AtlasClear Holdings, Inc.

Q1 2024 Earnings Conference Call

5/28/2024

spk01: Good morning and welcome to our first quarter 2024 earnings conference call. With us today are John Shibley, Atlas Clear's executive chairman, and Craig Reinauer, Atlas Clear's president. During this call, we will make forward-looking statements about our beliefs and estimates regarding future events and results. Those forward-looking statements are subject to risks and uncertainties, including those set forth in the SEC filings related to today's results and our most recent Form 10-K. Actual results may differ materially from any forward-looking statements that we make today. Forward-looking statements may speak only as of today, and we do not assume any obligation or intent to update that except as required by law. In an effort to provide additional information to investors, today's discussion will also include references to certain non-GAAP financial measures. Reconciliations and other explanations of those non-GAAP financial measures can be found in today's press release available on the company's IR site.
spk02: Thank you, everyone, for joining us for Atlas Clear's first earnings call as a public company. The transition to a public company was an important milestone for Atlas Clear, and we were able to celebrate this momentous occasion by ringing the New York Stock Exchange bell on March 6th. We have achieved this through a lot of hard work and dedication, and I would like to take this time to thank all of our employees for this incredible accomplishment. The team and I are excited to share our first quarter results, as well as provide you with an overview of our business and future growth strategies. With that, I'll begin my remarks with our first quarter highlights. In the first quarter, we successfully closed the D-SPAC transaction and began trading on the New York Stock Exchange AMEX on February 12th. At the operational level of Wilson-Davidson Company, our first quarter was profitable, and we anticipate increasing that profit moving forward. We expanded the scale of our income-generating activities with increased margin lending, increased stock loan business, and announced a new line of investment banking business. Now, before I talk about some recent business development, since it's the first time we're discussing our quarterly results in a conference call format, I wanted to spend some time discussing Atlas Clear's market opportunity and value proposition. At Atlas Clear, our goal is to build a cutting-edge technology-enabled financial services firm that will create a more efficient platform for trading, clearing, settlement banking, with evolving and innovative financial products that focus on financial services firms. We believe we are positioned to provide a modern, mission-critical suite of solutions to our clients, enabling them to reduce their transaction costs and compete more effectively in their businesses. Our target client base for our prime banking and prime brokerage services includes financial services firms, generally with annual revenues up to $1 billion, including brokerage firms, hedge funds, pension plans, and family offices, that are not adequately served by today's larger corresponding clearing firms and banks. The larger clearing firms have raised their minimums to a point where it is difficult for this segment of the market to meet the requirements for access to their clearing offerings. Smaller financial services firms are thus forced to find alternative solutions to continue to service the client basis. The practice of obtaining these services through intermediaries results in additional fees and a loss of transparency and control for such financial services firms. Through the acquisition of Wilson Davis, a corresponding clearing firm, and our proposed acquisition of Commercial Bancorp, a Federal Reserve member, we will have acquired capabilities to provide specialized clearing and banking services to financial services firms with an emphasis on domestic and international markets currently under service by larger vendors. Once properly integrated, anticipated synergies between Commercial Bancorp, post-successful regulatory approval, and Wilson Davis, are expected to allow for lower cost of capital, higher net interest margins, expanded product development, and greater credit extension for our current and future client base. Now I want to discuss the market opportunity. We estimate total revenue of execution, clearing, and prime services in the industry to exceed $150 billion annually. Today, Atlas Clear has the capabilities that it would answer unmet needs compared to competitors. We believe our technology platform and specialized clearing and banking services will be mission critical to our clients, given complexities of investing infrastructure, the complications around collateral and capital requirements, and a complicated regulatory landscape. We expect to benefit as new fintech firms launch and existing firms scale, potentially outpacing legacy financial firms in their own categories. We believe consumer expectations for a one-stop shop for their investing, banking, spending, insurance, and borrowing needs is driving the convergence of financial services. As a result, financial companies that traditionally operated as single product specialists, for example, savings-focused platforms or lending-focused platforms, are now seeking to integrate trading and investing capabilities into their broader offering. Now I'd like to go over our four growth strategies in detail. Growth strategy number one. Growing our base of clients organically. Our technology platforms, combined with the rapidly accelerating demand for cost efficiency, are expected to drive growth in our prospective client base. For new market entrants, we believe the efficiencies of our prospective turnkey solutions and speed at which we expect to be able to bring a client's offering to market will position us to win new clients. Growth strategy number two. Growing our clients' revenues. We believe we will succeed when our clients succeed. The more assets, services, or transactions the customers direct through our prospective platform, the more revenue we and our clients would be able to generate. Through innovation, we also expect to enhance our product offerings and add more products, capabilities, and functionality for our clients, which in turn should allow such clients to drive growth into their business. Additionally, we see an opportunity for us to develop new financial products to provide to our clients and their customer base, thereby increasing their revenues. Growth strategy number three, pursuing potential international expansion opportunities. While we expect our operations will be initially U.S.