AMTD IDEA Group
Q3 2005 Earnings Call Transcript

Published: 9 Nov 2005

[Operator:]

Good morning. My name is Lee and I will be your conference facilitator. At this time I would like to welcome everyone to the Ameritrade September quarter and fiscal quarter 2005 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. Operator Instructions Thank you. Miss Kush, you may begin.

[Donna Kush:]

Thank you, Lee. Good morning, everyone. By now you should have received a copy of our press release that was faxed or Emailed to you this morning. If you have not, please call our Investor Relations department and we will fax or Email one to you immediately. Otherwise you can view a copy of our release and slides, listen to the call, and submit any questions to us via our website at amtd.com. Also, if you want to contact us directly after the conference call, please call Investors Relations at 800-237-8692. Before we begin, I would like to note that this call contains forward-looking statements that are made pursuant to the Safe Harbor Provisions of the Federal Securities laws. These statements involve risks, uncertainties, and assumptions that may cause actual results to differ materially from those anticipated. Listeners to the call are advised to review the risk factors contained in our most recent annual report on form 10-Q, 10-K, and quarterly report on 10-Q for descriptions of risks, uncertainties, and assumptions related to the forward-looking statements. In this call, Ameritrade management will discuss some non-GAAP financial measures, specifically, operating margins, EBITDA, expenses excluding advertising, and liquid assets. Listeners to the call 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 can be found, again, on our website at amtd.com. Please 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 Ameritrade. At this time I'll turn the call over to Ameritrade CEO Joe Moglia, who will be followed by Ameritrade's CFO and CAO, Randy McDonald. Joe?

[Joe Moglia:]

