Is TD Ameritrade’s Fiscal 2020 Revenue Guidance Too Optimistic?

In its recent fourth-quarter and full-year earnings release, TD Ameritrade (NASDAQ: AMTD) provided a strong guidance for its fiscal 2020 revenue despite zero commissions and changing competitive landscape (the company reports based on a fiscal year ending September). The slashing of trading commissions are expected to wipe out nearly $2 billion in recurring revenues from the company’s top line for the current year – understandably triggering a steep decline in its market value. While we expect Ameritrade’s other revenue streams to witness strong growth and mitigate a sizable chunk of the lost revenues, we believe that the company’s current revenue guidance of $4.9 billion to $5.3 billion for the year is rather optimistic. After all, TD Ameritrade had the highest exposure to trading revenues among the 3 largest U.S. brokerages. Trefis captures trends in TD Ameritrade’s Revenues over recent years along with the forecast for the current fiscal year in an interactive dashboard.

A Quick Look at Ameritrade’s Revenues

TD Ameritrade reported $6 billion in Total Revenues for the fiscal year 2019. This included five revenue streams:

• Commissions and transaction fees: $2 billion in FY2019 (33% of Total Revenues). A trading commission is charged for executing trades in stocks, bonds, options, futures, etc.
• Net Interest Revenue: $1.5 billion in FY2019 (25% of Total Revenues). It is the interest earned on loans and margin receivables net of interest expense on funding sources.
• Bank Deposit Account Fees: $1.7 billion in FY2019 (29% of Total Revenues). It is earned for providing cash management services such as deposit accounts and money market mutual funds.
• Investment Product Fees: $586 billion in FY2019 (10% of Total Revenues). It is the fee earned on client assets invested in investor programs, mutual funds, and money market funds.
• Other Revenues: $178 million in FY2019 (3% of Total Revenues). It includes proxy income, solicit and tender fees, and income from other ancillary services.

Improving Customer Base and High Volatility To Aid Revenue Growth, But Will It Be Enough To Meet Guidance?

• Ameritrade’s management has guided for $4.9 – $5.3 billion in total revenues for fiscal 2020.
• With this guidance range, the management expects total revenues to shrink by 17% in fiscal 2020.
• Keeping in mind the low interest-rate environment and global trade uncertainties, Trefis forecasts Ameritrade’s key revenue drivers in an interactive dashboard.
• Post-zero commissions, the bank deposit account fees are expected to be the largest contributor to the company’s top line and are likely to grow by 4% to $1.8 billion in FY2020.
• Though the low short-term interest rate environment and declining 5-yr bond yields present challenges in the near term, the growing BDA balances are likely to offset interest rate declines.
• Considering a 50-basis point reduction in the federal funds rate, the net interest revenues are expected to remain relatively flat in 2020, with a slight upside from margin balances.
• The investment product fee acts as a recurring revenue source in this zero-commission era and integral in determining the company’s long-term competitive position.
• We expect the average fee-based balances are to observe strong growth in 2020, as the company expands its RIA network.
• However, considering stiff competition from Schwab and other brokerages for custodial assets, Ameritrade is likely to face margin erosion and yield reduction in the near term.
• The company earned $458 million as payments for order flow in FY2019 and we recognize it as a recurring revenue stream under the ‘Other Revenue” category for our FY2020 projections.
• Though a strong guidance figure led to a surge in TD Ameritrade’s stock, we forecast its actual revenues for the year to fall short by nearly $100 million.

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