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TD Ameritrade Holding (AMTD) |
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WIKI ANALYSIS
TD Ameritrade Holding Corporation (NYSE: AMTD) is an online stock brokerage that executes 371,579 transactions on an average day.[1] Both individuals and institutional investors use TD Ameritrade's service to trade common and preferred stock, ETFs, options, futures, foreign exchange, mutual funds and fixed income securities. TD Ameritrade also offers margin lending and cash management services.
TD Ameritrade's traditional revenue base comes from the transaction-based fees it charges to clients for brokerage and clearing services. This business model has been successful for online brokers because operating costs remain low in the online brokerage industry. TD Ameritrade also generates revenue from the cash in its clients' accounts, by lending out this money to other clients through margin accounts, and to third-party borrowers through affiliate banks.
Company Overview
Business and Financial Metrics
First Quarter 2010 Results[2]
TD Ameritrade reported revenue of $635 million, an increase of 21% compared to $525 million in the year-ago quarter. Net income increased 23% to $163 million, and EPS increased 17% to $0.27. During the quarter, TD Ameritrade executed an average of 379,000 trades per day. Also, the company acquired $10 billion of new client assets for a record annualized growth of 13%, bringing total client assets to $342 billion. TD Ameritrade opened a record 187,000 new accounts during the first quarter.
| Quarterly Financial Data, in millions[3] | Q1 2010 | Q1 2009 |
| Transaction based revenues | $301 | $265 |
| Asset-based revenues | $300 | $252 |
| Other revenues | $34 | $8 |
| Net revenues | $635 | $525 |
| Operating Expenses | $336 | $240 |
| Advertising | $72 | $53 |
| Operating Margin | 36% | 44% |
| Operating income | $227 | $233 |
| Net income | $163 | $132 |
Cost Structure
TD Ameritrade has a unique cost structure compared to its competitors in the online brokerage services industry. Operating mainly as an online brokerage, maintaining only around 100 brokerage firm locations throughout the United States, TD Ameritrade’s fixed cost infrastructure has allowed for greater financial flexibility and has resulted in one of the lowest operating expense per trade figure out of all the publicly traded brokerage firms. [4]
Revenue Sources
TD Ameritrade generates revenue from transaction fees that it charges to its clients and from asset-based revenues.
Over the past five years, TD Ameritrade’s growth in asset-based revenue has outpaced its growth in transaction-based revenue. The amount of revenue generated via transaction fees is directly tied to the performance of the overall economic environment. For this reason, many brokerages have turned to revenue sources that don't directly depend on trading volumes in order to diversify and protect themselves against downside risk.
TD Ameritrade earns commissions and transaction fees on client trades in common and preferred stock, ETFs, options, futures, foreign exchange, mutual funds and fixed income securities. Margin lending and the related securities lending business generate net interest revenue. Cash management services and fee-based mutual funds generate insured deposit account fees and investment product fee revenues.
| Revenues (millions): [5] | FY2009 | FY2008 | FY2007 |
| Commissions and transaction fees | 52% | 40.1% | 37.4% |
| Net interest revenue | 14.4% | 21.7% | 25.6% |
| Insured deposit account fees | 23.6% | 24.8% | 24.6% |
| Investment product fees | 7.7% | 12.2% | 10.7% |
| Other revenues | 2.3% | 1.2% | 1.7% |
| Net Revenues | 100% | 100% | 100% |
Asset-Based Revenue
TD Ameritrade earns asset-based revenue through loans to clients who elect to purchase securities on margin. In margin loans, TD Ameritrade facilitates a loan to the client and charges an interest rate based on the type and terms of the loan to the client. The client pays down the interest and the capital within the period specified. The second way in which TD Ameritrade earns asset-based revenue is through opt-in money management services that it provides to its clients and account holders. Money from these accounts is loaned out to banks (in this case, TD Bank USA). The bank, in turn, makes long term loans on the cash and pays short term rates to the account holder, making a profit on the interest rate spread.
Transaction-Based Revenue
TD Ameritrade offers and facilitates the transaction of corporate stock, fixed income securities, exchange traded funds, options trades, mutual funds, cash management services, and margin accounts. For most of the transaction-based services that TD Ameritrade provides, it charges a fee. Transaction revenue is dictated by the trading volume and the total fees that are collected based on those volumes.
| Transaction Metrics[6] | FY2009 | FY2008 | FY2007 | FY2006 | FY2005 |
| Total trades (in millions) | 93.27 | 75.72 | 63.11 | 54.24 | 39.94 |
| Average commissions and transaction fees per trade | $13.35 | $13.44 | $12.90 | $13.61 | $13.37 |
| Average client trades per day | 371,579 | 301,061 | 253,440 | 216,970 | 155,696 |
| Average client trades per account (annualized) | 12.9 | 11.4 | 10 | 10.1 | 11 |
| Trading days | 251 | 251.5 | 249 | 250 | 256.5 |
Client Offerings
- TD Ameritrade is the company's core offering for self-directed retail investors. TD Ameritrade offer sophisticated tools and services, including TD Ameritrade Command Center 2.0, SnapTicket, TM Trade Triggers, TM QuoteScope, TM Advanced Analyzer, TM Market Motion Detector, Pattern Matcher, TM StrategyDesk TM and WealthRuler.
- TD Ameritrade Institutional is a provider of brokerage and custody services to more than 4,000 independent registered investment advisers (RIAs) and their clients. TD Ameritrade's technology platform, coupled with personal support from its service teams, allows RIAs to run their practices more effectively and efficiently while optimizing time with clients.
- thinkorswim, Inc. provides a suite of trading platforms serving self-directed and institutional traders and money managers. thinkorswim clients trade a broad range of products including stock and stock options, index options, futures and futures options, foreign exchange, mutual funds and fixed income.