Thank you, Donna. Good morning, everybody. Welcome to the call. This is our third consecutive record year in a row. We finished the year at $0.81, with $335 million in net income. That's up 27% from where we were a year ago. And over the span of the last three years, Ameritrade has generated $744 million in bottom line net income. That's something, frankly, in a difficult market environment, that we are really very proud of. When you take a look at the actual quarter itself, there were a number of records that were set. We set records for EPS, net income, pre-tax income, operating margin, EBITDA, and net revenue. When you look at the entire year, I've already alluded to the fact the $0.81 and the $335 million were both records. Our pre-tax income, also a record of $545 million or 54%. That was up 24% from where we were a year ago. Our operating margin is at $637 million or 64%, up 17% from where we were a year ago. EBITDA, $572 million, 57%. And net revenue is just about $1 billion. As far as the rest of the quarter goes, we did average trades per day of 146,000. For the year, we came in at 156,000. So, for October, it is 154. Our ROE for the year came in at 25%. And new accounts, we opened up 372,000. Now, of the 372,000, 327 were opened organically through our advertising and 45,000 through our M&A and acquisition of JB Oxford. The net account growth for the year was 197,000. We finished the year with 1.735 million qualified accounts. Our client access were 83 billion. And our liquid assets were almost 400 million. Now, I want to spend a minute and I want to talk about, frankly, where we're headed over the span of the next couple of years. Our scalability and our operating leverage have been, I believe, to a great degree, our competitive advantages, and they are the reasons why we've achieved what we've achieved over the span the last three years. If, however, we're going to maximize our potential and accomplish something really significant over the span of the next several years, we're if effect going to have to be able to focus on long-term growth and we will do that through our client segmentation strategy and our movement from a marketing organization to a marketing and a sales organization. With regard to the client segmentation strategy, and we've talked about this before. We will continue to emphasize our efforts in the active trader space. But we will very much intensify our efforts in the long-term investor area. The big effort for us is that of the $83 billion of assets that we have, or the almost quarter of a trillion that we're going to have after we close the deal, the majority of our clients' assets are still held away from us. So we think by having a legitimate long-term investor suite of products and services, we will significantly have an opportunity to be able to grow our share of wallet. That will help us with our prospects. But we think it will also help us garner greater yield from our current account base. It will make us more of an asset gatherer, and we believe that should command a higher premium with regard to our PE in the marketplace. It will help us with our retention. And it will help us with new accounts. And as far as our clients go, we will offer them now the full spectrum of -- going forward, the full spectrum of customization and choice, whether you're do-it-yourself and you want an electronic execution to simply buy or sell a stock, or whether you want somebody else to actually manage your money or you want a relationship with the branch. The movement from marketing organization to a marketing and sales will become apparent over the span of the next 12 months or so, especially after we close the deal. A simple example of what that means is just how we will focus on Amerivest. Today the entire effort on Amerivest has dominantly been internal and has been all from a marketing perspective. Moving forward, there will be a much greater effort from the branches and from our investment consultants to sell Amerivest works appropriate for our clients. We just recently relaunched the Amerivest site. We've added auto-balancing and auto-investing. For those of you that haven't seen it, it would only take you a few minutes. I would encourage you to do it. And again, while this has been our dream and our vision all along, the TD acquisition, frankly, leapfrogs our ability to implement our strategy by several years because of the different assets and the products and services that we are getting from them. Now I want to focus a little bit on what is going to take place as far as the close goes. There are three things that have to take place. First, we've got to be able to finance the dividend. We will be doing $2.2 billion, 1.6 of which will be used to pay the dividend itself. We'll have 300 million of working capital. And we're going to increase our revolver that's currently at 105 million to 300 million. We have already made our presentation to the rating agencies and we're waiting for them to come back with their final determination of those rates. Citibank will lead the deal and co-led by Merrill, UBS, and JP Morgan. Second thing that has got to take place is regulatory approval. We're already done with Hart-Scott-Rodino. And we are awaiting on the New York City Stock Exchange and the NESD. We don't anticipate any issues as far as they are concerned. Lastly, we need to be able to come up -- provide shareholder approval. Now, on September 12th, we filed the proxy. That was returned to us about a week ago. We're going to get that refiled within about a week. Now, once the SEC is satisfied, i.e., that means they send the proxy back with no more comments, at that moment we will be ready to go within 24 hours. A mailing will take place immediately, and then there will be a 20-business day wait from the time the proxy gets out to the shareholders' vote. The vote takes place, and then there is approximately ten business days after that that is basically an administrative waiting period for the New York Stock Exchange. Once that is done, we pay the dividend and then actually close it. We want to get this deal done as soon as possible. But my best guess with regards to an estimate is probably going to be sometime in January. Now, with regards to the specific SEC comments

[Randy McDonald:]

All right. Thanks, Joe. Let's start with operating leverage. As Joe mentioned, this year was the best in the Company's history. It also included three of the four best quarters in Ameritrade's history. We generated a record $572 million in EBITDA or 57%. When you combine that with $467 million that was earned in fiscal year '04, the firm generated more than $1 billion in EBITDA. Net revenues increased from the same quarter last year by $87 million or 47%, from 187 million to 274 million. That was driven by almost a 100% increase in net interest income and a 26% increase in commission income. Now, I'll note that we continue to deliver on our promise of operating leverage, as our revenues increased 47%, yet our earnings per share increased 64%. Let's review the income statement and look at the quarter-over-quarter results. Again, this quarter, we move to a more diversified revenue stream. Last year, commissions versus asset and fee-based revenues were a split of 55, 45. This quarter, the split is 47, 53. Turning specifically to commission income, the commission revenues increased 26% or $27 million over the same quarter last year as a result of an 18% increase in trades per day and five additional trading days in the current quarter. The commission rate was $13.01 for the September quarter, which was 1% lower than the same quarter last year. That's slightly higher than what we expect in our outlook statement, and that would be primarily due to greater activity and options trading. Turning now to net interest income, the net interest revenue approximately doubled, to $126 million from $63 million in the same quarter last year. The net interest revenue growth is comprised of three things