(Adds CEO comments on stock price and outlook)
By Jed Horowitz
NEW YORK, April 23 (Reuters) - TD Ameritrade Holding Corp , the biggest U.S. discount broker, said profit in its fiscal second quarter jumped 34.7 percent to $194 million on record revenue driven by net new client assets of $12.2 billion and heavy trading.
The profit translates to 35 cents a share, also up 35 percent from the year-earlier quarter and consistent with the forecast of analysts tracked by Thomson Reuters I/B/E/S.
On a conference call with analysts, Chief Financial Officer William Gerber said the firm expects earnings per share for the firm's fiscal year, which ends on Sept. 30, to hit or beat the high end of its earlier projections of $1.20 to $1.40. In the first six months, TD Ameritrade has generated earnings of 70 cents a share, up from 53 cents in the comparable 2013 period.
Fred Tomczyk, the company's chief executive, told Reuters that it's unrealistic to expect customer trading to continue at the elevated levels of the just-ended quarter, however, in part because the social media, biotech and other technology stocks popular with TD Ameritrade's customers are declining.
On the conference call, Tomczyk criticized the knee-jerk reaction to Michael Lewis's new book "Flash Boys," which says markets are rigged in favor of super-automated, high-frequency trading firms.
TD Ameritrade and other discount brokerage firms sell most of their customer trades to selected market-makers for execution, leading to concerns from investors that Lewis's book may spur regulators to curtail their lucrative "payment for order flow" practice.
TD Ameritrade and other discounters' stocks fell by more than 10 percent after Lewis's book was published on April 7, though they have recovered much of the decline.
Tomczyk said the company will never sacrifice its duty to seek the best execution for clients even as it extracts profit for shareholders from the flood of client orders professional traders use to guide their own trading, and that exchanges want to ensure liquidity.
"We're not anticipating because a book's been written that payment for order flow is going away," Tomczyk said. TD Ameritrade customers appear unconcerned about the book, he said, noting the company received only 70 phone calls and 112 emails asking questions about the book and payment for order flow. The company ended the quarter with 6.15 million funded accounts, up from 5.88 million one year earlier.
The Omaha, Nebraska-based company said average client trades per day, fee-based investment balances and total client assets all hit record levels during the quarter that ended on March 31.
Retail investors are "increasingly bullish" about stocks in general, Tomczyk said, and in the first three months of the year made an average of 492,000 trades a day at TD Ameritrade, up 30 percent over last year. The trading also elevated customers' highly lucrative margin borrowing, while cash balances fell to 14.8 percent of their accounts from a more typical range of 15-20 percent.
The margin lending led to a higher-than expected net interest margin of 1.52 percent, Christopher Harris, an analyst at Wells Fargo Securities wrote in a note to clients. Pretax profit margin, a measure of how much revenue falls to the bottom line before tax, rose for the entire firm to 39 percent from 34 percent one year earlier.
The margin was down slightly from the last three months of 2013, in part because advertising expenses rose 24 percent to $94 million due to TD Ameritrade's sponsorship of the Winter Olympics. Gerber said expenses should return to more normal levels the rest of the year.
Trading activity this month has fallen slightly but should remain high because many TD Ameritrade's customers become active when markets are volatile. The S&P 500 index rose or fell 1 percent or more on 25 days during the quarter versus just 12 days in the same period of 2013.
TD Ameritrade expects volatility to continue this year due to the Federal Reserve's tapering policy of reducing its bond volume and other fiscal policies, Gerber said.
Clients also are making many more of their trades through cellphones and other mobile devices. Mobile orders averaged 13 percent of the firm's daily total, up about 50 percent from last year.
Tomczyk also said the broad U.S. economy continues to slowly recover, a trend that encourages more retail investors to trade.
TD Bank Group, the parent of Toronto-Dominion Bank and TD Ameritrade's largest shareholder with a 40 percent stake, said TD Ameritrade's results should contribute about C$78 million to its yet-to-be-reported second-quarter net income. The bank sold some shares during the quarter but has the contractual ability to own as much as 45 percent of the broker-dealer.
Shares of TD Ameritrade, which have jumped 75 percent over the past 12 months, including reinvested dividends, fell as much as 2 percent to $32.10 in early morning trading on the New York Stock Exchange.
Tomczyk said investors were likely taking gains after a 3 percent rise in the share price on Tuesday on expectations TD Ameritrade would have a strong quarter. He also said it's fair to characterize the often-volatile stock at the moment as fully valued.
During the call he said the company expects to continue using surplus cash to raise dividends but has no immediate plans for stock buybacks. TD has to be cautious about buybacks that could bring TD Bank's holdings closer to the 45 percent level, he told Reuters.
(Reporting By Jed Horowitz; Editing by Clive McKeef and Meredith Mazzilli)