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Operator

Good day, everybody, and welcome to the TD Ameritrade third quarter fiscal 2006 earnings results conference call. Today's call is being recorded. At this time I'd like to turn the call over to Katrina Becker. Please go ahead.

Katrina Becker

Thank you and good morning, everyone. By now you've probably seen our press release that was made public this morning. You can also review a copy of our release, listen to the call, and submit any questions to us via our corporate web site at AMTD.com. We will be discussing a number of financial measures in this call, so in order to more easily follow along with us, we strongly encourage participants to download and print the presentation for this call, located also on the home page of AMTD.com. If you want to contact us directly after the conference call, please call investor relations at 800-237-8692. Before we begin, I would like to note that this call contains forward-looking statements that are made pursuant to the Safe Harbor provisions. These statements involve risks, uncertainties and assumptions that may cause actual results to differ materially from those anticipated. Listeners to the call are advised to review the risk factors contained in our most recent annual report on Form 10-K and quarterly report on Form 10-Q for a description of these risks, uncertainties and assumptions related to the forward-looking statements. In this call, TD Ameritrade management will discuss some non-GAAP financial measures, specifically: operating margins, EBITDA, and non-GAAP EPS and liquid assets. Listeners to the call can find a reconciliation of these financial measures to the most comparable GAAP financial measures and other required disclosures in the slide presentation, which can also be found, again, on our website at AMTD.com. Please note that this call is intended for investors and analysts and may not be reproduced in the media in whole or in part without prior consent of TD Ameritrade. This call will cover June quarter earnings results for TD Ameritrade Holding Corporation. This call also marks the first complete quarter of combined results since the close of the TD Ameritrade transaction. At this time, I'll turn the call over to TD Ameritrade's CEO, Joe Moglia, who will be followed by TD Ameritrade’s CFO and CAO, Randy MacDonald.

