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Ameritrade Holding Corporation (AMTD)

Q2 2006 Earnings Conference Call

April 24, 2006, 8:30 a.m. EST

Executives

Joe Moglia - Chief Executive Officer

Randy MacDonald - CFO, EVP, Treasurer, Principal Account Officer

Donna Kush - IR

Analysts

Patrick Pinschmidt - Merrill Lynch

Prashant Bhatia - Citigroup

Rich Repetto - Sandler O’Neill & Partners

Mike Vinciquerra - Raymond James & Associates

Howard Chen - Credit Suisse

Michael Hecht - Banc of America

Matt Snowling - Friedman, Billings, Ramsey

Richard Herr - Keefe, Bruyette & Woods, Inc.

Casey Ambrich - Millennium Partners

Paul Frisco - Montana Capital

Andrew Rickshaw - Citadel Investments

Barry Cohen - Merrill Lynch

Operator

Please stand by. Good day, everyone, and welcome to today’s TD Ameritrade March Quarter Earnings Conference Call. Today’s call is being recorded. At this time, for opening remarks and introductions, I’ll turn the call over to Donna Kush. Please go ahead, Madam.

Donna Kush

Thank you. Good morning, everyone. By now you’ve probably seen our two press releases that were made public this morning. You can also view a copy of our releases, listen to the call, and submit any questions to us via our new corporate website, which is still our ticker symbol, at amtd.com. We will be discussing a number of financial metrics in this call, so in order to more easily follow along with us, we strongly encourage participants to download and print the presentation for this call now on the home page of amtd.com.

Also, if you want to contact us directly after the conference call, please call investor relations at 800-237-8692.

Before we begin, I would like to not that this call contains forward-looking statements that are made pursuant to the safe harbor provisions of the federal securities laws. These statements involve risk, uncertainties and assumptions that may cause actual results to differ materially from those anticipating. Listeners to the call are advised to review the risk factors contained in our most recent annual report on form 10-K, and quarterly report on 10-Q for descriptions of risk, uncertainties, and assumptions related to the forward-looking statements.

In this call, TD Ameritrade management will discuss some non-GAAP financial measures, specifically operating margins, EBITDA, non-GAAP EPS, and liquid assets. Listeners can find a reconciliation of these financial measures to the most comparable GAAP financial measures and the other required disclosures in the slide presentation during this call, which again can be found on our corporate website at amtd.com.

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

This call will cover March quarter earnings and marks the first quarter of combined results since the close of the TD Waterhouse acquisition.

At this time, I’ll turn the call over to TD Ameritrade CEO, Joe Moglia, who will be followed by TD Ameritrade’s CFO and PAO, Randy MacDonald. Joe.

Joe Moglia

Thank you very much, Donna, and good morning, everybody. This is an exciting day for us with the launch of the new TD Ameritrade. We’ve got an awful lot going on. This morning, what I’m going to try to do is give you an update with regards to highlights from the quarter. I want to take you through once again what our actual growth strategy is. I will review with you our new client value propositions and how we came to those numbers. We’re going to give you an update with regards to our outlook going forward, and I’d like to spend a few minutes discussing what our new brand and advertising campaign is really all about.

So, if you focus specifically now on the March quarter, I’d like to point out that the TD Ameritrade deal is accretive as of now. When we first talked about the deal, we said that the deal actually wouldn’t be accretive until the latter part of the first 12 months. We are accretive already and we are very pleased with that.

If you notice on the slide that says March quarter 2006, we’ve broken that down for you into two categories; our normal GAAP numbers, and we also wanted to include what the GAAP numbers would look like excluding the gain and the benefit that we had gotten from Knight.

I will focus on the numbers excluding Knight. On an earnings per share basis, we came in at $0.22, which was the second-best quarter in our company’s history. Net income was a record $124 million. Our pre-tax income was a record $203 million. Now, the record pre-tax percentage came in at 41% -- I’m sorry, the pre-tax margins came in at 41%. Now that number is not a record, but I point that out specifically because the outlook for the quarter, the upper end of the range, was 38%. We beat that.

Now, going forward, we told you at the end of the integration, we believe we’re still going to get back the 50% plus margins -- we still believe that. EBITDA came in at a record $246 million, and our ROE on an annualized basis for the quarter came in at 34%. That’s a record since we’ve been a public company.

The next side actually reviews just the basic numbers for the March quarter, 2006. This is all GAAP. These are the numbers for the March 2006.

Our operating margin was a record. It came in at $251 million. That was 50%. The $251 million is a record. The 50% is not. We expect our percentage also to go up as we get to the end of the integration.

Now, we’ve said over the span of about the last three quarters, that we were going to report to you on a regular basis our non-GAAP EPS. Now, so we’re in sync, the non-GAAP EPS numbers excludes the amortization of acquired intangible assets, the interests on our borrowings, and basically any one-time gains or losses.

Our non-GAAP EPS for the quarter was $0.26.

Net revenues were a record $497 million. Average trades per day for the quarter were about 254,000. So far in April we’re at 270,000. New accounts came in at the quarter at 140,000. Net new accounts were 79,000, so we lost, so we closed about 60,000 accounts. Qualified accounts are at almost $3.3 million, client assets $263 billion, and cash and money market funds came in at $36.6 billion.

Now, the next slide talks about our growth strategy, our thoughts about market share and what we really think the opportunity is.

The pie chart on the left talks about the amount of equity trades online that we do as part of the retail business in the United States. We’re about 26% of that. Now, we have always been a leader in that category, or one of the leaders, certainly, in that category.

We will continue to work hard to be a leader in the future in that category. This is still a focus of ours. It always will be. But as we’ve talked about before, as we move into the long-term investor space, and as we move into the -- as we become more dominant or more of a player in the independent advisor’s space, we’re going to focus more on active gathering. We think that will be not only good for our multiple down the road, but we think that that’s really a significant opportunity for us.

So the pie chart on the top on the right talks about all the assets in retail for online brokerage in the United States. We’re only 11% of that. That’s without a primary focus on the launch of investor, or the independent advisor.

That will be a focus for us going forward, and we think we have very reasonable opportunity to be able to garner greater share in the online asset space going forward.

But as we move into the launch of investor space, and as we get more involved in the independent advisor space, keep in mind that for the launch of investor, the sweet spot for us is the mass affluent market in the United States. Most of the full commission firms are focused on high net worth money. While we think we can do a reasonable job providing long-term assets, an excellent home and an excellent portfolio strategy and provide real solutions to those client financial needs, the fact of the matter remains that the typical full-commission firm has difficulty getting to the mass-affluent part of their base. That’s the sweet spot for us, and that’s who we’re going after.

So if you look at the slide below, that’s all assets in the online brokerage business in retail, and the retail side of the full commission firms in the United States. We’re only 3% of that, and as we go forward, we will be competing more with the full-commission firms for the mass-affluent part of their base.

So we think that there’s actually a greater opportunity in garnering market share in that segment from the full commission firms than there is just focused on the online competitors.

So when we look at that down the road, we think that that’s a fairly significant opportunity.

Now, I think the fair question is, in fact, I think most people would acknowledge we’ve had pretty good success in the active trader space. Why do you think you’re going to be successful in the long-term investor space and the independent advisor space?

First, our success with the active trader is directly driven by our core strengths. We’ve always told you that our entire mantra is to take our core competencies, lever those into competitive advantages, and focus on areas where we believe we can be a market leader. Well, those strengths specifically apply to the long-term investor segment as well as the independent advisor segment, where we think there’s significantly greater growth opportunities down the road.

You take that and you add in the benefits that we receive from TD Waterhouse, their presence that already exists in the independent advisor space and what they provide us with regard to sales benefit for the new TD Ameritrade -- the branches, the sales focus, and the investment centers are things that we believe can help us.

You couple that with what is going on with the basic demographics of our country, the wealth of the baby boomers, the transfers of wealth from the baby boomers to the next generation, and the growth of 41K, we think that this is a very, very nice economic platform and market opportunity for us to pursue in areas that we believe we are strong in.

Now, it’s because we want to deliver on this growth strategy that ultimately led us to the decisions we made on our value propositions.

Our objective on the value propositions, everywhere we look at this, is simple -- we had to figure out a way -- we know we can grow market share. We know we can grow profitability, but we had to figure out a way to maximize the balance between our market share and our overall profitability.

