6 million in interest income in the first quarter, but the run rate after those 75 basis points in cuts that we had at the end of the March was between $12 million and $12.5 million per quarter, depending on kind of those issues that we are talking about in terms of cuts – cash mix, what's in what bucket. And then, each quarter point cut from here will impact interest revenue a little more than $0.005 per quarter.

Michael Hecht – Banc of America Securities

Okay.

David Fisher

And, to move on to your other questions, in terms of margin rates, we haven't changed our margin rates at all, so these vary directly with Fed rate changes, with broker call actually which is anchored to Fed rates. So if you looking to get a sense for where they were throughout the quarter and where you think they will go, you could take a look at our commission rates paid and see kind of where they are, I can tell you that exiting March, I think they are in the mid-5s on average, in terms of what we are bringing in. But again that will go up and down based on what the Fed does with interest rates.

On the credit rate side, we've talked about this in the past, we're certainly close to the floor on where we can go. Traditionally, those have not varied 100% with Fed rate cuts, so in other words we don't pass along all the benefit on and if the Fed raises, consequently on the way back down, we don't get to pass along a lot of the cost. But, certainly, we are at a point here where we are closing in on zero, so incremental and my guidance reflects that. So incremental cuts from here on in will be on to [ph] pass on less and less of the cost.

Michael Hecht – Banc of America Securities

Okay. That is fair enough. And then, any more color on the outlook for commission per trade as you know, it was kind of stable this quarter, but I guess what should we expect in terms of the mix kind of going forward and is this pricing something you guys are planning on looking at to kind of tweak to kind of drive incremental growth here?

Adam DeWitt

As we have talked in the past, we don t feel any pressure on our commission rate schedule. We continue not to feel any pressure on our commission rate, so we don't think that there is going to be any impact from commission rate changes. As you pointed out, I mean look – if you want to assume that as futures grows disproportionally to some of the other – to options, then you would see a little bit of an impact there on the downside. But overall, we don't really see (inaudible) other than mix changes for average commission to change either way.

Michael Hecht – Banc of America Securities

Okay, okay. And just a couple of follow-ups on the expense side, where did headcount end the quarter? What's the outlook for this year? And how that ties to what we should be expect for comp expense?

Adam DeWitt

We ended the quarter at 273 employees, which is slightly higher than we ended the year. We had some back filling. We're obviously with the markets the way they are and we, David and I talked about the headwinds in the market where we are cautious in terms of adding employees and very careful in terms about where we add employees and how. And so, we are thinking carefully about it. We are not laying off anybody. We don't have any plans to do that and so we will see what happens.

Michael Hecht – Banc of America Securities

Okay. And then, just a follow-up on the brokerage and clearing expense again, I mean, I am just trying to get some sense of the cost to clear an options trade versus the futures trade and we are kind of crudely try to calculate brokerage and clearing expense per trade, and we kind of come up with a number of like $2.17 in the first quarter versus like $1.92 in Q4, I mean is that just kind of mix driven?

Adam DeWitt

Yes. Brokerage and clearing?

Michael Hecht – Banc of America Securities

Yes.

Adam DeWitt

It's just vary with – I mean, look, there is some portion of – like I said earlier, there is some portion of the brokerage and clearing expenses at this point are facts. I mean we don't – to clear – we are clearing everything internally. So, there is very little cost. I mean we do have a back office software that we provide or that we talked about and the costs are in there. But we do have certain execution costs on certain types of trades and the other item that's in that line item that's a big chunk that you didn't mention was brokersXpress payouts, which vary based on how much volume brokersXpress is doing. So its kind of – like I mentioned earlier, it is a lot of fixed cost in there, so it is hard to get to a kind of a variable cost per trade to use on a go forward basis. So, the level that we're at is – in the first quarter is kind of consistent with what our expectations are, I mean it is down a little bit from the fourth quarter. But, the trade volume was down a little bit more. If trade volume tops, we wouldn't necessarily see a corresponding increase in brokers and clearing expense.

Michael Hecht – Banc of America Securities

Okay. That's fair enough. And then, as you guys talked about, you've seen a nice pick up in new accounts. Just broadly, I mean, who do you guys thank you're taking share from, I mean, the other large discount brokers or more full-service firms, and then maybe talk a little bit about the competitive environment, what you are seeing from smaller competitors like Bankers Win [ph], OptionsHouse, TradeKing, those kind of guys?

