Shares of the financial services provider have outperformed the S&P 500 over the past month following better than expected fiscal third quarter earnings. TD Ameritrade's bottom line came in at 44 cents a share, above Wall Street estimates for 41 cents a share, despite lower trading commissions. The company was boosted by new account growth and asset-based revenue -- total revenue rose 11% from the prior year to $931 million, eclipsing forecasts for $899.5 million.
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TheStreet talked with TD Ameritrade CEO Tim Hockey about the quarter and overall trading environment. What follows is a condensed and edited version of our conversation.
Question: The Scottrade acquisition closes soon - do you anticipate a need to get even larger?
A: The closing is still on track: We said Sept. 30, and we're hoping to advance that by a month or so. We literally only have the Federal Reserve and the Canadian bank regulator left to opine. In terms of additional M&A, we've got pretty enormous scale post Scottrade, over $1 trillion in assets and over 10 million in client accounts. Scale used to be an incredibly important thing in any business, but my general philosophy is that scale past a certain size tends to be less important than it used to be: A) because it drives you to be slower just because you're a larger firm and speed is very important, and B) because smaller players can now almost mimic scale at a very early stage in their development.
The examples everybody likes to talk about are Airbnb having more hotel rooms and actually not having a hotel at all and Uber being [one of the world's largest car companies] yet they don't actually have any cars. These are companies that have [amassed] global scale very quickly. To me, speed in the last number of years has become more important than sheer scale once you get past a certain size, and we've passed that size.
Q: We are seeing such a strong appetite by investors for top tech names. How much is interest in tech stocks fueling Ameritrade?
A: Clearly, the traditional FANG (Facebook (FB) - Get Report , Apple (AAPL) - Get Report , Netflix (NFLX) - Get Report and Google (GOOGL) - Get Report ) stocks are the ones that drive retail. We had a broader retail engagement, and retail clients, as you know, tend to trade those things that they know. They trade the brands that they know -- they trade Netflix (NFLX) - Get Report , they trade Amazon (AMZN) - Get Report , Nvidia (NVDA) - Get Report was a big trader this particular quarter.
These are all brands, consumer brands that, notably, our millennial and active traders like to talk about because they know them.
Q: Your average trades per day surged to about 510,000 despite trading declines at some of the big Wall Street firms amid lower volatility. How did you pull that off?
A: It's a bit of a conundrum. If you look at how the numbers were mathematically generated, there was an uptick in net new accounts generated this [fiscal] year, and literally, in the first three quarters, we did more than we did in all of last year. That then led to a total of about 6% growth in the actual number of accounts, and on average, those accounts traded a little more than they did last year. It was the combination of those three trailing factors that we were up 10% year-over-year.
With a 30% reduction in [online stock and ETF trade commissions, from $9.99 to $6.95 in March], the impact was offset by larger account numbers times more trades, which means that it literally was only a one-cent year-over-year impact on commission revenue.
I wouldn't have thought lower pricing would drive more trading because we didn't think the pricing sensitivity of retail clients at these low levels was such that a lower price drives more activity, but there might be a factor in that.
Brian Sozzi contributed to this story.
Editor's Pick: Originally published July 18.
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