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Ad Budget Cuts Cushion Ameritrade's Fall

The online broker manages to beat analysts estimates for its most recent quarter.


(AMTD) - Get TD Ameritrade Holding Corporation Report

, slashing its ad budget to offset plunging revenues, managed to beat Wall Street earnings expectations in the latest quarter.

Ameritrade earned $9 million, or 4 cents per share, in its fiscal first quarter, compared with a loss of $23 million, or 13 cents per share, in the same quarter a year ago. The results topped Wall Street's expectations of 1 cent a share, according to Thomson Financial/First Call.

Net revenue rose to $108.2 million from $92.2 million in the previous quarter, but it was down from $130.9 million in the year-ago period. Revenue from commissions fell 20% from a year ago.

"Going forward, we remain absolutely committed to profitability and growth," said Joe Moglia, chief executive of Ameritrade, in a written statement, "even in difficult market conditions." Ameritrade didn't make changes to its outlook for 2002; analysts are expecting it to earn 16 cents a share this year.

Bailing Out

In the past year, online brokerage firms have been hurt by a steep decline in retail trading activity. Shares of Ameritrade are off 16% since the beginning of 2001. They were lately flat at $5.92. But over the past three months, with a rally in the stock market, some investors have gotten back in the game.

Ameritrade said average daily trading volume in the quarter was 86,000, up 18% sequentially. But it was down 23% from 111,000 reported during the same quarter last year. Most analysts are expecting a rise in trading volume to coincide with a turnaround in the economy in the second half of the year.

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In the meantime, what stuck out in the company's report was its ability to lower costs, analysts said. "They were conservative on their expense guidance," said Richard Repetto, an analyst at Putnam Lovell Securities. "I was skeptical they'd be able to cut costs from industry low levels," said Ken Worthington, an analyst at CIBC World Markets. "But they took a chunk out of expenses across the board."

The online broker cut costs largely through a reduction in advertising spending, which dropped to $14.6 million in the latest quarter from $63.5 million in the same quarter a year ago.

Ameritrade's total operating expenses fell to $78.4 million from $104.6 million a year ago, with the firm's occupancy and equipment expenses decreasing to $13.6 million from $16.2 million last year.

The Right Things

Even though the market could be nearing a turnaround, analysts said Ameritrade's cost-cutting strategy makes sense. They've done all the right things, considering the market environment," said Greg Smith, an analyst at J.P. Morgan, "and will benefit from an upturn in trading, when it occurs."

Smith said the company has the capacity to handle a boost in daily trading volume. And he added: "They'll have a lot of leverage with their earnings, since costs will be unlikely to pick up."

Ameritrade is the third online broker to report earnings in the past week. Rival


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earned 7 cents per share in the fourth quarter, above estimates for 4 cents per share, by cutting costs as well and through its diversified revenue sources, which include mortgage banking.