National Holdings Corporation (NASDAQ:NHLD)
Q2 2016 Results Earnings Conference Call
May 17, 2016 09:00 AM ET
Ed McGregor - IR, LHA
Robert Fagenson - Chairman and CEO
Mark Goldwasser - President
Glenn Worman - COO and EVP, Finance
Walter Schenker - MAZ Partners
Good day and welcome to the National Holdings Corporation Second Quarter Fiscal 2016 Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ed McGregor from LHA. Please go ahead.
Thank you, Angela and good morning everyone. Thank you for joining us for National Holding Corporation’s fiscal second quarter 2016 earnings conference call. With me on this call this morning are Robert Fagenson, National Holdings Corporation’s Chairman and Chief Executive Officer; Mark Goldwasser, President; and Glenn Worman, Chief Operating Officer and Executive Vice President of Finance; Alan Levin, our Chief Financial Officer is also on the line and will be available to answer questions during Q&A session.
National Holdings Corporation issued a press release this morning with the details of the Company’s fiscal second 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 at nhldcorp.com, following the conclusion of this conference call.
I would also like to call your attention to the customary Safe Harbor disclosure regarding forward-looking information included in the earnings release. 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 Holding Corporation. Although management believes these statements are reasonable based on estimates, assumptions and projections as of today, May 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 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.
I would now like to turn the call over to Robert Fagenson. Robert?
Thanks Ed and welcome everyone. Good morning and thanks for joining us today. During today’s call, I’ll begin 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 business segments. Following Goldie’s remarks, we will hear from our Chief Operating Officer and Executive Vice President of Finance, Glenn Worman, who will discuss our financials in greater detail. Once Glenn is finished, I’ll wrap up and then will open the call to your questions.
Let me start by emphasizing the simple fact. We’ve become an increasingly diversified financial services firm and our businesses basically fall into two categories, those that are part of our historic brokerage execution business and those that are not. As has been the case for a number of quarters, the performance of these two categories continued to be a positive on another. The brokerage category which consists of retail commissions, transfer fees and clearance services clearly remained under pressure.
This is an industry-wide headwind that’s essentially a function of retail investors’ continued resistance to invest and trade standard market correlated investment vehicles such as stocks and certain bonds in the face of economic and political uncertainty, high levels of market volatility and global geopolitical unrest. The second category includes among other business lines, our investment banking as well of our tax preparation and accounting businesses. These typically offer better margins and therefore yield comparatively better profitability.
As a result, these businesses in contrast to brokerage continued to perform well growing steadily on a trailing 12-month basis and increasing 10% in the second quarter. While the timing of magnitude of a general improvement in investing and trading environment remains impossible to predict, particularly in light of what I would say is an unprecedented and to say the least, unusual election cycle and year that continues to unfold with new surprises every day, we do not consider this ongoing retail investor strength to be a chronic condition.
While we wait for retail investors to regain their footing and confidence, we continue to press forward with our strategic focus that revolves around further expanding our network of registered reps and advisors, giving them an expanded and widened attractive investment vehicle platform to sell to their clients, exploring other bolt-on opportunities and managing our costs, while improving our competitiveness for each of our businesses.
With that overview, I’m going to turn the call over to Mark Goldwasser. Goldie?
Thanks, Robert, and good morning, everyone. We feel pretty good to report our strongest quarter of net income and adjusted EBITDA since 2014. Even though we had $0.5 million in expense related to the Fortress Biotech merger agreement, at the same time, I’d like to emphasize that we still talk on where should be, where we plan to be. Most of our businesses continued to perform fairly well in the quarter, and while we came away with some good sequential and year-over-year gains, it feels like we are still trying to stay uphill as we deal with the industry-wide commission headwind.
I’ll now run through our businesses with you. As usual, I’ll start with our core retail brokerage operation, our network of 770 registered independent brokers and investment advisors that offer broad range of financial products and services to retail and institutional clients. In the second quarter of ‘16, revenues from commissions and transaction fees, and clearing services totaled $25.2 million versus $27.6 million in the same period last year. Of the $2.4 million decline, commissions accounted for roughly $2.1 million and with the drop related to weaker industry conditions versus the prior year.
As Robert mentioned, retail investors just aren’t as active as they’d be in the past. Now this course of action in lieu of an eventual recovery and activity, it continues to offer an attractive non-market correlated vehicles such as alternative investments, private placements and transaction related products including initial public offerings and secondary offerings. As the case in point, sales of alternative investment products were sequentially strong this quarter, 25% above prior year’s level. Also, we’ve been very active in marketing private security through advisors. We view these vehicles as terrific investments that help broaden our client’s portfolios through further diversification.
