LPL Financial Holdings Inc.

Good afternoon, and thank you for joining the second quarter 2023 earnings conference call for LPL Financial Holdings, Inc. Joining the call today are our President and Chief Executive Officer, Dan Arnold, and Chief Financial Officer and Head of Business Operations, Matt Audet. Dan and Matt will offer introductory remarks, and then the call will be open for questions. The company would appreciate if analysts would limit themselves to one question and one follow-up each. The company has posted its earnings press release and supplementary information on the investor relations section of the company's website, investor.lpl.com. Today's call will include forward-looking statements, including statements about LPL financials, future financial and operating results, outlook, business strategy and plans, as well as other opportunities and potential risks that management foresees. Such forward-looking statements reflect management's current estimates or beliefs and are subject to known and unknown risks and uncertainties that may cause actual results or the timing of events to differ materially from those expressed or implied in such forward-looking statements. For more information about such risks and uncertainties, the company refers listeners to the disclosures set forth under the caption forward-looking statements in the earnings press release, as well as the risk factors and other disclosures contained in the company's recent filings with the Securities and Exchange Commission. During the call, the company will also discuss certain non-GAAP financial measures. For reconciliation of such non-GAAP financial measures to the comparable GAAP figures, please refer to the company's earnings release, which can be found at investor.lpl.com. With that, I will now turn the call over to Mr. Arnold.

Thank you, Tanya, and thanks to everyone for joining our call today. Over the past quarter, our advisors continue to provide their clients with personalized financial guidance on the journey to help them achieve their life goals and dreams. To help support that important work, we remain focused on our mission, taking care of our advisors so they can take care of their clients. This quarter, we continue to see the appeal of our model grow due to the combination of our robust and feature-rich platform, the stability and scale of our industry-leading model, and our capacity and commitment to invest back into the platform. As a result, we continue to make progress toward our vision of becoming the leader across the advisor-mediated market. In that spirit, we remain focused on helping advisors and enterprises solve challenges and capitalize on opportunities better than anyone else, and thereby serve as the most appealing player in the industry. With respect to our performance, we delivered another quarter of solid results, while also continuing to make progress on the execution of our strategic plans. I'll review both of these areas, starting with our second quarter business results. In the quarter, total assets increased to 1.2 trillion. This continued solid organic growth was complemented by higher equity markets. With respect to organic growth, second quarter organic net new assets were 22 billion, representing 7.4% annualized growth, or approximately 8% when adjusted for seasonal taxing. This contributed to organic net new assets over the past 12 months of 84 pages, representing approximately an 8% organic growth rate. In Q2, recruited assets were 19 billion, which represents a quarterly record excluding periods when onboarding large enterprises. This outcome was driven by the ongoing enhancements to our model, as well as our expanded addressable market. Looking at same store sales, Our advisors remain focused on serving the clients and delivering a differentiated experience. As a result, our advisors are both winning new clients and expanding wallet share with existing clients, a combination that drove solid same-store sales in Q2. With respect to retention, we continue to enhance the advisor experience through the delivery of new capabilities and technology, as well as the evolution of our service and operations function. As a result, asset retention for the second quarter and over the last 12 months was approximately 99%. Our second quarter business results led to solid financial outcomes, $3.94 adjusted EPS, an increase of 76% from a year ago. Let's now turn to the progress we made on our strategic plan. Now, our long-term vision has become a leader across the advisory center market, which for us means being the best at empowering advisors and enterprises to deliver great advice to their clients and to be great operators of their businesses. To bring this vision to life, we are providing the capabilities and solutions that help advisors deliver personalized advice and planning experiences to their clients, and at the same time, through human-driven, technology-enabled solutions and expertise, we're supporting advisors in their efforts to be extraordinary businessmen. Doing this well gives us a sustainable path to industry leadership across the advisor experience, organic growth, and market share. Now, to execute on our strategy, we organize our work around two primary categories. Horizontal expansion, where we look to expand the ways that advisors and enterprises can affiliate, such that