- thinkorswim from TD Ameritrade is a feature-rich platform that delivers trading tools and investment analytics. Currently the platform is available to a limited number of TD Ameritrade brokerage clients.
- thinkorswim’s Investools Inc. subsidiary offers a suite of investor education products and services for stock, option, foreign exchange, futures, mutual fund and fixed-income investors.
- Amerivest TM is an online advisory service that develops portfolios of exchange-traded funds to help long-term investors pursue their financial goals.
- TD Ameritrade Corporate Services provides self-directed brokerage services to employees and executives of corporations, either directly in partnership with the employer or through joint marketing relationships with third-party administrators, such as 401(k) providers and employee benefit consultants.
Trends and Forces
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Trends and Forces Affecting Asset-Based Revenue
- TD Ameritrade depends on the Yield Curve for a large part of its revenues - Money market sweep accounts and margin loans are the two ways that TD Ameritrade earns asset-based revenue. In both cases, the firm's profits are tied to the yield curve, which is determined by the market's current interest rate spread. The yield curve describes the difference between short-term and long-term interest rates. When the yield curve is positive, meaning long term interest rates are higher than short term rates, TD makes higher profits on the loans it makes with the liquid cash in its clients' accounts - it pays out lower short term interest rates on this cash, but loans it out at the higher long-term rate to make a profit.
- Recession conditions reduce revenues from margin buying – Besides the revenue lost from falling trade volume, in a recession fewer people will buy stock on margin, which will result in additional loss of revenue for AMTD. Even though the cost of margin calls might have fallen with interest rates, investors during a recession tend to pull money away from equity and invest in less risky assets such as corporate and Treasury bonds. So AMTD suffers from lower revenues in a recession both because transaction volume is lower, and margin buying is less frequent as well.
Competition
TD Ameritrade faces strong competition, most importantly from Charles Schwab (SCHW),E*TRADE Financial (ETFC) , Fidelity, and Scottrade. E*Trade and TD Ameritrade are very similar in structure: they both run a no-frills investing platform geared towards self-guided investors. Asset accumulation can be difficult for E*Trade and other no-frills online brokers as they are competing against firms that offer more advanced guidance for investors. However, E*Trade and TD Ameritrade are divergent with respect to their platform development. TD Ameritrade is still digesting the acquisition of TD Waterhouse and is in the midst of fully integrating the newly acquired RIA network and brokerage locations with TD Ameritrade's technological platform. Further competition is provided by Charles Schwab--which has more comprehensive offerings-- which has been more successful in attaining a greater share of its clients' total assets through a larger, more cohesive network of associated RIAs.
Revenue Composition Comparison: The sources of revenue are different between the competing online broker-dealers. In particular, Charles Schwab is quite different because their main source of revenue is from asset management fees, a source of revenue that E*Trade and TD Ameritrade do not have. Below are the revenue compositions for TD Ameritrade, E*Trade and Charles Schwab. Notice the extent to which E*Trade has moved towards asset-based revenue streams: 58% Net Interest Income vs. 41% and 34% at TD Ameritrade and Charles Schwab, respectively. This shows E*Trade's aggressive move towards a new business model that is less reliant upon trading based revenue streams. By increasing its dependence on interest-based revenue streams, however, E*Trade has increased its exposure to market fluctuations; its investments are linked to market conditions and can be volatile. Schwab and TD Ameritrade are relatively less exposed to this risk.
Notice the difference in revenue composition. E*TRADE Financial (ETFC) generates more than half of its revenue from interest income, which would make it the most exposed to any collateralized debt obligations and/or mortgage backed securities that the brokerage would be responsible for fulfilling as a result of their sweep account operations. Relative to E*TRADE Financial (ETFC) , Charles Schwab (SCHW) generates a greater proportion of its revenue through asset management fees, which would make its balance sheet the most exposed to any reduction mass market brokerage transactions.
- Daily Average Revenue Trades: DARTs are the average number of trades clients make in a day. Each of these trades provides revenue for the broker-dealer through their commissions.
- Net Interest Spread: The net difference between the interest rate the broker-dealer makes on its investments and the interest rate it pays its clients. The larger the net interest spread is, the more money the broker-dealer makes on its clients assets.
- Total Client Assets: The total amount of money that the broker-dealer is holding for its clients. The higher their total client assets the more they can exploit the net interest spread and create revenue. This makes building up client assets a main focus for broker-dealers.
| Operating Metrics | E*Trade | Charles Schwab | TD Ameritrade | |
|---|---|---|---|---|
| Average Commission Per Trade | $11.73 | $14.01 | $12.90 | |
| Daily Average Revenue Trades (DARTs) | 187K | 245K | 253K | |
| Net Revenues (MM) | $3,570 | $4,994 | $2,177 | |
| Net Income (MM) | $-1,442 | $2,407 | $645.9 | |
| Client Assets Under Control (AUC) (bn) | $190 | $1,445 | $302.7 | |
References
- ↑ stock:TD_Ameritrade_Holding_(AMTD)/Advertising Marketing AMTD FY2007 10-K Annual Financial Report, “Business Overview,” p. 8.
- ↑ TD Ameritrade March Quarter 2010 Earnings. April 20, 2010
- ↑ "Apple," Morningstar Investment Research
- ↑ AMTD FY2007 10-K Annual Financial Report, "Strategy,” p. 4.
- ↑ AMTD FY2007 10-K Annual Financial Report, “Consolidated Statements of Income Data,” p. 33.
- ↑ AMTD FY2007 10-K Annual Financial Report, “Trading Activity Metrics,” p. 31.
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