Joe Moglia

Thank you very much, Katrina. Good morning, everybody. This morning we are going to go over our highlights for June. We’ll talk a little bit about our growth strategy; specifically, where we also stand with regard to the launch of our value propositions and our brand and ad effectiveness so far; and then we'll talk about guidance for the September quarter, the rest of '06, and for '07. We have a slide for you that talks about June quarter 2006. All of these numbers for us, every one of them is a record. Our EPS for the quarter, despite a soft June, came in at $0.23. That was a tie, actually, for the September quarter 2005. Non-GAAP EPS -- which is basically our EPS that excludes the amortization of the intangible, as well as the interest on our loans -- came in at $0.27. Our net income came in at $140 million, and a comment about that. With our numbers, our net income comes close to approximating our free cash. If you annualize that $140 million number, you're well over $500 million of something that resembles our free cash flow. Clearly, there are a number of things we can do with that. Net revenues came in at $540 million, but our revenues generated from our assets have come in at 59%. Now, as we become more recognized for becoming an asset gatherer in the marketplace, I believe that ultimately, over time, that will also have a positive impact on our multiple. Our pre-tax income came in at $233 million, or 43%. That's still ahead of schedule as far as the integration goes, and we are still committed to being back over 50% free cash margins during 2007. EBITDA, $287 million or 53%. ROE for the quarter, if you annualize it, came in at 36%. Our operating margins -- and remember, our operating margins are our pre-tax margins minus our advertising -- came in at $288 million or 53%, as well. If you go on to the next slide, we talk about our value propositions and our brand update. Remember we are only 66 days into our value propositions and our new brand re-launch. So far we're pleased with what we've seen. We've had increased brand awareness by 25% and we are outperforming industry norms as far as our actual ads go. We are reconfirming our ad spend for the 12 months from the actual launch of $150 million. We are relatively pleased with what we're seeing with regards to our business drivers. That will take us to the next slide. Now, average trades per day came in around 253,000 that's about flat to where we were for the March quarter and it’s up 26% from where we were a year ago on a pro forma basis. So far in July, we're averaging 204,000 trades a day. New accounts came in at 128,000. Now the CPA for those accounts was $432. That would be on the high side for us. The reason for that is, if you remember in April, we were advertising two brands. So the actual spend for advertising for April was $26 million; it was $25 million for the subsequent May and June. One of the pieces of data we looked at to give us a little color with regard to our value propositions was we looked at periods just before the launch and just after the launch. We compared that to where we were a year ago for the same time periods. The periods after the launch have outperformed the periods before the launch. As I said, it is only 66 days into this, but so far we're pleased with the early results. Net new accounts was 69,000. Qualified accounts were 3.26 million. That's down 1% from where we were a year ago versus an S&P that was down 2%; a NASDAQ that was down 7%; and a DOW that was in effect flat. Client assets came in at $255 billion, that was down 2.7%. Cash and money market funds came in at $37.5 billion, that was up about $1 billion from the previous quarter. That tells us that of our overall client assets, we've got about 15% on the sidelines. Since most people don't come to us specifically to park cash, we would look at that as a liquidity pool to get back in the market as things seem to get a little better. Average investable assets, for the quarter we're $27.5 billion, that's down $200 million from where we were the previous quarter. The yield on those accounts that were able to earn came in at 387 basis points, up from 361 the previous quarter. The primary reasons for that were the two Fed increases. We have already begun our extension out the curb with regard to our client assets. Randy will give you a little bit more color on that in a couple of minutes. The next slide we talk about our guidance. Before I do that, I want to spend a minute and talk about the glitch that we had in the middle of June. Basically what happened was we were interested in upgrading the TD Waterhouse security. The typical TD Waterhouse client has always been able to automatically log into their account. Best practices absolutely suggest that you have a mandatory manual identification of yourself every time you come to the site. We implemented that, that created confusion, thus some service crashed and there were backups in the call center. That did take us three days, we did get that resolved. The impact on our numbers, in effect, is de minimus. That is behind us now. That leads us to this whole philosophy of our effort to try to invest in ourselves for '06 and '07 so we come out and have a stronger '08. While that was a bad experience to go through, I think we've learned a lot from that, and hopefully that will never be repeated. When we look at other things that are just on the docket, or other things that are going on, keep in mind that the number one priority for us is the client experience. So, for example, when we closed the deal I told you that we had five call centers; we were planning to close two of those. Instead, we closed one and we are extending the lease on another one for a couple of years. The reason why we were doing that is we were, in effect, going to be moving head count to Omaha and Fort Worth. As we were analyzing it, we found out that it was more advantageous, in effect, to leave the call center in Canada open and fund that with our head count. The ultimate impact down the road that will have on our expenses will offset. The initial impact it has, it will take us a little longer to get to our goals, but we are still committed to our goals for 2007. Another possible example: we are committed to our clearing conversion for the March quarter 2007. But if, for any reason, anybody in our organization thinks that we are not prepared enough where that would create a disruption with our client service, we would postpone that clearing conversion at that particular point in time. Those are just concrete examples of what I mean when I say we're investing in '06 and '07 to make sure we are stronger in '08. As far as September quarter guidance, we have taken our activity rate down from 3.8 to 3.6, just based on all of the issues that we've seen with regard to what's going on in the market; geopolitical headaches, the softness in the market that we've seen from June and what continues through July, for July. That happens to be offset by the Fed increases, so there's really no change at all as far as the September quarter goes. When you look at overall '06, you just take the three quarters actual, you add the September quarter forecast, and what you'll find is that we are $0.03 above the midpoint for '06. Now, when we look at '07, keep in mind that this is not meant to change our policy. What we have done every year for the last few years is that we have always given you as much detail as we can and color on the upcoming year, at the end of the current year. We continue to plan to do that. So therefore, most of the color you're going to get from us with regard to '07 will take place at the end of fiscal '06, and therefore the October quarter as we have been doing all along. But, numbers that already exist, we want to make sure that you have. So with the two Fed increases, it gives us an incremental $0.04. Thus we are increasing '07 guidance today by $0.04. But more to come on '07 in October. A couple of other comments. First, so far we have told you that every 25 basis points that the Fed tightens in the front end approximates about $0.02 to our overall bottom line. That's not going to be a good measurement going forward, because we have already extended out on the curve, so therefore the movement of the Fed on the front end matters not quite as much to us as what it had. Part of that increase that the Fed may provide going forward may also wind up going to our clients. There are two things there. We are already well into our extension, and at higher rates, we may choose to give more of that to our actual clients. As I said, we are still committed to hitting our cost synergy goals, which gives us a fixed cost run rate of $333 million by the end of the integration. With that, let me turn it over to Randy.

