LPL Commission Revenue Drops 13% in Second Quarter
LPL Financial Holdings Inc. (NASDAQ: LPLA) announced earnings results for its second quarter ended June 30, 2016.
The company reported a net income of $48 million, or $0.53 per share. This compares with $50 million, or $0.56 per share, in the prior quarter and $50 million, or $0.52 per share, in the second quarter of 2015.
Commission revenue topped $446 million in the second quarter, a 2 percent increase compared to last quarter’s total of $436.7 million. Commission revenue has decreased 13 percent compared to the same period in 2015, when it totaled $510 million
Commissions for alternative investments reached $9.1 million in the second quarter, which is an increase of 17 percent compared to last quarter’s total of $7.8 million. However, alternative investment revenue saw a significant decrease of 72 percent compared to last year when it topped nearly $32 million.
Sales-based commission revenue increased 2 percent from $214.8 million in the first quarter to $218.3 million in the second quarter. Year-over-year, sales-based commissions have decreased 17 percent.
Trailing commission revenue reached $227.5 million in the second quarter, up 3 percent compared to last quarter when revenues were $221.9 million. Compared to last year, trailing commission revenue has dropped 8 percent.
“We delivered another strong quarter driven by improving business fundamentals and disciplined expense management, despite the volatile market,” said Mark Casady, chairman and chief executive officer. “We also had good growth in the quarter with assets and advisors both up.”
Casady continued, “We continue to invest in service, technology, and other capabilities to help our advisors and their clients. We are committed to being a source of strength for our advisors and supporting them through these changing times.”
Financial Metrics (last year’s numbers added by The DI Wire)
• EBITDA of $132 million (compared to $135 million in the second quarter of 2015)
• Gross profit of $345 million (compared to $340 million in the second quarter of 2015)
• Core general and administrative totals of $168 million (compared to $99 million in 2Q15)
Operating Metrics
• End of period total brokerage and advisory assets of $488 billion (compared to $486 billion in 2Q15)
• Net new advisory assets of $2.8 billion (compared to $4.3 billion in the second quarter of 2015)
• Net new advisors of 100
• End of period cash sweep balances of $29.2 billion (compared to $22.6 million in the second quarter of 2015)
Capital Management
• Credit Agreement EBITDA of $143 million for the quarter, $521 million on a trailing 12-month basis
• Cash available for corporate use of $523 million
• Dividends of $22 million paid on May 31, 2016.
Second Quarter 2016 Financial and Business Highlights
Market Drivers
• S&P 500 index ended the quarter at 2,099, up 2 percent sequentially (since last quarter). The S&P 500 index averaged 2,075, up 6 percent sequentially.
• Federal funds daily effective rate averaged 37 bps during the quarter, up 1 bps sequentially.
Assets and Advisors
• Brokerage and advisory assets were $488 billion, up 2 percent sequentially.
• Net new advisory assets were $2.8 billion, translating to a 6 percent annualized growth rate.
• Cash sweep balances were $29.2 billion, down 4 percent sequentially.
• Advisor headcount was 14,193, up by 100 from the prior quarter. Production retention rate was 97 percent.
Gross Profit
• Commissions were $446 million, up 2 percent from the prior quarter. The increase was mostly driven by higher trailing commissions, though sales commissions also increased.
• Advisory fees were $323 million, up 1 percent from the prior quarter.
• Asset-based revenues were $138 million, up 1 percent sequentially. Sponsor revenues increased 4 percent due to higher average billable assets. This was partially offset by cash sweep revenue which was down 6 percent primarily from the wind down of an insured cash account anchor bank contract.
• Transaction and fee revenues were $102 million, down 1 percent sequentially due to lower transaction volumes.
• Total payout ratio was 86 percent, up from 84.1 percent in the prior quarter. This was primarily driven by a seasonal increase in advisor production-based bonus expense.
Expenses
• Core G&A expenses were $168 million, down $7 million sequentially. This was driven by ongoing expense management efforts, which kept most costs flat, along with a seasonal decline in compensation-related expenses.
• Promotional expenses were $35 million, down $1 million sequentially due to lower conference expense and partially offset by higher transition assistance driven by increased advisor recruiting.
• Regulatory expenses were $6 million, up $4 million sequentially. The majority of the difference was due to recoveries from prior matters that provided a $3 million benefit in the first quarter which did not recur. First half 2016 regulatory expenses of $7 million are meaningfully below first half 2015 levels of $18 million.
• Depreciation and amortization expenses were $19 million, flat sequentially.
• Interest expense was $24 million, flat sequentially.
Capital Management
• Credit agreement EBITDA was $143 million for the quarter, down $1 million sequentially. Credit agreement EBITDA was $521 million for the trailing 12 months, up $3 million from the prior quarter.
• Credit agreement net debt was $1.9 billion, calculated as $2.2 billion of total debt less $300 million of cash available for corporate use.
• Credit agreement net leverage ratio was 3.7x, flat with the prior quarter. Cash available for corporate use was $523 million as of quarter-end. After applying $300 million to credit agreement net debt, this left an additional $223 million of cash, which if applied to the debt, would further reduce the credit agreement net leverage ratio to 3.2x.
• The company did not conduct share repurchases during the quarter.
• For the second quarter, dividends were $22 million, paid on May 31, 2016. For the third quarter, the company’s board of directors has declared a 25 cent quarterly dividend to be paid on August 25, 2016.
• Capital expenditures were $36 million, up $16 million sequentially. This was driven by increased expenditure related to construction of the company’s new campus in Fort Mill, South Carolina, as well as technology projects.
LPL is an RIA custodian and the nation’s largest independent broker-dealer, based on total revenues. The company provides proprietary technology, comprehensive clearing and compliance services, practice management programs and training, and independent research to more than 14,000 independent financial advisors and 700-plus banks and credit unions. Advisors associated with LPL also serviced an estimated 45,000 retirement plans with an estimated $124 billion in retirement plan assets. LPL also supports approximately 4,200 financial advisors licensed and affiliated with insurance companies with customized clearing, advisory platforms, and technology solutions.
