Penson Worldwide ( PNSN)

3Q 2010 Earnings Call

November 2, 2010 10:00 a.m. ET


Phil Pendergraft – Chief Executive Officer

Kevin McAleer – Executive Vice President & Chief Financial Officer


Mike Vinciquerra - BMO

Ken Worthington – J.P. Morgan

Patrick O’Shaughnessy – Raymond James

Howard Chen – Credit Suisse

Dave Katz – J.P. Morgan

Chris Connor – Sandler O’Neill

Kevane Wong – JMP Securities

Mark Lane – William Blair

Scott Appleby – Appleby Capital



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’s Securities and Exchange Commission filings. Actual results could differ materially from those currently anticipated and we disclaim any obligation to update information disclosed in this call as a result of developments which occur afterwards. At this time, all participants have been placed on a listen-only mode and the floor will open for questions and comments following the presentation. During the question-and-answer session, please do not use cell phones or blackberries as they can cause loud static on the line. I would now like to turn the floor over to Mr. Phil Pendergraft, Chief Executive Officer. Mr. Pendergraft, you may begin.

Phil Pendergraft

Good morning and thank you for joining us today. I am here with Kevin McAleer, our Chief Financial Officer, as usual. We have a presentation that accompanies our remarks and provides other information. It can be found on the Penson investor relations page events calendar. Look for the .pdf connected to this conference call.

Last night we released our third quarter results. We reported an after-tax net loss of $8 million from operations equal to $0.28 per share, an after-tax severance charge of $1.4 million equal to $0.05 per share, totaling a GAAP net loss of $9.4 million equal to $0.33 per share. These results include $8 million in non-cash expenses that have an after-tax effect of $5 million. This quarter’s loss was larger than anticipated, due almost entirely to significantly lower trading volumes at our U.S. securities clearing and execution company. However, revenues from correspondent contracts acquired from Ridge did hold up well and performed fairly close to the expectations we discussed on our last earnings call. Our business expansion and cost saving programs are on track and since the end of the third quarter, industry activity has improved and our volumes have begun to rebound. Company-wide, net revenues total just under $70 million. That included more than $12 million from former Ridge correspondents, but a decline of $13 million from other businesses. That decrease was primarily due to 22% lower non-inertest revenues in Penson businesses excluding Ridge. In general, this fall off was in-line with the sharply reduced average daily volumes experienced industry-wide, which were off more than 27% in equities and 21% in options. As you know, our non-interest revenues are closely tied to volumes. Since the end of the quarter, however, industry activity has improved and, in fact, it began to improve in the middle of September and our volumes have begun to rebound just as industry volumes have. Average daily trades for the company, including Ridge, are up 19% in equities and 26% in options, October versus September. We anticipate that this volume increase will have a corresponding impact on all non-interest revenue categories including other revenues, much of which is tied to our execution services business, in one way or another. Net interest income was up 18% on a quarter-over-quarter basis, due entirely to the business acquired from Ridge. Average interest earning balances increased by 12% to a record $6.75 billion. Net interest spread was unchanged at 92 basis points. We have continued to see improvements in interest revenues in October with stock lending net revenues estimated to be up 25% and total net interest revenues up between 10% and 15%, in both cases, compared with our September numbers. Third quarter expenses totaled approximately $85 million, approximately $11.4 million of these expenses related to the Ridge correspondents, which included amortization and interest expense on long-term debt associated with the acquisition. Excluding Ridge and severance costs, total expenses declined by $1.5 million, reflecting the impact of lower volumes and our cost-control measures. During the quarter, but not reflected in the quarter’s results, we reduced annual compensation by an additional $4 million. We will begin to see these savings in the fourth quarter. Expenses included $1.2 million in technology conversion costs related to our just-completed conversion at our futures company and our upcoming conversion to Broadridge in the U.S. We expect these expenses to decline substantially in the fourth quarter. As I mentioned earlier, as a part of the third quarter expenses, there were $8 million of non-cash items. About $44.5 million for depreciation and more than $1 million each for amortization, non-cash interest expenses, and stock-based compensation. Looking at the $13 million net revenue decline in Penson businesses excluding Ridge, about $7.4 million came from lower clearing and commission fees. Most of that was at PFSI, our U.S. securities clearing business. Most of that came from our active trader base. That is the black box and direct market access or DMA correspondents that cater to high-volume, institutional and professional clients and the online correspondents that serve active retail clients. Revenues from these groups of correspondents were down approximately 40% as compared to PFSI’s other correspondents categories which were off an average of 20%. This makes sense because the customers of our more active trader correspondents thrive off of market volume and volatility, both of which were lower during the third quarter. Of the $13 million, approximately $4.2 million was due to a 34% drop in other revenues. This was primarily in our execution services business which includes trade aggregation and execution, which we provide to our correspondents (“inaudible”). Again, this was principally volume-related in what, for us, is a very high margin business. The balance of the decline, about $700,000.00 was in net interest revenues. Interest earning customer balances grew by 1%, while the net interest spread fell by six basis points to 86 basis points, due primarily to changes in a our balance mix. All of our other businesses, the former Ridge correspondents, futures, London, Canada, and technology held up fairly well, with our Australian business continuing to make good progress toward profitability.

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