UPDATE: TD Ameritrade 3Q Net Fell But Still Beat Estimates

(Adds comments from management and more information on trading activity and auction-rate securities repurchase agreement.)

By Brett Philbin
Of DOW JONES NEWSWIRES


NEW YORK (Dow Jones)--TD Ameritrade Holding Corp.'s (AMTD) fiscal third-quarter profit fell 17% on market declines and acquisition costs, but the drop in earnings was less than expected because of strong trading volumes.

The Omaha, Neb., online broker said average client trades per day surged to 392,000, up 36% from a year ago, amid a rally in the stock market. However, client assets dropped to $265 billion, down 14% from a year earlier, reflecting weakness in the markets over the past year.

TD Ameritrade added $6.9 billion in net new assets, a 73% increase from a year ago.

Overall, the company posted earnings of $170.5 million, or 30 cents a share, down from $204.4 million, or 34 cents, a year earlier.

Excluding items, including the acquisition of options broker thinkorswim Group Inc., results would have been 33 cents a share, beating the average analyst estimate on Thomson Reuters of 29 cents a share.

Revenue fell 1.6% to $613.8 million but surpassed the Thomson Reuters estimate of $580 million.

Shares of TD Ameritrade recently rose 5.9% to $18.76. The company's stock, which had traded as low as $9.34 in November, is up 32% year-to-date.

During a conference call with analysts, TD Ameritrade Chief Executive Fred Tomczyk said the company had "its best trading quarter ever." However, Tomczyk didn't predict a continuation of that trend.

"We do not expect our trading levels to stay at this level over what is normally a slower period of the year," he said.

Reflecting that forecast, TD Ameritrade's average trades per day in June fell to 378,000, down 7% from 408,000 in May. Tomczyk said the company has averaged 343,000 trades per day so far in July.

Trading has been a source of strength for the online brokerage industry as investors have used tools including options and exchange-traded funds to capitalize on market volatility. For TD Ameritrade, ETFs accounted for 17% of trades in the third quarter. The company expects its acquisition of thinkorswim to double its quarterly options trades as a percentage of total trades to 20%.

However, asset-based revenue declined by nearly a third to $263 million, while net interest revenue fell by 25% to $98.6 million, due to low short-term interest rates. TD Ameritrade, like Charles Schwab Corp. (SCHW), has waived fees on some of its money market funds so that clients' returns don't turn negative.

In an interview, Chief Financial Officer Bill Gerber said fee waivers in the third quarter equaled 60 basis points on $18 billion in money market funds. The company currently manages $14 billion in money market funds, though it has begun to move some cash out of those funds to its own balance sheet and into money market deposit accounts.

TD Ameritrade also said it expects to record a charge of 5 cents to 10 cents a share in its fiscal fourth quarter related to its agreement to repurchase auction rate securities from clients. On Monday, the company agreed to buy back $456 million of ARS as part of a settlement with New York Attorney General Andrew Cuomo, the U.S. Securities and Exchange Commission and Pennsylvania securities regulators.

On the call, Gerber estimated that the company's total amount of ARS outstanding is $400 million to $500 million. TD Ameritrade expects the first repurchase to occur in October.

In a note to clients, Credit Suisse analyst Howard Chen said the boost in TD Ameritrade's trading volumes were "mostly driven by higher securities lending revenues."

However, Chen said he remains neutral on the company's shares given his outlook for a pullback in retail trading, continued lower short-term interest rates and "relative return prospects within the firm's coverage universe."



- By Brett Philbin, Dow Jones Newswires; 212-416-2173; brett.philbin@dowjones.com

(John Kell contributed to this report.)

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