Good day, everyone, and welcome to the TD Ameritrade Holding Corporation’s March Quarter Earnings Results Conference Call. This call is being recorded. With us today from the company is President and Chief Executive Officer, Tim Hockey; and Chief Financial Officer, Steve Boyle. An audio file containing Mr. Hockey’s and Mr. Boyle’s comments on the quarter can be found on the company’s corporate website, amtd.com, under Investor Relations. This call is intended to address related questions from investors and analysts. Questions from reporters can be directed to the company’s media relations team, or you can follow their Twitter handle @TDAmeritradePR, which will be live tweeting this morning’s call. Let me take a moment to compile the questions.

Okay. Here is the first question comes from Chris Harris with Wells Fargo. Please go ahead.

Yes, thanks. Hey, guys. Question for you on the securities borrowing revenues. Just wondering how sustainable this level of revenues are. And you mentioned you made some improvements to be able to generate a little bit higher revenue. Wondering if you could elaborate on what those improvements are.

Sure. So I think when you look at stock lending this quarter, one of the things we saw is it’s fairly broad based, so good demand across the book. So we would expect in this, if we keep this kind of robust environment that we would continue to see some pretty good stock lending revenue. And the other point you made was – then on our Scottrade book that came over. We have been able to realize better rates on that book than they had been earning pre-conversion. And so that’s really a revenue synergy that we’re starting to see now. So that was a positive in the quarter as well. And we are going to expect to continue.

Next question comes from Bill Katz from Citigroup. Please go ahead.

Thank you very much for taking the question this morning. Just in terms of your guidance around picking up the integration expenses rate increase in the range. Just sort of wondering, what’s driving that? And then on the other side of that, why wouldn’t you expect to get a bit more pickup on incremental synergies? Thank you.

Yes, Bill. So there’s a few things going into that. I think, as we went into this deal in model, the year and half or so ago, what we’re finding is at the job market is a bit stronger than we had expected. And so while we’ve seen more folks leave, and we’re paying a little bit higher synergy, a little bit of higher severance to those folks. We’ve also had to pay a little bit higher retention to make sure that we had a very smooth conversion. And then on the back end, we’re rehiring a little bit to replace some of those folks. And so it’s created an environment where, even though the synergies are about the same, we are seeing a little bit higher payments being made.

Next question comes from Rich Repetto from Sandler O’Neill. Please go ahead.

Good morning, Tim and good morning, Steve. I missed the prepared remarks here. It’s like we didn’t even date here. But anyway, my question is on the loss, the bad debt loss of $58 million. So when you look at it compared to peers – order of magnitudes higher. I’m just trying to understand whether the risk-mitigation techniques and what you learned from it, how you can prevent something like this going forward.

Yes. Thanks, Rich. So clearly, obviously, from margin lending and providing derivatives trading, et cetera, is something we’re very good at. It’s been a longstanding business for us. Historically, as you know, losses due to unsecured debt have been basically immaterial over the long period of time. In early February events were clearly anomalous. It drove a significant increase, as we all know, both in volatility as well as the first material decline in the market in many years. So I can’t speak to the practices of the competitors. I can tell you that this was an event that we took a great deal of learning from. And as a result, we’re adjusting our models. We are adjusting the margin requirements on our various instruments, as appropriate. We still remain committed to the business. But as you see, with some of our technology forecast, we’re going to be making sure we’re spending the right amount of money on the improving our technology to manage our risks better in the future. So not our greatest moment in terms of sheer amount of losses in the quarter, but we’re going to make sure we learn from it and move on.

Okay. Thank you.

Next question comes from Michael Carrier from Bank of America Merrill Lynch. Please go ahead.

Thanks guys. Just on the Scottrade synergies, maybe can you provide us some color on roughly where we are – on the $450 million. And then I think in the text, you guys mentioned like $100 million dropdown next quarter. But that includes the bad debt, so I’m just trying to understand, sort of the outlook and then same thing on the remaining charges. Can you just give some color on there? And then on the revenue synergies, Steve, you mentioned on the stock loan. But maybe just any early indications on where you’re seeing some of the potential on the revenue synergy side. I know that’s longer term, but for – thinking over the next few years, where you see some of the opportunities that you can generate on the revenue side?

