TD AMERITRADE Hits an Earnings Bump

Well, at least the market wasn't bitterly disappointed. Shares of TD AMERITRADE (NAS: AMTD) dropped only slightly following the discount broker's announcement of fiscal second-quarter results, which met diminished expectations. Revenue was up sequentially from the previous quarter, but net income fell -- and both figures were substantially lower than in the same period last year. This was largely expected by analysts and the market and follows a broader trend for the financial industry in recent months.

We'd rather be underwriting
These are difficult times to be in the investment-banking business. Interest rates are low, and trading activity has been lackluster for months in a largely unexciting market. There are, as ever, segments of the industry that remain lucrative, of course. Stock underwriting is doing well, thanks to the host of IPOs that have and will come to the market now and in the immediate future.

It's too bad TD AMERITRADE doesn't engage in that activity. Rather, as a largely retail-oriented brokerage firm, it has to rely on its clients to trade at a decent pace and, better, use the company's brokers to buy higher-margin products and services.

In those respects, TD AMERITRADE is actually doing fairly well given current market conditions. Its key metric of average trades per day was down last month to around 381,000 from February's 409,000. But February was a relatively busy period on the market, and March's number was higher than that of November, December, or January.

In fact, the company's single most important revenue component, commissions and transaction fees, grew 7% from the previous quarter. All told, revenues advanced by $20 million over the first quarter.

That's fine, but when looked at on an annual basis, these metrics aren't so pretty. March 2011 average trades per day amounted to 416,000, or 35,000 more than March 2012. Revenue saw a drop this past quarter compared with the company's 2011 fiscal second quarter, falling 6% to $292 million. The fall in net income was even steeper over that period, tumbling 20% to $137 million. Ouch.

Join the club
At least TD AMERITRADE isn't alone in feeling that pain. Broadly speaking, most discount brokers have been following the same pattern recently. Charles Schwab (NYS: SCHW) , for example, also saw slight improvements from its previous quarter. But compared with the same time frame a year ago, it posted a minor dip in revenue and a deeper one in net profit, matching TD AMERITRADE's 20% decline.

The pattern is likely to be similar for struggling rival E*TRADE (NAS: ETFC) . Analysts expect the company to post a net of $0.09 per share when it reports its results this afternoon. That anticipated per-share number is nearly 50% lower than what the bank netted in 2011's first quarter.

Even the big guys have been struggling in core areas lately. Goldman Sachs (NYS: GS) , for instance, saw decent revenue and net profit numbers for its most recent quarters, but its traditional investment-banking activities saw a year-on-year drop of 9%. Not even the mightiest Wall Street players are immune from Sluggish Trading Sickness.

Hollywood says buy
The costs line item that saw the biggest increase for TD AMERITRADE over its previous quarter wasn't any of the usual suspects -- not personnel expenses, depreciation, rent, or equipment. Rather, it was advertising that saw the biggest leap, at a whopping 48%.

This is likely because at the beginning of the year it hired movie star Matt Damon as its new spokesman, replacing character actor Sam Waterston. Hot Hollywood talent is always expensive (just ask any film producer), and even though Damon is donating his fees for the gig to charity, he's probably not doing those TD AMERITRADE ads for scale.

It's an interesting reposition toward the younger investing crowd for the company, whose advertising has been overshadowed by those funny E*TRADE talking babies. Will Damon help get revenue and profitability back to previous levels, though? If his work brings in new investors who trade actively, then possibly yes. The company could use their business.

Like TD AMERITRADE, a host of companies are posting results this earnings season, some of which are at a critical juncture in their business. For more, download our free report "5 Stocks Investors Need to Watch This Earnings Season".

At the time thisarticle was published Fool contributorEric Volkmanowns shares of TD AMERITRADE.Motley Fool newsletter serviceshave recommended buying shares of Charles Schwab, TD AMERITRADE, and Goldman Sachs, as well as creating a bull put spread position in TD AMERITRADE. The Motley Fool has adisclosure policy.
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