| 21 July 2010

TD Ameritrade (AMTD) reported their second quarter results yesterday and we've been spending a little time charting their performance and taking stock of the quarter. We recently reported Schwab's results and noted that, in addition to an overall flat quarter, their DARTS came crashing down and new accounts suffered. Will we see the same from our friends at TD Ameritrade?

Before we move on to the charts we should note two things. First, we tend to look at the online brokers' performance relative to each other. And second, we also tend to look at their performance relative to the overall performance of the markets. Since their performance, especially as relates to assets under management, is highly correlated to market performance we can learn a lot about a firm when measuring their relative performance. So keep in mind, during the second quarter brokers faced a stiff headwind: the S&P 500 lost 12%.

Moreover, during their last quarterly release TD Ameritrade 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 prior to that. 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."

The firm's EBITDA of $340 million is a 26% increase over the prior quarter and 7% over the prior year. So the firm is holding steady on financial results. But we're operating geeks, so let's take a look at how the firm was able to achieve these results, shall we?

First, we begin with DARTs. TD Ameritrade suffered the same swin as Schwab, which is to say a dramatic bump up in May and then a drop in June. But TD Ameritrade's relative performance in June was much better. We think more active traders, using platforms like thinkorswim, help to steady overall DART activity. But we're not as concerned about DARTs as we used to be, given the reduced commissions thanks to the broker price war. So let's move on to new account growth.



TD Ameritrade only reports their new account growth on a quarterly basis. So we're always held a bit in suspense on their performance until quarter end. We've known for several months now that other firms have been holding steady on new accounts through the quarter. We've also started to see some dramatic drops in new account activity toward the end of the quarter. TD Ameritrade appears to be no exception. They added fewer accounts in Q2 than in either Q1 or Q4. But this actually good news when you take a look at their advertising spending, which is the next chart.



The slight slowdown in new account growth the firm saw in Q2 is easily explained when you take into account the big cut in advertising spending. The firm cut their advertising spending by about 27% while experiencing only about a 5% slowdown in new account growth, during a down market.




Finally we take a look at assets. Keep in mind the S&P lost 12% during the quarter. But TD Ameritrade ended with 5% fewer assets in the quarter versus the end of Q1. All in all about what we would expect given the new account activity. But take note of the fact that for the first time in over a year the firm experience two consecutive months of declining assets. That is not a good sign any way you look at it.



All in all we think TD Ameritrade appears to be on of the more resilient firms of the bunch. We expect to hear from E*TRADE Financial (ETFC) tomorrow which will help us confirm this. Our big question with E*TRADE is how they were able to add so many accounts in April, and at what cost. Stay tuned.