Sure. So I think we’re making really good progress on the expense synergies. In terms of the headcount reductions, we’ve had very significant savings in our back office functions already. We still have some more to do in the technology area going forward and in some of the contracts that we have. As you look at our expense outlook going forward, you see significant reductions across all of our major line items, so whether that’s employment or occupancy, et cetera, et cetera. So the big increase that you’re going to see in the second quarter is just we’ve deferred some technology investments. We’re going to continue to advertise strongly into the second half of the year. So you could see our ad spend up around $300 million. You’re going to see some investments in customer experience, in automation, that should help reduce our rate of expense growth going forward. And we would expect, by the time we get to the first quarter of next year that will have the full $450 million of synergies left. So we have three or four more waves of headcount reductions that are going to roll through here in the rest of the year. But by the time, we get through the first quarter. We should have hit our headcount reduction goals.

Why don’t I take it on the revenue side? So clearly, it’s a longer timeframe between now and when we expect to have the revenue synergies. But let me just give you, given we’re only a month or so passed the conversion, our early outlook. On the one hand, all eyes were on the actual conversion weakened itself, and that is a – that’s a fairly disruptive client event. Everybody has transferred over to a brand-new platform. So there is, as we know, an increase in attrition that we modeled that happens right about that period and has a significant amount of service level of focus that has put on that conversion weaken. Post that, what we found was, Scottrade clients immediately started testing our platform. So they signed up for our thinkorswim platform, frankly, at a higher level than we expected initially. Now we also think that, sort of, taking the tires right off the bat. But we expect that, hopefully, to translate into at least the revenue synergies we talked about in the initial model. I’d also say that now that we’re through the actual conversion weakened, we can turn the attention of our teams to start doing the outbound calls to our clients to get them more comfortable with the capabilities. There’s been a huge uptick in our educational offering. So all signs are good on the revenue synergies, and as Steve said, we get some nice surprises on things like stock lending that was, frankly, a bit of a surprise to us as we were doing the original modeling.

Okay. Thanks so much.

Next question comes from Devin Ryan, JMP Securities. Please go ahead.

Hey, great. Thanks, good morning, Tim, good morning, Steve and congratulations on the Scottrade conversion. It sounds like you learned a lot from that experience thus far, especially with the actual conversion. So it will be helpful, maybe, to talk about some of the things you learned about the firm, especially with the conversion, and maybe what was more challenging than expected, where you’ve exceeded expectations and then how this could – or is shaping how you’re thinking about organic growth in acquisitions from here?

Yes, great. So you’re right, it’s – when you go through these events, obviously it’s a massive amount of learning. I’m thrilled with the team and with the actual conversion itself. We actually had a third-party assessment done after the fact, and they compared to a bunch of other deals, and we compared very favorably. I think it was fairly textbook. Having said that, there was a bunch of assumptions we made going in to the conversion weaken and the client activity and their reaction. And then there was some learning. I would say the biggest one was – on the one hand, we were seeing, and we certainly believe, that our both our education and our trading platforms are the best in the business. As a result of that though, if you’re a client on the Scottrade platform, you were used to a simpler offering, which includes things like a simpler interface. There was there’s always an element of, "Hey, I’m looking at a screen, and none of this looks familiar." So there is a learning curve to come up. But clearly, if anything, we’re realizing, hey, the more we can work with our clients, they’re walking in, for example, to our new expanded branch network at a higher pace, and they’re sitting down with their advisors and their – the team they know and they’re saying, "Hey. Help me understand this. What can I now do?" So it’s probably making sure we’re doing as much handholding as we possibly can to get our comfortable – our new clients comfortable with their new capabilities.

And in terms of confidence for maybe doing or thinking about more of Scottrade acquisitions in the future?

