Penson Worldwide, Inc. (PNSN)

Q2 2010 Earnings Conference Call

July 23, 2010 10:00 AM ET

Executives

Philip Pendergraft – CEO

Kevin McAleer – VP & CFO

Analysts

Richard Repetto – Sandler O'Neil

Mike Vinciquerra – BMO

Howard Chen – Credit Suisse

Dave Capps – JPMorgan

David Scharf – JMP Securities

Jeff Graf – Springhouse Capital

Presentation

Operator

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. Mr. Pendergraft, you may begin.

Philip Pendergraft

Thank you, and thank you for joining us. As usual I'm here with Kevin McAleer, our Chief Financial Officer. We have a presentation that accompanies our remarks today. It can be found on the Penson Investor Relations' page under the events calendar. Look for the PDF accompanying our conference call.

Last night we released our second quarter results. We reported net revenues of just over $71 million, and a net loss of approximately $7.4 million or $0.29 per share. This loss was compromise of three major components.

The first was approximately $4.8 million, pre-tax in expenses related to the recently completed Ridge transaction. The second was approximately $2.8 million in non-operating expenses unrelated to Ridge, primarily severance and legal settlements and reserves. Lastly, was a pre-tax operating loss of $1.9 million equal to about $0.03 per share net after tax.

Now, this operating lost was driven by several factors, lower than expected trading volumes in June here and industry-wide, approximately $1.3 million in lower net interest income from reduced spreads in both our in-house and conduit securities lending businesses as compared to the first quarter 2010, higher than anticipated loss in Australia of about $1.3 million due to both lower revenues and higher cost, and in addition, as we indicated on our last call, we have approximately $1 million for two months of interest expense without the benefit of any offsetting revenues on the portion of our recently raised long-term debt that was incurred principally to increase regulatory net capital in anticipation of the acquisition of the Ridge course one.

Now, while we are not satisfied with our operating performance this quarter, we do remain confident about our strategy and our direction both in the near term and in the future. Our existing business showed reasonable revenue growth in the quarter. The $50 million in revenues acquired from Ridge are the most significant sub-transaction in our history and will shape our growth and plans far into the future.

In addition, the technology and outsourcing agreements with Broadridge will have a significant impact on reducing cost and increasing efficiency and scale as we begin to implement these agreements over the next year. However, we are clearly in the transition period. Interest rates continue to be under pressure and it appears that the European financial issues will forestall any near-term increases in the federal funds rate.

Spreads in our stock lending business has come down impacting growth of higher margin interest income. In industry volumes while up in the quarter were very weak in June, with many concerns that the extreme volatility in May could negatively impact retail volumes for some times to come.

In light of all these, for the rest of the year, we will be strongly focused in four areas. First, we are intensifying our efforts to adjust our cost structure in line with the current operating environment. Second, we are focus on building relationships with our new Ridge correspondents and with providing them with additional products and services, helping them to expand their businesses and providing additional revenues for us. Third, we are continuing to seek new revenue opportunities from new clients and products. And fourth, we are continuing to drive toward fully implementing the technology and outsourcing agreement with Broadridge.

Let's turn to our operating results. In this discussion, I'm excluding the $6 million pre-tax in non-operating cost and comparing numbers on a sequential quarter basis. Rather than go through each company right now, I will focus on the big differences from the first quarter.

Non-interest revenues increased 7% to about $56 million. This represents and 11% increase in clearing and commission fees, while technology and other revenues remain relatively flat. Through May, we were actually up 10% in non-interest around the news and 15% in clearing and commissions when compared to the first quarter or to the first quarter average. But June turned out to be the weakest overall volume month of the year for us or we did not expect another month like May, we also did not expect the magnitude of the decline that we saw in June.

Now, net interest revenues increased 1% to $15.2 million. This reflected level spreads on higher customer balances, which totaled a record $6 billion. In turn, this offset a 30 basis point decline in spread and a 2% decline in balances in our conduit stock lending business.

The good news here is that the extra capital we have on our hands as we indicated in our first quarter call, we are able to reduce our cost of funds in our customer business so we could maintain our 92 basis points spread from the first quarter and benefit from the growth of customer balances. The downside was that both our in-house and conduit stock lending book saw a big decrease in spread.

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