LPL Financial : Q4 2022 Earnings Transcript

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

LPLA.OQ - Q4 2022 LPL Financial Holdings Inc Earnings Call

EVENT DATE/TIME: FEBRUARY 02, 2023 / 10:00PM GMT

OVERVIEW:

LPLA reported 4Q22 gross profit of $972m and $4.21 of EPS prior to intangibles and acquisition costs.

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FEBRUARY 02, 2023 / 10:00PM, LPLA.OQ - Q4 2022 LPL Financial Holdings Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Dan Hogan Arnold LPL Financial Holdings Inc. - President, CEO & Director

Matthew Jon Audette LPL Financial Holdings Inc. - CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Alexander Blostein Goldman Sachs Group, Inc., Research Division - Lead Capital Markets Analyst

Devin Patrick Ryan JMP Securities LLC, Research Division - MD, Director of Financial Technology Research & Equity Research Analyst Gerald Edward O'Hara Jefferies LLC, Research Division - Equity Analyst

Jeffrey Paul Schmitt William Blair & Company L.L.C., Research Division - Research Analyst

Kyle Kenneth Voigt Keefe, Bruyette, & Woods, Inc., Research Division - MD

Michael Cho JPMorgan Chase & Co, Research Division - Research Analyst

Steven Joseph Chubak Wolfe Research, LLC - Director of Equity Research

William Raymond Katz Crédit Suisse AG, Research Division - MD

P R E S E N T A T I O N

Operator

Good afternoon, and thank you for joining the Fourth Quarter 2022 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, Matt Audette. Dan and Matt will offer introductory remarks, and then the call will be open for questions. (Operator Instructions) 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 Financial's 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 a 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'll turn the call over to Mr. Arnold.

Dan Hogan Arnold - LPL Financial Holdings Inc. - President, CEO & Director

Thank you, John, and thanks to everyone for joining our call today. Over the past quarter and throughout 2022, our advisors remained a source of support and guidance for their clients against a backdrop of increased market volatility. In doing so, they reinforced the value of their advice and the important role they play for their clients. We thank them for their continued commitment and dedication as we focus on our mission of taking care of our advisors, so they can take care of their clients.

With respect to our performance, our fourth quarter business results drove solid financial outcomes while at the same time, we continued to make progress on the execution of our strategic plan. I'll review both of these areas, starting with our fourth quarter business results.

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FEBRUARY 02, 2023 / 10:00PM, LPLA.OQ - Q4 2022 LPL Financial Holdings Inc Earnings Call

In the quarter, total assets increased to $1.1 trillion as continued solid organic growth was complemented by higher equity markets. With respect to organic growth, fourth quarter net new assets were $21 billion, representing 8% annualized growth. This contributed to net new assets for the year of $96 billion, also representing an 8% organic growth rate.

Recruited assets were $15 billion in Q4, bringing our total for the full year to $82 billion. These results were driven by the ongoing enhancements to our model and our expanded addressable markets.

Looking at same-store sales, our advisors remain focused on serving their 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 which drove solid same store sales in the fourth quarter.

With respect to retention, we continue to enhance the advisor experience through the delivery of new capabilities and technology as well as the ongoing modernization of our service and operations functions. As a result, asset retention for the fourth quarter and full year was approximately 98%.

Our fourth quarter business results led to solid financial outcomes of $4.21 of EPS prior to intangibles and acquisition costs, which brought our full year total to $11.52, an increase of 64% from a year ago.

Now let's turn to the progress we made on our strategic plan. As a reminder, our long-term vision is to become the leader across the advisor-centered marketplace, 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.

Now to bring this vision to life, we are providing the capabilities and solutions that help our advisors deliver personalized advice and planning experiences to their clients. And at the same time, through human-driven,technology-enabled solutions and expertise, we are supporting advisors in their efforts to be extraordinary business owners. 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 have organized our work into four strategic plays, which I'll review in turn. Our first strategic play involves meeting advisors and institutions where they are in the evolution of their businesses by winning in our traditional markets, while also leveraging new affiliation models, which expand our addressable markets.