Yes. Well, we’re always going to consider any acquisitions that make financial and strategic sense. I’m smiling while I say that. And so – but I think we’ve generally – what we’ve proven once again with the Scottrade conversion, is that we’re good at this. We’ve done this a number of times in the past. And I’m thrilled with the execution of the team to make sure we onboarded our Scottrade clients as best as we possibly can.

Great. Thanks, Tim.

Next question comes from Chris Shutler from William Blair. Please go ahead.

Hey, guys, good morning. Couple of questions on the new assets. On the retail side, and I seem to decelerate a bit sequentially, which I think stood in contract to some of your peers. I’m guessing that was just Scottrade attrition. But can you give us a little more color on the, what the sequential retail NNA trend would’ve looked like, excluding Scottrade? And then on the institutional side, any more color on the split of NNA between existing adviser clients and new advisors? Thanks.

Yes. So let me take retail first. So you’re exactly right. There’s a couple of things that happened moving in the quarter. Obviously, all eyes were on the integration weakened itself. And so as a result, there was a significant amount of activity, both on legacy Ameritrade and legacy Scottrade sides. So there was a bit of distraction, I would say, as we ramped up our service levels and our call centers staff prepared for the weekend, the training, the education. But having said that, notwithstanding we don’t want to split out, forever, Ameritrade legacy and Scottrade going forward. Our sense is that if you look at just the legacy Ameritrade retail NNA, it was improving year-over-year and quarter-over-quarter and actually, better. And then it will offset as we talked about elevated level of Scottrade attrition. So there’s two factors, I would say, going forward. The conversion weakened itself has passed us. And now that that’s the case, then the distraction level will go down, and now we can point all of our associate’s efforts towards building, upgraded relationships with clients, because we’re all one big happy family now.

And on the institutional side?

Oh, sorry, on the institutional side. Yes, we don’t split out the difference between new and existing clients. But I would say that we continue to have very strong growth in that platform, and our pipeline is very strong going forward.

Thank you.

Next question comes from Michael Cyprys from Morgan Stanley. Please go ahead.

Hi, good morning, thanks for taking the question. Just wanted to circle back on deposit betas. I think, you said in your prepared remarks that the next 25 basis point hike, you expect about $75 million to $100 million pretax benefit there, implying like a 15% or 20% deposit data. So just hoping you could frame how that compares versus your cycle-to-date deposit betas compared to prior cycles. And just, also, if you kind of overlay that with how you’d expect the deposit beta to accelerate beyond the next 25 hike as well. And I guess, why would that like accelerate from here?

Sure. So thanks a lot. I think as we think about the betas, and just to be clear, we quote the beta on the sum of the BDA and the free credits. But as we think about it, the 15% to 20% is what we expect to see in the next move. What we’ve seen to date is that betas have been a little bit better than we would have expected. With each move, we survey the competition, we look at our work customers and how they are reacting, what their expectations are. And what we found so far is that we’ve been able to elaborate a little bit more than we would have expected. As we move out into the future, clearly, we do expect that betas will increase over time, but we’ll take that move by move. We haven’t given any guidance. And at some point, what we’re going to see is that the money that’s left is not very rate sensitive. And so we wouldn’t expect, probably, a large increase in betas going forward. But we’ll continue to give guidance on that next quarter.

Next question comes from Steven Chubak from Nomura Instinet. Your line is open.

Hey, guys. This is actually Sharon Leung in for Steven this morning. Just a quick question on the BDA yields. Just hoping you could help us understand the benefits from three, kind of moving pieces. First is the anticipated June hike; second is a higher reinvestment yields versus some planned maturities in the back half; and third is the extension of excess float. Just trying to unpack how the BDA yield might project from here, given the forward curve and planned management actions.

