The Charles Schwab Corporation (SCHW)

SCHW 
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The Charles Schwab Corporation (SCHW)

April 25, 2013 11:00 am ET

Executives

Richard Fowler

Joseph R. Martinetto - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Walter W. Bettinger - Chief Executive Officer, President, Director and Member of Policy Committee

Analysts

Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division

Brian Bedell - ISI Group Inc., Research Division

William R. Katz - Citigroup Inc, Research Division

Howard Chen - Crédit Suisse AG, Research Division

Alexander Blostein - Goldman Sachs Group Inc., Research Division

J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division

Presentation

Richard Fowler

And we are live. Good morning, everyone, welcome to the Spring 2013 Schwab Business Update. This is Rich Fowler, Head of Investor Relations for Schwab, coming to you once again from beautiful San Francisco on yet another top-down day.

Thanks, as always, for joining us. We know it is still earnings season and that folks in financial services also continue to cope with an ongoing stream of challenges. We also wanted to acknowledge our friends in Boston as their city continues its recovery with truly inspiring determination.

With me here today are Joe Martinetto, our Chief Financial Officer; and Walt Bettinger, our President and CEO.

Per our usual practice for these interim business updates, we'll spend a focused hour with Walt and Joe, sharing their perspectives on life at Schwab right now, starting off with some prepared comments and then Q&A until it's time to wrap up.

Joe's going to start us off again but let's spend a minute on the forward-looking statement page, the main point of which is to remind everyone that outcomes can differ from expectations, so please keep an eye on our evolving disclosures. And then let's cover how we'll take some questions. Once again, we'll do so via the webcast console and by the dial-in as well. You don't already have that, the dial-in is (800) 871-6752, again (800) 871-6752. The conference ID is 10769792; once again, 10769792. When we start the Q&A session, we'll ask the operator to remind us how the process works.

So we have the administrative stuff out of the way. We have our 2 best-in-class business leaders ready. We're audible to the outside world. So Joe, over to you.

Joseph R. Martinetto

Great. Thanks, Rich. So I never enjoy these phone calls as much as I do because -- I forgot to push the button. There you go.

So I never enjoy these phone calls, maybe it's because I can't work technologically as much as I do the live presentations, I thought maybe it's because I don't get to see everybody's smiling face but I dug a little deeper and I think it's probably because I have this great fear that, when you're out there on the phone, I can't actually see when I've said something that sends you all scrambling to type a note and sends the stock price moving. So I will attempt to be complete in my comments to see if we can't head off any of those kinds of events today.

In February, just walking back to the last time we were all together, we talked about stepping up our spending on client-related investments. At the same time, we also said that if the environment weakened, we were in a position to manage our expenses to deliver on results that would be consistent with the baseline scenario that we shared with you at that point. Given what we've experienced in trading and the interest rate environment, we've made a number of adjustments to our expenses to ensure that we'll be able to demonstrate the financial leverage in our business model for the remainder of 2013.

Even having trimmed our spending plans, we're still making significant investments and, over the course of the past few years, we've closed the gap between the more severe reductions we enacted during the worst of the financial crisis and more normal levels of spending. That means you should expect to see a widening of the gap between revenue growth and expense growth going forward, with more of our success at driving revenue growth falling to the bottom line.

So why have we been talking about spending more aggressively? Because we saw and continue to see an opportunity to drive growth, and it's hard to argue with the results. We put up some of the strongest net new asset numbers in the history of the company, bringing in $91 billion of core net new assets in the last half year. Clearly, we're winning in the competitive environment.

Even in the face of a weak trading environment and an interest rate environment that softened over the course of the quarter, we managed to turn the growth in client assets into an 8.5% increase in revenues. Asset management and net interest revenues were able to more than offset the softness that we saw in the trading line, which was down year-over-year. Asset management continues -- the asset management fees continue to be a bright spot. Net enrollments of $4.7 billion in advice solutions in Q1 was up more than 70% over Q1 of last year.

Finally, if we look quarter-over-quarter, all 3 of our major revenue lines contributed to sequential growth.

While we've been talking about ramping spending aggressively, expenses were up a little bit more than we would have liked in Q1. Compensation expenses, in particular, were impacted by a number of factors. Some of these factors included the transition from a trailer-type plan to a pay-as-you-go plan for our financial consultants, that led to elevated incentive pay, which should work down over the course of the year if those trailers are all paid out.

We've also been transitioning to an HSA-type medical plan and the adoption was much stronger than we thought it was going to be. That led to a bigger upfront contribution to the HSA accounts for our employees than we anticipated. Again, this will not repeat for the remainder of this year but if you're thinking about models into coming years, this may be a seasonal factor in Q1 that does stay with us.

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