we can compete for all 300,000 advisors in the advisor-mediated market. And vertical integration, where we focus on providing capabilities that solve for a broader spectrum of advisor needs, and in doing so, create durable, differentiated value. With that as context, let's start with our efforts around horizontal expansion. This work involves meeting advisors and enterprises where they are in the evolution of the business by creating flexibility in our affiliation model so they can design the perfect practice for themselves and for their clients. As a result, this component of our strategy helps contribute to solid growth in our traditional markets while also expanding our adjustable markets through our new affiliation. Now, over the quarter, we saw strong recruiting in our traditional independent markets, reaching a new quarterly high of approximately $14 billion in assets. At the same time, due to the appeal of our model and the efficacy of our business development We maintained our industry-leading win rates while also expanding the breadth and depth of our pipeline. With respect to our new affiliation models, strategic wealth, employee, and our enhanced RAA offering, we delivered our strongest quarter to date, recruiting roughly $4 billion in assets in Q2. Now, in each of these models, we continue to experience growing demand and expanding pipeline, which positioned them for increased contribution for organic growth. Looking ahead, we expect to carry this recruiting momentum into Q3 for both our traditional independent market and our new affiliation. Now, as a complement to our organic growth, we also recently announced the planned acquisition of Crown Capital, a California-based firm with approximately 260 advisors and 6.5 billion client assets. This transaction will give Crown Capital's advisors access to our differentiated capabilities, technology, and service. We look forward to onboarding them early next year. With respect to large enterprises, we recently onboarded Bank of the West and are on track to onboard Commerce Bank in August. Looking ahead, we are encouraged by our growing momentum and strong pipeline across the broader enterprise market, including in our traditional bank and credit lines. Now shifting to our vertical integration efforts, Here, we are focused on delivering value-added capabilities, services, and technology that extend across an advisor's end-to-end business, all for the purpose of helping them differentiate when in the marketplace and run thriving business. In that spirit, this quarter we launched a new performance optimization solution called Practice Hub. This capability delivers comprehensive data in a structured format, so advisors can better understand their performance on an absolute and relative basis. And over the coming months, we will further expand the functionality by enabling it to generate personalized insights around additional services, technology, and solutions we offer in order to help advisors enhance the overall performance of the practice. Over time, we see practice hub becoming a key tenet of our advisor experience, leveraging the power of artificial intelligence to operate as a co-pilot for our advisors. And while we're still in early innings, we're excited about the growth opportunities that this innovation unlocks and how it will serve as an additional leverage point to help advisors run thriving businesses. Now in a separate play within our vertical integration strategy, we continue to expand and enhance our services portfolio and are encouraged by the evolving appeal of our value proposition and the seasoning of this business. As a result of demanding Q2, the number of advisors utilizing our services group continued to increase. We ended the quarter with approximately 3,500 active users, up roughly 30% year over year. As we work with advisors to increase the utilization of existing services, we're also continuing to create new services, such as our tax planning solution, which is part of our broader suite of comprehensive advice and planning services. This new solution helps enable tax-intelligent advice that can deliver material savings to clients and help further differentiate advisors' value practices. This service is receiving positive early feedback and demand in the marketplace, while also unlocking interesting synergies with our existing services portfolio. Now, as we continue to evolve our services portfolio, we are leveraging our structured approach to innovation in order to address the needs of our broader advisor base. In that spirit, we are creating streamlined versions of existing solutions to help advisors who may have less complex practices. Examples of these solutions include CFO's Essentials, Digital Marketing, and Payroll, all of which are progressing through our innovation pipeline. As we move forward, we remain focused on enhancing and expanding our services portfolio to better support our advisors in enterprises and to drive growth. In summary, In the second quarter, we continued to invest in value proposition for advisors and their clients, while driving growth and increasing our market leadership. As we look ahead, we remain focused on executing our strategy to help our advisors further differentiate when in the marketplace, and as a result, got long-term shareholder value. With that, I'll turn the call over to Matt.

