National Holdings Corp. (NASDAQ:NHLD)
Q1 2016 Earnings Conference Call
February 17, 2016 9:00 AM ET
Jody Burfening - LHA Investor Relations
Robert Fagenson - Executive Co-Chairman of the Board and Chief Executive Officer
Mark Goldwasser - Vice Chairman of the Board and President
Glen Worman - Chief Operating Officer and Executive Vice President of Finance
Alan Levin - Chief Financial Officer
Paul Misleh - Fortis Capital Management.
Walter Schenker - MAZ Partners
Michael Freeburg - Greenwich Wealth Management, LLC
Good day and welcome to the National Holdings Corporation First Quarter Fiscal 2016 Conference Call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Jody Burfening from LHA. Please go ahead.
Thank you, [Miller] and good morning everyone. Thank you for joining us for National Holdings Corporation's fiscal first quarter 2016 earnings conference call.
With me on the call this morning are Robert Fagenson, National Holdings Corporation's Chairman and Chief Executive Officer; Mark Goldwasser, President; and Glen Worman, Chief Operating Officer and Executive Vice President of Finance; Alan Levin, Chief Financial Officer is also on the line and will be available to answer questions during Q&A.
National Holdings Corporation issued a press release this morning with details of the Company's fiscal first quarter 2016 financial results. A copy of the press release is available on the Investor Relations page of the Company's website at nhldcorp.com.
I would like to remind everyone that today's call is being recorded. A replay of today's call will be available by using the telephone numbers and conference ID provided in the earnings press release. In addition, an archived webcast replay will be available on the Investor Relations page of the Company's website following the conclusion of this conference call.
I would also like to draw your attention to the customary Safe Harbor disclosure regarding forward-looking information. The conference call today may contain certain forward-looking statements, including statements regarding the goals, strategies, beliefs, future potential operating results and cash flows of National Holdings Corporation.
Although management believes these statements are reasonable based on estimates, assumptions and projections as of today, February 17, 2016, these statements are not guarantees of future performance. Time-sensitive information may no longer be accurate at the time of any telephonic or webcast replay.
Actual results may differ materially as a result of risks, uncertainties and other factors, including but not limited to the factors set forth in the Company's filings with the SEC. National Holdings undertakes no obligation to update or revise any of these forward-looking statements.
With that, I would now like to turn the call over to Robert. Good morning, Robert.
Good morning. Thank you, Jody. Welcome everyone. Good morning and thanks for joining us today. During today's call, I’ll start off with some brief opening remarks about our financial and operational performance during the quarter and then turn the call over to my partner Mark Goldwasser, who will give you a review of our various business segments.
Following Goldie's remarks, we will hear from our Chief Operating Officer and Executive Vice President of Finance Glen Worman, who will discuss our financials in greater detail. Once Glen is finished, I’ll wrap up and then we’ll open the call to your questions.
Looking at our first quarter results that we just reported, it’s apparent that we have begun our current fiscal year very much the way we ended the last one. And by this we mean at while we believe we’re executing our overall business strategy reasonably effectively and then a number of our businesses are continuing to perform reasonably well.
We are at the same time reporting overall disappointing results due in large part ongoing weakness in our largest business retail commissions as well as the transfer fees, clearing services and other fees that are directly related to trading activity and transactional volume.
The market environment for trade execution certainly remains challenging as many of our clients are trading and investing less as a result of ongoing concerns regarding, but certainly not limited to marketed volatility, economic uncertainty, geopolitical unrest and the other things that were affecting investors psychology all around the world.
These concerns are producing headwinds and headaches for the entire industry and we are certainly not immune to them. Fortunately, we’ll continue to benefit from diversification actions that we’ve taken in the recent years. Our investment banking, investment advisory and tax prep and accounting businesses were collectively up 10% this quarter were offsetting more than a half the declining commission revenue.
In the phase of these difficult market conditions, we’re going to stick with our game plan of growing our base of registered reps and advisors both individually and in larger groups, continually diversify our revenues of growth and controlling expenses wherever and whenever we can. Obviously, we’d like to realize the profit this quarter with what we hoped would have been an improving commission environment, but that dynamic did not present itself.
