Broadpoint Securities Group Inc. Q2 2008 Earnings Call Transcript

Broadpoint Securities Group Inc. (BPSG)

Q2 2008 Earnings Call

August 7, 2008 10:00 am ET

Executives

Lee Fensterstock – Chairman, Chief Executive Officer

Robert Turner – Chief Financial Officer

Presentation

Operator

Welcome to the second quarter 2008 Broadpoint Securities Group Inc. earning conference call. (Operator Instructions)

Certain statements made during this call may be forward-looking statements. These statements are not historical facts but instead represent the company's belief regarding future events, many of which by their nature are inherently uncertain and outside of the company's control.

The company's forward-looking statements are subject to various risks and uncertainties including their traditions of the securities markets generally and acceptance of the company's services within those markets and other risks and factors identified from time to time in the company's filings with the Securities and Exchange Commission.

It is possible that the company's actual results and financial condition may differ, possibly materially from the anticipated results and financial condition indicated in this forward-looking statement. You are cautioned not to place undue reliance on these forward-looking statements. The company does not undertake to update any of its forward-looking statements.

I would now like to turn the presentation over to your host for today's call, Lee Fensterstock.

Lee Fensterstock

With me today is Peter McNierney, our President and Chief Operating Officer and Rob Turner, our Chief Financial Officer. I'd like to make some general comments about our performance, and the Rob will walk you through the financials for the quarter. After that, Peter, Rob and I will be happy to take questions.

In a nutshell, the financial results for the quarter are indicative of the progress that we're making in building a full service premier investment bank, serving mid size companies and their investors. Our revenues increased 97% from last quarter and excluding restructuring costs, Broadpoint generated its first pre-tax operating profit in recent memory. These results are particularly noteworthy in light of the difficult market environment in which we and our competitors are operating.

They are reflective of the hard work of our staff, the confidence of our clients and the validity of the multi-product business model we're executing. Specifically, our solid foundation of research based sales and trading in Broadpoint debt cap and mortgage and asset bank subsidiary, in debt capital markets our high yield investment grade convertible bond and distress debt division and in our equities division where we transact each and every day, serves us well during a period of low new issue activity.

During the quarter we significantly grew our debt capital markets in investment banking revenues. We added 18 professionals to our staff including Bob Myer, a industry veteran who's heading up our equities division. We closed our $25 million series B mandatory redeemable preferred stock issued to a fund managed by Mass Capital LLC, and we continue to execute our restructuring plan to properly size our infrastructure.

Finally, it's probably worth summarizing our progress since the Matlin Patterson investment in 2007. We've added 138 professionals to our organization both through individual hires and the hiring of teams, most notably our debt capital markets division and our recapitalization and restructuring group in investment banking.

We've eliminated 60 positions in connection with our restructuring and reduced our real estate footprint to properly size our infrastructure, as well as outsourcing our clearing and data processing functions, saving an estimated $7.8 million per year. We've raised $95 million in long term capital from Matlin Patterson, Mass Capital and our employees, enabling us to recapitalize Broadpoint debt cap and to have sufficient operating capital and capital for acquisitions.

We've increased revenues from the 2007 third quarter level of $8.7 million to $34.1 million in Q2 '08 and turned an operating loss of $9.9 million to an operating profit of $600,000 pre taxes and restructuring costs. So we're off to a positive start toward building the kind of company that will serve all of its constituencies well.

However, there is still much work to do. The notion of having $34 million in revenue and not making any money, while relatively a good performance, in absolute terms we need to do much better than that. But, to be continued.

In the meantime Rob, let's review this quarter's numbers.

Robert Turner

As Lee mentioned, we are very pleased with Broadpoint's financial results in the second quarter of 2008. Our debt capital markets grew. Investment banking and Broadpoint Debt Cap, our mortgage and asset subsidiary all performed very well in a difficult market environment. My remarks today will focus on our financial results for the second quarter of 2008 compared to the first quarter of 2008. Given that Broadpoints Securities Group was recapitalized in the fourth quarter of 2007, it is most relevant to compare our progress over the last two quarters.