Randy MacDonald

Thanks, Joe. Let's go to the financial highlight slide and just review again the quarter. We had record EPS, $0.23; that compares to $0.18 for the same quarter last year. So that was a 28% growth in earnings. We also had record revenues, as Joe mentioned, over $500 million of revenues. The mix was a record. The asset base revenues were 59%. So we believe we're delivering on our strategy for diversifying our revenue stream and, as Joe mentioned, we think that may lead to a higher PE. Let's now go to the guidance and take a look at what we're doing. We're increasing our guidance; we are going from $1.06 to $1.10. I want to remind everyone that next quarter is the end of our fiscal year, so that would be our normal cycle for putting out next year's guidance, so we wouldn't normally do that until the next earnings call. At that time we'll be reviewing the outlook for updates and color. In the meantime, we are only updating the guidance for the known events and there were three. We had the two Fed increases in May and June which had not yet been built in to our guidance, that's resulting in a $0.04 lift in earnings per share coming from the higher spreads. We've also extended $8 billion of client cash in the FDAC or MMDA accounts to an average duration of two years. This translates to an average of $6.4 billion versus the guidance we gave of $5.7 billion. We still have another $6 billion to extend, but first we need to get that swept from the broker to the bank, and I expect that will take place in the next few months. Lastly, we're enhancing the value proposition for clients with higher balances. Let me remind you that we have not built into our guidance any potential benefit we might see from having just released our new value propositions; again, they are only 66 days old. So next quarter when we have more historical results, we expect to be able to use those historical results to help us update the guidance for next year. Let's take a look at the investable assets on the next slide, and the net interest margin. The purpose of this slide is to assist you in understanding the changes that I just described. So on the left side of the slide, we have a graph for the changes in the average investable assets, and in the amount we've extended in investment duration, that's the yellow. So the average investable assets for the June quarter were $27.5 billion. Of that amount, we extended the duration on $8.1 billion of the MMDA assets. By the September '07 quarter, we'd expect those average investable assets to have grown to about $29 billion, and of that we expect about $13 billion will be extended in duration. Turning to the right side of the slide, we have the changes to the net interest margin. Since we announced the TD Waterhouse deal in June of 2005, we've gone through nine Fed increases. Until recently, because we had not yet extended the duration of our assets to match the longer life of the liabilities, we've enjoyed the majority of these assets repricing and therefore expanding our net interest margin. As a matter of fact, we've hit historical highs for the net interest margin, that's the 3.87% in the June quarter. This is in spite of TD Ameritrade not risking its capital by being in the principal lending business. As Joe mentioned, we're no longer using the Fed moves as a sensitivity factor for increasing EPS. Therefore, we're providing an update on the midpoint of our guidance through fourth quarter of '07. We expect the net interest margin to be about 3.81%. Let’s now talk about the quarter. Let’s go to the next slide, which is looking at the revenues for the June quarter versus the midpoint of our guidance. Starting at the bottom of the slide, it's labeled Point 1, the midpoint in net revenue guidance was $526 million and we came in at $540 million, or about $0.015 of EPS better. Then moving back to the top of the page, it's labeled Point 2. Transaction-based revenues were $213 million or $12 million better than we expected. Trades per day were 253,000 or 9% better than our guidance. The commission rate was slightly below guidance and that's because the capital markets business is winding down more quickly than we guessed as we've converted TD Waterhouse over to the Ameritrade systems. Moving down near the bottom of the page, labeled Point 3, the asset-based revenues were $318 million; that was versus guidance of $309 million. That was mostly due to increased balances in the money market and mutual fund assets. The line below that, labeled Point 4, Other Revenue, was about $6 million below guidance for three reasons: $2 million in maintenance fees at TD Waterhouse legacy were waived; we had a $2 million mark-to-market adjustment for our seats on the New York Stock Exchange; and we reclassified up into commission income $2 million of handling fees. Let's turn to the expenses. We’ll compare the expenses to our guidance. Starting down at line 11, let's take a look at the June quarter. The expenses, excluding advertising, they were $252 million, or $21 million better than the midpoint of our guidance. There are three main reasons, the first one being line 1. Compensation was better than expected by $19 million, and that's because we're not reaching our internal compensation targets. So we have a year-to-date adjustment for reduction in bonuses. Turning to line 2, this is the fair market value of the restricted stock unit hedge. So the value of the restricted stock units, its included in compensation above, it went up in value. This is the hedge, and it went down. So they offset each other. Line 8 is the second reason for the expenses being down, professional services were about $8 million lower, and we're using less contractors for the integration than we expected. Lastly at line 10, other, that was $3 million higher than expected. Most of that was variable expenses, but we did have some relicensing of some associates when the two introducing brokers got merged. So let's turn to the next slide, it's entitled Improved Deal Economics. Let's take a look at the first column. At announcement, we said we expected the TD Waterhouse deal to be 39% accretive upon completion. The second column, which is fiscal year ’06 -- and by the way, that only includes eight months of the new combined company -- we're already nearly achieving the accretion goal and that's without most of the integration being completed. The third column, Fiscal Year ’07, that includes the camel's hump of expenses until we get to the fourth quarter of that year, is significantly greater than at announcement. Then the last column, we took the fourth quarter of '07 and we annualized it. It's 83% accretive and is more than double our original estimate. This is without any potential benefit of the new value propositions. So in the next five quarters, we're expecting to be at a run rate of about $1.22 in earnings per share. Let's look at the next slide, the growth drivers. This slide provides some context on the fiscal year '07 guidance versus actual results. Again, this quarter, the actual results for those key drivers of organic growth mostly exceeded the midpoint of our guidance. So the new accounts, for instance, were 128,000 or 20% better than the midpoint of our guidance. Our current guidance for the next five quarters continues to be 21% below these results. New accounts, net of traded accounts was also significantly better than thought. For the next five quarters, our guidance continues to assume more modest growth than what we've experienced so far. Primarily driven by a downturn in the market, qualified accounts were below our expectations. Investable assets were in line with our expectations, but I'll note the next five quarters also have modest growth forecasted. Then the yield was much better than expected, for all of the reasons we've discussed. We don't expect this to change much from here and our current guidance is 3.87%. Finally, the trades per day were 9% better than our guidance and very much ahead of our expectations for the next five quarters. So keeping in mind these results, now let's review our sensitivity table. Let's go to the next slide. As we've done for you in the past, we are providing you with a sensitivity table. It includes four drivers of growth and the impact they generate in the earnings per share. I remind you we've not yet quantified the potential impact of our new value propositions on growth, higher yield or retention. So if the activity rates increase or decrease 1%, it results in $0.20 of annual EPS impact. Per 100,000 of new accounts, that's a $0.04 impact; and for $1 billion of investable assets from existing clients, that raises EPS by $0.04. So keeping in mind that we're closing our GAAP risk by extending the duration of our assets and by mostly sharing the fed rate changes with clients, we wouldn't expect a significant impact on earnings for further Fed moves. Let's summarize, let's go to the key takeaways slide on the next page. Let me close by saying it was another good quarter. We surpassed expectations in almost every area, we had a record quarter. We increased our guidance to $1.10, and we continue to outperform our modest growth. Lastly, we continue to be on track for integration and delivering on our operating expense synergies. So operator, we're going to turn the call over to you now for Q&A.