The best thing we believe we can do is to continue to stay the course and take a renewed look at further expense reductions, continue to strengthen our competitive position, allow us to benefit with stronger market conditions and commissions begin to reassert themselves.
With that overview I am going to turn the call over to Mark Goldwasser. Goldie?
Thanks, Robert, and good morning, everyone. With this one takeaway I can leave you with today is that we do believe we have a solid business model currently in place for optimal performance and we continue to execute it against it well. As Robert mentioned, we have diversified our revenue base over the past decade and streamlined our cost to significant degree and we all focus in achieving more of the same going forward.
Most of our businesses continued to perform relatively well, but those types of market in retail sales psychology are not immune to the industry headwinds we continue to face. I will now run through our businesses with you. Our core retail brokerage operations and network of registered employee and independent brokers offer broad range of financial products and services to retail and institutional clients.
In the first quarter of 2016, revenues from commissions and transfer fees and clearing services totaled $25.4 million versus $27.1 million in the same period last year. Of the $1.8 million decline, commissions accounted for roughly $1.4 million the drop related to weaker industry conditions versus the prior year.
On the plus side, our alternative investment products will include sales as a result of restructuring actions taken in the second quarter of fiscal 2015 and now the strongest level since October of 2014. Also we’ve acted as the broker of record for Kingdom Holding Corporation’s purchase of approximately $150 million worth of Lyft, Inc. shares in the secondary market as well as the investment by Kingdom, Prince Alwaleed Bin Talal and other parties of $100 million in Lyft Series F capital increase, which was announced on January 4, 2016.
These trade an example of our diversification strategy. The market key milestone in our efforts to develop a trading business, which we expect will be a key contributor to our overall business going forward, being able to execute such a large transaction and one of the world’s most well-known and sophisticated investors is a testament to the strength of our platform.
In terms of broker network expansion remain very active in our efforts with strong opportunities [indiscernible] small. Through early January we did managed to add 10 registered reps and advisors with $9 million in trailing 12, production. We have expanded our assets under management by $905,000. These figures represent on strategic addition we made at the corporate level and excludes net high as made by our local branches. The main keys with high-caliber of brokers and advisors we continue to attract them higher.
In our investment banking operations, a business that addresses the underserved capital needs of emerging growth companies, continued to benefit from a strong deal of pipeline with solid offerings and execution. Revenues from the first quarter increased 19% to approximately $6.1 million. During the quarter we participated in 19 transactions, four in the healthcare space, seven in technology, three REITs, and five in various other industries.
During the quarter we also initiated capital raises for a private company including the total of $58 million with Checkpoint Therapeutics, a Fortress Biotech Company, where we acted a sole placement agent for the financing. This represented a record private rates for National.
Moving onto trading, our net dealer inventory gains in the first quarter of 2016 fell 26% to $2.5 million for the prior year level. As was the case throughout our prior fiscal year, a lower interest rate environment reduced both our lower institutional principal investment businesses and shrinkage proprietary trading to the industry continued to negatively impact trading volumes for equities, municipal and corporate debt and treasury bonds where our trading is highly concentrated.
In our asset management business, we saw investment of advisory fee declined slightly to $2.7 million versus $3.8 million in the prior year, while assets under management continue to grow with huge market value led to lower associated fee of the period.
Lastly, our tax prep accounting business increased revenue by 19% to $900,000 versus the prior year level, and which is one of a seasonally lower quarters. The bottom line is that we have a sound strategy in place and continue to execute against this. We will continue to expand our retail broker and advisor networks as well as offering a diverse products and services we distribute throughout that network. We will also continue to push for improved profitability by reducing overall cost base as we scale the platform.
With that, I will now turn the call over to Glen Worman to discuss some of the first quarter figures from our Form 10-Q. Glen?
Thanks, Goldie. Just a couple of comments before going through some of the numbers. As both Robert and Goldie described we are in a very challenging market that requires us to be efficiently controlled in each of our businesses and within every one of our support organizations.
We are spending a tremendous amount of time looking at all of our businesses to make sure we are doing everything we can’t to recognize savings wherever possible. And at the same time we are viewing how we support our businesses to keep cost and check.
