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LPL Financial Holdings Inc. Advisor Activity Levels Remain Subdued, but Expense Management Focus Improves; Maintain Outperform Rating

LPL reported third quarter 2012 earnings before the market open on Wednesday, featuring adjusted EPS of $0.47, easily exceeding our estimate of $0.42 and consensus of $0.43; a lower tax rate helped by a little over a penny. Net revenue grew 3% year‐over‐ year, to $907 million, in line with our estimate but $7 million above consensus. Upside versus our estimate was driven by lower ore operating expenses, partly offset by higher production payouts.

In our opinion, key positives in the quarter included the following: 1) continued solid new advisor recruitment, net new advisory assets, and pipeline commentary; 2) a heightened focus on expense controls in the quarter and on a go‐forward basis, including better management of bonus payouts to large practices and hiring a couple of prominent consulting firms to assist in identifying efficiency opportunities; 3) improved transparency on a number of items, including the discussion of core versus nonrecurring expenses, the advisory yield on the corporate RIA platform, and ICA yield forecast; and 4) a new $150 million share‐repurchase authorization (at $29, LPL can buy back 5% of existing shares).

The biggest negative from the quarter was the loss of a bank program with 181 advisors, which also led to a decline in the company’s production retention rate to 95% year‐to‐ date, but we viewed this as a one‐off event, as recruiting remains robust. Same‐store sales for seasoned advisors were relatively flat year‐over‐year, and annualized commissions per average advisor were down 2% sequentially, so while far from encouraging, these trends were in line with expectations.

We lowered our full year 2012 and 2013 revenue estimates by 0.3% and 1.9%, respectively, primarily reflecting lower attachment revenue expectations. However, we increased our adjusted EBITDA and EPS estimates, on lower core operating expense expectations, following management’s heightened focus on expense control. Our new estimates for 2012 and 2013 are as follows: revenue of $3.64 billion (4.6% year‐over‐ year growth) and $3.94 billion (8.2% growth); adjusted EBITDA of $458 million (0.4% decline) and $485 million (5.9% growth); and adjusted EPS of $2.03 (4.1% growth), and $2.21 (8.7% growth). A table summarizing the changes to our estimates can be found at the end of this note.

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