Operator

(Operator Instructions) Our first question comes from Patrick Pinschmidt - Merrill Lynch.

Patrick Pinschmidt

Thanks guys, good morning. A quick question on account growth. Total accounts were up, qualified accounts were down. I understand the function of the market decline on the average balance for the typical account, but can you maybe help us understand any mix shift you're seeing as a result of your value proposition? Are your accounts becoming weighted towards the lower end because you're retaining more of those? How has the growth been at the higher end in the retention of the TD Waterhouse accounts?

Joe Moglia

So far, Pat, the type of growth we've seen has been fairly broad-based, it has been across the board. The retention so far, as far as the Waterhouse accounts, has been fine. As I said, it's still 66 days, it’s still relatively early, and we'll continue to track that. But I don't find any significant mix of shift there between what we see with regard to what we are opening and what we are, in effect, retaining. I don’t see anything specific there.

Patrick Pinschmidt

Okay. That's helpful. And then on ad spending, obviously the last two months have been kind of tough, and you've actually taken up your ad spending guidance for '07. How sensitive are your spending forecasts there to the market backdrop? If we were to see a continuation here in some of the weakness, would you take that down? Or if conditions got better, would you actually even take it up?

Joe Moglia

Pat, we would look at serious ad spend every couple of weeks. Both of what you said would be true. If our ads are being particularly effective, we are opening a lot of accounts, it's a reasonable CPA, we would grow that ad spend. If the reverse were true, i.e. a debacle over the summer months, stuff going on in the Middle East, problems with North Korea, energy prices, et cetera, et cetera, if indeed the typical individual investor moved to the sideline and we saw our ad spend wasn't being effective, we'd dial it back.

Patrick Pinschmidt

Thank you very much.

Joe Moglia

Thanks, Pat.

Operator

Our next question comes from Richard Herr - KBW.

Richard Herr

Good morning.

Joe Moglia

Good morning, Rich.

Richard Herr

To start off, any kind of color you can give us on how July's been trending?

Joe Moglia

Well, activity for July is similar to what we saw as far as June goes, and its about 204,000 trades a day so far. I think it's fair to assume that as the markets come under more significant pressure, the retail investor might become a little bit more nervous, and might tend to move more towards cash. In fact, that's pretty much what we've seen; a movement over the span of the last several weeks on the part of our clients to greater investment products in the front end of the curve. They have a significant weighting, actually, in the energy sector as far as the stock holdings go. Pretty much what you see going on in the market, is what you should assume is taking place with the retail investor.

Richard Herr

That is helpful. On the qualified accounts, just to follow-up on that again, is this in any way related to, or lack thereof of, growth in the qualified accounts? Is this in any way related to your decision to give more of the yield to your clients rather than letting that drop to your net interest margin?

Joe Moglia

No, I wouldn't think so. I would think in fact maybe the opposite would happen as far as that goes. I think the downward movement that we had in our qualified accounts is almost totally correlated with the downward movement that we've seen in the actual indices. The S&P down 2%, the NASDAQ down 7%, I think is the dominant reason for that.

Richard Herr

Thanks for being so clear on the integration and on the data centers. Can you just walk us through, are you still committed to, I know you said March end quarter clearing integration, I think you had said in the past January. Is that still a reasonable target to keep in mind in terms of modeling, or should we dial that back a bit?

Joe Moglia

No, it is a reasonable target to keep in mind as far as your models go. You should not necessarily dial it back, but I want everybody to understand -- and this gets back to this philosophy in '06/'07 to benefit us, so we're stronger in '08. The number one priority for us is going to be the client experience. If anybody -- this call is not going to be made by me, there are probably 30, 40, 50 people in our organization that could turn around the week before the clearing conversion takes place and say, you know what? I think because we have quotes A, B, C over here, it may not be a smooth as transition as we'd like it to be for our clients; we should hold off. I will then say, let’s hold off. So the number one priority is still what we are going to look like coming out of '07 and going into '08. If that meant moving the current conversion back a little bit, we will not hesitate to do that. Having said all that, Rich, we are still on track to have the clearing conversion done by the March quarter.