We’ve been looking at this now very hard for over a year-and-a-half. We looked at it. Every possible different pricing scenario that somebody can come up with, we came up with. Regardless of what you may think matters, we looked at it. We used outside sources, we had surveys, we had focus groups, etc., etc., etc.

It was our clients that told us again and again and again that you don’t necessarily have to be the lowest price on the market, but you’ve got to have a fair price, it’s got to be simple, it’s got to be transparent, and you’ve got to deliver what you tell us you’re going to deliver. That’s what I think we’re all about anyway.

So the $9.99 price across the board, and the elimination of maintenance fees, we think gives us our best list reward scenario to optimize our long-term profitability and our actual market share growth.

Now, as we said before, if it’s just price, we are missing the boat. It’s not just price. It’s the products and the services that you can provide to the clients. Again, go back to what the clients told us. They said “deliver on what you tell us you’re going to deliver on�?.

So consequentially, our focus has been at three client segments that only continues to intensify down the road.

With regard to the active trader space, they tell us again and again, excellent ordering execution is important to them. Over 60% of the time, we provide our clients with price improvements. Half of our trades get done in a second or less. They care about innovative tools. We have been known for that in the past. We’re going to be more aggressive about that in the future.

We’re rolling out market motion detector that you might be interested in taking a look at. But the bottom line is we recognize what the active trader cares about. We’re going to do everything we can to take care of them.

In the long-term investor space, again, it will be a focus. The core competencies from the active trader space will pop up here for us and will help us, but I do believe that our portfolio allocation service, Amerivest, is a differentiator in the market place, and that will be something we’ll continue to work on in the future.

In the independent advisor space, no one in the market has been nearly as public as we have been with regard to the public stand we’ve taken to support the independent advisors. We believe and we’ve said publicly -- and we’ll say again and again, and we’ve said in Washington, that the independent advisor and the actual individual brokers should have the same standard.

The other advantage that I believe we have to the independent advisors, unlike most of the industry, we have no conflicts of interest with advisors, and that’s something we think will help us down the road, and we think that that’s something that they appreciate.

Now I’m going to talk a little bit about our outlook impact. I’m actually going to talk quite a bit about our outlook impact going forward.

Now, our analysis tells us that there should be clear benefits to the new pricing and the value propositions, and we should clearly see that with greater account growth, greater asset growth, greater trades, and greater retention. However, we have factored in none of that -- none of that in our numbers.

Now, let me walk you through that a little bit. In January, the mid-point of our ’06 range is $0.91, and for ’07, the mid-point was $1.15. We are taking the full, hard dollar financial impact of the new pricing up front. We’re taking that right now. So for 2006, that’s $0.04. For 2007, that’s $0.10.

As we update our outlook, we certainly include the Fed increases that have already taken place and the benefits that have already taken place. That’s an incremental $0.07 and an incremental $0.01.

That then leads us to our mid-point for now for ’06 for $0.94 and $1.06 for ’07, which is at the bottom of the page. Now, Randy’s going to give you more details on that in a few minutes, but something that we want to point out. Remember, all of our numbers come off our original base case, and then we update the base case based on the actuals that have already taken place. We don’t factor in a lot of new stuff unless we know for a fact that it’s going to be there. So we know there is a hard dollar impact on the value propositions for ’06 and ’07.

But just a moment or two on our base case. We are already ahead of our 2006 base case. Our activity rate so far this year is 4.3 versus a 3.9 base case. We haven’t changed the 3.9 base case going forward so far. We haven’t changed it yet. Our account growth, the original base case was we were going to be flat this year, or close to flat. So far, our net new account growth for the first two quarters is 100,000 accounts. We haven’t assumed growth going forward. Remember, we’re not finished the integration.

Our balances are ahead of where we suggested they were going to be when we first rolled out the base case. Today is the very first day we are rolling out our new value propositions. Now, we would not have gone to this pricing if we did not believe that ultimately it would deliver good economics for us.

Now, having said all that, let me focus on what I think may be on many of your minds. I think many of you may very well be questioning, why didn’t then we just build some of that upside into the outlook so we wouldn’t have to have lowered our guidance for 2007. I think that’s a very fair question, but here’s why we didn’t do that.

Our standard operating procedure over the span of the last five years, any time -- any time -- we have rolled out a new initiative was to include all the costs up front and not any of the upside until we either started to achieve that upside, or the progress that we were making was clear, and then we always gave you color on that in subsequent quarters when we had an actual track record and data that told us how the initiative was going.

We didn’t want to change that this time. This initiative is a couple of hours old. Please give us a little patience and give us a quarter to experience the reaction from the market place and we will give you greater color and an update on our next earnings call.

That takes me to the new value -- I’m sorry, that takes me to the new brand. The new value propositions are highlighted in our new brand and our advertising campaign. They started to run this morning.

Now, with regard to our new brand, our goal is to help independent-minded investors and traders drive with confidence. That’s why our new tagline is the independent spirit. The independent spirit basically means that we believe every client or every retail investor should have the independence to choose what they want. That’s why we will provide them with a full spectrum of customization and choice.

If you want a totally do it yourself electronic experience, we’re providing that for you. If you want a relationship with a branch, we’re providing that for you. If you want a customized asset allocation portfolio service, we’re providing it for you. If you want to give your money to somebody else to manage, that’s your choice -- we provide that for you.

So across the entire board, we’re trying to do what the individual investor wants, and serve them in a way that we believe accomplishes this entire concept when they tell us “do what you tell us you’re going to do, because that’s one of the reasons why we come to you�? and we want to do that for the active trader, the long-term investor, and the independent advisor.

Now, if you’ve had a chance to see any of the ads so far, you’ll see that we are going with Sam Waterston. Now, we think that Sam is an excellent personification of the independent spirit. He has already resonated well with long-term investor money, and we have run test that demonstrate that he will play well with the active trader community. So we feel good about Sam and we feel great about how he works into and represents TD Ameritrade as part of the independent spirit.

Now, this weekend, we re-branded our branches, our facilities and our new website, and if you haven’t had a chance, I would actually encourage you to go to the new website. I think we’ve done a really good job on that, but I’d love to hear back from you on it. Again, the entire thing was done with a focus for our clients in mind.

Now, before I turn it over to Randy, a couple of things with regard to what’s going on, corporate news and a couple of things with regard to what’s going on with me personally.

We announced this morning in a press release that I am staying on with a five-year contract. I am very excited with that. The details are in that press release, but I’d ask you to just keep in mind that other than my actual base salary, 100% of every dime that I earn from TD Ameritrade will be based on the performance of TD Ameritrade. Two-thirds of all of my competition compensation will be equity based. Our executive management also will be getting a greater percentage of their compensation in equity, and other than their base salaries, 100% of all of their other compensation will also be performance-based.

We absolutely believe we are totally aligned with our shareholders. If our shareholders do well, we will do well.

Now, along that line, from a personal perspective, 90% of my family’s net worth is in TD Ameritrade. I believe it’s prudent at this time in my life for my family to restructure our overall estate plan. We need greater diversification, and that diversification primarily will be focused in the fixed income arena.

We will be selling in an effort to do that. My family will still have about 60% of our net worth in TD Ameritrade going forward, not counting -- not counting -- any of the equity that I will be getting with my new contract.

Now, some of my senior executives are in exactly the same boat, so what’s going to happen is altogether, we will be selling probably between 5 to 6 million shares over the span of the next couple of weeks. Recognize all we’re doing is estate planning and providing diversification, and as I said, in my case, the vast majority of all that will be going into fixed income.

Now, with regard to the status of TDBFG, under the terms of the shareholder agreement, we have an obligation to buy back our stock to offset dilution that takes place from the sale of options. That obligation is actually postponed until TD completes their 10B51 purchases, which they’re in the process of doing right now. So we will address this later in the fall.

With regard to TD themselves, they are currently committed to buying back 15 million shares. They have already bought back better than half of that, and altogether so far they’re currently at 205 million shares, and they have 34%, or almost 34% ownership in TD Ameritrade.

You also saw I believe in the press release that Phyllis Esposito is going to be leaving to pursue other interests in financial services, and Bill Murray will be taking over for her as head of our investor relations group and our gov reg functions.

