| 20 April 2010

TD Ameritrade (AMTD) reported first-quarter 2010 results today (their second quarter fiscal results) and despite the fact that CEO Fred Tomczyk called the environment a "perfect storm" of bad news on their conference call, the firm was quick to point out $10 billion in record net new assets. So what gives?

To put this in perspective, we wrote about The Charles Schwab Corporation's (SCHW) gain in assets last week and learned that the firm gained $50 billion in total assets in March alone. While the first quarter was, overall, choppy at best, we did see a huge market gain of 12.4% from early February through March and this gain drove total asset values for all firms.

While TD Ameritrade is also reporting record total client assets of $342 billion, they are specifically pointing out record net new assets, as opposed to total assets. That $10 billion gain in net new assets represents roughly 3% of total assets. Schwab's, meanwhile,cranked out $23.3 billion gain in net new assets for the quarter which represents a 1.5% gain compared to total assets. To be fair, Schwab is a supertanker compared with TD Ameritrade's luxury yacht-sized assets, so gains are hard-fought.

One thing we noticed with Schwab, however, was a dramatic ramp-up in marketing spending in March which helped to drive new assets (and lower net income). We'll dig in to TD Ameritrade's efforts below.

As for financial performance, the firm generated $635 million of revenue in Q1, compared with $625 million in revenue last quarter. The firm reports that 47% of that revenue was asset-based (important as we will see later) compared with 45 percent last quarter.

Their net income of $0.27 per share (which included some favorable tax wins) either beat estimates or not depending whether you decide to count those tax wins. But more importantly, the firm revised their guidance for fiscal 2010 to $0.90 to $1.10 per share. This is dramatically lower than the $1.10 to $1.40 range the company predicted earlier.

Defending the move to lower guidance, CEO Fred Tomczyk said on their conference call, "For the first time that I've seen, both are trending to the low end of the scale," referring to trading activity and interest rates. "This perfect storm creates one of the more difficult operating environments we've encountered since the bust of the tech bubble."  Harsh prognosis to be sure.

But interest rates have been low for some time now, and we've been reporting on the decrease in trading activity for going on six monhts, so none of this is really new to us. It's also worth recalling that their big hit came last quarter when the firm's net dropped 26%. Their net actually increased this quarter by 23%. If it turns out their net increase while their advertising also increased, that would be a feat indeed. (We won't now until we see their 10Q.)

While financial metrics captivate most of the world we're operating geeks who like to focus on the nuts and bolts that make the busines run. So let's take a moment to look at TD Ameritrade's detailed operating metrics.

First we take a look at DARTs. The story has been consistent: trading activity has been on the decline. We can't help but notice, however, that for TD Ameritrade's size relative to Schawb, they pump out about the same number of traders per day (see Schwab's here). As in, almost exactly. We think this is due to the fact that Schwab has, over time, downplayed its active trader segment while TD Ameritrade has ramped up efforts with its recent purchase of thinkorswim, for example -- notorious speed traders.

This might be more interesting if trades = revenue. But given the recent price war we reported and its effect on brokers, wecan't clearly claim TD Ameritrade to be a winner thanks to increased trading activity. Regardless, TD Ameitrade trading activity is, you could say, channeling.



Next up we take a look at new account growth. After taking a dip in the third quarter, new account activity for the firm began to pick up again last quarter. But no discussion of new account growth can take place without some review of the firm's advertising expense, which is next.



Advertising expense for the firm ramped up significantly during the tail end of last year which, we suggest, is the primary (and obvious) driver behind new account growth. (Advertising expense numbers for Q1 won't be available until the firm releases their 10Q.)



Finally we look at their much ballyhooed assets number -- of which $10 billion is new and that is, according to the company, a record. Total client assets are, indeed, on a steady climb and the firm saw a nice rise in assets through February and March of this year. When you combined the ramped-up advertising spend in Q4 with the market bump in February and March you start to undestand why assets could grow at such a clip.

We saw a similar trend in Schwab's results, including the ramp up in advertising spend coinciding with the market bump.



We expect to hear from optionsXpress (OXPS) next week and will see how they handled the quarter, whether they also ramped up their mareting spend, and whether the market bump in February and March also affected their net new accounts and assets.