I am sure that we are working smart and challenging how we approach things historically to improve our model. The improved analytics is key and we are making strong progress. While this is a difficult market we believe there are growth opportunities that we can exploit in a smart controlled way.
Now taking through the highlights of earnings that were filed last night on Form 10-Q. For the current December 31, 2015 quarter we reported total revenues of $39.6 million which represented a decline of 3.8% versus revenue of $41.2 million in the prior year quarter.
It is important to note that was down year-over-year, we did increase revenues over the fourth quarter of fiscal 2015 by approximately $3 million. The principal components of revenue in the quarter was filed as; commissions and related fees of $25.4 million, investment banking $6.1 million, investment advisory $3.7 million, net dealer inventory gains of $2.5 million, interest and dividends and other income of $1 million and tax prep accounting of $0.9 million.
On the expense side, costs declined in the quarter by 1% versus the prior year with the most meaningful decline coming in the commission’s compensation of these category, which was down 1.6% to $34.7 million. We were also able to realize a double-digit decline in our communication expense as a result of a valuation and renegotiation of the number of our telecommunications contracts.
Offsetting these declines was at 27% increase in clearing fees to $0.8 million and 13.7% increase in other administrative expenses of $1.6 million. The clearing fee number was higher due to the one-time credit that was recorded in the prior year quarter, which was not duplicated in the current quarter. And other administrative expenses increased year-over-year as a result of higher installment fees being recorded again in the current quarter.
So larger decline in year-over-year revenue relative to our decline in expenses resulted in an operating loss for the first quarter of $0.6 million versus operating income of $0.5 million in last year’s period. The net loss was $0.5 million or $0.04 per basic and diluted share for the quarter end December 31, 2015 compared to net income of $0.3 million or $0.02 per share both basic and fully diluted in the quarter ended December 31, 2014. Adjusted EBITDA, which is non-GAAP measure, was a loss of $0.2 million in the first quarter versus income of $1 million in the prior year quarter.
Turning now to our balance sheet. As of December 31, 2015 we had cash and cash equivalents, which included receivables from our clearing firms and marketable securities of approximately $25.7 million or roughly 42% of our total assets as compared to $28.6 million or 45% of our total assets as of September 30, 2015. When compared to the first quarter of fiscal 2015 cash and cash equivalents were unchanged at 42%.
This is important to note as cash flow increases in our fiscal second and third quarters on increased revenues from our tax and accounting business segment. The Company’s total stockholders equity is $44.8 million or $3.60 per share and represents a slight decrease compared to $45.3 million as of September 30, 2015 and lastly our balance sheet remains debt free.
And with that, I’ll turn the call back to Robert.
Glen, thank you. In closing, I’d just like to say that suffering along with the rest of our industry with core revenues and profit levels does not make any easier for us to accept or tolerate just because [indiscernible] Company doesn’t mean that we’re happy with that situation or accepted.
We are clearly disappointed by the absolute numbers and there is no other way to say it. The macro headwinds that we continue to face with the rest of the industry may well be significant, but they do not keep us from being confident about the way we positioned the firm, our enhanced reputation on the prospectus we expect to realize going forward once the retail commission environment more normalizes and improves.
Looking forward, we do see positives in place that lead us to believe that we’re well-positioned to achieve sequential operating improvements in our coming quarters. First, we are seeing continued interest and increased interest by our clients in non-market correlated alternative investments, certain private placements, IPOs and secondary offerings.
Backend we’re entering a seasonally strong period for our tax prep and accounting businesses. We will of course remain focused on our strategy and further diversifying our revenue base as Goldie mentioned with private shares and other initiative such as that and continuing to scale our business revision of quality registered reps and investment advisors and our ongoing continued expansion of our brokerage system, while working to lower the cost base of our various business lines and keeping a weather eye and making sure we don’t suffer from expense creep.
We’ll confidently remain proceed throughout the independent brokerage community as the destination of choice known for offering brokers and advisors an attractive welcoming and diverse platform that continues to grow where they can move, join and expand their businesses.