I wanted to take this moment to tell Phyllis thank you very, very much for everything you’ve done for us, and we wish you all the best going forward, and anything we can do to help you, we will do to help you.

With that, let me turn it over to Randy.

Randy MacDonald

Thanks, Joe. I’m going to cover the following topics, and I’ll go through them pretty quickly. I’ll go through the impact of the pricing change, the revenue opportunity update, I’ll then go through our asset-based revenues as they compare the outlook. I’ll give you an update on the operating expense synergies, go through the outlook, updating that, talk about some recent growth trends. We provided you with some sensitivity on certain growth factors, and lastly, I’ll talk about non-GAAP EPS.

Before I get started with that, refer you to slide 11, it’s the Deal Immediately Accretive, Record Asset-Based Revenue slide. I want to make three points. The first point is on EPS. TD Waterhouse deal was immediately accretive, so when you look at the same quarter last year EPS, excluding Knight, it was $0.17, and this quarter it’s $0.22 excluding Knight, or 29% accretive. The second point is that the $0.22 EPS excluding Knight, that’s the second best quarter in the firm’s history, and excluding about $20 million of non-recurring deal related expenses, EPS would have been $0.02 higher, and that would have been a record.

The third point that I want to make is the current mix of business is a record for the firm, so the same quarter last year asset-based revenues were only 39% of revenues. This quarter, they’re 50%. So that’s a 28% increase, and that’s even considering that we saw a 12% increase in activity rates versus the December quarter. Then, of course, we had all those records that Joe talked about.

With regard to the impact of our new pricing, I need to ground everyone in the historical commission rates, so let’s turn to slide 12, called the Blended Commission Rates.

The legacy Ameritrade advertised commission rate was $10.99. however, the actual rate average was $13.03, and that’s because it includes both payment for order flow, and the additional $0.75 per contract that we get for each options trade.

Now, although the commission per trade at TD Waterhouse legacy is much higher at $17.04, its percentage of the overall revenues though is significantly lower, so the new blended commission rate of TD Ameritrade was $14.04 for the March quarter, and that was within our guidance. So the new blended rate is only $1.00 above the Ameritrade legacy rate of $13.03.

Moving down to the next table, when we look forward, we expect the midpoint of the June quarter commission rate to be about $13.85 per trade. That’s because the new value propositions begin to take effect today, which is one month into the June quarter.

The September quarter, that will be the first full quarter with the new pricing structure in place, so the rate drops to $13.15. Now, ultimately we expect the midpoint of the commission rate per trade to be approximately $13.10 for fiscal year ’07. So that’s almost a $1.00 decrease as a result of the new pricing.

Given the number of trades expected, the impact for the balance of fiscal year ’06 is about $16 million, and about $55 million in fiscal year ’07. You then add to that the maintenance fees being suspended. Maintenance fees have been running about $12 million per quarter, so the total impact to the balance of fiscal year ’06 is about $40 million, or $0.04 of EPS. In fiscal year ’07, it’s about $102 million, or $0.10 EPS.

Now, as Joe already mentioned, this does not assume any benefit from the improvement coming from our new value-propositions.

With regard to revenue opportunities, let’s take a look at slide 13, and I think what I need to do is ground you in what first is the horizontal axis. So the first two columns, that’s at the time of the deal when we announced the deal in June. The first column is the pro forma last 12 months, March ’05, without the synergies, and then the next column is with the synergies.

The third and fourth columns, those are both March. The first one is actual. The second one we adjusted for two things. One was for TD Waterhouse legacy for June, for January, rather, and then the full impact of the January and the March Fed rate moves. Then, of course, the last column is the midpoint of fiscal year ’07.

Then going down the rows, we start with investable assets in billions, we have the spread on investable assets, the net interest margin in dollars, then the increases in your net interest margin, and then the next two rows what we do is we take that change and we break it down between the change in balance and the change in rates, and the rate is labeled revenue opportunity. Of course, the next one is the percentage improvement of rates. That’s over the original goal.

Now, for the March quarter adjusted column, we’ve achieved approximately $314 million of annualized revenue opportunities. That’s already 57% ahead of the $200 million we estimated at the deal announcement.

Now, the increase of $114 million is coming from increased spreads of 3.7% versus our goal of 3.43%, and this is mostly due to the recent Fed increases. For the fiscal year ’07 column, we expect $328 million, or another $14 million of spread increase over the next six quarters, as we fully implement our extension strategy for the MMDA balances, and that’s 64% better than the original goal.

In the fiscal year ’07 column, there’s another approximately $88 million of increase that has come from -- it’s the addition of stock borrow balances plus increased balances on investable assets. Then finally, at the bottom, that table at the bottom, what that does is that summarizes our significant client cash and money market balances, which is over $36 billion.

Now, let me go and review some of the highlights of our record net revenues. First thing I wanted to mention is revenue more than doubled to $497 million from $233 million in same quarter last year, but that was principally as a result of the TD Waterhouse acquisition. So rather than focus on historical absolute dollar comparisons, I thought we’d spend time on focusing on the variance from guidance and then talk about our expectations for future quarters.

Now, the transaction revenue increased $32 million over guidance, but that was almost entirely due to the higher trading activity.

We also had a reclassification on our income statement. Our other revenue guidance formerly included mutual fund revenue, and we’ve now reclassified mutual fund revenue out of other and into money market and other mutual funds, the income. So let’s start now with asset-based revenues, and that’s slide 14, and we’ll compare that to our outlook.

The asset-based revenue was $251 million for the quarter, and it’s comprised of two things; the first is the net interest margin of $219 million, and then the fees of $32 million. Now, the net interest revenue was $219 million, or $11 million above guidance, and that was primarily due to two 25 basis rate increases by the Fed. The first one was January 31st. The second one was March 28th. But we only felt the effects of the first increase and that, of course, was only for two-thirds of the quarter.

Then we have money market and other mutual funds fees, and that is comprised primarily of the fees from the money market product and the 12b1 fees from the mutual fund product. That was $4 million higher than the midpoint in the outlook, and that was due almost entirely to higher balances.

Other revenue, the other revenue was $25 million. That was above guidance. This is primarily due to increased maintenance and transfer fees, plus TD Waterhouse owned two seats on the NYSE, and we received stock and cash when NYSE went public.

So going forward, we expect other revenue in the future quarters to be approximately $13 million to $15 million.

Now talking about expenses when compared to the outlook, really, all the expenses were very, very close to the midpoint of the outlook except interest, and interest was above guidance by $5 million. That was due to $300 million of debt because TD Waterhouse brought non-cash capital, and we paid $200 million of that debt so far.

Now, turning to slide 15, which is the integration update. In addition to the brand and value proposition launch, we’ve already, in the first 65 days, we’ve already reduced our head count by about 300 people, and we have termination agreements with another 300. We’ve already shut down the Jersey City call centre, and transfer the call centre operations to Fort Worth in Omaha. We’ve closed approximately 44 branches, but we deployed those resources to potentially higher earnings geographic destinations. So at this point, we have 103 total branches.

We’ve also begun routing all the TD Waterhouse client orders through the Ameritrade routing technology so they get better execution.

This weekend, we had the introducing broker-dealer conversion. What that means is that we converted the two websites from two entry doors to just one, so both client bases can now also utilize the branch infrastructure, and we’ve combined the RIA sales force.

So net net, we’re on track to achieve our expense before advertising synergies of $328 million, because this quarter included $20 million of deal related costs, and only two-thirds of the quarter included TD Waterhouse legacy. We’ll begin tracking those detailed expense before advertising synergies starting with the June quarter.

So let’s go and take a look at slide 16. That’s the outlook bridge for 2006. So our new outlook statement, which reflects the updated guidance for 2006 and 2007, can be found on our corporate website, amtd.com. By the way, that’s a new site as well. That got launched this weekend, and good job to everybody on that one.

I would like to briefly review the changes we’ve made. We’re increasing guidance from a midpoint of $0.91 to $0.94. So we start with the previous midpoint of $0.91, the March quarter results, they’re $0.05 better. We had a $0.02 benefit for the balance of the year from those two Fed rate changes that I mentioned that occurred in the March quarter.

We also experience lower tax rates, and we overestimated that diluted shares outstanding. That’s for another $0.02.