Richard Herr

Thanks. Congrats on a good quarter.

Joe Moglia

Thanks a lot, Rich.

Operator

Our next question comes from Rich Repetto - Sandler O’Neill & Partners.

Rich Repetto

Hi, guys, can you hear me?

Joe Moglia

Good morning, Rich. I can hear you. We can hear you. Everybody can hear you.

Rich Repetto

Well, let me ask a question then. The average commission, I didn't get the explanation that Randy said on moving legacy over to Ameritrade. I would just follow up on the average commission explanation.

Joe Moglia

Nobody heard that, Rich. Would you repeat that? Just kidding.

Randy MacDonald

Rich, if the numerator of the equation is revenues, denominator being trades per day, included in the numerator is the capital markets business. So as we've moved those revenues down, we’ve shifted the order flow over to the Ameritrade legacy order flow. We get payment for overflow, we're no longer acting on a principal basis and being an intermediary there, so that revenue goes down. The expenses -- the capital markets business, as a net business, is not as profitable to us as being an agent only and getting payment for order flow. So you have the revenues for the capital market businesses up top and the expenses are down in expenses, so you're not seeing the net economics there. Does that make sense?

Rich Repetto

Roughly.

Randy MacDonald

Well, so let's try it again. So if the capital markets revenues were included before and now they're going down, they're shrinking, then your commission per trade is going to go down.

Rich Repetto

Okay. The expenses go down, are being reduced in the expense categories?

Randy MacDonald

That's correct.

Rich Repetto

Okay. On the comp going down in this quarter, because you're accruing less, but I see in the next quarter it goes right back up. I guess this is just a year-to-date accrual. The comp goes back up; the guidance roughly $13 million to $14 million, I think, in the summer quarter here.

Randy MacDonald

That's correct, Rich. So what you're doing is reversing the first two quarters that you accrued that were higher than they should have been. Our comp targets are higher, we are not meeting them, so we're reversing the first two quarters of bonus accruals. You're absolutely right.

Rich Repetto

When I look at '07 comp, it's not up materially, but up slightly as far as the overall numbers. Was that just refining the numbers?

Randy MacDonald

No, what happens, we have cost of living adjustments and as the two firms have come together, we have to harmonize benefit plans and things. So there's constant refinement, yes. But there's also just increases to salaries and benefits.

Rich Repetto

My last question, when I dug through this guidance, the next year you can see how you're bringing up the rates on margin lending, on the segregated, the cash because you have factored in, it roughly looks like 50-basis point increases. You are following through on the 50-basis point increase, the two Fed rate hikes we saw in this past quarter. But I also see that on the client cash, what you are paying on clients, you are bringing up about 47 basis points as well. That hadn't been the case in the past on a Fed hike, you might share only 10 basis points with actual cash sitting in the client account. I am just trying to understand that a little bit more.

Joe Moglia

Rich, as we get more involved with the long-term investor segment, there are going to be more people that have greater interest in having a specific yield or a greater yield on their overall cash balances. So consequently, as we move forward, we are making an assumption that we are going to share much more of a Fed increase with our clients that perhaps we had in the past. As has always been our standard operating procedure, we would rather err on the side of factoring that in and then adjusting if it doesn't happen rather than doing that the other way around.

Rich Repetto

Tutto grazie. Ciao.

Joe Moglia

Prego, prego. Ciao.

Operator

Our next question comes from Howard Chen – CSFB,

Howard Chen

Good morning, Joe. Good morning, Randy.

Joe Moglia

Good morning.

Howard Chen

Joe, you began the call talking about the free cash flow generation of the Company and your options with flowing that. Can you update us a bit on your current thoughts and prioritizing delevering the balance sheet, stock buyback, acquisitions, or internal investment?

Joe Moglia

Right. I think, certainly with the level that the stocks are at now, we would feel that the stock is certainly an attractive purchase here. There are some qualifications that are associated with that with regard to the loan agreements, or the covenant agreements that we have on our loans. These are all of the different things, Howard, that we will be looking at. These are things, frankly, that we're going to be discussing at our next board meeting in August.

Howard Chen

But just mechanically on the stock buyback, with the TD ownership and the cap that they are under, is there a way that you could buy back stock on the market outside of that $5 million to $6 million that the Company is committed to buying back?

Joe Moglia

The answer is absolutely yes. Keep in mind while there's a cap on TD's ownership, TD's as part of the board is also very much behind us doing the right thing to TD Ameritrade. So if at the end of the day it's the right thing for TD Ameritrade to be buying back stock, we would buy back stock; and if TD needed to sell stock to offset that, they would do that.

Howard Chen

Okay, that's helpful.

