Charles Schwab 2007 Annual Report Download - page 28

26 | LETTER FROM THE CEO
As I stepped into the CFO role in 2007,
I joined a management committee that
was determined to remain focused on our
clients and their needs. After all, that
focus, along with expense discipline and
careful risk and capital management,
comprise the key elements of the formula
for sustained, profi table growth that the
company has followed so successfully in
recent years. In my fi rst letter to you, I’d like
to share some perspectives on how the
formula infl uences our approach to fi nancial
management before discussing our 2007
performance – including our success with
clients – and then closing with some
thoughts on expectations for 2008.
There’s a cornerstone principle that
still guides our approach to fi nancial
management even after 30-plus years
of storied history: Schwab is, and will
remain, a growth company. We’ve gone
from upstart discount broker to one of
the largest fi nancial services fi rms
around, but even now our market share
of U.S. investable assets is still under 10
percent. For a long time, our growth story
was very straightforward – deliver high-
quality products and service at a great
value, capture rapid revenue growth, and
deliver a comparable rate of earnings
growth, since expenses needed to rise
along with an expanding infrastructure.
Our Annual Report for 1997, my fi rst year
at Schwab, offers a classic example: It
shows that with revenues up 25 percent,
we delivered growth in net income and
earnings per share of 27 percent and 26
percent, respectively.
Today, the story is not quite as simple.
First, we have to acknowledge that we’re
just bigger. That 1997 report showed $69
billion in net new assets helping push
total client assets up by 40 percent, to
$354 billion – phenomenal for the time.
In comparison, our even more phenom-
enal $160 billion in net new assets during
2007 helped total client assets rise by
17 percent, to $1.4 trillion. Next, our ded-
ication to offering clients better choices
at a better value has facilitated a dramatic
reduction in our revenue relative to client
asset levels. In 1997, our revenues
equaled approximately 0.75 percent of
average client assets; by 2007, that ratio
had dropped to 0.37 percent.
How can we plan for and deliver com-
pelling fi nancial performance in a world
where it only gets harder to achieve
outsized revenue growth year after
year? Here’s where the formula comes in.
Given our current mix of businesses and
the outlook for pricing our services, we
believe we can deliver revenue growth
percentages in the low double digits or
better on a sustained basis in many
market environments. We hope you agree
that’s impressive organic growth for a
well-established firm. With an existing
infrastructure capable of supporting
ongoing growth in our businesses without
commensurate growth in expenses, and
the willingness and ability to prioritize and
control our reinvestment in the company,
we believe we can limit overall expense
growth suffi ciently to deliver earnings
growth percentages in the mid to upper
teens. Careful capital management,
including the timely return of excess
equity to stockholders, can then help us
achieve earnings per share growth and
ROEs of 20 percent or more. Environ-
mental factors might prevent us from
hitting these marks every year, but this
is our baseline for running the company.
Now let’s look at our 2007 performance.
Our planning scenario included equity
market appreciation of about 6 percent
and moderate declines in short-term
interest rates. Since we had not yet
determined how we would redeploy the
proceeds from the sale of U.S. Trust, we
limited our fi nancial commitments to 12
percent revenue growth and a 2 percent-
age point increase in our pre-tax profi t
margin, to 36 percent. While overall
equity market returns for 2007 were in
the mid to upper single digits, our clients
faced signifi cant volatility as the year
progressed and the economic picture
darkened, and the Fed Funds rate
dropped to a lower than anticipated 4.25
percent by year end. Despite these
market headwinds, our fundamentals
continued to improve, and we were able
to achieve 16 percent revenue growth
and a record 37 percent pre-tax margin.
In addition, even after excluding U.S.
Trust-related impacts, our income and
earnings per share from continuing
operations were up 26 percent and 33
percent, respectively, to $1.1 billion and
92 cents, setting new records as well.
We believe the formula works, in part,
because our commitment to delivering a
low-cost, high-value client experience
helps build stronger relationships. I’ve
already discussed the outstanding
growth in client assets we achieved in
2007; our progress with clients is also
refl ected in a 24 percent increase in
new brokerage accounts, to more than
26 | LETTER FROM THE CFO
Joe Martinetto
Executive Vice President
and Chief Financial Offi cer