We then reflect the $0.04 due to the impact in the new pricing, and then finally, we’re increasing our technology spend for the balance of the year by about $20 million, and that’s to help fuel accelerated growth initiatives, and that’s another $0.02.

So the net result is the midpoint of $0.94, and of course, we have not yet quantified the positive impact of our new value propositions on growth, higher yield, and retention.

So now let’s look at 2007 on slide 17. Previously, the midpoint was $1.15, so we start with the full-year impact from those Fed rate increases in the March quarter, that’s $0.04, then we have the impact from the change in the pricing of $0.10. We have that same technology spend I just mentioned, but that continues only for the first half of fiscal year ’07, so that doesn’t affect the achievement of our expense before amortizing synergies, and then we have other of $0.01.

So the net result is a midpoint of $1.06, and again, we’ve not yet quantified the positive impact of the new value propositions.

In turning to slide 18, I want to talk a little bit about some recent growth trends, and Joe described some benefits we may see from new value propositions, and we would anticipate improvement in our acquisition of new accounts, improved retention, incremental asset-based revenues, and higher-yield, and incremental trading revenues, with more of our client trades executed at TD Ameritrade, and we’ve not yet included any forecast from those benefits, until we have some better historical data to support an increase in guidance.

However, when you look at the March results versus previous guidance, they were pretty encouraging, so when you look at new accounts, they were better than expected by 46%. The net new accounts were better than expected over nine-fold. The qualified accounts were better by 53,000 accounts. The investable assets were better by $1.1 billion. The yield on investable assets was higher by 13 basis points, and the trades were 18 percent higher than guidance. By the way, this was all with our old value propositions.

So in the last column, those are growth assumptions for the next six quarters. Now, in all cases, they were below the growth we saw in the March quarter. Going forward, our outlook includes modest growth, so it will be interesting to see how these new value propositions impact these numbers.

Let’s go to the next stage, and we thought what we’d do is give you some key metrics, and the sensitivity on those key metrics. We’ve selected four drivers of growth, and what we did is we asked ourselves, “how much growth does that driver need to see a $25 million increase in revenues?�? So for new accounts, it would be 69,000. For new trades, it would be 7,500 trades per day, or about a 3% increase over the March quarter. For investable assets, it would be an increase of slightly more than 2.5%, more assets than we currently have. For client retention, it would mean reducing lost accounts, equal to a little over 1% of our total accounts.

So when we compare these revenue driver metrics to the March quarter, we believe this is very achievable, especially in light of the new value propositions announced today.

Let’s turn to the non-GAAP EPS slide, slide 20. This is another important measure of our financial performance, and our ability to generate cash. It’s also a guidepost for what EPS might look like once the debt is repaid.

Now, we calculate this metric using GAAP EPS, and then remove three items; the non-cash amortization of acquire intangibles, the debt financing, and then any unusual items, like Knight. In fiscal year ’07, the non-GAAP EPS is expected to exceed GAAP EPS by $0.16, or $160 million of pre-tax earnings.

Now, we’re currently focused on paying down debt. However, we’re assessing the final level of outstanding debt, and our goal is investment grade, and our initial indications are that this would allow for about $1 billion of outstanding debt. Our $1.9 billion of debt is trading close to or above par. The interest rate on our debt is very attractive. It’s averaging less than 6.25% for the quarter, and cash flow remains on target to begin pay down in 2006.

So let’s wrap this up. Slide 21, let me just close by saying it was a great quarter. We surpassed expectations in almost every area. The TD Waterhouse deal was immediately accretive. We had another record quarter. We’re delivering on our revenue and expense goals. We’ve launched the new client value props. The new brand, the new advertising campaign, and we locked Joe in for another five years. Before we go to Q&A, and before you all ask, Joe already told me that he’s not going to commit to whether that would be the spring or the summer of 2011.

Operator, at this time, we’re going to take questions, so if you’d handle that, please?

Question-and-Answer Session

Operator

Thank you. The question and answer session will be conducted electronically. (Operator Instructions)

Our first question will come from Patrick Pinschmidt with Merrill Lynch.

Patrick Pinschmidt - Merrill Lynch

Good morning, guys. Okay, I guess the first question is on the money market deposit accounts, and looking at the projected rate earned for 2007, it’s 3.17 to 3.27. That’s unchanged from your last guidance. I was just wondering, is this going to be sensitive at all to some of the rate increases, or there’s just a lag there? How should we understand that line?

Randy MacDonald

Those are really fees, so those are negotiated fees, so they are not rate-sensitive. They’re like the 12b1 fees.

Patrick Pinschmidt - Merrill Lynch

The MMDA net rate earned?

Randy MacDonald

No, you said money market.

Patrick Pinschmidt - Merrill Lynch

Oh, sorry, I meant the MMDA.

Randy MacDonald

Oh, the MMDA absolutely is tied to that, yes, Patrick. Now, the reason I think you’re asking that question is that rate is the net rate, so that reflects us also assuming that we would share some of those rate increases with clients, so that is where the extension strategy would take place, so we do expect those rates to get better, but of course, you do have then the bank is paying the client’s directly, so what we get is the net rate. So rate earned by the bank less what they have to pay clients, less the cost of running the bank, that’s what we get net and that’s what we’re showing net.

Patrick Pinschmidt - Merrill Lynch

Okay, and then in terms of your projections for the sweep, initially that was 15%. You scaled it back to zero. Has your thinking changed there?

Randy MacDonald

No, it’s not changed a lot, but what we are seeing is more and more people are rate sensitive. We have seen some people move their MMDA into money market, elect a money market fund, but generally, we’re still planning on having more funds going to the sweeps.

Patrick Pinschmidt - Merrill Lynch

But you don’t have a target rate, like 10% or anything like that?

Randy MacDonald

No, I mean, this is part of pricing in the market place. You have to be very sensitive. You don’t want to have clients leave because they’re not getting enough money on a high cash balance, so we have to be rate sensitive. It’s part of our pricing and our value prop.

Patrick Pinschmidt - Merrill Lynch

Okay, and then finally on expense guidance for ’07, can you help me flesh out some of the changes in the different line items you mentioned, the higher tech spending, but I was looking at particularly professional services, that was up about $15 million. Does that reflect some of the tech spending? Is there something going on?

Randy MacDonald

Yeah, that’s exactly. The professional is when we go out and hire contractors to help us build widgets and so there, you don’t have to hire them full-time. Plus the skills are somewhat unique that you don’t necessarily need to hire someone in who’s got JavaScript experience when you don’t need to keep them long term. So we outsource that, and that’s the line where the consultants would show up, is professional services. So you’re exactly right, Patrick.

Patrick Pinschmidt - Merrill Lynch

Okay, great, thank you very much.

Operator

Thank you. Next from Citigroup, Prashant Bhatia has our next question.

Prashant Bhatia - Citigroup

Hi, I just wanted to get an update on the back-office integration. How is that going on the retail brokerage side, and if we were to get a summer slowdown, could you accelerate the integration sooner as opposed to I think January of ’07 when you were targeting?

Randy MacDonald

The answer is it wouldn’t accelerate because of seasonal conditions. It’s really dependent on programmers getting projects completed. So I’m still thinking it’s around Christmas time, or right thereafter.

Prashant Bhatia - Citigroup

Okay, and also, you broke out the $32 billion in mutual fund balances that are earning I guess 16 basis points, what exactly is that?

Randy MacDonald

Those are primarily 12B1 fees. We’re selling mutual funds and we’re getting a sales commission.

Prashant Bhatia - Citigroup

Okay, and also, when you I guess came up with the new pricing, part of it was to stem some attrition, can you give us a feel for what you were seeing in terms of the reasons clients were leaving Ameritrade? Also, the reasons clients were leaving TD? How much of that do you think was based on price versus products, services or other things?

Joe Moglia

Prashant, the number one reason that we had why clients were leaving us was because they wanted to consolidate their business elsewhere. So an individual might have felt really good about their active trader relationship with us, but not as good about some of the other parts of the relationship with us.

From a TD perspective, they were pleased with what they had from a long-term investor perspective, but not as pleased with what they may have had from an active trader perspective.

So consequently, the number one reason why client drop was to try to consolidate their assets at another firm that gave them the best of all the worlds that they were interested in. We believe we are addressing that now.