In our traditional markets, ongoing enhancements to our platform and the efficacy of our business development team led to continued improvement to our win rates and an expansion of the depth and breadth of our pipeline, despite advisor movement in the industry remaining at lower levels. As a result, Q4 was our strongest quarter of recruiting in 2022 in our traditional markets with approximately $11 billion in assets. Looking ahead, we expect to carry this recruiting momentum into Q1.

With respect to our new affiliation models, Strategic Wealth, Employee and our enhanced RIA offering, we recruited over $1 billion in assets in Q4. In each of these models, we continue to see growing demand and expanding pipelines, which position them for increased contributions for our organic growth.

With respect to large enterprises, they remained a meaningful source of recruiting in 2022, including the additions of CUNA and People's United Bank. Looking ahead, we expect to onboard Commerce Bank around the middle of this year and continue to see our pipeline build as demand for our model grows. Now at the same time, we continued to have success recruiting in our traditional enterprise channel, including the addition of BancorpSouth in Q4.

Within this strategic play, we are also seeing positive early momentum with our most recent innovation, our Liquidity and Succession capability, where we are providing a differentiated offering to meet the succession needs of the advisors. Over the next decade, it is estimated that up to a third of advisors will be retiring, and will likely address the succession needs of their practices.

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FEBRUARY 02, 2023 / 10:00PM, LPLA.OQ - Q4 2022 LPL Financial Holdings Inc Earnings Call

To solve for this need, our first innovation was providing M&A support as a service to help facilitate the transition of practices from advisor to advisor. Our key learning from that experience, there are many instances due to factors like large practice size, or lack of an identified successor that would require a different solution.

Now it was out of this need, we created our differentiated Liquidity and Succession offering, in which LPL will step in to purchase an advisor's business and serve as a bridge to the next entrepreneurial successor, all while preserving the principles of independence.

The offering has been well received and we are encouraged by our early momentum, having already executed on a handful of transactions with advisors on our platform. This year, we will also plan to take the capability to the external marketplace and look forward to sharing our progress.

Our second strategic play is to provide capabilities that help our advisors differentiate the marketplace and drive efficiency in their practices. In 2023, we will focus our development of new capabilities and solutions within this play across four key areas. First, we will continue to enhance our wealth management platforms to help advisors provide their clients with differentiated advice, products and pricing.

Second, we will continue to advance ClientWorks, our core operating platform, with additional digitized workflows to help advisors operate more efficiently and increase their scalability to serve more clients. Third, we will expand our banking and lending services to help advisors address a broader spectrum of the clients' financial needs and thus deepen their role as an essential partner. And the final area is to enrich the end-client experience with additional digital solutions that increase personalization and self-service and enable advisors to create customized experiences for their businesses. We believe these evolving capabilities will help drive increased advisor growth, productivity and retention.

Now let's move to our third strategic play, which is focused on creating an industry-leading service experience that delights advisors and their clients and, in turn, helps drive advisor recruiting and retention. As a reminder, over the past couple of years, we've been on a journey to transform our service model into an omni-channel client care model, including voice, chat, and digital support. Now, as part of this journey, we have evolved the technology and instrumentation of our traditional voice channel while also made meaningful enhancements to our always-on, digital support capabilities. As a result, approximately 75% of engagements with our digital channel fully resolve their service request and don't necessitate a phone call to complete the task. As we continue to expand and refine our digital support channel, we believe that an increasing share of advisors will leverage digital-first support for a more flexible and efficient service experience.

Now as we continue to evolve our service interface, we are also transforming the operational processing that takes place behind that interface. For example, last year, we began automating much of the processing for our core clearing functions, including money movement, account opening and account transfers, which collectively drive the majority of our operational processing. And with these learnings from our transformation in service and operations, we are reengineering other areas of the business, including our compliance and risk management functions. To that end, we've applied robotics and AI capabilities through a number of our compliance review workflows, which has improved both the efficiency of the reviews as well as the efficacy of the overall risk management. Efforts on this front include automating the reviews of client communications, marketing materials and transactions. By automating more workflows, we continue to increase the scalability of our platform while also enhancing the client experience.