Joe Moglia

So you should always assume that the number one priority for our management team and for our board is to do what we believe is in the best long-term interest of our TD Ameritrade shareholders.

Howard Chen

Randy, switching gears a bit, on the professional services fees you touched on it briefly in your comments, but I thought I heard you say last quarter you’d be hiring some consultants and we would see somewhat of a one-time pop-up in the professional service fees. Did you find a cheaper way to do that, or was some of that investment pushed off due to the market environment or canceled altogether?

Randy MacDonald

It wasn't really canceled altogether, it was a combination of more full-time people in technology rather than the contractors. The second thing is, there are only so many people you can get around the hood of a car to work on the engine, so we cut back on the number of contractors. Doesn't really impact us in terms of the efficiency of the work getting done, though.

Howard Chen

Okay. On that EPS sensitivity to Fed actions, does that work both ways? Meaning, since you've extended some of the duration and locked in the rates, does that mean you're protected if the Fed begins lowering rates?

Randy MacDonald

That's correct, that's what we're trying to do by matching the durations of the assets and the liabilities. So regardless of whether rates are going up or down – now shifts in yield curve may be a different answer. We've talked about that in the past, but I agree with your statement.

Howard Chen

Okay. Final one, any changes in the equity options activity mix this quarter? Did that have anything to do with the lower commission per trade, or is it purely due to this cap markets business contribution coming out?

Randy MacDonald

There was. It was so minor that I didn't bother to include it in my comments.

Howard Chen

So, to Joe's point, de minimus impact on the average commission per trade?

Randy MacDonald

Yes.

Howard Chen

Great, thanks, guys.

Joe Moglia

Thanks, Howard.

Operator

Our next question comes from Matt Snowling - Friedman, Billings, Ramsey.

Matt Snowling

Good morning.

Joe Moglia

Hi, Matt.

Matt Snowling

Hi, Joe. One question. I know it's fairly early into the value proposition, but I'm wondering if you can give us a sense of how the branches are performing now verses pre-merger. Has Amerivest had enough time to really take hold, is really the question?

Joe Moglia

I think Amerivest still has not had enough time to take hold. Keep in mind, there are a couple of things going on as far as the branches go, Matt. First we went from 140 to 100, so that incremental overflow from the branches that we closed down went to those branches. Then we are also at the point where legacy Ameritrade clients will now also have access to those branches. So those are the types of things that are going on, and we still haven't gotten anywhere near where I'd like to be at with regard to the sales force distributing Amerivest for us.

Randy MacDonald

So the thing that we've not done so far is assign the Ameritrade customers to a branch. That's not yet happened, so it couldn't have traction; that's about to happen.

Matt Snowling

That's about to happen?

Randy MacDonald

Yes.

Matt Snowling

2006?

Randy MacDonald

Yes.

Matt Snowling

Great, thanks.

Operator

Our next question comes from Prashant Bhatia - Citigroup.

Prashant Bhatia

Hi. On the MMDA rate earned that you show in the guidance, I think it's about 350 to 360 basis points. We come up with about 80 to 100 basis points higher making the assumption that you earn about 560 basis points on the cash that you invest. You pay the client about 1%, which is your free credit rate, and then you pay TD 20 basis points or so on management fee. You can come up with roughly 80 basis points higher, maybe 100 basis points higher. Is that the right way to look at it?

Randy MacDonald

Yes, I think that’s probably the math. We've gone through that with you before. I think that hasn't changed, Prashant.

Prashant Bhatia

So that's probably just a little consecutive, the 350 to 360 basis points?

Randy MacDonald

I wouldn't characterize it as conservative, I think what we're showing you is what's really going on. We're not taking high risk. The investments are not high risk.

Prashant Bhatia

No, I understand that, I'm just saying taking no risk. If you look at a two-year swap curve, you're earning probably 560 basis points today and you're paying the customer about a percentage point.

Joe Moglia

We're paying actually a little bit higher than that to the client.

Prashant Bhatia

Okay a little bit higher, a few basis points higher. I'm just using free credit as a base case, and I guess you pay TD about 20 basis points. I come up with about a 440 basis point net spread verses the 350 to 360 basis points that you're showing.

Bill Gerber

The difference between what we are earning and the 20 basis point fee that we pay to TD Bank are going to decline.

Prashant Bhatia

Okay.

Bill Gerber

We can go through that in more detail if you want, that's the math.

Joe Moglia

Prashant, I'm going to ask if Bill gives you a buzz on that, you know, subsequent to the call later on today. I think your numbers versus our numbers, we're just paying more to the clients than you think we are.

Prashant Bhatia

Okay. Fair enough. I know you've set a target for keeping account attrition below 10%. What are you seeing in terms of revenue attrition on the TD side? How is that tracking?

Joe Moglia

We've seen an improvement across the board on our overall revenue attrition. We're well below the 10% target that we originally established through the integration for the TD Waterhouse clients.