In terms of broker network expansion, we remain very active in our efforts as we explore opportunities, both large and small. Since January 1 of this year, we have added 30 registered reps and advisors who’ve expanded our assets under management by $700 million. Many of these registered reps and advisors connected with the project we have been working on for some time, and now in the process of bringing that number closer to $1 billion. As has been the case, we remain pleased with the high caliber of registered reps and advisors to continue attract and hire.
In our investment banking operations, business that addresses the underserved capital needs of emerging growth companies, particularly in the healthcare space, we continue to have benefits from the strong pipeline that produces solid offerings and execution. Revenues for the second quarter increased 38% to approximately $6.1 million. During the quarter, we participated in 15 transactions, 5 were in the healthcare space, 2 in technology, 1 REIT. During the quarter, we also initiated seven capital raises for seven private issuances.
Turning to trading, net dealer inventory gains in the second quarter of 2016 fell just 4% to $2.6 million from prior year’s level, halting a trend of double-digit year over year decline that had persisted for the past year. This business has stabilized in recent quarters. Although our lack of volatility in the fix income market, due to the lower but rising interest rate and fed rate hike uncertainty will likely continue to weigh on results in this business.
In our asset management business, we saw investment advisory fees declined 6% to $3.3 million versus the prior year $3.5 million. While reduced market value led to lower associate fees in the period, we remained focus on adding new assets and registered investment advisors to our NAM platform and remain comfortable that our service offerings and business model can hold its own against the competition.
Lastly, our tax preparation and accounting business saw revenue climbed 5% to $3.9 million versus $3.7 million in the prior year in what is our seasonally strongest quarter for this business growth and the quarter was primarily due to acquisition of a tax practice completed in second fiscal quarter of 2015.
Clearly, we have diversified our business base, both in terms of revenues and profits, but we’re certainly not resting on our laurels. We will continue to expand our retail broker and advisor network, grow the selection of diverse products and services we distribute through that network, looking, as Robert said, opportunistic bolt-on acquisitions in our other business and all along managing cost and expenses checked.
With that I’ll now turn the call over to Glenn Worman, the guy tasked with managing the costs and expenses effectively, who will discuss on second quarter figures from our form 10-Q. Glenn?
Thanks, Goldie. As both Robert and Goldie noted, we continue to operate in a challenging and very competitive environment. This highlights the importance of making sure each of our businesses maintain the tight control on their expenses and run as efficiently and flexibly as possible, while looking each and every day at how we can grow our firm.
You’ll note when reviewing our financial statements that we’re making progress in both our variable cost of revenue expenses base as well as our more fixed operating expense categories. These positive expense results are early indications of what we believe will be continuing efficiency. We have many projects underway, are being relentless and indentifying acting on unnecessary cost and recognizing savings whenever and wherever we can.
While we do need to invest in certain parts of our organization to enhance efficiency and improve our service model, we expect to do this by eliminating unnecessary spending and reinvesting intelligently. We still have a lot to do but I believe we’ve been very successful in creating a team that is energized and excited about the future prospects for National.
I’ll now run through the financial results of our earnings, which are filed on Form 10-Q with the SEC last night. For the March 31, 2016 quarter, we reported total revenues of $42 million, which represented a decline of 2.1% versus revenue of $42.9 million in the prior year quarter. The principal components of revenue in the quarter were as follows: Commissions and related fees of $25.2 million; investment banking $6.1 million; tax prep and accounting $3.9 million; investment advisory $3.3 million; and net dealer inventory gains of $2.6 million; and net interest and dividends and other income totaling $0.9 million.
On the expense side, costs declined in the quarter by 2.3% versus the prior year with absolute declines coming in commissions, compensation and fess which dropped to $0.2 million to $35.9 million, clearing fees which dropped $0.4 million to $0.5 million, and other administrative expenses which dropped $0.5 million to $1.1 million. Somewhat offsetting these declines was $0.3 million increase in professional fees to $1.5 million. Although professional fees would have declined in the quarter after excluding the $0.5 million expenses related to Fortress Biotech merger agreement, the remaining expense categories were essentially flat on year over year basis. So, the slightly smaller decline in year over year revenue relative to the expenses resulted in a moderate improvement in our operating income in the quarter, in the second quarter of 2016, $2.6 million versus $0.5 million in last year period. Net income was $0.4 million or 0.03 per basic and diluted share for the quarter ended March 31, 2016 compared to net income of $0.3 million or $0.03 per basic and diluted share for the quarter ended -- for the comparative quarter ended last year.
Adjusted EBITDA, which is obviously a non-GAAP measure was $1.2 million for the fiscal second quarter of 2016 versus $1 million in the prior year quarter. It’s important to note that our overall EBITDA performance, our main measure of financial performance would have increased by approximately 70% after eliminating deal related expenses when compared to last year’s second quarter.