With that, I am going to conclude the remarks and turn it back to the operator so we can move to the Q&A period. Operator?
Thank you, sir. [Operator Instructions] And we’ll take our first question from Paul Misleh with Fortis Capital Management.
Hey guys, thank you. Can you comment on any of the potential acquisitions or anything you didn’t have that in your prepared remarks or at the filings? Thank you.
Paul, we’re really restricted on what we can say. We made the public filings, 8-Ks both we and one of our proposed acquirers also made filings. And as we said in our comments, we are in discussions with CB Pharma representatives and that’s continuing, beyond that we just really can’t comment.
Okay. Thank you very much.
[Operator Instructions] We’ll take our next question from Walter Schenker with MAZ Partners.
Hello. Are you restricted from buying back stock because of subjects you can't discuss as per last question and if you were not, if you are, but if you don't become what is your general thoughts about buying back stock at this discount asset value? I realize liquidity is important in the business?
Nonetheless we did make a commitment to be in the market actively and we were every day for a period of time, but when we receive the offers we've been advised by counsel to remain out of the market. I mean there are two thoughts that people have expressed regarding this. One is, well, if you have reasonable confidence that one of these offers will be successful at a price above $3. Why wouldn’t you take the opportunity to buy stock when it’s under $2.5? And the answer is if we could we would.
The other side of the argument is that if the Company has knowledge that the world doesn't about the likelihood of completing one of these offers and buying stock from shareholders at a price of substantially lower than where the Company believes the transaction to be completed would not be fair to the shareholders and there is some recent case flow that shows but Company's management reports can be criticized for acting that way.
So counsel advise us to stay out of the market and it means basically that both the Company and our entire organization restricted and that clearly has takes a large body of potential investors out of the marketplace at this point.
Okay. Thank you.
[Operator Instructions] And we do have a question from Gary Ribe, Private Investor.
Hey guys. I was just wondering if you could kind of comment a little bit on the recruiting environment, what’s the turmoil that’s going on out there and just if the quality of rep you are seeing is improving as people look further places to go. I think you said you added – was it $900 million in AUM and $9 million in revenue that suggest to me that it might be IA focused, so I think that’s a little bit higher quality if that's true?
Gary, good morning. Good to hear from you again. Yes, the recruiting environment is [so tough], we continue to see market turmoil, we continue to see squeeze on lot more traditional value to broker dealer; we continue to see a squeeze on lot of [$10.99] broker dealers as well. And yes, we look fortunate in the quarter and I’m saying going through early January of recruiting the group.
One of the groups had $5 million revenues and that aggregate total of nine advisors and brokers with close to $900 million of assets and we’ve included hybrids Gary, so I think the sweet spot for us a broker also an advisor that has somewhat of these bookings in the IA business and want to continue in the brokerage business.
Gary, there is always – there is the old saying is if there is profit and confusion I don’t think there is ever been more confusion in terms of the future and viability with very small broker-dealers. As Goldie says the early opportunities are significant and they’re giving us the opportunity to be selective. So the opportunities are there and to the extent that makes sense for this company we aren’t taking advantage of them.
Got it. And then I guess just in terms of like kind of some of the stuff that you guys are talking about that you can’t comment too much on, do you view that the Gilman business has relative help or hindrance or attractiveness I mentioned that because there was a specific deal that went off with the rationale being that this Company could sell their tax prep software to reps and that sort of thing.
And I don't know how you guys view, you are not just a straight BD, you are also underwriting and you have this tax prep business so it's – some of those parts maybe more valuable than others and how do you guys view that as you guys kind of go through this process?
Well I'll take that, let me add it first, certainly the tax prep business have been accretive and it’s broadening the scope of this firm. We are first beginning to see some of these synergies across marketing. The current market turmoil as I mentioned earlier is where there is a lot of people to look for non-market correlated investments. And a lot of our accounting reps and a lot of our brokerage reps are looking to broaden their horizons.
We’ve had a record number of brokers register to become eligible for insurance products and we’re seeing a lot more of our accounting reps as well, see increased interest in reaching across the aisle and the rocks and taking clients who happen to view their accounts by and large with a very, very high esteem since they are in fact preparing their tax-preparation work and in some cases also acting as their investment advisor.
