National Holdings Corp. (NASDAQ:NHLD)
Q3 2014 Earnings Conference Call
August 13, 2014, 05:00 PM ET
Nick Rust - Investor Relations, Prosek Partners
Mark Klein - Co-Executive Chairman and Chief Executive Officer
Alan Levin - Chief Financial Officer
At this time, I'd like to welcome everyone to the National Holdings Corporation Fiscal Third Quarter 2014 Earnings Teleconference. Our host for today's call are Robert Fagenson, Co-Executive Chairman of National Holdings Corp.; Mark Klein, Co-Executive Chairman and CEO; Alan Levin, Chief Financial Officer; and Mark Goldwasser, Chief Executive Officer of National Securities, our broker/dealer subsidiary. Today's call is being recorded and will be available for replay beginning at 8 o'clock PM Eastern Daylight Time. The replay dial number is 404-537-3406404-537-3406 and the pin number is 40300645. (Operator Instructions)
It is now my pleasure to turn the floor over to Nick Rust of Prosek Partners.
Thank you, operator. Good day to everyone for joining us today to discuss National Holdings Corporation's fiscal third quarter 2014 earnings results.
Before we begin, I would like to remind everyone that certain statements made during this call, which are not based on historical facts, including any statements relating to financial guidance, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Because these forward-looking statements involve known and unknown risks and uncertainties, these are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. National Holdings Corporation assumes no obligation or responsibility to update any forward-looking statements.
With that, allow me to introduce National Holdings Corporation's CEO and Co-Executive Chairman, Mark Klein. Mark, you may begin.
Good evening and thank you to everyone for joining us today. During the call today, I will make some opening remarks about the company's operational highlights and financial performance as well as provide updates to our long-term strategic operating plan that we discussed on our last call. Then I will turn the call over to Alan Levin, our CFO, for a detailed review of our financial results. Once Alan is done, we'll open the call to Q&A where we will be joined by Robert Fagenson, our Co-Executive Chairman; and Mark Goldwasser, Chief Executive Officer of National Securities, our broker/dealer subsidiary.
Our third quarter and year-to-date financial results reflected continuing momentum across all major business lines, leading to strong revenue growth, margin expansion and significant EBITDA and net income growth. In particular, our third quarter results reflect strong topline growth in our retail brokerage, investment banking and asset management businesses and marks our 10th consecutive quarter of positive adjusted EBITDA in our six straight quarter of net income.
In the third quarter of 2014, we record revenue growth of 43% to $46.6 million, adjusted EBITDA growth of 101% to $2.3 million and net income growth of 75% to $1.4 million. As our results have demonstrated over the past couple of years, we continue to report strong financial results from every aspect of our business, even against tougher year-over-year comps. More impressive, we're able to achieve this while keeping our expenses in line with our existing platform. That being said, our operating profit has shown an improvement of approximately 50 basis points from the same period last year.
For the year-to-date period, we achieved revenue growth of 53% to $141.1 million and net income growth of 322% to $5.3 million or $0.04 a share. We also recorded adjusted EBITDA of $2.3 million in the third quarter and $8.2 million year-to-date, which reflects increases of 101% and 187% over the three and nine months period last year respectively.
As of June 30, 2014, we had approximately 1,200 associated personnel serving retail and institutional customers trading and investment banking clients. In addition to our 32 company offices located in New York, New Jersey, Florida and Washington, the company has approximately 110 independent registered offices.
Now let me turn to the performance of our business segments. First, our core retail brokerage operations remains our flagship and include brokers and National Securities. Through National, we are committed to meet the varying investment needs of our retail, corporate and institutional clients. For the three months ended June 30, 2014, revenues from retail brokers totaled approximately $31 million, an increase of 37% over the same period of time last year.
Turning next to the investment banking operations, where we continued to outperform our internal expectations as we leverage our platform and further entrench ourselves as the leading underwriter to emerging growth companies. For the three months ended June 30, revenues from investment banking were approximately $5.3 million, which was an increase of over 28% year-over-year.