Thank you, Dan, and I'm glad to speak with everyone on today's call. In the second quarter, we remained focused on serving our advisors, growing our business, and delivering shareholder value. This focus led to strong organic growth in both our traditional and new markets, and we continued to build momentum in our liquidity and succession offering. In addition, we entered into an agreement to acquire the wealth management business of Crown Capital, onboarded Bank of the West earlier this month, and are preparing to onboard Commerce Bank later this quarter. We accomplished all of this while continuing to invest in our industry-leading value proposition. So as we look ahead, we continue to be excited by the opportunities we have to help our advisors differentiate and win in the marketplace. Now let's turn to our second quarter business results. Total advisory and brokerage assets were $1.2 trillion, up 6% from Q1, as continued organic growth was complemented by higher equity marks. Total organic net new assets were $22 billion, or a 7.4% annualized growth rate. Our Q2 recruited assets were $19 billion, which prior to large enterprises was a new record. This included $4 billion of recruited assets from our new affiliation models, which is also a new record. Looking ahead to Q3, our momentum continues, and we are on pace to deliver another strong quarter of recruiting. As for our Q2 financial results, The combination of organic growth, rising interest rates, and expense discipline led to adjusted EPS of $3.94. Looking at gross profit, it was $990 million, down 30 million or 3% sequentially. As for the components, commission advisory fees net of payout were $218 million, up $3 million from Q1, primarily driven by organic growth and higher advisories. In Q2, our payout rate was 86.7%, up about 50 basis points from Q1 due to typical seasonality. Looking ahead to Q3, we anticipate our payout rate will increase to 87.5%, driven by typical seasonality as well as the onboarding of Commerce Bank and Bank of the West. With respect to client cash revenue, it was $396 million, down $42 million from Q1, driven by a sequential decline in cash balances. Looking at overall client cash balances, they ended the quarter at $50 billion, down $5 billion from Q1. The primary driver of the decrease was typical April seasonality, when the majority of quarterly advisory fees and tax payments hit. As we moved beyond April, the pace of declines moderated in both May and June. Within our ICA portfolio, the mix of fixed rate balances increased to roughly 60%, within our target range of 50% to 75%. Our ICA yield averaged 322 basis points in the quarter, up two basis points from Q1, as the increase in short-term rates was partially offset by a decline in higher-yielding floating rate balances. As for Q3, based on where client cash balances and interest rates are today, we expect our ICA yield to decline by a few basis points, as the mixed impact of lower floating rate balances is partially offset by the benefit of higher short-term interest rates. As for service and fee revenue, it was $123 million in Q2, up $4 million from Q1, primarily driven by strong organic growth. Looking ahead to Q3, we expect service and fee revenue to increase by a few million sequentially, driven by revenues from our National Advisor Conference. Moving on to Q2 transaction revenue, it was $47 million, down $2 million sequentially due to decreased trading volume. As we look ahead to Q3, we expect transaction revenue to be relatively flat with Q2. Now let's turn to expenses starting with core G&A. It was $337 million in Q2. Looking ahead, given our strong levels of organic growth and the variable costs associated with supporting that growth, we are increasing the lower end of our 2023 core G&A range by $10 million. We now expect our 2023 Core G&A to be in a range of $1,345,000 to $1,307,000. To give you a sense of the near-term timing of the spend, in Q3, we expect Core G&A to increase by $5 to $10 million sequentially. Moving on to Q2 promotional expense, it was $107 million, up $5 million sequentially, primarily driven by increased transition assistance resulting from strong recruiting, and large enterprise onboard. In Q3, we expect promotional expense to increase to approximately $125 to $130 million, primarily driven by conference spend, as we will host our largest advisor conference of the year next week, as well as the onboarding of two large enterprises, Bank of the West and Commerce Bank. Looking at share-based compensation expense, with $17 million in Q2, down $1 million from Q1, In Q3, we expect share-based compensation expense to be roughly flat sequentially. Turning to depreciation and amortization, it was $58 million in Q2, up a modest $2 million sequentially, given it was a low-deployment quarter. Looking ahead to Q3, our plans for technology spend have not changed, but we expect more deployments in the quarter. As a result, we expect depreciation and amortization to be roughly $65 million. Regarding capital management, our balance sheet remains strong. We ended Q2 with corporate cash of $325 million, up $91 million from Q1. Our leverage ratio was 1.2 times, down from 1.3 times in Q1, driven by a combination of our continued growth and a higher interest rate environment, both of which have meaningfully improved our earnings power. I would also note that earlier this month, we increased the size of our parent revolver from $1 billion to $2 billion. Given the significant growth of our business in recent years, the added capacity enables us to operate comfortably within our target range of 1.5 to 2.5 tons and leaves us well-positioned to capitalize on growth opportunities. As for capital deployment, our framework remains focused on allocating capital aligned with the returns we generate, investing in organic growth first and foremost, pursuing M&A where appropriate, and returning excess capital to shareholders. In Q2, we allocated capital across our entire frame. We continue to invest to drive and support organic growth. Specific to our liquidity and succession offering, momentum is building and we continue to have a solid pipeline. To date, we've closed 15 deals for approximately $200 million, including four deals for around $50 million in Q2. With regards to capital return, we increased our share of purchases to $350 million in Q2, as we took advantage of the pullback in our share price. As we look ahead to Q3, we plan to repurchase $250 million of our shares, consistent with our plan to execute on our $2 billion authorization over two years. To summarize, our balance sheet is strong, and we are well positioned to drive value through our capital allocation framework. In closing, we delivered another quarter of strong business and financial results. As we look forward, we remain excited about the opportunities we see to continue investing to serve our advisors, grow our business, and create long-term shareholder value. With that, operator, please open the call for questions.