Turning now to our balance sheet, as of March 31, 2016, we had cash and cash equivalents which included receivables from our clearing firm and marketable securities of approximately $26.8 million or roughly 43% 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 second quarter of fiscal 2015, cash and cash equivalents declined 43% of total assets from 45% in that period.
Company’s total stockholders’ equity was $45.2 million or $3.63 per share and represented a slight decrease compared to $45.3 million as of September 30, 2015. Lastly, our balance sheet remains debt free.
And with that, I’ll turn the call back to Robert.
Thanks Glenn. In closing, I’d just like to say that while we took some steps forward this quarter, we still have a long journey in front of us. The world will most likely continue to present challenges and potholes as well as hopefully some smooth straight-aways. We’re not sprinters, and while we keep our eye on short-term trends affecting our business, we have to keep the marathon runner’s perspective.
We’ll continue to take advantage of opportunities as they present themselves and certainly keep the organization focused on our long-term goals and that we have the resources in place to maintain the longer strides and sustainable pace. We’ll remain focused on our strategy to further diversifying our revenue base and scaling our business with the addition of quality registered reps and investment advisors in the ongoing expansion of our brokerage network in tandem with working to lower our cost base of our various business lines.
When commissions in our industry do finally stabilize and do finally recover as we’re confident that they will, we expect to be in a very strong position to capitalize on that renewed trend through product positioning, operational excellence and the reputation that we have achieved over time as a destination known for offering brokers and advisors an attractive, diverse and growing platform that will serve their customers and help build their businesses in the future.
Before I turn the call back to the operator for Q&A, I’d like to briefly comment on the 800-pound gorilla who’s sitting in the corner which is the merger agreement we’ve entered into with Fortress Biotech. As we stated in the press release issued on April 28th, our Board of Directors approve this agreement and is remaining neutral to make no recommendation to the NHLD shareholders whether they accept the offer and tender their share pursuant to the offer or to retain their shares.
So while we’ll be happy to answer some questions you might have regarding the terms of the agreement and the timelines involved to help clarify aspects of the agreement, I hope you’ll understand that it may not be appropriate to discuss certain items that will fall outside the public disclosures that have already been made about this agreement with possible outcomes at this point in time. We’ll do the best we can to be able to clarify what we can.
And with that, I’m going to turn it back over to Angela, the operator for any questions. Angela?
Thank you. [Operator Instructions] And we’ll take our first question from Walter Schenker with MAZ Partners.
If we’re going to talk about the big question, just as a general question as there is no financing requirement for the transaction, the main issue still -- and lower minimum if as part of the tender, the main issue that’s between now and the beginning of the tender and completion of the tender is the regulatory approval?
It’s certainly the next step; as these things normally transpire, we will be filling 1017 application with FINRA in the near future. And then, there are certain timelines that apply as to when they have to respond, and ultimately either grant approval or if they find a problem to ask for clarification or modification to grant that approval. And the agreement provides that between 20 and 30 days after the application has been substantially complete, the timeline begins, that Fortress would begin extender offer. Now, part of the agreement, as you see, requires that the money to buy all of the shares disaggregated and be in place with the commencement of the tender. So, you’re correct, financing is not supposed to be an issue.
And having watched or been involved in companies which have antitrust issues but not many that have been involved requiring FINRA approval, what are the major, just generally, what issues might FINRA come up with or might -- does FINRA come up with? It’s not a competitive issue obviously.
Well, in a situation like this with the main potentials are that they acquired 80% or more and had to take the company private and merge it, and that would be an issue as to management and control. If in fact National Holdings remains a public company under essentially the same day-to-day operations, you have to -- broker dealers registered that are compliant and there is no change in the capital structure or the regulatory structure or the current management structure. So, I’m not sure where the problems will arise if any.
Okay. So, there is nothing obvious relating, I mean there -- as opposed to some mergers, office products companies totally unrelated where there is obvious conflicts or otherwise?
Well, it’s more if you that you were merging with other regulated broker dealer entities; there was a question about whether capital would change; we have significant excess capital, whether there was going to be some drain of that or significant change FINRA could perceive that would give them reason to believe that two stable entities might be destabilize.
And since you said shortly to file with FINRA, and FINRA has a timeframe in which to ask questions, assuming there are no -- nothing comes up that you don’t expect, this is sometime during the summer event?
I would think that’s a fair estimation.
Very quiet group this morning, right Angela?
End of Q&A
I see. Well if there aren’t any other questions, please -- Mr. Fagenson, if you could please close this out with any closing remarks.
Thank you. Once again, thanks everyone for joining us today. We appreciate your continued interest in National Holdings and we look forward to speaking you again, when we report our fiscal third quarter 2016 results and that’s our next earning conference call in mid August. And with that we’ll bid everyone a good morning. And we hope to speak and see you again soon. Thank you.
Ladies and gentlemen, this does conclude today’s conference. We thank you for your participation.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!