Sure. So we actually expanded our disclosure this quarter. So if you look on our web FAQ, you’ll see that we gave the maturities for the next 90 days. And so over the next quarter, we would expect about $1.3 billion in maturities each month. And those maturities are coming off at about a valued 152 [ph] rate before management fees, FDIC assessments. The equivalent reinvestment rate is about 260 right now. And so you should see a nice pickup on those roles, albeit, this was fairly small portion of the entire portfolio. And then we also mentioned that there’s about $2 billion of money that we would plan to extend in the next quarter or two. And so you’d probably see a little bit lift on that as well, again, at that – probably, at that 260-ish rate compared to our float rate today, which the IOER is just 175. So hopefully, that gives you a pretty rough idea of the math, as you roll forward, the BDA yield.

Next question comes from Kyle Voigt with KBW. Please go ahead.

Sure. Just one on capital deployment. It’s like – sounds like we’re trying to repurchases in the fiscal third quarter is unlikely. Like, can you help us understand what level of liquid asset you’d like to have on your balance sheet before returning to more meaningful level of repurchase activity? I think you might have ended the quarter with around $460 million of liquid assets.

Yes, Kyle. Thanks, good question. So we haven’t set a limit, per say, yet. But we have really changed our philosophy on stock buyback. So we’re going to take this quarter and rebuild those liquid assets, and I think those who get to next quarter’s call, we’ll probably be able to give more guidance on when and how much we expect to return to buyer buyback.

Next question comes from Brian Bedell from Deutsche Bank. Please go ahead.

Great. Thanks for taking the questions. Just while we’re on the topic of building liquidity, as you think about the M&A landscape, how should we think we’re at, or I guess what was your Plan B for building liquidity, and how much cash do think do you need to run the balance sheet at? And also, how much do you think you could flex on debt EBITDA if, obviously, you trade talked about their review of their independent growth goals versus other alternatives. And so if a property like that came on the market, what type of financial preparation, I guess, would you be thinking about for that, or are you essentially managing buildable liquidity for the potential of a large deal?

So let me start on that, and as I said, the standard answer, any deal we would look at, only if it makes sense on those two factors, both strategic and financial. But there’s no element of our capital management that has to do with preparing for any potential deal. It’s all independent that’s over these deals.

Yes, I was going to say, typically, we’ve kept a little bit of excess cash at the parent company. But for the most part, the cash that we hold is for our liquidity purposes. And that’s what we would expect going forward.

Thank you.

Next question comes from Dan Fannon with Jefferies. Please go ahead.

One more on expenses. I guess, understand the $100 million or at least a $100 million decline next quarter. But maybe if you could help us think about the trajectory going forward for the fourth quarter, and then also talk about what the underlying core expense growth is, ex all the synergies.

Sure. Thanks, Dan. So yes, we would expect, probably, a similar order of magnitude in the next quarter. We’re going to continue to good declines in our expenses on a linked-quarter basis throughout this year. We think we’ll probably end the year, if you took out the losses on the unsecured debts, you would – you’d probably end up around the high end of the non-GAAP expense range. We’re not really going to comment into next year. But I think that our philosophy on expenses, we want to make sure we’re creating significant operating leverage going forward. And that would be on, sort of, a normalized basis after you take the benefits of the synergies out. And so while we’re making some investments today, a lot of those investments really are in growing more profitably in the future. And so I think you’ll see the benefit of that into next year

Great. Thank you.

Next question comes from Brennan Hawken with UBS. Please go ahead.

Just following up on the expenses. Sorry, one more here. Just want to make sure I understand. Number one, it looks like you’ve got the core expenses, ex Scottrade here,8.24% onthe quarter. You seem to be guiding that to be down by about $100 billion by the September quarter. So I would assume a run rate of, roughly, below 700s. And then number one, is that right? And then – or am I missing something? And then number two, given that you’re going to have the rest of the acquisition-related benefits out of fiscal 1Q, how should we think about the right jumping-off point in – to kick off 2019?

