| 16 July 2010

[Corrected to reflect 58,000 new accounts added in June.]

The Charles Schwab Corporation (SCHW) reported Q2 earning today and if you read any of the news regarding the announcement you already know that they had basically a flat quarter. In terms of revenue and income, this was certainly the case. Schwab's total net revenue of $1.08 billion increased about 10% versus the prior quarter and was flat versus Q2 2009. Their net income popped up to $205 million, which was a nice gain versus last quarter but again, even with Q2 2009.

CEO Walt Bettinger chose to focus his comments on the ongoing attention Schwab is paying to the development of new tools and services. "We continue to make significant investments in an enhanced platform for actively trading clients, new mobile applications for banking and brokerage, a major rebuild of our platform that serves investment advisors, and expanded global research and equity trading capabilities," he said.

We've been spending some time with the numbers this morning and we have say, the real story is how Schwab has been able to position themselves to stay flat on income, despite some declines in parts of the core business. This comment will make more sense when we dig into the charts, so let's get to it.

DARTs came crashing down in June to the lowest level we've seen in all of the last 12 months. But overall, DARTs for the quarter were strong thanks to a huge May -- in fact, a record number of trades in May really helped the quarter for Schwab. But we've been consistent in our refrain that DARTs don't mean as much as they used to, thanks to the broker price war and ever-decreasing commissions. Lucky for Schwab, they know this to and have clearly adjusted to take this change into account.




Total client assets for the firm dropped again this quarter. This drop was somewhat expected given the Schwab lost a large mutual fund clearing client. Schwab previously announced that it lost $29.5 billion in assets in May and expected to lose another $22 billion in June thanks to this single client. If we ignore that loss (not saying we should, but if we did) the company would have posted a gain of $14 billion in net new assets for the quarter.

Whenever we analyze asset growth or loss we always take into account market activity during the same time period. The S&P 500 lost 12% during the second quarter, which suggests that Schwab has done a good job maintaining asset growth despite a strong negative pull in the markets. Also effecting this number is the total number of new accounts added, which we'll analyze next.



[Editor's Note: This is a corrected version of the original ariticle which showed that Schwab added just 14,000 new accounts in June. The Broker Blogger takes full responsiblity for this mistake but will fire his fact-checker immediately! H/T to Robyn for pointing this out. Good to know someone is paying attention.]

Schwab added 58,000 new accounts in June. You can tell by the chart below that Schwab had been hovering around the 60k a month range for new accounts, then saw a nice bump at the end of last year and leading through Q1 and the start of Q2. The decrease to 58,000 new accounts is what we would expect given decrease in marketing spending, which you will see below. 





When you see the significant drop in overall advertising and market deveopment (as opposed to the earlier increase) it becomes easy to see why new account growth would slow in May and June. What is unclear, however, is exactly where they're spending their marketing dollars. In other words, there may have been a decisions to shift focus on acquiring new bank accounts (which did increase 35% in the quarter). We are concerned about the significant drop in new brokerage accounts and will be watching closely to see if this trend continues in July. [Editor's Note: We are not as concerned now, given the correction above.]



We had expected the investment in advertising and market development to continue, given CFO Joe Martinetto's comments last quarter about balancing results with investment in the future. "Our first quarter operating results embody our commitment to building value for stockholders and clients over the long term as we continue to balance current profitability with investing for growth," he said then. "We remain convinced that our chosen path of sustaining and even enhancing our investment for future growth during 2010 is the right one for the company."

We said previously that there are two things unique to Schwab that drive their numbers: 1) they've announced plans to issue more stock to drive their banking business, and 2) they're actively pursuing the fee-based advisor business. The firm ended June with 803,000 banking accounts, up 35% from last March and up 1% from last month. But the firm most recently lost advisor services assets in June, dropping to $597 billion in assets, an 18% increase over June 2009 but a 4% drop versus the prior month. This segment is important because, as most firms decrease prices, firms like Schwab are pushing fee-based services as an alternative to low commission accounts which generate little margin.

The results were generally well-received in the markets due, at least in part, to the fact that their Q1 was so bad. Investors needed reassuring that things were back on track and at last in terms of revenue and income, they are.

But a Citigroup analyst announced earlier today that he was dropping his target price for Schwab from $18 to $16. (Not much of a target, given the stock is currently trading in the mid-$15 range.) He also dropped target prices for TD Ameritrade (AMTD) and E*TRADE Financial (ETFC), which we expect to hear from next week.