Penson Worldwide, Inc. (PNSN)

Q1 2010 Earnings Call

May 7, 2010 10:00 am ET


Philip Pendergraft – CEO

Kevin McAleer – VP & CFO


Michael Vinciquerra - BMO Capital Markets

Howard Chen - Credit Suisse

Patrick O'Shaughnessy - Raymond James

Mark Lane - William Blair & Company

Chris Connors – Sandler O’Neill

Dave Capps - JPMorgan

Scott Applebee – Applebee Capital Incorporated

David Scharf - JMP Securities

William Matthews – Post Advisory Group


Ope rator

Good morning and welcome to the Penson Worldwide conference call. Before we begin, I would like to read Penson’s Safe Harbor statement.

Please note that this presentation contains certain forward-looking statements about management's goals, plans, and expectations which are subject to various risks and uncertainties outlined in the Risk Factors section of Penson Securities and Exchange Commission filings.

Actual results could differ materially from those currently anticipated and we disclaim any obligations to update information disclosed in this call as a result of developments which occur afterwards. (Operator Instructions) I would now like to turn the floor over to Mr. Philip Pendergraft, Chief Executive Officer.

Phil ip Pendergraft

Thank you for joining us here today. I’m here with Kevin McAleer, our Chief Financial Officer. Before I begin today’s presentation, I want to let you know that it is going to be a little bit heavier on numbers than normal, especially in the interest area. We want to make sure that we communicate clearly so please don’t hesitate to ask questions either now or later if we aren’t clear in some areas.

Last night we issued our first quarter news release. We reported revenues of $67.4 million, and net income of $140,000 or $0.01 per share. Excluding $1.3 million in expenses related to severance and the Broadridge transaction, net income would have been just under $1 million or $0.04 per share.

This is generally in line with our previously expressed view that our operating earnings would be down in the first quarter and its in line with our April 20 news release. We continue to believe that this is going to be a challenging year from a financial metric point of view. As you know, there are two major drivers to our revenue stream; interest rates and industry volumes.

We do not expect to see any improvement in interest rates this year. Retail volumes were generally flat to down slightly across the industry in the first quarter, much as we expected. Of note April volumes especially in our US securities business have been strong and were the best since September of last year.

But we think its still too early to say if this is the start of a new trend or whether it will hold for the entire quarter. In the absence of a more normal trading and interest rate environment, our focus continues to be on building for the future. That includes growing our correspondent base, organically and by acquisition, expanding our products and services, and controlling costs and increasing efficiencies.

As volumes and interest rates rebound from the first quarter’s depressed levels, we expect to be well positioned to significantly expand margins and profitability. To that end we’re pleased to have been able to successfully raise $200 million in debt capital. This is the largest capital offering we’ve ever done as a company.

The net proceeds of approximately $193 million have been used to pay off bank debt, and will provide us with capital to support the Ridge correspondents and with additional working and regulatory capital. Now there are four key points to make on this debt offering. First, we have significantly strengthened our overall capital structure by putting in place a seven-year instrument.

This eliminates our reliance on a short-term revolving credit facility for longer-term capital needs. Second, we have raised the capital necessary to move forward with closing the Broadridge transaction, a very important piece of our growth strategy.

Third, we’ve added additional capital to our US securities clearing business which should improve cash management efficiencies and improve spreads modestly. Lastly we put in place a new three-year revolving credit facility which provides additional capital flexibility as we look to position ourselves for improvements in the macroeconomic environment and the growth that this should bring.

All of this has been completed without any deletion of our equity shareholders at current stock price levels. The interest rate on the bonds while impacted by the uncertainty in the European sovereign debt markets was in line with the estimates that we’ve been using to model the Broadridge transaction.

Now the Broadridge transaction continues on track. We expect regulatory approval shortly and anticipate closing this quarter. The closing of the acquisition will result in a significantly higher level of one-time expenses in the second quarter.

Now with regard to organic growth we are pleased to report that the second sequential quarter increase in correspondent accounts since the fourth quarter of 2008, a record pipeline of new and signed correspondents and steady progress in signing correspondents for our recently launched Australian operation.

Now let’s look at the income statement for a minute, please remember that our analysis is based upon excluding one-time revenues and costs from the first and fourth quarter as we articulated in our press release.

Non-interest revenues of $52.3 million were down about $2.4 million from the fourth quarter. Clearing revenues of $34.4 million were off approximately $500,000 sequentially. Now our futures clearing revenue was up just under $1 million or 22%, while Penson Australia contributed $600,000.

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