Yes. So as you said, if you take the non-GAAP OpEx right now, we’re at 8.24% this quarter. So we said, we should a drop 100 next quarter. So that’s the June quarter. And then we’ll drop again after that. And then we’d pretty close to a decent run rate rolling into 2019. There’ll be some additional technology synergies that we’re going to realize in the first quarter that would bring that number down again, and then you’ll have your normal parent increases and stuff into 2019. Hopefully…

Just a little bit more color, because I know there’s a lot of question marks on expenses. If I could sort of summarize, on the – we’re quite confident that we can hit the synergy expense target that we laid out in the deal model, number one. Number two, if the revenue environment had stayed the same as anticipated at the end of 2016, then you would be seeing a much more direct drive linked to that expense synergy number in the underlying run rate. The fact of the matter is that we’ve had very strong engagement in growth since then and as a result, it’s driven the revenue numbers that you’re talking about. So this is a bunch of investments that we want to take this opportunity to make. So let me just, sort of, walk through the high-level categories. I mean, the first is, just handle the higher levels of retail engagement we’ve seen in 2018 and hopefully, same in 2019. Second, I’d say we’ve – you’ve heard me talk about being a customer experience-based organization, and we’re going to take the opportunity to invest in increasing our service levels to clients. That’s in the short term. That’s in, literally, just more bodies on phones, et cetera, so that we have trained associates available to deliver a high level of service. We’re also increasing our advertising spend this year to the, sort of, a run rate level of the $300 million, which is, obviously, driving more revenue and growth with fairly good marketing efficiency, I’d say, too, given the market activity. And lastly, we want to make sure that we continue to the theme we’ve talked about over the last couple of years and investing in technology. Because ultimately, we believe that will bend the cost curve and provide an even better and lower-cost client experience for the long term. So having said all that, I know we’re still within the non-GAAP expense range for the year if you back out the margin losses. And as Steve said, we’re committed to operating leverage going forward. Next year will be a bit noisy, obviously, because of the synergies in the revenue growth we’re expecting. So it will be quite – but going forward, we’re – we still see a long term as one of our key operating metrics to make sure that there’s revenue growth that’s better than our operating expense growth. So I just wanted to give a little bit color of what the philosophy is on where we’ll invest for growth when times are good.

No, Tim. That’s very helpful. Thanks for the color. And just to clarify, Steve, you said that the $100 million next quarter decline, that’s in the operating expense, excluding the acquisition cost. I just didn’t clarifying, because from the comments from last night seem to imply $100 million in acquisition related, a $100 million in non-GAAP. I just wanted to try to understand that.

Yes. This – they’re $100 million in each, right? $100 million in non-GAAP. Yes.

Through the back half of your fiscal.

Just between this quarter and next quarter, non-GAAP operating expense declined $100 million from the March quarter to the June quarter.

Next question comes from Doug Mewhirter from SunTrust. Please go ahead.

I had a question about your Mobile adoption and your Mobile customers. Sounds like you made a lot of progress over the past couple of years in providing a good product for that, and I know it’s a pretty good engagement. Have you looked at them, I guess, the profitability of customers who engage on Mobile in terms of, do they have higher activity? Do they have higher revenue per trade? Or is it lower, because maybe they’re smaller clients or – just give me a better idea of how, if Mobile is sort of an incrementally – incremental contribution to your business whether on the revenue on the profit margin side.

Yes. One of the things we know about, when a client adopts our mobile platforms, they clearly are more active with us, they login more often, and they more trade more often. It make sense, right? If you’re not sitting engaged all the time sitting at your desktop and you can engage with markets, when you’re walking around turn it make sense to you to have actually more activity. So it is one of the key metrics in our trade group to try the mobile adoption rate. I think it’s about 31% currently and just the Ameritrade side, I’m not sure, in particular. And that was one of those, sort of, early revenue synergies that I talked about as well, which is the Scottrade client adoption of Mobile was lower, call it, 10%, and the immediately increased upon conversion we can do a higher rate than we originally expected. No time will tell you that they will actually get the same level of trade, uplift that we’ve seen, the CD Ameritrade by clients, but clearly, that is as an increase in a for profitability, if your client is on mobile. We love our all of our plans to be on mobile.