Deals remained strong across stated target industries of healthcare, technology media and telecom, energy and financial institutions. Year-to-date, we participated in 32 deals. More important is our ability to increase our participations on each transaction wherein 30 of the 32 deals we served as the lead manager, joint manager or co-manager. The breakdown of the 32 deals is as follows: 12 deals in financial institutions, 11 deals in energy and transportation, seven deals in technology media and telecom and two deals in the healthcare space.
Since the end of the fiscal third quarter, we've signed an agreement with a Los Angeles-based group, Liquid Venture Partners. This deal will further expand our ability to raise private and public capital for high-growth technology issuers with dynamic IP. This experienced team with a unique expertise will complement our existing technology-focused banking team.
Turning next to asset management, we continue to enjoy significant growth and benefit from incorporating Gilman's operations into National. Investment advisory income was $3.8 million for the three months ended June 30, 2014, which was an increase of 60% over the same period last year. In the third quarter, we completed the successful integration of Gilman's Asset And Financial Planning LTD or AFP into National Asset Management. This has led to increased synergies and growth in assets.
With the inclusion of AFP, we've expanded our firm-wide assets under advisory or AUA to record levels of $10.1 billion and our fee-based assets to over $1.3 billion. Going forward, our asset management business will remain an important unit and will focus on broadening the platform, gathering assets and developing new products to meet the needs of our clients.
In terms of Gilman Ciocia, the division met our internal expectations. Following the seasonal peak from the business, we recorded tax prep and accounting fees of $2.6 million in the fiscal third quarter 2014, building on a $4.2 million prior year-to-date revenue.
Before turning the call over to Alan, let me just reiterate a few points made on our last call as it relates to our long-term strategy. With the ongoing success of transformation of the business, our emphasis is on building out the platform we created. This includes a focus on identifying growth ladders while keeping costs in line with revenue growth. We are doing this in a much stronger financial position. We have a debt-free balance sheet and over $23 million of cash, allowing us to seek additional accretive acquisitions and strengthen our platform.
Our strong financial position also allows us to attract and retain key personnel to remain competitive as well as maintain flexibility as opportunities present themselves. Going forward, we will maintain a prudent focus on managing operating expenses by implementing additional cost cutting measures with a focus on maintaining profitability.
We are also in a position for management and the Board believes it is now time to increase our visibility and gain greater exposure to potentially broader shareholder base, while simultaneously improving the company's capital structure. As such, our Board of Directors has elected to enact a 1 for 10 reverse stock split as a first step to seeking listing on a national exchange. Pursuant to the most recent annual meeting last month, we received approval for a proposal to effect the reserve stock split.
You may recall that we discussed this on our last call and continue to believe that a national listing will not only position the company as an investment opportunity to a broader institutional base, it'll also help in improvement in retention. Concurrent with those, we will seek a national listing on (inaudible) Exchange subject to all necessary approvals.
With that, I'd like to now turn the call over to Alan. Alan?
Thank you, Mark. I'll now take you through the financial highlights of our earnings, which should be filed on Form 10-Q with the SEC. For the fiscal third quarter 2014 results, as Mark noted, we reported total net revenue of $46.6 million in the fiscal third quarter 2014, a $13.9 million or 43% increase from the $32.7 million reported in the fiscal third quarter of 2013. The increase in third quarter revenues reflects growth in all major business lines and reflects the operations and higher headcount from the integration of Gilman Ciocia. As Mark noted, the increase was due to strong topline growth in all major business lines.
Operating expenses for the fiscal third quarter totaled $45.2 million, an increase of $13.3 million or 42% compared with the $31.9 million in the fiscal third quarter of 2013. There was an improvement in contribution margin of 0.5% in the three months ended June 30 as compared to the same period in 2013. The increase in expenses is primarily a result of commissions, compensation and fees increasing $10.5 million or 38%, occupancy expenses increasing $560,000 due primarily to the inclusion of Gilman's operating cost and office leases assumed as part of the transaction. Professional fees increased $568,000. Depreciation and amortization increased $357,000 primarily as a result of the amortization of intangibles acquired in the merger.