The second reason was price, and that was mostly for the lower-balanced accounts.

Prashant Bhatia - Citigroup

Okay, great, and just finally, your interest expense is going up, I guess, in ’07, but you said you were paying down debt, so I just wanted to understand why that would happen.

Joe Moglia

The reason why the interest rate has gone up is because it’s a variable interest rate, so with the movements of the Fed going up, that meant the interest on our borrowings were going up. Now, altogether we borrowed $1.9 billion. Remember, Randy had addressed earlier that there were incremental non-cash capital in the broker deal when TD Waterhouse came over to us. That was about $300 million. That was TD’s money. So that gave us $2.2 billion worth of debt. We’ve already paid TD back $200 million of it. We’re down to $2 billion, so we are paying down our debt.

The borrowings is the $1.9 billion, and the rate of that has gone up because interest rates have gone up.

Prashant Bhatia - Citigroup

Okay, great, thank you.

Operator

We’ll go next to Rich Repetto with Sandler O’Neill.

Rich Repetto - Sandler O’Neill and Partners

Hi, guys. The first question is, Randy, I was hopping around here a little bit, but just trying to get these growth initiatives, because the expense line items, you’re at negative $0.03 impact in ’07 on the expense side. Could you detail those a little bit more?

Randy MacDonald

Yes, we had rounding of a penny. I mean, that literally was just sort of trying to be accurate, so it’s sort of cats and dogs. The other two cents, Rich, are that professional services line. Those are the people that we’ve gone out and hired in technology. It’s about $20 million in ’07, but it’s the first half of ’07, not the second half of ’07, so you can think of it as a camel’s hump. We have a lot of projects going on through right after Christmas, and then those people, because they’re consultants, we just don’t renew the contracts.

Rich Repetto - Sandler O’Neill and Partners

And these weren’t foreseen before, I guess?

Randy MacDonald

Right, we’ve decided to do some projects that we think are going to fuel some growth initiatives. Go ahead, Joe.

Joe Moglia

Rich, if you’ll remember, we talked about our philosophy for ’06 to ’08, and that we would then, and the real key for us being successful with regards to the integration, was positioning ourselves for how we would look like going into 2008, and if we needed to make any incremental decisions or investments right now that helped us do that, we would do it.

So for example, the increase in the technology spend is to provide us with what we believe will be better value propositions down the road. So those are expected to be increased for the ‘06/’07 timeframe. Frankly, we would expect those to go away in 2008.

Rich Repetto - Sandler O’Neill and Partners

Okay, and then I guess the next question is on TD, the earlier question was interesting about the earning of 16 basis points on the mutual fund revenue. I guess now that you’ve had a couple of months at TD, can you tell us what the net flows look like there on a monthly basis and what the return on client assets at TD, or even the net flows of the company for the quarter, I guess.

Randy MacDonald

It’s kind of hard to do that just yet. I’m anticipating sometime this year we’re going to have their historical databases loaded in and have much better insight into actual flows. Part of some of the technology spend you see is exactly that. So unfortunately, stay tuned. I anticipate that information being available to us and then to you over the next few quarters.

Rich Repetto - Sandler O’Neill and Partners

So even say March, we don’t have a good figure on what the net money that TD brought in?

Randy MacDonald

I don’t.

Rich Repetto - Sandler O’Neill and Partners

Okay.

Joe Moglia

But we’ll take a closer look at that, Rich, and if we have anything specific, we will get back to you on it.

Randy MacDonald

Yes.

Rich Repetto - Sandler O’Neill and Partners

Okay, and I guess one last thing, no tax rate for ’07 either, is that just because it’s a little bit less clear with the TD integration, or did I miss it?

Randy MacDonald

Yes, you’re exactly right, and with all the branches in all the different states, it is definitely a different state tax profile, and you know, we’re still getting our arms around that, but I think the rate that we have in there is probably our best guess at this point.

Rich Repetto - Sandler O’Neill and Partners

I guess one other. Joe, you made a pretty good emphasis on how much time and effort and the difficult decision, or how much the different options you went through to come up with a straight $9.99, you know, some might say that may or may not help with account growth in that some people have some teaser rates out there that are lower, and that they may be getting left off the hook as far as e-trade and Schwab by you staying at sort of a flat $9.99. Any comment there?

Joe Moglia

I think one of the things that our clients told us is that they don’t like teaser rates. They don’t like you to come in with one rate and then change that later on. They told us they don’t like you coming in and, you know, they do X amount of trades this month and next month, they do a few less because they’re on vacation and their rates changes. Those are the things that people have told us.

Having said that, literally, there are a lot of people to look at this and come to different conclusions. Our job, we felt, was to balance our growth in market share with our balance in long-term profitability. That’s what we were trying to do. On a risk reward basis, we think this was the best decision that we could have made at this time.

Rich, one other thing, because I didn’t want to avoid this. When you asked the question about the increase in expenses, you said “now had you not anticipated that�??

We didn’t answer that specifically. That request for the incremental expenses, so we could do more projects, and these are all client-oriented projects, was only made several weeks ago and it was approved several weeks ago, so they weren’t anticipated until they were asked for. We told our people, you will be held accountable for the roll-out of the value propositions and the client experiences that take place here from now ad infinitum, so if there’s something you need to really provide a great client experience, you ask for it now. That’s basically what happened.

Randy MacDonald

Joe, just to make sure we put an emphasis, that was just the first six months of ’07, Rich, that $0.02, the $20 million.

Rich Repetto - Sandler O’Neill and Partners

No, I understand, but I would think that it would be fair if they’re going to ask for the money to at least ask for, well, I guess it isn’t fair because you don’t know when the return on that money is going to occur. Maybe not in ’07, but anyway, congratulations, Joe, on the un milone contract there.

Joe Moglia

Thank you very much, Rich.

Rich Repetto - Sandler O’Neill and Partners

I should say duce milone. Thank you.

Operator

Thank you. We’ll go next to Mike Vinciquerra with Raymond James and Associates.

Mike Vinciquerra - Raymond James & Associates

Good morning. I appreciate all the extra detail this morning, guys, a lot of stuff going on here. Joe, when you look at your opportunities for outside, you’ve calculated no growth here at all for accounts or assets, but when you look across the board, it is regional fund fees, is it additional cash, is it Amerivest kind of wrap product? Where do you see the real opportunity when you look at what’s most right for it?

Joe Moglia

Well, I think literally I think our really making Amerivest the best portfolio allocation service in the market place I believe will really make a difference. That will be one of our goals. Within the long-term investor space, you’ve got to be able to provide them with a full suite of solutions that the client cares about, but we also need to be really effective, we need to have something that differentiates us, and we think that does.

Standing behind the independent advisors is a very, very big deal. It helps them with regard to the growth of their overall business. Then, in the active trader space, frankly, it really is, I know for the last two or three years, every time we have a call we talk about price, and if I were in your shoes, I would be talking about it as well, and frankly, we do it as well. But we’re really trying to listen to what the clients care about, and if it were only price, what we would do is we would cut a lot of our costs in many, many other areas, and we’d come up with a lower price, and we thought that was the case.

Now, I don’t want to see a price war in the industry, but having said that, if there’s going to be a price war, I’d rather be at the firm that has the best operating margins in the industry.

But that’s not what anybody’s telling us, Mike. What they’re telling us is it’s a combination of all these things. That’s why we are so focused away from the price to make sure that if you come to us as a client, you’re expecting a certain level of service, products, etc. We’re going to give you that. We want to surprise you as a client on the upside. We want to make you feel that you legitimately have a great relationship with us.

So at the end of the day, what we’re really going to look at is we think that will then result in a positive response with regard to asset growth, account growth, better retention, and just more overall business, across the current client base we have. We can make a lot of money just by the current client base doing more business with us.

Now, Mike, did that answer your question?

Mike Vinciquerra - Raymond James & Associates

No, it does. I was just kind of curious where you thought the asset flows, what categories it seemed to you that you had the most opportunity with the mutual fund screener or the Waterhouse branch of the table, or what not.

Joe Moglia

You know, the reality is every client cares about something different, so the mutual fund screener, we think is a great product. Away from the mutual fund screener, this market motion detector that we’re rolling out now, we think is a great product. Different clients sort of care about different things, and you’ve got to have enough for them that we’re really trying to serve their needs, and that’s what’s going on.