Next question comes from Conor Fitzgerald with Goldman Sachs. Please go ahead.

Good morning. Just wanted to ask on the leverage profile. I think, at least on my number it’s be a little lower than it was, pre-Scottrade once the full synergies, board. Can you just talk about how we should think about what your leverage profile should be going forward? And then on a bigger picture perspective, can you remind us how much leverage do think the business could accommodate, if the right opportunity came your way?

I’m sorry, Connor. When you say leverage, you mean debt to EBITDA?

Debt to EBITDA.

Yes, okay. Yes, so we’ve said that, we would expect our debt to EBITDA to be improving significantly as we, I get, ultimately realize the synergies as we continue to have those – the strong revenue growth. Ultimately, we would like to stay below two times EBITDA. Probably, a normal for level for us is between 1 and 1.5 times. And so I think those targets will be pretty consistent going forward.

Next question comes from Chris Allen with Rosenblatt Securities. Please go ahead.

Good morning. Just wanted to ask a little bit on the investments you’re making. I think it’s the right thing to be doing in this current environment. Any color in terms of the magnitude of the investments and the ability to flex them down, effectively slows. I mean, a post down from a little bit from where we have been running. Seems like we certainly from a little bit quieter, so getting that question from clients.

Yes. Generally, will don’t want to disclose too much detail on the levels. And Steve,.

Yes. So we’ve continued to increase the amount of [indiscernible] technology project investment that we make a couple of years ago, we were at, like $75 million we increase to $150 million and then $175 million. We’re heading up towards $200 million here. So we continue to ramp up the amount of spend on those projects. And we’re seeing pretty good business cases, and, a good payoffs-related to those.

Yes. If you think of those and the chunks are laid out for you, whether it be their overall great volume increase versus what we would’ve thought going into 2018. Well, each of those is in the multiples of 10 in terms of total. But again, as we say, the intent is to try and take the additional great revenue drivers we’ve seen and invest when we can and still deliver great earnings for all of our investors.

And the ability to flex it down, things are very quiet, is that something you can prolong very quickly or does it take a little bit of time?

Some of it is very easy to do. Obviously, the marketing spend, part of the reason why you spend is when there is a lot of activity in the market, so we have the opportunity to turn that on and turn that off. Specifically, when clients are interested in the market, that’s also when they’re trading. So that’s a very, very much a direct rise in period, absolutely. So that’s very key technology. That something we want to continue to make sure we’re wrapping up because ultimately, those projects deliver great associate and client expense benefit, but they also drive additional expense reductions over time. We do have the ability to because we have – we have a number of resources and third-party, so you can decide and projects and just not refresh. So that’s the – and easy to do it. But we try to make sure, and again, that philosophy having a long-term positive and operating leverage, that we have the ability to flex up and down when times are good and when times are bad.

Next question comes from Craig Siegenthaler with Credit Suisse. Your line is open.

Thanks, guys. Good morning.

Good morning.

Good morning.

So most of my questions were asked, I still have one on investment product fees. I see here in the disclosure that market fee-based revenues were $137 million in the quarter. But do you have the rough mix of 12b-1 fees, distribution shelf fee, shareholder servicing fees and maybe any items that make up this line?

Yes. So you got most of the items, there advised assets or what’s that line, our mutual fund service fees roll into that line. But we don’t grow that break in the past. I know…

Got it. Thanks.

And at this time, the Q&A session is over. I will turn the call over to the presenters.

Great. Well, thanks, everybody. A bit of unusual, as Rich said, state and the marriage, no dating. But it was great Q&A. We’re quite thrilled to have the quarter past. It was a big win for us. The integration, as we said, was we think fairly textbook. And it gives everybody a great boost to focus on a bit of improving our client expense and building the business forward on a much larger and more scaled up base. So we look forward to seeing you in the quarter. Take care.

This concludes today conference call. You may disconnect.