We reported a 75% increase in operating income for the quarter ended June 30, 2014, of $1.4 million compared with income of $805,000 for the quarter ended June 30, 2013. Earnings before interest, taxes, depreciation and amortization or EBITDA as adjusted, which is a non-GAAP measure, increased by 101% to $2.3 million for the third quarter 2014 compared to the $1.2 million in fiscal third quarter 2013.
Net income for the fiscal third quarter of 2014 increased 75% to $1.4 million or $0.01 per share basic and diluted compared with net income of $800,000 or $0.01 per share basic and diluted for the quarter ended June 30, 2014.
Now looking at our results for the nine months ended June 30, 2014, we reported year-to-date fiscal 2014 revenue of $141.1 million, a $49 million or 52% increase from the $92.1 million in the prior year same period. Operating expenses for the nine months ended June 30 totaled $135.5 million, an increase of $44.9 million or 50% compared with the $90.6 million in the comparable period of 2013.
There was an improvement in contribution margin of approximately 2.4% in the nine months ended June 30, 2014, as compared to the same period in 2013. The increase in expenses was primarily a result of commissions, compensation and fees increasing $36.4 million or 46%, clearing fees increasing by $878,000 or 41%, occupancy expenses increasing $1.471 million or 91%. And as I mentioned earlier, the increase here is attributable to the Gilman margin. Professional fees increased $1.4 million or 83%. And depreciation and amortization increased $975,000 primarily as a result of the amortization of intangibles acquired in the merger.
We reported an increase of 278% in operating income to $5.6 million for the nine month period ended June 30, 2014, compared with income of $1.5 million for the same nine months ended June 30, 2013. Adjusted EBITDA, which is a non-GAAP measure, increased 187% to $8.2 million for the year-to-date fiscal 2014 compared to $2.9 million in the same period of 2013.
Net income increased 322% to $5.3 million or $0.04 per basic and diluted share for the nine months ended June 30, 2014, compared with the net income of $1.3 million or $0.02 per basic and diluted share for the nine months ended June 30, 2013.
Turning now to our balance sheet, as of June 30, 2014, we had cash and cash equivalents, which include receivables from our clearing firms and marketable securities of approximately $30 million or 58% of our total assets, compared to $24.7 million or 84% for the fiscal year ended September 30, 2013. The higher percentage in September was primarily a result of the cash raise for the purpose of paying down Gilman debt at the closing of the Gilman merger, which occurred in October 2013.
The company increased total stockholders' equity by 94% to $30.6 million as compared to $15.8 million on September 30, 2013.
That concludes my formal remarks, and I'll now turn the call over to the operator and we look forward to your questions. Operator?
(Operator Instructions) Your first question comes from the line of [Craig Barrison with Cullum Capital].
Just a quick question, I'm sorry if I missed it. The expected timing on the reverse split and up-listing, could you review how are you thinking about that?
We approved the reverse split with our Board yesterday. We are going through the general approval process in order to get the approval to go do that. It takes some period of time. And we'll then set a date to have the reverse split. And then the listing takes a bit longer period of time, somewhere from 30 to 90 days on the listing.
Your next question comes from the line of [Marvin Miller], a private investor.
I'd also like to congratulate all of you, outstanding quarter. And may I say, in the last year, you've done a fantastic job in turning this company around. Thank you. I was ask the question that was just asked, but I take it that you currently meet all the requirements for a major US listing. Is that correct?
We believe that we do and we will look at the two major exchange groups, the NYSE and NASDAQ and receive from them presentations and make the decision about where to go. We wouldn't qualify for full New York Stock Exchange listing.
And that concludes the Q&A session. I would now like to turn the call back over to Mark Klein for additional or closing remarks.
Thank you all for your support and thank you for taking the time out of your day to listen to our presentation. We all appreciate it.
Thank you. That does conclude today's conference call. Thank you for your participation and please disconnect at this time.