So you get back even to Rich’s question, when he said how do you know where the real return’s going to come from? The truth is when you’re breaking it down by specific offering, the truth, you really don’t know. Now, everybody could put numbers on a piece of paper. But you don’t know until you’ve had a chance to see the response in action, and that’s sort of what we’re looking at.

Mike Vinciquerra - Raymond James & Associates

That’s fair. Thank you very much. I wanted to ask a question just on your stock sale, Joe. Is it even possible for you to turn around and do a sale directly to TD Waterhouse to avoid commission costs and keep it off the market?

Joe Moglia

The answer is as long as TD -- TD, not TD Waterhouse -- as long as TD is in the marketplace themselves with the 10b5-1 plan. Their responsibility is to buy stock in the open market, so the answer there is no, so we are just going to do this in the open markets ourselves.

Mike Vinciquerra - Raymond James & Associates

Okay, and then finally, Randy, on the debt itself, I presume that you’re leading the rate variables so that you’re essentially match-funded, so to speak, with the yields on the asset side of things. There’s no desire at this point to try to hedge and lock in a rate?

Randy MacDonald

That’s correct at this point, although you know, we’re certainly looking at the futures market and asking ourselves whether there is an opportunity to lock in the right side of our balance sheet for some amount, so that is an active discussion that we’re having internally.

Mike Vinciquerra - Raymond James & Associates

Thanks very much.

Operator

Thank you. We’ll go next to Howard Chen with Credit Suisse.

Howard Chen - Credit Suisse

Good morning, Joe, good morning, Randy. Joe, you spoke earlier in your comments to the market share opportunity that you see versus the full commission firms. I know it’s obviously early with regard to the new value proposition, but more curious about what early returns you may have experienced under the combined brand, and you know, one of your competitors spoke positively with regard to market share wins from the full commission firms here in the last couple of months.

Joe Moglia

Howard, what’s the question?

Howard Chen - Credit Suisse

So the question is I’m just more curious about early returns. I think you’ve got some experience outside the new value proposition, in terms of attaching the full commission.

Joe Moglia

Right, well, we have always experience positive returns from the full commission firms, but the fact of the matter is at Legacy Ameritrade, we were never attacking the full commission firms. We were focused in the active trader market in our space. Now, the real object, along with TD Waterhouse, now is TD Ameritrade, we are aggressively going after the long-term investor and the independent advisor.

So now that we are doing that, we’re just going to lever the same core competencies we have with the active trader space with the same focus on the long-term investor and the needs of the long-term investor, plus to differentiate over Amerivest to be able to do that.

So I can’t imagine how we couldn’t do that and combine that with the Waterhouse sales force, investment centers, and branches without having a far more positive impact on the full commercial firms than we’ve had in the past.

The priority reason for that is remember, we’re going after the mass affluent, and the full commission firms are absolutely focused, no matter what they say, on the high net worth client. They can’t get to the mass affluent clients. We’re going to focus on that and we’re going to do a better product and service offering than we’ve ever had in the past.

Howard Chen - Credit Suisse

Okay, thanks. Randy, sorry if I missed this in the prepared remarks, but can you speak to the product mix this quarter? Clearly average commission per trade was fairly healthy.

Randy MacDonald

Can you ask that question more specifically? When you say…

Howard Chen - Credit Suisse

Options versus equities, and -- what I’m trying to get at is what was the options versus equities mix this quarter and is any of that baked into the forward average commission per trade guidance?

Randy MacDonald

The answer is the options business is up again this quarter, but again, being conservative, we used more the historical ratio.

Howard Chen - Credit Suisse

In the forward guidance?

Randy MacDonald

In the forward guidance, we’ve been probably using more the historical rate rather than recent trends, but the recent trend, pretty much every quarter now for about three or four quarters, we’ve seen a healthy increase in the ratio of options trades.

Howard Chen - Credit Suisse

Okay, and then on slide 19, that $100 million incremental revenue sensitivity that you’re speaking to, I know it’s early, but what time frame does management get comfortable baking in the incremental revenues from those assets or the new accounts and then places it two quarters, four quarters, how should we think about that?

Randy MacDonald

Yes, I think four quarters would be kind of far out, but you know, whether it’s next quarter or the quarter after, I can’t tell you. One of the earlier questions was more about flows on the Waterhouse side. I think we have our arms the flows on the Ameritrade side. I’d like to see some of our internal flow funds, or flow of funds before we really start to bake anything in, but we do use our historical models to create that guidance, so if we do see trends like the options, the percentage of options going up, we use that. That keeps bumping up as it bumps up, and that would be true for balances as well.

March was very encouraging -- $1.1 billion above our guidance. That was a pretty encouraging number to me, but that’s very short-term, and I’d hate to take 65 days and annualize it.

Howard Chen - Credit Suisse

I hear you. Following up on the incremental growth investment questions, if there’s more incremental growth investment from here, how should we think about that, gross of incremental cost savings or net of incremental cost savings? I.E., do you need to find more cost savings to invest? Do you find more investable ideas internally?

Joe Moglia

Howard, I think it would be a fair assumption that any increments to our cost structure over the span of the integration will be going away at the end of the integration. That’s probably a good rule of thumb for you to take a look at. As I’ve said before, we think we need to spend a little bit more to make us stronger coming out, we will. But remember, we are also committed to, as of now, still saying that we can reach that $330 million fixed cost run rate, and that’s still our objective.

So we’ll be very clear in terms of our transparency as far as that goes. We increased our costs. You’ll understand why. If it's meant for the integration, they would go away at the end of the integration.

Howard Chen - Credit Suisse

Thanks, and then one final one for me. The five bullets on your integration update slide, are those initiatives all on pace, ahead, or below what you originally expected?

Randy MacDonald

On pace.

Howard Chen - Credit Suisse

Okay, great, thanks so much guys.

Operator

We’ll go next to Michael Hecht with Banc of America.

Michael Hecht - Banc of America

Good morning, guys. Quick question, did you guys where the account attrition is running today on the TD Waterhouse side? It seems like it’s running low, given where the balances are. I just wanted to clarify when the actual account conversion from TD Waterhouse to Ameritrade will take place? I’m just trying to get a sense of what kind of key dates we should be looking out for here.

Randy MacDonald

Well, you can see by the combined numbers, we’re not breaking out the historical numbers, but certainly much better than guidance, and the conversion of the Waterhouse, the back-office conversion that was mentioned earlier, that’s the clearing broker switching over. They clear through ADP. That will happen around Christmas or the first of the year.

Michael Hecht - Banc of America

Okay, great. I also noted on the website this morning, with the new pricing strategy, you have an offer out there to get 50 free trades and $100 in cash for opening a new account between now and June 30th. I’m just wondering what’s the impact of that offer and the outlook statement? Could you talk a little bit about your experience with some of those teaser offers in the past and how sticky those accounts end of being?

Joe Moglia

I think that that’s a fair question, Mike. Now, we don’t give color on individual offerings that we hand out because frankly, the ones that we really like are the ones that work and the ones that work are the ones we continue to do. The ones we’re not crazy about are the ones that don’t work and they’re the ones we need to change or eliminate.

So we don’t talk about individual ones. Some work, some don’t. I just told you how we’ll handle those.

Michael Hecht - Banc of America

Okay. Can you talk also about your price on margin debit balances and how those are changing this morning with the new value proposition? I seem to remember that TD Waterhouse schedule being a bit higher, so I’m just wondering if they’re under one schedule now, and if you can comment on part of that as part of the competitive environment you’re seeing for the pricing on margin debit balance there and whether you’re feeling any pressure to lower pricing there?

Randy MacDonald

Pricing is something that we’ve looked at in conjunction with the commission price, so when Joe refers to the pricing change, it’s all in. The value proposition is not just the commission rate. There is harmonization of the rate, so there is one rate schedule. I think we’ve been fairly competitive.

One thing we’ve seen over time with all of our tests, all of our surveys, the labs that Joe mentioned, is there’s generally been insensitivity to rates, except when you get to higher balances, and we do have tiered rate structure there that I think is very competitive.

So it’s part of what we look at when we look at client retention and the value proposition is absolutely important, but probably relative to everything else, less important than some of the other things.