Broadpoint had net revenues of $34.1 million, a 97% increase from the first quarter 2008 net revenues of $17.4 million, and a 222% increase from the fourth quarter of 2007 net revenues of $10.6 million. In the second quarter, Broadpoint reported a net loss of $1.1 million, or a loss of $0.02 per share compared to the first quarter of 2008 which had a net loss of $9.2 million or a loss of $0.15 per share.

Looking at our results, pre tax from continuing operations and excluding restructuring costs which I will discuss shortly, Broadpoint posted a gain in the second quarter of $616,000 compared to a loss of $7.3 million in the first quarter of 2008. Broadpoints main revenue drivers in the second quarter were our debt capital markets group which commenced operations in March of 2008 and our investment banking group. Our mortgage and asset back trading group, Broadpoint Debt Cap also generated excellent results for the second quarter.

Our debt capital markets division produced net revenues from sales and trading in the second quarter, its first full quarter of operations, of $11.7 million compared to $3.7 million in the first quarter. In the second quarter, total investment banking revenues were $9.3 million up from $670,000 in the first quarter.

Our mortgage bank and asset bank subsidiary, Broadpoint Debt Cap generated $10.6 million in net revenues compared to first quarter revenues of $10.8 million. Our equity division generated $1.7 million of sales and creating revenues in the second quarter compared to $1.8 million in the first quarter.

Turning to our expenses, compensation in the second quarter totaled $26.1 million and increased 52% over the prior quarter increasing as a result of a 97% increase in revenues. Clearing, settlement and brokerage expense was $667,000, and $280,000 increase from the first quarter. The increase is primarily due to the activities of the debt capital markets group which had a full quarter of operations in the second quarter.

Communications and data processing totaled $2.2 million, up 35% from $1.7 million in the first quarter. The debt capital markets group activity primarily accounted for much of the increase. Our occupancy and equipment expense was $1.5 million in line with the first quarter. Selling expense of $1 million was 5% lower than the first quarter.

I'd like to take time to explain the restructuring expense associated with Broadpoint's goal of right sizing the company. Broadpoint began restructuring the company in the fourth quarter with the recapitalization of the company and the appointment of a new Chairman and CEO. To date, Broadpoint has taken $4.8 million of restructuring expenses consisting of $2.2 million of severance and $2.5 million in real estate related costs, the charges consisting of severance and costs to exit real estate.

In the second quarter restructuring expenses were $869,000 consisting of costs associated with exiting real estate in Albany and severance costs. We have completed our exit of Albany and some of New York City and virtually all severance related to the restructuring has now been expensed. We believe that as a result of the restructuring charges taking to date, we will save on an annual basis $6.1 million, consisting of $1.5 million in compensation and $700,00 in real estate costs on an annualized basis.

Our other expense of $1.9 million in the second quarter was $800,000 lower than the first quarter. Other expense consists primarily of legal, audit, insurance and professional fees and other items such as employment fees. In the first quarter, legal costs of $1.3 million were incurred related to the hiring of personnel in our new recapitalization and restructuring banking business.

In summary, Broadpoint has made significant progress over the last nine months since the Broadpoint brand was launched, increasing our revenues and attacking our costs. Our revenues have grown dramatically from $8.7 million for the quarter ended September 30, 2007 compared to $34.1 million for the second quarter of 2008. We are right sizing the company by taking actions such as outsourcing our data center. We moved from self clearing to full lease disclosure clearing reducing our head count in support functions, eliminating excess real estate and taking steps to eliminate redundant communication and market data costs.

We are beginning to see the positive impact of our efforts to grow our revenues and align our cost structure to support these revenues. Broadpoint is off to an excellent start and I look forward to reporting our progress to you in the future.

Lee Fensterstock

I think at this point, we'd be happy to take any questions.

Question-and-Answer Session

Operator

There are no questions at this time.

Lee Fensterstock

Thank you all. Everybody have a great day.

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