LPL Financial Holdings' CEO Discusses Q2 2012 Results - Earnings Call Transcript

LPL Financial Holdings, Inc. (LPLA)

Q2 2012 Earnings Conference Call

July 31, 2012, 08:00 a.m. ET


Trap Kloman - SVP, IR

Mark Casady - Chairman and CEO

Robert Moore - COO

Dan Arnold - CFO


Chris Harris - Wells Fargo Securities

[Alex Williston] - Goldman Sachs

Ken Worthington - JP Morgan

Thomas Allen - Morgan Stanley

Devin Ryan - Sandler O’Neill

Steve Fullerton - Citigroup

Joel Jeffrey - KBW

Alex Kramm - UBS

Chris Shutler - William Blair

Ed Ditmire - Macquarie Research



Good day, ladies and gentlemen and welcome to the LPL Financial Holdings Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I’d now like to turn the conference over to Trap Kloman, Senior Vice President of Investor Relations. Sir, you may begin.

Trap Kloman

Thank you. Good morning and welcome to the LPL Financial second quarter earnings conference call. On the call today is Mark Casady, our Chairman and Chief Executive Officer, who will provide his perspective on our performance during the quarter. Following his remarks, Robert Moore, our Chief Operating Officer, will highlight drivers of our financial results. And lastly Dan Arnold, our Chief Financial Officer will speak to our capital deployment. We will then open the call for questions.

Please note that we have posted a financial supplement on the Events section of the Investor Relations page on Before turning the call over to Mark, I’d like to note that comments made during this conference call may incorporate certain forward-looking statements. This may include statements concerning such topics as earnings growth targets, operational plans, and other opportunities we foresee.

Underpinning these forward-looking statements are certain risks and uncertainties. We refer our listeners to the Safe Harbor disclosures contained in the earnings release and our latest SEC filings to appreciate those factors that may cause results to differ from those contemplated in such forward-looking statements. In addition, comments during this call will include certain non-GAAP financial measures governed by SEC Regulation G. For a reconciliation of these measures, please refer to our earnings press release.

With that, I’ll turn the call over to Mark Casady.

Mark Casady

Thanks Trap and thank you for joining today’s call. Second quarter presented uncertain market conditions that resulted in 1.5% revenue growth year-over-year. Our advisors have been clear and communicating to us the more cautious sentiment that exists among retails investors causing lower investment activity which intensify in June. While we continually strive to provide value added technologies and services to support our advisors to grow their businesses, when faced with this macro driven headwinds it is challenging to produce top line growth in the short-term. At the same time our performance has been impacted by our ongoing commitment to additional investment.

Adjusted earnings for the quarter were $0.49 per share down 5.8% relative to the second quarter of 2011. While we are managing our ongoing operating expense to reflect the slowdown in top line performance, we continue to expand investments in key strategic areas to fuel future growth. Specifically, year-over-year earnings were impacted by the added expenses related to the acquisitions of Fortigent and Concord, investment in our retirement platform and the formation of NestWise to address advisor training and enter the mass market channel. In addition, as our business development pipeline remains very active we increased our investment in transition of systems to support new advisor growth.

The cost to recruit remain steady but the increased volume resulted in 41% expense growth in business development relative to 2011. Together these incremental items reduced adjusted earnings by $4.1 million and adjusted EPS by $0.04.

The 223 net new advisors joining LPL during the quarter, our expenditures to fuel advisor growth continue t produce results. The acquisitions and investments are consistent with our stated objective to provide broad and leading edge solutions to our advisors and to end investors.

We have a history of investing in the business through varying market cycles including market downturns. This includes developing our fee based platform in 1990, our move to (inaudible) in the year 200 and our initiation of our independent RIA platform in 2008. These advisor additions and the acquisition opportunities are not planned by quarter or time with stronger market conditions. That’s not the nature of either activity.

We recognized such opportunities come in cycles and this period will not persistent definitely. Our strategy continues to be to capture opportunities as they arise as long as we believe the fundamental health of the underlying business remains intact. This sustains our value proposition to our advisors and further sets us apart from many of our competitors.

With the challenging market conditions and increased investment impacting results, we are proactively taking steps to reduce our core expense run rate, operationally we continue to provide our advisors and their clients with the high level of service and execution they are accustomed to and stand ready to support them when growth returns.

As you expect, we are balancing this approach by pursuing cost management opportunities to control our expenses appropriately. The result is we are better positioned to manage to the uncertain market conditions that will likely persist to the end of 2012. Should conditions worsen we will reassess our levels in investment and degree of expense management. We have a history of been able to swiftly and effectively course correct in the face of deteriorating market conditions. Our experience has led us to see greater discipline in managing the efficiency with which we support our growth today. We have implemented resource planning models to evaluate our [staff need] and launched our service value commitment initiatives based on lean principles.

We does not change with shifting market conditions as the need for and value of financial advice, these macro issues and a company investor sentiment are not unique to today. We have great confidence and the relationships our advisors have with their clients and their relationships with us. With investor sentiment does improve we are well positioned to resume our trajectory of strong growth and margin expansion.

We know our independent and dedicated business model delivers differentiated value proposition that attracts advisors. This quarter advisor production retention was in excess of 97% and we generated net new advisor growth of 223 advisors and 671 net new advisors over the past four quarters. We continue to see the pipeline filled with advisors from all channels and in particular from the wire houses and independent.

Our investments in the high network space, the RIA market and retirement platform have supplemented our strong ongoing success in attracting new advisors. As we do not control the advisors in motion at any time in the marketplace and important measure I track is our net new advisor growth relative to our competitors. The expectation I set for our company is to be in the top three each and every year. We were number two in 2010 and 2011, and I see us on similar trajectory to-date in 2012.

I’d like to provide a brief update on our management structure. Over the past year we have evaluated the next several years of challenges and opportunities for the business and start to align the needs of the company with the capabilities and diversity of our leadership team.

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