Michael Hecht - Banc of America

Okay. Can you also talk about how this morning’s pricing changes may be impacting the Izone offer you guys have out there, the $5 trade offer?

Joe Moglia

It won’t have any impact on the Izone offer, so anybody, frankly, that already has a lower price than the $9.99, gets that grandfathered.

Michael Hecht - Banc of America

Now, can you give us any color on how that offer has been going, as far as mix goes or just how receptive clients have been?

Joe Moglia

Again, Mike, it goes well, but it’s still small. So frankly, we like that offering out there, but it’s a very, very small niche in the marketplace. But it’s been positive, that’s the reason why it’s still out there.

Michael Hecht - Banc of America

Okay, sorry, I just have a couple more here. You also mentioned Amerivest as part of the new value proposition, I’m just wondering, any changes in Amerivest in terms of pricing? Can you talk at all about how much client assets are in Amerivest now and the average rate you’re running on those?

Joe Moglia

Right. We don’t have any real changes as of now as far as Amerivest goes. We continue to be at 35 basis points if you’re over $100,000 and 50 basis points if you’re less than that, number one.

Number two, the numbers are still small enough that we don’t want to disclose that, but again, I am pleased with the progress being made in Amerivest, and I think now that our company’s TD Ameritrade and that we have the sales force behind it, we should be doing even better than that in the future. But it’s not something we break out or be too aggressive about talking about, but you know how important it is to us, and at some point, I’ll be delighted to be able to do that, but we’re not there now.

Michael Hecht - Banc of America

Okay, and can you talk about how much in assets you have in the RAA business today, and how many RAA clients you have as a combined firm?

Joe Moglia

Yes, in RAA we had about $55 billion, and I think the clients -- is it 4,000?

Randy MacDonald

A little over four, yes.

Joe Moglia

A little over 4,000.

Randy MacDonald

Going back to Amerivest, in terms of modest growth, the emphasis is there. I mean, we don’t have a whole lot built in for Amerivest ramping up.

Michael Hecht - Banc of America

Okay, my last question, I’m just curious what the average MMDA rate your customer earns was in the quarter and where you’re kind of assuming that goes over time?

Randy MacDonald

We haven’t disclosed that. The net rate that we show you is the only thing we’ve been showing the public, but we’ll think about that in the future.

Michael Hecht - Banc of America

Is that a rate that we should be able to get out on your website or something?

Randy MacDonald

Yes, they’re the advertised rates, but obviously the advertised rates and the negotiated rates are two different things, there’s tiering, so what you don’t have is the mix of cash. Obviously someone with $100,000 of cash gets a very different rate than someone with $50 in cash. Unfortunately, we don’t show you that mix.

Michael Hecht - Banc of America

Just generally, I mean, I would guess the MMDA rate is higher than what you pay on free credits, but it’s probably somewhat lower than what someone’s getting in the money fund?

Randy MacDonald

Naturally, yes, absolutely, Michael.

Michael Hecht - Banc of America

Okay, great. Thanks, guys.

Operator

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

Matt Snowling - Friedman, Billings, Ramsey

Good morning. I promise to be quick here. I’m just wondering, as you move more towards kind of an asset-gathering model, why the flat pricing and commission versus maybe a tier structure where you can kind of incent your high balance customers?

Joe Moglia

Because the objective was to figure out a way we could maximize our overall market share growth with our overall profitability, and we thought that one price across the board worked. But I’d go back to, Matt, what we were saying before. Our clients said to us, be simple, be fair, be transparent, and we thought part of that simplicity and transparency, that one simple price across the board frankly worked very nicely for us three years ago when we actually increased our prices, so we felt we had a pretty good track record. We felt that worked, and moving to the one price fits all is part of our brand. Clients helped us, we’re trying to give the clients what want -- simple, transparent, up front, no games, that’s your price, period.

Matt Snowling - Friedman, Billings, Ramsey

Okay, fair enough. One quick question then, can you give us the timing of when you plan on rebranding the branches, maybe retooling or retraining the sales force for Amerivest?

Joe Moglia

Yes, we rebranded the branches this morning, and as far as training for the sales force with regard to Amerivest, we’ve already started that.

Matt Snowling - Friedman, Billings, Ramsey

When do you expect to be done?

Joe Moglia

You know what, I don’t know if we’ll ever be done on that. There’s always going to be something new, a better wrinkle, a better offering, a better service, a better bell and whistle, and as always, better ways that you can understand what a client is really trying to get at by their questions and how you handle those, so I think the sales instruction effort never ends.

Matt Snowling - Friedman, Billings, Ramsey

I guess, Joe, I was trying to get at when can we actually expect to start seeing some sort of benefit from the…

Joe Moglia

From Amerivest?

Matt Snowling - Friedman, Billings, Ramsey

Right.

Joe Moglia

I would like to believe that we’re going to see some sort of benefit immediately, and frankly, we have, but it’s small. In the grander scheme of things, it doesn’t matter. I think everything we’ve been talking about, Matt, is sort of what we’re going to look like coming out of the integration, and I would say coming out of ’07, we should start to feel pretty good. We would hope we feel pretty good about what those results are, but none of this happens overnight, but rest assured, it’s a priority for us, so it’s not going to be something you’re going to slip through the cracks and we’re going to make believe one day we are at.

Matt Snowling - Friedman, Billings, Ramsey

Okay, thanks.

Operator

Next we’ll hear from Richard Herr of KBW.

Richard Herr - Keefe, Bruyette & Woods, Inc.

Hi, good morning. Just on the outlook statement, it looks, fiscal 2005, you had an average rate per trade of about $13.12, and in 2007, you’re guiding us in the range of $12.85 to $13.35. With the dollar price cut, how do you continue to maintain a similar average rate per trade similar to what you had at legacy Ameritrade?

Randy MacDonald

Sure, Richard. Actually, let’s go back then to slide 12, if you have that handy. Do you?

Richard Herr - Keefe, Bruyette & Woods, Inc.

Yes.

Randy MacDonald

So starting with that advertised rate at $10.99, we had $13.03 versus the $10.99, and that’s because you also have payment for order flow, plus the options business mix drives that up, then you blend in Waterhouse, which obviously is a much higher rate, but the overall percentage of that business to the total business is much smaller.

So the difference between our $13 and the blended rate of $14 is not significant because Waterhouse is so much smaller in trades and so much bigger in asset-based revenues. So when we then have a $1 pricing impact, you’re back down to what we saw for historical rates. Does that make sense?

Richard Herr - Keefe, Bruyette & Woods, Inc.

Yes, that helps a little bit, but it was my assumption that you had Waterhouse at $9.99 and prices higher at $14.99, and I think a $17.00 price point, if you’re giving up all those higher price points, I guess the question is how do you still get to around the $13 number, but I guess that kind of gets me what I was looking for.

Randy MacDonald

Yes, I think the math is right in front of you. I did that slide because I think everyone had that exact question, Rich, and rather than make you guys all guess, I just simply gave you the math. I think that’s a great question. If I were you, that’s the question I would’ve had, for that reason. Waterhouse was a much, much higher advertised price, so how does this work again that you’re only having a $1 impact because of $9.99 across the board? But study that. If that doesn’t make sense to you, absolutely give us a call, and we’ll walk through that math with you.

Richard Herr - Keefe, Bruyette & Woods, Inc.

Okay, and a follow-up on the pricing. Joe, back in January, we talked about segmentation, and it looks like the attrition rates you've given us in March, it looks pretty good. What was the impetus? Was it just more feedback from customers about pricing that made you stick with the one price and then just decide to cut by a dollar?

Joe Moglia

Yes, that would be very fair, Rich.

Richard Herr - Keefe, Bruyette & Woods, Inc.

Lastly, how does April look?

Joe Moglia

We already told you we're coming in so far, as far as April goes, 270,000 trades per day. Do you want me to give you a lot more color on all the other numbers for April?

Richard Herr - Keefe, Bruyette & Woods, Inc.

No, that's fine. Thank you very much.

Joe Moglia

Thanks, Rich.

Operator

Our next question comes from Casey Ambrich with Millennium Partners.

Casey Ambrich - Millennium Partners

Good morning. Thank you for taking the questions. One question and two details. The first question is what happens -- in the new Ameritrade's guidance if the Fed begins cutting in 2007?