Prashant Bhatia

And that 10% target is on accounts?

Joe Moglia

The 10% cut target is for the Waterhouse accounts. The revenue attrition we don't disclose, but that has also improved.

Prashant Bhatia

Okay. Great. Then in the RIA business, have you seen any Ameritrade customers starting to opt over to the RIA platform? Do you have any kind of process in place to help that along?

Joe Moglia

We have an Advisor Direct Program where Ameritrade clients that are interested or need specific help can get referred to our advisor program. Yes, that's moving along.

Prashant Bhatia

Okay, great. Thanks.

Operator

Our next question comes from Mike Vinciquerra - Raymond James & Associates.

Mike Vinciquerra

Thank you, good morning. If I look at the guidance on interest on borrowings, Randy, am I correct in that you're looking to pay down roughly 25% or so of the outstanding debt over the course of fiscal '07? Just looking at the decline from the first quarter of the year to the fourth quarter, it looks like about a 25% decline in interest. I'm just doing a quick, back of the envelope.

Bill Gerber

You actually have a line in there, average debt outstanding, which is the third to last line of the entire outlook statement. The average goes from $1.6 billion in the December quarter to $1.1 billion in the September ’07 quarter.

Mike Vinciquerra

Sorry I missed that, I apologize. I have a question on the Canada operation. I just want to make sure I understand. The original guidance was $378 million in cost saves. Can you help us understand how you get to the same number even keeping open an additional facility? Maybe a little more detail on how you get to the same synergy number and what really drove keeping that fourth facility open versus moving it to Fort Worth and Omaha.

Joe Moglia

What drove keeping that facility open: first of all, it's the extension of a two-year lease, so it is not necessarily forever. Secondly, the number one priority again is the client experience. So we thought it would be more efficient, rather than bringing everyone to Omaha or Fort Worth, get them trained, get staffed up -- we already had people that were solid, legitimate employees that were good client service people, already in place. When we said that we expect to get to -- remember that $378 million number was $328 million in operating costs and $50 million in marketing. In order to get to the $328 million, there may be areas where we increase our expenses. There'll be also other areas where we decrease our expenses. What we are saying is, as of right now we are still absolutely committed to that $328 million number, which when you factor in variable costs et cetera, it's easier to track the $333 million fixed cost number that we're talking about. So we're still committed to that.

Mike Vinciquerra

Great, thank you. One other thing, just on the branch infrastructure, just curious what kind of flow you guys have seen from legacy Ameritrade clients using the branch office. Are you starting to see a little bit more account openings and greater assets coming in through the branches?

Joe Moglia

What we've seen is approximately the same type on a percentage basis, the number of accounts that are being open in the branches are comparable to what we're doing away from the branches, in effect on the Internet or the web. The quality of the account opening in those branches is greater. So the amount of assets that they bring in to open their account will or fund it later on is significantly greater than what will take place on the web.

Mike Vinciquerra

Have you seen much greater flows, though, into the branches just with the combination of the two customer bases at all?

Joe Moglia

I don't know if I would say we have seen that yet, but remember the Ameritrade legacy clients are just getting access to the branches now.

Mike Vinciquerra

Thanks very much.

Joe Moglia

Is that your question, Mike?

Mike Vinciquerra

Yes, that's essentially it.

Joe Moglia

That wouldn't have happened yet. Frankly, in an effort to go from 140 to 100 branches and then take on the 3 million clients that legacy Ameritrade had, that would be overwhelming for the branches. So we're staggering that.

Mike Vinciquerra

Thank you.

Operator

Our next question comes from Michael Hecht - Banc of America.

Michael Hecht

Good morning, guys.

Joe Moglia

Good morning, Michael.

Michael Hecht

I wanted to touch a little bit on market share. I know we don't have a lot of your competitors' numbers out yet, but we saw Schwab’s number, it was out during this call and their June numbers, the DART numbers were down about 17% versus you are down 24%. I'm just wondering if there's anything you can say about how you are feeling about your market share, your value proposition. Is it more a function of differences in the kind of customer base or just something else we should attribute that shortfall to?

Joe Moglia

Well, I think, when we look at the numbers for April and May, we were pleased. The value proposition came out at the end of April. The numbers that we saw in May, I believe we outperformed the rest of the market. The numbers you're talking about now for June, which we haven't seen yet, you're saying versus the Schwab numbers we would have underperformed. So if we outperformed in May and underperformed in June, that's probably more of a neutral there. The bottom line is we want to be able to maintain or grow our market share. So if we don't do that, that's not going to be something we're going to be pleased about. But I think that's still a little too early to say, and I definitely wouldn't take just one month and look at it, I would look at it in aggregate.

Michael Hecht

No, that's fair. Like I said, we don't have a lot of the data points out yet. I was trying to get at, for June for you guys, your customer base versus Schwab’s may be being more active trader-oriented; or, the fact that you did have some service issues with some of the TD accounts during June where there might have been a day or two and some folks who maybe were trying to trade couldn't trade, could that have had some impact on the numbers?