-focused, we see opportunity to grow our business and total addressable market by expanding into international markets. As we assess international opportunities, We believe our core competencies and operational excellence positions well to win in new markets, many of which are experiencing secular tailwinds similar to what we are seeing in the U.S., for example, growth of mobile and digital solutions. Initially, we plan to focus on serving international clients seeking access to U.S. markets. Growth strategy number four, identifying and executing strategic acquisitions. We expect to selectively pursue acquisitions that we believe will create value for our shareholders. We plan to evaluate acquisition opportunities based on a number of strategic parameters, including their ability to, one, enhance our product capabilities, two, broaden our client reach, three, drive further scale, four, increase our presence in new geographies, and five, generate attractive financial returns. Going forward, we have a lot to be excited about. Management is working hard to secure additional capital into the broker-dealer to take advantage of the clients we believe are available to us. Should we be successful in securing the capital, we'll be better positioned to onboard additional introducing brokers and accelerate our growth. We have a very strong management team led by Bob McVeigh, an industry veteran of more than 35 years. In addition to Bob, we have exceptional team members within our broker-dealer organization and a very experienced board of directors. We believe our technology suite will allow us to compete in a space that efficiencies unmatched in the market. We will be rolling out part of our PACS Square code in Q2, and we believe this rollout will have immediate positive results at the bottom line by making our account opening and fully paid lending offerings faster and more robust. Finally, we cannot overstate how excited we are to have Wilson Davis and its unique licensing set at the core of our company. We have a fully licensed correspondent clearing firm that will allow us over time to provide a full suite of products and potential new products to our client base. This will allow us to bring additional value and flexibility to an ever-changing financial world to meet our clients' needs. So to summarize, we believe we have built a compelling prime brokerage model that is well-positioned on filling a gap in the capital markets where smaller institutions, broker-dealers, and asset managers have been at a disadvantage. Our successful industry track record, strategically experienced leadership team, and accretive acquisition opportunities positions us well for long-term growth. Now I'll turn over the call to John so he can provide a review of our financial results from the first quarter. John?
spk00: Thanks, Craig. Our key financial model drivers for Wilson Davis for quarter one, 2024, on a pro forma basis comparing Q1, 2023 versus Q1, 2024 for Wilson Davis on a standalone non-GAAP basis include first commissions and related execution fees. For commissions and related execution fees, We increased from 1.3 million in the first quarter of 2023 to approximately 1.8 million in the first quarter of 2024. This was a 27.9% increase. Second, the stock loan revenue. For stock loan revenues, revenues from stock loan increased significantly quarter over quarter. In Q1 2023 for Wilson Davis, stock loan revenue was negligible, but management increased this line to approximately 3% of revenue for Q1 2024. Other interest income. Interest income increased approximately 9% in 2024, quarter one, over quarter one, 2023. This is largely due to increases in our money market balances. As a standalone company, Wilson Davis & Company was profitable with $125,000 in net income, and we anticipate improving that going forward. Some of our primary areas of focus for revenue growth following the acquisition of Wilson Davis were commissions, stock loan, and other forms of interest income. As evidence, quarter one reflected improvement in all three of these segments, and we anticipate increasing those lines of revenue moving forward. Again, on a standalone pro forma basis, we are profitable, recognizing over $125,000 in net income in quarter one, and we are in the very early stages of executing our growth plans. Now I'd like to turn to our consolidated results for the three-month period ended March 31, 2024. At the consolidated level, we recognized a net loss in Q1 of approximately $86.2 million. That loss includes expenses for changes and the fair value of the notes we used to close the acquisition of approximately $6.7 million, an additional negative write-down of approximately $68.5 million in assets on the acquisition, and over $9 million in regulatory and professional expenses. In the simplest terms, we bit the bullet for the significant transaction-related expenses in quarter one. We think it's important that going forward, these expenses will not be recurrent and the company has a large net operating loss which it can use to manage tax consequences as it expands the operating profit of its primary subsidiary, Wilson Davis. To summarize, at the operational level, we delivered a solid first quarter in 2024. Perhaps most importantly, we recognize revenue growth across three of our primary drivers with notable growth in stock loan revenue and a 27.9% increase in commissions quarter over quarter. We are encouraged with the momentum that we are seeing in the business, and we will remain laser focused on filling a gap in the capital markets where smaller institutions, broker dealers, and asset managers have been at a disadvantage. We believe we are well positioned for a successful 2024, and we look forward to delivering a prosperous year. I would like to thank you all for your time, and now I'll turn the call back to the operator.
spk01: Thank you. Ladies and gentlemen, this concludes our call today. We thank you for your interest and your time. You may now disconnect your lines.
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