Charles Schwab 2010 Annual Report Download - page 8

Managing rough the Turn
If 2009 was the year the macro economic environment
dominated our story, then I believe 2010 will be
remembered for the way we took back control of that
story as we rebuilt the company’s business momentum
and nancial performance.
In my last letter to you, I discussed how the aftermath
of the recent nancial crisis essentially overwhelmed
the progress we’d been making in growing our business,
leading to a substantial decline in revenues and prots
during 2009.
We entered 2010 with the equity markets on the mend,
but facing a still shaky economic recovery, an interest rate
environment that had yet to nd a bottom, and a lot of
investor uncertainty. As a result, we began the year by
posting our weakest rst quarter net new assets since
2005 and our lowest quarterly revenues and operating
earnings in four years.
When a company’s performance hits a low point, as
ours did in late 2009 and early 2010, it’s natural to
question whether it’s on the right path. Should expenses
be cut further or client-related investments delayed? Can
revenues be enhanced by taking the business in a different
direction or by assuming new or additional risks? At
Schwab, we’d been testing ourselves with those questions
long before 2010 arrived, basically since the advent of
the crisis in 2008. While we moved aggressively to reduce
costs early in the economic cycle, the answer in 2010 was
to stay the course.
Our clients have made it clear for some time that they
want more from us, not less. Access to more investment
products, more forms of help and advice, more value.
They’ve also made it clear that they expect Schwab to
remain a stable protable nancial institution with a
healthy balance sheet. Additionally, and very importantly,
by the time 2010 began we did not believe we were
looking at a deteriorating environment — rather one that
was likely to recover at an uncertain pace. Further, while
short-term interest rates were still nding ways to creep
downwards, we knew they literally couldn’t go much
lower, and they were therefore at least heading toward
stabilization even if they wouldn’t begin to rebound for
some time.
With the environment’s grip on our attention and decision-
making fading, our model remaining right on track, and no
reason to take on more risk or cut investing in our clients,
our main issue came down to the balancing act between
the level of that investing for growth and near-term
protability. We felt the stabilizing environment would
enable us to post at least some revenue improvement
for the year and to begin demonstrating the enhanced
earnings power arising from sustained growth in our
client base. That growing earnings power would, in turn,
enable us to nearly double our spending on client-related
initiatives, as Walt mentioned in his letter, while remaining
solidly protable. To sum all this up, we believed that the
turn was coming, that the moment had arrived to start
putting the crisis and its impact behind us, and that our
best path forward was the one we were already on.
So in 2010 we acted to boost investment in our clients
with the intent of driving increased business momentum.
How well did that approach work for us? As it turns
out, the economy did continue to improve during the
6 LETTER FROM THE CHIEF FINANCIAL OFFICER
NET REVENUES*
in millions at year end)
$4,309
2006 2007 2008 2009 2010
$4,994 $5,150
$4,193 $4,248
FROM JOE MARTINETTO
Chief Financial Ocer