As a source for good advice and to the extent that the advisors are seeing a more diversified platform of products that’s available from National, they’re taking increased more serious looks and participating in that. So the tax prep business remains the solid business was when Gilman was acquired and we are finally beginning to see some of the synergies we hope that there was some more resistant that we expected in the initial stages. Glen, do you want to add to that?
Since coming to National I’ve spent a fair amount of time looking at our businesses and we are big fans of the Gilman business to be perfectly honest I mean the synergies between accounting a tax and the registered reps of the Gilman business again it’s a very accretive, it’s a very good relationship and very good feeding of the business from one piece of that business to the other. It works very well, accounting a tax again adds a lot of – just adds a lot of efficiency if you will to the overall cost platform of the Gilman business. So and it’s a unique business, its unique offering.
So we're looking at the business every day and looking to expand it, we look for tax and accounting firms where it makes sense to acquire them, we are looking at that. Now we do have a pipeline there as well our businesses that we are looking at. And then again that does nothing more than add more overall value that we required. So again I am a big fan I think I speak for the management team here when I say that, so nothing but positive.
Gary, the other thing I would add as always as we explained before the tax prep is an extremely seasonal business and we’ve just moved out of the [indiscernible] into one of the busiest four months with that business, so that’s what we got to look forward to implement it.
Right. And just remind me [indiscernible] for me, what did you guys pay for Gilman?
$13 million, a combination of cash and stock.
Okay. Thanks guys.
Thank you Gary.
We’ll take our next question from Michael Freeburg with Greenwich Wealth Management.
Hi guys. Can you discuss with me how you view the Department of Labor and position of the fiduciary standard and how you expect it to affect your BD business or not?
[Gary] this is Goldie, we’ve discussed this before in our last two calls. I mean two things, obviously the DOL, which seems to being rushed dramatically through before the next election is going to impact all the businesses, everybody’s business and it’s a negative. What’s interesting to us, when we speak about clearing for fidelity is a percentage of our business that’s depended on the time and talents is a lot less than our peers.
So the impact by definition is going to be less than the more traditional [indiscernible] meaning that amount of 401(k) business we do with the amount of IRA business we do is less than our peers. We’ve been spoken to fidelity and I don’t have the file in front of me they did a detailed analysis and we will have less impact in most of our peers that are on the fidelity platform because at the end of the day our [indiscernible] brokerage.
Okay. Thank you.
End of Q&A
[Operator Instructions] And with no further questions at this time I would like to turn the call back over to Robert for any additional or closing remarks.
Thank you Miller. I want to thank you all for joining us today. We appreciate for your continuing interest in National. And we look forward to speaking with you again when we report our second quarter and conduct our next earning conference call in mid-May. I just want to make it perfectly clear. We are not the least, but sanguine about delivering the results. And you can come up with as many ideas and excuses as we learn about market headwinds.
The question is how we are going to adjust to them and be assure that we’re looking at every aspect of our business, how to grow, how to reduce expenses, how to broaden our platform and how to become less reliant on commissions by expanding IRA recurring revenues and all the things that can soften that cushion. We've been successful with some of our businesses and we intend to continue to apply that course to try and make the firm more immune to market vagaries like this.
I don't think as a commission led brokerage firm, we will probably ever going to be completely immune. But to the extent that we can move the platform in the direction that reduces our reliance on commissions for delivering bottom line profitability that's the goal we’re trying to achieve. Our focus on extraordinary expenses, a reduction of legal and professional fees and the other items that are under our control are things that we’re spending a lot of time on.
Improving our management reporting systems so we can have relevant accurate information in a much shorter timeframe so we can make adjustments is one of the key focuses that Glen is working on. Migrating to more efficient commission reporting systems and other accounting systems that allow us to take a lot of our manual processes and eliminate them is taking a tremendous amount of our focus in that area. We are continuing to strive to improve the platform and to deliver the results that we expect and we know you expect.
So with that, I’ll close the call and look forward to speaking to you all on our next conference call. Thank you operator.
And that does conclude today’s conference. Thank you for your participation.
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