David Fisher

Sure. I think three things that the competition from the large online brokers seems to have subsided. E-Trade is obviously having some difficulties, Ameritrade is focusing on being – Ameritrade and (inaudible) focus more on asset gathering than I think catering towards customers who want to use derivative products. These are important parts of their platform and you won't see offerings from them, it is just as hard to focus on a lot of different things, I think we are benefitting from that.

On the smaller side, there was a surge of activity last year, but I think it's hard to grow in these businesses, and it is hard to grow scale. I think some of those guys are seeing that and I think we've built up some steam kind of in terms of gathering market share, instead of rolling [ph] some of the smaller guy do it, as the market continues to grow, and I think that's the important price – important kind of piece the story, it is not all about stealing market share from competitors. The use of derivative products is growing and as it does, we continue to capture significant portion of that volume.

Michael Hecht – Banc of America Securities

Okay. Thanks a lot guys.

David Fisher

Thanks, Mike.

Operator

We will take our next question from George Grose with American Capital

Partners. Please go ahead.

George Grose – American Capital Partners

Hi, good morning.

Adam DeWitt

Good morning.

David Fisher

Good morning.

George Grose – American Capital Partners

Just on the marketing spend, just maybe to recap here, like you are increasing your marketing spend and yet, I guess, you're saying to that you really haven't seen a decline in the quality of the new accounts, despite the lower trading activity on an annualized basis. Is that – am I reading this correctly or – ?

David Fisher

Yes, I mean keep in mind, last quarter, we had one of our highest trading activities in the company's history, so certainly the extra 15,000 accounts we added this quarter isn't all of a sudden going to just have a huge impact on that number. So, yes, we're able to spent more money by bringing the same high-quality accounts, again the market is growing. So it's not like– it's not all about stealing market share, it is just getting our message out to people who're interested in using these products. And we continue to find a lot of high-quality customers out there who have that interest.

George Grose – American Capital Partners

Okay, and then what percentage of these new accounts, of these 15,000 came from like your educational initiatives would you say?

David Fisher

It's hard to track exactly where they're coming from. Right. Because customers they don't always tell you, we ask, but you get a lot of non-responses. But, certainly our educational initiatives are becoming an increasingly important part of our new account growth. Our seminars are becoming more and more focused on new account generation as opposed to just serving our existing customers. We have more basic education that we're pushing out there. And we're getting great traction from that and we think we will continue to going forward.

George Grose – American Capital Partners

So, I guess, you're saying like you are seeing like some traction from your education initiatives as compared to last year?

David Fisher

This is really – in the last quarter to two, it's the first time we've ever really targeted new customers with our education. That's something we started in the first quarter and accelerated – started in the fourth quarter and accelerated in the first quarter. And so, for the first time, we are actually seeing customers coming – new customers coming directly from our educational efforts.

George Grose – American Capital Partners

Okay. And but yet, I guess, it is hard to quantify the number though?

David Fisher

Well, we can see that number but, that is still relatively a small number as we are still ramping it up. But we know those educational efforts had more broad reaching appeal to our customers and it is certainly important part of the overall acquisition strategy.

George Grose – American Capital Partners

Okay. And then what's your DARTs here for the months of March, I mean, you showed a nice double-digit year-over-year and month-to-month growth. But, they came off some easier comps, I mean what initiatives you have in place? I mean, do you expect to see continued double-digit growth in your DARTs?

David Fisher

I would certainly call March of last year an easy comp compared to March in this year, which is one of the most difficult economic and market environment we've seen in quite sometime. But, yes, we absolutely continue to think we can grow this business at double-digit and we have always maintained this was a growth story. We had one small period, where new account growth was lower than we liked and we have since done a great job of turning that around, and we don't see any reason why that would change going forward.

George Grose – American Capital Partners

Okay. Thanks

David Fisher

Thank you.

Operator

We will take our next question from Edward Ditmire with Fox-Pitt Kelton. Please go ahead.

