LPL Financial Holdings, Inc. (LPLA) Q2 2012 Earnings Conference Call July 31, 2012, 08:00 a.m. ET Executives Trap Kloman - SVP, IR Mark Casady - Chairman and CEO Robert Moore - COO Dan Arnold - CFO Analysts 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 Presentation Operator
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Please note that we have posted a financial supplement on the Events section of the Investor Relations page on lpl.com. 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. Read the rest of this transcript for free on seekingalpha.com