Joe Moglia

I think the fact that our client base is more active certainly had an impact on the numbers. I'd say that would be the bulk of it. I’d say what took place with the glitch that we had would also only add to that, but those numbers were not that significant.

Michael Hecht

I just had one follow-up on the revised outlook statement. Looking at the mutual fund revenue line where you guys did $17.8 million in the June quarter. Then in the September quarter you're sticking to the $13 million, which I think was consistent with what you had previously and flowing that through for the rest of next year. Is that just conservatism? It seems like the balances there continue to grow, it seems like you have the fee rate that you are earning coming down a little bit. I am just trying to get a little more color on how you are thinking about that.

Randy MacDonald

Again, it's tied into the value proposition. I think between Joe and I we've emphasized that we've changed a lot about not just the commission rate, but about interest rate structure. We're now telling you that for Fed increases or decreases, that a lot more of that interest is being shared with customers.

Michael Hecht

I'm sorry, but isn't this just the mutual funds? I am not talking about the money markets. I am just talking about the funds. Aren't these just the 12 B1 trailers that you're getting on mutual funds?

Randy MacDonald

Yes, but my point is that I think customers are now looking to move their cash into either higher rate instruments, either money market funds or even mutual funds, and so we saw that trend. If you look at the June quarter, those balances went up. That was the big difference towards investable assets this quarter. So I don't know if that's a continuing trend, so we've not really had enough insight to update our outlook. That was one of the other comments I made. Next quarter we're going to come back and look, having more historical results, have that color reflected more in the outlook statement. So we've not made overhauls to our outlook statement for things like that.

Michael Hecht

Okay. All right.

Joe Moglia

Michael, I think Randy's point there is really the key for you, that we didn't specifically update that line item.

Michael Hecht

Okay. Fair enough. All right, thanks guys.

Joe Moglia

Thanks, Michael.

Operator

Our next question comes from Scott Appleby – Deutsche Bank.

Scott Appleby

Hi guys. Most of my questions have been asked, but I wanted to touch base on your options, percentage of your trades on options. I think, Randy, you had mentioned that it didn't move much?

Randy MacDonald

As a percentage, right.

Scott Appleby

As a percentage. Can you tell me where it is?

Randy MacDonald

Well, it has historically been about 6% of our trades and about 10% of our revenues.

Scott Appleby

Is the majority of the activity coming from your individual retail accounts? Or do you get much from the institutional business?

Randy MacDonald

I don't know about that. Larry? It's mostly retail, is the answer.

Scott Appleby

Okay. That's all I have, thanks.

Joe Moglia

Thanks, Scott.

Operator

(Operator Instructions) Our next question comes from Joan Lappin – Gramercy Capital.

Joan Lappin

Good morning, gentlemen. Are you fellows more or less firm with your stock sales? Because I think they were not up for the quarter.

Joe Moglia

Joan, do you mean management sales?

Joan Lappin

Yes.

Joe Moglia

We had our earnings call on April 24th. April 26th, 100% of those sales had taken place.

Joan Lappin

I see, okay. You said earlier you're seeing that the smaller investor is pretty much running for the hills right now, into either energy or cash. How good do you find your base to be as a very reliable reverse indicator? Could you make money selling that information?

Joe Moglia

You know, I think that that's a pretty good question, except I think the typical retail investor -- and I would not go as far as saying they're running for the hills, they are still buying stocks -- but a number of them have made a move from equities to the front end of the curve, number one. Number two, I think the typical retail investor is a lagging indicator in terms of what's goes on. So as the markets improve, do better, we tend to open up more accounts, do more trades, margin balances go up, et cetera. The reverse would also be true of that. So while we have, I think, pretty good information flow and we should think about different ways where we might be able to sell that. Whether or not you can make money on retail flow is a question mark because they tend to lag the markets, not lead the markets.

Joan Lappin

I was being a smart aleck, but the question is, could you set up some sort of an index that you could get some channels to carry that would be useful to people?

Joe Moglia

Well, I think that's a great point. In fact, last month, the TD Ameritrade Independent Investor Survey Index was released on CNBC. We go to our clients on a regular basis and we ask them these sorts of questions; they give us feedback and we are going to actually release the current numbers, I think sometime next week. In fact, I think it's the 27th of the month.

Joan Lappin

It is good free advertising, that was where I was going with that.

Joe Moglia

We agree with that.

Joan Lappin

Thank you.

Operator

At this time there are no further questions in the queue. I'll turn the conference back to management for any additional remarks.

Joe Moglia

Folks, I very much appreciate you taking the time to join us today. We're pleased with what we had with regards to our quarter. We're pleased with what we've seen so far with regard to the response in terms of our value proposition and our brand awareness. We will give you more color as far as '07 goes on the next quarter. Thanks, everybody, and have a great summer.

Operator

Thank you for your participation. You may disconnect at this time.