Edward Ditmire – Fox-Pitt Kelton

I've two quick questions on net interest income. Just following on your description of the sensitivity to the next quarter point cut, you said about $0.05 or slightly above that for the next quarter point cut, could you tell us like if we were 100 basis points away, what the quarter point sensitivity would be imagining, somewhere just as a worst case somewhere around 100 basis point Fed funds rate, would that be dramatically higher?

Adam DeWitt

It might be a little bit higher, you see closer to that one, but the next 100 basis points of the guidance is fine, but it is a little bit more than $0.05 per quarter.

Edward Ditmire – Fox-Pitt Kelton

Okay, great.

Adam DeWitt

If that was down to one and below, then we need to when we look at it.

Edward Ditmire – Fox-Pitt Kelton

And then one more question. Can you guys help us frame the difference between the (inaudible) income that you make on your corporate cash and securities versus the clearing spread of business?

Adam DeWitt

In terms of what kind of yield?

Edward Ditmire – Fox-Pitt Kelton

Well, just for example, out of the $12 million to $12.5 million quarterly run rate, around what portion do you think arises more from interest on your corporate cash versus the clearing business?

Adam DeWitt

I can tell you the easiest way to think about it is to look at our balance sheet and the portion that is in investments is our corporate – essentially our corporate cash and since we are conservative and trying to assume very conservative short-term interest rate on that. And then you can kind of get to what part of the – what part of the interest income is corporate cash.

Edward Ditmire – Fox-Pitt Kelton

And so, that would be investments on securities, but not the cash and cash equivalents?

Adam DeWitt

You can take half because roughly half of that's going to be company cash and some of that's going to be customer cash.

Edward Ditmire – Fox-Pitt Kelton

Okay, thanks a lot.

Adam DeWitt

Okay thanks.

Operator

We will take our next question from the Richard Fetyko with Merriman Curhan Ford. Please go ahead.

Richard Fetyko – Merriman Curhan Ford

Yes, thanks good morning.

David Fisher

Good morning.

Richard Fetyko – Merriman Curhan Ford

Guys, your account base increased by 6% sequentially, yet client assets declined 6% sequentially and the DARTs decline 8% sequentially. I know there is some market volatility and tough environment, but also it is a sharp contrast to with the market overall. The options were up sequentially for the overall market and one of your competitors actually is posting an 8% sequential increase in DARTs, so I was just wondering it seems to suggest that perhaps you are adding smaller, lower quality accounts, or is it really just purely a reflection of the market trends in the last three months?

Adam DeWitt

Yes, the – it's clearly a reflection of the market trends. If you look at some of the larger online brokers that each had sequential declines in DARTs, if you look at our growth in – if you look at the change in our account assets – our total assets, it was much less than the drop in the NASDAQ, Dow, S&P and Russell 2000 combined. So, we actually outperformed the markets in each one of those cases and really it's just a reflection of the difficult market environments in the first quarter. And as we – as I mentioned in the question earlier, when we look at new accounts, they are – they perform every bit as well as our older accounts.

Richard Fetyko – Merriman Curhan Ford

Okay. And then the follow up on the payment for order flow test that you are conducting, and I know you want to keep things secret, could you just give us any feel for what improvements you are seeing in your test sample versus the portion of the order flow that you are not testing, what's – is that sort of 10% lift in your test or 20% lift?

Adam DeWitt

It is a very substantial lift, but it is very choppy as we learn kind of what works and what doesn't work. There is a lot of ancillary expenses that we try to ramp up, new areas and experiment with new things, there is a lot of ancillary one-time costs, so we are not getting any benefit from it. But, when we kind of look at the incremental candidates, the incremental trade, the incremental contract, when it's working, we are seeing very substantial improvement in our payment rates, and at the same time significant increases and price improvements for the customers, so none of this comes at the detriment of the customers. In fact in this way, in this place our interests are 100% inline. Almost all of the initiative that we are testing also have the impact of getting our customers significant price improvement on their trades.

Richard Fetyko – Merriman Curhan Ford

Got it. Okay, thanks.

Adam DeWitt

Thank you.

David Fisher

Thanks.

Operator

And at this time, there are no further questions in the queue. Ladies and gentlemen, this will conclude today's optionsXpress Holdings first quarter 2008 financial results conference call. We do appreciate your participation and you may disconnect at this time.

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