Our fourth strategic play is focused on developing a services portfolio that helps advisors and institutions run thriving businesses and deliver comprehensive advice to their clients. As we discussed last quarter, we are encouraged by the seasoning of this business and the evolving appeal of our value proposition. As a result of solid demand, in Q4, the number of advisors utilizing our Services Group continued to increase and we ended the year at over 3,000 active users, up more than 30% year-over-year and generating run rate revenue of $36 million.

Now when we started our Services Group, we focused on addressing some of the most complex challenges facing our advisors, which were often more acute for advisors with larger practices. With the insights and learnings from this initial client segment, we are now expanding our services portfolio to address the needs of our broader advisor base.

As we continue to evolve the offering in 2023, we are focused on several key opportunities for our Services Group. First, addressing additional channels, specifically building solutions that solve for needs of enterprise partners. Second, leveraging our structured approach to innovation in

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FEBRUARY 02, 2023 / 10:00PM, LPLA.OQ - Q4 2022 LPL Financial Holdings Inc Earnings Call

order to continue to develop new services and evolve our existing portfolio. Third, contributing to the growth of our new affiliation models, Strategic Wealth and Linsco, as well as expanding our ability to serve "high net worth oriented" advisors.

So in summary, in the fourth quarter and throughout the year, we continued to invest in the 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 and win in the marketplace and as a result, drive long-term shareholder value.

With that, I'll turn the call over to Matt.

Matthew Jon Audette - LPL Financial Holdings Inc. - CFO

All right. Thank you, Dan, and I'm glad to speak with everyone on today's call.

Before I review our fourth quarter results, I'd like to highlight our progress during 2022. Against an evolving market backdrop, we maintained our focus on supporting our advisors and their clients while executing on our strategic priorities. We continued to grow assets organically in both our traditional and new markets, successfully onboarded new enterprise clients, developed and piloted our new Liquidity and Succession capability and announced two strategic acquisitions. We accomplished this all while continuing to invest in our industry-leading value proposition and delivering record earnings per share.

Now let's turn to our fourth quarter business results. Total advisory and brokerage assets were $1.1 trillion, up 7% from Q3 as continued organic growth was complimented by higher equity markets. Total net new assets were $21 billion or an 8% annualized growth rate. Our Q4 recruited assets were $15 billion. I would note, this included $11 billion from our traditional independent model, which was the highest quarter of the year.

Looking ahead to Q1, our overall pipelines continue to remain strong. In particular, I would highlight that within our traditional models, the momentum we saw in Q4 has continued into Q1, and we are on pace to deliver one of our strongest first quarters in what is typically our slowest quarter of the year.

As for our Q4 financial results, the combination of organic growth, rising interest rates and expense discipline led to EPS prior to intangibles and acquisition costs of $4.21, the highest in our history.

Looking at our top line growth, Gross Profit reached a new high of $972 million, up $135 million or 16% sequentially. As for the components, commission and advisory fees net of payout were $172 million, down $10 million from Q3, primarily driven by the seasonal increase in production bonus. In Q4, our payout rate was 88.4%, up about 50 basis points from Q3 due to the seasonal build in the production bonus. Looking ahead to Q1, we anticipate our payout rate will decline to approximately 87% as the production bonus resets at the beginning of each year.

With respect to client cash revenue, it was $439 million, up $136 million from Q3 as the impact of higher short-term interest rates more than offset a sequential decline in balances.

Looking at overall client cash balances, they ended the quarter at $64 billion, down $3 billion driven by record net buying of $25 billion. Within our ICA portfolio, we added $4 billion of new fixed rate contracts, bringing our fixed rate balances to roughly 45% of the ICA portfolio, up from 25% a year ago.

Our ICA yield averaged 291 basis points in the quarter, up 79 basis points from Q3, primarily driven by the increase in short-term rates during the quarter.

As for Q1, we expect our ICA yield to increase to approximately 315 basis points, which includes yesterday's 25 basis point hike, at an assumed deposit beta of 25%.

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