Joe Moglia

I'm sorry?

Casey Ambrich - Millennium Partners

What happens to your guidance in 2007 if the Fed begins cutting?

Joe Moglia

We would build those cuts, we will build what actually happens into our numbers.

Casey Ambrich - Millennium Partners

It would be dilutive, right?

Randy MacDonald

Let me elaborate a little bit. Joe is absolutely right. We don't anticipate any Fed rate increases, but I think the MMDA, that is where we're extending out on the yield curve. The duration of those assets going out to more like two years. We would in effect be locking in two-year rates there. Basically the rest of the business would re-price.

Casey Ambrich - Millennium Partners

Down?

Randy MacDonald

Yes.

Casey Ambrich - Millennium Partners

Re-price down?

Randy MacDonald

Yes.

Casey Ambrich - Millennium Partners

I just want to make sure. It is not there. Finally one other question was, I notice on Slide 20 I think it is, you're adding back the interest on the borrowings to get your non-GAAP earnings?

Randy MacDonald

Yes.

Casey Ambrich - Millennium Partners

Is that the way it should be done?

Randy MacDonald

Well, it is the way we are presenting it.

Casey Ambrich - Millennium Partners

Those borrowings are from the dividend though, right?

Randy MacDonald

Yes. The borrowing funded a lot of dividend. It funded $4 of the $6 dividend.

Casey Ambrich - Millennium Partners

So why are you backing it out?

Randy MacDonald

Because that is representative of the financing of the deal. We're looking forward and saying once we have the debt paid off; also, what is the basis for funding the debt? Those are the two reasons and this is a focus more, frankly for bond holders, but also frankly for investors. A couple years out when that debt is retired, what are we going to look like?

Casey Ambrich - Millennium Partners

Okay. Joe, maybe you can answer this. I remember going back a few years with the Company, the one thing the Company wanted to do is have the one price, $10.99, one price for everybody. Just simplify it. Now there is a lot of talk about customization. What made it such a huge 180 transformation in probably a year? You are talking about $10.99 versus now three segments, multiple customization?

Joe Moglia

Casey, we're still at $9.99. From $10.99 or $9.99 across all the segments period. The concept you just referenced is still what we believe in and that's the reason why we came up with the number. Don't confuse the $9.99 pricing everybody, period versus our client segmentation strategy that happens to cover three business segments: The active trader, the long-term investor and the independent advisor. We're still at $9.99.

Casey Ambrich - Millennium Partners

Okay. One last thing. Joe, I think it is good idea you're selling some stock. You made a lot of money for shareholders. I was just looking at the holders, though. Did the Rickett's family also sell stock? Looks like they sold 14 million shares, is that right?

Joe Moglia

The Rickett's family had sold some stock as part of the secondary a while ago. They have not sold since then.

Randy MacDonald

It was well before the deal.

Casey Ambrich - Millennium Partners

Thank you very much.

Joe Moglia

Thanks, Casey.

Operator

We'll go next to Paul Frisco with Montana Capital.

Paul Frisco - Montana Capital

Joe, asked and answered. Thanks, guys.

Joe Moglia

Hi, Paul.

Randy MacDonald

Operator, how are we doing? Any more questions?

Operator

We have two more questions in the queue. The next is from Richard Lee with Citadel Investments.

Andrew Rickshaw - Citadel Investments

It is Andrew Rickshaw. Good morning, guys. I had a question for you, Joe.

I didn't see in the release a lot of detail about your incentive compensation agreement. I assume that's based on performance. Are any of the metrics in the incentive comp arrangement you have now based on the guidance that has been set today, and beating that guidance or exceeding that guidance?

Joe Moglia

It doesn't have anything to do with the guidance. It is metrics that get established, in effect, at the beginning of the year for what the comp committee and the board feel would be good results for that particular year. Then a schedule gets set for if things do not go well, we get paid less. If things do go well, we get paid more.

It has nothing to do with whatever we do with guidance over the span of the year.

Andrew Rickshaw - Citadel Investments

Has the basis been set yet for just for '06 or for '06 into '07? Where --

Joe Moglia

There is a guideline for '06. There are numbers that specifically we're going to use as far as '06 goes. Then there are guidelines that have been established for '07 and '08. All of the '07 and '08 numbers obviously would get re-evaluated at the end of '06.

Andrew Rickshaw - Citadel Investments

Are there stock options that are part of this package that you received?

Joe Moglia

No. Other than the base salary, every nickel is performance based, number one. Number two, two-thirds of my contract is all equity anyway. That would be, in effect, restricted shares.

Andrew, specifically -- maybe you were getting at this. We lower guidance and then beat guidance later on -- Do we get compensated for that? No. If that's what you were getting at.

Andrew Rickshaw - Citadel Investments

I just ask because you guys seem to be truly conservative in the guidance and it seems like we have six or seven metrics here which you have guided to that are probably conservative and you might have been hinting at that; I am sorry, I am trying to understand the thinking. Was it just extreme conservatism or other thoughts going around that?

Joe Moglia

In terms of guidance?

Andrew Rickshaw - Citadel Investments

Yes.

Joe Moglia

It was very simply we knew we were going to have to take a hard dollar hit because of the increase in the commission, and we have not yet seen any of the potential benefits yet.

For the last five years we've never built in positive results into our numbers because we thought we might wind up seeing them; we did that after we started to deliver, and we had actual progress. That's it.

Andrew Rickshaw - Citadel Investments

I guess we'll look forward to the progress, then.

Joe Moglia

Yes, we will, too.

Andrew Rickshaw - Citadel Investments

Okay.

Operator

Our next and final question will come from Barry Cohen with Merrill Lynch.

Barry Cohen - Merrill Lynch

Thanks for taking the call. I didn't hear -- and I apologize if you said it -- what is your debt down payments schedule?

Randy MacDonald

Was the question the schedule of payment of the debt?

Barry Cohen - Merrill Lynch

I would like to know what your anticipation is in terms of dollars of debt repayment this year and next?

Randy MacDonald

Yes, I think we're thinking it is about 75% or so of the EBITDA; or maybe more like 50%. Why don't we take a look at that, what we are doing in the outlook.

The way you get to that number, Barry, may be too circuitous. We have to take a look at that. If you essentially take the interest rate and basically do an inversion calculation, you will get to the balance outstanding each quarter. Maybe what we need to do, Bill, is put the pay down out there on the outlook. Why don't we take a look at that. I think that is a good question. The way you get there, take the interest expense and divide by the rate that we're giving you.

Barry Cohen - Merrill Lynch

Right. I just didn't know if -- when you take a look, I understand where you're getting at. Maybe I asked the question the wrong way. So when you take a look at your outlook for the year and get EBITDA, how much of the free cash or cash flow do you anticipate paying down debt?

Randy MacDonald

Virtually all of it. We have Uncle Sam. EBITDA and Uncle Sam and what's left over really is what we're going to start putting towards the debt. We already just 65 days into the quarter, we already repaid $200 million.

We're going to aggressively pay down the debt is the answer, if that's what you're getting at. I thought you were being more quantitative.

Barry Cohen - Merrill Lynch

No, I am not that smart.

Randy MacDonald

Okay, Barry.

Barry Cohen - Merrill Lynch

Thank you.

Operator

We have no other questions at this time.

Joe Moglia

Folks, I think it is important to remind you what we talked about a couple minutes ago about our 2006-2008 philosophy. We know and we expect to be held to what we're going to look like coming out of '07 and going into '08 as a clear indication of how successful we were with the overall integration. We know that. We will make decisions in '06 and '07 that will help us be stronger in '08.

I really am excited about the rollout of the new brand and the value propositions. Give us a little time. We will give you more color next quarter. We might also be able to give you a little bit of color if we can -- I don't know if we can -- on the Analyst/Investor Day that takes place May 23rd. Hopefully we get a chance to actually see you there.

Thanks for spending time with us. I know it was a little longer than normal this morning. There is a lot of stuff going on and there was a lot of stuff to talk about. Thank you everybody for joining us this morning.

Operator

That does conclude our conference today. We would like to thank everybody for their participation. Have a nice day.

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Source: TD Ameritrade Holding Corporation Q2 2006 Earnings Conference Call Transcript (AMTD)
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